10-Q 1 etsy630201610q.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
_________________________
FORM 10-Q
_________________________
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2016
 
 
 
OR
 
 
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from              to             

Commission File Number 001-36911
_________________________
ETSY, INC.
(Exact name of registrant as specified in its charter)
_________________________
Delaware
 
 20-4898921
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
117 Adams Street, Brooklyn, NY
 
11201
(Address of principal executive offices)
 
(Zip code)
 
(718) 855-7955
(Registrant's telephone number, including area code) 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x No  ¨
   
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer x (Do not check if a smaller reporting company) Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x 

The number of shares of common stock outstanding as of July 15, 2016 was 113,741,588.




Etsy, Inc.
Table of Contents

Note Regarding Forward-Looking Statements
 
 
Page
 
Part I - Financial Information
Item 1.
Consolidated Financial Statements (Unaudited)
 
Consolidated Balance Sheets as of December 31, 2015 and June 30, 2016
 
Consolidated Statements of Operations for the three and six months ended June 30, 2015 and 2016
 
Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2015 and 2016
 
Consolidated Statements of Changes in Stockholders' Equity for the six months ended June 30, 2016
 
Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2016
 
Notes to Consolidated Financial Statements
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
 
Part II - Other Information
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
 
Signatures
 
Exhibit Index
Unless the context otherwise requires, we use the terms “Etsy,” the “company,” “we,” “us” and “our” in this Quarterly Report on Form 10-Q, or Quarterly Report, to refer to Etsy, Inc. and, where appropriate, our consolidated subsidiaries.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating and Financial Metrics” for the definitions of the following terms used in this Quarterly Report: “active buyer,” “active seller,” “GMS,” “International GMS,” “mobile visit” and “mobile GMS.”




NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements include information related to our possible or assumed future results of operations and expenses, our outlook, our mission, business strategies and plans, business environment and future growth. Forward-looking statements include all statements that are not historical facts. In some cases, forward-looking statements can be identified by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “seeks,” “should,” “will,” “would” or similar expressions and the negatives of those terms.

Forward-looking statements are not guarantees of performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Those risks include those described in “Risk Factors,” “Management's Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report. Given these uncertainties, you should read this report in its entirety and not place undue reliance on any forward-looking statements in this report.

Moreover, we operate in a competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements made in this report. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

Forward-looking statements represent our beliefs and assumptions only as of the date of this report. We disclaim any obligation to update forward-looking statements.



PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited).
Etsy, Inc.
Consolidated Balance Sheets (Unaudited)
(In thousands except share and per share data)
 
As of
December 31,
2015
 
As of
June 30,
2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
271,244

 
$
167,482

Short-term investments
21,620

 
110,718

Accounts receivable, net of allowance for doubtful accounts of $2,071 and $1,772 as of December 31, 2015 and June 30, 2016, respectively
20,275

 
19,507

Prepaid and other current assets
9,521

 
8,972

Deferred tax charge—current
17,132

 
17,132

Funds receivable and seller accounts
19,262

 
22,966

Total current assets
359,054

 
346,777

Restricted cash
5,341

 
5,341

Property and equipment, net
105,021

 
125,754

Goodwill
27,752

 
28,147

Intangible assets, net
2,871

 
1,877

Deferred tax charge—net of current portion
51,396

 
42,128

Other assets
1,626

 
932

Total assets
$
553,061

 
$
550,956

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
14,382

 
$
7,574

Accrued expenses
31,253

 
29,448

Capital lease obligations—current
5,610

 
6,347

Funds payable and amounts due to sellers
19,262

 
22,966

Deferred revenue
4,712

 
5,199

Other current liabilities
4,903

 
2,977

Total current liabilities
80,122

 
74,511

Capital lease obligations—net of current portion
7,571

 
6,098

Deferred tax liabilities
61,420

 
61,420

Facility financing obligation
51,804

 
53,145

Other liabilities
21,646

 
22,761

Total liabilities
222,563

 
217,935

Stockholders’ equity:
 
 
 
Common stock ($0.001 par value, 1,400,000,000 shares authorized as of December 31, 2015 and June 30, 2016; 112,563,354 and 113,672,931 shares issued and outstanding as of December 31, 2015 and June 30, 2016, respectively)
113

 
114

Additional paid-in capital
406,020

 
417,981

Accumulated deficit
(86,440
)
 
(92,559
)
Accumulated other comprehensive income
10,805

 
7,485

Total stockholders’ equity
330,498

 
333,021

Total liabilities and stockholders’ equity
$
553,061

 
$
550,956



The accompanying notes are an integral part of these consolidated financial statements

4


Consolidated Statements of Operations (Unaudited)
(In thousands except share and per share data)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2016
 
2015
 
2016
Revenue
$
61,365

 
$
85,349

 
$
119,908

 
$
167,196

Cost of revenue
21,909

 
29,098

 
42,618

 
57,009

Gross profit
39,456

 
56,251

 
77,290

 
110,187

Operating expenses:
 
 
 
 
 
 
 
Marketing
15,543

 
17,205

 
27,753

 
33,052

Product development
10,072

 
11,840

 
20,081

 
24,070

General and administrative
17,632

 
22,537

 
38,089

 
41,613

Total operating expenses
43,247

 
51,582

 
85,923

 
98,735

(Loss) income from operations
(3,791
)
 
4,669

 
(8,633
)
 
11,452

Other (expense) income:
 
 
 
 
 
 
 
Interest expense and amortization of deferred financing costs
(351
)
 
(1,803
)
 
(544
)
 
(2,341
)
Interest and other income
43

 
470

 
58

 
911

Net unrealized loss on warrant and other liabilities
(3,151
)
 

 
(3,139
)
 

Foreign exchange gain (loss)
5,805

 
(6,386
)
 
(15,048
)
 
1,734

Total other income (loss)
2,346

 
(7,719
)
 
(18,673
)
 
304

(Loss) income before income taxes
(1,445
)
 
(3,050
)
 
(27,306
)
 
11,756

Provision for income taxes
(4,909
)
 
(4,261
)
 
(15,634
)
 
(17,875
)
Net loss
$
(6,354
)
 
$
(7,311
)
 
$
(42,940
)
 
$
(6,119
)
Net loss per share:
 
 
 
 
 
 
 
Basic and diluted
$
(0.07
)
 
$
(0.06
)
 
$
(0.61
)
 
$
(0.05
)
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic and diluted
96,503,149

 
113,045,888

 
70,403,009

 
112,760,531

 

The accompanying notes are an integral part of these consolidated financial statements

5


Consolidated Statements of Comprehensive Loss (Unaudited)
(In thousands)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2016
 
2015
 
2016
Net loss
$
(6,354
)
 
$
(7,311
)
 
$
(42,940
)
 
$
(6,119
)
Other comprehensive (loss) income:
 
 
 
 
 
 
 
Cumulative translation adjustment
(4,644
)
 
4,011

 
10,412

 
(3,428
)
Unrealized gains on marketable securities, net of tax
1

 
16

 
5

 
108

Total other comprehensive (loss) income
(4,643
)
 
4,027

 
10,417

 
(3,320
)
Comprehensive loss
$
(10,997
)
 
$
(3,284
)
 
$
(32,523
)
 
$
(9,439
)


The accompanying notes are an integral part of these consolidated financial statements

6


Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
(In thousands except share data)
 
 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income
 
Total
 
 
Shares
 
Amount
Balance as of December 31, 2015
112,563,354

 
$
113

 
$
406,020

 
$
(86,440
)
 
$
10,805

 
$
330,498

Stock-based compensation expense

 

 
6,301

 

 

 
6,301

Exercise of vested options
1,035,963

 
1

 
2,893

 

 

 
2,894

Vesting of restricted stock units, net of shares withheld
29,949

 

 
(180
)
 

 

 
(180
)
Exercise of warrants
97,931

 

 
159

 

 

 
159

Shares withheld in net exercise of warrants
(17,920
)
 

 
(159
)
 

 

 
(159
)
Retirement of restricted shares
(36,346
)
 

 

 

 

 

Stock expenseacquisitions

 

 
459

 

 

 
459

Conversion of liability-classified restricted shares upon vesting

 

 
1,942

 

 

 
1,942

Excess tax benefit from the exercise of options

 

 
546

 

 

 
546

Other comprehensive loss

 

 

 

 
(3,320
)
 
(3,320
)
Net loss

 

 

 
(6,119
)
 

 
(6,119
)
Balance as of June 30, 2016
113,672,931

 
$
114

 
$
417,981

 
$
(92,559
)
 
$
7,485

 
$
333,021

 
 

 
 

 
 

 
 

 
 

 
 

 
 
The accompanying notes are an integral part of these consolidated financial statements

7


Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 
Six Months Ended 
 June 30,
 
2015
 
2016
Cash flows from operating activities
 
 
 
Net loss
$
(42,940
)
 
$
(6,119
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Stock-based compensation expense
4,355

 
6,033

Stock-based compensation expense—acquisitions
2,439

 
1,472

Contribution of stock to Etsy.org
3,200

 

Depreciation and amortization expense
9,073

 
9,834

Bad debt expense
1,642

 
681

Foreign exchange loss (gain)
15,048

 
(1,734
)
Amortization of debt issuance costs
73

 
91

Non-cash interest expense

 
1,287

Interest income on marketable securities

 
(573
)
Net unrealized loss on warrant and other liabilities
3,139

 

Loss on disposal of assets
411

 
766

Amortization of deferred tax charge
9,883

 
9,267

Excess tax benefit from exercise of stock options
(1,382
)
 
(546
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(210
)
 
135

Funds receivable and seller accounts
(585
)
 
(3,630
)
Prepaid expenses and other current assets
1,373

 
453

Other assets
(81
)
 
593

Accounts payable
(929
)
 
(5,804
)
Accrued liabilities
8,233

 
1,288

Funds payable and amounts due to sellers
585

 
3,630

Deferred revenue
529

 
469

Other liabilities
(224
)
 
1,442

Net cash provided by operating activities
13,632

 
19,035

Cash flows from investing activities
 
 
 
Purchases of property and equipment
(4,544
)
 
(26,278
)
Development of internal-use software
(5,123
)
 
(5,611
)
Purchases of marketable securities
(13,236
)
 
(108,216
)
Sales of marketable securities
10,883

 
19,799

Net cash used in investing activities
(12,020
)
 
(120,306
)
Cash flows from financing activities
 
 
 
Repurchase of stock

 
(180
)
Proceeds from public offering
199,467

 

Proceeds from exercise of stock options
2,058

 
2,894

Excess tax benefit from the exercise of stock options
1,382

 
546

Payments on capitalized lease obligations
(1,254
)
 
(2,810
)
Deferred payments on acquisition of business

 
(649
)
Payments relating to public offering
(2,491
)
 

Net cash provided by (used in) financing activities
199,162

 
(199
)
Effect of exchange rate changes on cash
(2,278
)
 
(2,292
)
Net increase (decrease) in cash and cash equivalents
198,496

 
(103,762
)
Cash and cash equivalents at beginning of period
69,659

 
271,244

Cash and cash equivalents at end of period
$
268,155

 
$
167,482


8


Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 
Six Months Ended 
 June 30,
 
2015
 
2016
Supplemental non-cash disclosures
 
 
 
Equipment acquired under capital lease obligations
$
7,356

 
$
2,074

Stock-based compensation capitalized in development of capitalized software
$
223

 
$
267

Non-cash additions to development of internal-use software and property and equipment
$
798

 
$
9,800

Non-cash addition to construction in progress related to build-to-suit lease and facility financing obligation
$
1,915

 
$

Non-cash addition to capitalized public offering costs
$
1,630

 
$



The accompanying notes are an integral part of these consolidated financial statements

9


Notes to Consolidated Financial Statements
Note 1—Basis of Presentation and Summary of Significant Accounting Policies
Description of Business
Etsy, Inc. (the “Company” or “Etsy”) was incorporated in Delaware in February 2006. Etsy operates a marketplace where people around the world connect, both online and offline, to make, sell and buy unique goods. The Company generates revenue primarily from transaction and listing fees, Promoted Listings, Direct Checkout fees and Shipping Label sales.
Initial Public Offering
On April 21, 2015, the Company completed an initial public offering (the “IPO”) in which it issued and sold 13,333,333 shares of common stock at a public offering price of $16.00 per share. The Company received net proceeds of $194.4 million after deducting underwriting discounts of $13.9 million and other offering expenses of approximately $5.1 million. These expenses were recorded against the proceeds received from the IPO.
Certain selling stockholders sold an additional 5,833,332 shares of common stock in the IPO. The Company did not receive any proceeds from the sale of shares sold by the selling stockholders.
Upon the closing of the IPO, all outstanding shares of preferred stock of the Company converted into 53,448,243 shares of common stock. In addition, all outstanding warrants for preferred stock converted into warrants for 203,030 shares of common stock.
The Company effected a 1-for-2 reverse split of its common stock on March 25, 2015. The reverse split combined each two shares of the Company’s issued and outstanding common stock into one share of common stock and correspondingly adjusted the conversion prices of its convertible preferred stock. No fractional shares were issued in connection with the reverse split, and any fractional shares resulting from the reverse split were rounded down to the nearest whole share. All share, per share and related information presented in the consolidated financial statements and accompanying notes have been retroactively adjusted, where applicable, to reflect the reverse stock split.
Basis of Consolidation
The consolidated financial statements include the accounts of Etsy and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Unaudited Interim Financial Information
The accompanying consolidated balance sheet as of June 30, 2016, the consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2015 and 2016, the consolidated statements of cash flows for the six months ended June 30, 2015 and 2016 and the consolidated statement of changes in stockholders’ equity for the six months ended June 30, 2016 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s financial position as of June 30, 2016, results of operations for the three and six months ended June 30, 2015 and 2016 and cash flows for the six months ended June 30, 2015 and 2016. The financial data and the other information disclosed in these notes to the consolidated financial statements related to these three and six month periods are unaudited. These unaudited interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2016 (the “Annual Report”).
There have been no material changes in the Company's significant accounting policies from those that were disclosed in the Annual Report.

10


Etsy, Inc.
Notes to Consolidated Financial Statements

Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The accounting estimates that require management’s most difficult and subjective judgments include revenue recognition, income taxes, website development costs and internal-use software, purchase price allocations for business combinations, valuation of goodwill and intangible assets, leases and stock-based compensation. The Company evaluates its estimates and judgments on an ongoing basis and revises them when necessary. Actual results may differ from the original or revised estimates.
Income Taxes
The Company's income tax provision for interim periods is determined using an estimate of its annual effective tax rate adjusted for discrete items, if any, for relevant interim periods. The Company updates its estimate of the annual effective tax rate each quarter and makes cumulative adjustments if its estimated annual tax rate changes.

The Company's quarterly tax provision and quarterly estimate of its annual effective tax rate are subject to significant variations due to several factors, including variability in predicting its pretax and taxable income and the mix of jurisdictions to which those relate, changes of expenses or losses for which tax benefits are not recognized and changes in the laws, regulations and administrative practices of the jurisdictions in which the Company operates.

Build-to-Suit Lease
In May 2016, the Company took possession of its corporate headquarters in Brooklyn upon substantial completion of the construction phase of the build-out. Upon completion of the project, the Company performed a sale-leaseback analysis pursuant to Accounting Standards Codification (“ASC”) 840 - Leases, to determine the appropriateness of removing the previously capitalized assets from the consolidated balance sheets. The Company concluded that components of “continuing involvement" were evident as a result of this review, precluding the derecognition of the related assets from the consolidated balance sheets. In conjunction with the lease, the Company also recorded a facility financing obligation equal to the fair market value of the assets received from the landlord. At the end of the lease term, including exercise of any renewal options, the net remaining facility financing obligation over the net carrying value of the fixed asset will be recognized as a non-cash gain on sale of the property. The Company does not report rent expense for the lease. Rather, rental payments under the lease are recognized as a reduction of the financing obligation and interest expense and the associated asset capitalized throughout the construction project is depreciated over its determined useful life.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued an accounting standards update that replaces existing revenue recognition guidance. The new guidance is effective for the annual and interim periods beginning after December 15, 2017. Among other things, the updated guidance requires companies to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements.
In August 2014, the FASB issued an accounting standard update under which management will be required to assess an entity’s ability to continue as a going concern and provide related disclosures in certain circumstances. The new guidance is effective for annual and interim periods beginning after December 15, 2016. The adoption of this guidance is not expected to have an impact on the Company’s consolidated financial statements or disclosures.
In February 2016, the FASB issued an accounting standard update that requires a reporting entity to recognize right-of-use assets and lease liabilities on the balance sheet for operating leases to increase transparency and comparability. The new guidance is effective for annual and interim periods beginning after December 15, 2018, and early adoption is permitted. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements.

11


Etsy, Inc.
Notes to Consolidated Financial Statements

In March 2016, the FASB issued an accounting standard update for share-based payment transactions that require a reporting entity to recognize excess tax benefits and deficiencies as income tax expense or benefit in the income statement. The new guidance is effective for annual and interim periods beginning after December 15, 2016, and early adoption is permitted for financial statements as of the beginning of an interim or annual reporting period. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements.
Recently Adopted Accounting Pronouncements
In April 2015, the FASB issued an accounting standard under which customers will apply the same criteria as vendors to determine whether a cloud computing arrangement contains a software license or is solely a service contract. The new standard is effective for annual and interim periods beginning after December 15, 2015. The Company has adopted this guidance in the first quarter of 2016 noting no material impact to the current period consolidated financial statements.
In August 2015, the FASB issued an accounting standard update to address the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. The guidance affirms the Company's treatment of such costs, which is to defer and present the debt issuance costs as an asset and subsequently amortize the costs over the term of the line-of-credit arrangement. The new standard is effective for annual and interim periods beginning after December 15, 2015. The Company has adopted this guidance in the first quarter of 2016 noting no impact to the current period consolidated financial statements.
In September 2015, the FASB issued an accounting standard update that eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment. The new guidance is effective for annual and interim periods beginning after December 15, 2015. The Company has adopted this guidance in the first quarter of 2016 noting no impact to the current period consolidated financial statements.
Note 2—Debt
Credit Agreement
In May 2014, the Company entered into a $35.0 million senior secured revolving credit facility pursuant to a Revolving Credit and Guaranty Agreement with several lenders (the “Credit Agreement”). In March 2015, the Company amended the Credit Agreement to increase the credit facility to $50.0 million. In December 2015, the Company amended the Credit Agreement to clarify certain provisions relating to permitted investments and to make other immaterial updates. As amended, the Credit Agreement will mature in May 2019. The Credit Agreement includes a letter of credit sublimit of $10.0 million and a swingline loan sublimit of $15.0 million.
Borrowings under the Credit Agreement (other than swingline loans) bear interest, at the Company’s option, at (i) a base rate equal to the highest of (a) the prime rate, (b) the federal funds rate plus 0.50% and (c) an adjusted LIBOR rate for a one-month interest period plus 1.00%, in each case plus a margin ranging from 0.00% to 0.25% or (ii) an adjusted LIBOR rate plus a margin ranging from 1.00% to 1.25%. Swingline loans under the Credit Agreement bear interest at the same base rate (plus the margin applicable to borrowings bearing interest at the base rate). These margins are determined based on the total leverage ratio for the preceding four-fiscal-quarter period. The Company is also obligated to pay other customary fees for a credit facility of this size and type, including an unused commitment fee and fees associated with letters of credit. As amended, the Credit Agreement also permits the Company, in certain circumstances, to request an increase in the facility by an amount of up to $50.0 million (and in minimum amounts of $10.0 million) at the same maturity, pricing and other terms.
The amended Credit Agreement contains customary representations and warranties applicable to the Company and its subsidiaries and customary affirmative and negative covenants applicable to the Company and its restricted subsidiaries. The negative covenants include restrictions on, among other things, indebtedness, liens, investments, mergers, dispositions, transactions with affiliates and dividends and other distributions. These restrictions do not prohibit a subsidiary of the Company from making pro rata payments to the Company or any other person that owns an equity interest in such subsidiary. The amended Credit Agreement contains a financial covenant that requires the Company and its subsidiaries to maintain a total leverage ratio (defined as net debt to adjusted EBITDA) not to exceed 3.50 to 1.00.

12


Etsy, Inc.
Notes to Consolidated Financial Statements

As amended, the Credit Agreement includes customary events of default, including a change in control and a cross-default on the Company’s material indebtedness. The Company’s obligations under the Credit Agreement are secured by substantially all of the Company and its subsidiaries’ assets, and its obligations under the Credit Agreement are guaranteed by certain of the Company’s subsidiaries.
At June 30, 2016, the Company did not have any borrowings under the Credit Agreement.
Note 3—Stock-based Compensation

The Company's 2015 Equity Incentive Plan (the “2015 Plan”) provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”) and performance cash awards to employees, directors and consultants. The number of shares available for issuance under the 2015 Plan may be increased annually by an amount equal to the lesser of 7,050,000 shares of common stock, 5% of the outstanding shares of common stock as of the last day of the immediately preceding fiscal year, or such other amount as determined by the Company's Board of Directors. The Board of Directors approved an increase of 2,814,083 shares available for issuance under the 2015 Plan as of January 4, 2016. Any awards issued under the 2015 Plan that are forfeited by the participant will become available for future grant under the 2015 Plan. The number of shares of the Company’s common stock initially reserved for issuance under the 2015 Plan equaled the sum of 14,100,000 shares plus up to 12,653,075 shares reserved for issuance or subject to outstanding awards under the 2006 Stock Plan. At June 30, 2016, 17,549,262 shares were authorized under the 2015 Plan, and 14,701,850 shares were available for future grant.
In the three and six months ended June 30, 2016, the Company granted nonqualified stock options and RSUs to eligible participants. Options have a term of 10 years. For both options and RSUs, vesting is typically over a four-year period and is contingent upon continued employment with the Company on each vesting date.  In general, for newly-hired employees, options vest 25% after the first year of service and ratably each month over the remaining 36-month period. In general, for current employees who receive an additional grant, options vest ratably each month over a 48-month period. In general, for newly-hired employees, RSUs vest 25% after the first year following the vesting commencement date, which is the first day of the fiscal quarter closest to the date of grant, and then vest ratably each quarter over the remaining 12-quarter period. In general, for current employees who receive an additional grant, RSUs vest ratably each quarter over a 16-quarter period following the vesting commencement date, which is the first day of the fiscal quarter closest to the date of grant.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model using the inputs below. Prior to the IPO, the Company utilized equity valuations based on comparable publicly-traded companies, discounted free cash flows, an analysis of the Company's enterprise value and any other factors deemed relevant in estimating the fair value of its common stock. Subsequent to the IPO, the Company has used the closing price of its common stock on Nasdaq as the fair value of its common stock. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant for time periods that approximate the expected life of the option awards. Expected volatilities are based on implied volatilities from market comparisons of certain publicly traded companies and other factors. The expected term of stock options granted has been determined using the simplified method, which uses the midpoint between the vesting date and the contractual term. The requisite service period is generally four years from the date of grant. The fair value of RSUs is determined based on the closing price of the Company's common stock on Nasdaq on the grant date.
The fair value of options granted in each year using the Black-Scholes pricing model has been based on the following assumptions:
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2016
 
2015
 
2016
Volatility
40.4% - 45.0%
 
44.3% - 44.6%
 
40.4% - 45.0%
 
44.2% - 44.6%
Risk-free interest rate
1.4% - 1.7%
 
1.2% - 1.5%
 
1.3% - 1.7%
 
1.2% - 1.9%
Expected term (in years)
5.5 - 6.1
 
5.5 - 6.3
 
5.5 - 6.1
 
5.5 - 6.3
Dividend rate
—%
 
—%
 
—%
 
—%
 


13


Etsy, Inc.
Notes to Consolidated Financial Statements

The following table summarizes the activity for the Company's options:

 
Shares
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contract Term (in years)
 
Aggregate Intrinsic Value
Outstanding at December 31, 2015
11,068,859

 
$
6.94

 
 
 
 
Granted
1,322,157

 
8.57

 
 
 
 
Exercised
(1,035,963
)
 
2.79

 
 
 
 
Forfeited/Cancelled
(636,414
)
 
10.07

 
 
 
 
Outstanding at June 30, 2016
10,718,639

 
7.36

 
6.78
 
$
36,195,028

Total exercisable at June 30, 2016
7,105,222

 
5.67

 
5.84
 
32,475,823

Total vested and expected to vest at June 30, 2016
10,512,831

 
7.28

 
6.74
 
36,075,287


The following table summarizes the weighted average grant date fair value of options granted, intrinsic value of options exercised and fair value of awards vested in the the three and six months ended June 30, 2015 and 2016:

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2016
 
2015
 
2016
Weighted average grant date fair value of options granted
$
6.95

 
$
4.09

 
$
7.10

 
$
3.78

Intrinsic value of options exercised
3,961,415

 
3,722,306

 
10,679,283

 
6,110,175

Fair value of awards vested
1,543,309

 
2,873,120

 
3,592,891

 
6,208,730


The total unrecognized compensation at June 30, 2016 was $17.9 million, which will be recognized over a weighted-average period of 2.64 years.

The following table summarizes the activity for the Company's unvested RSUs:

 
Shares
 
Weighted-Average
Grant Date Fair Value
Unvested at December 31, 2015
395,846

 
$
13.70

Granted
1,876,671

 
7.82

Vested
(51,613
)
 
10.04

Forfeited/Cancelled
(65,690
)
 
9.92

Unvested at June 30, 2016
2,155,214

 
8.78

Total expected to vest at June 30, 2016
1,932,855

 
8.81


The total unrecognized compensation at June 30, 2016 was $17.2 million, which will be recognized over a weighted-average period of 3.58 years.


14


Etsy, Inc.
Notes to Consolidated Financial Statements

Total stock-based compensation expense included in the consolidated statements of operations is as follows (in thousands):

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2016
 
2015
 
2016
Cost of revenue
$
124

 
$
250

 
$
532

 
$
451

Marketing
126

 
221

 
229

 
402

Product development
681

 
1,026

 
1,225

 
1,883

General and administrative
1,889

 
2,771

 
4,808

 
4,769

Total stock-based compensation expense
$
2,820

 
$
4,268

 
$
6,794

 
$
7,505


The total stock-based compensation expense in the three months ended June 30, 2015 and 2016 includes $0.6 million and $0.8 million in acquisition-related stock-based compensation expense, respectively.

The total stock-based compensation expense in the six months ended June 30, 2015 and 2016 includes $2.4 million and $1.5 million in acquisition-related stock-based compensation expense, respectively.
Note 4—Income Taxes
In January 2015, the Company implemented an updated global corporate structure to more closely align with its global operations and future expansion plans outside of the United States. The new structure changed how the Company uses its intellectual property and implemented certain intercompany arrangements. The Company believes this may eventually result in a reduction in its overall effective tax rate and other operational efficiencies. The revised structure resulted in the setup of a deferred tax liability in the amount of $66.0 million on the taxable gain created in the transaction. A deferred charge was recorded for the same amount representing the future income tax which will be amortized into income tax expense over five years. During the three and six months ended June 30, 2016, the Company recorded $0.2 million of income tax benefit and $9.3 million of income tax expense, respectively.

The amount of unrecognized tax benefits included in the consolidated balance sheets increased $0.5 million in the six months ended June 30, 2016, from $22.2 million at December 31, 2015 to $22.7 million at June 30, 2016. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate is $9.1 million at June 30, 2016.
Note 5—Fair Value Measurements
The Company has characterized its investments in marketable securities, based on the priority of the inputs used to value the investments, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), and lowest priority to unobservable inputs (Level 3). If the inputs used to measure the investments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the investment. Investments recorded in the accompanying consolidated balance sheet are categorized based on the inputs to valuation techniques as follows:
Level 1—These are investments where values are based on unadjusted quoted prices for identical assets in an active market that the Company has the ability to access.
Level 2—These are investments where values are based on quoted market prices in markets that are not active or model derived valuations in which all significant inputs are observable in active markets.
Level 3—These are liabilities where values are derived from techniques in which one or more significant inputs are unobservable.

15


Etsy, Inc.
Notes to Consolidated Financial Statements

The following are the major categories of assets and liabilities measured at fair value on a recurring basis as of December 31, 2015 and June 30, 2016 (in thousands):
 
 
As of December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Asset
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
212,390

 
$

 
$

 
$
212,390

U.S. Government bills
3

 

 

 
3

 
212,393

 

 

 
212,393

Short-term investments:
 
 
 
 
 
 
 
U.S. Government and agency bills
21,620

 

 

 
21,620

 
$
234,013

 
$

 
$

 
$
234,013

Liability
 
 
 
 
 
 
 
Acquisition–related contingent consideration classified as liability
$

 
$

 
$
2,357

 
$
2,357

 
$

 
$

 
$
2,357

 
$
2,357

 
As of June 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Asset
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
86,675

 
$

 
$

 
$
86,675

U.S. Government bills
11,215

 

 

 
11,215

 
97,890

 

 

 
97,890

Short-term investments:
 
 
 
 
 
 
 
Commercial paper

 
14,974

 

 
14,974

Corporate bonds

 
57,019

 

 
57,019

U.S. Government and agency bills
34,664

 

 

 
34,664

Yankee bonds

 
4,061

 

 
4,061

 
34,664

 
76,054

 

 
110,718

 
$
132,554

 
$
76,054

 
$

 
$
208,608

Liability
 
 
 
 
 
 
 
Acquisition–related contingent consideration classified as liability
$

 
$

 
$
1,428

 
$
1,428

 
$

 
$

 
$
1,428

 
$
1,428

Level 1 instruments include money market funds and AAA-rated U.S. Government and agency securities, which are valued based on inputs including quotes from broker-dealers or recently executed transactions in the same or similar securities.
Level 2 instruments include fixed-income funds consisting of investments in commercial paper, corporate bonds and yankee bonds, which are valued based on quoted market prices in markets that are not active or model derived valuations in which all significant inputs are observable in active markets.
Level 3 instruments include contingent consideration classified as a liability in connection with the acquisition of ALM. The contingent consideration is classified as a liability due to its affiliation with a related put option, which will expire upon vesting of the underlying consideration, and its fair value is determined based on the fair value of the Company's common stock at the period-end reporting date.

16


Etsy, Inc.
Notes to Consolidated Financial Statements

The table below provides a reconciliation of the beginning and ending balances for the liabilities measured at fair value using significant unobservable inputs (Level 3) (in thousands):
 
 
Six Months Ended 
 June 30, 2016
Balance at beginning of period
$
2,357

Acquired

Changes to liability-classified stock awards
1,013

Settled

Conversion of liability-classified restricted shares upon vesting
(1,942
)
Balance at end of period
$
1,428



Note 6—Marketable Securities
Short-term investments consist of marketable securities that are available-for-sale. The cost and fair value of available-for-sale securities were as follows as of the dates indicated (in thousands):

 
Cost
 
Gross
Unrealized
Holding Loss
 
Gross
Unrealized
Holding Gain
 
Fair Value
December 31, 2015
 
 
 
 
 
 
 
U.S. Government and agency bills
$
21,636

 
$
(16
)
 
$

 
$
21,620

 
$
21,636

 
$
(16
)
 
$

 
$
21,620

June 30, 2016
 
 
 
 
 
 
 
Commercial paper
$
14,974

 
$

 
$

 
$
14,974

Corporate bonds
56,959

 
(2
)
 
62

 
57,019

U.S. Government and agency bills
34,632

 
(1
)
 
33

 
34,664

Yankee bonds
4,061

 

 

 
4,061

 
$
110,626

 
$
(3
)
 
$
95

 
$
110,718

The Company’s investments in marketable securities consist primarily of investments in fixed-income funds, money market funds and AAA-rated U.S. Government and agency bills. When evaluating investments for other-than-temporary impairment, the Company reviews factors such as length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and the Company’s ability and intent to hold the investment for a period of time, which may be sufficient for anticipated recovery in market value. The Company evaluates fair values for each individual security in the investment portfolio.

17


Etsy, Inc.
Notes to Consolidated Financial Statements

Note 7—Net Loss Per Share
The following table presents the calculation of basic and diluted net loss per share for periods presented (in thousands, except share and per share data):
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2016
 
2015
 
2016
Net loss
$
(6,354
)
 
$
(7,311
)
 
$
(42,940
)
 
$
(6,119
)
Basic and diluted shares:
 
 
 
 
 
 
 
Weighted average common shares outstanding
96,503,149

 
113,045,888

 
70,403,009

 
112,760,531

Net loss per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic and diluted net loss per share applicable to common stockholders
$
(0.07
)
 
$
(0.06
)
 
$
(0.61
)
 
$
(0.05
)

The following potential common shares were excluded from the calculation of diluted net loss per share attributable to common stockholders because their effect would have been anti-dilutive for the periods presented:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2016
 
2015
 
2016
Stock options
12,020,426

 
11,129,114

 
11,919,345

 
11,155,837

Restricted stock units
30,794

 
1,941,768

 
15,482

 
1,395,452

Warrants
203,030

 
36,590

 
203,030

 
67,261

Convertible preferred stock
12,334,210

 

 
32,777,652

 

Total anti-dilutive securities
24,588,460

 
13,107,472

 
44,915,509

 
12,618,550

Note 8—Segment and Geographic Information
Revenue by country is based on the billing address of the seller. The following table summarizes revenue by geographic area (in thousands):
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2016
 
2015
 
2016
United States
$
47,981

 
$
64,773

 
$
93,733

 
$
127,814

International
13,384

 
20,576

 
26,175

 
39,382

Revenue
$
61,365

 
$
85,349

 
$
119,908

 
$
167,196

No individual international country’s revenue exceeded 10% of total revenue.
Note 9—Contingencies
Non-Income Tax Contingencies
The Company had reserves of $2.6 million and $1.8 million at December 31, 2015 and June 30, 2016, respectively, for certain non-income tax obligations, representing management’s best estimate of its potential liability.
The Company could also be subject to examination in various jurisdictions related to non-income tax matters. The resolution of these types of matters, if in excess of the recorded reserve, could have an adverse impact on the Company’s business.

18


Etsy, Inc.
Notes to Consolidated Financial Statements

Legal Proceedings

On May 13, 2015, a purported securities class action complaint (Altayyar v. Etsy, Inc., et al., Docket No. 1:15-cv-02785) was filed in the United States District Court for the Eastern District of New York against the Company and certain officers. The complaint was brought on behalf of a purported class consisting of all persons or entities who purchased or otherwise acquired shares of the Company's common stock from April 16, 2015 through and including May 10, 2015. It asserted violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based on allegedly false or misleading statements and omissions with respect to, among other things, merchandise for sale on the Company's website that may be counterfeit or constitute trademark or copyright infringement. 

On October 22, 2015, the court appointed a lead plaintiff and lead plaintiff’s counsel. On January 21, 2016, lead plaintiff filed an amended class action complaint alleging false or misleading statements or omissions with respect to substantially the same topics as the original complaint. The amended complaint adds certain outside directors and underwriters as defendants, expands the purported class period to be April 16, 2015 to August 4, 2015, inclusive, and asserts violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, as well as Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The amended complaint seeks certification as a class action and unspecified compensatory damages plus interest and attorneys' fees. The Company and the named officers and directors intend to defend themselves vigorously against this action. In light of, among other things, the early stage of the litigation, the Company is unable to predict the outcome of this matter and is unable to make a meaningful estimate of the amount or range of loss, if any, that could result from an unfavorable outcome.

On July 21, 2015, a purported securities class action complaint (Cervantes v. Dickerson, et.al., Case No. CIV 534768) was filed in the Superior Court of State of California, County of San Mateo, against the Company, certain officers, directors and underwriters. The complaint asserts violations of Sections 11 and 15 of the Securities Act of 1933.  As in the Altayyar litigation, the complaint alleges misrepresentations in the Company’s Registration Statement on Form S-1 and Prospectus with respect to, among other things, merchandise for sale on the Company's website that may be counterfeit or constitute trademark or copyright infringement. The complaint seeks certification as a class action and unspecified compensatory damages plus interest and attorneys' fees.

On November 5, 2015, another purported securities class action complaint (Weiss v. Etsy et al., No. CIV 536123) was filed in the Superior Court of State of California, County of San Mateo. The Weiss complaint names as defendants the Company and the same officers, directors and underwriters named in the Cervantes complaint, and also asserts violations of Sections 11 and 15 of the Securities Act of 1933 based on allegedly false or misleading statements or omissions with respect to, among other things, merchandise for sale on the Company's website that may be counterfeit or constitute trademark or copyright infringement. On December 24, 2015, the court consolidated the Cervantes and Weiss actions. The Company and the named officers and directors intend to defend themselves vigorously against these consolidated actions. On February 3, 2016, the court granted the Company’s motion to stay the consolidated actions. In light of, among other things, the early stage of the litigation, the Company is unable to predict the outcome of this matter and is unable to make a meaningful estimate of the amount or range of loss, if any, that could result from an unfavorable outcome.
In addition, from time to time in the normal course of business, various other claims and litigation have been asserted or commenced against the Company. Due to uncertainties inherent in litigation and other claims, the Company can give no assurance that it will prevail in any such matters, which could subject the Company to significant liability for damages. Any claims or litigation, regardless of their success, could have an adverse effect on the Company’s consolidated results of operations or cash flows in the period the claims or litigation are resolved. As of June 30, 2016, the Company does not believe that there are any material litigation exposures relating to these other claims.

19


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and with the audited consolidated financial statements included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2016. This discussion, particularly information with respect to our outlook, our plans and strategy for our business and our performance and future success, includes forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section, and in “Management's Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting our Performance” in our Annual Report on Form 10-K.
Overview
We operate a marketplace where people around the world connect, both online and offline, to make, sell and buy unique goods. Our business model is based on shared success: we make money when Etsy sellers make money, so we also offer services to Etsy sellers to help them create and grow their businesses.
Our revenue is diversified, generated from a mix of marketplace activities and Seller Services. Marketplace revenue is made up of two components: the $0.20 listing fee that an Etsy seller pays for each item she lists and the 3.5% transaction fee she pays for each completed transaction. Seller Services revenue includes the fees our Etsy sellers pay Etsy for services, which include Promoted Listings, our ad service for prominent placement in on-site search results, Direct Checkout, our payment processing service, Shipping Labels, which allows Etsy sellers to purchase shipping labels through our platform, and Pattern by Etsy, our subscription service enabling sellers to create their own custom website. Other revenue includes the fees we receive from Paypal, a third-party payment processor, and funds we receive from a third-party service provider for unused Etsy gift cards.
As of June 30, 2016, through our innovative, technology-based platform, we connected a community of 1.7 million active Etsy sellers and 26.1 million active Etsy buyers, in nearly every country in the world. In the three and six months ended June 30, 2016, Etsy sellers generated GMS of $669.7 million and $1.3 billion, respectively, of which slightly more than 47% came from purchases made on mobile devices. We are a global company and 30.7% and 30.5% of our GMS in the three and six months ended June 30, 2016, respectively, came from an Etsy seller or an Etsy buyer outside of the United States.
We completed our initial public offering (the “IPO”) of our common stock on April 21, 2015.
Key Operating and Financial Metrics
We collect and analyze operating and financial data to evaluate the health of our ecosystem, allocate our resources (such as capital, time and technology investments) and assess the performance of our business. The key operating and financial metrics we use are:
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2016
 
2015
 
2016
 
 
 
 
 
 
 
 
 
(in thousands, except percentages)
GMS
$
546,197

 
$
669,704

 
$
1,078,112

 
$
1,298,871

Revenue
$
61,365

 
$
85,349

 
$
119,908

 
$
167,196

Marketplace revenue
$
30,469

 
$
37,405

 
$
60,620

 
$
73,135

Seller Services revenue
$
29,770

 
$
47,069

 
$
57,049

 
$
90,602

Net loss
$
(6,354
)
 
$
(7,311
)
 
$
(42,940
)
 
$
(6,119
)
Adjusted EBITDA
$
4,061

 
$
14,040

 
$
10,734

 
$
28,791

 
 
 
 
 
 
 
 
Active sellers
1,484

 
1,654

 
1,484

 
1,654

Active buyers
21,697

 
26,104

 
21,697

 
26,104

Percent mobile visits
60
%
 
64
%
 
60
%
 
63
%
Percent mobile GMS
43
%
 
47
%
 
43
%
 
47
%
Percent international GMS
30.2
%
 
30.7
%
 
30.4
%
 
30.5
%

20


GMS
Gross merchandise sales, or GMS, is the dollar value of items sold in our marketplace within the applicable period, excluding shipping fees and net of refunds associated with canceled transactions. GMS does not represent revenue earned by us. GMS relates only to Marketplace activity and does not reflect Seller Services activity. However, because our revenue and cost of revenue depend significantly on the dollar value of items sold in our marketplace, we believe that GMS is an indicator of the success of Etsy sellers, the satisfaction of Etsy buyers, the health of our ecosystem and the scale and growth of our business.
Adjusted EBITDA
Adjusted EBITDA represents our net loss adjusted to exclude: interest and other non-operating expense, net; provision for income taxes; depreciation and amortization; stock-based compensation expense; net unrealized loss on warrant and other liabilities; foreign exchange (gain) loss; and our contributions to Etsy.org. See “Non-GAAP Financial Measures” for additional information regarding our use of Adjusted EBITDA, including its limitations as a financial measure, and for a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure calculated in accordance with GAAP.
Active Sellers
An active seller is an Etsy seller who has incurred at least one charge from us in the last 12 months. Charges include transaction fees, listing fees and fees for Direct Checkout, Promoted Listings, Shipping Labels, Pattern and Wholesale enrollment. An Etsy seller is someone who has created an account and has listed an item in our marketplace. An Etsy seller is identified by a unique e-mail address; a single person can have multiple Etsy seller accounts. We succeed when Etsy sellers succeed, so we view the number of active sellers as a key indicator of the awareness of our brand, the reach of our platform, the potential for growth in GMS and revenue and the health of our ecosystem.
Active Buyers
An active buyer is an Etsy buyer who has made at least one purchase in the last 12 months. An Etsy buyer is someone who has created an account in our marketplace. An Etsy buyer is identified by a unique e-mail address; a single person can have multiple Etsy buyer accounts. We succeed when Etsy buyers order items from Etsy sellers, so we view the number of active buyers as a key indicator of our potential for growth in GMS and revenue, the reach of our platform, awareness of our brand, the engagement and loyalty of Etsy buyers and the health of our ecosystem.
Mobile Visits
A visit represents activity from a unique browser or mobile app. A visit ends after 30 minutes of activity. A mobile visit is a visit that occurs on a mobile device, such as a tablet or a smartphone. Etsy sellers are increasingly using mobile devices to manage their listings and track their business performance on our platform. In addition, Etsy buyers increasingly use mobile devices to search, browse and purchase items on our platform. We view percent mobile visits as a key indicator of the level of engagement of Etsy sellers and Etsy buyers on our mobile website and mobile apps and of our ability to sustain GMS and revenue.
Mobile GMS
Mobile GMS is GMS that occurs on a mobile device, such as a tablet or a smartphone. Mobile GMS excludes orders initiated on mobile devices but ultimately completed on a desktop. We believe that mobile GMS indicates our success in converting mobile activity into mobile purchases and demonstrates our ability to grow GMS and revenue.
International GMS
International GMS is GMS from transactions where either the billing address for the Etsy seller or the shipping address for the Etsy buyer at the time of sale is outside of the United States. We believe that international GMS shows the level of engagement of our community outside the United States and demonstrates our ability to grow GMS and revenue.

21


Results of Operations
The following tables show our results of operations for the periods presented and express the relationship of certain line items as a percentage of revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results. For more information regarding the components of our results of operations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Components of Our Results of Operations” in the Annual Report, which we incorporate by reference.
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2016
 
2015
 
2016
 
 
 
 
 
 
 
 
 
(in thousands)
 
(in thousands)
Revenue:
 
 
 
 
 
 
 
Marketplace
$
30,469

 
$
37,405

 
$
60,620

 
$
73,135

Seller Services
29,770

 
47,069

 
57,049

 
90,602

Other
1,126

 
875

 
2,239

 
3,459

Total revenue
61,365

 
85,349

 
119,908

 
167,196

Cost of revenue
21,909

 
29,098

 
42,618

 
57,009

Gross profit
39,456

 
56,251

 
77,290

 
110,187

Operating expenses:
 
 
 
 
 
 
 
Marketing
15,543

 
17,205

 
27,753

 
33,052

Product development
10,072

 
11,840

 
20,081

 
24,070

General and administrative
17,632

 
22,537

 
38,089

 
41,613

Total operating expenses
43,247

 
51,582

 
85,923

 
98,735

(Loss) income from operations
(3,791
)
 
4,669

 
(8,633
)
 
11,452

Other income (expense), net
2,346

 
(7,719
)
 
(18,673
)
 
304

(Loss) income before income taxes
(1,445
)
 
(3,050
)
 
(27,306
)
 
11,756

Provision for income taxes
(4,909
)
 
(4,261
)
 
(15,634
)
 
(17,875
)
Net loss
$
(6,354
)
 
$
(7,311
)
 
$
(42,940
)
 
$
(6,119
)
 
 
 
 
 
 
 
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2016
 
2015
 
2016
Revenue:
 
 
 
 
 
 
 
Marketplace
49.7
 %
 
43.8
 %
 
50.6
 %
 
43.7
 %
Seller Services
48.5

 
55.1

 
47.6

 
54.2

Other
1.8

 
1.0

 
1.9

 
2.1

Total revenue
100.0

 
100.0

 
100.0

 
100.0

Cost of revenue
35.7

 
34.1

 
35.5

 
34.1

Gross profit
64.3

 
65.9

 
64.5

 
65.9

Operating expenses:
 
 
 
 
 
 
 
Marketing
25.3

 
20.2

 
23.1

 
19.8

Product development
16.4

 
13.9

 
16.7

 
14.4

General and administrative
28.7

 
26.4

 
31.8

 
24.9

Total operating expenses
70.5

 
60.4

 
71.7

 
59.1

(Loss) income from operations
(6.2
)
 
5.5

 
(7.2
)
 
6.8

Other income (expense), net
3.8

 
(9.0
)
 
(15.6
)
 
0.2

(Loss) income before income taxes
(2.4
)
 
(3.6
)
 
(22.8
)
 
7.0

Provision for income taxes
(8.0
)
 
(5.0
)
 
(13.0
)
 
(10.7
)
Net loss
(10.4
)
 
(8.6
)
 
(35.8
)
 
(3.7
)


22


Comparison of Three Months Ended June 30, 2015 and 2016
Revenue
 
 
 
Three Months Ended
June 30,
 
Change
 
 
2015
 
2016
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except percentages)
Revenue:
 
 
 
 
 
 
 
 
Marketplace
 
$
30,469

 
$
37,405

 
$
6,936

 
22.8
 %
Percentage of total revenue
 
49.7
%
 
43.8
%
 
 
 
 
Seller Services
 
$
29,770

 
$
47,069

 
$
17,299

 
58.1
 %
Percentage of total revenue
 
48.5
%
 
55.1
%
 
 
 
 
Other
 
$
1,126

 
$
875

 
$
(251
)
 
(22.3
)%
Percentage of total revenue
 
1.8
%
 
1.0
%
 
 
 
 
Total revenue
 
$
61,365

 
$
85,349

 
$
23,984

 
39.1
 %
GMS increased $123.5 million, or 22.6%, to $669.7 million in the three months ended June 30, 2016 compared to the three months ended June 30, 2015. On a currency-neutral basis (excluding the direct impact of currency translation on GMS from goods that are not listed in U.S. dollars) GMS growth in the second quarter of 2016 would have been 23.1%, or approximately 0.5 percentage points higher than the as-reported 22.6% growth. Supporting this growth in GMS, active sellers increased 11.5% to 1.7 million and active buyers increased 20.3% to 26.1 million at June 30, 2016 compared to June 30, 2015.
During the three months ended June 30, 2016, mobile GMS increased as a percentage of total GMS to slightly more than 47%, up from approximately 43% for the three months ended June 30, 2015, as a result of increased mobile traffic and, to a lesser extent, continued improvements in our mobile offerings for Etsy buyers. During the second quarter, conversion rates increased across desktop, mobile web and mobile app. Desktop conversion rates expanded at a pace similar to overall mobile conversion rates, and as a result,the gap between mobile visits and mobile GMS remained stable. Year-over-year, mobile app and mobile web GMS each continued to grow faster than desktop GMS during the three months ended June 30, 2016. We believe that we will continue to see the gap between mobile visits and mobile GMS narrow over time. 
For the three months ended June 30, 2016, international GMS increased as a percentage of total GMS to 30.7%, from 30.2% for the three months ended June 30, 2015. We expect our percent international GMS to remain stable in 2016, assuming that currencies remain stable compared to average levels in December 2015. We continue to believe that we can grow international GMS, over time, to represent 50% of total GMS. The improved performance in percent international GMS was largely driven by GMS growth between U.S. buyers and international sellers and GMS growth between international buyers and sellers, both in the same country and cross-border. We continue to believe the decline of GMS between U.S. sellers and international buyers, which declined 8% in the second quarter, is indicative of the indirect impact of fluctuating currency exchange rates on international buyer behavior, which is difficult to estimate. Finally, GMS growth between international buyers and sellers in the same country has been the fastest growing category of international GMS for several quarters. Excluding our French marketplace ALM, GMS growth between international buyers and sellers in the same country accelerated to 67% year-over-year during the second quarter. Although this is still our smallest category of international GMS, it has grown in size, which we believe demonstrates the progress we are making on our strategy to build local marketplaces, globally.
Revenue increased $24.0 million, or 39.1%, to $85.3 million in the three months ended June 30, 2016 compared to the three months ended June 30, 2015, of which 43.8% of the total consisted of Marketplace revenue and 55.1% consisted of Seller Services revenue.
Marketplace revenue increased $6.9 million, or 22.8%, to $37.4 million in the three months ended June 30, 2016 compared to the three months ended June 30, 2015. This growth corresponded with a 22.6% increase in GMS to a total of $669.7 million for the three months ended June 30, 2016. As our GMS increased, our Marketplace revenue increased, primarily due to growth in transaction fee revenue and, to a lesser extent, an increase in listing fee revenue.
Seller Services revenue increased $17.3 million, or 58.1%, to $47.1 million in the three months ended June 30, 2016 compared to the three months ended June 30, 2015. The growth in Seller Services revenue was primarily driven by an increase in revenue from Direct Checkout, which continued to benefit from the integration of Paypal. We believe that the Paypal integration will remain a driver of year-over-year growth in Direct Checkout and Seller Services revenue until we anniversary this event in the fourth quarter of 2016. Seller Services revenue also benefited from the growth in revenue from Promoted Listings and Shipping Labels and, to a lesser extent, a modest contribution from Pattern by Etsy, our newest Seller Service that we launched in April.

23


The increase in Promoted Listings revenue was due to higher click volume and overall product enhancements. The increase in Shipping Label revenue reflects a combination of an increase in label volume and an increase in average margin per label. Growth in Seller Services revenue continued to outpace growth in Marketplace revenue in the second quarter of 2016. We expect Seller Services revenue related to our existing offerings to continue to grow in 2016, driven by increased adoption and product enhancements. Additionally, we expect to see modest contributions to revenue related to new product launches and types of Seller Services, including Pattern by Etsy. We do not expect the incremental revenue related to these new product launches and types of Seller Services to be material in comparison to total revenue in 2016.
Other revenue decreased 22.3% to $0.9 million in the three months ended June 30, 2016 compared to the three months ended June 30, 2015, mainly due to the reduction of fees from Paypal, a third-party payment processor, as a result of its integration into Direct Checkout.

Cost of Revenue
 
 
 
Three Months Ended
June 30,
 
Change
 
 
2015
 
2016
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except percentages)
Cost of revenue
 
$
21,909

 
$
29,098

 
$
7,189

 
32.8
%
Percentage of total revenue
 
35.7
%
 
34.1
%
 
 
 
 
Cost of revenue increased $7.2 million, or 32.8%, to $29.1 million in the three months ended June 30, 2016 compared to the three months ended June 30, 2015, primarily as a result of additional costs to support the increase in Direct Checkout revenue and, to a lesser extent, an increase in employee-related costs. Cost of revenue decreased as a percentage of revenue due to the leverage we achieved in costs related to our technology infrastructure and employee-related costs.
Operating Expenses
Overall in 2016, we expect total operating expenses as a percentage of revenue to decline, which will create leverage in our operating cost structure. There were 921 total employees on June 30, 2016, compared with 852 on March 31, 2016. We expect to continue to hire at the same pace in the three months ended September 30, 2016 as compared to both the three months ended June 30, 2016 and September 30, 2015.
Marketing
 
 
 
Three Months Ended
June 30,
 
Change
 
 
2015
 
2016
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except percentages)
Marketing
 
$
15,543

 
$
17,205

 
$
1,662

 
10.7
%
Percentage of total revenue
 
25.3
%
 
20.2
%
 
 
 
 
Marketing expenses increased $1.7 million, or 10.7%, to $17.2 million in the three months ended June 30, 2016 compared to the three months ended June 30, 2015, primarily as a result of an increase in employee-related expenses in our marketing team, which includes our public relations, communications and seller development teams, while digital marketing spend decreased. During the second half of 2016, we expect to accelerate our pace of marketing spend compared with the first half, but overall, as a percent of revenue, marketing will decrease in 2016.

24


Product development
 
 
 
Three Months Ended
June 30,
 
Change
 
 
2015
 
2016
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except percentages)
Product development
 
$
10,072

 
$
11,840

 
$
1,768

 
17.6
%
Percentage of total revenue
 
16.4
%
 
13.9
%
 
 
 
 
Product development expenses increased $1.8 million, or 17.6%, to $11.8 million in the three months ended June 30, 2016 compared to the three months ended June 30, 2015, primarily as a result of an increase in employee-related expenses in our product and engineering teams.
General and administrative
 
 
 
Three Months Ended
June 30,
 
Change
 
 
2015
 
2016
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except percentages)
General and administrative
 
$
17,632

 
$
22,537

 
$
4,905

 
27.8
%
Percentage of total revenue
 
28.7
%
 
26.4
%
 
 
 
 
General and administrative expenses increased $4.9 million, or 27.8%, to $22.5 million in the three months ended June 30, 2016 compared to the three months ended June 30, 2015, primarily driven by an increase in employee-related costs, overhead related to our new office locations, including depreciation expense related to our new Brooklyn headquarters and professional services mainly related to compliance with Sarbanes-Oxley. We expect general and administrative expense to increase in the second half of 2016 due to additional overhead expenses related to our new Brooklyn headquarters.
Other Income (Expense), net
 
 
 
Three Months Ended
June 30,
 
Change    
 
 
2015
 
2016
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except percentages)
Other income (expense), net
 
$
2,346

 
$
(7,719
)
 
$
(10,065
)
 
NM
Percentage of total revenue
 
3.8
%
 
(9.0
)%
 
 
 
 
Other income, net was $2.3 million in the three months ended June 30, 2015 mainly due to a foreign exchange gain largely made up of a non-cash unrealized currency gain due to intercompany debt in connection with the revised global corporate structure that we implemented on January 1, 2015. The gain was partially offset by the mark-to-market loss related to convertible warrants. As a result of the IPO, the convertible warrants are now classified as equity instruments and do not require additional mark-to-market adjustments. Other expense, net was $7.7 million in the three months ended June 30, 2016 mainly due to a foreign exchange loss related to the intercompany debt in addition to interest expense largely associated with the build-to-suit lease accounting related to our new corporate headquarters.

25


Provision for Income Taxes
 
 
 
Three Months Ended
June 30,
 
Change
 
 
2015
 
2016
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except percentages)
Provision for income taxes
 
$
(4,909
)
 
$
(4,261
)
 
$
648

 
(13.2
)%
Percentage of total revenue
 
(8.0
)%
 
(5.0
)%
 
 
 
 
Our income tax provision for the three months ended June 30, 2015 and June 30, 2016 was $4.9 million and $4.3 million, respectively. The primary driver of our income tax provision for the three months ended June 30, 2015 was the tax expense related to our updated corporate structure of $2.0 million. The primary driver of our income tax provision for the three months ended June 30, 2016 was an increase in our forecasted pretax income. For both periods, other drivers include the disallowance of the benefit of losses in certain foreign jurisdictions, the mix of income and losses in jurisdictions with a wide range of tax rates, and the amount of non-deductible stock-based compensation expense.
Comparison of Six Months Ended June 30, 2015 and 2016
Revenue
 
 
 
Six Months Ended 
 June 30,
 
Change
 
 
2015
 
2016
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except percentages)
Revenue:
 
 
 
 
 
 
 
 
Marketplace
 
$
60,620

 
$
73,135

 
$
12,515

 
20.6
%
Percentage of total revenue
 
50.6
%
 
43.7
%
 
 
 
 
Seller Services
 
$
57,049

 
$
90,602

 
$
33,553

 
58.8
%
Percentage of total revenue
 
47.6
%
 
54.2
%
 
 
 
 
Other
 
$
2,239

 
$
3,459

 
$
1,220

 
54.5
%
Percentage of total revenue
 
1.9
%
 
2.1
%
 
 
 
 
Total revenue
 
$
119,908

 
$
167,196

 
$
47,288

 
39.4
%
GMS increased $220.8 million, or 20.5%, to $1.3 billion in the six months ended June 30, 2016 compared to the six months ended June 30, 2015. On a currency-neutral basis (excluding the direct impact of currency translation on GMS from goods that are not listed in U.S. dollars) GMS growth for the six months ended June 30, 2016 would have been 21.1%, or approximately 0.6 percentage points higher than the reported 20.5% growth. Supporting this growth in GMS, active sellers increased 11.5% to 1.7 million and active buyers increased 20.3% to 26.1 million at June 30, 2016 compared to June 30, 2015.
During the six months ended June 30, 2016, mobile GMS increased as a percentage of total GMS to slightly more than 47%, up from approximately 43% for the six months ended June 30, 2015 as a result of increased mobile traffic and, to a lesser extent, continued improvements in our mobile offerings for Etsy buyers. For the six months ended June 30, 2016, conversion rates increased across desktop, mobile web and mobile app. Desktop conversion rates expanded at a pace similar to overall mobile conversion rates, and as a result, the gap between mobile visits and mobile GMS remained stable. Year-over-year, mobile app and mobile web GMS each continued to grow faster than desktop GMS during the six months ended June 30, 2016. We believe that we will continue to see the gap between mobile visits and mobile GMS narrow over time. 
For the six months ended June 30, 2016, international GMS increased as a percentage of total GMS to 30.5%, from 30.4% for the six months ended June 30, 2015. We expect our percent international GMS to remain stable in 2016, assuming that currencies remain stable compared to average levels in December 2015. We continue to believe that we can grow international GMS, over time, to represent 50% of total GMS. The improved performance in percent international GMS was largely driven by GMS growth between U.S. buyers and international sellers and GMS growth between international buyers and sellers, both in the same country and cross-border. We continue to believe the decline of GMS between U.S. sellers and international buyers, which decreased 9% in the six months ended June 30, 2016, is indicative of the indirect impact of fluctuating currency exchange rates on international buyer behavior, which is difficult to estimate. Finally, GMS growth between international buyers and sellers in the same country has been the fastest growing category of international GMS for several quarters. Excluding our French marketplace ALM, GMS growth between international buyers and sellers in the same country accelerated

26



to 62% year-over-year during the six months ended June 30, 2016. Although this is still our smallest category of international GMS, it has grown in size, which we believe demonstrates the progress we are making on our strategy to build local marketplaces, globally.
Revenue increased $47.3 million, or 39.4%, to $167.2 million in the six months ended June 30, 2016 compared to the six months ended June 30, 2015, of which 43.7% consisted of Marketplace revenue and 54.2% consisted of Seller Services revenue. Additionally, we recognized $1.7 million in revenue from accumulated unused gift card funds received from our third-party service provider during the first quarter of 2016. Excluding this one-time payment, revenue would have increased 38.0% in the six months ended June 30, 2016 compared to the six months ended June 30, 2015.
Marketplace revenue increased $12.5 million, or 20.6%, to $73.1 million in the six months ended June 30, 2016 compared to the six months ended June 30, 2015. This growth corresponded with a 20.5% increase in GMS to a total of $1.3 billion for the six months ended June 30, 2016. As our GMS increased, our Marketplace revenue increased, primarily due to growth in transaction fee revenue and, to a lesser extent, an increase in listing fee revenue.
Seller Services revenue increased $33.6 million, or 58.8%, to $90.6 million in the six months ended June 30, 2016 compared to the six months ended June 30, 2015.The growth in Seller Services revenue was primarily driven by an increase in revenue from Direct Checkout, which continued to benefit from the integration of Paypal. We believe that the Paypal integration will remain a driver of year-over-year growth in Direct Checkout and Seller Services revenue until we anniversary this event in the fourth quarter of 2016. Seller Services revenue also benefited from the growth in revenue from Promoted Listings and Shipping Labels and, to a lesser extent, a modest contribution from Pattern by Etsy, our newest Seller Service that we launched in April. The increase in Promoted Listings revenue was due to higher click volume and overall product enhancements. The increase in Shipping Label revenue reflects a combination of an increase in label volume and an increase in average margin per label. Seller Services revenue continued to outpace growth in Marketplace revenue in the first half of 2016. We expect Seller Services revenue related to our existing offerings to continue to grow in 2016, driven by increased adoption and product enhancements. Additionally, we expect to see modest contributions to revenue related to new product launches and types of Seller Services, including Pattern by Etsy. We do not expect the incremental revenue related to these new product launches and types of Seller Services to be material in comparison to total revenue in 2016.
Other revenue increased $1.2 million, or 54.5%, to $3.5 million in the six months ended June 30, 2016 compared to the six months ended June 30, 2015, mainly due to the recognition of $1.7 million in revenue from accumulated unused gift card funds received from our third-party service provider. This represents the three-year cumulative value of gift cards that the third-party service provider has concluded are not likely to be redeemed. Future unused gift card revenue will be recognized monthly as earned and is not anticipated to be significant in future periods. This increase was partially offset by a reduction of fees from Paypal, a third-party payment processor, as a result of its integration into Direct Checkout.

Cost of Revenue
 
 
 
Six Months Ended 
 June 30,
 
Change
 
 
2015
 
2016
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except percentages)
Cost of revenue
 
$
42,618

 
$
57,009

 
$
14,391

 
33.8
%
Percentage of total revenue
 
35.5
%
 
34.1
%
 
 
 
 
Cost of revenue increased $14.4 million, or 33.8%, to $57.0 million in the six months ended June 30, 2016 compared to the six months ended June 30, 2015, primarily as a result of additional costs to support the increase in Direct Checkout revenue and, to a lesser extent, an increase in employee-related costs. Cost of revenue decreased as a percentage of revenue due to the leverage we achieved in costs related to our technology infrastructure and employee-related costs.

27



Operating Expenses
Overall in 2016, we expect total operating expenses as a percentage of revenue to decline, which will create leverage in our operating cost structure. There were 921 total employees on June 30, 2016, compared with 819 on December 31, 2015. We expect to continue to hire at the same pace in the second half of 2016 compared to the six months ended June 30, 2016 and higher than the six months ended December 31,2015.
Marketing
 
 
 
Six Months Ended 
 June 30,
 
Change
 
 
2015
 
2016
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except percentages)
Marketing
 
$
27,753

 
$
33,052

 
$
5,299

 
19.1
%
Percentage of total revenue
 
23.1
%
 
19.8
%
 
 
 
 
Marketing expenses increased $5.3 million, or 19.1%, to $33.1 million in the six months ended June 30, 2016 compared to the six months ended June 30, 2015, primarily as a result of an increase in spending on employee-related expenses and affiliate marketing campaigns in our marketing team, which includes our public relations, communications and seller development teams. During the second half of 2016, we expect to accelerate our pace of marketing spend compared with the first half, but overall, as a percent of revenue, marketing will decrease in 2016.
Product development
 
 
 
Six Months Ended 
 June 30,
 
Change
 
 
2015
 
2016
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except percentages)
Product development
 
$
20,081

 
$
24,070

 
$
3,989

 
19.9
%
Percentage of total revenue
 
16.7
%
 
14.4
%
 
 
 
 
Product development expenses increased $4.0 million, or 19.9%, to $24.1 million in the six months ended June 30, 2016 compared to the six months ended June 30, 2015, primarily as a result of an increase in employee-related expenses in our product and engineering teams.
General and administrative
 
 
 
Six Months Ended 
 June 30,
 
Change
 
 
2015
 
2016
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except percentages)
General and administrative
 
$
38,089

 
$
41,613

 
$
3,524

 
9.3
%
Percentage of total revenue
 
31.8
%
 
24.9
%
 
 
 
 
General and administrative expenses increased $3.5 million, or 9.3%, to $41.6 million in the six months ended June 30, 2016 compared to the six months ended June 30, 2015, primarily driven by an increase in professional services mainly related to compliance with Sarbanes-Oxley, overhead related to our new office locations, including depreciation expense related to our new Brooklyn headquarters and employee-related costs. This increase was partially offset by a one-time contribution of $3.5 million to Etsy.org during the first half of 2015. Removing the impact of this contribution, general and administrative expenses would have increased 20.3%. We expect general and administrative expense to increase in the second half of 2016 due to additional overhead expenses related to our new Brooklyn headquarters.

28



Other Expense (Income), net
 
 
 
Six Months Ended 
 June 30,
 
Change    
 
 
2015
 
2016
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except percentages)
Other expense (income), net
 
$
(18,673
)
 
$
304

 
$
18,977

 
NM
Percentage of total revenue
 
(15.6
)%
 
0.2
%
 
 
 
 
Other expense, net was $18.7 million in the six months ended June 30, 2015 mainly due to a foreign exchange loss largely made up of a non-cash unrealized currency loss due to intercompany debt in connection with the revised global corporate structure that we implemented on January 1, 2015. The loss was in addition to the mark-to-market loss related to convertible warrants. As a result of the IPO, the convertible warrants are now classified as equity instruments and do not require additional mark-to-market adjustments. Other income, net was $0.3 million in the six months ended June 30, 2016 mainly due to interest expense largely associated with the build-to-suit lease accounting related to our new corporate headquarters partially offset by a foreign exchange gain related to the intercompany debt and interest income.
Provision for Income Taxes
 
 
 
Six Months Ended 
 June 30,
 
Change
 
 
2015
 
2016
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except percentages)
Provision for income taxes
 
$
(15,634
)
 
$
(17,875
)