Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________________

FORM 10-Q

__________________________________



☒	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended	June 30, 2020

	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) 880-3660

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class		Trading Symbol(s)	Name of each exchange on which registered
Common Stock	$0.001 par value per share	ETSY	The Nasdaq Global Select Market

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 every Interactive Data File required to be submitted 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 such files). Yes x No ¨

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



Large Accelerated Filer	☒	Accelerated Filer	☐
Non-accelerated Filer	☐	Smaller Reporting Company	☐
Non-accelerated Filer		Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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 August 3, 2020 was 119,327,613.

Etsy, Inc.

Table of Contents



		Page
	Note Regarding Forward-Looking Statements	3
	Part I - Financial Information	4
Item 1.	Consolidated Financial Statements (Unaudited)	4
	Consolidated Balance Sheets	4
	Consolidated Statements of Operations	5
	Consolidated Statements of Comprehensive Income	6
	Consolidated Statements of Changes in Stockholders’ Equity	7
	Condensed Consolidated Statements of Cash Flows	9
	Notes to Consolidated Financial Statements	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	46
	Part II - Other Information	47
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	73
Item 3.	Defaults Upon Senior Securities	73
Item 4.	Mine Safety Disclosures	73
Item 5.	Other Information	73
Item 6.	Exhibits	74
	Signatures	75

Unless the context otherwise requires, we use the terms “Etsy,” the “Company,” “we,” “us,” and “our” in this Quarterly Report on Form 10-Q (“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,” “Adjusted EBITDA,” “GMS,” “international GMS,” and “mobile GMS.”

Etsy has used, and intends to continue using, its investor relations website and the Etsy News Blog (blog.etsy.com/news) to disclose material non-public information and to comply with its disclosure obligations under Regulation FD. Accordingly, you should monitor our investor relations website and the Etsy News Blog in addition to following our press releases, SEC filings, and public conference calls and webcasts.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements include information relating to the impact of our strategy, marketing, and product investments on future gross merchandise sales (“GMS”) and revenue growth, the impact of our “Right to Win” strategy and levers for growth, the impact of ongoing settlement of intercompany balances on future foreign exchange rate volatility, our free shipping initiative, and our new Offsite Ads offering on our future financial performance, and the uncertain impacts that the COVID-19 pandemic may have on our business, strategy, operating results, key metrics, financial condition, profitability, and cash flows and changes in overall level of consumer spending and volatility in the global economy. 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 the section titled “Risk Factors” and elsewhere in this Quarterly Report. Given these uncertainties, you should read this Quarterly Report in its entirety and not place undue reliance on any forward-looking statements in this Quarterly Report.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report and, although we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

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 Quarterly Report. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this Quarterly Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. In addition, the global economic climate and additional or unforeseen effects from the COVID-19 pandemic may amplify many of these risks.

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

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PART I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited).

Etsy, Inc.

Consolidated Balance Sheets (Unaudited)

(In thousands, except share and per share amounts)



	As of June 30, 2020			As of December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	677,524		$	443,293
Short-term investments	365,659			373,959
Accounts receivable, net of expected credit losses of $6,182 and $5,033 as of June 30, 2020 and December 31, 2019, respectively	16,527			15,386
Prepaid and other current assets	30,768			38,614
Funds receivable and seller accounts	103,857			49,786
Total current assets	1,194,335			921,038
Restricted cash	5,341			5,341
Property and equipment, net of accumulated depreciation and amortization of $141,307 and $120,084 as of June 30, 2020 and December 31, 2019, respectively	126,187			144,864
Goodwill	138,757			138,731
Intangible assets, net of accumulated amortization of $17,293 and $16,911 as of June 30, 2020 and December 31, 2019, respectively	191,685			199,236
Deferred tax assets	8,336			14,257
Long-term investments	73,143			89,343
Other assets	24,247			29,542
Total assets	$	1,762,031		$	1,542,352
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	15,978		$	26,324
Accrued expenses	134,016			88,345
Finance lease obligations—current	8,073			8,275
Funds payable and amounts due to sellers	103,857			49,786
Deferred revenue	9,181			7,617
Other current liabilities	8,474			8,181
Total current liabilities	279,579			188,528
Finance lease obligations—net of current portion	49,258			53,611
Deferred tax liabilities	66,301			64,497
Long-term debt, net	803,227			785,126
Other liabilities	39,491			43,956
Total liabilities	1,237,856			1,135,718
Commitments and contingencies (Note 10)
Stockholders’ equity:
Common stock ($0.001 par value, 1,400,000,000 shares authorized as of June 30, 2020 and December 31, 2019; 119,140,637 and 118,342,772 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively)	119			119
Preferred stock ($0.001 par value, 25,000,000 shares authorized as of June 30, 2020 and December 31, 2019)	—			—
Additional paid-in capital	675,213			642,628
Accumulated deficit	(143,458		)	(227,414		)
Accumulated other comprehensive loss	(7,699		)	(8,699		)
Total stockholders’ equity	524,175			406,634
Total liabilities and stockholders’ equity	$	1,762,031		$	1,542,352

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

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Etsy, Inc.

Consolidated Statements of Operations (Unaudited)

(In thousands, except share and per share amounts)



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Revenue	$	428,737		$	181,095		$	656,792		$	350,434
Cost of revenue	111,381			58,605			193,797			111,263
Gross profit	317,356			122,490			462,995			239,171
Operating expenses:
Marketing	114,707			45,994			163,212			81,438
Product development	45,233			28,765			83,015			53,712
General and administrative	38,276			29,883			72,263			54,530
Total operating expenses	198,216			104,642			318,490			189,680
Income from operations	119,140			17,848			144,505			49,491
Other (expense) income:
Interest expense	(10,026		)	(4,678		)	(19,993		)	(9,331		)
Interest and other income	1,732			3,391			5,345			6,776
Foreign exchange gain (loss)	1,470			(192		)	(7,848		)	870
Total other expense	(6,824		)	(1,479		)	(22,496		)	(1,685		)
Income before income taxes	112,316			16,369			122,009			47,806
(Provision) benefit for income taxes	(15,891		)	1,854			(13,062		)	1,996
Net income	$	96,425		$	18,223		$	108,947		$	49,802
Net income per share attributable to common stockholders:
Basic	$	0.81		$	0.15		$	0.92		$	0.42
Diluted	$	0.75		$	0.14		$	0.88		$	0.38
Weighted-average common shares outstanding:
Basic	118,865,885			120,198,526			118,483,712			119,848,289
Diluted	134,408,041			130,807,743			133,238,316			130,463,025

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

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Etsy, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020			2019
Net income	$	96,425	$	18,223	$	108,947		$	49,802
Other comprehensive income (loss):
Cumulative translation adjustment	2,538		982		(133		)	(79		)
Unrealized gains on marketable securities, net of tax expense of $142, $0, $347, and $0, respectively	462		378		1,133			477
Total other comprehensive income	3,000		1,360		1,000			398
Comprehensive income	$	99,425	$	19,583	$	109,947		$	50,200

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

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Etsy, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

(In thousands, except share amounts)



	Three Months Ended June 30, 2020
	Common Stock			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total
	Common Stock
	Shares	Amount
Balance as of March 31, 2020	118,376,782	$	118	$	657,311		$	(239,883	)	$	(10,699	)	$	406,847
Stock-based compensation	—	—		16,975			—			—			16,975
Exercise of vested options	510,113	1		7,280			—			—			7,281
Vesting of restricted stock units, net of shares withheld	253,742	—		(6,353		)	—			—			(6,353		)
Other comprehensive income	—	—		—			—			3,000			3,000
Net income	—	—		—			96,425			—			96,425
Balance as of June 30, 2020	119,140,637	$	119	$	675,213		$	(143,458	)	$	(7,699	)	$	524,175



	Six Months Ended June 30, 2020
	Common Stock					Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total
	Common Stock
	Shares		Amount
Balance as of December 31, 2019	118,342,772		$	119		$	642,628		$	(227,414	)	$	(8,699	)	$	406,634
Stock-based compensation	—		—			30,960			—			—			30,960
Exercise of vested options	957,999		1			12,176			—			—			12,177
Vesting of restricted stock units, net of shares withheld	382,972		—			(10,551		)	—			—			(10,551		)
Stock repurchase	(543,106	)	(1		)	—			(24,991		)	—			(24,992		)
Other comprehensive income	—		—			—			—			1,000			1,000
Net income	—		—			—			108,947			—			108,947
Balance as of June 30, 2020	119,140,637		$	119		$	675,213		$	(143,458	)	$	(7,699	)	$	524,175

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Etsy, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

(In thousands, except share amounts)



	Three Months Ended June 30, 2019
	Common Stock			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total
	Common Stock
	Shares	Amount
Balance as of March 31, 2019	119,933,386	$	120	$	570,906		$	(142,238	)	$	(8,775	)	$	420,013
Stock-based compensation	—	—		11,280			—			—			11,280
Exercise of vested options	154,197	—		1,910			—			—			1,910
Vesting of restricted stock units, net of shares withheld	247,941	—		(10,485		)	—			—			(10,485		)
Other comprehensive income	—	—		—			—			1,360			1,360
Net income	—	—		—			18,223			—			18,223
Balance as of June 30, 2019	120,335,524	$	120	$	573,611		$	(124,015	)	$	(7,415	)	$	442,301



	Six Months Ended June 30, 2019
	Common Stock					Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total
	Common Stock
	Shares		Amount
Balance as of December 31, 2018	119,771,702		$	120		$	562,033		$	(153,442	)	$	(7,813	)	$	400,898
Cumulative effect adjustment related to the adoption of the leasing standard	—		—			—			7,116			—			7,116
Stock-based compensation	—		—			19,896			—			—			19,896
Exercise of vested options	688,890		1			7,839			—			—			7,840
Vesting of restricted stock units, net of shares withheld	407,344		—			(16,157		)	—			—			(16,157		)
Stock repurchase	(532,412	)	(1		)	—			(27,491		)	—			(27,492		)
Other comprehensive income	—		—			—			—			398			398
Net income	—		—			—			49,802			—			49,802
Balance as of June 30, 2019	120,335,524		$	120		$	573,611		$	(124,015	)	$	(7,415	)	$	442,301

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

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Etsy, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)



	Six Months Ended June 30,
	2020			2019
Cash flows from operating activities
Net income	$	108,947		$	49,802
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense	30,536			18,919
Depreciation and amortization expense	29,334			19,952
Bad debt expense	5,904			4,146
Foreign exchange loss (gain)	10,394			(1,240		)
Non-cash interest expense	17,026			6,792
Deferred income taxes	7,389			(1,996		)
Other non-cash expense (income), net	1,845			(478		)
Changes in operating assets and liabilities:
Current assets	(51,975		)	(51,284		)
Non-current assets	4,994			2,037
Current liabilities	90,707			37,626
Non-current liabilities	(5,006		)	(2,982		)
Net cash provided by operating activities	250,095			81,294
Cash flows from investing activities
Purchases of property and equipment	(209		)	(3,747		)
Development of internal-use software	(2,043		)	(4,669		)
Purchases of marketable securities	(181,198		)	(305,391		)
Sales of marketable securities	206,182			265,852
Net cash provided by (used in) investing activities	22,732			(47,955		)
Cash flows from financing activities
Payment of tax obligations on vested equity awards	(10,551		)	(16,157		)
Repurchase of stock	(24,992		)	(27,492		)
Proceeds from exercise of stock options	12,177			7,840
Payment of debt issuance costs	(14		)	(1,392		)
Payments on finance lease obligations	(4,927		)	(5,475		)
Other financing, net	(10,196		)	2,072
Net cash used in financing activities	(38,503		)	(40,604		)
Effect of exchange rate changes on cash	(93		)	(561		)
Net increase (decrease) in cash, cash equivalents, and restricted cash	234,231			(7,826		)
Cash, cash equivalents, and restricted cash at beginning of period	448,634			372,326
Cash, cash equivalents, and restricted cash at end of period	$	682,865		$	364,500

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Etsy, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)



	Six Months Ended June 30,
	2020		2019
Supplemental non-cash disclosures:
Stock-based compensation capitalized in development of capitalized software	$	424	$	977
Additions to development of internal-use software and property and equipment included in accounts payable and accrued expenses	$	658	$	2,637
Additions to intangible assets included in other current liabilities	$	—	$	1,720
Right-of-use assets obtained in exchange for new lease liabilities:
Finance leases	$	370	$	333

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheets that sum to the total of the same such amounts shown above:



	Six Months Ended June 30,
	2020		2019
Beginning balance:
Cash and cash equivalents	$	443,293	$	366,985
Restricted cash	5,341		5,341
Total cash, cash equivalents, and restricted cash	$	448,634	$	372,326

Ending balance:
Cash and cash equivalents	$	677,524	$	359,159
Restricted cash	5,341		5,341
Total cash, cash equivalents, and restricted cash	$	682,865	$	364,500

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

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Etsy, Inc.

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”) operates two-sided online marketplaces that connect millions of passionate and creative buyers and sellers. Our primary marketplace, Etsy.com, is the global marketplace for unique and creative goods. The Company generates revenue primarily from transaction, listing, and payments processing fees, and on-site advertising and shipping label services.

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.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). We have condensed or omitted certain information and notes normally included in complete annual financial statements prepared in accordance with GAAP. These unaudited interim consolidated financial statements should therefore be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K filed with the SEC on February 27, 2020 (the “Annual Report”). In the opinion of management, all material adjustments, which are of a normal and recurring nature, necessary for a fair presentation of the results for the periods presented have been reflected in the consolidated financial statements. The results of operations of any interim period are not necessarily indicative of the results of operations for the full annual period or any future period due to seasonal and other factors.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and accompanying Notes. Actual results could differ from these estimates and assumptions. However, the Company believes it has used reasonable estimates and assumptions in preparing the consolidated financial statements. The accounting estimates that require management’s most subjective judgments include: leases, including determining the incremental borrowing rate; income taxes, including the estimate of annual effective tax rate at interim periods and evaluation of uncertain tax positions; purchase price allocations for business combinations, valuation of the acquired intangibles purchased in a business combination, and valuation of goodwill and intangible assets; stock-based compensation; fair value of financial instruments; and provision for expected credit losses.

As of June 30, 2020, the effects of the ongoing COVID-19 pandemic on our business, results of operations, and financial condition continue to evolve. As a result, many of our estimates and assumptions required increased judgment and carry a higher degree of variability and volatility. As additional information becomes available, our estimates may change materially in future periods.

Reclassifications

Certain items in the prior years’ consolidated financial statements have been reclassified to conform to the current year presentation reflected in the consolidated financial statements. Specifically, the Company reclassified $6.8 million previously included in other non-cash expense (income), net to non-cash interest expense on the Consolidated Statement of Cash Flows for the six months ended June 30, 2019 to conform to the current year presentation.

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Etsy, Inc.

Notes to Consolidated Financial Statements

Recently Issued Accounting Pronouncements

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06—Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40)—Accounting For Convertible Instruments and Contracts in an Entity's Own Equity. The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted net income per share calculation in certain areas. The new guidance is effective for annual and interim periods beginning after December 15, 2021, and early adoption is permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently evaluating the impact that this new guidance will have on its consolidated financial statements.

Recently Adopted Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12—Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes, which enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. The Company adopted this standard in the first quarter of 2020, effective as of January 1, 2020, on a prospective basis. The effect of this standard was not material to the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15—Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40)—Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The Company adopted this standard January 1, 2020 on a prospective basis. The effect of this standard was not material to the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13—Financial Instruments—Credit Losses (Topic 326)—Measurement of Credit Losses on Financial Instruments, and additional changes, modifications, clarifications, or interpretations related to this guidance thereafter, which require a reporting entity to estimate credit losses on certain types of financial instruments, including accounts receivable and funds receivable and seller accounts, and present assets held at amortized cost and available-for-sale debt securities at the amount expected to be collected. The Company adopted this standard January 1, 2020 using a modified retrospective transition method. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements on the date of its adoption.

For the six months ended June 30, 2020, our assessment of the provision for expected credit losses considered market disruptions caused by COVID-19 and estimates of expected and emerging credit and collectibility trends. The continued volatility in market conditions and evolving shifts in credit trends are difficult to predict causing variability and volatility that may have a significant impact on our provision for credit losses in future periods.

Accounts Receivable: This standard requires the Company to consider forward-looking information to estimate expected credit losses in addition to its previous policy of determining the allowance by a number of factors, including age of the receivable, current economic conditions, historical losses, and management’s assessment of the financial condition of sellers on its platform.

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Etsy, Inc.

Notes to Consolidated Financial Statements

The following table provides a rollforward of the allowance for credit losses that is deducted from the amortized cost basis of accounts receivable to present the net amount expected to be collected (in thousands):



	June 30, 2020
Balance as of December 31, 2019	$	5,033
Adoption of ASU 2016-13, cumulative-effect adjustment to retained earnings	—
Provision for expected credit losses	5,904
Amounts written off, net of recoveries	(4,755		)
Balance as of June 30, 2020	$	6,182

Available-For-Sale Debt Securities: The Company’s investment portfolio at any point in time contains investments in U.S. Government and agency securities, corporate bonds, commercial paper, certificates of deposit, cash deposits, and money market funds. The Company’s investment policy is to invest in high quality, investment grade securities from diverse issuers with credit ratings higher than BBB. In accordance with its investment policy, the Company’s investments have maturities no longer than 37 months, with the average maturity of these investments maintained at 12 months or less. The Company segments its portfolio based on the underlying risk profiles of the securities and has a zero loss expectation for U.S. treasury and U.S. Government agency securities. The potential of credit losses for the remainder of the portfolio of available-for-sale debt securities is mitigated by the high quality nature of the investments. The Company regularly reviews the securities in an unrealized loss position and evaluates the current expected credit loss by considering factors such as historical experience, market data, issuer-specific factors including their credit rating, and current economic conditions. As of June 30, 2020, the Company did not recognize any year-to-date credit loss related to available-for-sale debt securities. The Company evaluates fair values for each individual security in the investment portfolio. See “Note 7—Marketable Securities” for additional information on the Company’s marketable securities.

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Etsy, Inc.

Notes to Consolidated Financial Statements

Note 2—Revenue

The following table summarizes revenue by type of service for the periods presented (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Marketplace revenue	$	332,031	$	135,199	$	487,952	$	262,367
Services revenue	96,706		45,896		168,840		88,067
Revenue	$	428,737	$	181,095	$	656,792	$	350,434

On May 4, 2020, Etsy started charging sellers on its marketplace platform for Offsite Ads, whereby sellers will pay Etsy an advertising fee of 12% or 15% of the value of a sale based on the seller’s volume of sales, if such sale is generated from an advertisement placed by the Company on third-party internet platforms. The Company recognizes the revenue related to Offsite Ads on a gross basis in Marketplace revenue. The Company recognizes the cost of promoting the sellers’ listing on multiple third-party internet platforms as marketing expense.

Our dedicated on-site advertising service for sellers to promote their listings to shoppers on Etsy.com has been renamed Etsy Ads (formerly Promoted Listings). Revenue from Etsy Ads consists of cost-per-click fees an Etsy seller pays for prominent placement of her listings in search results in the Etsy.com marketplace. Etsy Ads fees are based on an auction system, which utilizes the budget that each Etsy seller sets when using Etsy Ads to determine the cost-per-click fee. Etsy Ads fees are nonrefundable and are charged to a seller’s Etsy bill when the Etsy Ad is clicked, at which time the Company recognizes revenue as part of Services revenue.

Contract balances

Deferred revenues

The amount of revenue recognized in the six months ended June 30, 2020 that was included in the deferred balance at January 1, 2020 was $7.6 million.

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Etsy, Inc.

Notes to Consolidated Financial Statements

Note 3—Income Taxes

The Company’s provision or benefit from income taxes in interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter the Company updates its estimate of the annual effective tax rate, and if its estimated tax rate changes, the Company makes a cumulative adjustment. The estimate of the annual effective income tax rate for the full year is applied to the respective interim period, taking into account year-to-date amounts and projected results for the full year.

The Company’s quarterly tax provision, and its quarterly estimate of the annual effective tax rate, is subject to significant variation due to several factors, including variability in accurately predicting its income or loss before tax and the mix of jurisdictions to which they relate, taxable income or loss in each jurisdiction, changes in its stock price, audit-related developments, acquisitions, changes in its deferred tax assets and liabilities and their valuation, foreign currency gains (losses), changes in statutes, regulations, case law, and administrative practices, principles, and interpretations related to tax, including changes to the global tax framework, competition, and other laws and accounting rules in various jurisdictions, and relative changes of expenses or losses for which tax benefits are not recognized. Additionally, the effective tax rate can be more or less volatile based on the amount of income or loss before tax. For example, the impact of discrete items and non-deductible expenses on the effective tax rate is greater when income before tax is lower.

For the six months ended June 30, 2020 the Company’s effective income tax rate was 10.7% representing an income tax provision recorded on net income before tax. The effective tax rate for the six months ended June 30, 2020 was lower than the U.S. statutory rate of 21% primarily due to excess tax benefits from employee stock-based compensation, a benefit related to research and development tax credit and the impact from foreign operations that are subject to lower tax rates, partially offset by additional U.S. taxes on foreign earnings.

Although management believes its tax positions and related provisions reflected in the consolidated financial statements are fully supportable, it recognizes that these tax positions and related provisions may be challenged by various tax authorities. These tax positions and related provisions are reviewed on an ongoing basis and are adjusted as additional facts and information become available, including progress on tax audits, changes in interpretation of tax laws, developments in case law and closing of statute of limitations. To the extent that the ultimate results differ from the original or adjusted estimates of the Company, the effect will be recorded in the provision for income taxes.

The provision for income taxes involves a significant amount of management judgment regarding interpretation of relevant facts and laws in the jurisdictions in which the Company operates. Future changes in applicable laws, projected levels of taxable income and tax planning could change the effective tax rate and tax balances recorded by the Company. In addition, tax authorities periodically review income tax returns filed by the Company and can raise issues regarding its filing positions, timing and amount of income and deductions, and the allocation of income among the jurisdictions in which the Company operates. A significant period of time may elapse between the filing of an income tax return and the ultimate resolution of an issue raised by a revenue authority with respect to that return. Any adjustments as a result of any examination, may result in additional taxes or penalties against the Company. If the ultimate result of these audits differ from original or adjusted estimates, they could have a material impact on the Company’s tax provision.

The amount of unrecognized tax benefits included in the Consolidated Balance Sheets increased $1.3 million in the six months ended June 30, 2020, from $19.9 million at December 31, 2019 to $21.2 million at June 30, 2020. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate is $20.7 million at June 30, 2020. Although the timing of the resolution and/or closure of audits is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. Given the number of years remaining subject to examination and the number of matters being examined, at this time, the Company is unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.

The Company recognizes interest and/or penalties related to uncertain tax positions in income tax expense. The amount of interest and penalties accrued in tax (benefit)/expense for the six months ended June 30, 2020 was nil, and the total amount accrued as of June 30, 2020 remained flat at $0.2 million from December 31, 2019.

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Etsy, Inc.

Notes to Consolidated Financial Statements

Note 4—Net Income Per Share

The following table presents the calculation of basic and diluted net income per share for the periods presented (in thousands, except share and per share amounts):



	Three Months Ended June 30,					Six Months Ended June 30,
	2020		2019			2020		2019
Numerator:
Net income	$	96,425	$	18,223		$	108,947	$	49,802
Net income allocated to participating securities under the two-class method	—		(9		)	—		(24		)
Net income attributable to common stockholders—basic	96,425		18,214			108,947		49,778
Dilutive effect of net income allocated to participating securities under the two-class method	—		9			—		24
Add back interest expense, net of tax attributable to assumed conversion of the 2018 Notes (1)	3,969		—			7,891		—
Net income attributable to common stockholders—diluted	$	100,394	$	18,223		$	116,838	$	49,802

Denominator:
Weighted-average common shares outstanding—basic (2)	118,865,885		120,198,526			118,483,712		119,848,289
Dilutive effect of assumed conversion of options to purchase common stock	4,279,288		4,667,849			4,149,229		4,764,942
Dilutive effect of assumed conversion of restricted stock units	1,750,875		1,693,130			1,093,382		1,841,363
Dilutive effect of assumed conversion of the 2018 Notes (1)	9,511,993		4,226,839			9,511,993		3,989,402
Dilutive effect of assumed conversion of restricted stock from acquisition	—		21,399			—		19,029
Weighted-average common shares outstanding—diluted	134,408,041		130,807,743			133,238,316		130,463,025

Net income per share attributable to common stockholders—basic	$	0.81	$	0.15		$	0.92	$	0.42
Net income per share attributable to common stockholders—diluted	$	0.75	$	0.14		$	0.88	$	0.38


(1)	The Company used the if-converted method when calculating the dilutive effect of the 0% Convertible Senior Notes due 2023 (the “2018 Notes”) for the three and six months ended June 30, 2020 and used the treasury stock method for the three and six months ended June 30, 2019.


(2)	22,993 and 23,759 shares of unvested stock were considered participating securities and were excluded from basic shares outstanding for the three and six months ended June 30, 2019, respectively.

Since the Company expects to settle in cash the principal outstanding under the 0.125% Convertible Senior Notes due 2026 (the “2019 Notes”), it used the treasury stock method to determine that the 2019 Notes were anti-dilutive for the three and six months ended June 30, 2020. The following potential common shares were excluded from the calculation of diluted net income 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,
	2020	2019	2020	2019
Stock options	410,409	337,907	777,412	224,706
Restricted stock units	42,361	716,869	1,166,627	424,461
2019 Notes	7,412,600	—	7,412,600	—
Total anti-dilutive securities	7,865,370	1,054,776	9,356,639	649,167

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Etsy, Inc.

Notes to Consolidated Financial Statements

Note 5—Business Combinations

On August 15, 2019, the Company acquired all of the outstanding capital stock of Reverb, a leading online marketplace dedicated to buying and selling new, used, and vintage musical instruments. The acquisition enables the Company to expand into a new vertical with a company that has a similar strategy and business model. The total cash consideration paid was $270.4 million, net of cash acquired.

The acquisition was accounted for under the acquisition method of accounting. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values as of the date of the acquisition. The excess of the purchase price over the estimated fair value of the net assets acquired was recorded as goodwill, which consists largely of synergies and acquisition of workforce. The resulting goodwill is not expected to be deductible for tax purposes.

The Company has finalized the valuation of assets acquired and liabilities assumed for the acquisition of Reverb as of December 31, 2019.

Purchase Price Allocation

The following table summarizes the allocation of the purchase price (at fair value) to the assets acquired and liabilities assumed of Reverb as of August 15, 2019 (the date of acquisition) (in thousands):



	Final Fair Value as Adjusted
Short-term investments	$	1,028
Other current assets (1)	2,902
Funds receivable and seller accounts	5,578
Property and equipment other	1,543
Developed technology	30,300
Trademark	79,400
Customer relationships	93,500
Goodwill	101,703
Other assets (1)	6,743
Other net working capital	(208		)
Funds payable and amounts due to sellers	(5,578		)
Other current liabilities (1)	(3,684		)
Other liabilities (1)	(7,333		)
Deferred tax liability, net (1)	(35,485		)
Total purchase price	$	270,409


(1)	Other current liabilities and other liabilities are primarily related to non-income tax related contingency reserves, which are wholly offset by an indemnification asset of $5.5 million and a deferred tax asset.

Acquisition-related expenses are expensed as incurred and are recorded in general and administrative expenses. They were $0.6 million and $1.3 million for the three and six months ended June 30, 2020, respectively, and primarily related to non-recurring employee-related costs associated with the acquisition. Acquisition-related expenses were $1.2 million for both the three and six months ended June 30, 2019, and primarily related to advisory, legal, and other professional fees.

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Etsy, Inc.

Notes to Consolidated Financial Statements

Unaudited Supplemental Pro Forma Information

The following unaudited pro forma summary presents consolidated information of the Company as if the business combination had occurred on January 1, 2018 (in thousands):



	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Revenue	$	192,365	$	373,524
Net income	14,948		42,965

The pro forma financial information includes adjustments that are directly attributable to the business combination and are factually supportable. The pro forma adjustments include incremental amortization of intangible and developed technology assets, based on final values of each asset and acquisition-related expenses and are tax-effected. For the three and six months ended June 30, 2019, the pro forma financial information excludes $1.7 million of non-recurring acquisition-related expenses. These pro forma results are illustrative only and not indicative of the actual results of operations that would have been achieved nor are they indicative of future results of operations.

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Etsy, Inc.

Notes to Consolidated Financial Statements

Note 6—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 Sheets 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 financial instruments where values are derived from techniques in which one or more significant inputs are unobservable.

The following are the major categories of assets measured at fair value on a recurring basis as of the dates indicated (in thousands):



	As of June 30, 2020
	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents:
Money market funds	$	550,544	$	—	$	—	$	550,544
	550,544		—		—		550,544
Short-term investments:
Certificate of deposit	—		14,998		—		14,998
Commercial paper	—		8,690		—		8,690
Corporate bonds	—		81,849		—		81,849
U.S. Government and agency securities	260,122		—		—		260,122
	260,122		105,537		—		365,659
Funds receivable and seller accounts:
Money market funds	35,495		—		—		35,495
	35,495		—		—		35,495
Long-term investments:
Certificate of deposit	—		2,040		—		2,040
Corporate bonds	—		13,803		—		13,803
U.S. Government and agency securities	57,300		—		—		57,300
	57,300		15,843		—		73,143
	$	903,461	$	121,380	$	—	$	1,024,841

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Etsy, Inc.

Notes to Consolidated Financial Statements



	As of December 31, 2019
	Level 1		Level 2			Level 3		Total
Assets
Cash equivalents:
Certificate of deposit	$	—	$	2,959		$	—	$	2,959
Commercial paper	—		5,794			—		5,794
Money market funds	228,859		—			—		228,859
	228,859		8,753			—		237,612
Short-term investments:
Certificate of deposit	—		26,132			—		26,132
Commercial paper	—		29,320			—		29,320
Corporate bonds	—		114,202			—		114,202
U.S. Government and agency securities	204,305		—			—		204,305
	204,305		169,654		</