Robinhood Markets, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section presents management’s perspective on our financial condition and results of operations, including performance metrics that management uses to assess company performance. The following discussion and analysis is intended to highlight and supplement data and information presented elsewhere in this Annual Report, and should be read in conjunction with our consolidated financial statements and notes elsewhere in this Annual Report. It is also intended to provide you with information that will assist you in understanding our consolidated financial statements, the changes in key items in those consolidated financial statements from year to year, and the primary factors that accounted for those changes. To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which might not be indicative of our future financial outcomes. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the sections titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors.” We refer to our “users” and our “customers” interchangeably throughout this Annual Report to refer to individuals who hold accounts on our platform. Glossary Terms • Automated Customer Account Transfer Service (ACATS) : A system that automates and standardizes procedures for the transfer of assets in a customer account from one brokerage firm and/or bank to another. • Churned Account: An account is considered “Churned” if it was ever a New Funded Account whose account balance (measured as the fair value of assets in the account less any amount due from the user and excluding certain Company-initiated Credits) drops to or below zero for at least 45 consecutive calendar days. Negative balances typically result from Fraudulent Deposit Transactions (as defined below) and unauthorized debit card use, and less often, from margin loans. • Company-initiated Credits: Company-initiated Credits are amounts that are deposited into a Robinhood Account by the Company with no action taken by the user. Examples of Company-initiated Credits excluded for purposes of identifying Churned Accounts and Resurrected Accounts are price correction credits, related interest adjustments, and fee adjustments. • Daily Average Revenue Trades (DARTs) : We define DARTs for any asset class as the total number of revenue generating trades for such asset class executed during a given period divided by the number of trading days for such asset class in that period. • Fraudulent Deposit Transactions: Occur when users initiate deposits into their accounts, make trades on our platform using a short-term extension of credit from us, and then repatriate or reverse the deposits, resulting in a loss to us of the credited amount. • Margin Book: We define Margin Book as our period-end aggregate outstanding margin loan balances receivable (i.e., the period-end total amount we are owed by customers on loans made 71 Table of Contents for the purchase of securities, supported by a pledge of assets in their margin-enabled brokerage accounts). • New Funded Account: We define a New Funded Account as a Robinhood Account into which the user makes an initial deposit, money transfer or asset transfer, of any amount during the relevant period. • Notional Trading Volume: We define Notional Trading Volume for any specified asset class as the aggregate dollar value (purchase price or sale price as applicable) of trades executed in that asset class over a specified period of time. • Resurrected Account: An account is considered “Resurrected” in a stated period if it was a Churned Account as of the end of the immediately preceding period and its balance (excluding certain Company-initiated Credits) rises above zero. • Robinhood Account : We define a Robinhood Account as a unique log-in that provides the account user access to any and all of the Robinhood products offered on our platform. Key Performance Metrics • Net Cumulative Funded Accounts (NCFA) : We define Net Cumulative Funded Accounts as New Funded Accounts less Churned Accounts plus Resurrected Accounts. • Monthly Active Users (MAU) : We define MAUs as the number of unique Robinhood Accounts who meet one of the following criteria at any point during a specified calendar month: a) executes a debit card transaction, b) transitions between two different screens on a mobile device while logged into their Robinhood Account or c) loads a page in a web browser while logged into their Robinhood Account. A user need not satisfy these conditions on a recurring monthly basis or have a funded account to be included in MAU. MAU figures in this Annual Report reflect MAU for the last month of the relevant period presented. We utilize MAU to measure how many customers interact with our products and services during a given month. MAU does not measure the frequency or duration of the interaction, but we consider it a useful indicator for engagement. Additionally, MAUs are positively correlated with, but are not indicative of, the performance of revenue and other key performance indicators. • Asset Under Custody (AUC) : We define AUC as the sum of the fair value of all equities, options, cryptocurrency and cash held by users in their accounts, net of receivables from users, as of a stated date or period end on a trade date basis. Net Deposits and net market gains (losses) drive the change in AUC in any given period. • Net Deposits: We define Net Deposits as all cash deposits and asset transfers received from customers, net of reversals, customer cash withdrawals, and other assets transferred out of our platform (assets transferred in or out include debit card transactions, ACATS transfers, and custodial crypto wallet transfers) for a stated period. • Average Revenues Per User (ARPU) : We define ARPU as total revenue for a given period divided by the average of Net Cumulative Funded Accounts on the last day of that period and the last day of the immediately preceding period. 72 Table of Contents Overview With respect to the year ended December 31, 2022, as compared to the year ended December 31, 2021: • we generated total net revenues of $1.36 billion compared to $1.82 billion, for a year-over-year decrease of 25%; • we incurred a net loss of $1.03 billion, or -$1.17 per share, compared to net loss of $3.69 billion, or -$7.49 per share; net loss in 2021 included expense of $2.05 billion associated with the change in fair value of convertible notes and warrant liability issued in February 2021; • operating expenses were $2.37 billion compared to $3.46 billion, for a year-over-year decrease of 31%; ◦ share-based compensation (“SBC”) expense totaled $654 million compared to $1.57 billion, for a year-over-year decrease of 58% . SBC expense for the year ended December 31, 2021, was primarily related to the cumulative one-time expense recognized upon our IPO. SBC expense for the year ended December 31, 2022 included $77 million net reversals of previously recognized expense in connection with both the April 2022 Restructuring and August 2022 Restructuring; • our Adjusted EBITDA (non-GAAP) was negative $94 million compared to positive $33 million ; • we had NCFA of 23.0 million compared to 22.7 million, for a year-over-year increase of 1% ; • we had MAU of 11.4 million in December 2022 compared to 17.3 million in December 2021, for a year-over-year decrease of 34%; • we had AUC of $62.2 billion compared to $98.0 billion , for a year-over-year decrease of 37%; • Net Deposits were $18.4 billion compared to $27.1 billion , for a year-over-year decrease of 32%, which translates to a growth rate of 19% relative to AUC for the year ended December 31, 2021; • we had ARPU of $60 compared to $103 , for a year-over-year decrease of 42%. Adjusted EBITDA is a non-GAAP financial measure. For more information about Adjusted EBITDA, including the definition and limitations of such measure, and a reconciliation of net income (loss) to Adjusted EBITDA, please see “—Non-GAAP Financial Measures.” Recent Developments Restructurings In 2020 and the first half of 2021, we went through a period of hyper growth accelerated by several factors including pandemic lockdowns, low interest rates, and fiscal stimulus. From the beginning of 2020 to the end of 2021, we grew net funded accounts from 5.1 million to 22.7 million and revenue from $278 million in 2019 to $1.82 billion in 2021. To meet customer and market demands, we grew our headcount from 700 at the end of 2019 to nearly 3,900 at the end of the first quarter of 2022. This rapid headcount growth led to some duplicate roles and job functions with more layers and complexity than 73 Table of Contents were optimal. As a result, we completed two restructurings, detailed below, and significantly reduced our hiring in 2022. April 2022 Restructuring. On April 26, 2022, we announced a reduction in force involving approximately 330 employees, representing approximately 9% of our full-time employees at the time. August 2022 Restructuring. On August 2, 2022 we announced an additional reduction in force involving approximately 780 employees, representing approximately 23% of our full-time employees at the time, the planned closure of two offices, and related matters. These actions were part of a Company reorganization into a GM structure under which GMs have started to assume broad responsibility for our individual businesses. As we continued to execute the August 2022 Restructuring, our lower headcount led us to evaluate our real estate portfolio. On September 30, 2022, we decided to partially or completely close five additional offices as part of the August 2022 Restructuring, four of which were not occupied. See Note 6 - Restructuring Activities and Note 13 - Common Stock and Stockholders' (Deficit) Equity to our consolidated financial statements in this Annual Report for further information relating to these restructurings. Termination of Ziglu Stock Purchase Agreement On April 16, 2022, we entered into a definitive stock purchase agreement to acquire all outstanding equity of Ziglu. Advances of $12 million made to Ziglu during the year were accounted for as non-marketable equity securities under the fair value alternative, considering the securities lacked a readily determinable fair value. In February 2023, we notified Ziglu of the termination of the stock purchase agreement. Due to this and other factors, we have adjusted the carrying value of our investment in Ziglu to zero as of December 31, 2022. See Note 18 - Subsequent Events to our consolidated financial statements in this Annual Report for further information. COVID-19 Update The COVID-19 pandemic has resulted, in part, in inefficiencies and delays in our business, operational challenges, additional costs related to business continuity initiatives as our workforce continues to work remotely, and increased vulnerability to cybersecurity attacks or other privacy or data security incidents. The extent of the impact of any COVID-19 resurgence or emergence of similar public health threats on our business, financial condition, and results of operations will depend largely on future developments, including the duration of COVID-19 resurgence or similar public health threat and actions taken to contain or address their impact, their impact on capital and financial markets, and the related impact on the financial circumstances of our customers, all of which are highly uncertain and difficult to predict. Key Performance Metrics In addition to the measures presented in our consolidated financial statements, we use the following key performance metrics to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions: Year Ended December 31, 2020 2021 2022 NCFA (1) (in millions) 12.5 22.7 23.0 MAU (in millions) 11.7 17.3 11.4 AUC (2) (in billions) $ 63.0 $ 98.0 $ 62.2 Net Deposits (in billions) $ 31.0 $ 27.1 $ 18.4 ARPU (in dollars) $ 109 $ 103 $ 60 74 Table of Contents ________________ (1) The following table describes the annual changes within NCFA: Year Ended December 31, (in millions) 2020 2021 2022 Beginning NCFA 5.1 12.5 22.7 New funded accounts 8.0 12.2 1.3 Resurrected accounts 0.3 0.5 0.2 Churned accounts (0.9) (2.5) (1.2) Ending NCFA 12.5 22.7 23.0 (2) The following table sets out the components of AUC by type of asset: Year Ended December 31, (in billions) 2020 2021 2022 Equities $ 53.0 $ 72.1 $ 45.8 Cryptocurrencies 3.5 22.1 8.4 Options 2.1 1.5 0.3 Cash held by users 7.9 8.8 10.8 Receivables from users (3.5) (6.5) (3.1) AUC $ 63.0 $ 98.0 $ 62.2 The following table describes the changes within AUC: Year Ended December 31, (in billions) 2020 2021 2022 Beginning AUC $ 14.1 $ 63.0 $ 98.0 Net Deposits 31.0 27.1 18.4 Net market losses 17.9 7.9 (54.2) Ending AUC $ 63.0 $ 98.0 $ 62.2 Non-GAAP Financial Measures Adjusted EBITDA We collect and analyze operating and financial data to evaluate the health of our business, allocate our resources and assess our performance. In addition to total net revenues, net income (loss), and other results under GAAP, we utilize non-GAAP calculations of adjusted earnings before interest, taxes, depreciation, and amortization (“Adjusted EBITDA”). Adjusted EBITDA is defined as net income (loss), excluding (i) interest expenses related to credit facilities, (ii) provision for (benefit from) income taxes, (iii) depreciation and amortization, (iv) share-based compensation, (v) change in fair value of convertible notes and warrant liability, (vi) significant legal and tax settlements and reserves, and (vii) other significant gains, losses, and expenses (such as impairments, restructuring charges, and business acquisition- or disposition-related expenses) that we believe are not indicative of our ongoing results. This non-GAAP financial information is presented for supplemental informational purposes only, should not be considered a substitute for or superior to financial information presented in accordance with GAAP, and may be different from similarly titled non-GAAP measures used by other companies. The above items are excluded from our Adjusted EBITDA measure because these items are non-cash in nature, or because the amount and timing of these items are unpredictable, are not driven by core results of operations, and render comparisons with prior periods and competitors less meaningful. We believe Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our results of operations, as well as providing a useful measure for period-to-period comparisons of our business performance. Moreover, Adjusted EBITDA is a key measurement used by our management internally to make operating decisions, including those related to operating expenses, 75 Table of Contents evaluate performance, and perform strategic planning and annual budgeting. The following table presents a reconciliation of net income (loss), which is the most directly comparable GAAP measure, to Adjusted EBITDA: Year Ended December 31, (in millions) 2020 2021 2022 Net income (loss) $ 7 $ (3,687) $ (1,028) Add: Interest expenses related to credit facilities 5 20 24 Provision for (benefit from) income taxes 6 2 1 Depreciation and amortization 10 26 61 EBITDA (non-GAAP) 28 (3,639) (942) Share-based compensation (1) 24 1,572 654 Change in fair value of convertible notes and warrant liability — 2,045 — Impairment of Ziglu equity securities (2) — — 12 Restructuring charges (3) — — 105 Significant legal and tax settlements and reserves 102 55 20 Q4 2022 Processing Error (4) — — 57 Adjusted EBITDA (non-GAAP) $ 154 $ 33 $ (94) (1) For the year ended December 31, 2022, share-based compensation benefited from restructuring-related net reversals of previously recognized expense was $77 million in connection with both the April 2022 Restructuring and August 2022 Restructuring (see Note 13 - Common Stock and Stockholders' (Deficit) Equity, to our consolidated financial statements in this Annual Report for further information). (2) Partially as a result of the termination of the stock purchase agreement, which occurred in February 2023, the advances made to Ziglu accounted for as non-marketable equity securities were impaired to a carrying value of zero. (3) Restructuring charges for the year ended December 31, 2022 related to both the April 2022 Restructuring and August 2022 Restructuring and primarily consisting of $45 million of impairment and $9 million of accelerated depreciation, in each case relating to office closures, and $51 million of cash charges for employee-related wages, benefits and severance. See Note 6 - Restructuring Activities, to our consolidated financial statements in this Annual Report for further information. (4) Q4 2022 Processing Error: Delays in notification from third parties and process failures within Robinhood’s brokerage systems and operations in connection with the handling of a 1-for-25 reverse stock split transaction of Cosmos Health, Inc. (“COSM”), a NASDAQ-listed company, on December 16, 2022, allowed customers, for a limited time, to execute trades selling more shares than they held in their accounts. This caused a temporary short position in that ticker symbol which Robinhood covered out of corporate cash within the same trading day. The resulting loss of $57 million is recorded within brokerage and transaction in the consolidated statement of operations. Key Factors Driving Our Performance Growing Our Customer Base Sustaining our growth requires continued adoption of our platform by new customers. We will continue to introduce products and features to attract new customers and we will seek to increase brand awareness and customer adoption of our platform through broad-scale brand marketing and the Robinhood Referral Program (defined below). Expanding Our Relationship with Existing Customers Our revenue has generally increased over time as we have introduced new products and features to our customers and as our customers have increased their usage of our platform. We aim to grow with our customers over time as they build and manage their wealth. Our ability to expand our relationship with our customers will be an important contributor to our long-term growth. Additionally, we strive to strengthen our relationships with our customers by responding to customer feedback not only through the introduction of new products, but also through improvements to our existing products and services. 76 Table of Contents Investing in Our Platform We intend to continue to invest in our platform capabilities and regulatory and compliance functions to support new and existing customers and products that we believe will drive our growth. As our customer base and platform functionalities expand, areas of investment priority will likely include product innovation, educational content, and technology and infrastructure improvements. We believe these investments will contribute to our long-term growth. Customer Interest in Investing and Saving Our results of operations are impacted by the overall health of the economy and retail investing and saving behaviors, which include the following key drivers: • Seasonality . Our business can be subject to seasonal fluctuations due to such factors as retail interest in investing, overall number of market participants and trading volumes, varying numbers of trading days from quarter-to-quarter, declines in trading activity around holidays, and proxy and investor communications activity during proxy season. Seasonal trends may be superseded by market or macroeconomic events, which can have a significant impact on equity and cryptocurrency valuations and trading activity. • Consumer Behavior . Consumer behavior varies over time and is affected by numerous conditions. For example, behavior might be impacted by social or economic factors such as changes in disposable income levels, general interest in investing, and volatility in the stock and cryptocurrency markets. There might also be high profile initial public offerings, or idiosyncratic events impacting single companies, that impact consumer behavior. • Market Trends . As financial markets grow and contract, our customers’ investing, saving, and spending behaviors are affected. We have seen periods both of general macroeconomic growth and slowdown in the United States, particularly in the U.S. equity and cryptocurrency markets, which stimulated and contracted growth in overall investment activity on our platform . Macroeconomic Events and Conditions Customer behavior is impacted by the overall macroeconomic environment, which is influenced by elements beyond our control, including economic and political conditions (such as the Russian invasion of Ukraine), inflation, tax rates, fluctuations in interest rates, the COVID-19 pandemic or the emergence of any similar public health threats, unemployment rates, and natural disasters. Additionally, macroeconomic conditions have an impact on asset values, which are an input into the transaction-based revenues we earn on equities and cryptocurrencies, and interest rates set by the U.S. Federal Reserve, which significantly impacts interest revenues. Finally, inflation can and will results in increased costs to operate our business, including potential increases in supplier costs,/ employee compensation and benefits expenses. For more information about how market trends and macroeconomic events can adversely impact our results of operations, see “Risk Factors—Risks Related to Our Business.” Key Components of Our Results of Operations Revenues Transaction-Based Revenues Transaction-based revenues consist of amounts earned from routing customer orders for options, cryptocurrencies, and equities to market makers. When customers place orders for options, cryptocurrencies, or equities on our platform, we route these orders to market makers and we receive 77 Table of Contents consideration from those market makers. With respect to equities and options trading, such fees are known as PFOF. With respect to cryptocurrency trading, we receive “Transaction Rebates.” In the case of equities, the fees we receive are typically based on the size of the publicly quoted bid-ask spread for the security being traded; that is, we receive a fixed percentage of the difference between the publicly quoted bid and ask at the time the trade is executed. For options, our fee is on a per contract basis based on the underlying security. In the case of cryptocurrencies, our rebate is a fixed percentage of the notional order value. Within each asset class, whether equities, options or cryptocurrencies, the transaction-based revenue we earn is calculated in an identical manner among all participating market makers. We route equity and option orders in priority to participating market makers that we believe are most likely to give our customers the best execution, based on historical performance (according to order price, trading symbol, availability of the market maker and, if statistically significant, order size), and, in the case of options, the likelihood of the order being filled is a factor as well. For cryptocurrency orders, we route to market makers based on price and availability of the cryptocurrency from the market maker. Net Interest Revenues Net interest revenues consist of interest revenues less interest expenses. We earn interest revenues on margin loans to users, corporate cash and investments, segregated cash and cash equivalents, deposits with clearing organizations, and Cash Sweep. We also earn and incur interest revenues and expenses on securities lending transactions. We incur interest expenses in connection with our revolving credit facilities. Other Revenues Other revenues primarily consist of Robinhood Gold subscription fees, as well as proxy rebates, proxy revenues, and ACATS fees charged to users for facilitating the transfer of part or all of assets in their accounts to another broker-dealer. Operating Expenses Brokerage and Transaction Brokerage and transaction costs primarily consist of broker-dealer transaction expenses (such as fees paid to centralized clearinghouses and regulatory fees), market data expenses, cash and share-based compensation and benefits as well as allocated overhead for employees engaged in clearing and brokerage functions, and Robinhood Cash Card transactions expenses (such as network fees and card processing fees). A large portion of our brokerage and transaction costs are variable and tied to trading and transaction volumes on our platform. Technology and Development Technology and development costs primarily consist of cash and share-based compensation and benefits as well as allocated overhead for engineering, data science, and design personnel who support and improve our platform and develop new products, costs for cloud infrastructure services, and costs associated with computer hardware and software, including amortization of internally developed software. Operations Operations costs consist of customer service related expenses, including cash and share-based compensation and benefits as well as allocated overhead for employees engaged in customer support, and costs incurred to support and improve customer experience (such as third-party customer service vendors). Operations costs also include our provision for credit losses and fraud in connection with unrecoverable receivables due to Fraudulent Deposit Transactions and chargebacks for unauthorized 78 Table of Contents debit card use. The provision for credit loss is equal to the unsecured receivable balance owed by users, i.e., the difference between the amount due from users and the fair value of the assets in the users’ accounts. We seek to reduce Fraudulent Deposit Transactions and unauthorized debit card usage by deploying and iterating on machine learning models that identify high risk users and transactions on our platform. In addition, upon identifying high risk users and transactions, we seek to prevent further losses by introducing friction into the user experience (for example, by not offering the identified customer access to instant funds) or implementing restrictions to mitigate the risk of these transactions (such as temporarily restricting withdrawals). Due to the fraudulent nature of these transactions, recourse and collection of the funds is limited. The provision for credit losses also includes losses related to our margin lending and proxy rebate activities. Marketing Marketing costs primarily consist of cash and share-based compensation and benefits as well as allocated overhead for employees engaged in the marketing function. Marketing costs also include digital marketing, brand marketing, and creative services costs for creation, production, and placement of advertisements and marketing content, as well as marketing incentive expenses associated with the Robinhood Referral Program. Other marketing costs include cash credits we offer to customers, which primarily relate to remediation for losses experienced by our customers due to service interruptions on our platform and reimbursement of direct losses incurred by our customers from allegedly unauthorized account activity. Under the Robinhood Referral Program, we credit referring and referred customers with a stock reward, with the potential value of each share ranging from $5 to $200. The 20 stocks that are available to choose from are selected by choosing the two largest S&P 500 companies, within the top 10 sectors, based on market cap. Referring customers can earn more than one reward through the Robinhood Referral Program, by making multiple referrals, subject to a maximum of $1,500 in total rewards earned annually per customer. From time to time, we offer multiple stock rewards per referral. In order for rewards to be earned by the referring and referred customer, the referred customer must fulfill certain conditions stated in their promotion, such as linking their bank accounts to our platform. After the referred Robinhood account is approved, each customer must claim their stock reward in the Robinhood app within 60 days of notification thereof, at which point the stock is deposited to such customer’s Robinhood account. Customers do not provide any cash consideration for the stock reward. General and Administrative General and administrative costs primarily consist of cash and share-based compensation and benefits as well as allocated overhead for certain executives and employees engaged in legal, finance, human resources, risk, and compliance. General and administrative costs also include legal expenses, other professional fees, settlements and penalties, and business insurance. 79 Table of Contents Results of Operations The following table summarizes our consolidated statements of operations data: (in millions) Year Ended December 31, 2020 2021 2022 Revenues: Transaction-based revenues $ 720 $ 1,402 $ 814 Net interest revenues 177 256 424 Other revenues 61 157 120 Total net revenues 958 1,815 1,358 Operating expenses: (1) Brokerage and transaction 114 158 179 Technology and development 215 1,234 878 Operations 135 368 285 Marketing 186 325 103 General and administrative 295 1,371 924 Total operating expenses 945 3,456 2,369 Change in fair value of convertible notes and warrant liability — 2,045 — Other expense (income), net — (1) 16 Income (loss) before income taxes 13 (3,685) (1,027) Provision for income taxes 6 2 1 Net income (loss) $ 7 $ (3,687) $ (1,028) _______________ (1) Includes share-based compensation expense as follows: Year Ended December 31, (in millions) 2020 2021 2022 Brokerage and transaction $ — $ 7 $ 5 Technology and development 18 610 212 Operations — 20 8 Marketing 1 50 4 General and administrative 5 885 425 Total share-based compensation expense $ 24 $ 1,572 $ 654 The 2020 amounts exclude the effect of share-based compensation for awards with performance-based conditions because our IPO had not occurred and, therefore, could not be considered probable. Upon our IPO in 2021, we recognized $1.01 billion of share-based compensation. For more information, see “Share-based compensation” in Note 1 - Description of Business and Summary of Significant Accounting Policies, to our consolidated financial statements in this Annual Report. 80 Table of Contents Comparison of the Years Ended December 31, 2022 and 2021 A discussion of our results for fiscal year 2021 compared to fiscal year 2020 can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations — Comparison of the Years Ended December 31, 2020 and 2021" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 24, 2022. Revenues Transaction-Based Revenues Year Ended December 31, (in millions, except for percentages) 2020 2021 2022 2020 to 2021 % Change 2021 to 2022 % Change Transaction-based revenues Options $ 440 $ 690 $ 488 57 % (29) % Cryptocurrencies 27 420 202 NM (52) % Equities 251 287 117 14 % (59) % Other 2 5 7 150 % 40 % Total transaction-based revenues $ 720 $ 1,402 $ 814 95 % (42) % Percentage of total net revenues: Options 46% 38% 36% Cryptocurrencies 3% 23% 15% Equities 26% 16% 9% Other —% —% —% Total transaction-based revenues 75 % 77% 60% Transaction-based revenues decreased by $588 million primarily driven by the market environment which had a negative impact on the number of traders and Notional Trading Volumes in all asset classes. Options DARTs decreased from 0.8 million to 0.6 million. Additionally, the number of users placing option trades decreased 42% while the average number of options contracts traded per trader was up 33%. Crypto DARTs decreased from 1.2 million to 0.3 million. Additionally, the number of users placing cryptocurrency trades decreased 61% and the average Notional Trading Volume traded per trader decreased 43%. The decrease was partially offset by a higher rebate rate from crypto market makers (initial increase was effective in late December 2021 and a further increase was effective in May 2022). Equities DARTs decreased from 3.1 million to 1.6 million. Additionally, the number of users placing equity trades decreased 47% and the average Notional Trading Volume traded per trader decreased 5%. 81 Table of Contents Net Interest Revenues Year Ended December 31, (in millions, except for percentages) 2020 2021 2022 2020 to 2021 % Change 2021 to 2022 % Change Net interest revenues: Margin interest $ 67 $ 132 $ 177 97 % 34 % Interest on corporate cash and investments 2 1 103 (50) % NM Securities lending, net 98 136 89 39 % (35) % Interest on segregated cash and cash equivalents and deposits 14 4 57 (71) % NM Cash Sweep, net 1 3 22 200 % 633 % Interest expenses related to credit facilities (5) (20) (24) 300 % 20 % Total net interest revenues $ 177 $ 256 $ 424 45 % 66 % Percentage of total net revenues: Margin interest 7% 7% 13% Interest on corporate cash and investments —% —% 7% Securities lending, net 10% 7% 7% Interest on segregated cash and cash equivalents and deposits 2% 1% 4% Cash Sweep, net —% —% 2% Interest expenses related to credit facilities —% (1)% (2)% Total net interest revenues 19% 14% 31% Net interest revenues increased by $168 million primarily due to higher interest revenues earned from corporate cash and investments, segregated cash and cash equivalents and deposits, margin interest, and Cash Sweep, partially offset by lower interest revenues earned through securities lending. Increased net interest revenues were driven by the higher interest rate environment due to the rise in the federal funds rate, which is an input to our floating margin rate calculation and impacts the interest rate we receive on investable assets. Net interest revenues earned from investments and corporate cash, segregated cash and cash equivalents and deposits increased by $102 million and $53 million. Interest revenues from margin interest also increased by $45 million due to the higher rate while our Margin Book balance declined year-over-year. These increases were partially offset by a $47 million decrease in net interest revenues earned from securities lending transactions due to lower demand for hard-to-borrow securities. 82 Table of Contents The following table summarizes interest-earnings assets, the revenue or expense generated by these assets, and their respective annualized yields (computed based on average balance over the quarter): (in millions, except for annual yield) Margin Book (1) Cash and deposits (2) Cash Sweep (off-balance sheet) (3) Total interest-earning assets Securities lending, net Interest expenses related to credit facilities Net interest revenue Year ended December 31, 2022 December 31, 2022 $ 3,089 $ 9,530 $ 5,837 $ 18,456 December 31, 2021 6,467 10,600 2,095 19,162 Average (4) 4,778 10,065 3,966 18,809 Revenue/(expense) $ 177 $ 160 $ 22 $ 359 $ 89 $ (24) $ 424 Annual yield (5) 3.70 % 1.59 % 0.55 % 1.91 % 2.25 % Year ended December 31, 2021 December 31, 2021 $ 6,467 $ 10,600 $ 2,095 $ 19,162 December 31, 2020 3,351 6,544 1,827 11,722 Average (4) 4,909 8,572 1,961 15,442 Revenue/(expense) $ 132 $ 5 $ 3 $ 140 $ 136 $ (20) $ 256 Annual yield (5) 2.69 % 0.06 % 0.15 % 0.91 % 1.66 % Year ended December 31, 2020 December 31, 2020 $ 3,351 $ 6,544 $ 1,827 $ 11,722 December 31, 2019 642 3,186 59 3,887 Average (4) 1,997 4,865 943 7,805 Revenue/(expense) $ 67 $ 16 $ 1 $ 84 $ 98 $ (5) $ 177 Annual yield (5) 3.36 % 0.33 % 0.11 % 1.08 % 2.27 % _________ (1) Margin Book is the aggregate outstanding margin loan balances receivable. (2) Includes cash and cash equivalents, cash segregated under federal and other regulations, deposits with clearing organizations and investments. (3 ) Cash Sweep is an off-balance-sheet amount. Robinhood earns a net interest spread on Cash Sweep balances based on the interest rate offered by the partner banks less the interest rate given to users as stated in our program terms. (4) Average balance rows present a simple average of the ending balances as of each of the indicated dates for the relevant period. (5) Annual yield is calculated by annualizing revenue/expense for the given period then dividing by the applicable average asset balance. 83 Table of Contents Other Revenues Year Ended December 31, (in millions, except for percentages) 2020 2021 2022 2020 to 2021 % Change 2021 to 2022 % Change Other revenues $ 61 $ 157 $ 120 157 % (24) % Percentage of total net revenues 6 % 9 % 9 % Other revenues decreased by $37 million compared to the prior year, mainly driven by the decreases in ACATS fees and subscription fees as a result of a decrease in paid subscribers to Robinhood Gold from 1.3 million to 1.1 million. Operating Expenses Year Ended December 31, (in millions, except for percentages) 2020 2021 2022 2020 to 2021 % Change 2021 to 2022 % Change Operating expenses: Brokerage and transaction $ 114 $ 158 $ 179 39 % 13 % Technology and development 215 1,234 878 474 % (29) % Operations 135 368 285 173 % (23) % Marketing 186 325 103 75 % (68) % General and administrative 295 1,371 924 365 % (33) % Total operating expenses $ 945 $ 3,456 $ 2,369 Percent of total net revenues: Brokerage and transaction 12 % 9 % 13 % Technology and development 22 % 68 % 65 % Operations 14 % 20 % 21 % Marketing 19 % 18 % 8 % General and administrative 31 % 76 % 68 % Total operating expenses 98 % 191 % 175 % 84 Table of Contents Brokerage and Transaction Year Ended December 31, (in millions) 2020 2021 2022 2020 to 2021 % Change 2021 to 2022 % Change Q4 2022 Processing Error $ — $ — $ 57 NM NM Broker-dealer transaction expenses 55 48 31 (13)% (35) % Market data expenses 21 33 26 57% (21) % Employee compensation, benefits, and overhead, excluding share-based compensation 7 14 20 100% 43 % Robinhood Cash Card transaction expenses 4 12 9 200% (25) % Share-based compensation — 7 5 NM (29) % Other 27 44 31 63% (30) % Total $ 114 $ 158 $ 179 39% 13 % Brokerage and transaction costs increased by $21 million primarily due to the $57 million Q4 2022 Processing Error, offset by a $17 million decrease in broker-dealer transaction expenses primarily driven by lower trading volume and a reduction of certain of these expenses effective in June 2021, and a $13 million decrease in other brokerage and transaction costs primarily due to lower bank charges as a result of more favorable pricing from our banking counterparties. Technology and Development Year Ended December 31, (in millions) 2020 2021 2022 2020 to 2021 % Change 2021 to 2022 % Change Employee compensation, benefits, and overhead, excluding share-based compensation $ 104 $ 284 $ 367 173% 29 % Share-based compensation 18 610 212 NM (65) % Cloud infrastructure services 67 267 175 299% (34) % Software and tools 22 63 105 186% 67 % Other 4 10 19 150% 90 % Total $ 215 $ 1,234 $ 878 474% (29) % Technology and development costs decreased by $356 million primarily due to a decrease in share-based compensation expense of $398 million as higher share-based compensation expenses were recognized as a result of our IPO in July 2021. The April 2022 Restructuring and August 2022 Restructuring resulted in net reductions of $38 million in share-based compensation expense. Additionally, we experienced lower costs in cloud infrastructure services of $92 million primarily due to cost optimization efforts focusing on improvements in utilization of cloud infrastructure and lower overall activity. These decreases were offset by an increase of employee compensation, benefits, and overhead of $83 million as our engineering and data science average headcount increased in the first half of the 2022 compared to 2021 to continue to support our platform and develop new products. These expenses also included $18 million due to severance expenses related to the April 2022 Restructuring and August 2022 Restructuring . Finally, we incurred an increase of $42 million in software and tools primarily driven by amortization of internally developed software and other software services utilized in delivering our products. 85 Table of Contents Operations Year Ended December 31, (in millions) 2020 2021 2022 2020 to 2021 % Change 2021 to 2022 % Change Employee compensation, benefits, and overhead, excluding share-based compensation $ 36 $ 125 $ 144 247% 15 % Customer experience 28 98 78 250% (20) % Provision for credit losses and fraud 61 108 42 77% (61) % Share-based compensation — 20 8 NM (60) % Other 10 17 13 70% (24) % Total $ 135 $ 368 $ 285 173% (23) % Operations costs decreased by $83 million primarily due to a decrease in our provision for credit losses and fraud losses of $66 million as a result of decreased user transactions and our strengthened process to identify high risk users and prevent Fraudulent Deposit Transactions and unauthorized debit card use. Additionally, we experienced a decrease in customer experience costs of $20 million, primarily due to decrease in costs related to third-party customer support vendors as we consolidated our third-party customer support centers due to the overall decrease in user transactions. Furthermore, we experienced a decrease in share-based compensation expense of $12 million as higher share-based compensation expenses were recognized as a result of our IPO in July 2021. These decreases were offset by an increase in employee compensation, benefits, and overhead of $19 million, primarily due to $12 million severance expenses related to the April 2022 Restructuring and August 2022 Restructuring. Marketing Year Ended December 31, (in millions) 2020 2021 2022 2020 to 2021 % Change 2021 to 2022 % Change Employee compensation, benefits, and overhead, excluding share-based compensation $ 8 $ 37 $ 26 363% (30) % Digital marketing 36 49 21 36% (57) % Creative services 12 23 14 92% (39) % Brand marketing 29 24 14 (17)% (42) % Marketing incentives 81 121 11 49% (91) % Share-based compensation — 50 4 NM (92) % Other marketing 20 21 13 5% (38) % Total $ 186 $ 325 $ 103 75% (68) % Marketing costs decreased by $222 million partially due to a decrease in marketing incentives of $110 million, substantially all of which was due to lower costs associated with the Robinhood Referral Program, which was in line with the slower growth in our user base. The expense recognized related to the Robinhood Referral Program is comprised of the fair value of awards earned in the current period, changes in estimate of unclaimed awards earned in the current and prior periods, fair value adjustments of shares held to support the program, and reversals related to awards that expire unclaimed. The fa ir value adjustments of shares held to support the program were 86 Table of Contents immaterial for the periods presented. The following table summarizes the Robinhood Referral Program liability activity for the periods indicated: Years ended December 31, (in millions) 2020 2021 2022 Beginning balance, January 1 $ — $ 1 $ — Fair value of current period awards 86 127 14 Changes in estimate of unclaimed awards for current and prior periods 1 — — Reversals related to unclaimed, expired awards (8) (10) (4) Claimed awards (78) (118) (10) Ending balance, December 31 $ 1 $ — $ — Additionally, share-based compensation expense decreased by $46 million as higher share-based compensation expenses were recognized as a result of our IPO in July 2021. Digital marketing, brand marketing, and creative services decreased by $28 million, $10 million and $9 million, respectively. We invested significantly in marketing costs to raise brand awareness in 2021, which were reduced as our brand became more well established. General and Administrative Year Ended December 31, (in millions) 2020 2021 2022 2020 to 2021 % Change 2021 to 2022 % Change Share-based compensation $ 5 $ 885 $ 425 NM (52) % Employee compensation, benefits, and overhead, excluding share-based compensation 79 196 239 148% 22 % Legal expenses 56 101 76 80% (25) % Other professional fees 30 54 53 80% (2) % Impairment — — 45 NM NM Business insurance 4 25 41 525% 64 % Settlements and penalties 106 70 24 (34)% (66) % Other 15 40 21 167% (48) % Total $ 295 $ 1,371 $ 924 365% (33) % General and administrative costs decreased by $447 million primarily due to decreases in share-based compensation of $460 million as higher share-based compensation expenses were recognized as a result of our IPO in July 2021, including $323 million related to executive compensation arrangements (see Note 13 - Common Stock and Stockholders' (Deficit) Equity, t o our consolidated financial statements in this Annual Report for further information ). The April 2022 Restructuring and August 2022 Restructuring resulted in net reductions of $34 million in share-based compensation expense. We also experienced a decrease of $46 million in costs associated with settlements and penalties (see Note 17 - Commitments & Contingencies, t o our consolidated financial statements in this Annual Report for further information ) and $25 million in legal expenses. These decreases were partially offset by impairment of $45 million related to the August 2022 Restructuring (see Note 6 - Restructuring Activities, t o our consolidated financial statements in this Annual Report for further information). Employee compensation, benefits, and overhead also increased by $43 million , as our general and administrative personnel average headcount increased in the first half 87 Table of Contents of the 2022 compared to 2021 to continue to support our business. This expense included $15 million of severance expenses related to the April 2022 Restructuring and August 2022 Restructuring . Change in Fair Value of Convertible Notes and Warrant Liability Year Ended December 31, (in millions) 2020 2021 2022 2020 to 2021 % Change 2021 to 2022 % Change Change in fair value of convertible notes and warrant liability — 2,045 $ — NM NM Change in fair value of convertible notes and warrant liability was due to the mark-to-market adjustment of the convertible notes and warrants we issued in February 2021. Upon completion of our IPO, the aggregate outstanding principal and accrued interest of the convertible notes converted into Class A common stock and the warrants became equity-classified, which resulted in the warrant liability being reclassified to additional paid-in capital . There will be no additional mark-to-market adjustments related to the convertible notes or warrant liability. See Note 8 - Investments and Fair Value Measurement, to our consolidated financial statements in this Annual Report for further information. Provision for Income Taxes Year Ended December 31, (in millions) 2020 2021 2022 2020 to 2021 % Change 2021 to 2022 % Change Provision for income taxes $ 6 $ 2 1 (67)% (50)% Provision for income taxes decreased by $1 million primarily due to a favorable provision to return true up adjustment in certain tax jurisdictions upon the completion of our 2021 U.S. income tax returns, and offset by the change in valuation allowance on our remaining U.S. federal and state deferred tax assets and by our current state taxes payable. Liquidity and Capital Resources Sources and Uses of Funds Our principal sources of liquidity are cash flows generated from operations, and our cash, cash equivalents, and investments. Other sources of future funds may include potential borrowing capacity under our revolving lines of credit and potential issuance of new debt or equity. Our liquidity needs are primarily to support and invest in our core business, including investing in new ways to serve our customers, potentially seeking strategic acquisitions to leverage existing capabilities and further build our business, and for general capital needs (including capital requirements imposed by regulators and SROs and cash deposit and collateral requirements under the rules of the DTC, NSCC, and OCC). Based on our current level of operations, we believe our primary sources of liquidity will be adequate to meet our current liquidity needs for the next 12 months. Cash, Cash Equivalents, and Investments Our cash, cash equivalents, and investments were $6.25 billion and $6.34 billion as of December 31, 2021 and 2022. Our investment portfolio comprises highly liquid available-for-sale securities, including asset-backed securities, commercial paper, corporate bonds, and government bonds. 88 Table of Contents Revolving Lines of Credit As of December 31, 2022, we had a total of $2.91 billion in committed revolving lines of credit. See Note 12 - Financing Activities and Off-Balance Sheet Risk, to our consolidated financial statements in this Annual Report for further information. Commitments The following table summarizes our short- and long-term material cash requirements for contractual obligations as of December 31, 2022: Payments Due by Period (in millions) Total 2023 2024-2025 2026-2027 Thereafter Operating lease commitments $ 190 $ 30 $ 56 $ 36 $ 68 Non-cancelable purchase commitments (1) 1,037 309 490 238 — Total $ 1,227 $ 339 $ 546 $ 274 $ 68 ________________ (1) Non-cancelable purchase commitments are determined based on the non-cancelable quantities or termination amounts to which we are contractually obligated. They primarily relate to commitments for cloud infrastructure service and business insurance. In addition to lease and purchase commitments, we have a committed financing agreement with a contractual term of 30 days and a daily minimum commitment of $25 million and another with a contractual term of 21 days with a daily minimum commitment of $35 million. See "Securities Borrowing and Lending" in Note 1 - Description of Business and Summary of Significant Accounting Policies, to our consolidated financial statements in this Annual Report for further information. Regulatory Capital Requirements Our broker-dealer subsidiaries (RHF and RHS) are subject to the SEC Uniform Net Capital Rule, administered by the SEC and FINRA, which requires the maintenance of minimum net capital, as defined. Net capital and the related net capital requirements may fluctuate on a daily basis. RHS and RHF compute net capital under the alternative method as permitted by the SEC Uniform Net Capital Rule. The tables below summarize the net capital, capital requirements and excess net capital of RHS and RHF as of periods presented: December 31, 2022 (in millions) Net Capital Required Net Capital Net Capital in Excess of Required Net Capital RHS $ 2,503 $ 66 $ 2,437 RHF 231 0.25 231 89 Table of Contents Cash Flows The following table summarizes our cash flow activities: Year Ended December 31, (in millions) 2020 2021 2022 Cash provided by (used in): Operating activities $ 1,876 $ (885) $ (852) Investing activities (32) (238) (60) Financing activities 1,276 5,203 — Cash used in operating activities decreased $33 million. The decrease consisted of net loss adjusted for certain non-cash items and the effect of changes in operating assets and liabilities. Cash used in operating activities resulting from net loss adjusted for certain non-cash items increased by $230 million. This was primarily due to lower net loss partially offset by the effect of non-cash items adjustments that provided cash and only occurred in 2021 such as the mark-to-market adjustment of convertible notes and warrants of $2.05 billion and the cumulative one-time SBC expense recognized upon our IPO of $1.57 billion as compared to the SBC expense in 2022 of $654 million. Adjustments for non-cash items in 2022 also included a $45 million impairment of long-lived assets related to the August 2022 Restructuring. Cash used in operating activities resulting from changes in operating assets and liabilities decreased $263 million. The decrease was primarily driven by a decrease in receivables from users, net of $6.75 billion, partially offset by an increase of $2.35 billion for payable to users, net, an increase of $3.55 billion for securities loaned, and an increase of $517 million in securities borrowed. Net operating assets and liabilities at any specific point in time are subject to many variables, including variability in user activity, the timing of cash receipts and payments, and vendor payment terms. Cash used in investing activities decreased $178 million in 2022 compared to 2021, which was primarily driven by $125 million used in business acquisitions, net of cash acquired in 2021, and to a lesser extent a reduction in expenditures related to the purchases of property and equipment and the capitalization of internally developed software. Cash used in investing activities in 2022 was partially offset by cash provided by investing activities of $42 million resulting from sale of investments. We did not have any cash flows from financing activities in 2022 compared to cash flows provided by financing activities of $5.20 billion in 2021, which was primarily driven by the issuance of convertible notes and warrants totaling $3.55 billion as well as proceeds from issuance of common stock in connection with our IPO, net of offering costs totaling $2.05 billion. Critical Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting estimates addressed below. We also have other key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional information, see Note 1 - Description of Business and Summary of Significant Accounting Policies, to our consolidated financial statements in this Annual Report. Although we believe that our estimates, assumptions, and judgments 90 Table of Contents are reasonable, they are based upon information presently available. Actual results might differ significantly from these estimates under different assumptions, judgments, or conditions. Business Combinations We allocate the fair value of purchase price to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customer contracts, acquired technology, and trade names, based on expected future growth rates and margins, attrition rates, future changes in technology and royalty for similar brand licenses, useful lives, and discount rates. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results might differ from estimates. Goodwill Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination and is allocated to reporting units expected to benefit from the business combination. We operate and report financial information in one operating segment. We test goodwill for impairment at least annually, in the fourth quarter, or whenever events or changes in circumstances indicate that goodwill might be impaired. We evaluate our reporting units when changes in our operating structure occur, and if necessary, reassign goodwill using a relative fair value allocation approach. In testing for goodwill impairment, we first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then additional impairment testing is not required. However, if we conclude otherwise, we proceed to a quantitative assessment. The quantitative assessment compares the estimated fair value of a reporting unit to its book value, including goodwill. If the fair value exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary. However, if the book value of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Income Tax We make significant judgments and estimates to determine any valuation allowance recorded against deferred tax assets. Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the extent we believe that they will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets including, but not limited to, historical cumulative loss experience and expectations of future earnings, tax planning strategies, and the carry-forward periods available for tax reporting purposes. Our judgment regarding future profitability may change due to many factors, including future market conditions and the ability to successfully execute business plans and/or tax planning strategies. Should there be a change in the ability to recover deferred tax assets, our tax provision would increase or decrease in the period in which the assessment is changed. We recognize a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized. We account for uncertain tax positions, including net 91 Table of Contents interest and penalties, as a component of income tax expense or benefit. We make adjustments to these uncertain tax positions in accordance with applicable income tax guidance and based on changes in facts and circumstances. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact to our consolidated financial statements and operating results. Share-based Compensation Time-Based RSUs We have granted RSUs that vest upon the satisfaction of a time-based service condition (“Time-Based RSUs”). Prior to our IPO, our Time-Based RSUs vested based upon the satisfaction of both a time-based service condition and a performance-based condition, namely the occurrence of a liquidity event such as the IPO. The fair value of our RSUs is estimated based on the fair value of our common stock on the date of grant. The time-based service condition for our awards is generally satisfied over four years. For Time-Based RSUs granted pre-IPO, we record share-based compensation expense on an accelerated attribution method over the requisite service period, as these awards include a performance-based vesting condition. The performance-based condition for our pre-IPO grants was satisfied upon the occurrence of the IPO in 2021, at which point we recorded a cumulative one-time share-based compensation expense determined using the awards’ grant-date fair value. No performance-based conditions exist for our post-IPO grants, and therefore for grants of Time-Based RSUs issued post-IPO, we record share-based compensation expense on a straight line basis over the requisite service period. Market-Based RSUs We have granted RSUs that vest upon the satisfaction of all the following conditions: time-based service conditions, performance-based conditions, and market-based conditions. The time-based service condition for these awards generally is satisfied over six years. The performance-based conditions are satisfied upon the occurrence of an IPO. The market-based conditions are satisfied upon our achievement of specified share prices. For market-based awards, we determine the grant-date fair value utilizing a Monte Carlo valuation model, which incorporates various assumptions including expected stock price volatility, expected term, risk-free interest rates, expected date of an IPO, and expected capital raise percentage. We estimate the expected term based on various vesting scenarios, as these awards are not considered “plain vanilla.” We estimate the expected date of an IPO based on our expectation at the time of measurement of the award’s value. We record share-based compensation expense for market-based equity awards on an accelerated attribution method over the requisite service period, and only if performance-based conditions are considered probable to be satisfied. We determine the requisite service period by comparing the derived service period to achieve the market-based condition and the explicit time-based service period, using the longer of the two service periods as the requisite service period. Upon the occurrence of our IPO in 2021, we recorded a cumulative one-time share-based compensation expense determined using the grant-date fair values. Share-based compensation related to remaining time-based service and market-based conditions to be met will be recorded over the remaining derived requisite service period. Common Stock Valuations Prior to our IPO, given the absence of a public trading market for our common stock and in accordance with the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation, our board of directors exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of fair value of our common stock. 92 Table of Contents These factors included: • independent third-party valuations of our common stock; • the prices paid for common or convertible preferred stock sold to third-party investors by us and prices paid in secondary transactions, including any tender offers; • the rights, preferences and privileges of our redeemable convertible preferred stock relative to those of our common stock; • our financial condition, results of operations, and capital resources; • the industry outlook; • the valuation of comparable companies; • the lack of marketability of our common stock; • the likelihood of achieving a liquidity event, such as an IPO or a sale of our company, given prevailing market conditions; • the history and nature of our business, industry trends, and competitive environment; and • general economic outlook including economic growth, inflation, unemployment, interest rate environment, and global economic trends. Our board of directors determined the fair value of our common stock by first determining the enterprise value of our business, and then allocating the value among the various classes of our equity securities to derive a per share value of our common stock. The enterprise value of our business was primarily estimated by reference to the closest round of equity financing or tender transaction preceding the date of the valuation. In a few cases, we also utilized the income or market approaches. The income approach estimates enterprise value based on the estimated present value of future cash flows the business is expected to generate over its remaining life. The estimated present value is calculated using a discount rate reflective of the risks associated with an investment in a similar company in a similar industry or having a similar history of revenue growth. The market approach estimates value based on a comparison of the subject company to comparable public companies. From the comparable companies, a representative market value multiple is determined and then applied to the subject company’s financial forecasts to estimate the value of the subject company. In allocating the enterprise value of our business among the various classes of stock prior, we primarily used the option pricing method (“OPM”), which models each class of stock as a call option with a unique claim on our assets. After the allocation to the various classes of stock, a discount for lack of marketability (“DLOM”), is applied to arrive at a fair value of the common stock. A DLOM is meant to account for the lack of marketability of a stock that is not traded on public exchanges. In addition, we also considered any secondary transactions involving our capital stock. In our evaluation of those transactions, we considered the facts and circumstances of each transaction to determine the extent to which they represented a fair value exchange and assigned the transactions an appropriate weighting in the valuation of our common stock. Factors considered include the number of different buyers and sellers, transaction volume, timing relative to the valuation date, whether the transactions occurred between willing and unrelated parties, and whether the transactions involved investors with access to our financial information. Application of these approaches involves the use of estimates, judgments, and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses and 93 Table of Contents future cash flows, discount rates, market multiples, the selection of comparable companies, and the probability of possible future events. Changes in any or all of these estimates and assumptions or the relationships between those assumptions impact our valuations as of each valuation date and may have a material impact on the valuation of our common stock. Following the completion of our IPO, there is an active market for our Class A common stock, so we no longer apply these valuation approaches. Recent Accounting Pronouncements See Note 2 - Recent Accounting Pronouncements, to our consolidated financial statements in this Annual Report.