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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			March 31, 2021
			OR
☐			Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from              to

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.

    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 April 30, 2021 was 127,102,598.

Table of Contents

Part I - Financial Information

5

Item 1.

Consolidated Financial Statements (Unaudited)

11

Notes to Consolidated Financial Statements

22

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

38

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

38

Item 4.

Controls and Procedures

Part II - Other Information

39

Item 1.

Legal Proceedings

39

Item 1A.

Risk Factors

66

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

66

Item 3.

Defaults Upon Senior Securities

66

Item 4.

Mine Safety Disclosures

66

Item 5.

Other Information

67

Item 6.

Exhibits

68

Signatures

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,” “mobile GMS,” and “currency-neutral GMS growth.”

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 our opportunity; the impact of our “Right to Win” strategy and levers for growth, marketing, and product initiatives and investments on our business and operating results, including future gross merchandise sales (“GMS”) and revenue growth; the impact of our Offsite Ads offering on our future financial performance; our plans for acquisitions and strategic investments and their impact on our growth and results of operations; our intended environmental, social, and ecological impacts; and the uncertain impacts that the COVID-19 pandemic or its abatement may have on our business, strategy, operating results, key metrics, financial condition, profitability, and cash flows, on changes in overall levels of consumer spending, on e-commerce generally, and on 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 “aim,” “anticipate,” “believe,” “could,” “enable,” “estimate,” “expect,” “goal,” “intend,” “may,” “plan,” “potential,” “project,” “seek,” “should,” “target,” “will,” “would” or similar expressions and derivative forms and/or 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 Part II, Item 1A, “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.

Summary Risk Factors

Our business is subject to numerous risks. The following summary highlights some of the risks we are exposed to in the normal course of our business activities. This summary is not complete and the risks summarized below are not the only risks we face. You should review and consider carefully the risks and uncertainties described in more detail in the “Risk Factors” section of this Quarterly Report which includes a more complete discussion of the risks summarized below as well as a discussion of other risks related to our business and an investment in our common stock.

Financial Performance and Operational Risks Related to Our Business

•We have experienced rapid growth, and we may not have the infrastructure, human resources, or operational resources to sustain continued growth at our recent pace.

•The COVID-19 pandemic is unprecedented and has impacted, and may continue to impact, our GMS, and could impact our results of operations in numerous ways that remain volatile and unpredictable.

•Our quarterly operating results may fluctuate, which could cause our stock price to decline. The price of our common stock has been and will likely continue to be volatile and declines in the price of our common stock could subject us to litigation.

•We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which could cause our stock price to decline.

•Our business could suffer if we experience a technology disruption that results in a loss of information, if personal data or sensitive information about users or employees is misused or disclosed, or if we or our third-party providers are unable to protect against technology vulnerabilities, service interruptions, security breaches, or other cyber incidents.

•The trustworthiness of our marketplaces and the connections within our community are important to our success. Our business, financial performance, and growth depend on our ability to attract and retain an active and engaged community of buyers and sellers. If we are unable to retain our existing buyers and sellers and activate new ones, our financial performance could decline.

•Our business depends on continued and unimpeded access to third party services, platforms, and infrastructure that we rely upon to maintain and scale our platform.

•We have experienced rapid domestic and global growth, and we may be subject to expanded and potentially uninsured risk, making it more difficult for us to maintain profitability in the future.

•Our business could be adversely affected by economic downturns, natural disasters, political crises, geopolitical changes or other macroeconomic conditions which have in the past and may in the future negatively impact our business and financial performance.

•Our ability to attract and hire a diverse pipeline of talent and retain key employees is important to our success. If we experience significant attrition or turnover it could impact our ability to grow our business.

Strategic Risks Related to Our Business and Industry

•We face intense competition and may not be able to compete effectively.

•If we are not able to keep pace with technological changes, and enhance current and develop new offerings to respond to the changing needs of sellers and buyers, our business may be harmed.

•If the widely adopted mobile, social, search and advertising solutions that we, our sellers and our buyers rely on as part of our key offering are no longer available or effective, or if access to these major platforms is limited, the use of our marketplaces could decline.

•If we do not demonstrate progress against our Impact strategy or if our Impact strategy is not perceived to be adequate, our reputation could be harmed. We could also damage our reputation and the value of our brand if we fail to demonstrate that our commitment to our Impact strategy enhances our overall financial performance.

•Expanding our operations outside of the United States is part of our strategy, and the growth of our business could be harmed if our international expansion efforts do not succeed.

•We may expand our business through acquisitions of other businesses or assets or strategic partnerships and investments, which may divert management’s attention and/or prove to be unsuccessful.

•We have a significant amount of convertible debt that may be settled in cash and may incur additional debt in the future.

Regulatory, Compliance, and Legal Risks

•Compliance and protection under evolving global legal and regulatory requirements including privacy and data protection laws, tax laws, product liability laws, antitrust laws, intellectual property and counterfeiting regulations, may materially impact our time, resources, and ability to grow our business.

•We may be involved in litigation and regulatory matters that are expensive and time consuming and that may require changes to our strategy, the features of our platform and how our business operates.

•We may be subject to intellectual property or other claims, which, even if untrue, could damage our brand, require us to pay significant damages, and could limit our ability to use certain technologies or business strategies in the future.

Other Risks

•Future sales and issuances of our common stock, or rights to purchase common stock, including upon conversion of our convertible notes, could result in additional dilution to our stockholders and could cause the price of our common stock to decline.

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 March 31, 2021						As of December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents			$	1,163,678					$	1,244,099
Short-term investments			502,569						425,119
Accounts receivable, net of expected credit losses of $10,811 and $9,757 as of March 31, 2021 and December 31, 2020, respectively			22,991						22,605
Prepaid and other current assets			46,277						56,152
Funds receivable and seller accounts			158,104						146,806
Total current assets			1,893,619						1,894,781
Restricted cash			5,341						5,341
Property and equipment, net of accumulated depreciation and amortization of $156,287 and $158,771 as of March 31, 2021 and December 31, 2020, respectively			107,960						112,495
Goodwill			139,745						140,810
Intangible assets, net of accumulated amortization of $29,132 and $25,705 as of March 31, 2021 and December 31, 2020, respectively			182,312						187,449
Deferred tax assets			7,723						115
Long-term investments			137,655						39,094
Other assets			23,056						24,404
Total assets			$	2,497,411					$	2,404,489
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable			$	16,386					$	40,883
Accrued expenses			218,157						232,352
Finance lease obligations—current			8,639						8,537
Funds payable and amounts due to sellers			158,104						146,806
Deferred revenue			12,260						11,264
Other current liabilities			13,499						14,822
Total current liabilities			427,045						454,664
Finance lease obligations—net of current portion			43,042						44,979
Deferred tax liabilities			33						58,481
Long-term debt, net			1,302,345						1,062,299
Other liabilities			41,172						41,642
Total liabilities			1,813,637						1,662,065
Commitments and contingencies (Note 8)
Stockholders’ equity:
Common stock ($0.001 par value, 1,400,000,000 shares authorized as of March 31, 2021 and December 31, 2020; 126,785,568 and 125,835,931 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively)			127						126
Preferred stock ($0.001 par value, 25,000,000 shares authorized as of March 31, 2021 and December 31, 2020)			—						—
Additional paid-in capital			664,240						883,166
Retained earnings (accumulated deficit)			24,775						(146,819)
Accumulated other comprehensive (loss) income			(5,368)						5,951
Total stockholders’ equity			683,774						742,424
Total liabilities and stockholders’ equity			$	2,497,411					$	2,404,489

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

Consolidated Statements of Operations (Unaudited)

(In thousands, except share and per share amounts)

 

									Three Months Ended   March 31,
															2021						2020
Revenue															$	550,646					$	228,055
Cost of revenue															142,917						82,416
Gross profit															407,729						145,639
Operating expenses:
Marketing															151,204						48,505
Product development															53,706						37,782
General and administrative															52,182						33,987
Total operating expenses															257,092						120,274
Income from operations															150,637						25,365
Other income (expense):
Interest expense															(1,685)						(9,967)
Interest and other income															979						3,613
Foreign exchange gain (loss)															7,797						(9,318)
Total other income (expense)															7,091						(15,672)
Income before income taxes															157,728						9,693
(Provision) benefit for income taxes															(13,962)						2,829
Net income															$	143,766					$	12,522
Net income per share attributable to common stockholders:
Basic															$	1.14					$	0.11
Diluted															$	1.00					$	0.10
Weighted-average common shares outstanding:
Basic															126,214,735						118,138,186
Diluted															144,714,686						123,119,053

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

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)

 

			Three Months Ended   March 31,
			2021						2020
Net income			$	143,766					$	12,522
Other comprehensive loss:
Cumulative translation adjustment			(11,064)						(2,671)
Unrealized (losses) gains on marketable securities, net of tax (benefit) expense of $(80) and $205, respectively			(255)						671
Total other comprehensive loss			(11,319)						(2,000)
Comprehensive income			$	132,447					$	10,522

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

Etsy, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

(In thousands, except share amounts)

																																																																																										Three Months Ended March 31, 2021
																																																Common Stock												Additional Paid-in Capital						(Accumulated Deficit) Retained Earnings						Accumulated Other Comprehensive Income (Loss)						Total
																																																																																																																		Shares						Amount
Balance as of December 31, 2020																																																																																										125,835,931						$	126					$	883,166					$	(146,819)					$	5,951					$	742,424
Cumulative effect of adoption of accounting standard changes																																																																																										—						—						(228,738)						27,828						—						(200,910)
Stock-based compensation																																																																																										—						—						20,976						—						—						20,976
Exercise of vested options																																																																																										217,293						—						3,930						—						—						3,930
Settlement of convertible senior notes, net of taxes																																																																																										625,022						1						(292)						—						—						(291)
Vesting of restricted stock units, net of shares withheld																																																																																										107,322						—						(14,802)						—						—						(14,802)
Other comprehensive loss																																																																																										—						—						—						—						(11,319)						(11,319)
Net income																																																																																										—						—						—						143,766						—						143,766
Balance as of March 31, 2021																																																																																										126,785,568						$	127					$	664,240					$	24,775					$	(5,368)					$	683,774

																																																																																										Three Months Ended March 31, 2020
																																																Common Stock												Additional Paid-in Capital						Accumulated Deficit						Accumulated Other Comprehensive Loss						Total
																																																																																																																		Shares						Amount
Balance as of December 31, 2019																																																																																										118,342,772						$	119					$	642,628					$	(227,414)					$	(8,699)					$	406,634
Stock-based compensation																																																																																										—						—						13,985						—						—						13,985
Exercise of vested options																																																																																										447,886						—						4,896						—						—						4,896
Vesting of restricted stock units, net of shares withheld																																																																																										129,230						—						(4,198)						—						—						(4,198)
Stock repurchase																																																																																										(543,106)						(1)						—						(24,991)						—						(24,992)
Other comprehensive loss																																																																																										—						—						—						—						(2,000)						(2,000)
Net income																																																																																										—						—						—						12,522						—						12,522
Balance as of March 31, 2020																																																																																										118,376,782						$	118					$	657,311					$	(239,883)					$	(10,699)					$	406,847

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

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

			Three Months Ended   March 31,
			2021						2020
Cash flows from operating activities
Net income			$	143,766					$	12,522
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense			20,351						13,811
Depreciation and amortization expense			13,080						15,163
Provision for expected credit losses			4,601						3,684
Foreign exchange (gain) loss			(4,395)						8,157
Non-cash interest expense			271						8,570
Deferred benefit for income taxes			(3,068)						(2,829)
Other non-cash expense, net			1,184						530
Changes in operating assets and liabilities:
Current assets			(11,580)						(2,784)
Non-current assets			1,231						915
Current liabilities			(16,597)						(27,235)
Non-current liabilities			(379)						(840)
Net cash provided by operating activities			148,465						29,664
Cash flows from investing activities
Purchases of property and equipment			(526)						(567)
Development of internal-use software			(3,226)						(1,261)
Purchases of marketable securities			(268,972)						(101,501)
Sales and maturities of marketable securities			91,714						109,422
Net cash (used in) provided by investing activities			(181,010)						6,093
Cash flows from financing activities
Payment of tax obligations on vested equity awards			(14,802)						(4,198)
Repurchase of stock			—						(24,992)
Proceeds from exercise of stock options			3,930						4,896
Payment of debt issuance costs			(25)						(14)
Settlement of convertible senior notes			(27,319)						—
Payments on finance lease obligations			(2,421)						(2,566)
Other financing, net			1,259						(5,804)
Net cash used in financing activities			(39,378)						(32,678)
Effect of exchange rate changes on cash			(8,498)						(4,018)
Net decrease in cash, cash equivalents, and restricted cash			(80,421)						(939)
Cash, cash equivalents, and restricted cash at beginning of period			1,249,440						448,634
Cash, cash equivalents, and restricted cash at end of period			$	1,169,019					$	447,695

Etsy, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

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

			Three Months Ended   March 31,
			2021						2020
Beginning balance:
Cash and cash equivalents			$	1,244,099					$	443,293
Restricted cash			5,341						5,341
Total cash and cash equivalents, and restricted cash			$	1,249,440					$	448,634
Ending balance:
Cash and cash equivalents			$	1,163,678					$	442,354
Restricted cash			5,341						5,341
Total cash and cash equivalents, and restricted cash			$	1,169,019					$	447,695

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

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”). The Company has 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 26, 2021 (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 the Company to make estimates and judgments that affect the amounts reported and disclosed in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates and judgments. The accounting estimates that require management’s most subjective judgments include: stock-based compensation; income taxes, including the estimate of the annual effective tax rate at interim periods and evaluation of uncertain tax positions; and valuation of goodwill and intangible assets. As of March 31, 2021, 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 the Company’s estimates and judgments required increased judgment and carry a higher degree of variability and volatility. As additional information becomes available, the Company’s estimates may change materially in future periods.

Stock-Based Compensation

Service based stock options, service based restricted stock units (“RSUs”), and performance based restricted stock units (“PBRSUs”), are awarded to employees, officers, and members of the Company’s Board of Directors. The PBRSUs include financial performance based restricted stock units (“Financial PBRSUs”) and total shareholder return performance based restricted stock units (“TSR PBRSUs”), both of which have performance and service vesting requirements. The Company recognizes forfeitures as they occur.

The fair value of the stock options and RSUs are measured using the closing price of the Company’s common stock on Nasdaq on the grant date. Additionally, the fair value of the Financial PBRSUs are determined using a probability assessment and the fair value of the TSR PBRSUs with market conditions are determined using the Monte-Carlo simulation model.

For PBRSUs, the Company recognizes stock-based compensation expenses on a straight-line basis over the longer of the derived, explicit, or implicit service period. As of interim and annual reporting periods, the Financial PBRSUs stock-based compensation expense is adjusted based on expected achievement of performance targets, while TSR PBRSUs stock-based compensation expense is not adjusted.

Recently Adopted 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 (“ASU 2020-06”). ASU 2020-06 simplifies accounting for convertible instruments by removing major separation models previously required under GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features through equity. Without an initial allocation of proceeds to the conversion option, the debt will likely have a lower discount, thereby resulting in less non-cash interest expense through accretion. ASU 2020-06 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. ASU 2020-06 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. This update permits the use of either the modified retrospective or fully retrospective method of transition.

The Company early adopted this standard, effective as of January 1, 2021, on a modified retrospective basis. The adoption of this standard had a material effect on the Company’s consolidated financial statements. The most significant effects related to the 0.125% Convertible Senior Notes due 2027 (the “2020 Notes”), 0.125% Convertible Senior Notes due 2026 (the “2019 Notes”), and 0% Convertible Senior Notes due 2023 (the “2018 Notes” and together with the 2020 Notes and the 2019 Notes, the “Notes”), and included derecognition of the unamortized debt discount, which was recorded as a direct deduction from the Notes, resulting in an increase in long-term debt, net of approximately $264 million; derecognition of the equity component, which represents the value of the conversion option on the issuance date of the Notes outstanding, resulting in a reduction in additional paid-in capital of approximately $229 million, net of taxes; derecognition of deferred tax liabilities of approximately $63 million; and reversal of the cumulative debt discount recognized as interest expense in the Company’s Consolidated Statements of Operations since the date of issuance of each of the Notes to the period ending December 31, 2020, resulting in a decrease of accumulated deficit of approximately $28 million, net of taxes. The Company also had a reduction in interest expense due to the adoption of ASU 2020-06 as the debt discount has been derecognized and, effective January 1, 2021, there is no amortization of the debt discount. The Company did not incur any impact to liquidity or cash flows. When calculating net income per share of common stock attributable to common stockholders, the Company uses the if-converted method as required under ASU 2020-06 to determine the dilutive effect of the Notes.

Note 2—Revenue

The following table summarizes revenue disaggregated by Marketplace revenue and optional Services revenue for the periods presented (in thousands):

The amount of revenue recognized in the three months ended March 31, 2021 that was included in the deferred balance at January 1, 2021 was $10.8 million.

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 income taxes is lower.

For the three months ended March 31, 2021, the Company’s effective income tax rate was 8.9% representing an income tax provision recorded on net income before tax. The effective tax rate for the three months ended March 31, 2021 was lower than the U.S. statutory rate of 21% primarily due to excess tax benefits from employee stock-based compensation, the impact from foreign operations that are subject to lower tax rates, and a benefit related to a research and development tax credit, partially offset by state income taxes.

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 $1.0 million in the three months ended March 31, 2021, from $23.7 million as of December 31, 2020 to $24.7 million as of March 31, 2021. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate is $23.8 million as of March 31, 2021. 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.

Etsy, Inc.

Notes to Consolidated Financial Statements

Note 4—Net Income Per Share

The following table presents the method used when calculating the impact of the Company’s convertible senior notes on earnings per share for the periods presented:

Three Months Ended   March 31,

2021

2020

2020 Notes

If-Converted

N/A

2019 Notes

If-Converted

Treasury Stock

2018 Notes

If-Converted

If-Converted

The Notes were dilutive for the three months ended March 31, 2021.

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   March 31,
															2021						2020
Numerator:
Net income attributable to common stockholders—basic															$	143,766					$	12,522
Add back interest expense, net of tax attributable to assumed conversion of convertible senior notes															784						—
Net income attributable to common stockholders—diluted															$	144,550					$	12,522
Denominator:
Weighted-average common shares outstanding—basic															126,214,735						118,138,186
Dilutive effect of assumed conversion of options to purchase common stock															4,405,537						4,000,177
Dilutive effect of assumed conversion of restricted stock units															2,311,459						980,690
Dilutive effect of assumed conversion of convertible senior notes															11,782,955						—
Weighted-average common shares outstanding—diluted															144,714,686						123,119,053
Net income per share attributable to common stockholders—basic															$	1.14					$	0.11
Net income per share attributable to common stockholders—diluted															$	1.00					$	0.10

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   March 31,
															2021						2020
Stock options															32,992						624,906
Restricted stock units															114,953						1,144,169
Convertible senior notes															—						16,924,593
Total anti-dilutive securities															147,945						18,693,668

Note 5—Fair Value Measurements

The Company has characterized its investments in marketable securities, based on the priority of the inputs used to value the investments, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), and lowest priority to unobservable inputs (Level 3). If the inputs used to measure the investments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the investment. Investments recorded in the accompanying Consolidated Balance 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 Company did not have any Level 3 instruments as of March 31, 2021 and December 31, 2020.

Short- and long-term investments and certain cash equivalents consist of investments in debt securities. With the exception of money market funds, these investments in debt securities are classified as available-for-sale. The following table sets forth the cost, gross unrealized losses, gross unrealized gains, and fair values of the Company’s investments as of the dates indicated (in thousands):

(1)$18.7 million and $39.2 million of money market funds were classified as funds receivable and seller accounts as of March 31, 2021 and December 31, 2020, respectively.

The Company evaluates fair value for each individual security in the investment portfolio. All investments in an unrealized loss position have been in an unrealized loss position for less than 12 months as of March 31, 2021.

The Company typically invests in short- and long-term instruments, including fixed-income funds and U.S. Government and agency securities aligned with our investment strategy. The maturities of the Company’s non-current marketable debt securities generally range from greater than 12 and up to 37 months.

Disclosure of Fair Values

The Company’s financial instruments that are not measured at fair value in the Consolidated Balance Sheets include the Notes, see “Note 7—Debt.” The Company estimates the fair value of the Notes through inputs that are observable in the market, classified as Level 2 as described above. The following table presents the carrying value and estimated fair value of the Notes as of the dates indicated (in thousands):

(1)Upon adoption of ASU 2020-06 as of January 1, 2021, the carrying value of the Notes increased due to the derecognition of the unamortized debt discount, as described in “Note 1—Basis of Presentation and Summary of Significant Accounting Policies—Recently Adopted Accounting Pronouncements.” The increase in the carrying value of the 2018 Notes was offset by the conversion of $27.3 million of the 2018 Notes in the first quarter of 2021 (see “Note 7—Debt”).

The carrying value of other financial instruments, including cash, accounts receivable, accounts payable, funds receivable and seller accounts, and funds payable and amounts due to sellers approximate fair value due to the immediate or short-term maturity associated with these instruments.

Note 6—Accrued Expenses

Accrued expenses consisted of the following as of the dates indicated (in thousands):

Note 7—Debt

2020 Convertible Debt

In August 2020, the Company issued $650.0 million aggregate principal amount of the 2020 Notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The net proceeds from the sale of the 2020 Notes were approximately $639.5 million after deducting the offering expenses. The 2020 Notes are convertible into shares of the Company’s common stock based upon an initial conversion rate of 5.0007 shares of the Company’s common stock per $1,000 principal amount of 2020 Notes (equivalent to an initial conversion price of approximately $199.97 per share). The Company used $74.7 million of the net proceeds from the 2020 Notes offering to enter into separate capped call instruments (“2020 Capped Call Transactions”) with the initial purchasers and/or their respective affiliates.

During any calendar quarter preceding May 1, 2027 in which the closing price of the Company’s common stock exceeds 130% of the applicable conversion price of the 2020 Notes on at least 20 of the last 30 consecutive trading days of the quarter, holders may, in the immediate quarter following, convert all or a portion of their 2020 Notes. Based on the daily closing prices of the Company’s stock during the quarter ended March 31, 2021, holders of the 2020 Notes are not eligible to convert their 2020 Notes during the second quarter of 2021. Based on the terms of the 2020 Notes, when a conversion notice is received, the Company has the option to pay or deliver cash, shares of the Company’s common stock, or a combination thereof. Accordingly, the Company cannot be required to settle the 2020 Notes in cash and, therefore, the 2020 Notes are classified as long-term debt as of March 31, 2021.

2019 Convertible Debt

In September 2019, the Company issued $650.0 million aggregate principal amount of the 2019 Notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The net proceeds from the sale of the 2019 Notes were $639.5 million after deducting the initial purchasers’ discount and offering expenses. The 2019 Notes are convertible based upon an initial conversion rate of 11.4040 shares of the Company’s common stock per $1,000 principal amount of 2019 Notes (equivalent to an initial conversion price of approximately $87.69 per share). The Company used $76.2 million of the net proceeds from the 2019 Notes offering to enter into separate capped call instruments (“2019 Capped Call Transactions”) with the initial purchasers and/or their respective affiliates.

During any calendar quarter preceding June 1, 2026 in which the closing price of the Company’s common stock exceeds 130% of the applicable conversion price of the 2019 Notes on at least 20 of the last 30 consecutive trading days of the quarter, holders may, in the immediate quarter following, convert all or a portion of their 2019 Notes. Based on the daily closing prices of the Company’s stock during the quarter ended March 31, 2021, holders of the 2019 Notes are eligible to convert their 2019 Notes during the second quarter of 2021. Based on the terms of the 2019 Notes, when a conversion notice is received, the Company has the option to pay or deliver cash, shares of the Company’s common stock, or a combination thereof. Accordingly, the Company cannot be required to settle the 2019 Notes in cash and, therefore, the 2019 Notes are classified as long-term debt as of March 31, 2021.

2018 Convertible Debt

In March 2018, the Company issued $345.0 million aggregate principal amount of the 2018 Notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The net proceeds from the sale of the 2018 Notes were $335.0 million after deducting the initial purchasers’ discount and offering expenses. The 2018 Notes are convertible based upon an initial conversion rate of 27.5691 shares of the Company’s common stock per $1,000 principal amount of 2018 Notes (equivalent to an initial conversion price of approximately $36.27 per share). The Company used $34.2 million of the net proceeds from the 2018 Notes offering to enter into separate capped call instruments (“2018 Capped Call Transactions”) with the initial purchasers and/or their respective affiliates.

During the third quarter of 2020, the Company paid $137.2 million in cash and issued approximately 7.3 million shares of Etsy’s common stock to repurchase $301.1 million aggregate principal amount of its outstanding 2018 Notes through privately negotiated transactions. Concurrently, the Company repurchased 1.3 million shares of Etsy’s common stock for $166.2 million, in order to effectively complete the partial repurchase of 2018 Notes principal value in cash, and the conversion premium in shares. The equity component impact associated with the conversion premium on the 2018 Notes was a net increase to additional paid-in capital of $143.2 million. This transaction was accounted for as an extinguishment of debt and recorded in accordance with the applicable accounting standard in the year ended December 31, 2020. The Company recognized a non-cash loss on extinguishment of $16.9 million. This loss was calculated by comparing the carrying value of the debt component with the fair value of a similar liability that does not have an associated convertible feature immediately prior to extinguishment as well as writing off any remaining unamortized deferred debt issuance costs at the time of extinguishment.

During the first quarter of 2021, the Company paid $27.3 million in cash and issued approximately 0.6 million shares of Etsy’s common stock to settle conversion notices of $27.3 million aggregate principal amount of the outstanding 2018 Notes. The debt conversion transaction was accounted for in accordance with ASU 2020-06, which was adopted in the first quarter of 2021. See “Note 1—Basis of Presentation and Summary of Significant Accounting Policies—Recently Adopted Accounting Pronouncements” for additional information.

During any calendar quarter preceding November 1, 2022 in which the closing price of the Company’s common stock exceeds 130% of the applicable conversion price of the 2018 Notes on at least 20 of the last 30 consecutive trading days of the quarter, holders may, in the immediate quarter following, convert all or a portion of their 2018 Notes. Based on the daily closing prices of the Company’s stock during the quarter ended March 31, 2021, holders of the remaining 2018 Notes are eligible to convert their 2018 Notes during the second quarter of 2021. Based on the terms of the 2018 Notes, when a conversion notice is received, the Company has the option to pay or deliver cash, shares of the Company’s common stock, or a combination thereof. Accordingly, the Company cannot be required to settle the 2018 Notes in cash and, therefore, the remaining 2018 Notes are classified as long-term debt as of March 31, 2021.

The following table presents the outstanding principal amount and carrying value of the Notes as of the dates indicated (in thousands):

(1) Upon adoption of ASU 2020-06 as of January 1, 2021, the unamortized debt discount balance was derecognized, as described in “Note 1—Basis of Presentation and Summary of Significant Accounting Policies—Recently Adopted Accounting Pronouncements.”

The effective interest rate for the 2020 Notes, 2019 Notes, and 2018 Notes at the date of issuance was 3.50%, 4.00%, and 4.75%, respectively. Interest expense related to each of the Notes for the periods presented below was as follows (in thousands):

(1) The decrease in interest expense related to the amortization of the debt discount in the current year is due to the adoption of ASU 2020-06 as of January 1, 2021, as described in “Note 1—Basis of Presentation and Summary of Significant Accounting Policies—Recently Adopted Accounting Pronouncements.”

The estimated fair value of each of the Notes was determined through inputs that are observable in the market, and are classified as Level 2. See “Note 5—Fair Value Measurements” for more information regarding the fair value of the Notes.

The Notes are general unsecured obligations of the Company. The Notes rank senior in right of payment to all of the Company’s future indebtedness that is expressly subordinated in right of payment to the Notes; rank equal in right of payment with all of the Company’s liabilities that are not so subordinated; are effectively junior to any of the Company’s secured indebtedness; and are structurally junior to all indebtedness and liabilities (including trade payables) of the Company’s subsidiaries.

2019 Credit Agreement

On February 25, 2019, the Company entered into a $200.0 million senior secured revolving credit facility pursuant to a Credit Agreement (the “2019 Credit Agreement”) with lenders party thereto from time to time, and Citibank N.A., as administrative Agent. The 2019 Credit Agreement will mature in February 2024. The 2019 Credit Agreement includes a letter of credit sublimit of $30.0 million and a swingline loan sublimit of $10.0 million.

Borrowings under the 2019 Credit Agreement (other than swingline loans) bear interest, at the Company’s option, at (i) a base rate equal to the highest of (a) the prime rate, (b) the federal funds rate plus 0.50%, and (c) an adjusted LIBOR rate for a one-month interest period plus 1.00%, in each case plus a margin ranging from 0.25% to 0.875% or (ii) an adjusted LIBOR rate plus a margin ranging from 1.25% to 1.875%. Swingline loans under the 2019 Credit Agreement bear interest at the same base rate (plus the margin applicable to borrowings bearing interest at the base rate). These margins are determined based on the senior secured net leverage ratio (defined as secured funded debt, net of unrestricted cash up to $100 million, to EBITDA) for the preceding four fiscal quarter period. The Company is also obligated to pay other customary fees for a credit facility of this size and type, including an unused commitment fee, ranging from 0.20% to 0.35% depending on the Company’s senior secured net leverage ratio, and fees associated with letters of credit.

The Company capitalized $1.4 million of debt issuance costs in connection with the 2019 Credit Agreement. Total unamortized debt issuance costs related to the 2019 Credit Agreement were $0.8 million and $0.9 million as of March 31, 2021 and December 31, 2020, respectively. Non-cash interest expense related to debt issuance costs on the 2019 Credit Agreement for both the three months ended March 31, 2021 and 2020 was $0.1 million. At March 31, 2021, the Company did not have any borrowings under the 2019 Credit Agreement and was in compliance with all financial covenants.

Note 8—Commitments and Contingencies

Legal Proceedings

From time to time in the normal course of business, various other claims and litigation have been asserted or commenced against the Company. Due to uncertainties inherent in litigation and other claims, the Company can give no assurance that it will prevail in any such matters, which could subject the Company to significant liability for damages. Any claims or litigation could have an adverse effect on the Company’s results of operations, cash flows, or business and financial condition in the period the claims or litigation are resolved. Although the results of litigation and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not have a material adverse effect on its business.

Note 9—Stockholders’ Equity

In December 2020, the Board of Directors approved a stock repurchase program that enables the Company to repurchase up to $250 million of its common stock. The program does not have a time limit and may be modified, suspended, or terminated at any time by the Board of Directors. The number of shares repurchased and the timing of repurchases will depend on a number of factors, including, but not limited to, stock price, trading volume, and general market conditions, along with Etsy’s working capital requirements, general business conditions, and other factors.

Under the stock repurchase program, the Company may purchase shares of its common stock through various means, including open market transactions, privately negotiated transactions, tender offers, or any combination thereof. In addition, open market repurchases of common stock could be made pursuant to trading plans established pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, which would permit common stock to be repurchased at a time that the Company might otherwise be precluded from doing so under insider trading laws or self-imposed trading restrictions. For the three months ended March 31, 2021, the Company did not repurchase common stock under the stock repurchase program, and the remaining amount authorized as of March 31, 2021 is $250 million.

Note 10—Stock-Based Compensation

During the three months ended March 31, 2021, the Company granted stock options and RSUs, including Financial PBRSUs and TSR PBRSUs, under its 2015 Equity Incentive Plan (“2015 Plan”) and, pursuant to the evergreen increase provision of the 2015 Plan, the Board of Directors approved an increase of 6,291,797 shares to the total number of shares available for issuance under the 2015 Plan effective as of January 4, 2021. At March 31, 2021, 44,040,744 shares were authorized under the 2015 Plan and 30,272,377 shares were available for future grant.

The fair value of options granted in the periods presented below using the Black-Scholes pricing model has been based on the following assumptions:

The following table summarizes the activity for the Company’s options during the three months ended March 31, 2021 (in thousands, except share and per share amounts):