Roblox Corp (RBLX) FY 2021 MD&A

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition, results of operations and cash flows should be read in conjunction with the consolidated financial statements and the related notes appearing under “Consolidated Financial Statements and Supplementary Data” in Item 8 of this filing. This discussion and analysis and other parts of this Annual Report on Form 10-K contain forward-looking statements, such as those relating to our plans, objectives, expectations, intentions, and beliefs, that involve risks, uncertainties and assumptions. Our actual results could differ materially from these forward-looking statements as a result of many factors, including those discussed in the section titled “Risk Factors,” “Special Note Regarding Forward-Looking Statements”, and “Special Note Regarding Operating Metrics” included elsewhere in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any periods in the future. Unless the context otherwise requires, all references in this report to “Roblox,” the “Company”, “we,” “our,” “us,” or similar terms refer to Roblox Corporation and its subsidiaries.

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This section of our Annual Report on Form 10-K discusses our financial condition and results of operations for the fiscal years ended December 31, 2021 and 2020, and year-to-year comparisons between fiscal 2021 and fiscal 2020. A discussion of our financial condition and results of operations for the fiscal year ended December 31, 2019 and year-to-year comparisons between fiscal 2020 and fiscal 2019 that is not included in this Annual Report on Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Company’s final prospectus dated March 2, 2021, or the Effective Date, and filed with the SEC pursuant to Rule 424(b)(4) on March 10, 2021, or the Final Prospectus.

Overview

People from around the world come to Roblox every day to connect with friends. Together they play, learn, communicate, explore, and expand their friendships, all in 3D digital worlds that are entirely user-generated, built by our community of developers. We call this emerging category “human co-experience,” which we consider to be the new form of social interaction we envisioned back in 2004. Our Platform is powered by user-generated content and draws inspiration from gaming, entertainment, social media, and even toys.

Our Roblox human co-experience Platform consists of the Roblox Client, the Roblox Studio, and the Roblox Cloud. Roblox Client is the application that allows users to explore 3D digital worlds. Roblox Studio is the free toolset that allows developers and creators to build, publish, and operate 3D experiences and other content accessed with the Roblox Client. Roblox Cloud includes the services and infrastructure that power our human co-experience Platform.

Our mission is to connect a billion people with optimism and civility. We are constantly improving the ways in which the Roblox Platform supports shared experiences, ranging from how these experiences are built by an engaged community of developers, to how they are enjoyed and safely accessed by users across the globe.

Our primary areas of investment are our developer and creator community, and the people, technology, and infrastructure required to keep improving the Roblox Platform. These areas of focus are how we drive the business and are reflected in our operating cost structure, which primarily consists of four major areas: payment processing and other fees, compensation and benefits, developer earnings, and direct infrastructure.

Recent Developments

On October 29, 2021, we issued $1.0 billion aggregate principal amount of 2030 Notes in a private placement for net proceeds of approximately $987.5 million. We intend to use the net proceeds from this offering for general corporate purposes, which may include production and development, capital expenditures, investments, working capital, and potential acquisitions and strategic transactions.

On August 16, 2021, we acquired Guilded, a privately-held company, which operates a communications platform for connecting gaming communities. The acquisition has been accounted as a business combination. The acquisition date fair value of the consideration transferred was $77.6 million, which consisted of cash and 0.5 million shares of Class A common stock with a fair value of $31.3 million and $46.3 million paid in cash.

Key Metrics

We believe our performance is dependent upon many factors, including the key metrics described below that we track and review to measure our performance, identify trends, formulate financial projections, and make strategic decisions.

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Operating Metrics

We manage our business by tracking several operating metrics, including DAUs, hours engaged, and ABPDAU. As a management team, we believe each of these operating metrics provides useful information to investors and others. For definition of these metrics, refer to the section titled “Special Note Regarding Operating Metrics.”

Daily Active Users

We define a DAU as a user who has logged in and visited Roblox through our website or application on a unique registered account on a given calendar day. We track DAUs as an indicator of the size of the audience engaged on our Platform. DAUs are also broken out by geographic region to help us understand the global engagement on our Platform.

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Hours engaged

We define hours engaged as the time spent by our users on the Platform, which includes time spent in experiences, which refer to the titles that have been created by developers, and also within Platform features such as chat and avatar personalization. We believe that the growth in hours engaged on our Platform reflects the increasing value of our Platform.

Average bookings per daily active user

We define average bookings per DAU, or ABPDAU, as bookings in a given period divided by the DAUs for such period. We use ABPDAU as a way to understand how we are monetizing across all of our users through the sale of virtual currency and subscriptions.

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Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we believe the following non-GAAP financial measures are useful in evaluating our performance. We use this non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that this non-GAAP financial information may be helpful to investors because it provides consistency and comparability with past financial performance. However, non-GAAP financial measures have limitations in their usefulness to investors because they have no standardized meaning prescribed by GAAP and are not prepared under any comprehensive set of accounting rules or principles. In addition, other companies, including companies in our industry, may calculate similarly titled non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial information as a tool for comparison. As a result, our non-GAAP financial information is presented for supplemental informational purposes only and should not be considered in isolation from, or as a substitute for financial information presented in accordance with GAAP.

Bookings

Bookings represent the sales activity in a given period without giving effect to certain non-cash adjustments. Substantially all of our bookings are generated from sales of virtual items on the Roblox Platform. Proceeds from the sale of virtual items are initially recorded in deferred revenue and recognized as revenues over the estimated period of time the virtual items are available on the Roblox Platform (estimated to be the average lifetime of a paying user) or as the virtual items are consumed. Bookings also include a minimal dollar amount from advertising and licensing arrangements.

We believe bookings provide a timelier indication of trends in our operating results that are not necessarily reflected in our revenue as a result of the fact that we recognize the majority of revenue over the estimated average lifetime of a paying user. The change in deferred revenue constitutes the vast majority of the reconciling difference from revenue to bookings. By removing these non-cash adjustments, we are able to measure and monitor our business performance based on the timing of actual transactions with our users and the cash that is generated from these transactions. Over the long-term, the factors impacting our revenue and bookings trends are the same. However, in the short-term, there are factors that may cause revenue and bookings trends to differ in any period.

The following table presents a reconciliation of revenue, the most directly comparable financial measure calculated in accordance with GAAP, to bookings, for each of the periods presented (in thousands):

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Free cash flow

We define free cash flow as net cash provided by operating activities less purchases of property, equipment, and intangible assets. We believe that free cash flow is a useful indicator of our unit economics and liquidity that provides information to management and investors about the amount of cash generated from our core operations that, after the purchases of property, equipment, and intangible assets, can be used for strategic initiatives.

The following table presents a reconciliation of net cash from operating activities, the most directly comparable financial measure calculated in accordance with GAAP, to free cash flow, for each of the periods presented (in thousands):

Acquisition of property and equipment primarily includes servers, infrastructure equipment and tenant improvements.

Adjusted EBITDA

Adjusted EBITDA for purposes of the table below is calculated in accordance with the calculation of “Consolidated EBITDA” as that term is defined in the Indenture. Adjusted EBITDA is a measure of operating performance as used in certain covenant calculations specified in the Indenture that is not calculated in accordance with GAAP and may not conform to the calculation of EBITDA in other circumstances. Adjusted EBITDA should not be considered as a substitute for net loss as determined in accordance with GAAP. Management believes that, when considered together with reported amounts, this measure is useful to investors and management in understanding our ongoing operations and operating trends for purposes of analyzing the covenants specified in the Indenture. This metric should be considered in addition to, and not as a replacement for, the most comparable GAAP measure. Adjusted EBITDA should be read in connection with our financial statements presented in accordance with GAAP.

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The following table presents a reconciliation of consolidated net loss, the most directly comparable financial measure calculated in accordance with GAAP, to adjusted EBITDA, for each of the periods presented (in thousands):

Impact of COVID-19

Although the COVID-19 pandemic has caused general business disruption worldwide beginning in January 2020, it has resulted in an increase in our operational performance, cash flows, and financial condition. We experienced an increase in user and bookings growth following the implementation of shelter-in-place orders to mitigate the COVID-19 pandemic. The COVID-19 pandemic accelerated adoption of our Platform, which generated additional opportunities for us.

However, this increase in engagement and monetization may be temporary and we have seen it moderate as vaccination rates increase, children return to classrooms, and shelter-in-place orders are lifted. The long-term effects of the COVID-19 pandemic on society, and developer, creator and user engagement remain uncertain. There can be no assurance that, as a result of the COVID-19 pandemic or other global economic conditions, users will not reduce their discretionary spending on Robux, will renew their subscriptions or may otherwise increase or maintain their usage of our Platform, which would adversely impact our revenue and financial condition. In addition, in response to the spread of COVID-19, we required and have continued to require substantially all of our employees to work remotely to minimize the risk of the virus to our employees and the communities in which we operate, which represents a significant disruption in how we operate our business. We may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners. We announced our “return to office” plan, which includes shifting to a hybrid model where employees can work from home up to two days a week, that we intend to commence during 2022. Although we have announced a return to office plan, and we expect most of our employees to return to physical offices in the future, the timing, nature and extent of that return remains uncertain.

The full extent to which the COVID-19 pandemic will directly or indirectly impact the global economy, the lasting social effects, and impact on our business, results of operations and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted. For additional details, refer to the section titled “Risk Factors—The global COVID-19 pandemic has significantly affected our business and operations.”

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Components of Results of Operations

Revenue

We generate substantially all of our revenue through the sale of virtual items on the Roblox Platform. Users can purchase and spend Robux to obtain virtual items to enhance their social experience on the Roblox Platform. We recognize revenue over the estimated period of time the virtual items are available to the user on the Roblox Platform (estimated average lifetime of a paying user) or at the time the virtual item is consumed. The average lifetime of a paying user is calculated based on the monthly retention data for each paying user cohort. We then calculate the average retention period by determining the weighted-average period paying users have spent on the Platform and are projected to participate in the Roblox environment. The average lifetime for a paying user for the year ended December 31, 2021 and December 31, 2020 was 23 months. Revenue is reported net of taxes and estimated chargebacks.

Other revenue streams include a minimal amount of revenue from advertising, licenses, and royalties. We recognize revenue based on the performance obligations of the underlying agreements, in an amount that reflects the consideration we expect to be entitled to.

Costs and Expenses

We allocate shared costs, such as facilities (including rent, depreciation on equipment and leasehold improvements shared by all departments) and software costs, to all departments based on headcount. As such, allocated shared costs are reflected in each expense category, with the exception of cost of revenue and developer exchange fees.

Personnel costs include salaries, benefits, travel-related expenses, and stock-based compensation for each expense category, with the exception of cost of revenue and developer exchange fees. In the years ended December 31, 2021, and 2020, personnel costs were $748.9 million, and $292.9 million, respectively.

During the year ended December 31, 2021, we recorded a one-time catch-up of stock-based compensation expense of $21.3 million related to the RSUs granted prior to the direct listing of our Class A common stock on the NYSE, or the Direct Listing, that vest upon the satisfaction of both the service condition and a liquidity event-related performance vesting condition which was satisfied on the effective date of our registration statement on Form S-1/A, and $42.0 million of stock-based compensation expense related to the CEO Long-Term Performance Award granted in February 2021. In addition, stock-based compensation expense attributed to RSUs granted to employees during the year ended December 31, 2021, account for a large portion of personnel costs in the period.

During the year ended December 31, 2020, we recorded compensation expense of $35.2 million related to a tender offer conducted by the purchasers of Series F and Series G convertible preferred stock to acquire shares from employees, former employees, and other existing investors. This expense was recorded because the purchasers were our affiliates, and the tender was completed at above the then-fair market value. In connection with the tender offer, we waived any rights of first refusal or transfer restrictions applicable to such shares.

Cost of revenue

Cost of revenue primarily consists of third-party payment processing fees charged by the various distribution channels. We defer payment processing fees and recognize them over the same period as the respective revenue. These costs are incurred in connection with our sales of our virtual currency.

We intend to use nearly all of any efficiencies earned in this area over time to increase earnings for our developers and creators. Additionally, cost of revenue as a percentage of revenue is affected by shifts in user purchasing preferences and trends. We have observed a shift of our sales toward mobile distribution channels, such as the Apple App Store and Google Play Store. These distribution channels are subject to higher processing fees compared to other distribution channels, such as credit card payment processors. As a result, we expect our cost of revenue expenses to increase both in absolute dollars and as a percentage of revenue over time as our business grows due to the ongoing shift toward these mobile channels, although the percentage may fluctuate from period to period.

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Developer exchange fees

Developer exchange fees represent the amount earned by developers and creators on the Platform. Developers and creators are able to exchange their accumulated earned Robux, for real-world currency under certain conditions outlined in our Developer Exchange Program. Developers and creators can earn Robux through sale of access to their experiences and enhancements in their experiences, sale of content and tools between developers through the Studio Marketplace, and the sale of items to users through the Avatar Marketplace. Additionally, developers can earn Robux through our engagement-based reward program, Premium Payouts, that rewards developers based on the number of hours spent in their experiences by Roblox Premium subscribers.

Over the next few years, a major goal is to drive as much money to our developer and creator community as possible while maintaining reasonable margins and free cash flow. We intend to use future cost efficiencies realized in other areas of our business to increase earnings for our developers and creators. As such, we expect that our developer exchange fees will increase in both absolute dollars and as a percentage of bookings over time as our business grows and as we continue to invest in supporting our Roblox developer and creator community.

Infrastructure and trust & safety

Infrastructure and trust & safety expenses consist primarily of expenses related to the operation of our data centers and technical infrastructure. These costs include costs to third-party service providers, such as cloud computing or other hosting and data storage, rent and facilities-related expenses for our co-located data centers and PoPs that we lease and operate, network and bandwidth costs, and depreciation and associated support and maintenance of our servers and infrastructure equipment. In the year ended December 31, 2021, depreciation related to infrastructure and trust & safety was $60.8 million. The same costs were $40.4 million and $26.5 million in the years ended December 31, 2020 and 2019, respectively. As of December 31, 2021, we have data centers and PoPs around the world with over 40,000 servers.

Infrastructure and trust & safety expenses also include personnel costs and allocated overhead for employees and team members whose primary responsibilities relate to supporting our infrastructure and trust & safety initiatives. In the year ended December 31, 2021, stock-based compensation related to infrastructure and trust & safety was $35.3 million. The same costs were $7.4 million and $2.1 million in the years ended December 31, 2020 and 2019, respectively.

We plan to continue increasing the capacity and enhancing the capability and reliability of our infrastructure to support more sophisticated content, more users, and increased engagement. We expect to increase the dollar amount of our investment in infrastructure for the foreseeable future as we continue to build out our global infrastructure. We intend to achieve scalability and operating leverage in the business by building and maintaining our own technical infrastructure and expect our infrastructure and trust & safety expenses to increase in the short term and then decrease over time as a percentage of bookings as our business grows, primarily through leverage on infrastructure expenses, although the percentage may fluctuate from period to period depending on fluctuations in the timing and extent of our infrastructure and trust & safety expenses and business seasonality.

Research and development

Research and development expenses consist primarily of personnel costs and allocated overhead for our engineering, design, product management, data science, and other personnel engaged in maintaining and enhancing the functionality of the Platform. We plan to increase research and development expenses, both in absolute dollars as well as a percentage of bookings, for the foreseeable future primarily on increased headcount to develop new features, functionality, and innovation of our product.

General and administrative

General and administrative expenses consist primarily of personnel costs and allocated overhead for our finance and accounting, legal, human resources, talent acquisition, and other administrative teams. General and administrative expenses also include professional services fees such as outside legal, accounting, audit, and outsourcing services, and other corporate expenses. We plan to increase general and administrative expenses, both in absolute dollars as well as a percentage of bookings, for the foreseeable future to support the growth of the business and due to costs associated with being a public company, such as increased headcount, enhanced systems, processes, and controls as well as increased expenses in the areas of insurance, compliance, investor relations, and professional services.

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Sales and marketing

Sales and marketing expenses consist primarily of user acquisition expenses and personnel costs and allocated overhead for our marketing, business development, and developer relations functions. Other expenses include those associated with market research, branding, public relations, and developer relations programs, including our annual Roblox Developer Conference. We plan to increase the sales and marketing expenses, both in absolute dollars as well as a percentage of bookings, for the foreseeable future primarily on increased headcount to support our developer relations and brand partnership teams.

Interest Income

Interest income consists primarily of interest earned on our cash, cash equivalents, and restricted cash balances.

Interest Expense

Interest expense consists primarily of contractual interest and amortization of debt issuance costs on our 2030 Notes.

Other Income/(Expense), net

Other expense for historical periods consisted primarily of changes in the fair value of our outstanding warrants to purchase convertible preferred stock that were remeasured at the end of each reporting period. As of December 31, 2021, there were no outstanding convertible preferred stock warrants. Other expense also includes foreign currency exchange gains and losses.

Provision for/(Benefit from) Income Taxes

Provision for (benefit from) income taxes consists primarily of income taxes in foreign jurisdictions and U.S. federal and state income taxes. We maintain a full valuation allowance on federal, state, and foreign deferred tax assets as we have concluded that it is not more likely than not that the deferred assets will be utilized. As of December 31, 2021, we had federal net operating loss carryforwards of $2,120.8 million, which begin to expire in 2024, state net operating loss carryforwards of $840.1 million, which begin to expire in 2027, and foreign net operating loss carryforwards of $49.6 million, which begin to expire in 2024. Utilization of our net operating loss carryforwards and other tax attributes, such as research and development tax credits, may be subject to annual limitations, or could be subject to other limitations on utilization or benefit due to the ownership change limitations provided by Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, and other similar provisions. Further, the Tax Cuts and Jobs Act, or the Tax Act, as modified by the Coronavirus Aid Relief, and Economic Security Act, or the CARES Act, changed the federal rules governing net operating loss carryforwards. Of the $2,120.8 million of federal net operating losses, $2,035.2 million is carried forward indefinitely but is limited to 80% of taxable income.

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Results of Operations

The following tables set forth our results of operations for the periods presented in dollars and as a percentage of our revenue (in thousands, except per share data):

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(1)Depreciation of servers and infrastructure equipment included in infrastructure and trust & safety.

(2)Includes stock-based compensation as follows:

During the year ended December 31, 2021, we recorded a one-time catch-up of stock-based compensation expense of $21.3 million related to the RSUs granted prior to our Direct Listing that vest upon the satisfaction of both the service condition and a liquidity event-related performance vesting condition which was satisfied on the Effective Date. During the year ended December 31, 2020, we recorded compensation expense of $35.2 million related to a tender offer conducted by the purchasers of Series F and Series G convertible preferred stock to acquire shares from employees, former employees, and other existing investors. This expense was recorded because the purchasers were our affiliates and the tender was completed at above the then-fair market value. In connection with the tender offer, we waived any rights of first refusal or transfer restrictions applicable to such shares.

(3)Our consolidated financial statements include our majority-owned subsidiary Roblox China Holding Corp. The ownership interest of a minority investor, Songhua, is recorded as a noncontrolling interest.

(4)See Note 16, “Basic and Diluted Net Loss Per Common Share” to the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for an explanation of the method used to calculate our basic and diluted net loss per share, and the weighted-average number of shares used in the computation of the per share amounts.

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The following table sets forth the components of our consolidated statements of operations data, for each of the periods presented, as a percentage of revenue.

Comparison of the Years Ended December 31, 2021, and 2020

Revenue

Revenue in the year ended December 31, 2021 increased $995.3 million, or 108%, compared to the year ended December 31, 2020. The increase is primarily due to expansion within our daily paying users, which is measured as the average number of unique paying users for each day during the period. Our number of daily paying users increased from roughly 490,000 in 2020 to roughly 678,000 in 2021. Bookings per daily paying user for both periods remained relatively consistent but may not be reflected in the revenue recognized per daily paying user as a substantial portion of revenue recognized each period is from bookings from prior periods. The daily paying user expansion followed existing growth trends, but also included the impact of COVID-19.

Cost of revenue

Cost of revenue increased $257.0 million, or 107%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase is primarily due to an increase of $171.7 million in payment processing fees primarily driven by the growth in our bookings.

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Developer exchange fees

Developer exchange fees increased $209.6 million, or 64%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase is primarily driven by the growth in our bookings over the same period and the associated growth in amounts earned by developers and creators due to the growth in bookings. Additionally, we launched premium payouts in the first half of 2020, and have increased those payouts over time, which contributed to an increase in the developer exchange fees as a percentage of bookings. Developer exchange fees track with our overall bookings performance as more users on the Platform and Robux purchased by our users drives more Robux earned by developers and creators.

Infrastructure and trust & safety

Infrastructure and trust & safety expenses increased $192.3 million, or 73%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase is primarily due to an increase of $90.2 million related to our data center and technical infrastructure expenses associated with providing the platform to our users as well as depreciation of our servers and infrastructure equipment.

In addition, trust & safety expenses increased by $53.4 million to support the growth in users and increased traffic to our platform. Other increases include $44.1 million in personnel costs primarily due to an increase in headcount to support our infrastructure growth and stock-based compensation expense of $27.9 million.

Research and development

Research and development expenses increased $331.8 million, or 165%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase is primarily due to an increase of $314.0 million of personnel costs, which includes $180.4 million in stock-based compensation expense. The increase is also due to an increase in headcount and consultants supporting our engineering, design, and product teams. Other increases include amortized costs of $11.4 million primarily due to intangible assets related our Guilded and Loom.ai acquisitions.

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General and administrative

General and administrative expenses increased $205.7 million, or 211%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase is primarily due to an increase of $124.9 million in professional services expenses, including one-time fees related to the Direct Listing of $50.7 million. The majority of the remaining costs is related to NMPA lawsuit and other litigations settled and paid during the period as well as accruals for other litigation and related changes recorded during the period. The increase is also due to an increase in headcount in our finance, accounting, people, IT and legal functions as part of our transition to a publicly traded company. Personnel costs increased $75.9 million to support increased headcount, and includes $47.0 million increase for stock-based compensation expense.

Sales and marketing

Sales and marketing expenses increased $28.0 million, or 48%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. This increase is due to an additional $22.0 million in personnel costs, including stock-based compensation expense of $7.5 million. The increase also includes $3.6 million related to marketing and promotional expenses.

Interest income, interest expense, other income/(expense), and provision for/(benefit from) income taxes

Interest income decreased $1.7 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020. The decrease is primarily due to liquidation of our investments in fiscal year 2020 and decrease in interest rates in fiscal year 2021 compared to 2020.

Interest expense increased by $7.0 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020. The increase is primarily due to amortization of debt issuance costs of $0.2 million and contractual interest of $6.7 million on the 2030 Notes issued in October 2021.

Other income/(expense), net changed by $1.8 million for the year ended December 31, 2021 as compared to 2020. The change was primarily due to a loss of $1.9 million on remeasurement of warrant liability recorded in 2020 and increase in foreign exchange loss by $4.1 million in the year ended December 31, 2021 as compared to 2020. The change was offset was other miscellaneous charges of $0.4 million recorded in the year ended December 31, 2020.

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Provision (benefit) for income taxes decreased by $6.3 million for the year ended December 31, 2021 as compared to prior year ended December 31, 2020. The change was primarily due to the difference in the acquired deferred taxes in the Guilded acquisition in the year ended December 31, 2021 compared to the acquired deferred taxes in the Loom.ai acquisition in the year ended December 31, 2020.

Liquidity and Capital Resources

As of December 31, 2021, our principal sources of liquidity were cash and cash equivalents of $3.0 billion, which were held for working capital purposes, capital expenditures and acquisitions.

Since our inception, we have financed our operations primarily through cash generated from operations and, to a lesser extent, sales of convertible preferred stock, borrowings under our credit facilities and, more recently, the sale of our 2030 Notes. We bill and collect payment upfront for our bookings.

On October 29, 2021, we issued the 2030 Notes, which will mature on May 1, 2030, unless earlier repurchased or redeemed. Interest is payable semi-annually in arrears on May 1 and November 1 of each year, commencing on May 1, 2022. The net proceeds from the 2030 Notes issuance were approximately $987.5 million and we intend to use the net proceeds for general corporate purposes, which may include production and development, capital expenditures, investments, working capital, and potential acquisitions and strategic transactions.

As of December 31, 2021, contractual obligations related to the 2030 Notes are payments of $39.1 million in 2022 and $38.8 million each year from 2023 through 2029 and $1,019.4 million due in 2030. These amounts represent principal and interest cash payments over the term of the 2030 Notes. Any future redemption of the 2030 Notes could impact the amount or timing of our cash payments.

For more information regarding the 2030 Notes, see Note 8, “Debt” to the Notes to Consolidated Financial Statements.

In January 2021, we completed a private placement and sold an aggregate of 11.9 million shares of our Series H convertible preferred stock at a purchase price of $45.00 per share for net proceeds of approximately $534.3 million.

In February 2019, we entered into an agreement for a revolving line of credit, with maximum borrowings of up to $50.0 million available under the line, due February 2020. Outstanding borrowings under the line of credit bear interest at 1.5% per annum. In February 2020, this credit facility was renewed for a one-year period. In February 2021, we terminated the credit facility agreement. No amounts had been borrowed under the revolving line of credit.

We have non-cancelable lease arrangements for office facilities and space for data center operations expiring in various years through 2031. As of December 31, 2021, the Company had fixed lease payment obligations of $278.4 million, with $59.9 million payable within 12 months.

For more information regarding the operating lease commitments, refer to Note 3, “Leases” to the Notes to Consolidated Financial Statements.

Our other purchase obligations primarily consist of non-cancelable obligations with our data center hosting providers and software vendors. As of December 31, 2021, we had other purchase obligations of $40.1 million, with $16.0 million payable within 12 months.

In addition, as of December 31, 2021, we had $9.9 million in letters of credit outstanding related to our office facilities in San Mateo, California and data center facilities in Ashburn, Virginia.

For more information regarding our contractual obligations, refer to Note 9, “Commitments and Contingencies” to the Notes to Consolidated Financial Statements.

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As of December 31, 2021, we have generated losses from our operations as reflected in our accumulated deficit of $983.9 million as of December 31, 2021, and positive cash flows from operating activities for each of the periods presented. A substantial source of our cash provided by operating activities is our deferred revenue, which is included on our consolidated balance sheets as a liability. Deferred revenue consists of the unearned portion of bookings for which we have already received cash and, which is recorded as revenue over the estimated average lifetime of a paying user or as the virtual items are consumed.

We expect to continue to incur operating losses for the foreseeable future due to the investments that we intend to make in our business.

We believe our existing cash and cash equivalents, together with cash provided by operations, will be sufficient to meet our needs for the next 12 months. Our future capital requirements, however, will depend on many factors, including our growth rate, investment in our headcount, capital expenditures to build out new facilities and purchase hardware for infrastructure, timing and extent of spending to support our efforts to develop our Platform, and the effects of inflation on these various expenses. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, and technologies, including intellectual property rights. In the event that additional financing is required from outside sources, we may seek to raise additional funds at any time through equity, equity-linked arrangements, and debt. If we are unable to raise additional capital when desired and at reasonable rates, our business, results of operations, and financial condition would be adversely affected. See Part 1, Item 1A. “Risk Factors” for more information.

Our principal uses of cash in recent periods have been funding our operations, making capital expenditures and acquisitions.

Cash Flows

The following table summarizes our cash flows for the periods presented (in thousands):

Operating activities

Our largest source of operating cash is cash collection from sales of Robux to our paying users. Our primary uses of cash from operating activities are for payment processing fees, personnel-related expenses, data center and infrastructure-related operations, and developer exchange fees.

During the year ended December 31, 2021, cash provided by operating activities was $659.1 million, which consisted of a net loss of $503.5 million, adjusted by non-cash charges of $462.3 million and net cash inflows from the change in net operating assets and liabilities of $700.3 million. The non-cash charges were primarily comprised of stock-based compensation of $341.9 million and depreciation and amortization of $75.6 million. The net cash inflows from the change in our net operating assets and liabilities was primarily due to a $819.9 million increase in deferred revenue and a $83.0 million increase in developer exchange liability offset by a $172.8 million increase in deferred cost of revenue and a $61.0 million increase in accounts receivable, all due to increases in bookings. A majority of our bookings and costs of revenue is deferred over a 23 month period as they pertain to the sale and associated costs pertaining to durable goods. In addition, the increase in net cash inflows was also driven by $58.8 million increase in accrued expenses primarily due to ESPP liability and other tax related liabilities.

During the year ended December 31, 2020, cash provided by operating activities was $524.3 million, which consisted of a net loss of $257.7 million, adjusted by non-cash charges of $126.0 million and net cash inflows from the change in net operating assets and liabilities of $656.0 million. The non-cash charges were primarily comprised of stock-based compensation of $79.2 million and depreciation and amortization of $43.8 million. The net cash inflows from the change in our net operating assets and liabilities was primarily due to a $965.9 million increase in deferred revenue and a $49.9 million increase in developer exchange liability offset by a $230.4 million increase in deferred cost of revenue and a $156.9 million increase in accounts receivable, all due to increases in bookings.

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Investing activities

During the year ended December 31, 2021, cash used in investing activities was $146.8 million, primarily consisting of cash used in capital expenditures of $93.2 million, payments related to business combination of $45.7 million, and cash paid for purchase of intangible assets of $7.9 million.

During the year ended December 31, 2020, cash used in investing activities was $97.0 million, primarily consisting of cash used in capital expenditures of $104.2 million, and payments related to business combination of $40.9 million, offset by cash provided by net maturities of marketable securities of $57.0 million.

Financing activities

During the year ended December 31, 2021, cash provided by financing activities was $1,598.1 million primarily consisting of proceeds of $987.7 million from the issuance of 2030 Notes, net of debt issuance costs, $534.3 million from the issuance of convertible preferred stock, and proceeds of $76.2 million from the exercise of stock options.

During the year ended December 31, 2020, cash provided by financing activities was $165.0 million primarily consisting of net proceeds of $149.7 million from the issuance of convertible preferred stock and proceeds of $15.2 million from the exercise of stock options.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated, and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected.

An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements.

We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Refer to Note 1, “Overview and Summary of Significant Accounting Policies” to the Notes to Consolidated Financial Statements for a full description of our revenue and stock-based compensation policy.

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Revenue Recognition

In accordance with ASC 606, Revenue from Contracts with Customers, revenue is recognized when control of the service is transferred to the customer. The amount of revenue recognized reflects the consideration that we expect to be entitled to in exchange for these services. To achieve the core principle of this standard, we determine revenue recognition by:

•identifying the contract, or contracts, with the customer;

•identifying the performance obligations in the contract;

•determining the transaction price;

•allocating the transaction price to performance obligations in the contract; and

•recognizing revenue when, or as, we satisfy performance obligations by transferring the promised services.

We derive substantially all of our revenue from the sale of virtual items on the Roblox Platform.

Roblox Platform

We operate the Roblox Platform as live services that allow users to play and socialize with others for free. Within the experience, however, users can purchase virtual currency (Robux) to obtain virtual items to enhance their social experience. Proceeds from the sale of Robux are initially recorded in deferred revenue and recognized as revenues as a user purchases and uses virtual items. Our identified performance obligation is to provide users with the ability to acquire, use, and hold virtual items on the Roblox Platform over the estimated period of time the virtual items are available to the user or until the virtual items are consumed.

Users can purchase Robux, as one-time purchases or through monthly subscriptions via mobile payments, credit cards, or prepaid cards. Payments from users are non-refundable and relate to noncancellable contracts for a fixed price that specify our obligations. Revenue is recorded net of taxes assessed by a government authority that are both imposed on and concurrent with specific revenue transactions between us and our users, and estimated chargebacks. Such payments are initially recorded to deferred revenue.

The satisfaction of our performance obligation is dependent on the nature of the virtual item purchased and as a result, we categorize our virtual items as either consumable or durable.

•Consumable virtual items represent items that can be consumed by a specific user action. Common characteristics of consumable virtual items may include items that are no longer displayed on the user’s inventory after a short period of time or do not provide the user any continuing benefit following consumption. For the sale of consumable virtual items we recognize revenue as the items are consumed.

•Durable virtual items represent items which result in a persistent change to a users’ character or item set (e.g., virtual hat, pet, or house). These items are generally available to the customer to hold, use, or display for as long as they are on our Roblox Platform. We recognize revenue from the sale of durable virtual items ratably over the estimated period of time the items are available to the user on the Roblox Platform.

To separately account for consumable and durable virtual items, we specifically identify each purchase for the majority of virtual items purchased on the Roblox Platform. For the remaining population, we estimate the amount of consumable and durable virtual items purchased based on data from specifically identified purchases and the expected behavior of the users within similar experiences. The estimation of amount of consumable and durable virtual items purchased for the population of purchases not specifically identified, requires management’s judgement as it requires us to evaluate and estimate the expected behavior of users in the population using information from known purchases in similar experiences.

The average lifetime of a paying user estimate is calculated based on historical monthly retention data for each user cohort to project future participation on the Roblox Platform and is currently estimated to be 23 months. Determining the estimated average lifetime of a paying user requires management’s judgment as it requires us to analyze the most recent trends in player cohort activity and other qualitative factors to estimate the average lifetime of a paying user. We also consider results from prior analyses in determining the estimated average lifetime of a paying user. We believe this estimate is the best representation of the average life of the durable virtual items.

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Stock-Based Compensation

We measure and recognize stock-based compensation expense based on the estimated grant date fair value of the awards. We have granted certain awards, consisting primarily of stock option awards, RSUs, PSUs, and stock purchase rights granted under the 2020 ESPP. We account for forfeitures as they occur.

We estimate the fair value of stock options and stock purchase rights granted under the 2020 ESPP using the Black-Scholes option-pricing model and recognize expense on a straight-line basis over the requisite service period of the awards. The Black-Scholes option pricing model requires certain subjective inputs and assumptions, including the fair value of our Class A common stock, the expected term, risk-free interest rates, expected stock price volatility, and expected dividend yield of our Class A common stock. The assumptions used to determine the fair value of the option awards and the stock purchase rights granted under the 2020 ESPP represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. These assumptions and estimates are as follows:

•Fair value of Class A common stock—Prior to the Direct Listing, we estimated the fair value of Class A common stock, as discussed below in the section titled “Common Stock Valuations.” After the completion of the Direct listing, the fair value of our Class A common stock is determined based on the NYSE closing price on the date of grant.

•Expected term—The expected term represents the period that our stock-based awards are expected to be outstanding. The expected term assumptions were determined based on the vesting terms, estimated exercise behavior, post-vesting cancellations and contractual lives of the awards.

•Risk-free interest rates—The risk-free interest rate is based on the implied yields in effect at the time of the grant of U.S. Treasury notes with terms approximately equal to the expected term of the award.

•Expected stock price volatility—Prior to the Direct Listing, we used the historical volatility of the Class A common stock price of similar publicly-traded peer companies. After the completion of the Direct Listing we continue to use the historical volatility of the stock price of similar publicly traded peer companies since we have not established sufficient public trading history.

•Expected dividend yield—Our expected dividend yield is zero, as we have not yet paid and do not anticipate paying dividends on our common stock.

The fair value of RSUs is estimated based on the fair value of our common stock on the date of grant. Prior to the Direct Listing, we estimated the fair value of Class A common stock, as discussed below in the section titled “Common Stock Valuations.” After the completion of the Direct listing, the fair value of our Class A common stock is determined based on the NYSE closing price on the date of grant.

CEO Long-Term Performance Award

In February 2021, the leadership development and compensation committee of our board of directors granted our Chief Executive Officer a Long-Term Performance Award, or CEO Long-Term Performance Award, an RSU award that includes a service and a market condition. The fair value of the CEO Long-Term Performance Award is determined using a Monte Carlo simulation model. One of the most judgmental assumptions in the Monte Carlo simulation is the estimated fair value of the common stock underlying the award as discussed below in the section titled “Common Stock Valuations.”. We estimated the expected term based on the time period from the valuation date to the end of the performance period. The risk-free interest rate is based on the United States treasury yield curve in effect at the time of grant for zero-coupon U.S. Treasury notes. The expected volatility is derived from the historical stock volatility of selected peers over a period equivalent to the expected term of the CEO Long-Term Performance Award. The associated stock-based compensation is recorded over the derived service period, using the accelerated attribution method. If the stock price goals are met sooner than the derived service period, we will adjust the stock-based compensation expense to reflect the cumulative expense associated with the vested portion of the CEO Long-Term Performance Award. Provided that David Baszucki continues to be our Chief Executive Officer, stock-based compensation expense is recognized over the derived service period, regardless of whether the stock price goals are achieved.

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Common Stock Valuations

Prior to the Direct Listing, due to 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 along with management exercised its reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of fair value of our common stock, including:

•the prices at which we or other holders sold our common and convertible preferred stock to outside investors in arms-length transactions;

•contemporaneous valuations performed by an unrelated third-party valuation firm;

•our operating and financial performance;

•the lack of marketability of our common stock;

•the valuation of comparable companies;

•the industry outlook;

•the likelihood of achieving a liquidity event, such as an initial public offering or a sale of our company given prevailing market conditions; and

•the U.S. and global economic and capital market conditions and outlook.

We determine the fair value of our common stock using the most observable inputs available to us, including income approaches as well as recent sales of our stock. The income approach estimates the value of our business based on the future cash flows we expect to generate discounted to their present value using an appropriate discount rate to reflect the risk of achieving the expected cash flows.

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. Factors considered include transaction volume, timing, whether the transactions occurred among willing and unrelated parties, and whether the transactions involved investors with access to our financial information.

Recent Accounting Pronouncements

See section “Recent Accounting Pronouncements” within Item 8. Financial Statements and Supplementary Information, Note 1, “Overview and Summary of Significant Accounting Policies”, for discussion of recent accounting pronouncements.