Robinhood(HOOD) - 2024 Q1 - Quarterly Report

Cautionary Note Regarding Forward-Looking Statements This section outlines the nature of forward-looking statements, highlighting inherent risks and uncertainties that may cause actual results to differ materially - Forward-looking statements are subject to known and unknown risks, uncertainties, assumptions, and other factors that may cause actual future results to differ materially[9] - Key risk factors include legal and regulatory proceedings, international expansion, liquidity needs, limited operating experience at current scale, fluctuations in financial results, reliance on transaction-based revenue (PFOF), exposure to interest rate fluctuations, and the difficulty of complying with a complex regulatory environment[10][13] PART I - FINANCIAL INFORMATION ITEM 1. Unaudited Financial Statements This section presents Robinhood Markets, Inc.'s unaudited condensed consolidated financial statements and related notes Condensed Consolidated Balance Sheets These balance sheets present the company's financial position, noting a substantial increase in assets and liabilities from user cryptocurrency safeguarding | Metric (in millions) | Dec 31, 2023 | Mar 31, 2024 | | :------------------- | :----------- | :----------- | | Total assets | $32,332 | $46,088 | | Total liabilities | $25,636 | $39,203 | | Total stockholders' equity | $6,696 | $6,885 | - Asset related to user cryptocurrencies safeguarding obligation increased significantly from $14,708 million to $26,223 million, with a corresponding increase in the liability[15] Condensed Consolidated Statements of Operations These statements detail the company's revenues, operating expenses, and net income (loss), showing a significant shift from a net loss to net income | Metric (in millions, except per share) | Q1 2023 | Q1 2024 | | :----------------------------------- | :------ | :------ | | Total net revenues | $441 | $618 | | Total operating expenses | $950 | $460 | | Net income (loss) | $(511) | $157 | | Diluted EPS | $(0.57) | $0.18 | - Total net revenues increased by 40% from $441 million to $618 million, while total operating expenses decreased by 52% from $950 million to $460 million, primarily due to a significant reduction in share-based compensation[17][144] Condensed Consolidated Statements of Comprehensive Income (Loss) This statement presents net income (loss) and other comprehensive income (loss), indicating a positive shift in total comprehensive income | Metric (in millions) | Q1 2023 | Q1 2024 | | :------------------- | :------ | :------ | | Net income (loss) | $(511) | $157 | | Total comprehensive income (loss) | $(511) | $158 | Condensed Consolidated Statements of Cash Flows These statements summarize cash flows from operating, investing, and financing activities, noting a shift from positive to negative operating cash flow | Metric (in millions) | Q1 2023 | Q1 2024 | | :------------------- | :------ | :------ | | Net cash provided by (used in) operating activities | $828 | $(623) | | Net cash used in investing activities | $(481) | $(47) | | Net cash used in financing activities | $(11) | $(30) | | Cash, cash equivalents, segregated cash, and restricted cash, end of period | $9,693 | $8,646 | - Operating cash flow decreased by $1,451 million, primarily due to lower non-cash add-backs (like SBC) and increases in operating assets such as securities segregated under federal regulations and receivables from users[174] Condensed Consolidated Statements of Stockholders' (Deficit) Equity This statement details changes in stockholders' equity, including common stock, additional paid-in capital, and accumulated deficit | Metric (in millions) | Dec 31, 2023 | Mar 31, 2024 | | :------------------- | :----------- | :----------- | | Additional paid-in capital | $12,145 | $12,176 | | Accumulated deficit | $(5,446) | $(5,289) | | Total stockholders' equity | $6,696 | $6,885 | - Net income of $157 million contributed to a reduction in accumulated deficit and an increase in total stockholders' equity[23] Notes to Unaudited Condensed Consolidated Financial Statements Note 1 - Description of Business and Summary of Significant Accounting Policies This note describes Robinhood's business, key subsidiaries, significant accounting policies, and revenue/credit risk concentrations - Robinhood's core business involves facilitating the purchase and sale of options, cryptocurrencies, and equities through its platforms, routing transactions through market makers[26] - Following the adoption of SEC SAB 121, Robinhood recognizes a liability and a corresponding asset on its balance sheet for cryptocurrencies held in custody for users[26] Concentrations of Transaction-Based Revenue (as % of total revenue): | Market Maker | Q1 2023 | Q1 2024 | | :----------- | :------ | :------ | | Citadel Securities, LLC | 13% | 12% | | Wintermute Trading Ltd | —% | 10% | | All others individually less than 10% | 32% | 30% | | Total | 45% | 52% | Note 2 - Recent Accounting Pronouncements This note discusses recent accounting pronouncements, noting no material Q1 2024 impact but evaluating future effects of new FASB ASUs and SEC rules - No new accounting pronouncements adopted during Q1 2024 materially impacted the unaudited condensed consolidated financial statements[37] - The company is evaluating the impact of FASB ASUs 2023-06 (Disclosure Improvements), 2023-07 (Segment Reporting), 2023-09 (Income Taxes Disclosures), and SEC Final Rules on Climate-Related Disclosures, with most not expected to have a material impact[38][39][40][42] Note 3 - Revenues This note disaggregates total net revenues by source, including transaction-based, net interest, and other revenues, along with contract balances Revenues by Source (in millions): | Revenue Type | Q1 2023 | Q1 2024 | | :----------- | :------ | :------ | | Options | $133 | $154 | | Cryptocurrencies | $38 | $126 | | Equities | $27 | $39 | | Other transaction-based | $9 | $10 | | Total Transaction-based revenues | $207 | $329 | | Margin interest | $53 | $72 | | Interest on corporate cash and investments | $68 | $70 | | Interest on segregated cash, securities, and deposits | $45 | $58 | | Cash Sweep | $22 | $39 | | Securities lending, net | $26 | $15 | | Credit card, net | $— | $6 | | Interest expenses related to credit facilities | $(6) | $(6) | | Total Net interest revenues | $208 | $254 | | Other revenues | $26 | $35 | | Total Net Revenues | $441 | $618 | - Cryptocurrency transaction-based revenues saw a significant increase of 232% from $38 million to $126 million, driven by an 88% increase in average Notional Trading Volume per trader and a 57% increase in users trading crypto[43][150][151] - Net interest revenues increased by $46 million, primarily due to growth in interest-earning assets and a higher short-term interest rate environment[43][154] Note 4 - Allowance for Credit Losses This note details the allowance for credit losses, distinguishing between brokerage-related and credit card-related losses and their primary sources Brokerage Related Allowance for Credit Losses (in millions): | Metric | Q1 2023 | Q1 2024 | | :----- | :------ | :------ | | Beginning balance | $18 | $15 | | Provision for credit losses | $9 | $6 | | Write-offs | $(7) | $(2) | | Ending balance | $20 | $19 | Credit Card Related Allowance for Credit Losses (on-balance sheet, in millions): | Metric | Q1 2024 | | :----- | :------ | | Beginning balance | $1 | | Provision for credit losses | $2 | | Write-offs | $(1) | | Ending balance | $2 | Credit Card Related Allowance for Credit Losses (off-balance sheet, in millions): | Metric | Q1 2024 | | :----- | :------ | | Beginning balance | $32 | | Provision for credit losses | $8 | | Payments to Coastal Bank | $(9) | | Recoveries | $1 | | Ending balance | $32 | Note 5 - Investments and Fair Value Measurement This note details the company's investment portfolio, fair value measurement, and the composition and value of safeguarded user cryptocurrencies Held-to-Maturity Investments (in millions): | Type | Dec 31, 2023 (Amortized Cost) | Mar 31, 2024 (Amortized Cost) | | :--- | :---------------------------- | :---------------------------- | | Corporate debt securities | $205 | $158 | | U.S. Treasury securities | $202 | $338 | | U.S. government agency securities | $42 | $9 | | Certificates of deposit | $34 | — | | Commercial paper | $3 | — | | Total | $486 | $505 | Safeguarded User Cryptocurrencies (in millions): | Cryptocurrency | Dec 31, 2023 | Mar 31, 2024 | | :------------- | :----------- | :----------- | | Bitcoin (BTC) | $6,149 | $10,309 | | Dogecoin (DOGE) | $3,319 | $7,365 | | Ethereum (ETH) | $3,761 | $5,629 | | Other | $1,479 | $2,920 | | Total | $14,708 | $26,223 | - The total value of user cryptocurrencies safeguarding obligation and corresponding asset increased by 78% from $14,708 million to $26,223 million, reflecting increased cryptocurrency valuations[58] Note 6 - Derivatives and Hedging Activities This note describes the company's use of interest rate floors as cash flow hedges for margin receivables and their impact on AOCI - Robinhood entered into two interest rate floors with notional amounts of $2 billion (effective June 30, 2023) and $1 billion (effective January 1, 2024) to hedge interest rate risk on margin receivables[59] - A $1 million loss was reclassified from AOCI into net interest revenues for the three months ended March 31, 2024, with an expectation of $2 million in losses to be reclassified over the next 12 months[60][61] Note 7 - Income Taxes This note provides information on the company's income tax provision and effective tax rate, explaining influencing factors like the valuation allowance Income Tax Information (in millions, except percentages): | Metric | Q1 2023 | Q1 2024 | | :----- | :------ | :------ | | Income (loss) before income taxes | $(509) | $162 | | Provision for income taxes | $2 | $5 | | Effective tax rate | (0.5)% | 3.0% | - The effective tax rate was lower than the U.S. federal statutory rate primarily due to a full valuation allowance on U.S. federal and state deferred tax assets, offset by current taxes payable[63] Note 8 - Securities Borrowing and Lending This note details Robinhood's securities borrowing and lending activities, including balance sheet presentation, collateral, and fair value of re-pledged securities Securities Borrowing and Lending (in millions): | Metric | Dec 31, 2023 | Mar 31, 2024 | | :----- | :----------- | :----------- | | Securities borrowed | $1,602 | $2,107 | | Securities loaned | $3,547 | $4,215 | - As of March 31, 2024, Robinhood was permitted to re-pledge securities with a fair value of $5.74 billion under margin account agreements and $19.22 billion under the Fully-Paid Securities Lending program[68] Note 9 - Financing Activities and Off-Balance Sheet Risk This note outlines the company's financing activities, including revolving credit facilities and the Credit Card Funding Trust, and addresses off-balance sheet risks - RHM entered into a $750 million unsecured revolving credit agreement (RHM March 2024 Credit Agreement) with a maturity of March 22, 2027[70] - RHS entered into a $2.25 billion senior secured revolving credit facility (RHS March 2024 Credit Agreement) with a 364-day term, which can be increased to $3.375 billion[71][72] - The Credit Card Funding Trust, a consolidated VIE, had an outstanding borrowing principal and interest of $17 million as of March 31, 2024, with purchased credit card receivables of $19 million[81] - Off-balance sheet credit card receivables funded under the Coastal Bank Program Agreement totaled $177 million as of March 31, 2024[84] Note 10 - Common Stock and Stockholders' (Deficit) Equity This note details the company's capital structure, including common stock classes, outstanding warrants, equity incentive plans, and share-based compensation expense - Class A common stock holders have one vote per share, Class B holders have 10 votes per share, and Class C holders have no voting rights (except as required by law)[87] - As of March 31, 2024, warrants to purchase 14.3 million shares of Class A common stock were outstanding with a strike price of $26.60 per share, expiring February 12, 2031[88] Share-Based Compensation Expense (in millions): | Expense Category | Q1 2023 | Q1 2024 | | :--------------- | :------ | :------ | | Brokerage and transaction | $2 | $2 | | Technology and development | $54 | $44 | | Operations | $2 | $2 | | Marketing | $1 | $2 | | General and administrative | $539 | $12 | | Total SBC expense | $598 | $62 | - The significant decrease in total share-based compensation expense from $598 million in Q1 2023 to $62 million in Q1 2024 was primarily due to a $485 million charge related to the 2021 Founders Award Cancellation in the prior year[93][96] Note 11 - Net Income (Loss) per Share This note presents the calculation of basic and diluted net income (loss) per share and lists anti-dilutive securities excluded from diluted EPS Net Income (Loss) per Share Attributable to Common Stockholders: | Metric | Q1 2023 | Q1 2024 | | :----- | :------ | :------ | | Basic EPS | $(0.57) | $0.18 | | Diluted EPS | $(0.57) | $0.18 | Anti-Dilutive Securities Excluded from Diluted EPS (in millions of shares): | Security Type | Q1 2023 | Q1 2024 | | :------------ | :------ | :------ | | Time-Based RSUs | 63.6 | 4.6 | | Market-Based RSUs | 22.8 | 6.0 | | Stock options | 14.5 | 2.6 | | Warrants | 14.3 | 14.3 | | ESPP | 1.1 | — | | Total anti-dilutive securities | 116.3 | 27.5 | Note 12 - Leases This note provides information on the company's operating leases, detailing right-of-use assets, liabilities, and related cash flows Lease Assets and Liabilities (in millions): | Metric | Dec 31, 2023 | Mar 31, 2024 | | :----- | :----------- | :----------- | | Operating lease assets | $68 | $70 | | Total lease liabilities | $109 | $110 | - Cash payments for operating lease liabilities were $7 million for both Q1 2023 and Q1 2024[99] Note 13 - Commitments & Contingencies This note outlines accruals for loss contingencies and details significant legal and regulatory matters, including class actions and the SEC Wells Notice - Accrued amounts for contingencies were $184 million as of March 31, 2024, down from $190 million at December 31, 2023[100] - Robinhood Crypto received a 'Wells Notice' from the SEC Staff on May 4, 2024, indicating a preliminary determination to recommend an enforcement action alleging violations of Sections 15(a) and 17A of the Exchange Act[112] - Settlements with 46 states regarding options trading, customer communications, service outages, and customer support totaled $9.2 million, with potential additional settlements of approximately $1 million[107] - A settlement with the Massachusetts Securities Division in January 2024 resulted in a $7.5 million fine and agreement to engage an independent consultant[117] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Robinhood's financial condition and results, highlighting revenue growth, a shift to net income, and key performance metrics Overview Robinhood reported strong Q1 2024 financial performance with significant increases in total net revenues, net income, Adjusted EBITDA, and key customer metrics - Total net revenues increased by 40% to $618 million in Q1 2024 compared to $441 million in Q1 2023[144] - The company achieved net income of $157 million (diluted EPS of $0.18) in Q1 2024, a significant improvement from a net loss of $511 million (diluted EPS of -$0.57) in Q1 2023[144] - Adjusted EBITDA (non-GAAP) increased by 115% to $247 million in Q1 2024 from $115 million in Q1 2023[144] - Assets Under Custody (AUC) grew by 65% to $129.6 billion, and Gold Subscribers increased by 42% to 1.68 million[144] Key Performance Metrics This section defines and presents key performance metrics, including Funded Customers, AUC, Net Deposits, ARPU, and Gold Subscribers, noting a shift from MAU focus - Monthly Active Users (MAU) is no longer considered a key performance metric, with a new focus on Gold Subscribers and Net Deposits to deepen customer relationships and increase wallet share[133] Key Performance Metrics: | Metric | Q1 2023 | Q1 2024 | % Change | | :----- | :------ | :------ | :------- | | Funded Customers (millions) | 23.1 | 23.9 | 3% | | AUC (billions) | $78.4 | $129.6 | 65% | | Net Deposits (billions) | $4.4 | $11.2 | NM | | ARPU (dollars) | $77 | $104 | 35% | | Gold Subscribers (millions) | 1.18 | 1.68 | 42% | Components of AUC (in billions): | Asset Type | Q1 2023 | Q1 2024 | % Change | | :--------- | :------ | :------ | :------- | | Equities | $55.3 | $81.5 | 47% | | Cryptocurrencies | $11.5 | $26.2 | 128% | | Options | $0.4 | $1.2 | 200% | | Cash held by Customers | $14.2 | $24.8 | 75% | | Receivables from Customers | $(3.0) | $(4.1) | 37% | | Total AUC | $78.4 | $129.6 | 65% | Non-GAAP Financial Measures This section defines Adjusted EBITDA as a non-GAAP measure and provides its reconciliation to net income (loss), excluding specific non-operating items - Adjusted EBITDA is defined as net income (loss) excluding interest expenses related to credit facilities, provision for income taxes, depreciation and amortization, share-based compensation, significant legal and tax settlements and reserves, and other significant gains, losses, and expenses[146] Reconciliation of Net Income (Loss) to Adjusted EBITDA (in millions): | Metric | Q1 2023 | Q1 2024 | | :----- | :------ | :------ | | Net income (loss) | $(511) | $157 | | Interest expenses related to credit facilities | $6 | $6 | | Provision for income taxes | $2 | $5 | | Depreciation and amortization | $20 | $17 | | EBITDA (non-GAAP) | $(483) | $185 | | SBC - 2021 Founders Award Cancellation | $485 | $— | | SBC Excluding 2021 Founders Award Cancellation | $113 | $62 | | Adjusted EBITDA (non-GAAP) | $115 | $247 | Results of Operations This section compares Robinhood's revenues and operating expenses, highlighting significant increases in transaction-based and net interest revenues, and decreased general and administrative expenses Revenues Total net revenues increased by 40% to $618 million, driven by strong growth in transaction-based revenues from cryptocurrencies and options, and increased net interest revenues Total Net Revenues (in millions): | Metric | Q1 2023 | Q1 2024 | % Change | | :----- | :------ | :------ | :------- | | Transaction-based revenues | $207 | $329 | 59% | | Net interest revenues | $208 | $254 | 22% | | Other revenues | $26 | $35 | 35% | | Total net revenues | $441 | $618 | 40% | - Cryptocurrency transaction-based revenues surged by 232% to $126 million, while options revenues increased by 16% to $154 million[150] - Net interest revenues increased by $46 million, primarily from margin interest (up 36% to $72 million) and Cash Sweep (up 77% to $39 million)[154] Operating Expenses Total operating expenses decreased by 52% to $460 million, primarily due to reduced general and administrative expenses, despite a notable increase in marketing costs Total Operating Expenses (in millions): | Expense Category | Q1 2023 | Q1 2024 | % Change | | :--------------- | :------ | :------ | :------- | | Brokerage and transaction | $36 | $35 | (3)% | | Technology and development | $199 | $196 | (2)% | | Operations | $42 | $44 | 5% | | Marketing | $26 | $67 | 158% | | General and administrative | $647 | $118 | (82)% | | Total operating expenses | $950 | $460 | (52)% | - General and administrative costs decreased by $529 million, primarily due to the 2021 Founders Award Cancellation charge of $485 million in Q1 2023 not recurring in Q1 2024[166] - Marketing costs increased by 158% to $67 million, driven by higher investments in digital and brand marketing channels[164][165] - Provision for income taxes increased by $3 million to $5 million, reflecting business growth and changes in valuation allowance[167] Liquidity and Capital Resources This section discusses Robinhood's liquidity and capital resources, including cash flows, liquid assets, credit facilities, and regulatory capital, deemed adequate for the next 12 months - As of March 31, 2024, cash and cash equivalents were $4.72 billion, with an additional $495 million in held-to-maturity investments maturing within one year[169] - Robinhood had $3.00 billion in committed revolving credit facilities and up to $100 million for its Credit Card Funding Trust as of March 31, 2024, with no outstanding borrowings[170][76] Regulatory Net Capital (in millions) as of March 31, 2024: | Subsidiary | Net Capital | Required Net Capital | Net Capital in Excess of Required Net Capital | | :--------- | :---------- | :------------------- | :------------------------------------------ | | RHS | $2,324 | $90 | $2,234 | | RHF | $291 | $0.25 | $291 | - Cash provided by operating activities decreased by $1,451 million, primarily due to lower non-cash add-backs (like SBC) and increases in operating assets such as securities segregated under federal regulations and receivables from users[174] Critical Accounting Estimates No material changes to critical accounting estimates occurred during the three months ended March 31, 2024, compared to the 2023 Form 10-K disclosures - No material changes to critical accounting estimates occurred during the three months ended March 31, 2024[178] Recent Accounting Pronouncements This section refers to Note 2 of the Unaudited Financial Statements for details on recent accounting pronouncements ITEM 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses Robinhood's exposure to market risks, primarily interest rate and market-related credit risk, including sensitivity analysis and risk management policies - Robinhood's exposure to interest rate risk primarily relates to interest revenue earned on interest-earning assets with floating rates[180] Impact of Hypothetical Interest Rate Change on Total Net Revenues, Net Income (Loss), and Cash Flows (in millions): | Basis Point Change | Q1 2023 | Q1 2024 | | :----------------- | :------ | :------ | | 50 basis point | $70 | $76 | | 100 basis point | $140 | $152 | | 150 basis point | $210 | $228 | - The company manages market-related credit risk by requiring customers to maintain collateral for margin and securities-based lending, and by monitoring counterparty creditworthiness for securities lending activities[188] ITEM 4. Controls and Procedures Management confirmed the effectiveness of disclosure controls and procedures as of March 31, 2024, with no material changes in internal control over financial reporting - Disclosure controls and procedures were evaluated and deemed effective as of March 31, 2024[189][190] - No material changes in internal control over financial reporting occurred during the three months ended March 31, 2024[191] PART II - OTHER INFORMATION ITEM 1. Legal Proceedings This section refers to Note 13 - Commitments & Contingencies in Part I for detailed information on legal proceedings ITEM 1A. Risk Factors This comprehensive section details significant risks and uncertainties that could materially affect Robinhood's business, covering growth, regulation, litigation, technology, and financial matters Summary of Risk Factors This summary provides a high-level overview of Robinhood's most material risks, including challenges in growth, financial predictability, regulatory compliance, technology, and cryptocurrency volatility - Material risks include potential for declining growth, limited operating experience at current scale, fluctuating financial results, past operating losses, and reliance on transaction-based revenue (PFOF) which is subject to regulatory scrutiny[196] - Other significant risks involve exposure to interest rate fluctuations, 'best execution' requirements, negative publicity, adverse economic conditions, dependence on key employees, challenges in international expansion, extensive regulatory environment, and ongoing litigation[196][198] - Technology-related risks include platform interruptions, reliance on third parties, integration of AI technologies, cybersecurity breaches, and maintaining regulatory net capital levels[198] - Cryptocurrency-specific risks include price volatility, uncertainty regarding 'security' status, and rapidly evolving regulations, alongside risks from the multi-class common stock structure concentrating voting power[198][203] Risks Related to Our Business This section details risks concerning Robinhood's business operations, including slower growth, financial fluctuations, profitability challenges, transaction-based revenue sensitivity, and remote work impacts - The company may not grow in line with historical rates due to slowing demand, insufficient customer growth, or macroeconomic factors[200][201] - Results of operations fluctuate significantly quarter-to-quarter, making metrics difficult to predict, influenced by trading activity, market volatility, interest rates, and new product introductions[206][207] - A large portion of revenue is transaction-based (PFOF and Transaction Rebates), making it sensitive to trading volumes and vulnerable to new regulations or bans on such practices, which could reduce profitability[211][216] - Direct and indirect exposure to interest rate fluctuations means rapidly changing interest rate environments could reduce net interest revenues and profitability[220] - The remote work policy introduces heightened operational risks, including potential for reduced productivity, increased cybersecurity vulnerability, and compliance challenges with new rules like the Residential Supervisory Location Designation Rule[240] Risks Related to Regulation and Litigation This section highlights the complex regulatory environment, risks of non-compliance, ongoing investigations, and potential impact of new regulations and litigation on business - Robinhood is subject to a wide variety of local, state, federal, and international laws and regulations across securities, financial services, money transmission, cryptocurrency, and data privacy, with compliance costs continuously increasing[259] - The company has been subject to numerous regulatory investigations and actions, including a $70 million FINRA settlement in June 2021 and a $30 million NYDFS settlement in August 2022, and expects to face more in the future[265][266][269] - New SEC rule proposals (December 2022 and July 2023) and FINRA guidance on complex products and social media marketing could require significant changes to business models, product features, and marketing channels, potentially impacting revenues and increasing compliance costs[272][273][275][276] - Ongoing litigation matters, including class action lawsuits, are expensive and time-consuming, with adverse resolutions potentially leading to significant liability and reputational harm[277][278] Risks Related to Attracting, Retaining, and Engaging Customers This section addresses challenges in attracting, retaining, and engaging customers in competitive markets, highlighting risks of attrition due to competition, market downturns, and platform issues - Robinhood operates in highly competitive markets against incumbent brokerages, fintech companies, and banks, many of which have greater resources and wider product ranges[284] - Customer growth and revenue depend on attracting new customers, retaining existing ones, and increasing usage of products and services, especially premium offerings like Robinhood Gold[288] - Factors that could lead to customer decline or decreased usage include brand damage, increased pricing, ineffective marketing, customer inexperience, market downturns (e.g., 2022 Bear Markets), inflation, platform issues, security breaches, and dissatisfaction with crypto offerings[290][291][293] - Failure to innovate and deliver new, market-fit products and services quickly enough compared to competitors could lead to declining revenue and reduced competitiveness[293] Risks Related to Our Platforms, Systems, and Technology This section outlines technological risks, including system interruptions, reliance on third parties, emerging AI risks, and significant threats from cybersecurity breaches and data privacy regulations - Robinhood's systems are vulnerable to disruptions from natural disasters, power outages, cyberattacks, software bugs, and other failures, which have caused past incidents like the March 2020 Outages and the Q4 2022 Processing Error (resulting in a $57 million loss)[294][298] - The company relies on third-party computer systems and service providers (e.g., Amazon Web Services, payment processors, market makers), and their failures or security vulnerabilities could interrupt business, cause losses, and harm reputation[302][303] - Incorporating AI technologies into products and processes presents business, compliance, and reputational risks, including potential for inaccurate or biased content, increased regulatory scrutiny, and intellectual property claims[304][305][306] - Cybersecurity breaches and data privacy incidents (e.g., November 2021 Data Security Incident) pose significant risks of financial loss, regulatory fines, litigation, and reputational damage, with increasing sophistication of cyber threats[307][309][312][313] Risks Related to Our Brokerage Products and Services This section details risks specific to brokerage products, including maintaining net capital, compliance effectiveness, clearing and execution risks, credit exposure, and liabilities from investment recommendations - Failure to maintain required net capital levels for broker-dealer subsidiaries (RHF and RHS) could lead to immediate suspension of securities activities, regulatory penalties, or even liquidation[317] - Compliance and risk management policies may not be fully effective in identifying or mitigating all types of risk, especially given the company's rapid growth and evolving regulatory landscape[318][319] - Clearing and execution activities expose Robinhood to potential losses from errors (e.g., Q4 2022 Processing Error), operational failures, and counterparty defaults, with the upcoming T+1 settlement cycle introducing new technological and operational challenges[321][323][324] - Extending margin credit and dealing with market makers for cryptocurrency orders exposes the company to credit risk, particularly during volatile markets, with unsecured payment obligations during settlement intervals[326][327] - Providing investment recommendations or educational tools that could be construed as investment advice may subject Robinhood to investigations, penalties, and liability for customer losses if regulatory standards are not met[329][331][333] Risks Related to Cryptocurrency Products and Services This section details significant risks of cryptocurrency offerings, including asset loss, price volatility, security status uncertainty, evolving regulations, and reliance on third-party providers - Loss, destruction, or unauthorized access to private keys for cryptocurrencies held on behalf of customers could result in irreversible loss of assets, reputational harm, and significant financial liability, which may not be fully covered by insurance[334][337] - Cryptocurrency prices are extremely volatile, influenced by global supply/demand, blockchain forks, regulatory measures, and market manipulation, which can negatively impact trading volumes and business growth[338][339][341][342] - The status of any particular cryptocurrency as a 'security' is highly uncertain, and an SEC assertion or court determination that a supported cryptocurrency is a security could lead to regulatory enforcement, fines, and the cessation of trading for that asset, as evidenced by the May 2024 Wells Notice[345][347][348] - Cryptocurrency laws, regulations, and accounting standards are rapidly evolving and difficult to interpret, with potential changes (e.g., February 2023 Custody Rule Proposal, SAB 121, MiCA, tax reporting requirements) posing significant compliance costs and operational challenges[352][353][354][355][356][357] - Features like Crypto Transfers, Robinhood Wallet, and Robinhood Connect increase risks of user error, illegal activity (fraud, money laundering), and potential violations of trade sanctions, leading to customer disputes and reputational harm[360][361][362][363] - Reliance on third-party banks, market makers, and liquidity providers for cryptocurrency services means operational failures or loss of these partners could disrupt trading operations and significantly reduce transaction-based revenues[371][372] Risks Related to Our Spending and Payments Products and Services This section addresses risks of spending and payments products, including reliance on bank partnerships, FDIC insurance, customer defaults, credit risk, and potential for illegal use - Spending Account and Robinhood Cash Card rely on partnerships with J.P. Morgan Chase Bank, N.A. and Sutton Bank, respectively, and Robinhood branded credit cards are issued by Coastal Bank[375] - There is a risk that the FDIC might not recognize users' claims as covered by deposit insurance in the event of bank failure, potentially impacting brand and business[376] - Offering Robinhood Credit increases exposure to customer defaults and credit risk, with the company indemnifying Coastal Bank for certain losses under the Program Agreement[379] - The highly automated nature of spending and payments services makes them targets for illegal or improper uses (e.g., fraud, money laundering), which could lead to claims, lawsuits, regulatory investigations, and reputational harm[380][381] Risks Related to Our Intellectual Property This section discusses risks associated with protecting Robinhood's intellectual property rights, including preventing infringement, defending against third-party claims, and open source software use - Failure to effectively protect intellectual property rights (patents, trademarks, copyrights, trade secrets) could allow third parties to infringe, misappropriate, or dilute them, harming the business and brand[383][384] - Robinhood has been, and may continue to be, subject to claims of violating third-party intellectual property rights, which can be costly to defend and could lead to significant liabilities or require expensive work-arounds[388][390] - The use of open source software in products and services carries risks, including potential requirements to disclose proprietary source code or face claims for breach of license terms[392][393] Risks Related to Finance, Accounting and Tax Matters This section addresses financial, accounting, and tax risks, including credit agreement covenants, insurance adequacy, tax law changes, NOL limitations, and internal control effectiveness - Covenants in credit agreements (e.g., minimum liquidity, tangible net worth) could restrict operations, and a breach could lead to immediate acceleration of debt and adverse financial impact[394][395] - Insurance coverage may be inadequate or become prohibitively expensive, potentially leaving the company exposed to substantial losses from operational failures or large claims[397][398] - Changes in U.S. and foreign tax laws, including potential financial transaction taxes or digital service taxes, could adversely impact tax liabilities and revenues[399][402] - The ability to use net operating losses (NOLs) to offset future taxable income may be limited by ownership changes under Sections 382 and 383 of the Code[404] - Inaccuracies in operational metrics (e.g., Funded Customers, AUC, Gold Subscribers) or failure to maintain effective internal control over financial reporting could harm reputation, stock price, and lead to litigation or regulatory scrutiny[406][407][409][410] Risks Related to Our Class A Common Stock This section addresses risks specific to Class A common stock, including price volatility, dilution, concentrated voting power from the multi-class structure, and anti-takeover provisions - The trading price of Class A common stock has been and may continue to be highly volatile, influenced by market conditions, company announcements, public perception, and analyst coverage[411][412] - Substantial future issuances or sales of Class A common stock, including from warrants, stock options, and RSUs, could result in significant dilution for stockholders and depress the market price[415][416][418] - The multi-class common stock structure concentrates over 50% of voting power with the founders, limiting other stockholders' ability to influence corporate matters and potentially delaying or preventing a change in control[419][420][422] - Provisions in the Charter, Bylaws, Delaware law, and FINRA Rule 1017 (requiring FINRA approval for 25%+ ownership changes) could deter or delay an acquisition of Robinhood[424][425] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds This section states that no unregistered sales of Class A common stock or other equity securities occurred during the three months ended March 31, 2024 - No unregistered sales of Class A common stock or other equity securities occurred from January 1, 2024, through March 31, 2024[428] ITEM 3. Defaults Upon Senior Securities This section indicates that there are no defaults upon senior securities to report ITEM 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the company ITEM 5. Other Information This section discloses that no director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during Q1 2024 - No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during Q1 2024[432] ITEM 6. Exhibit Index This section provides a list of documents filed as exhibits to the Quarterly Report on Form 10-Q, including corporate governance and credit agreements - Key exhibits include the Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, Form of ten-year Warrant, Third Amended and Restated Credit Agreement, and CEO/CFO Certifications (Sections 302 and 906 of Sarbanes-Oxley Act)[434] Signatures This section contains the duly authorized signatures of Robinhood Markets, Inc.'s CEO and CFO for the Quarterly Report on Form 10-Q