Table of Contents
Index to Financial Statements

As filed with the Securities and Exchange Commission on November 19, 2020.

Registration No. 333-                

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Roblox Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   7372   20-0991664

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

Roblox Corporation

970 Park Place, San Mateo, California 94403

(888) 858-2569

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

David Baszucki

Founder, President and Chief Executive Officer

970 Park Place, San Mateo, California 94403

(888) 858-2569

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Tony Jeffries

Michael Coke

Lianna Whittleton

Wilson Sonsini Goodrich & Rosati, P.C.

650 Page Mill Road

Palo Alto, California 94304

(650) 493-9300

 

Mark Reinstra

Adele Freedman

Roblox Corporation

970 Park Place

San Mateo, California 94403

(888) 858-2569

 

Kevin P. Kennedy

Simpson Thacher & Bartlett LLP

2475 Hanover St

Palo Alto, California 94304

(650) 251-5000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.  

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

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

 

Large accelerated filer         Accelerated filer     
Non-accelerated filer         Smaller reporting company     
     Emerging growth company     

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each Class of

Securities to be Registered

 

Proposed

Maximum

Aggregate

Offering Price(1)(2)

 

Amount of

Registration Fee

Class A common stock, par value $0.0001 per share

  $1,000,000,000   $109,100

 

 

(1)

Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) of the Securities Act of 1933, as amended.

(2)

Includes the aggregate offering price of additional shares that the underwriters have the option to purchase, if any.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant will file a further amendment which specifically states that this registration statement will thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement will become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents
Index to Financial Statements

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, Dated                     , 2020.

             Shares

 

LOGO

Class A Common Stock

 

 

This is the initial public offering of shares of Class A common stock of Roblox Corporation.

We are offering to sell              shares of Class A common stock in this offering. The selling stockholders identified in this prospectus are offering to sell an additional              shares of Class A common stock. We will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

We have two classes of authorized common stock, Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to twenty votes per share and is convertible at any time into one share of Class A common stock. Following this offering, entities affiliated with David Baszucki, our Founder, President, Chief Executive Officer and Chair of our board of directors will hold all outstanding shares of our Class B common stock representing approximately     % of the voting power of our outstanding capital stock. As a result, Mr. Baszucki will be able to significantly influence any action requiring the approval of our stockholders, including the election of our board of directors, the adoption of amendments to our certificate of incorporation and bylaws and the approval of any merger, consolidation, sale of all or substantially all of our assets or other major corporate transaction. Also as a result, we believe we are eligible for, but do not intend to take advantage of, the “controlled company” exemption to the corporate governance rules for New York Stock Exchange-listed companies.

Prior to this offering, there has been no public market for our Class A common stock. It is currently estimated that the initial public offering price per share will be between $         and $        . We intend to apply to list our Class A common stock on the New York Stock Exchange under the symbol “RBLX.”

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and, as such, we have elected to comply with certain reduced public company reporting requirements for this prospectus and may elect to do so in future filings.

 

 

See the section titled “Risk Factors” beginning on page 18 to read about factors you should consider before buying shares of our Class A common stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per share      Total  

Initial public offering price

   $                    $                

Underwriting discount(1)

   $        $    

Proceeds, before expenses, to Roblox Corporation

   $        $    

Proceeds, before expenses, to selling stockholders

   $        $    

 

(1)

See the section titled “Underwriting” for a description of the compensation payable to the underwriters.

To the extent that the underwriters sell more than              shares of Class A common stock, the underwriters have the option to purchase up to an additional              shares from Roblox Corporation.

The underwriters expect to deliver the shares against payment in New York, New York, on or about                     , 2020.

 

Goldman Sachs & Co. LLC       Morgan Stanley   J.P. Morgan
Allen & Company LLC       BofA Securities       RBC Capital Markets

 

 

Prospectus dated                     , 2020


Table of Contents
Index to Financial Statements

LOGO

ROBLOX


Table of Contents
Index to Financial Statements

LOGO

31.1M DAUS 22.2B HOURS ENGAGED $589M REVENUE $1.2B $345M OPERATING CASH FLOW *all metrics for the nine months ended 9/30/20


Table of Contents
Index to Financial Statements

LOGO

“As a developer on Roblox, I’ve learned that games aren’t always about winning, some are sort of challenging and some are about creating experiences you wish to share with others.” “I like Roblox because there are so ~ many different games, and it helps kids have fun and be creative.” “Roblox brings the creativity out of every individual. I’m so grateful to be part of a community that pushes each other to succeed.” “The best part about Roblox is chatting online with all my friends from around the world.”


Table of Contents
Index to Financial Statements

LOGO

“The limitless possibilities Roblox has unlocked for me have changed my life - for the better. The tools, community, and experience Roblox has given me turned my passion into a career.” “I enjoy playing Roblox because it’s super engaging and the developers are passionate about their games.” “I’ve grown a lot as a developer by using the platform. Roblox helped me grow my passion for game creation while enabling me to be creative.” “Roblox has enabled me to grow both personally and professionally. It’s been a rewarding opportunity creating amazing experiences that touch the lives of millions of players worldwide with my team at Shark Fin Studios.”


Table of Contents
Index to Financial Statements

LOGO


Table of Contents
Index to Financial Statements

LOGO


Table of Contents
Index to Financial Statements

LOGO


Table of Contents
Index to Financial Statements

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

     1  

RISK FACTORS

     18  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     67  

INDUSTRY, MARKET AND OTHER DATA

     69  

USE OF PROCEEDS

     70  

DIVIDEND POLICY

     71  

CAPITALIZATION

     72  

DILUTION

     75  

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

     78  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     83  

LETTER FROM OUR FOUNDER, PRESIDENT AND CHIEF EXECUTIVE OFFICER

     117  

BUSINESS

     119  

MANAGEMENT

     139  

EXECUTIVE COMPENSATION

     147  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     164  

PRINCIPAL AND SELLING STOCKHOLDERS

     170  

DESCRIPTION OF CAPITAL STOCK

     173  

SHARES ELIGIBLE FOR FUTURE SALE

     180  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS OF OUR CLASS A COMMON STOCK

     185  

UNDERWRITING

     190  

LEGAL MATTERS

     197  

EXPERTS

     197  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     197  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

Through and including              (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

Neither we, the selling stockholders, nor any of the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. Neither we, the selling stockholders, nor any of the underwriters take responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date, regardless of the time of delivery of this prospectus or of any sale of our Class A common stock.

For investors outside the United States: Neither we, the selling stockholders, nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our Class A common stock, and the distribution of this prospectus outside the United States.


Table of Contents
Index to Financial Statements

PROSPECTUS SUMMARY

This summary highlights selected information that is presented in greater detail elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our Class A common stock. You should read this entire prospectus carefully, including the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. Unless the context otherwise requires, the terms “Roblox,” “the Company,” “we,” “us” and “our” in this prospectus refer to Roblox Corporation and its consolidated subsidiaries and references to our “common stock” include our Class A common stock and Class B common stock.

Overview

The story of Roblox began in 1989 when our founders, David Baszucki and Erik Cassel, programmed a 2D simulated physics lab called Interactive Physics, which would later go on to influence our approach to building the groundwork for Roblox. Students across the world used Interactive Physics to see how two cars would crash, or how they could build destructible houses. In starting Roblox in 2004, we wanted to replicate the inspiration of imagination and creativity we saw in Interactive Physics on a much grander scale by ushering in a new category of human interaction that did not exist at the time.

An average of 36.2 million 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 nearly 7 million active 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.

Some refer to our category as the metaverse, a term often used to describe the concept of persistent, shared, 3D virtual spaces in a virtual universe. The idea of a metaverse has been written about by futurists and science fiction authors for over 30 years. With the advent of increasingly powerful consumer computing devices, cloud computing, and high bandwidth internet connections, the concept of the metaverse is materializing.

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 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 build a human co-experience platform that enables shared experiences among billions of users. 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.

The Roblox Platform has a number of key characteristics:

 

   

Identity.    All users have unique identities in the form of avatars that allow them to express themselves as whoever or whatever they want to be. These avatars are portable across experiences.



 

1


Table of Contents
Index to Financial Statements
   

Friends.    Users interact with friends, some of whom they know in the real world and others who they meet on Roblox.

 

   

Immersive.    The experiences on Roblox are 3D and immersive. As we continue to improve the Roblox Platform, these experiences will become increasingly engaging and indistinguishable from the real world.

 

   

Anywhere.    Users, developers and creators on Roblox are from all over the world. Further, the Roblox Client operates on iOS, Android, PC, Mac, and Xbox, and supports VR experiences on PC using Oculus Rift, HTC Vive and Valve Index headsets.

 

   

Low Friction.    It is simple to set up an account on Roblox, and free for users to enjoy experiences on the platform. Users can quickly traverse between and within experiences either on their own or with their friends. It is also easy for developers to build experiences and then publish them to the Roblox Cloud so that they are then accessible to users on the Roblox Client across all platforms.

 

   

Variety of Content.    Roblox is a vast and expanding universe of developer and creator-built content. As of September 30, 2020, there were over 18 million experiences on Roblox, and in the twelve months ended September 30, 2020, over 12 million of these were experienced by our community. There are also millions of creator-built virtual items with which users can personalize their avatars.

 

   

Economy.    Roblox has a vibrant economy built on a currency called Robux. Users who choose to purchase Robux can spend the currency on experiences and on items for their avatar. Developers and creators earn Robux by building engaging experiences and compelling items that users want to purchase. Roblox enables developers and creators to convert Robux back into real-world currency.

 

   

Safety.    Multiple systems are integrated into the Roblox Platform to promote civility and ensure the safety of our users. These systems are designed to enforce real-world laws, and are designed to extend beyond minimum regulatory requirements.

Growth at Roblox has been driven primarily by a significant investment in technology and two mutually reinforcing network effects: content and social.

First, user-generated content, built by our community of developers and creators, powers our platform. As developers and creators build increasingly high-quality content, more users are attracted to our platform. The more users on our platform, the higher the engagement and the more attractive Roblox becomes to developers and creators. With more users, more Robux are spent on our platform, incentivizing developers and creators to design increasingly engaging content and encouraging new developers and creators to start building on our platform.

Second, our platform is social. When users join, they typically play with friends. This inspires them to invite more friends, who in turn, invite their friends, driving organic growth. The more friends that each of our users has playing together on the platform, the more valuable and engaging the platform becomes. This drives more users to our platform through word of mouth from their existing friends on the platform.

The Roblox Platform combines significant bookings and revenue with strong unit economics, free cash flow generation, and high growth.

 

   

As of September 30, 2020, there were over 18 million experiences on Roblox, and in the twelve months ended September 30, 2020, over 12 million of those were experienced by our community.



 

2


Table of Contents
Index to Financial Statements
   

Daily active users, or DAUs, on Roblox grew 47%, from 12.0 million DAUs in 2018 to 17.6 million in 2019, and grew 82%, from 17.1 million in the nine months ended September 30, 2019 to 31.1 million in the nine months ended September 30, 2020.

 

   

Hours engaged on Roblox grew 45%, from 9.4 billion in 2018 to 13.7 billion in 2019, and grew 122%, from 10.0 billion in the nine months ended September 30, 2019 to 22.2 billion in the nine months ended September 30, 2020.

 

   

Revenue grew 56% from $312.8 million in 2018 to $488.2 million in 2019, and grew 68% from $349.9 million in the nine months ended September 30, 2019 to $588.7 million in the nine months ended September 30, 2020.

 

   

Bookings grew 39% from $499.0 million in 2018 to $694.3 million in 2019, and grew 171% from $458.0 million in the nine months ended September 30, 2019 to $1,240.2 million in the nine months ended September 30, 2020.

 

   

Net loss was $97.2 million and $86.0 million in 2018 and 2019, respectively and $46.3 million and $203.2 million in the nine months ended September 30, 2019 and September 30, 2020, respectively.

 

   

Net cash provided by operating activities was $101.0 million and $99.2 million in 2018 and 2019, respectively, and $62.6 million and $345.3 million in the nine months ended September 30, 2019 and September 30, 2020, respectively.

 

   

Free cash flow was $35.0 million and $14.5 million in 2018 and 2019, respectively, and $6.0 million and $292.6 million in the nine months ended September 30, 2019 and September 30, 2020, respectively.

See the section titled “Selected Consolidated Financial and Other Data” for a reconciliation of each non-GAAP financial measure to the most directly comparable financial measure calculated in accordance with GAAP.

Our Community

Roblox is powered by user-generated content from our community of developers and creators who build immersive and engaging experiences found only on Roblox, as well as the vast majority of the items for customizing avatars. Upon signing up for Roblox, users personalize their avatars by selecting body types, clothes, and gear. Users are then free to immerse themselves in the millions of developer-built experiences.

Our Users

In the nine months ended September 30, 2020, 31.1 million average DAUs across over 180 countries enjoyed experiences on Roblox across mobile, desktop and console platforms. Our users are diversified across multiple dimensions, including age, geography, platform and gender. Each day users can express themselves through their avatars, explore different worlds, and engage with others in the Roblox community. During the nine months ended September 30, 2020, users spent 22.2 billion hours engaged on the platform, or an average of 2.6 hours per daily active user each day. Over the same period, our users explored an average of over 20 different experiences on the Roblox Platform per month.

Our Developers and Creators

We offer users the ability to build engaging, immersive experiences that they can easily share with the Roblox community. Experiences refer to the various titles that can be enjoyed by our users in



 

3


Table of Contents
Index to Financial Statements

our platform. Users who create experiences are called developers and those who create avatar items are called creators. Developers can also build and sell custom tools and 3D models to help other developers create experiences. Collectively, our developers and creators contribute to our platform in three ways: by building experiences for users to enjoy, by building avatar items for users to acquire and express themselves with, and by building tools and 3D models for other developers and creators to utilize. In the nine months ended September 30, 2020, we had nearly 7 million active developers across more than 170 countries who had either created or updated an experience on the platform.

We measure the health and success of our developer and creator community based on their earnings and the user engagement in their experiences. As our platform has scaled, our monetizing developers and creators have enjoyed meaningful earnings expansion over time, reflecting the increasing monetization of our platform and driving a growing incentive for our developers and creators to continue to build high-quality content.

For the twelve months ended September 30, 2020, over 960,000 developers and creators earned Robux on the Roblox Platform, of which there were over 1,050 developers and creators that earned $10,000 or more and nearly 250 developers and creators that earned $100,000 or more in Robux.

Our Products and Technology

The Roblox Platform is the underlying technology and infrastructure that supports shared experiences for an average of 31.1 million daily active users. The platform is composed of three elements:

 

   

Roblox Client:    The application that allows users to explore 3D digital worlds.

 

   

Roblox Studio:    The toolset that allows developers and creators to build, publish, and operate 3D experiences and other content accessed with the Roblox Client.

 

   

Roblox Cloud:    The services and infrastructure that power the human co-experience platform.

Since our founding, we have invested heavily in building the Roblox Platform, and 79% of our employees are dedicated to maintaining, improving, and expanding it. Here is how our technology supports the key characteristics of the Roblox Platform:

Identity

The Roblox avatar system allows users to create and personalize their unique 3D identities. Our avatar technology supports a wide variety of character styles. The Roblox Client features the Avatar Editor, which enables users to manipulate the size and body shape of their avatars as well as equip their avatars with clothing, gear, animations, simulated gestures, or emotes, and other accessories from the Avatar Marketplace. Within most experiences, avatars appear exactly how they were configured in the Avatar Editor, creating a sense of persistent identity.

Friends

The Roblox Client allows users to connect through various means, including detecting nearby players, or simply meeting in 3D experiences. The social graph created by these connections is stored in the Roblox Cloud and requires mutual opt-in to avoid unwanted communications. When a user chooses to join an experience, the Roblox Cloud is designed to automatically place that user into the same virtual environment as others connected through the social graph. The Roblox Platform supports text-based chat among users sharing the same 3D experience and between users connected through the social graph.



 

4


Table of Contents
Index to Financial Statements

Immersive

The Roblox Platform allows developers to build deeply immersive 3D environments where users can share synchronous experiences with others, independent of where they may be physically. Developers use Roblox Studio to easily build 3D experiences that are then rendered and simulated on the Roblox Platform. The Roblox Client leverages efficient low-level hardware-specific device APIs to efficiently render those experiences. To achieve an optimal balance between latency, scale, and consistency, computations for the simulation are distributed across Roblox Clients and the Roblox Cloud.

Low Friction

The Roblox Platform gives users the ability to interact with experiences almost instantly, on most popular client devices, and from anywhere in the world over existing broadband and cellular networks. With Roblox, developers can build an experience once and then expect that experience to operate consistently on all supported devices. The Roblox Cloud is central to enabling low-latency, responsive gameplay within 3D environments having millions of concurrent players. The Roblox Cloud determines the format, level of detail, and priority of each asset sent through content delivery networks to a user’s device in order to optimize for the capabilities and bandwidth available to the device. When a user joins a 3D experience, the Roblox Cloud assigns that user to a particular game instance based on, among other considerations, the user’s social graph, geographic location, spoken language, and age group. Developers have access to high-speed data stores in the Roblox Cloud where information about users and each simulated environment can be persisted. The majority of services operated by the Roblox Cloud are hosted in Roblox managed data centers.

Variety of Content

Developers and creators build nearly all of the content for the Roblox Platform. Developers build, publish, and operate 3D experiences with Roblox Studio, a suite of tools accessible to all skill levels, from novice to professional. Teams can work together using built-in access control management and collaborative editing. Once content is built, it can be replicated and shared across multiple experiences giving developers the ability to scale their efforts and make rapid updates. Developers can share their work with other developers through the Studio Marketplace. Roblox provides developers with reference material, tutorials, community forums, and analytics to build their creations.

Anywhere

The Roblox Platform serves a global audience. In the nine months ended September 30, 2020, developers from over 170 countries and users spanning over 180 countries accessed the platform. Developers can build experiences in their native language and then, using machine translation and advanced pattern recognition, the Roblox Cloud automatically translates those experiences into 11 languages. Localization and compliance systems embedded within the Roblox Client and Roblox Cloud help to lower cultural barriers and enable our developers to meet regional requirements with little to no additional effort. We are addressing the opportunity in China through Luobu, a wholly-owned subsidiary of our joint venture with Songhua, an affiliate of Tencent.

Economy

Roblox has a vibrant economy built on a currency called Robux, which can be purchased through the Roblox Client and website. Users can also acquire Robux through a monthly subscription to Roblox



 

5


Table of Contents
Index to Financial Statements

Premium. Developers and creators earn Robux by selling access to virtual content. Developers can also earn Robux by driving engagement of Premium subscribers through an engagement-based payout system. When Premium subscribers spend time in a developer’s experience, that developer earns a prorated share of the user’s monthly subscription fee. Engagement-based payouts incentivize developers to invest in the engagement of their experiences. Roblox allows developers and creators to convert earned Robux into the real-world currency of their choice through our Developer Exchange Program.

Safety

Multiple systems are integrated into the Roblox Platform to promote civility and ensure the safety of our users. These systems are designed to enforce our policies, protect users’ personal information, and abide by local laws. We leverage text-filtering, content moderation systems, and automated systems to proactively identify behaviors that may violate our policies. A human review team is continuously operating to evaluate flagged experiences. During the nine months ended September 30, 2020, our human review team evaluated over 68 million assets. Assets refer to images, meshes, audio files, and video files that developers upload to Roblox to include in their experiences. Roblox operates a customer service portal that profiles self-help information along with ways to contact Roblox via email or from within the Roblox Client. In the nine months ended September 30, 2020, Roblox responded to over 9 million customer inquiries and had a human respond to all actionable safety issues within 10 minutes of their submission on average.

Safety and Digital Civility

We aspire to build a safe and civil online society. We have no tolerance on our platform for content or behavior that violates our rules. Safety and civility systems are built into our platform and apply to every experience. In many instances, our systems extend beyond minimum regulatory requirements.

Our platform is designed to comply with Children’s Online Privacy Protection Act and GDPR regulations. We work closely with regulators, authorities, and safety groups in many countries. We endeavor to promptly report any suspected child exploitation or abuse materials to the relevant authorities.

We partner with over 10 leading global organizations focused on child and internet safety. We are also a member of various organizations with a goal of cross-industry collaboration, knowledge and technology exchange in areas of user safety and child safety. We continue to work diligently with other digital platforms to report bad actors and inappropriate content so that they can also take appropriate actions on their platforms.

The Roblox Economy

We support our developer and creator community by giving them the tools to build, publish, operate, and monetize content. Our economy enables developers and creators to generate income through Roblox.

When users sign up for Roblox, they can create an avatar and explore the vast majority of our experiences for free. Most free experiences allow users to spend Robux by purchasing experience-specific enhancements and items such as clothing accessories and emotes from our Avatar Marketplace. Roblox retains a portion of every Robux transaction and distributes the rest to developers and creators.



 

6


Table of Contents
Index to Financial Statements

Users can purchase Robux in two ways, as one-time purchases or via Roblox Premium, a subscription service that is billed monthly and includes discounted Robux, access to exclusive in-experience benefits, exclusive and discounted marketplace items, and the ability to buy, sell, and trade certain Avatar items.

We currently offer developers and creators four mechanisms to earn Robux:

 

   

sale of access to their experiences and enhancements in their experiences;

 

   

engagement-based payouts, which reward developers for the amount of time that Premium subscribers spend in their experiences;

 

   

sale of content and tools between developers; and

 

   

sale of items to users through the Avatar Marketplace.

Earned Robux are deposited into the virtual accounts of the developers and creators, who can convert Robux into the real-world currency of their choice through our Developer Exchange Program. In the nine months ended September 30, 2020, developers and creators earned $209.2 million, up from $72.2 million in the nine months ended September 30, 2019. Developers and creators do not always cash out their Robux to real-world currency. Some choose to reinvest their Robux into developer tools, promote their experiences through our internal ad network, or spend the Robux as any other user would.

Our Growth Strategies

We believe that the Roblox Platform has the potential to transform how people express themselves, socialize, play, learn, work, and transact together around the world. We are focused on the following key growth strategies:

 

   

Platform Extension:    We are continually investing in the Roblox Platform, including significant investments in high fidelity avatars, more realistic experiences, 3D spatial audio technology, and other social features. These investments should enable Roblox to support human co-experience in the entertainment, learning and business markets.

 

   

Age Demographic Expansion:    As a result of platform extension, developers and creators are now able to build higher quality experiences and content that appeals to an older age demographic. We believe there is significant potential for us to increase our penetration and engagement across all age demographics.

 

   

International Reach:    We believe there is significant potential for us to grow the global reach of our platform. We believe some of that will occur by the same organic, word of mouth user and developer growth that we have seen in markets like the U.S., Canada, and the United Kingdom. In addition, we are investing in technology that will also enhance our growth around the world. For example, we believe that features such as automated translation and built-in regional compliance will enable us to scale usage in global markets. Further, we are addressing the opportunity in China through Luobu, a wholly-owned subsidiary of our joint venture with Songhua, an affiliate of Tencent.

 

   

Monetization:    We believe there is significant potential to increase monetization on our platform. First, we are actively working with our developer and creator community to help them improve their monetization. Second, we recently introduced our subscription service, Roblox Premium, which we believe will increase our conversion of our free users to paying users and the retention of our paying users. Finally, we expect to work with leading brands to build unique marketing opportunities on the Roblox Platform.



 

7


Table of Contents
Index to Financial Statements

Risk Factors Summary

Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this prospectus summary. These risks include, but are not limited to, the following:

 

   

We have experienced rapid growth in recent periods, and our recent growth rates may not be indicative of our future growth or the growth of our market.

 

   

We have a history of net losses and we may not be able to achieve or maintain profitability in the future.

 

   

Our financial condition and results of operations will fluctuate from quarter to quarter, which makes them difficult to predict and they may not fully reflect the underlying performance of our business.

 

   

Our business is affected by seasonal demands, and our quarterly operations results fluctuate as a result.

 

   

The recent global COVID-19 outbreak has significantly affected our business and operations.

 

   

We depend on effectively operating with mobile operating systems, hardware, and networks that we do not control; changes to any of these or our platform may significantly harm our user retention, growth, engagement, and monetization, or require us to change our data collection and privacy practices, business models, operations, practices, advertising activities or application content, which could restrict our ability to maintain our platform through these systems, hardware, and networks and would adversely impact our business.

 

   

Because we recognize revenue from bookings over the estimated user lifetime of our paying users, changes in new business may not be immediately reflected in our operating results.

 

   

If our business becomes constrained by changing legal and regulatory requirements, our operating results will suffer.

 

   

The success of our business model is contingent upon our ability to provide a safe online environment for children to experience and if we are not able to continue to provide a safe environment, our business will suffer dramatically.

 

   

After this offering, our executive officers, directors and holders of 5% of more of our Class A common stock will collectively beneficially own approximately      % of the outstanding shares of our Class A common stock and 100% of the outstanding shares of our Class B common stock, and continue to have substantial control over us, which will limit your ability to influence the outcome of important transactions, including a change in control.

 

   

The dual class stock structure of our common stock will have the effect of concentrating voting control in our founder, which will limit or preclude your ability to influence corporate matters, including the election of directors and the approval of any change of control transaction.

Channels for Disclosure of Information

Investors, the media and others should note that, following the completion of this offering, we intend to announce material information to the public through filings with the Securities and Exchange Commission, or the SEC, the investor relations page on our website, at www.corp.roblox.com, press releases, public conference calls and webcasts. We use these channels, as well as social media, to communicate with our developers, creators, users, and the public about our company, our platform and other issues, and the information disclosed by the foregoing channels could be deemed to be material



 

8


Table of Contents
Index to Financial Statements

information. As such, we encourage investors, the media and others to follow the channels listed above and to review the information disclosed through such channels. However, information contained on, or that can be accessed through, these channels does not constitute a part of this prospectus and is not incorporated by reference herein. Any updates to the list of disclosure channels through which we will announce information will be posted on the investor relations page on our website.

Corporate Information

We were incorporated in 2004. Our principal executive offices are located at 970 Park Place, San Mateo, California 94403, and our telephone number is (888) 858-2569. Our website address is www.roblox.com. Information contained on, or that can be accessed through, our website does not constitute part of this prospectus and inclusions of our website address in this prospectus are inactive textual references only. You should not consider information contained on our website to be part of this prospectus or in deciding whether to purchase shares of our Class A common stock.

“Roblox,” “Robux,” our logo and our other registered or common law trademarks, service marks or trade names appearing in this prospectus are the property of Roblox Corporation. Other trademarks and trade names referred to in this prospectus are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus, including logos, artwork and other visual displays, may appear without a trademark symbol, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other entities’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other entity.

We believe we are eligible for, but do not intend to take advantage of, the “controlled company” exemption to the corporate governance rules for New York Stock Exchange-listed companies.

JOBS Act

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting requirements that are otherwise applicable generally to public companies. These reduced reporting requirements include:

 

   

the requirement to present only two years of audited financial statements and only two years of related management’s discussion and analysis in this prospectus;

 

   

the ability to elect or delay compliance with new or revised accounting standards until they are made applicable to private companies;

 

   

an exemption from compliance with the auditor attestation requirement on the effectiveness of our internal control over financial reporting;

 

   

reduced disclosure about our executive compensation arrangements; and

 

   

an exemption from the requirements to obtain a non-binding advisory vote on executive compensation or shareholder approval of any golden parachute arrangements.

We may take advantage of these provisions until we are no longer an emerging growth company. We would cease to be an “emerging growth company” upon the earliest to occur of: (i) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; (ii) the date we qualify as a



 

9


Table of Contents
Index to Financial Statements

large accelerated filer, which would occur as of the last day of the fiscal year in which we have been subject to SEC reporting requirements for at least 12 months, we have filed at least one Annual Report on Form 10-K and we have at least $700 million of equity securities held by non-affiliates as of the end of the second quarter of that fiscal year; (iii) the date on which we have, in any three-year period, issued more than $1.0 billion in non-convertible debt securities; and (iv) the last day of the fiscal year ending after the fifth anniversary of this offering. We may choose to take advantage of some but not all of these reduced reporting burdens. We have taken advantage of certain reduced reporting burdens in this prospectus. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.

The JOBS Act permits an emerging growth company like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected to use this extended transition period until we are no longer an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period. As a result, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies and our consolidated financial statements may not be comparable to the financial statements of companies that comply with new or revised accounting pronouncements as of public company effective dates. It is possible that some investors will find our Class A common stock less attractive as a result, which may result in a less active trading market for our Class A common stock and higher volatility in our stock price.

See the section titled “Risk Factors—Risks Related to Our Business—We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Class A common stock less attractive to investors.”



 

10


Table of Contents
Index to Financial Statements

The Offering

 

Class A common stock offered by us

            shares

 

Class A common stock offered by the selling stockholders

            shares

 

Class A common stock to be outstanding after this offering

            shares (             shares if the option to purchase additional shares is exercised in full)

 

Class B common stock to be outstanding after this offering

            shares

 

Total Class A common stock and Class B common stock to be outstanding after this offering

            shares (             shares if the option to purchase additional shares is exercised in full)

 

Option to purchase additional shares of Class A common stock from us

            shares

 

Use of proceeds

We estimate that the net proceeds to us from the sale of shares of our Class A common stock in this offering will be approximately $             (or approximately $             if the underwriters’ option to purchase additional shares of our Class A common stock from us is exercised in full), based upon the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares of our Class A common stock by the selling stockholders.

 

 

Each $1.00 increase or decrease in the assumed initial public offering price per share of $             , which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease the net proceeds to us from this offering by approximately $             million, assuming the number of shares of Class A common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions payable by us. Similarly, each 1.0 million share increase or decrease in the number of shares of Class A common stock offered in this offering would increase or decrease the net proceeds to us from this offering by approximately $             million, assuming that the initial public offering price per share remains at $             , which is the midpoint of the price range set forth on the cover page of



 

11


Table of Contents
Index to Financial Statements
 

this prospectus, and after deducting estimated underwriting discounts and commissions payable by us.

 

  The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our Class A common stock, and enable access to the public equity markets for us and our stockholders. We intend to use the net proceeds we receive from this offering for general corporate purposes, including working capital, operating expenses, and capital expenditures. Additionally, we may use a portion of the net proceeds to acquire or invest in businesses, products, services, or technologies. See the section titled “Use of Proceeds” for additional information.

 

Voting Rights

Shares of Class A common stock are entitled to one vote per share.

 

  Shares of Class B common stock are entitled to twenty votes per share.

 

  Holders of our Class A common stock and Class B common stock will generally vote together as a single class, unless otherwise required by law or our amended and restated certificate of incorporation. Each share of our Class B common stock is convertible into one share of our Class A common stock at any time and will convert automatically upon certain transfers and upon the earliest of (i) the date that is specified by the affirmative vote of the holders of two-thirds of the then-outstanding shares of Class B common stock, (ii) the date on which less than 30% of the Class B common stock that was outstanding on the date of this offering continues to remain outstanding, (iii) the date that is 15 years from the date of this offering, (iv) nine months after the death or permanent disability of Mr. Baszucki, or (v) nine months after the date that Mr. Baszucki no longer serves as our Chief Executive Officer or as a member of our board of directors. As a result, Mr. Baszucki will be able to significantly influence any action requiring the approval of our stockholders, including the election of our board of directors, the adoption of amendments to our certificate of incorporation and bylaws and the approval of any merger, consolidation, sale of all or substantially all of our assets or other major corporate transaction.


 

12


Table of Contents
Index to Financial Statements
  See “Principal and Selling Stockholders” and “Description of Capital Stock” for additional information.

 

Directed Share Program

At our request, an affiliate of BofA Securities, Inc., a participating underwriter, has reserved for sale, at the initial public offering price, up to 2% of the shares offered by this prospectus for sale to certain developers located in the U.S. and certain other jurisdictions where such an offer is permitted by local securities laws. We do not know if parties will choose to purchase all or any portion of these reserved shares, but any purchases they do make will reduce the number of shares available for sale to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus.

 

Proposed trading symbol

“RBLX”

 

Risk factors

See “Risk Factors” beginning on page 18 and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our Class A common stock.

The number of shares of our Class A common stock and Class B common stock that will be outstanding after this offering is based on 477,532,658 shares of our Class A common stock outstanding as of September 30, 2020 (including shares of our convertible preferred stock on an as-converted basis) and 57,287,302 shares of Class B common stock outstanding as of September 30, 2020, and excludes the following:

 

   

101,340,752 shares of our Class A common stock issuable upon the exercise of options to purchase shares of our Class A common stock that were outstanding as of September 30, 2020, under our Amended and Restated 2017 Equity Incentive Plan, or 2017 Plan, and 2004 Incentive Stock Plan, or 2004 Plan, with a weighted average exercise price of $2.55 per share;

 

   

260,000 shares of our Class A common stock issuable upon the exercise of warrants to purchase Class A common stock outstanding as of September 30, 2020, with an exercise price of $3.41 per share;

 

   

64,000 additional shares of our Class A common stock issuable upon the exercise of one of the outstanding warrants after September 30, 2020 pursuant to the terms of such warrant, at an exercise price of $3.41 per share;

 

   

3,061,237 RSUs covering shares of our Class A common stock issuable upon satisfaction of both service-based and liquidity event-based vesting conditions that were granted after September 30, 2020, under our 2017 Plan; and



 

13


Table of Contents
Index to Financial Statements
   

             shares of our Class A common stock reserved for future issuance under our equity compensation plans, consisting of:

 

   

             shares of our Class A common stock to be reserved for future issuance under our 2020 Equity Incentive Plan, or 2020 Plan, which will become effective in connection with the effectiveness of the registration statement of which this prospectus forms a part;

 

   

             shares of our Class A common stock reserved for future issuance under our 2017 Plan, which number of shares will be added to the shares of our Class A common stock to be reserved for future issuance under our 2020 Plan upon its effectiveness, at which time we will cease granting awards under our 2017 Plan; and

 

   

             shares of our Class A common stock to be reserved for future issuance under our 2020 Employee Stock Purchase Plan, or ESPP, which will become effective in connection with the effectiveness of the registration statement of which this prospectus forms a part.

Our 2020 Plan and ESPP each provide for annual automatic increases in the number of shares of our Class A common stock reserved thereunder, and our 2020 Plan also provides for increases to the number of shares that may be granted thereunder based on shares under our 2017 Plan and 2004 Plan that expire, are tendered to or withheld by us for payment of an exercise price or for satisfying tax withholding obligations or are forfeited or otherwise repurchased by us, as more fully described in the section titled “Executive Compensation—Employee Benefit and Stock Plans.”

Except as otherwise indicated, all information in this prospectus assumes:

 

   

the conversion of all of our outstanding convertible preferred stock into Class A common stock, which we expect will occur immediately prior to the completion of this offering;

 

   

the filing and effectiveness of our amended and restated certificate of incorporation in Delaware and the effectiveness of our amended and restated bylaws, which will each occur immediately prior to the completion of this offering;

 

   

no exercise, forfeiture, or expiration of outstanding stock options or warrants subsequent to September 30, 2020; and

 

   

no exercise by the underwriters of their option to purchase up to an additional              shares of our Class A common stock from us.



 

14


Table of Contents
Index to Financial Statements

Summary Consolidated Financial and Other Data

The following tables summarize our consolidated financial and other data. The summary consolidated statements of operations data for the years ended December 31, 2018 and 2019 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statements of operations data for the nine months ended September 30, 2019 and 2020 and the summary consolidated balance sheet data as of September 30, 2020 have been derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus. The unaudited interim consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements, and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our financial position and results of operations. Our historical results are not necessarily indicative of the results that may be expected in the future, and our results for the nine months ended September 30, 2020 are not necessarily indicative of results to be expected for the full year or for any other period. You should read the following summary consolidated financial and other data in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. The summary consolidated financial data in this section are not intended to replace, and are qualified in their entirety by, the consolidated financial statements and related notes.

Consolidated Statement of Operations Data

 

     Year Ended
December 31,
    Nine Months Ended
September 30,
 
   2018     2019     2019     2020  
     (in thousands, except per share data)  

Revenue

   $ 312,773     $ 488,223     $ 349,888     $ 588,675  

Cost and expenses:

        

Cost of revenue(1)

     69,896       117,227       82,330       154,912  

Developer exchange fees

     71,887       111,976       72,216       209,228  

Infrastructure and trust & safety(2)

     105,590       156,699       111,684       185,496  

Research and development(2)

     87,051       107,095       74,398       138,074  

General and administrative(2)

     34,460       41,945       28,913       64,940  

Sales and marketing(2)

     40,542       44,737       31,243       42,259  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost and expenses

     409,426       579,679       400,784       794,909  

Loss from operations

     (96,653     (91,456     (50,896     (206,234

Interest income

     3,759       6,546       5,085       1,758  

Other expense

     (4,279     (1,211     (494     (1,357
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (97,173     (86,121     (46,305     (205,833

Provision for income taxes

     3       9       8       25  
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net loss

     (97,176     (86,130     (46,313     (205,858

Net loss attributable to the noncontrolling interest(3)

     —         (146     25       (2,641
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (97,176   $ (85,984   $ (46,338   $ (203,217
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(4)

   $ (0.66   $ (0.53   $ (0.29   $ (1.14
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used in computing net loss per share attributable to common stockholders—basic and diluted(4)

     147,278       163,051       162,009       177,771  
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders—basic and diluted (unaudited)(4)

     $ (0.17     $ (0.39
    

 

 

     

 

 

 

Weighted-average shares used in computing pro forma net loss per share attributable to common stockholders—basic and diluted (unaudited)(4)

       489,003         522,617  
    

 

 

     

 

 

 


 

15


Table of Contents
Index to Financial Statements
     Year Ended
December 31,
    Nine Months Ended
September 30,
 
   2018     2019     2019     2020  
     (in thousands, except hours engaged and
ABPDAU data)
 

Non-GAAP and selected financial and operating data:

        

Bookings(5)

   $ 499,038     $ 694,262     $ 457,959     $ 1,240,232  

Loss from operations (GAAP)

   $ (96,653   $ (91,456   $ (50,896   $ (206,234

Depreciation and amortization (GAAP)

   $ 11,941     $ 27,664     $ 19,179     $ 30,232  

Stock based compensation (GAAP)

   $ 36,310     $ 17,634     $ 11,696     $ 58,631  

Change in deferred revenue (GAAP)

   $ 187,244     $ 208,086     $ 109,373     $ 656,071  

Change in deferred cost of revenue (GAAP)

   $ (45,747   $ (53,463   $ (28,854   $ (162,166

Net cash provided by operating activities (GAAP)

   $ 101,038     $ 99,185     $ 62,637     $ 345,336  

Free cash flow(5)

   $ 34,966     $ 14,456     $ 5,961     $ 292,623  

Daily active users (DAUs)(6)

     12,017       17,623       17,121       31,064  

Hours engaged (in millions)(6)

     9,429       13,652       9,951       22,172  

Average Bookings per DAU (ABPDAU)(6)

   $ 41.53     $ 39.40     $ 26.75     $ 39.93  

 

(1)

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

(2)

Includes stock-based compensation as follows:

 

     Year Ended December 31,      Nine Months Ended September 30,  
           2018                  2019                  2019                  2020        
     (dollars in thousands)  

Infrastructure and trust & safety

   $ 3,046      $ 2,085      $ 1,324      $ 4,960  

Research and development

     25,691        9,695        6,320        25,903  

General and administrative

     4,426        3,347        2,359        22,248  

Sales and marketing

     3,147        2,507        1,693        5,520  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 36,310      $ 17,634      $ 11,696      $ 58,631  
  

 

 

    

 

 

    

 

 

    

 

 

 

During the year ended December 31, 2018 and nine months ended September 30, 2020, we recorded compensation expense of $25.2 million and $35.2 million, respectively, 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 the Company 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 minority investor, Songhua, is recorded as a noncontrolling interest.

(4)

See Note 12 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to calculate our basic and diluted net loss per share attributable to common stockholders, basic and diluted pro forma net loss per share attributable to common stockholders and the weighted-average number of shares used in the computation of the per share amounts.

(5)

See the section titled “Selected Consolidated Financial and Other Data” for a reconciliation of each non-GAAP financial measure to the most directly comparable financial measure calculated in accordance with GAAP.

(6)

See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics—Operating Metrics” for more information.

Consolidated Balance Sheet Data

 

     September 30, 2020  
     Actual     Pro Forma(1)     Pro Forma
as Adjusted(2)(3)
 
     (dollars in thousands)  

Cash and cash equivalents

   $ 801,646     $ 801,646     $                

Working capital

   $ 193,348     $ 193,348    

Total assets

   $ 1,489,541     $ 1,489,541    

Convertible preferred stock

   $ 345,085     $ —      

Accumulated deficit

   $ (483,973   $ (483,973  

Total stockholders’ equity (deficit)

   $ (292,208   $ 52,877    


 

16


Table of Contents
Index to Financial Statements

 

(1)

The pro forma consolidated balance sheet data gives effect to (a) the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 349,522,440 shares of our Class A common stock, as if such conversion had occurred on September 30, 2020 and (b) the filing and effectiveness of our amended and restated certificate of incorporation.

(2)

The pro forma as adjusted consolidated balance sheet data gives effect to (a) the pro forma adjustments set forth above, and (b) the sale and issuance by us of              shares of our Class A common stock in this offering, based upon the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

(3)

Each $1.00 increase or decrease in the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the amount of our pro forma as adjusted cash, cash equivalents, and marketable securities, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions payable by us. An increase or decrease of 1.0 million shares in the number of shares offered by us would increase or decrease, as applicable, the amount of our pro forma as adjusted cash, cash equivalents, and marketable securities, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by $             million, assuming the assumed initial public offering price remains the same, and after deducting estimated underwriting discounts and commissions payable by us.

Non-GAAP Financial Measures

In addition to our results determined in accordance with U.S. generally accepted accounting principles, or GAAP, we believe the following non-GAAP 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.

 

    Year Ended December 31,     Nine Months Ended September 30,  
          2018                 2019                   2019                     2020          
    (dollars in thousands)  

Bookings

  $ 499,038     $ 694,262     $ 457,959     $ 1,240,232  

Net cash provided by operating activities (GAAP)

  $ 101,038     $ 99,185     $ 62,637     $ 345,336  

Free cash flow

    34,966       14,456       5,961       292,623  

See the section titled “Selected Consolidated Financial and Other Data” for a reconciliation of each non-GAAP financial measure to the most directly comparable financial measure calculated in accordance with GAAP.



 

17


Table of Contents
Index to Financial Statements

RISK FACTORS

Investing in our Class A common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this prospectus, including our consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding whether to invest in our Class A common stock. The occurrence of any of the events or developments described below could materially and adversely affect our business, financial condition, results of operations, and growth prospects. In such an event, the market price of our Class A common stock could decline, and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently believe are not material may also impair our business, financial condition, results of operations, and growth prospects.

Risks Related to Our Business Generally

We have experienced rapid growth in recent periods, and our recent growth rates may not be indicative of our future growth or the growth of our market.

We have experienced rapid growth in the three months ended June 30, 2020, September 30, 2020 and for a portion of the three months ended March 31, 2020, due in part to the COVID-19 pandemic given our users have been online more as a result of global COVID-19 shelter-in-place policies. For example, our bookings increased 171% from the nine-months ended September 30, 2019 to the nine months ended September 30, 2020. We do not expect these activity levels to be sustained, and in future periods we expect growth rates for our revenue to decline, and we may not experience any growth in bookings or our user base during periods where we are comparing against COVID-19 impacted periods (i.e. the three months ended March 31, 2020, June 30, 2020, and September 30, 2020). Our historical revenue, bookings and user base growth should not be considered indicative of our future performance. We believe our overall acceptance, revenue growth and increases in bookings depend on a number of factors, including, but not limited to, our ability to:

 

   

enhance the tools we make available to developers for use in developing content;

 

   

expand the number of developers, creators, and users on our platform;

 

   

expand the types of experiences that our developers can build for users;

 

   

continue to provide, and be viewed as being able to provide, a safe and civil environment for all users;

 

   

maintain the security and reliability of our platform;

 

   

provide access to our platform for users in areas where access to the internet is challenged;

 

   

comply with country and region-specific regulatory environments with respect to privacy, data protection, intellectual property, child protection and other requirements;

 

   

attract highly qualified talent, and train, motivate and manage our highly-qualified personnel;

 

   

manage growth of our business, headcount and operations effectively;

 

   

provide excellent customer experience and customer support for our developers, creators, and users;

 

   

successfully compete against established companies and new market entrants offering a multitude of interactive entertainment offerings; and

 

   

increase global awareness of our brand.

 

18


Table of Contents
Index to Financial Statements

If we are unable to accomplish these tasks, our platform will not be attractive to developers, creators, and users and they may no longer seek new experiences in our platform, which would result in fewer bookings and lower revenue and could harm our operations.

We have a history of net losses and we may not be able to achieve or maintain profitability in the future.

We have incurred net losses since our inception, and we expect to continue to incur net losses in the near future. We incurred net losses of $97.2 million, $86.0 million, and $203.2 million for the years ended December 31, 2018 and 2019, and the nine months ended September 30, 2020, respectively. As of September 30, 2020, we had an accumulated deficit of $484.0 million. We also expect our operating expenses to increase significantly in future periods, and if our DAU growth does not increase to offset these anticipated increases in our operating expenses, our business, results of operations, and financial condition will be harmed, and we may not be able to achieve or maintain profitability. We expect our costs and expenses to increase in future periods as we intend to continue to make significant investments to grow our business. These efforts may be more costly than we expect and may not result in increased revenue or growth of our business. In addition to the expected costs to grow our business, we also expect to incur significant additional legal, accounting, and other expenses as a newly public company. If we fail to increase our revenue to sufficiently offset the increases in our operating expenses, we will not be able to achieve or maintain profitability in the future.

Our financial condition and results of operations will fluctuate from quarter to quarter, which makes them difficult to predict and they may not fully reflect the underlying performance of our business.

Our quarterly results of operations have fluctuated in the past and will fluctuate in the future, both based on the seasonality of our business as well as external factors impacting the global economy, our industry and our company. Additionally, the current scale of our business makes it difficult to forecast our future results. As a result, you should not rely on our past quarterly results of operations as indicators of future performance. You should take into account the risks and uncertainties frequently encountered by companies in rapidly evolving market segments. Our financial condition and results of operations in any given quarter can be influenced by numerous factors, many of which we are unable to predict or are outside of our control, including:

 

   

our ability to maintain and grow our user base and user engagement;

 

   

our ability to retain and grow our developer base and encourage them to continue developing experiences on our platform;

 

   

the level of demand for our platform;

 

   

the development and introduction of new or redesigned features on our platform or our competitors’ platforms;

 

   

seasonal fluctuations in user engagement on our platform;

 

   

our pricing model;

 

   

increases in marketing, sales, and other operating expenses that we may incur to grow and expand our operations and to remain competitive;

 

   

our ability to successfully expand internationally and penetrate key demographics;

 

   

our ability to maintain operating margins, cash used in operating activities, and free cash flow;

 

   

system failures or actual or perceived breaches of security or privacy, and the costs associated with such failures, breaches and remediations;

 

19


Table of Contents
Index to Financial Statements
   

inaccessibility of our platform, or certain features within our platform, due to third-party actions;

 

   

increase in stock-based compensation expense;

 

   

our ability to effectively incentivize our workforce and developers;

 

   

adverse litigation judgments, settlements, or other litigation and dispute-related costs;

 

   

changes in the legislative or regulatory environment, including with respect to privacy and data protection, consumer protection, and user-uploaded content, or enforcement by government regulators, including fines, orders, or consent decrees;

 

   

fluctuations in currency exchange rates and changes in the proportion of our revenue, bookings and expenses denominated in foreign currencies;

 

   

fluctuations in the market values of our portfolio investments and interest rates or impairments of any assets on our balance sheet;

 

   

changes in our effective tax rate;

 

   

changes in accounting standards, policies, guidance, interpretations, or principles; and

 

   

changes in domestic and global business or macroeconomic conditions.

Our business is affected by seasonal demands, and our quarterly operations results fluctuate as a result.

Historically our business has been highly seasonal, with the highest percentage of our sales occurring in the fourth quarter when holidays permit our users to spend increased time on our platform, and we expect this trend to continue. We may also experience fluctuations due to factors that may be outside of our control that affect user or developer and creator engagement with our platform. For example, we have also seen an increase in activity on our platform as a result of shelter-in-place policies instituted in response to the COVID-19 pandemic, and we do not expect these activity levels to be sustained. We also seek to further develop the live experiences available on our platform, such as virtual concerts, classrooms, meetings, and conferences, and to offer commercial partners with branding opportunities in conjunction with key events, such as a product launch. These episodic experiences may also contribute to fluctuations in our quarterly results of operations. As our business matures, other seasonal trends may develop or these existing seasonal trends may become more extreme.

The recent global COVID-19 outbreak has significantly affected our business and operations.

The outbreak of the novel coronavirus and the COVID-19 disease that it causes has evolved into a global pandemic. In light of the uncertain and rapidly evolving situation relating to the spread of COVID-19, we have taken precautionary measures intended to minimize the risk of the virus to our employees and the communities in which we operate, including temporarily closing our offices worldwide and virtualizing, postponing, or canceling user, developer, creator, employee, or industry events, which may negatively impact our business.

The full extent to which the COVID-19 pandemic and the various responses to it impact our business, operations, and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including:

 

   

the duration and scope of the pandemic, including any potential future waves of the pandemic;

 

   

governmental, business, and individuals’ actions that have been and continue to be taken in response to the pandemic;

 

20


Table of Contents
Index to Financial Statements
   

the availability of and cost to access the capital markets;

 

   

the effect of the pandemic on our developers, creators, and users;

 

   

disruptions or restrictions on our employees’ ability to work and travel; and

 

   

interruptions related to our infrastructure and partners.

While substantially all of our business operations can be performed remotely, many of our employees are balancing additional work-related and personal challenges, including preparing for a prolonged duration of remote working environments, adjusting communication and work practices to collaborate remotely with work colleagues and business partners, managing technical and communication challenges of working from home on a daily basis, looking after children as a result of school closures and remote-learning, making plans for childcare as children prepare to return to schools, and caring for themselves, family members or other dependents who are or may become ill.

The COVID-19 pandemic and resulting social distancing, shelter-in-place and similar restrictions led to increased developer and creator and user engagement on our platform relative to our quarterly forecast and historic trends. These increases in user activity are almost certainly not indicative of our financial and operating results in future periods. The long-term effects of the COVID-19 pandemic on society and developer, creator and user engagement are highly uncertain and there is no assurance that developer, creator and user engagement will not decrease, including below historic levels, as the full impact of the COVID-19 pandemic on society and the global economy become clearer.

We depend on effectively operating with mobile operating systems, hardware, and networks that we do not control; changes to any of these or our platform may significantly harm our user retention, growth, engagement, and monetization, or require us to change our data collection and privacy practices, business models, operations, practices, advertising activities, or application content, which could restrict our ability to maintain our platform through these systems, hardware and networks and would adversely impact our business.

For the nine months ended September 30, 2020, 34% of our revenue was attributable to Robux sales through the Apple App Store and 18% of our revenue was attributable to Robux sales through the Google Play Store, and during the same period 68% of our engagement hours on the platform were from users who signed up through the Apple App Store and Google Play Store. Because of the significant use of our platform on mobile devices, our application must remain interoperable with these and other popular mobile app stores and platforms, and related hardware. Further, we are subject to the standard policies and terms of service of these operating systems, as well as policies and terms of service of the various application stores that make our application and experiences available to our developers, creators, and users. These policies and terms of service govern the availability, promotion, distribution, content, and operation generally of applications and experiences on such operating systems and stores. As a result, we may not successfully cultivate relationships with key industry participants or develop products that operate effectively with these technologies, systems, networks, regulations, or standards. If it becomes more difficult for our users to access and engage with our platform on their mobile devices, if our users choose not to access or use our platform application on their mobile devices, or if our users choose to use mobile products that do not offer access to our platform, our business and user retention, growth, and engagement could be significantly harmed.

The owners and operators of these mobile application platforms, primarily Apple and Google, each have approval authority over our platform’s deployment on their systems and offer consumers products that compete with ours. Additionally, mobile devices are manufactured by a wide array of companies. Those companies have no obligation to test the interoperability of new mobile devices with our platform application and may produce new products that are incompatible with or not optimal for

 

21


Table of Contents
Index to Financial Statements

our platform. We have no control over these operating systems, application stores, or hardware, and any changes to these systems or hardware that degrade our platform’s functionality, or give preferential treatment to competitive products, could significantly harm our platform usage on mobile devices. An operating system provider or application store could also limit or discontinue our access to its operating system or store if it establishes more favorable relationships with one or more of our competitors, launches a competing product itself, or it otherwise determines that it is in its business interests to do so. Our competitors that control the operating systems and related hardware our application runs on could make interoperability of our platform with those mobile operating systems more difficult or display their competitive offerings more prominently than ours. Additionally, our competitors that control the standards for the application stores for their operating systems could make our platform application, or certain features of our platform, inaccessible for a potentially significant period of time. We plan to continue to introduce new technologies on our platform regularly and have experienced that it takes time to optimize such technologies to function with these operating systems, hardware, and standards, impacting the popularity of our new technologies and features, and we expect this trend to continue.

Moreover, our platform requires high-bandwidth data capabilities. If the costs of data usage increase or access to cellular networks is limited, our user retention, growth, and engagement may be significantly harmed. Additionally, to deliver high-quality video and other content over mobile cellular networks, our platform must work well with a range of mobile technologies, systems, networks, regulations, and standards that we do not control. In particular, any future changes to the iOS or Android operating systems or application stores may impact the accessibility, speed, functionality, and other performance aspects of our platform, and result in issues in the future from time to time. In addition, the proposal or adoption of any laws, regulations, or initiatives that adversely affect the growth, popularity, or use of the internet, including laws governing internet neutrality, could decrease the demand for our platform and increase our cost of doing business.

For our experiences accessed through mobile platforms such as the Apple App Store and the Google Play Store, we are required to share a portion of the proceeds from in-game sales with the platform providers. For operations through the Apple App Store and Google Play Store, we are obligated to pay 30% of any money paid by users to purchase Robux to Apple and Google and this amount could be increased. These costs are expected to remain a significant operating expense for the foreseeable future. If the amount these platform providers charge increases, it could have a material impact on our ability to pay developers and our results of operations. The providers of an operating system or application store may also change its fee structure, add fees associated with access to and use of its operating system, alter how its customers are able to advertise on their operating system, change how the personal or other information of its users is made available to application developers on their operating system, limit the use of personal information for advertising purposes or restrict how end-users can share information on their operating system or across other platforms.

Restrictions on our ability to collect, process, and use data as desired could negatively impact our ability to leverage data about the experiences our developers create. This in turn could impact our resource planning and feature development planning for our platform. Similarly, at any time, these operating system providers or application stores can change their policies on how we operate on their operating system or in their application stores by, for example, applying content moderation for applications and advertising or imposing technical or code requirements. Actions by operating system providers or application stores such as the Apple App Store and the Google Play Store may affect the manner in which we collect, process and use data from end-user devices. Accordingly, future changes implemented by Apple or Google could adversely impact our revenue. In addition, these operating systems and application stores could change their business models and could, for example, increase application store fees, which could have an adverse impact on our business. There are currently

 

22


Table of Contents
Index to Financial Statements

litigation and governmental inquiries over the application store fees, and Apple or Google could modify their platform in response to litigation and inquiries in a manner that may harm us.

Each provider of these operating systems and stores has broad discretion to change and interpret its terms of service and policies with respect to our platform and those changes may be unfavorable to us and our developers’, creators’, and users’ use of our platform. If we were to violate, or an operating system provider or application store believes that we have violated, its terms of service or policies, that operating system provider or application store could limit or discontinue our access to its operating system or store. In some cases these requirements may not be clear or our interpretation of the requirements may not align with the interpretation of the operating system provider or application store, which could lead to inconsistent enforcement of these terms of service or policies against us, and could also result in the operating system provider or application store limiting or discontinuing access to its operating system or store. Any limitation on or discontinuation of our access to any third-party platform or application store could adversely affect our business, financial condition or results of operations.

Because we recognize revenue from bookings over the estimated user lifetime of our paying users, changes in new business may not be immediately reflected in our operating results.

We generally recognize revenue from users ratably over the average lifetime of a paying user, which for the years ending December 31, 2018 and 2019 was 23 months. Therefore, much of the revenue we report in each quarter is the result of purchases of Robux during previous periods. Consequently, a decline in purchases of Robux in any one quarter will not be fully reflected in our revenue and operating results for that quarter. Any such decline, however, will negatively impact our revenue and operating results in future quarters. Accordingly, the effect of significant near-term downturns in purchases of Robux for a variety of reasons may not be fully reflected in our results of operations until future periods.

If our business becomes constrained by changing legal and regulatory requirements, our operating results will suffer.

Our future success will depend in part on market acceptance and widespread adoption across demographics and geographies of our platform over other interactive entertainment offerings. The widespread availability of content generated by our developers and creators on our platform is a newer development and the regulatory framework for broad dissemination of this content is new and evolving. We provide our developers and creators with the ability to publish their content throughout the world, and each country is developing regulations and policies to regulate this new space, including with respect to privacy, gambling, intellectual property, childhood protection, consumer protection, ratings, and taxes. If we are unable to allow developers and creators to comply with potentially conflicting regulations throughout the world, our ability to execute on our business model would be severely impacted, and our ability to grow our business could be harmed. Changes to these laws, regulations, standards, or obligations could require us to change our business model, take on more onerous obligations, and impact the functionality of our platform. If we are obligated to fundamentally change our business activities and practices or modify our platform, we may be unable to make these required changes and modifications in a commercially reasonable manner, or at all, and our ability to further develop and enhance our platform may be limited. The costs of compliance with, and other burdens imposed by, these laws, regulations, standards and obligations, or any inability to adequately address these, may limit the use of our platform or reduce overall demand for our platform, which could harm our business, financial condition and results of operations.

 

23


Table of Contents
Index to Financial Statements

The success of our business model is contingent upon our ability to provide a safe online environment for children to experience and if we are not able to continue to provide a safe environment, our business will suffer dramatically.

Our platform hosts a number of experiences intended for audiences of varying ages, a significant percentage of which are designed to be experienced by children. As a user generated content platform, it is relatively easy for developers, creators, and users to upload content that can be viewed broadly. We have made significant efforts to provide a safe and enjoyable experience for users of all ages. We invest significant technical and human resources to prevent inappropriate content on the platform by reviewing all images, audio, video, and 3D models at the time of upload in order to block inappropriate content before users have a chance to encounter it on the platform. Notwithstanding our efforts, from time to time inappropriate content is successfully uploaded onto our platform and can be viewed by others prior to being identified and removed by us. This content could cause harm to our audience and to our reputation of providing a safe environment for children to play online. If we are unable to prevent, or are perceived as not being able to sufficiently prevent, all or substantially all inappropriate content from appearing on our platform, parents and children will lose their trust in the safety of our platform, which would harm our overall acceptance by these audiences and would likely result in significantly reduced revenue, bookings, profitability, and ultimately, our ability to continue to successfully operate our platform.

In addition to generally blocking inappropriate content, we have statutory obligations under U.S. federal law to block or remove child pornography and report offenses to the National Center for Missing and Exploited Children, or NCMEC. While we have dedicated technology and trained human moderator staff that can detect and remove sexual content involving children, there have been instances where such content has been uploaded, and any future non-compliance by us or allegations of non-compliance by us with respect to U.S. federal laws on child pornography or the sexual exploitation of children could significantly harm our reputation, create criminal liability, and could be costly and time consuming to address or defend. We may also be subject to additional criminal liability related to child pornography or child sexual exploitation under other domestic and international laws and regulations.

Further, we have faced allegations that our platform has been used by criminal offenders to identify and communicate with children and to possibly entice them to interact off-platform, outside of the restrictions of our chat, content blockers, and other on-platform safety measures. While we devote considerable resources to prevent this from occurring, we are unable to prevent all such interactions from taking place. Any criminal incidents involving Roblox, whether or not we are directly responsible, could adversely affect our reputation as a safe place for children and hurt our business.

In addition, various local, national, and foreign laws and regulations apply to our operations, including the Children’s Online Privacy Protection Act, or COPPA, in the U.S. and Article 8 of the European Union’s, or EU’s, General Data Protection Regulation, or GDPR. COPPA imposes strict requirements on operators of websites or online services directed to children under 13 years of age. For the nine months ended September 30, 2020, 54% of our users were under the age of 13. COPPA requires companies to obtain parental consent before collecting personal information from children under the age of 13. Both the U.S. federal government and the states can enforce COPPA and violations of COPPA can lead to significant fines. No assurances can be given that our compliance efforts will be sufficient to avoid allegations of COPPA violations, and any non-compliance or allegations of non-compliance could expose us to significant liability, penalties and loss of revenue, significantly harm our reputation, and could be costly and time consuming to address or defend.

 

24


Table of Contents
Index to Financial Statements

Our reputation as a safe and civil environment for children is very important to our success and if we fail to protect users or we are perceived to be failing to protect users, our business will suffer and our results of operations could be materially and adversely affected.

We have received and may continue to receive a high degree of media coverage. Unfavorable publicity regarding, for example, our privacy or data protection practices, terms of service, product changes, product quality, litigation or regulatory activity, the actions of our users, the actions of our developers or creators whose products are integrated with our platform, the use of our platform for illicit or objectionable ends (including the use of our platform to possibly entice children to interact off-platform), actual or perceived incidents or misuses of user data or other privacy or security incidents, the substance or enforcement of our community standards, the quality and integrity of content shared on our platform, or the actions of other companies that provide similar services to ours, has in the past, and could in the future, adversely affect our reputation. For example, we have experienced negative media publicity related to content that developers produce for, or the conduct of users on, our platform that may be deemed illicit, explicit, profane, or otherwise objectionable. Although such activities are in violation of our terms and policies and we attempt to block objectionable material, we are unable to prevent all such violations from occurring. In addition, we have faced allegations that our platform has been used by criminal offenders to identify and communicate with children and to possibly entice them to interact off-platform, outside of the restrictions of our chat, content blockers and other on-platform safety measures. While we devote considerable resources to prevent this from occurring, any negative publicity could create the perception that we do not provide a safe online environment and may have an adverse effect on the size, engagement, and loyalty of our developer, creator and user community, which would adversely affect our business and financial results.

Our business depends on a strong brand and if events occur that damage our reputation and brand, we may be unable to maintain and grow the number of developers, creators, and users on our platform.

We believe that maintaining, protecting and enhancing our reputation and brand is critical to grow the number of developers, creators, and users on our platform, especially given the safe and civil atmosphere that we strive to achieve for our users, many of whom are children. Maintaining, protecting and enhancing our brand will depend largely on our ability to continue to provide high-quality, engaging and shared experiences on our platform. If users, developers, or creators do not perceive our platform to be of high quality, the value of our brand could diminish, thereby decreasing the attractiveness of our platform to users.

Our reputation and brand could also be negatively affected by the actions of users that are hostile, inappropriate or illegal, whether on or off our platform. In addition, users, developers or creators may become dissatisfied with our billing or payment policies, our handling of personal data or other aspects of our platform. If we fail to adequately address these or other user, developer, or creator complaints, negative publicity about us or our platform could diminish confidence in and the use of our platform. Maintaining, protecting, and enhancing our reputation and brand may require us to make substantial investments, and these investments may not be successful. Our reputation and brand are also important to attracting and retaining highly qualified employees. If we fail to successfully promote and maintain our reputation and brand or if we incur significant expenses in this effort, our business and financial results may be adversely affected.

The lack of encryption for communications on our platform may increase the impact of a data security incident.

Communications on our platform are not encrypted at this time. As such, any data security incident that involves unauthorized access, acquisition, disclosure, or use may be more impactful to

 

25


Table of Contents
Index to Financial Statements

our business. We may experience greater incident response forensics, data recovery, legal fees, and costs of notification related to any such potential incident, and we may face an increased risk of reputational harm, regulatory enforcement, and consumer litigation, which could further harm our business, financial condition, results of operations, and future business opportunities.

We depend on our developers to create digital content that our users find compelling, and our business will suffer if we are unable to entertain our users, improve the experience of our users, or properly incentivize our developers and creators to develop content.

Our platform enables our developers to create experiences and virtual items, which we refer to as user generated content. Our platform relies on our developers to create experiences and virtual items on our platform for our users to acquire and/or use. Our users interact with these experiences, which are largely free to engage with. These users can also elect to purchase virtual items through our Avatar Marketplace and in experiences that enhance their enjoyment. We believe the interactions between and within the developer, creator, and user communities on our platform create a thriving and organic ecosystem, and this network effect drives our growth. To facilitate and incentivize the creation of the experiences and virtual items by developers, our platform offers developers an opportunity to earn Robux, a virtual currency on our platform, in connection with their development work on our platform. When virtual items are purchased on our platform, the originating developer or creator earns a portion of the Robux paid for the item. Developers are able to exchange their accumulated earned Robux for real-world currency under certain conditions outlined in our Developer Exchange Program. If we fail to provide a sufficient return to developers, they may elect to develop user-generated content on other platforms, which would result in a loss of revenue. If we do not provide the right technologies or financial incentives to our developers, they may develop fewer experiences or virtual items, and our users may elect to not participate in the experiences or purchase the virtual items, and, thus, our platform, revenue, and bookings could be adversely affected.

If we experience outages, constraints, disruptions or degradations in our services, platform support and/or technological infrastructure, our ability to provide sufficiently reliable services to our customers and maintain the performance of our platform could be negatively impacted, which could harm our relationships with our developers, creators, and users, and consequently, our business.

Our users expect fast, reliable, and resilient systems to enhance their experience and support their play as they quickly traverse between and within experiences and acquire virtual items for their avatars or to enhance their experiences, which depends on the continuing operation and availability of our information technology systems from our global network of data centers controlled and operated by us and those of our external service providers, including third-party “cloud” computing services. We also provide services to our developer and creator community through our platform, including, a developer and creator hub for tutorials, hosting, customer service, regulatory compliance, and translation, among many others. The experiences and technologies on our platform are complex software products and maintaining the sophisticated internal and external technological infrastructure required to reliably deliver these experiences and technologies are expensive and complex. The reliable delivery and stability of our platform has been, and could in the future be, adversely impacted by outages, disruptions, failures or degradations in our network and related infrastructure. For example, since our inception we have had approximately one outage each year when the platform is unavailable for all users, developers, and creators. Although these outages were typically associated with a move to a new technology, the temporary unavailability of our platform, particularly if it should become more frequent, could cause our users to seek other entertainment options, including those provided by our competitors. In addition, the reliability and stability of our platform has also been affected by events outside of our control, such as the migration of data among data centers and to third-party hosted environments, the demand on our platform exceeding the capabilities of our

 

26


Table of Contents
Index to Financial Statements

technological infrastructure, and issues relating to our reliance on third parties to host our platform in areas where we do not operate our own data centers or regional points of presence.

Our data centers are vulnerable to damage or interruption from a variety of sources, including earthquakes, floods, fires, power loss, system failures, computer viruses, physical or electronic break-ins, human error or interference (including by disgruntled employees, former employees or consultants), and other catastrophic events. Our data centers may also be subject to local administrative actions, changes to legal or permitting requirements and litigation that could stop, limit or delay operations. Despite a reliability program focused on anticipating and solving issues that may impact the availability of our platform and precautions taken at our data centers, such as disaster recovery and business continuity arrangements, the occurrence of spikes in usage volume, the occurrence of a natural disaster, hacking event or act of terrorism, a decision to close the facilities without adequate notice or other unanticipated problems at our data centers could result in interruptions or delays on our platform, impede our ability to scale our operations or have other adverse impacts upon our business and adversely impact our ability to serve our developers, creators, and users.

Our developers or users may suffer a variety of outages or disruptions in accessing our platform for a variety of reasons, including issues with their technology providers. If we experience outages and our platform is unavailable or if our developers, creators, and users are unable to access our platform within a reasonable amount of time or at all, as a result of any such events, our reputation and brand may be harmed, developer, creator and user engagement with our platform may be reduced, and our revenue, bookings and profitability could be negatively impacted. We do not have full redundancy for all of our systems and our disaster recovery planning may not be sufficient to address all aspects of any unanticipated consequence or incident or allow us to maintain business continuity at profitable levels or at all. Further, in the event of damage or service interruption, our business interruption insurance policies will not adequately compensate us for any losses that we may incur. These factors in turn could further reduce our revenues, subject us to liability, or otherwise harm our business, financial condition, or results of operations.

Customer support personnel and technologies are critical to resolve issues and to allow developers, creators, and users to realize the full benefits that our platform provides. High-quality support is important for the retention of our existing developers, creators, and users and to encourage the expansion of their use of our platform. We must continue to invest in the infrastructure required to support our platform. If we do not help our developers, creators, and users quickly resolve issues and provide effective ongoing support, our ability to maintain and expand our platform to existing and new developers, creators, and users could suffer. In addition, if we do not make sufficient investments in servers, software or personnel in support of our infrastructure, to scale effectively and accommodate increased demands placed on our infrastructure, the reliability of our underlying infrastructure will be harmed and our ability to provide a quality experience for our developers, creators, and users will be significantly harmed. This would lead to a reduction in the number of developers, creators, and users on our platform, a reduction in our revenues, bookings, and ability to compete, and our reputation with existing or potential developers, creators or users could suffer.

Our future growth depends on our ability to continue innovating our platform to offer attractive features for our developers and safe and civil experiences for our developers, creators, and users.

We spend substantial amounts of time and money to research, develop, and enhance versions of our platform to incorporate additional features, improve functionality or other enhancements and prioritize user safety and security in order to meet the rapidly evolving demands of our developers, creators, and users. Maintaining adequate research and development resources, such as the

 

27


Table of Contents
Index to Financial Statements

appropriate personnel and development technology, to meet the demands of the market is essential. Developments and innovations on our platform may rely on new or evolving technologies which are still in development or may never be fully developed. If we fail to anticipate developers’ and creators’ needs, the quality of the content they create may not attract users to engage with our experiences and result in a decline of users on our platform. When we develop new or enhanced features for our platform, we typically incur expenses and expend resources upfront to develop, market, promote, and sell new features. Therefore, when we develop and introduce new or enhanced features, they must achieve high levels of developer, creator, and user acceptance in order to justify the investment in developing and bringing them to market. In the past, it has been difficult to remove features we have introduced that have not achieved acceptance, and as such, we still maintain them at some cost. Further, we have made and may in the future make changes to our platform or added features that our users, developers or creators do not like or find useful. Such changes and new features may be difficult to remove from the platform and expensive to maintain.

The Roblox Cloud may be relied upon in the future for increasingly complex decision-making as it integrates hardware, accelerated machine learning and artificial intelligence for a broad range of compute tasks, including control of non-player characters, improved personalization, synthetic content generation, and automation of the player experience. It is possible that at some point the Roblox Cloud may make decisions unpredictably or autonomously, which can raise new or exacerbate existing ethical, technological, legal, and other challenges, and may negatively affect the performance of the Roblox Platform and the user, developer, and creator experience.

New features or enhancements and changes to the existing features of our platform could fail to attain sufficient market acceptance for many reasons, including:

 

   

failure to predict market demand accurately in terms of functionality and to supply features that meet this demand in a timely fashion;

 

   

defects, errors, or failures;

 

   

negative publicity about performance or effectiveness;

 

   

delays in releasing new features or enhancements on our platform; and

 

   

introduction or anticipated introduction of competing products by competitors.

The failure to obtain market acceptance will negatively affect our business, financial condition, results of operations and brand.

We have seen the growth rate of our users fluctuate and expect it to continue to change over time. If we fail to retain current users or add new users, or if our users decrease their level of engagement with our platform, revenue, bookings, and operating results will be harmed.

During the nine months ended September 30, 2020, we averaged 31.1 million daily active users, or DAUs. We view DAUs as a critical measure of our user engagement, and adding, maintaining, and engaging users has been and will continue to be necessary to our continued growth. Our DAU growth rate has fluctuated in the past and may slow in the future due to various factors, including the end of COVID-19 related shelter-in-place orders in some areas, as the number of users increase and we achieve higher market penetration rates, as we face continued competition for our users and their time from a variety of entertainment sources, or if there are performance issues with our platform. For example, while our DAUs have grown sequentially on a quarterly basis for the last several years, there have been months where they have not or have grown at a slower pace, often due to seasonal factors. In addition, our strategy seeks to expand the age groups that make up our users, and if and when we achieve maximum market penetration rates among any particular user cohort overall and in particular

 

28


Table of Contents
Index to Financial Statements

geographic markets, future growth in DAUs will need to come from other age or geographic cohorts in other markets, which may be difficult, costly or time consuming for us to achieve. Accessibility to the internet and bandwidth or connectivity limitations as well as regulatory requirements, may also affect our ability to further expand our user base in a variety of geographies. If our DAU growth rate slows or becomes stagnant, or we have a decline in DAUs, our financial performance will increasingly depend on our ability to elevate user activity or increase the monetization of our users.

Our business plan assumes that the demand for interactive entertainment offerings, specifically, the adoption of a metaverse with users interacting together by playing, communicating, connecting, making friends, learning, or simply hanging out, all in 3D environments, will increase for the foreseeable future. However, if this market shrinks or grows more slowly than anticipated, if the metaverse does not gain widespread adoption as a forum for experiences, social interaction and creative expression for our users, or if demand for our platform does not grow as quickly as we anticipate, whether as a result of competition, product obsolescence, budgetary constraints of our developers, creators, and users, technological changes, unfavorable economic conditions, uncertain geopolitical environments or other factors, we may not be able to increase our revenue and bookings sufficiently to ever achieve profitability and our stock price would decline.

The multitude of other entertainment options, online gaming, and other interactive experiences is high, making it difficult to retain users who are dissatisfied with our platform and seek other entertainment options. Moreover, the majority of our users are under the age of 13. This demographic may be less brand loyal and more likely to follow trends, including viral trends, than other demographics. These and other factors may lead users to switch to another entertainment option rapidly, which can interfere with our ability to forecast usage or DAUs and would negatively affect our user retention, growth, and engagement. We also may not be able to penetrate other demographics in a meaningful manner to compensate for the loss of DAUs in this age group. Falling user retention, growth, or engagement rates could seriously harm our business.

The loss of David Baszucki, our Founder, President and Chief Executive Officer or one or more of our senior management team or key personnel, or our failure to attract new or replacement members of our senior management team or other key personnel in the future, could significantly harm our business.

We depend on the continued services and performance of our Founder, President and Chief Executive Officer, David Baszucki, members of our senior management team and other key personnel. David Baszucki has been responsible for our strategic vision, and should he stop working for us for any reason, it is unlikely that we would be able to immediately find a suitable replacement. We do not maintain key man life insurance for David Baszucki, and do not believe any amount of key man insurance would allow us to recover from the harm to our business if David Baszucki were to leave the Company for any reason. Similarly, members of our senior management team and key employees are highly sought after and others may attempt to encourage these executives to leave the Company. The loss of one or more of the members of the senior management team or other key personnel for any reason could disrupt our operations, create uncertainty among investors, adversely impact employee retention and morale, and significantly harm our business.

An inability to attract and retain highly qualified employees, including as a result to restrictive changes to immigration laws or the varying application of immigration laws, may hamper our growth and cause our revenues or bookings to decline, adversely affecting our business.

To execute our growth plan, we must hire a very large number of employees over the next few years. In addition we need to retain our highly qualified employees. Competition for these recruits and employees is intense from other internet and high growth publicly-traded and private companies,

 

29


Table of Contents
Index to Financial Statements

especially with respect to engineers with high levels of experience in our industry, in particular in the San Francisco Bay Area where our headquarters are located.

We have, from time to time, experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with the appropriate level of qualifications. Many of the companies with which we compete for qualified employees have greater resources than we have and may offer compensation packages that are perceived to be better than ours. For example, we offer equity awards to a substantial majority of our job candidates and existing employees as part of their overall compensation package. If the perceived value of our equity awards declines, including as a result of volatility or declines in the market price of our Class A common stock or changes in perception about our future prospects, it may adversely affect our ability to recruit and retain highly qualified employees. Additionally, changes in our compensation structure may be negatively received by employees and result in attrition or cause difficulty in the recruiting process. If we fail to attract new employees or fail to retain and motivate our current employees, our business and future growth prospects could be adversely affected. Changes in immigration laws or varying applications of immigration laws to limit the availability of certain work visas or increase visa fees in the U.S. may impact our ability to hire the engineering and other talent that we need to continue to enhance our platform, which could have an adverse impact on our business, financial condition, and results of operations. For example, the U.S. President’s Proclamation Suspending Entry of Aliens Who Present a Risk to the U.S. Labor Market Following the COVID-19 pandemic, which was issued in June 2020, may adversely affect our ability to hire or to retain highly qualified personnel who are not U.S. citizens or permanent residents. It is difficult to predict the political and economic events that could affect immigration laws, or the restrictive impact they could have on obtaining or renewing work visas for our technology professionals.

Our corporate culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovative approach, creativity, and teamwork fostered by our culture and our business could be harmed.

We believe that a critical component of our success has been our culture. We have invested substantial time and resources in building out our team with an emphasis on shared values and a commitment to diversity and inclusion. As we continue to grow and develop the infrastructure associated with being a public company, we will need to expend significant efforts to maintain our culture among a larger number of employees dispersed in various geographic regions. Additionally, with our employees currently working remotely, during the COVID-19 pandemic, it will be more difficult to maintain or enhance our culture. Any failure to preserve our culture could negatively affect our future success, including our ability to retain and recruit personnel and to effectively focus on and pursue our mission to build a human co-experience platform that supports shared experiences among billions of users.

If we are unable to successfully grow our user base, compete effectively with other platforms, and further monetize our platform, our business will suffer.

We have made, and are continuing to make, investments to enable our developers to design and build compelling content and deliver it to our users on our platform. Existing and prospective developers may not be successful in creating content that leads to and maintains user engagement (including maintaining the quality of experiences) or they may fail to expand the types of experiences that our developers can build for users, and other global entertainment companies, online content platforms, and social platforms may entice our users and potential users away from, or to spend less time with, our platform, each of which could adversely affect users’ interest in our platform and lead to a loss of revenue opportunities and harm our results of operations.

 

30


Table of Contents
Index to Financial Statements

Additionally, we may not succeed in further monetizing our platform and user base. As a result, our user growth, user engagement, financial performance and ability to grow revenue could be significantly harmed if:

 

   

we fail to increase or maintain DAUs;

 

   

our user growth outpaces our ability to monetize our users, including if our user growth occurs in markets that are not as profitable;

 

   

we fail to establish an international base of our developers, creators, and users;

 

   

we fail to increase or maintain the amount of time spent on our platform, the number of experiences that our users share and explore with friends, or the usage of our technology for our developers;

 

   

we do not develop and establish the social features of our platform, allowing it to more broadly serve the entertainment, education, and business markets;

 

   

we fail to increase penetration and engagement across all age demographics;

 

   

developers do not create engaging or new experiences for users;

 

   

users reduce their purchases of Robux on our platform; or

 

   

the experiences on our platform do not maintain or gain popularity.

If we are able to continue to grow, we will need to manage our growth effectively, which could require expanding our internal IT systems, technological operations infrastructure, financial infrastructure, and operating and administrative systems and controls. In addition, we have expended in the past and may in the future expend significant resources to launch new features and changes on our platform that we are unable to monetize, which may significantly harm our business. Any future growth would add complexity to our organization and require effective coordination across our organization, and an inability to do so would adversely affect our business, financial conditions and results of operations.

We are increasingly introducing our users to offerings for Robux that are subscription-based. While we intend for these efforts to generate increased recurring revenues from our existing user base, they may cause users to decrease their purchases of Robux and decrease these users’ overall spend on our platform. Our ability to continue to attract and retain users of our paid subscription services will depend in part on our ability to consistently provide our subscribers with a quality experience. If our users do not perceive these offerings to be of value, or if we introduce new or adjust existing features or pricing in a manner that is not favorably received by them, we may not be able to attract and retain subscribers or be able to convince users to become subscribers of such additional service offerings, and we may not be able to increase the amount of recurring revenue from our user base. Subscribers may cancel their subscription to our service for many reasons, including a perception that they do not use the service sufficiently, the need to reduce household expenses, competitive services that provide a better value or experience or as a result of changes in pricing. If our efforts to attract and retain subscribers are not successful, our business, operating results, and financial condition may be adversely impacted.

We rely on a very small percentage of our total users for a significant majority of our revenue and bookings that we derive from our platform.

We generate substantially all of our revenue through the sales of our virtual currency, “Robux,” which players can use to purchase virtual items sold by our developer and creator community on the platform. Only a small portion of our users regularly purchase Robux through subscriptions and pay for

 

31


Table of Contents
Index to Financial Statements

experiences and virtual items compared to all users who use our platform in any period. We rely on our developers to develop engaging content where users elect to purchase digital items to enhance their enjoyment. If users fail to purchase digital items at rates similar to or greater than they have historically and if we fail to attract new paying users, or if our paying users fail to continue interacting with the platform and purchasing digital items as they increase in age, our revenue will suffer.

Our user metrics and other estimates are subject to inherent challenges in measurement, and real or perceived inaccuracies in those metrics may significantly harm and negatively affect our reputation and our business.

We regularly review metrics, including our DAUs, hours engaged, and average bookings per DAU, or ABPDAU, to evaluate growth trends, measure our performance, and make strategic decisions. These metrics are calculated using internal data gathered on an analytics platform that we developed and operate and have not been validated by an independent third party. Our metrics and estimates may also differ from estimates published by third parties or from similarly titled metrics of our competitors due to differences in methodology or the assumptions on which we rely. If our estimates are inaccurate, then investors will have less confidence in our company and our prospects, which could cause the market price of our Class A common stock to decline, our reputation and brand could be harmed.

While these metrics are based on what we believe to be reasonable estimates of our user base for the applicable period of measurement, there are inherent challenges in measuring how our platform is used and as a result, the metrics may overstate the number of DAUs, hours engaged, and ABPDAU. For example, there are users who have multiple accounts, fake user accounts, or fraudulent accounts created by bots to inflate user activity for a particular developer or creator on our platform, thus making the developer or creator’s experience or other content appear more popular than it really is. We strive to detect and minimize fraud and unauthorized access to our platform, and these practices are prohibited in our terms of service and we implement measures to detect and suppress that behavior. Some of our demographic data may be incomplete or inaccurate. For example, because users self-report their dates of birth, our age demographic data may differ from our users’ actual ages. If our users provide us with incorrect or incomplete information regarding their age or other attributes, then our estimates may prove inaccurate.

Errors or inaccuracies in our metrics or data could also result in incorrect business decisions and inefficiencies. For instance, if a significant understatement or overstatement of active users were to occur, we may expend resources to implement unnecessary business measures or fail to take required actions to attract a sufficient number of users to satisfy our growth strategies. If our developers do not perceive our user, geographic, or other demographic metrics to be accurate representations of our user base, or if we discover material inaccuracies in our user, geographic, or other demographic metrics, our reputation may be seriously harmed. Our developers, creators and partners may also be less willing to allocate their budgets or resources to our platform, which could seriously harm our business.

Some developers, creators, and users on our platform may make unauthorized, fraudulent, or illegal use of Robux and other digital goods on our platform, including through unauthorized third-party websites or “cheating” programs.

Robux and digital goods on our platform have no monetary value outside of our platform, but users have made and may in the future make unauthorized, fraudulent, or illegal sales and/or purchases of Robux and other digital goods on or off of our platform, including through unauthorized third-party websites in exchange for real-world currency. For example, some users have made fraudulent use of credit cards owned by others on our platform to purchase Robux and offer the

 

32


Table of Contents
Index to Financial Statements

purchased Robux for sale at a discount on a third-party website. For the nine months ended September 30, 2020, total chargeback expense to us from this fraud was approximately 5% of bookings.

While we regularly monitor and screen usage of our platform with the aim of identifying and preventing these activities, and regularly monitor third-party websites for fraudulent Robux or digital goods offers as well as regularly send cease-and-desist letters to operators of these third-party websites, we are unable to control or stop all unauthorized, fraudulent, or illegal transactions in Robux or other digital goods that occurs on or off of our platform. Although we are not directly responsible for such unauthorized, fraudulent, and/or illegal activities conducted by these third parties, our user experience may be adversely affected, and users and/or developers may choose to leave our platform if these activities are pervasive. These activities may also result in negative publicity, disputes, or even legal claims, and measures we take in response may be expensive, time consuming, and disruptive to our operations.

In addition, unauthorized, fraudulent, and/or illegal purchases and/or sales of Robux or other digital goods on or off of our platform, including through third-party websites, bots, fake accounts, or “cheating” programs that enable users to exploit vulnerabilities in the experiences on our platform, could reduce our revenue and bookings by, among other things, decreasing revenue from authorized and legitimate transactions, increasing chargebacks from unauthorized credit card transactions, causing us to lose revenue and bookings from dissatisfied users who stop engaging with the experiences on our platform, or increasing costs we incur to develop technological measures to curtail unauthorized transactions.

Under our community rules for our platform, which developers, creators and users are obligated to comply with, we reserve the right to temporarily or permanently ban individuals for breaching our terms of use by violating applicable law or Roblox policies which include engaging in illegal activity on the platform. We have banned individuals as a result of unauthorized, fraudulent, or illegal use of Robux or other digital goods on our platform. We have also employed technological measures to help detect unauthorized Robux transactions and continue to develop additional methods and processes through which we can identify unauthorized transactions and block such transactions. However, there can be no assurance that our efforts to prevent or minimize these unauthorized, fraudulent, or illegal transactions will be successful.

Our business is highly competitive and subject to rapid changes. We face significant competition to attract and retain our users, developers, and creators that we anticipate will continue to intensify. Should we fail to attract and retain users, developers, and creators, our business and results of operations may suffer.

We compete for both users and developers and creators. We compete to attract and retain our users’ attention on the basis of our content and user experiences. We compete for users and their engagement hours with global technology leaders such as Amazon, Apple, Facebook, Google, Microsoft, and Tencent, global entertainment companies such as Comcast, Disney, and ViacomCBS, global gaming companies such as Activision Blizzard, Electronic Arts, Take-Two, Valve, Unity, and Zynga, online content platforms including Netflix, Spotify, and YouTube, as well as social platforms such as Facebook, Pinterest, and Snap.

We rely on developers to create the content that leads to and maintains user engagement (including maintaining the quality of experiences). We compete to attract and retain developers by providing developers the tools to easily build, publish, operate, and monetize content. We compete for developers and engineering talent with gaming platforms such as Epic Games, Unity, and Valve Corporation, which also give developers the ability to create or distribute interactive content.

 

33


Table of Contents
Index to Financial Statements

We do not have any agreements with our developers that require them to continue to use the Roblox Platform for any time period. Some of our developers have developed attractive businesses in developing content, including games, on our platform. In the future, if we are unable to continue to provide value to these developers and they have alternative methods to publish and commercialize their offerings, they may not continue to provide content to our platform. Should we fail to provide compelling advantages to continued use of our ecosystem to developers, they may elect to develop content on competing interactive entertainment platforms. If a significant number of our developers no longer provide content, we may experience an overall reduction in the quality of our experiences, which could adversely affect users’ interest in our platform and lead to a loss of revenue opportunities and harm our results of operations.

Many of our existing competitors have, and some of our potential competitors could have, substantial competitive advantages, such as:

 

   

larger sales and marketing budgets and resources;

 

   

broader and more established relationships with users, developers, and creators;

 

   

greater resources to make acquisitions and enter into strategic partnerships;

 

   

lower labor and research and development costs;

 

   

larger and more mature intellectual property portfolios; and

 

   

substantially greater financial, technical, and other resources.

We expect competition to continue to increase in the future. Conditions in our market could change rapidly and significantly as a result of technological advancements, the emergence of new entrants into the market, partnering or acquisitions by our competitors, continuing market consolidation, or changing developer, creator and user preferences, which can be difficult to predict or prepare for. Our competitors vary in size, and some may have substantially broader and more diverse offerings or may be able to adopt more lucrative payment policies or structures for developers. Failure to adequately identify and adapt to these competitive pricing pressures could negatively impact our business.

We focus our business on our developers, creators, and users, and acting in their interests in the long-term may conflict with the short-term expectations of analysts and investors.

A significant part of our business strategy and culture is to focus on long-term growth and developer, creator, and user experience over short-term financial results. We expect our expenses to continue to increase in the future as we broaden our developer, creator, and user community, as developers, creators, and users increase the amount and types of experiences and virtual items they make available on our platform and the content they consume, and as we develop and further enhance our platform, expand our technical infrastructure and data centers, and hire additional employees to support our expanding operations. As a result, in the near- and medium-term, we may continue to operate at a loss, or our near- and medium-term profitability may be lower than it would be if our strategy were to maximize near- and medium-term profitability. We expect to continue making significant expenditures to grow our platform and develop new features, integrations, capabilities, and enhancements to our platform for the benefit of our developers, creators, and users. Such expenditures may not result in improved business results or profitability over the long-term. If we are ultimately unable to achieve or improve profitability at the level or during the time frame anticipated by securities or industry analysts, investors and our stockholders, the trading price of our Class A common stock may decline.

 

34


Table of Contents
Index to Financial Statements

We rely on third-party distribution channels to facilitate Robux purchases by platform users. If we are unable to maintain a good relationship with such providers, if their terms and conditions change, or fail to process or ensure the safety of users’ payments, our business will suffer.

Purchases of Robux and other products (e.g., e-gift cards) on our platform are facilitated through third-party online distribution channels. We utilize these distribution channels, such as Amazon, Apple, Blackhawk, ePay, Google, Incomm, PayPal, Vantiv, and Xsolla, to receive cash proceeds from sales of our Robux through direct purchases on our platform. Any scheduled or unscheduled interruption in the ability of our users to transact with these distribution channels could adversely affect our payment collection and, in turn, our revenue and bookings.

Our business will suffer if we are unable to maintain a good relationship with these distribution channels or develop relationships with new and emerging channels, if their terms and conditions or fee structure changes to our detriment, if we violate, or if a channel believes that we have violated, their terms and conditions, or if any of these distribution channels loses market share or falls out of favor or is unavailable for a prolonged period of time. Any changes that affect our use of these distribution channels may decrease the visibility or availability of our platform, limit our distribution capabilities, prevent access to our platform, or result in the exclusion or limitation of our platform on those distribution channels.

We do not directly process purchases of Robux on our platform, and, thus, any information on those purchases (e.g., debit and credit card numbers and expiration dates, personal information, and billing addresses) is disclosed to the third-party online platform and service providers facilitating Robux purchases by users. We do not have control over the security measures of those providers, and their security measures may not be adequate. We could be exposed to litigation and possible liability if our users’ transaction information involving Robux purchases is compromised, which could harm our reputation and our ability to attract users and may materially adversely affect our business.

We also rely on the stability of such distribution channels and their payment transmissions to ensure the continued payment services provided to our users. If any of these providers fail to process or ensure the security of users’ payments for any reason, our reputation may be damaged and we may lose our paying users, and users may be discouraged from purchasing Robux in the future, which, in turn, would materially and adversely affect our business, financial condition, and prospects.

In addition, from time to time, we encounter fraudulent use of payment methods, which could impact our results of operations and if not adequately controlled and managed could create negative consumer perceptions of our service. If we are unable to maintain our fraud and chargeback rate at acceptable levels, card networks may impose fines, our card approval rate may be impacted and we may be subject to additional card authentication requirements. The termination of our ability to process payments on any major payment method would significantly impair our ability to operate our business.

We may require additional capital to meet our financial obligations and support business growth, and this capital might not be available on acceptable terms or at all.

We intend to continue to make significant investments to support our business growth and may require additional funds to respond to business challenges, including the need for developers and creators to develop new experiences and virtual items, enhance our existing experiences, improve our operating infrastructure or acquire complementary businesses, personnel and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of our Class A common stock. Any debt financing that we

 

35


Table of Contents
Index to Financial Statements

secure in the future could involve offering additional security interests and undertaking restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and our business, financial condition or results of operations may be harmed.

Our results of operations may be harmed if we are required to collect sales, value added, or other similar taxes for the purchase of our virtual currency.

Although we, either directly or through our third-party distribution channels, collect and remit taxes from users in certain countries and regions, there are some jurisdictions in which we operate where we do not currently collect taxes from users. One or more states or countries may seek to impose past, incremental or new sales, value added, or other tax collection obligations on us. A successful assertion by a state, country, or other jurisdiction that we should have been or should be collecting additional sales, value added, or other taxes could, among other things, result in substantial tax payments, create significant administrative burdens for us, discourage potential users, developers or creators from subscribing to our platform due to the incremental cost of any such sales or other similar taxes, or otherwise harm our business, results of operations, and financial condition.

If we are unable to maintain effective internal control over financial reporting, the accuracy and timeliness of our financial reporting may be adversely affected.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, and the rules and regulations of the listing standards of the New York Stock Exchange, or the NYSE. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting, and financial compliance costs, make some activities more difficult, time-consuming, and costly, and place significant strain on our personnel, systems, and resources. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the Securities and Exchange Commission, or the SEC, is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight.

Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, we have identified in the past, and may identify in the future, deficiencies in our controls. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which could have a negative effect on the

 

36


Table of Contents
Index to Financial Statements

trading price of our Class A common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the NYSE. We are not currently required to comply with the SEC rules that implement Section 404 of the Sarbanes-Oxley Act and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. As a public company, we will be required to provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second Annual Report on Form 10-K.

Our independent registered public accounting firm is not required to attest to the effectiveness of our internal control over financial reporting until after we are no longer an “emerging growth company” as defined in the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed, or operating. Any failure to maintain effective disclosure controls and internal control over financial reporting could have a material and adverse effect on our business and results of operations and could cause a decline in the price of our Class A common stock.

The popularity of our Lua scripting language for customization of and creation of virtual worlds and virtual goods and services is a key driver of content creation and engagement with our platform. If other programming languages or platforms become more popular with our developers, it may affect engagement with and content creation for our platform and our business may be harmed.

Roblox experiences are programmed using Lua scripting language on the Roblox Platform. In order to enhance the attractiveness of our platform to potential developers, we have made the Lua scripting language available without charge. The Lua scripting language permits developers on the Roblox Platform to develop customized add-on features for their own or others’ use, and we have trained our developers on how to write add-on programs using Lua scripting language. As part of this strategy, we have encouraged the development of an active community of Lua programmers similar to those which have emerged for other software platforms. The widespread use and popularity of our Lua scripting language is critical to creating engaging content on and demand for our platform. If developers do not find the Lua scripting language or our platform simple and attractive for developing content, or determine that our Lua scripting language or other features of our platform are undesirable or inferior to other scripting languages or platforms, or Lua scripting language becomes unavailable for use by the developers for any reason, they may shift their resources to developing content on other platforms and our business may be harmed.

We rely on Amazon Web Services for a portion of our cloud infrastructure in certain areas, and as a result any disruption of AWS would negatively affect our operations and significantly harm our business.

We rely on Amazon Web Services, or AWS, a third-party provider for a portion of our backend services, including for some of our high-speed databases, scalable object storage, and message queuing services. In addition, when additional compute resources are required, the Roblox Cloud can leverage Amazon EC2. For location-based support areas, we outsource certain aspects of the infrastructure relating to our cloud-native platform. As a result, our operations depend, in part, on AWS’ ability to protect their services against damage or interruption due to a variety of factors, including infrastructure changes, human or software errors, natural disasters, power or telecommunications failures, criminal acts, capacity constraints and similar events. Our developers, creators, and users need to be able to access our platform at any time, without interruption or degradation of performance. Our platform depends, in part, on the virtual cloud infrastructure hosted in AWS. Although we have disaster recovery plans that utilize multiple AWS availability zones to support our requirements, any

 

37


Table of Contents
Index to Financial Statements

incident affecting their infrastructure that may be caused by fire, flood, severe storm, earthquake or other natural disasters, power loss, telecommunications failures, cyber-attacks, terrorist or other attacks, and other similar events beyond our control, could adversely affect our cloud-native platform. Any disruption of or interference with our use of AWS could impair our ability to deliver our platform reliably to our developers, creators, and users.

Additionally, threats or attacks from computer malware, ransomware, viruses, social engineering (including phishing attacks), denial of service or other attacks, employee theft or misuse and general hacking have occurred and are becoming more prevalent in our industry, particularly against cloud-native services and vendors of security solutions. If AWS were to experience any of these security incidents, it could result in unauthorized access to, damage to, disablement or encryption of, use or misuse of, disclosure of, modification of, destruction of, or loss of our data or our developers’, creators’, and users’ data or disrupt our ability to provide our platform or service. A prolonged AWS service disruption affecting our cloud-native platform for any of the foregoing reasons would adversely impact our ability to serve our users, developers, and creators and could damage our reputation with current and potential users, developers, and creators, expose us to liability, result in substantial costs for remediation, cause us to lose users, developers, and creators, or otherwise harm our business, financial condition, or results of operations. and users. We may also incur significant costs for using alternative hosting cloud infrastructure services or taking other actions in preparation for, or in reaction to, events that damage or interfere with the AWS services we use.

Our commercial agreement with AWS will remain in effect until November 2021. Neither party may terminate the commercial agreement for convenience during its term. In the event that our AWS service agreements are terminated, or there is a lapse of service, elimination of AWS services or features that we utilize, we could experience interruptions in access to our platform as well as significant delays and additional expense in arranging for or creating new facilities or re-architecting our platform for deployment on a different cloud infrastructure service provider, which would adversely affect our business, financial condition, and results of operations.

If the security of our platform is compromised, it could compromise our and our developers’, creators’, and users’ proprietary information, disrupt our internal operations and harm public perception of our platform, which could cause our business and reputation to suffer.

We collect and store personal data and certain other sensitive and proprietary information in the operation of our business, including developer, creator and user information, and other confidential data. While we have implemented measures designed to prevent unauthorized access to or loss of our confidential data, mobile malware, viruses, hacking, social engineering, spam and phishing attacks have occurred and may occur on our systems in the future. Because of the popularity of our platform, we believe that we are an attractive target for these sorts of attacks.

Further, the techniques used to obtain unauthorized access to, or to sabotage, systems or networks, are constantly evolving and generally are not recognized until launched against a target. Consequently, we may be unable to anticipate these techniques, react in a timely manner, or implement preventive measures, which could result in delays in our detection or remediation of, or other responses to, security breaches and other security-related incidents. The wide availability of open source software used in our solutions could also expose us to security vulnerabilities.

If any unauthorized access to our network, systems or data, including our sensitive and proprietary information, personal data from our users, developers or creators, or other data, or any other security breach occurs, or is believed to have occurred, whether as a result of third-party action, employee negligence, error or malfeasance, defects, social engineering techniques, or otherwise, our reputation, brand and competitive position could be damaged, our and our users’, developers’, and

 

38


Table of Contents
Index to Financial Statements

creators’ data and intellectual property could potentially be lost or compromised, and we could be required to spend capital and other resources to alleviate problems caused by such actual or perceived breaches and remediate our systems, we could be exposed to a risk of loss, litigation or regulatory action and possible liability, and our ability to operate our business may be impaired. In the past, we have experienced social engineering attacks, and if similar attacks occur and are successful, this could have a negative impact on our business or result in unfavorable publicity. Additionally, we contract with certain third parties to store and process certain data for us, including our distribution channels, and these third parties face similar risks of actual and potential security breaches, which could present similar risks to our business, reputation, financial condition, and results of operations.

The economic costs to us to reduce or alleviate cyber or other security problems such as spammers, errors, bugs, flaws, “cheating” programs, defects or corrupted data, could be significant and may be difficult to anticipate or measure. These issues may cause developers, creators, and users to use our platform less or stop using it altogether, and the costs could divert our attention and resources, any of which could result in claims, demands, and legal liability to us, regulatory investigations and other proceedings, and otherwise harm our business, reputation, financial condition or results of operations. There could also be regulatory fines imposed for certain data breaches that take place around the world. For example, the California Consumer Privacy Act, or CCPA, also allows for a private right of action for certain data breaches that relate to a specified set of personal information.

Although we maintain cyber, privacy, and network security liability insurance, subject to applicable deductibles and policy limits, such coverage may not extend to all types of privacy and cybersecurity incidents, and it may be insufficient to cover all costs and expenses associated with such incidents.

Operating as a public company will require us to incur substantial costs and will require substantial management attention.

As a public company, we will incur substantial legal, accounting, and other expenses that we did not incur as a private company. For example, we are subject to the reporting requirements of the Exchange Act, the applicable requirements of the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the rules and regulations of the SEC, and the listing standards of the NYSE. The Exchange Act requires, among other things, we file annual, quarterly, and current reports with respect to our business, financial condition, and results of operations. Compliance with these rules and regulations will increase our legal and financial compliance costs, and increase demand on our systems, particularly after we are no longer an “emerging growth company.” In addition, as a public company, we may be subject to stockholder activism, which can lead to additional substantial costs, distract management, and impact the manner in which we operate our business in ways we cannot currently anticipate. As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which may result in threatened or actual litigation, including by competitors.

This management team, as a group, has no experience managing a publicly traded company, and certain members joined us more recently. As such, our management team may not successfully or efficiently manage our transition to being a public company subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents will require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely affect our business, financial condition, and results of operations.

 

39


Table of Contents
Index to Financial Statements

We anticipate that our ongoing efforts related to privacy, data protection, safety, security, and content review will identify additional instances of misuse of user data or other undesirable activity by third parties on our platform.

In addition to our efforts to mitigate cybersecurity risks, we have made and are continuing to make investments in privacy, data protection, safety, security, and content review efforts to combat misuse of our services and user data by third parties, including investigations of individuals we have determined to have attempted to access user data without authorization. Our internal teams also continually monitor and address any unauthorized attempts to access data stored on servers that we own or control or data available to our third-party customer service providers. As a result of these efforts we have discovered and announced, and anticipate that we will continue to discover and announce, additional incidents of misuse of or unauthorized access of user data or other undesirable activity by third parties. We have taken steps to protect the data that we have access to, but despite these efforts, our security measures or those of our third-party service providers could be insufficient or breached as a result of third-party action, malfeasance, employee errors, service provider errors, technological limitations, defects or vulnerabilities in our platform or otherwise. Additionally, with our employees and third-party service providers who have access to some of our user data currently working remotely during the COVID-19 pandemic, we are exposed to increased risks of security breaches or incidents. We may not discover all such incidents or activity or be able to respond to or otherwise address them, promptly or at all. Such incidents and activities have in the past, and may in the future, include the use of user data or our systems in a manner inconsistent with our terms, contracts or policies, the existence of false or undesirable user accounts, theft of in-game currency or virtual items in valid user accounts, and activities that threaten people’s safety on- or offline. We may also be unsuccessful in our efforts to enforce our policies or otherwise remediate any such incidents. Any of the foregoing developments, whether actual or perceived, may negatively affect user trust and engagement, harm our reputation and brands, require us to change our business practices in a manner adverse to our business, and adversely affect our business and financial results. Any such developments may also subject us to future litigation and regulatory inquiries, investigations, and proceedings, including from data protection authorities in countries where we offer services and/or have users, which could subject us to monetary penalties and damages, divert management’s time and attention, and lead to enhanced regulatory oversight.

The expansion of our platform outside the United States exposes us to risks inherent in international operations.

We operate our platform throughout the world and are subject to risks and challenges associated with international business. For the nine months ended September 30, 2020, we had users in over 180 countries and developers in over 170 countries. During this period, approximately 67% of our DAUs and 32% of our bookings were derived from outside the U.S. and Canada region. We intend to continue to expand internationally, and this expansion is a critical element of our future business strategy. While we have a number of developers, creators, and users outside of the U.S., we have limited offices located outside of the U.S. and Canada, and there is no guarantee that our international efforts will be successful. The risks and challenges associated expanding our international presence, having developers, creators, and users outside the U.S. and those that can affect international operations generally and negatively impact our business and results of operations, include:

 

   

greater difficulty in enforcing contracts and managing collections in countries where our recourse may be more limited, as well as longer collection periods;

 

   

higher costs of doing business internationally, including costs incurred in complying with local regulations related to privacy, data protection, content monitoring, preclusion, and removal, and online entertainment offerings, particularly as these rules apply to interactions with children, and establishing and maintaining office space for our international operations;

 

40


Table of Contents
Index to Financial Statements
   

double taxation of our international earnings and potentially adverse tax consequences due to changes in the tax laws of the U.S. or the foreign jurisdictions in which we operate;

 

   

expenses related to monitoring and complying with differing labor regulations, especially in jurisdictions where labor laws may be more favorable to employees than in the U.S.;

 

   

challenges inherent to efficiently recruiting and retaining talented and capable employees in foreign countries and maintaining our company culture and employee programs across all of our offices;

 

   

management communication and integration problems resulting from language or cultural differences and geographic dispersion;

 

   

the uncertainty of protection for intellectual property rights in some countries;

 

   

increased exposure to fluctuations in exchange rates between the U.S. dollar and foreign currencies in markets where we do business;

 

   

foreign exchange controls that might prevent us from repatriating cash earned outside the U.S.;

 

   

risks associated with trade restrictions and foreign legal requirements, and greater risk of unexpected changes in regulatory requirements, tariffs and tax laws, trade laws, and export and other trade restrictions;

 

   

risks relating to the implementation of exchange controls, including restrictions promulgated by the Office of Foreign Asset Control, and other similar trade protection regulations and measures;

 

   

exposure to regional or global public health issues, such as the recent COVID-19 pandemic, and to travel restrictions and other measures undertaken by governments in response to such issues;

 

   

general economic and political conditions in these foreign markets, including political and economic instability in some countries;

 

   

localization of our services, including translation into foreign languages and associated expenses;

 

   

the ability to monitor our platform in new and evolving markets and in different languages to confirm that we maintain standards consistent with our brand and reputation;

 

   

compliance with multiple, ambiguous, or evolving governmental laws and regulations, including those relating to employment, tax, content regulation, privacy, data protection, anti-corruption, import/export, customs, anti-boycott, sanctions and embargoes, antitrust, data transfer, storage and protection, content monitoring, preclusion, and removal, and industry-specific laws and regulations;

 

   

regulatory frameworks or business practices favoring local competitors;

 

   

changes in the public perception of our platform by governments in the regions where we operate or plan to operate;

 

   

uncertainty regarding the imposition of and changes in the U.S.’ and other governments’ trade regulations, trade wars, tariffs, other restrictions or other geopolitical events, and without limitation, including the evolving relations between the U.S. and China;

 

   

uncertainty regarding regulation, currency, tax, and operations resulting from the United Kingdom’s exit from the EU, or Brexit, on January 31, 2020 and possible disruptions in trade, the sale of our services and commerce, and movement of our people between the United Kingdom, EU, and other locations;

 

41


Table of Contents
Index to Financial Statements
   

natural disasters, acts of war, and terrorism, and resulting changes to laws and regulations, including changes oriented to protecting local businesses;

 

   

difficulties in hiring highly qualified employees internationally and managing foreign operations; and

 

   

regional economic and political conditions.

These and other factors could harm our ability to generate revenue and bookings outside of the U.S. and, consequently, adversely affect our business, financial condition and results of operations. We may not be able to expand our business and attract users in international markets and doing so will require considerable management attention and resources. International expansion is subject to the particular challenges of supporting a business in an environment of multiple languages, cultures, customs, legal systems, alternative dispute systems, regulatory systems and commercial infrastructures. We may not be able to offer our platform in certain countries, and expanding our international focus may subject us to risks that we have not faced before or increase risks that we currently face.

We may not realize the benefits expected through our China joint venture and the joint venture could have adverse effects on our business.

In February 2019, we entered into a joint venture agreement with Songhua River Investment Limited, referred to as Songhua, an affiliate of Tencent Holdings Ltd., a leading internet company in China and one of the world’s largest gaming companies. Under the joint venture agreement, we created Roblox China Holding Corp., referred to as the China JV, of which we own a 51% ownership interest. Through a wholly-owned subsidiary based in Shenzhen named Roblox (Shenzhen) Digital Science and Technology Co., Ltd and branded “Luobu,” the China JV is engaged in the development, localization and licensing to creators of a Chinese version of the Roblox Studio and also develops and oversees relations with local Chinese developers. Tencent currently intends to publish and operate a localized version of the Roblox Platform as a game in China under the name “Luobulesi.” Prior to publishing Luobulesi, Tencent must receive a publishing license from the National Radio and Television Administration of the Chinese government that entails a review of the content of Luobulesi to confirm that such content is not in contravention with the requirements of Chinese law. This publishing license has not yet been issued and we do not have an expected issuance date for this license. Luobu’s focus is on creating opportunities for local Chinese developers to learn Roblox Studio for building and publishing experiences and content.

Because our continued business operations in China are part of our current and future user growth plans, further adverse changes in the economic and political policies relating to China could have a material adverse effect on our business. An escalation of recent trade tensions between the U.S. and China has resulted in trade restrictions that could harm our ability to participate in Chinese markets and numerous additional such restrictions have been threatened by both countries. The U.S. government, for example, has recently barred or threatened to bar U.S. companies from doing business with certain Chinese technology companies. The Chinese government has, in turn, threatened to restrict the investment or trade privileges of companies that stop doing business with Chinese companies as a result of this or other similar rules. We may find it impossible to comply with these or other conflicting regulations in the U.S. and China, which could make it difficult or impossible to achieve our business objectives in China or realize a return on our investment in this market. Sustained uncertainty about, or worsening of, current global economic conditions and further escalation of trade tensions between the U.S. and its trading partners, especially China, could result in a global economic slowdown and long-term changes to global trade, including retaliatory trade restrictions that could further restrict our ability to operate in China.

 

42


Table of Contents
Index to Financial Statements

The Chinese economic, legal, and political landscape also differs from other countries in many respects, including the level of government involvement and regulation, control of foreign exchange and allocation of resources and uncertainty regarding the enforceability and scope of protection for intellectual property rights. The laws, regulations and legal requirements in China are also subject to frequent changes and the exact obligations under and enforcement of laws and regulations are often subject to unpublished internal government interpretations and policies which makes it challenging to ascertain compliance with such laws. Any actions and policies adopted by the Chinese government, particularly with regard to intellectual property rights and internet restrictions for non-Chinese businesses, or any prolonged slowdown in China’s economy, could have an adverse effect on our business, results of operations and financial condition.

The relationship between China and the U.S. is subject to periodic tension. Relations may also be compromised if the U.S. pressures the Chinese government regarding its monetary, economic, or social policies. Changes in political conditions in China and changes in the state of China-U.S. relations are difficult to predict and could adversely affect the operations or financial condition of the China JV. In addition, because of our proposed involvement in the Chinese market, any deterioration in political or trade relations might cause a public perception in the U.S. or elsewhere that might cause our products to become less attractive. The Committee on Foreign Investment in the U.S. has continued to apply a more stringent review of certain foreign investment in U.S. companies, including investment by Chinese entities, and has made inquiries to us with respect to Tencent’s equity investment in us and involvement in the China JV. We cannot predict what effect any further inquiry by the Committee on Foreign Investment in the U.S. into our relationship with Tencent or changes in China-U.S. relations overall may have on our ability to effectively support the China JV or on the operations or success of the China JV.

In addition to market and regulatory factors, any future success of the China JV will require a collaborative effort with Tencent to build and operate Luobu and Luobulesi as together, they will form the exclusive basis for growing our penetration in the China market. In addition, upon the occurrence of certain events, such as a termination of certain of the contractual relationships applicable to Luobu, a change of control of us, or the acquisition of 20% of our outstanding securities by certain specified Chinese industry participants, we may be required to purchase Songhua’s interest in the China JV at a fair market value determined at the time of such purchase. Any future requirement to purchase the interest in China JV from Songhua may have a material adverse effect upon our liquidity, financial condition, and results of operations both as a result of the purchase of such interests and the fact that we would need to identify and partner with an alternative Chinese partner in order for operations to continue in the China market.

Our results of operations, which are reported in U.S. dollars, could be adversely affected if currency exchange rates fluctuate substantially in the future.

As we continue to expand our international operations, we become more exposed to the effects of fluctuations in currency exchange rates. We generally collect revenue from our international markets in the local currency. For the nine months ended September 30, 2020, we had users in over 180 countries and approximately 67% of our DAUs and 32% of our bookings were derived from outside the U.S. and Canada region. While we periodically adjust the price of Robux to account for the relative value of this local currency to the U.S. dollar these adjustments are not immediate nor do they typically exactly track the underlying currency fluctuations. As a result, rapid appreciation of the U.S. dollar against these foreign currencies can harm our reported results and cause the revenue derived from our foreign users to decrease. In addition, even if we do adjust the cost of our Robux in foreign markets to track appreciation in the U.S. dollar, such appreciation could increase the costs of purchasing Robux to our users outside of the U.S., adversely affecting our business, results of operations and financial condition.

 

43


Table of Contents
Index to Financial Statements

We also incur expenses for employee compensation and other operating expenses at our non-U.S. locations in the local currency. Fluctuations in the exchange rates between the U.S. dollar and other currencies could result in the dollar equivalent of our expenses being higher which may not be offset by additional revenue earned in the local currency. This could have a negative impact on our reported results of operations. To date, we have not engaged in any hedging strategies and any such strategies, such as forward contracts, options and foreign exchange swaps related to transaction exposures that we may implement in the future to mitigate this risk may not eliminate our exposure to foreign exchange fluctuations. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments.

We plan to continue to make acquisitions and investments in other companies, which could require significant management attention, disrupt our business, dilute our stockholders, and significantly harm our business.

As part of our business strategy, we have made and intend to make acquisitions to add specialized employees and complementary companies, features, and technologies. For example, in 2020 we acquired Ceebr Limited, a company that operated a platform that teaches children age 6-13 to design, program, and play their own games. Our ability to acquire and successfully integrate larger or more complex companies, features, and technologies is unproven. In the future, we may not be able to find other suitable acquisition or investment candidates, and we may not be able to complete acquisitions or investments on favorable terms, if at all. The pursuit of potential acquisitions may divert the attention of management and cause us to incur significant expenses related to identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated. Our previous and future acquisitions may not achieve our goals, and any future acquisitions we complete could be viewed negatively by users, developers, creators, partners, or investors. In addition, if we fail to successfully close transactions or integrate new teams into our corporate culture, or integrate the features and technologies associated with these acquisitions, our business could be significantly harmed. Any integration process may require significant time and resources, and we may not be able to manage the process successfully. We may not successfully evaluate or use the acquired products, technology, and personnel, or accurately forecast the financial impact of an acquisition, including accounting charges which could be recognized as a current period expense. We also may not achieve the anticipated benefits of synergies from the acquired business, may encounter challenges with incorporating the acquired features and technologies into our platform while maintaining quality and security standards consistent with our brand, or may fail to identify security vulnerabilities in acquired technology prior to integration with our technology and platform. We may also incur unanticipated liabilities that we assume as a result of acquiring companies, including claims related to the acquired company, its offerings or technologies or potential violations of applicable law or industry rules and regulations arising from prior or ongoing acts or omissions by the acquired business that were not discovered during diligence. We will pay cash, incur debt, or issue equity securities to pay for any acquisitions, any of which could significantly harm our business. Selling equity to finance any such acquisition would also dilute our stockholders. Incurring debt would increase our fixed obligations and could also include covenants or other restrictions that would impede our ability to manage our operations.

In addition, it generally takes several months after the closing of an acquisition to finalize the purchase price allocation. Therefore, it is possible that our valuation of an acquisition may change and result in unanticipated write-offs or charges, impairment of our goodwill, or a material change to the fair value of the assets and liabilities associated with a particular acquisition, any of which could significantly harm our business.

Our acquisition strategy may not succeed if we are unable to remain attractive to target companies or expeditiously close transactions. If we develop a reputation for being a difficult acquirer

 

44


Table of Contents
Index to Financial Statements

or having an unfavorable work environment, or target companies view our Class A common stock unfavorably, we may be unable to consummate key acquisition transactions essential to our corporate strategy and our business may be significantly harmed.

Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited, each of which could significantly harm our business.

As of December 31, 2019, we had federal and state net operating loss carryforwards of $162.0 million and $54.3 million, respectively. If not utilized, these will begin to expire in 2024 and 2027, respectively. 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 $162.0 million of our federal net operating loss, $88.8 million is carried forward indefinitely but is limited to 80% of taxable income. Further, carryback of net operating losses is generally prohibited for tax years beginning after December 1, 2020. Our net operating loss carryforwards may also be subject to limitations under state law. For example, California recently enacted legislation suspending the use of net operating loss carryforwards for taxable years 2020, 2021, and 2022 for many taxpayers. Net operating loss carryforwards generated before January 1, 2018 will not be subject to the Tax Act’s taxable income limitation and will continue to have a twenty-year carryforward period. If our net operating loss carryforwards and other tax attributes expire before utilization or are subject to limitations, our business and financial results could be harmed.

Changes in existing financial accounting standards or practices may harm our results of operations.

Changes in existing accounting rules or practices, new accounting pronouncements rules, or varying interpretations of current accounting pronouncements practice could harm our results of operations or the manner in which we conduct our business. Further, such changes could potentially affect our reporting of transactions completed before such changes are effective. GAAP is subject to interpretation by the Financial Accounting Standards Board, or FASB, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. In particular, in February 2016, the FASB issued Accounting Standards Codification, or ASC, 842, which supersedes the lease accounting guidance in ASC 840, Leases. The core principle of ASC 842 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. As an “emerging growth company,” we are allowed under the JOBS Act to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We have elected to take advantage of this extended transition period under the JOBS Act with respect to ASC 842, which will result in ASC 842 becoming effective for us beginning on January 1, 2022 unless we choose to adopt it earlier. Any difficulties in implementing these pronouncements could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline and harm investors’ confidence in us.

We are evaluating the impact of the adoption of ASC 842 and currently believe the most significant impact upon adoption will be the recognition of material right-of-use assets and lease

 

45


Table of Contents
Index to Financial Statements

liabilities on our consolidated balance sheets associated with operating leases. We do not believe this standard will have a material impact on our consolidated statements of operations.

Our credit agreement provides our lender with a first-priority lien against substantially all of our assets and contains restrictive covenants which could limit our operational flexibility and otherwise adversely affect our financial condition.

Our credit agreement allows us to borrow up to $50.0 million. As of September 30, 2020, we have not borrowed any amounts under this agreement. In the event we borrow amounts under our credit agreement, we will become subject to a number of covenants that may limit our ability to, among other things, transfer or dispose of assets, pay dividends or make distributions, incur additional indebtedness, create liens, make investments, loans and acquisitions, engage in transactions with affiliates, merge or consolidate with other companies, and sell substantially all of our assets. Our credit agreement is secured by substantially all of our assets. The terms of our credit agreement may restrict our current and future operations and could adversely affect our ability to finance our future operations or capital needs, execute preferred business strategies, make it more difficult for us to successfully execute our business strategy, and compete against companies who are not subject to such restrictions. Additionally, any obligations to repay principal and interest on our indebtedness make us vulnerable to economic or market downturns.

Our failure to comply with the covenants or payment requirements, or other events specified in our credit agreement, could result in an event of default and our lender may accelerate our obligations under our credit agreement and foreclose upon the collateral, or we may be forced to sell assets, restructure our indebtedness, or seek additional equity capital, which would dilute our stockholders’ interests. Our failure to comply with any covenant could result in an event of default under the agreement and the lender could make the entire debt immediately due and payable. If this occurs, we might not be able to repay our debt or borrow sufficient funds to refinance it. Even if new financing is available, it may not be on terms that are acceptable to us. Any of the foregoing could adversely affect our business, financial condition, or results of operations.

Our estimates or judgments relating to our critical accounting policies may be based on assumptions that change or prove to be incorrect, which could cause our results of operations to fall below expectations of securities analysts and investors, resulting in a decline in the market price of our common stock.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as described in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The results of these estimates form the basis for making judgments about the recognition and measurement of certain assets and liabilities and revenue and expenses that is not readily apparent from other sources. Our accounting policies that involve judgment include those related to revenue recognition, assumptions used for estimating the fair value of common stock to calculate stock-based compensation, capitalization of internal-use software costs, valuation of goodwill and intangible assets, certain accrued liabilities, and valuation allowances associated with income taxes. If our assumptions change or if actual circumstances differ from those in our assumptions, our results of operations could be adversely affected, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock.

 

46


Table of Contents
Index to Financial Statements

Any legal proceedings or claims against us could be costly and time-consuming to defend and could harm our reputation regardless of the outcome.

We are and/or may in the future become subject to legal proceedings and claims that arise in the ordinary course of business, including intellectual property, data privacy, product liability, employment, class action, whistleblower and other litigation claims, and governmental and other regulatory investigations and proceedings. Such matters can be time-consuming, divert management’s attention and resources, cause us to incur significant expenses or liability, or require us to change our business practices. In addition, the expense of litigation and the timing of this expense from period to period are difficult to estimate, subject to change, and could adversely affect our financial condition and results of operations. Because of the potential risks, expenses, and uncertainties of litigation, we may, from time to time, settle disputes, even where we have meritorious claims or defenses, by agreeing to settlement agreements. Any of the foregoing could adversely affect our business, financial condition, and results of operations.

Catastrophic events may disrupt our business.

Natural disasters or other catastrophic events may cause damage or disruption to our operations, international commerce, and the global economy, and thus could harm our business. We have our headquarters and a large employee presence in San Mateo, California, an area which in recent years has been increasingly susceptible to fires and power outages, either of which could disrupt our operations, and which contains active earthquake zones. In the event of a major earthquake, hurricane, or catastrophic event such as fire, power loss, rolling blackouts, telecommunications failure, pandemic, cyber-attack, war, or terrorist attack, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our platform development, lengthy interruptions in our platform, breaches of security, and loss of critical data, all of which would harm our business, results of operations, and financial condition. Acts of terrorism and similar events would also cause disruptions to the internet or the economy as a whole. In addition, the insurance we maintain would likely not be adequate to cover our losses resulting from disasters or other business interruptions. Our disaster recovery plan may not be sufficient to address all aspects of any unanticipated consequence or incident, we may not be able to maintain business continuity at profitable levels or at all, and our insurance may not be sufficient to compensate us for the losses that could occur.

If we are determined to be an “investment company,” it will significantly affect our operational flexibility and our operating results.

If the SEC determines that we are required to register as an “investment company” it would result in the imposition of additional corporate governance and operational requirements through the application of the federal Investment Company Act of 1940. Any such burdens could be material. Among the particular repercussions for us as an “investment company” under the Investment Company Act of 1940, could be a short or long-term affect to liquidity and an increase our cost of capital and operational expenses, all of which would adversely affect our operating results. It is possible that such an outcome could threaten the viability of our business.

Risks Related to Government Regulations

We are subject to various governmental export control, trade sanctions, and import laws and regulations that require our compliance and may subject us to liability if we violate these controls.

We are subject to laws and regulations that could limit our ability to offer access or full access to our platform and experiences to certain persons and in certain countries or territories. For example,

 

47


Table of Contents
Index to Financial Statements

certain U.S. laws and regulations administered and enforced by U.S. Department of the Treasury’s Office of Foreign Assets Control, referred to as OFAC, may limit our ability to give users, developers, and creators access to certain aspects of our platform and experiences, or collectively with other applicable export control and economic sanctions laws and regulations, the Trade Control Laws and Regulations. Trade Control Laws and Regulations are complex and dynamic, and monitoring and ensuring compliance can be challenging. In addition, we rely on our payment processors for compliance with certain of these Trade Control Laws and Regulations, including the fact that our payment processors will not allow any paid activity by users, developers, and creators that attempt to access our platform from various jurisdictions specified by OFAC such as the Crimea region, Cuba, Iran, North Korea, and Syria. Users, developers, and creators from certain of these countries and territories have access to our platform and experiences and there can be no guarantee we will be found to have been in full compliance with Trade Control Laws and Regulations during all relevant periods. Any failure by us or our payment processors to comply with the Trade Control Laws and Regulations may lead to violations of the Trade Control Laws and Regulations that could expose us to liability. Any failure to comply with applicable laws and regulations also could have negative consequences for us, including reputational harm, government investigations, and monetary penalties.

In addition, various foreign governments may also impose controls, export license requirements, and/or restrictions. Compliance with such applicable regulatory requirements may create delays in the introduction of our platform in some international markets or prevent our international users from accessing our platform.

Governmental agencies may restrict access to platforms, our website, mobile applications or the internet generally, which could lead to the loss or slower growth of our user base.

Governmental agencies in any of the countries in which we, our users, developers, or creators are located could block access to or require a license for our platform, our website, operating system platforms, application stores or the internet generally for a number of reasons, including security, privacy, data protection, confidentiality, or regulatory concerns which may include, among other things, governmental restrictions on certain content in a particular country and a requirement that user information be stored on servers in a country within which we operate. Governmental agencies could issue fines or penalties if there are instances where we are found not to have been in compliance with regulations in any of these areas. Users generally need to access the internet, including in geographically diverse areas, and also mobile platforms such as the Apple App Store and the Google Play Store, to engage with experiences on our platform. If governmental or other entities block, limit or otherwise restrict developers, creators, and users from accessing our platform, or users from engaging with experiences on our platform, our business could be negatively impacted, we could be subject to additional fines and penalties, our developers, creators, and users could decline or grow more slowly, and our results of operations could be adversely affected.

Because we store, process, and use data, some of which contains personal information, we are subject to complex and evolving federal, state, and international laws and regulations regarding privacy, data protection, security, content, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in investigations, claims, changes to our business practices, increased cost of operations, and declines in user growth, retention, or engagement, any of which could significantly harm our business.

We are subject to a variety of laws and regulations in the U.S. and other countries that involve matters central to our business, including user privacy, data protection, security, rights of publicity, content, intellectual property, distribution, electronic contracts and other communications, competition, protection of minors, consumer protection, taxation, and online-payment services.

 

48


Table of Contents
Index to Financial Statements

The regulatory framework for privacy, data protection, and data transfers worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future.

Certain laws and regulations, such as the GDPR, which went into effect in May 2018, has placed and will continue to place significant data protection obligations and restrictions on organizations such as ours and may require us to continue to change our policies and procedures. The GDPR imposed more stringent data protection requirements and provides greater penalties for noncompliance than previous data protection laws, including potential penalties of up to 20 million or 4% of annual global revenues. If we are found not to be compliant with GDPR requirements, we may be subject to significant fines, the risk of civil litigation, and reputational damage, and our business may be seriously harmed.

Recently, the European Court of Justice struck down the EU-U.S. Privacy Shield framework, which provided companies with a mechanism to comply with data protection requirements when transferring personal data from the EU to the U.S. To the extent that any of our service providers, or consultants have been relying on the EU-U.S. Privacy Shield Framework, they cannot do so in the future, which could increase our costs and may limit our ability to process personal data from the EU. The same decision also cast doubt on the ability to use one of the primary alternatives to the EU-U.S. Privacy Shield framework, namely, the European Commission’s Standard Contractual Clauses, to lawfully transfer personal data from Europe to the U.S. and most other countries. At present, there are few, if any, viable alternatives to the Privacy Shield Frameworks and the Standard Contractual Clauses for the foregoing purposes.

Following a referendum in June 2016 in which voters in the United Kingdom approved an exit from the EU, the United Kingdom government has initiated a process to leave the EU, known as Brexit. Brexit has created uncertainty with regard to the regulation of data protection in the United Kingdom. In particular, while the Data Protection Act of 2018, which implements and complements the GDPR achieved Royal Assent on May 23, 2018 and is now effective in the United Kingdom, it is still unclear whether transfer of data from the European Economic Area to the United Kingdom will remain lawful under the GDPR. During the period of “transition” (i.e., until December 31, 2020), EU law will continue to apply in the United Kingdom, including the GDPR, after which it is expected that the Data Protection Act will substantially convert the requirements of the GDPR into United Kingdom law. However, we cannot fully predict how the Data Protection Act and other United Kingdom data protection laws or regulations may develop in the medium to longer term, affecting how data transfers to and from the United Kingdom will be regulated. We continue to monitor and review the impact of any resulting changes to EU or United Kingdom law that could affect our operations. Beginning in 2021, the United Kingdom will be a “third country” under the GDPR. We may incur liabilities, expenses, costs, and other operational losses under the GDPR and laws and regulations of applicable EU Member States and the United Kingdom relating to privacy and data protection in connection with any measures we take to comply with them.

Law no. 13.709/2018 of Brazil, the Lei Geral de Proteção de Dados Pessoais, or LGPD, entered into effect on September 18, 2020, authorizing a private right of action for violations. Administrative enforcement is anticipated to begin August 1, 2021, and may include fines of up to 2% of the organization’s annual global revenue or 50M reais (approximately $9.3 million U.S. dollars). The LGPD applies to businesses (both inside and outside Brazil) that process the personal data of users who are located in Brazil. The LGPD provides users with the similar rights as the GDPR regarding their data. A Brazilian Data Protection Authority, Brazilian National Data Protection Authority (Autoridade Nacional de Proteção de Dados, or ANPD) has been established to provide forthcoming rules and guidance on how to interpret and implement the LGPD’s requirements, including regarding notice of processing, data transfer requirements, and other compliance obligations, such as security measures, recordkeeping, training, and governance. Pending such developments from the ANPD and any

 

49


Table of Contents
Index to Financial Statements

emerging caselaw, the Company’s LGPD approach may be subject to further change, our compliance measures when implemented may not be fully adequate, we may expend significant time and cost in developing a privacy governance program and data transfer mechanisms to comply with the LGPD and any implementing regulations or guidance, and we may potentially face litigation prior to the implementation of regulations and guidance regarding the LGPD or before we have had a reasonable opportunity to fully implement measures designed to comply with such regulations and guidance.

In addition, the CCPA, went into effect in January 2020 and established a new privacy framework for covered businesses such as ours, requiring us to modify our data processing practices and policies and incur compliance related costs and expenses. The CCPA also provides for civil penalties for violations, as well as a private right of action for data breaches, which may increase the likelihood and cost of data breach litigation. If a ballot initiative to amend the CCPA passes in the upcoming California general election, the CCPA may be revised to place more restrictions on companies’ use of user data and potentially increase regulatory enforcement, and it remains unclear how various provisions of the CCPA will be interpreted and enforced. Additionally, a new privacy law, the California Privacy Rights Act, or CPRA, recently was certified by the California Secretary of State to appear on the ballot for the November 3, 2020 election. If this initiative is approved by California voters, the CPRA would significantly modify the CCPA, potentially resulting in further uncertainty and requiring us to incur additional costs and expenses in an effort to comply. The enactment of the CCPA is prompting similar legislative developments in other states in the U.S., which could create the potential for a patchwork of overlapping but different state laws. Some countries also are considering or have passed legislation requiring local storage and processing of data, or similar requirements, which could increase the cost and complexity of operating our products and services and other aspects of our business. The potential effects of this legislation are far-reaching and may require us to modify data processing practices and policies, incur substantial costs and expenses in an effort to comply, or restrict our operations.

We take reasonable efforts to comply with all applicable laws, policies, legal obligations and certain industry codes of conduct relating to privacy and data protection, and security. However, it is possible that the obligations imposed on us by applicable data privacy laws and regulations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices in other jurisdictions. Any failure or perceived failure by us to comply with our privacy policies, our privacy-related obligations to users or other third parties, or our other policies or obligations relating to privacy, data protection, or security, or any actual or perceived compromise of security, including any such compromise that results in the unauthorized release or transfer of personally identifiable information or other user, developer or creator data, may result in governmental investigations and enforcement actions, litigation, claims or public statements against us by consumer advocacy groups or others and could cause our developers, creators, and users to lose trust in us, any or all of which could have an adverse effect on our business, financial condition or results of operations.

United States or international rules that permit ISPs to limit internet data consumption by users, including unreasonable discrimination in the provision of broadband internet access services, could harm our business.

In January 2018, the Federal Communications Commission, or FCC, released an order that repealed the “open internet rules,” often known as “net neutrality,” which prohibit mobile providers in the U.S. from impeding access to most content, or otherwise unfairly discriminating against content providers like us and also prohibit mobile providers from entering into arrangements with specific content providers for faster or better access over their data networks. The FCC order repealing the open internet rules went into effect in June 2018. In response to this decision California and a number of states implemented their own net neutrality rules which largely mirrored the repealed federal regulations. The U.S. Department of Justice has filed suit to bar implementation of these state laws

 

50


Table of Contents
Index to Financial Statements

and their application remains uncertain. We cannot predict the outcome of this litigation or whether the FCC order or state initiatives regulating providers will be modified, overturned, or vacated by other legal action, federal legislation, or the FCC, or the degree to which this repeal would adversely affect our business, if at all. Similarly, the EU requires equal access to internet content, but as part of its Digital Single Market initiative, the EU may impose network security, and disability access, which could increase our costs. If the FCC’s repeal of the open internet rules is maintained, state initiatives are modified, overturned, or vacated, or the EU modifies its open internet rules, mobile and internet providers may be able to limit our users’ ability to access our platform or make our platform a less attractive alternative to our competitors’ applications. Were that to happen, our ability to retain existing users or attract new users may be impaired, or costs could increase, and our business would be significantly harmed.

We are subject to laws and regulations worldwide, many of which are unsettled and still developing which could increase our costs or adversely affect our business.

We are subject to a variety of laws in the U.S. and abroad that affect our business. As a global platform with users in over 180 countries, we are subject to a myriad of regulations and laws regarding consumer protection, including the use of gift cards, advertising, electronic marketing, protection of minors, data protection and privacy, data localization requirements, online services, data protection, anti-competition, freedom of speech, labor, real estate, taxation, intellectual property ownership and infringement, tax, export and national security, tariffs, anti-corruption and telecommunications, all of which are continuously evolving and developing. The scope and interpretation of the laws that are or may be applicable to us are often uncertain and may be conflicting, particularly laws outside the U.S., and compliance with laws, regulations and similar requirements may be burdensome and expensive. Laws and regulations may be inconsistent from jurisdiction to jurisdiction, which may increase the cost of compliance and doing business and expose us to possible litigation, penalties or fines. Any such costs, which may rise in the future as a result of changes in these laws and regulations or in their interpretation, could make our platform less attractive to our users, developers or creators or cause us to change or limit our ability to sell our platform. We have policies and procedures designed to ensure compliance with applicable laws and regulations, but we cannot assure you that we will not experience violations of such laws and regulations or our policies and procedures.

We are potentially subject to a number of foreign and domestic laws and regulations that affect the offering of certain types of content, such as that which depicts violence, many of which are ambiguous, still evolving and could be interpreted in ways that could harm our business or expose us to liability. Foreign governments, may censor our platform in their countries, restrict access to our platform from their countries entirely, impose other restrictions that may affect their citizens’ ability to access our platform for an extended period of time or even indefinitely, require data localization, or impose other laws or regulations that we cannot comply with, would be difficult for us to comply with, or would require us to rebuild our platform or the infrastructure for our platform. Numerous countries, including Germany, have regulations relating to this area and they may impose significant fines for failure to comply with certain content removal and disclosure obligations. Other countries, including Singapore, India, Turkey, Mexico, Australia, and the United Kingdom, have implemented or are considering similar legislation imposing penalties for failure to remove certain types of content. On the other hand, some users, developers, and creators may choose not to use our platform if we actively police content.

In addition, there are ongoing academic, political, and regulatory discussions in the U.S., Canada, Europe, Australia and other jurisdictions regarding whether certain mechanisms that may be included in the experiences on our platform, such as features commonly referred to as “loot boxes,” and certain genres of experiences, such as social casino, that may reward gambling, should be subject to a higher level or different type of regulation than other genres of experiences to protect consumers, in particular

 

51


Table of Contents
Index to Financial Statements

minors and persons susceptible to addiction, and, if so, what such regulation should include. New regulation by the U.S. federal government and its agencies, such as the FTC, state agencies or foreign jurisdictions, which may vary significantly, could require that certain content in the experiences on our platform be modified or removed, increase the costs of operating or monitoring the experiences on our platform, impact user engagement and thus the functionality and effectiveness of our platform or otherwise harm our business performance. It is difficult to predict how existing or new laws may be applied. If we become liable, directly or indirectly, under these laws or regulations, we could be harmed, and we may be forced to implement new measures to reduce our exposure to this liability. This may require us to expend substantial resources or to modify our platform, which would harm our business, financial condition and results of operations. In addition, the increased attention focused upon liability issues as a result of lawsuits and legislative proposals could harm our reputation or otherwise impact the growth of our business. Any costs incurred as a result of this potential liability could harm our business, financial condition, or results of operations.

It is also possible that a number of laws and regulations may be adopted or construed to apply to us or our users or our developers in the U.S. and elsewhere that could restrict the online and mobile industries, including developer, creator and user privacy, data protection, advertising, user acquisition practices, taxation, content suitability, copyright, distribution and antitrust, and our platform, experiences or components thereof may be deemed or perceived illegal or unfair practices. Furthermore, the growth and development of electronic commerce and virtual items may prompt calls for more stringent consumer protection laws that may impose additional burdens on companies such as us and developers, creators, and users conducting business through the internet and mobile devices. We anticipate that scrutiny and regulation of our industry will increase and we will be required to devote legal and other resources to addressing such regulation. For example, existing laws or new laws regarding the marketing of in-app purchases, labeling of our free experiences or regulation of currency, banking institutions, unclaimed property, or money transmission may be interpreted to cover experiences made with our technologies and the revenue and bookings that we receive from our platform. If that were to occur, we may be required to maintain certain records and seek licenses, authorizations or approvals from relevant regulators, the granting of which may be dependent on us meeting certain capital and other requirements and we may be subject to additional regulation and oversight and other operational requirements, all of which could significantly increase our operating costs. Changes in current laws or regulations or the imposition of new laws and regulations in the U.S. or elsewhere, or any withdrawal by us from certain countries because of such actions, would adversely affect our DAUs, including by giving our competitors an opportunity to penetrate geographic markets that we cannot access. As a result, our user growth, retention, and engagement may be significantly harmed.

Legal and regulatory restrictions on virtual currencies like Robux may adversely affect our platform, experiences, and virtual items on our platform, which may negatively impact our revenue, bookings, business, and reputation.

Users can purchase and use Robux to enrich their experience in various ways on our platform. For example, Robux are often used to purchase virtual clothes for users’ avatars. The regulations that apply to virtual currencies in the jurisdictions in which we operate are subject to change. It is possible that regulators in the U.S. or elsewhere may take regulatory actions in the future that restrict our ability to make Robux, allow users to acquire or use other digital goods available on our platform, or that prohibit developers or creators on our platform from earning Robux. We also make e-gift cards available for sale internationally that may be used to redeem Robux, and regulators may impose restrictions or bans on the sale of such e-gift cards. Any such restrictions or prohibitions may adversely affect our platform, business, revenue, and bookings. In the United States, the SEC, its staff, and similar state regulators have deemed certain virtual currencies to be securities subject to regulation under the federal and state securities laws. While we do not consider Robux to be a security, if Robux

 

52


Table of Contents
Index to Financial Statements

were subject to the federal or state securities laws of the U.S., we may be required to redesign our platform considerably, in a manner that would be disruptive to operations and costly to implement, which may threaten the viability of the platform. We may also be subject to enforcement or other regulatory actions by federal or state regulators, as well as private litigation, which could be costly to resolve.

The increased use of interactive entertainment offerings like ours by consumers, including younger consumers, may prompt calls for more stringent consumer protection laws and regulations that may impose additional burdens on companies such as ours making virtual currencies like Robux available for sale. Any such changes would require us to devote legal and other resources to address such regulation. For example, some existing laws regarding the regulation of currency, money transmitters and other financial institutions, and unclaimed property have been interpreted to cover virtual currencies, like Robux.

Although we have structured Robux, as well as our sales of other digital goods and e-gift cards on our platform, with applicable laws and regulations in mind, including applicable laws relating to money laundering and money transmission services, and believe we are in compliance with all applicable laws, it is possible that a relevant regulator may disagree, which could expose us to penalties. If a relevant regulator disagreed with our analysis of and compliance with applicable laws, we may be required to seek licenses, authorizations, or approvals from those regulators, which may be dependent on us meeting certain capital and other requirements and may subject us to additional regulation and oversight, all of which could significantly increase our operating costs.

Changes in current laws or regulations or the imposition of new laws and regulations in the U.S. or elsewhere that prohibit us from making Robux available on our platform would require us to make significant changes to our platform, which would materially impair our business, financial condition, and operating results.

We are subject to the Foreign Corrupt Practices Act (FCPA) and similar anti-corruption, anti-bribery, and anti-money laundering, and non-compliance with such laws can subject us to criminal or civil liability and harm our business, financial condition and results of operations.

We are subject to the FCPA, U.S. domestic bribery laws, the UK Bribery Act and other anti-corruption and anti-money laundering laws in the countries in which we conduct activities. Anti-corruption and anti-bribery laws have been enforced aggressively in recent years and are interpreted broadly to generally prohibit companies, their employees, agents, representatives, business partners and third-party intermediaries from authorizing, offering or providing, directly or indirectly, improper payments or benefits to recipients in the public or private sector in order to influence official action, direct business to any person, gain any improper advantage, or obtain or retain business. As we increase our international business, our risks under these laws may increase.

As we increase our international business, we may engage with business partners and third-party intermediaries to market our solutions and obtain necessary permits, licenses and other regulatory approvals. In addition, we or our employees, agents, representatives, business partners or third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities. We can be held liable for the corrupt or other illegal activities of our employees, agents, representatives, business partners or third-party intermediaries, even if we do not authorize such activities.

These laws also require that we keep accurate books and records and maintain internal controls and compliance procedures designed to prevent any such actions. While we have policies, training and procedures to address compliance with such laws, we cannot assure you that none of our employees,

 

53


Table of Contents
Index to Financial Statements

agents, representatives, business partners or third-party intermediaries will take actions in violation of our policies and applicable law, for which we may be ultimately held responsible.

Detecting, investigating, and resolving actual or alleged violations of anti-corruption laws can require a significant diversion of time, resources, and attention from senior management, as well as significant defense costs and other professional fees. In addition, noncompliance with anti-corruption, anti-bribery, or anti-money laundering laws could subject us to whistleblower complaints, investigations, sanctions, settlements, prosecution, enforcement actions, fines, damages, other civil or criminal penalties or injunctions against us, our officers, or our employees, disgorgement of profits, suspension or debarment from contracting with the U.S. government or other persons, reputational harm, adverse media coverage, and other collateral consequences. If any subpoenas or investigations are launched, or governmental or other sanctions are imposed, or if we do not prevail in any possible civil or criminal proceeding, our reputation, business, financial condition, prospects and results of operations and the price of our Class A common stock could be harmed.

We may incur liability as a result of content published using our platform or as a result of claims related to content generated by our developers, creators, and users, including copyright infringement, and legislation regulating content on our platform may require us to change our platform or business practices.

Our success relies in part on the ability of developers and creators to drive engagement with content that is challenging, engaging, fun, interesting, and novel. Developers and creators are responsible for clearing the rights to all of the content they upload to our service, but some developers or creators may upload content that infringes the rights of third parties in violation of our terms of service. We rely upon legal protections in various jurisdictions to protect us from claims of monetary damages for content that is uploaded to and stored on our system at the direction of our users but those protections may change or disappear over time, increasing our exposure for claims of copyright or other intellectual property infringement. If we should lose or fail to qualify for statutory or other legal protections that immunize us from monetary damages for intellectual property infringement, the damages could be significant and have a material impact on our business. While we have implemented measures to limit our exposure to claims of intellectual property infringement, intellectual property owners may allege that we failed to take appropriate measures, to prevent infringing activities on our systems, that we turned a blind eye to infringement, or that we facilitated, induced or contributed to infringement.

Even though we are not required to monitor uploaded content for copyright infringement in the U.S., we have chosen to do so through the services of a third-party audio monitoring service. We now monitor all uploaded sound recordings to exclude recordings owned or controlled by the major record labels. These record labels register certain of their content with our service provider. When audio is uploaded to our platform, we check the service provider’s system to exclude recordings owned or controlled by these record labels from being published on our platform. If our monitoring proves ineffective or we cease to rely upon a third-party monitoring service to exclude certain content from our platform, our risk of liability may increase. Certain record companies and music publishers also maintain that we are subject to liability for infringing content that was previously uploaded to our platform and have stated that they may seek damages for such infringement. We vigorously dispute the claims of infringement but could be subject to an adverse judgment in any litigation if a lawsuit were filed against us or be forced to settle any claims for an as-yet undetermined amounts. Depending on how such claims are resolved, the impact on us could be material.

The EU enacted a law that came into effect on June 6, 2019 that will require us to use best efforts in accordance with the high industry standards of professional diligence to exclude infringing content from our platform that may be uploaded by our users. Member states of the EU have until June 6, 2021

 

54


Table of Contents
Index to Financial Statements

to pass legislation to implement the law in their respective countries. To comply with this new law, we will likely have to devote significant time and resources to develop technologies to prevent infringing content from being uploaded to our platform and, to the extent infringing content makes it onto our platform, to expeditiously remove such content and implement measures to prevent re-uploads of such content. Although the EU law does not mandate monitoring, there may be no practical way for us to comply with the law’s stringent new requirements without adopting some form of robust content identification systems.

We may also be required to enter into license agreements with various licensors, including record labels, music publishers, performing rights organizations, and collective management organizations, to obtain licenses that authorize the storage and use of content uploaded by our users. We may not be able to develop technological solutions to comply with these laws on economically reasonable terms and there is no guarantee that we will be able to enter into agreements with all relevant rights holders on terms that we deem reasonable. Compliance may therefore negatively impact our financial prospects.

Risks Related to Intellectual Property

Claims by others that we infringe their proprietary technology or other rights, the activities of our users or the content of the experiences on our platform could subject us to liability and harm our business.

We have been and may in the future become subject to intellectual property disputes, and may become subject to liability, costs, and awards of damages and/or injunctive relief as a result of these disputes. Our success depends, in part, on our ability to develop and commercialize our platform without infringing, misappropriating or otherwise violating the intellectual property rights of third parties. However, there is no assurance that our technologies or platform will not be found to infringe, misappropriate or otherwise violate the intellectual property rights of third parties. We also have agreements with third parties to manufacture and distribute merchandise based on user content on our platform, and there is a possibility that such content could be found to be infringing. Lawsuits are time-consuming and expensive to resolve and they divert management’s time and attention. Further, because of the substantial amount of discovery required in connection with intellectual property litigation, we risk compromising our confidential information during this type of litigation. Companies in the internet, technology, and gaming industries own large numbers of patents, copyrights, trademarks, domain names, and trade secrets and frequently enter into litigation based on allegations of infringement, misappropriation, or other violations of intellectual property or other rights. As we face increasing competition and gain a higher profile, the possibility of intellectual property rights and other claims against us grows. Our technologies may not be able to withstand any third-party claims against their use. In addition, many companies have the capability to dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought against them.

We have a number of issued patents. We have also filed a number of additional U.S. and foreign patent applications but these applications may not successfully result in issued patents. Any patent litigation against us may involve patent holding companies or other adverse patent owners that have no relevant product revenue, and therefore, our patents and patent applications may provide little or no deterrence as we would not be able to reach meaningful damages if we assert them against such entities or individuals. If a third party is able to obtain an injunction preventing us from accessing such third-party intellectual property rights, or if we cannot license or develop alternative technology for any infringing aspect of our business, we would be forced to limit or cease access to our platform or cease business activities related to such intellectual property. In addition, we may need to settle litigation and disputes on terms that are unfavorable to us. We may be required to make substantial payments for legal fees, settlement fees, damages, royalties, or other fees in connection with a claimant securing a

 

55


Table of Contents
Index to Financial Statements

judgment against us. Although we carry general liability insurance, our insurance may not cover potential claims of this type or may not be adequate to cover all liability that may be imposed. We cannot predict the outcome of lawsuits and cannot ensure that the results of any such actions will not have an adverse effect on our business, financial condition, or results of operations. Any intellectual property claim asserted against us, or for which we are required to provide indemnification, may require us to do one or more of the following:

 

   

cease selling or using or recall products that incorporate the intellectual property rights that we allegedly infringe, misappropriate, or violate;

 

   

make substantial payments for legal fees, settlement payments, or other costs or damages;

 

   

obtain a license, which may not be available on reasonable terms or at all, to sell or use the relevant technology; or

 

   

redesign or rebrand the allegedly infringing products to avoid infringement, misappropriation, or violation, which could be costly, time-consuming, or impossible.

Furthermore, certain federal statutes in the U.S. may apply to us with respect to various activities of our users, including the Digital Millennium Copyright Act, or the DMCA, which provides immunity from monetary damages for online service providers such as us for, among other things, infringing content uploaded to our platform by our users provided we comply with certain statutory requirements, and Section 230 of the Communications Decency Act, or the CDA, which addresses blocking and screening of content on the internet and provides immunity to platforms that censor communications that they deem to be inappropriate. For example, we filter communications to eliminate speech we determine to be offensive based on our objective of creating a civil and safe place for all users. President Trump recently issued an executive order directing the FCC to redefine Section 230 of the CDA in such a way as to remove certain social media companies from its protection. If Section 230 of the CDA were so amended or repealed, we could potentially be subject to liability if we continue to censor speech, even if that speech were offensive to our users.

While we rely on a variety of statutory and common-law frameworks and defenses, including those provided by the DMCA, the CDA, the fair-use doctrine in the U.S. and the E-Commerce Directive in the EU, differences between statutes, limitations on immunity, requirements to maintain immunity, and moderation efforts in the many jurisdictions in which we operate may affect our ability to rely on these frameworks and defenses, or create uncertainty regarding liability for information or content uploaded by developers, creators, or users or otherwise contributed by third parties to our platform. As an example, Article 17 of the Directive on Copyright in the Digital Single Market was passed in the EU, which affords copyright owners some enforcement rights that may conflict with U.S. safe harbor protections afforded to us under the DMCA. Member states in the EU are in the process of determining how Article 17 will be implemented in their particular country. In addition, the EU is also reportedly reviewing the regulation of digital services, and it has been reported that the EU plans to introduce the Digital Services Act, a package of legislation intended to update the liability and safety rules for digital platforms, products, and services, which could negatively impact the scope of the limited immunity provided to us by the E-Commerce Directive. In countries in Asia and Latin America, generally there are not similar statutes to the CDA or E-Commerce Directive. The laws of countries in Asia and Latin America generally provide for direct liability if a platform is involved in creating such content or has actual knowledge of the content without taking action to take it down. Further, laws in some Asian countries also provide for primary or secondary liability, which can include criminal liability, if a platform failed to take sufficient steps to prevent such content from being uploaded. Although these and other similar legal provisions provide limited protections from liability for platforms like ours, if we are found not to be protected by the safe harbor provisions of the DMCA, CDA or other similar laws, or if we are deemed subject to laws in other countries that may not have the same protections or that may impose more onerous obligations on us, including Article 17, we may owe substantial damages and our brand, reputation, and financial results may be harmed.

 

56


Table of Contents
Index to Financial Statements

Even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business and operating results. Moreover, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our Class A common stock. We expect that the occurrence of infringement claims is likely to grow as the market for our platform grows. Accordingly, our exposure to damages resulting from infringement claims could increase, and this could further exhaust our financial and management resources.

Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement and other losses.

Our agreements with third parties generally include indemnification provisions under which we agree to indemnify these third parties for losses suffered or incurred as a result of claims of intellectual property infringement, or other liabilities relating to or arising from our software, services, platform or other contractual obligations. Large indemnity payments could harm our business, results of operations, and financial condition. Although we normally contractually limit our liability with respect to such indemnity obligations, those limitations may not be fully enforceable in all situations, and we may still incur substantial liability under those agreements. Any dispute with a third-party with respect to such obligations could have adverse effects on our relationship with such party and harm our business and results of operations.

Failure to protect or enforce our intellectual property rights or the costs involved in such enforcement would harm our business.

Our success depends to a significant degree on our ability to obtain, maintain, protect, and enforce our intellectual property rights, including our proprietary software technology, know-how, and our brand. We rely on a combination of trademarks, trade secret laws, patents, copyrights, service marks, contractual restrictions, and other intellectual property laws and confidentiality procedures to establish and protect our proprietary rights. However, the steps we take to obtain, maintain, protect, and enforce our intellectual property rights may be inadequate. We will not be able to protect our intellectual property rights if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property rights. If we fail to protect our intellectual property rights adequately, or fail to continuously innovate and advance our technology, our competitors could gain access to our proprietary technology and develop and commercialize substantially identical products, services or technologies. In addition, defending our intellectual property rights might entail significant expense and may not ultimately be successful.

Further, any patents, trademarks, or other intellectual property rights that we have or may obtain may be challenged or circumvented by others or invalidated or held unenforceable through administrative processes, including re-examination, inter partes review, interference and derivation proceedings and equivalent proceedings in foreign jurisdictions, such as opposition proceedings, or litigation. In addition, despite our pending patent applications, we cannot assure you that our patent applications will result in issued patents. Even if we continue to seek patent protection in the future, we may be unable to obtain or maintain patent protection for our technology. In addition, any patents issued from pending or future patent applications or licensed to us in the future may not provide us with competitive advantages, or may be successfully challenged by third parties. Furthermore, legal standards relating to the validity, enforceability, and scope of protection of intellectual property rights are uncertain. Despite our precautions, it may be possible for unauthorized third parties to copy our platform and use information that we regard as proprietary to create products that compete with ours. Patent, trademark, copyright, and trade secret protection may not be available to us in every country in which our products are available. The value of our intellectual property could diminish if others assert

 

57


Table of Contents
Index to Financial Statements

rights in or ownership of our trademarks and other intellectual property rights, or trademarks that are similar to our trademarks. We may be unable to successfully resolve these types of conflicts to our satisfaction. In some cases, litigation or other actions may be necessary to protect or enforce our trademarks and other intellectual property rights. In addition, the laws of some foreign countries may not be as protective of intellectual property rights as those in the U.S., and mechanisms for enforcement of intellectual property rights may be inadequate. As we expand our global activities, our exposure to unauthorized copying and use of our platform and proprietary information will likely increase. Moreover, policing unauthorized use of our technologies, trade secrets, and intellectual property may be difficult, expensive and time-consuming. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon, misappropriating or otherwise violating our intellectual property rights.

We rely, in part, on trade secrets, proprietary know-how, and other confidential information to maintain our competitive position. While we enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with other third parties, including suppliers and other partners, we cannot guarantee that we have entered into such agreements with each party that has or may have had access to our proprietary information, know-how and trade secrets or that has or may have developed intellectual property in connection with their engagement with us. Moreover, we cannot assure you that these agreements will be effective in controlling access to, distribution, use, misuse, misappropriation, reverse engineering, or disclosure of our proprietary information, know-how, and trade secrets. Further, these agreements may not prevent our competitors from independently developing technologies that are substantially equivalent or superior to our platform. These agreements may be breached, and we may not be able to detect any such breach and may not have adequate remedies for any such breach even if we know about it.

We use open source software on our platform and in connection with certain experiences on our platform, which may pose particular intellectual property risks to and could have a negative impact on our business.

We have in the past and may in the future continue to use open source software in our codebase and our platform. Some open source software licenses require users who make available open source software as part of their proprietary software to publicly disclose all or part of the source code to such proprietary software or make available any derivative works of such software free of charge, under open source licensing terms. The terms of various open source licenses have not been interpreted by courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our use of the open source software. Enforcement activity for open source licenses can also be unpredictable. Were it determined that our use was not in compliance with a particular license, we may be required to release our proprietary source code, defend claims, pay damages for breach of contract or copyright infringement, grant licenses to our patents, re-engineer our games or products, discontinue distribution in the event re-engineering cannot be accomplished on a timely basis, or take other remedial action that may divert resources away from our game development efforts, any of which could negatively impact our business. Open source compliance problems can also result in damage to reputation and challenges in recruitment or retention of engineering personnel.

Risks Related to Ownership of our Class A Common Stock and the Offering

The public trading price of our Class A common stock may be volatile, and the value of our Class A common stock may decline.

We cannot predict the prices at which our Class A common stock will trade. The initial public offering price of our Class A common stock will be determined by negotiations between us, the selling

 

58


Table of Contents
Index to Financial Statements

stockholders, and the underwriters and may not bear any relationship to the market price at which our Class A common stock will trade after this offering or to any other established criteria of the value of our business and prospects, and the market price of our Class A common stock following this offering may fluctuate substantially and may be lower than the initial public offering price. In addition, the trading price of our Class A common stock following this offering is likely to be volatile and could be subject to fluctuations in response to various factors, some of which are beyond our control. These fluctuations could cause you to lose all or part of your investment in our Class A common stock as you might be unable to sell your shares at or above the price you paid in this offering. Factors that could cause fluctuations in the trading price of our Class A common stock include the following:

 

   

price and volume fluctuations in the overall stock market from time to time;

 

   

volatility in the trading prices and trading volumes of technology stocks;

 

   

changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;

 

   

sales or expected sales of shares of our Class A common stock by us or our stockholders;

 

   

failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who follow us or our failure to meet these estimates or the expectations of investors;

 

   

any plans we may have to provide or not provide financial guidance or projections, which may increase the probability that our financial results are perceived as not in line with analysts’ expectations;

 

   

if we do provide financial guidance or projections, any changes in those projections or our failure to meet those projections;

 

   

announcements by us or our competitors of new services or platform features;

 

   

the public’s reaction to our press releases, other public announcements and filings with the SEC;

 

   

rumors and market speculation involving us or other companies in our industry;

 

   

actual or anticipated changes in our results of operations or fluctuations in our results of operations;

 

   

actual or anticipated developments in our business, our competitors’ businesses or the competitive landscape generally;

 

   

litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;

 

   

actual or perceived privacy or security breaches or other incidents;

 

   

developments or disputes concerning our intellectual property or other proprietary rights;

 

   

announced or completed acquisitions of businesses, services or technologies by us or our competitors;

 

   

new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

 

   

changes in accounting standards, policies, guidelines, interpretations, or principles;

 

   

any significant change in our management;

 

   

other events or factors, including those resulting from war, incidents of terrorism, pandemics, including the COVID-19 pandemic, wildfires or power outages or responses to these events; and

 

   

general economic conditions and slow or negative growth of our markets.

 

59


Table of Contents
Index to Financial Statements

In addition, stock markets, and the market for technology companies in particular, have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. Stock prices of many companies, including technology companies, have fluctuated in a manner often unrelated to the operating performance of those companies. In the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

No public market for our Class A common stock currently exists, and an active public trading market may not develop or be sustained following this offering.

No public market for our Class A common stock currently exists. An active public trading market for our Class A common stock may not develop following the completion of this offering or, if developed, it may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

Future sales of our Class A common stock in the public market could cause the market price of our Class A common stock to decline.

Sales of a substantial number of shares of our Class A common stock in the public market following the completion of this offering, or the perception that these sales might occur, could depress the market price of our Class A common stock and could impair our ability to raise capital through the sale of additional equity securities. Many of our existing equity holders may take steps to sell their shares or otherwise secure any unrecognized gains on those shares. We are unable to predict the timing of or the effect that such sales may have on the prevailing market price of our Class A common stock.

All of our directors and executive officers and certain holders of our Class A common stock and securities exercisable for or convertible into our Class A common stock are subject to lock-up agreements that restrict their ability to transfer such securities for a period ending on the earlier of (i) 180 days following the date of this prospectus and (ii) the opening of trading on the third trading day immediately following the public announcement of our full earnings for the second quarterly period ending after the date of this prospectus (such period, the “lock-up period”) and subject to certain exceptions, without the prior written consent of Goldman Sachs & Co. LLC; provided that beginning at the opening of trading on the third trading day after we announce full earnings for the quarter ending December 31, 2020, up to 30% of the shares of our capital stock and vested securities convertible into or exchangeable for our capital stock held by such holders may be sold, unless the Company, in its sole discretion, determines not to release such shares at that time.

If not earlier released, all of the shares of Class A common stock sold in this offering will become eligible for sale upon expiration of the lock-up period, except for any shares held by our affiliates as defined in Rule 144 under the Securities Act of 1933, as amended, or the Securities Act. Sales of a substantial number of such shares upon expiration of the lock-up and market stand-off agreements, or the perception that such sales may occur, or early release of these agreements, could cause our market price to fall or make it more difficult for you to sell your Class A common stock at a time and price that you deem appropriate. See “Shares Available for Future Sale” for a discussion of certain transfer restrictions, including market standoff agreements between us and each of our executive officers, directors, and holders of our capital stock and securities convertible into or exchangeable for our capital stock.

 

60


Table of Contents
Index to Financial Statements

In addition, after this offering, up to            shares of our Class A common stock may be issued upon exercise of outstanding stock options or upon settlement of outstanding RSUs, and will become eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules, exercise limitations, the lock-up agreements and Rule 144 and Rule 701 under the Securities Act. If these additional shares of Class A common stock are sold, or if it is perceived that they will be sold, in the public market, the trading price of our Class A common stock could decline.

After this offering, our executive officers, directors, and holders of 5% or more of our Class A common stock will collectively beneficially own approximately    % of the outstanding shares of our Class A common stock and 100% of the outstanding shares of our Class B common stock and continue to have substantial control over us, which will limit your ability to influence the outcome of important transactions, including a change in control.

Following the completion of this offering, our directors, executive officers, and other principal stockholders who own 5% or more of our outstanding Class A common stock and their affiliates will beneficially own, in the aggregate, approximately    % of the outstanding shares of our Class A common stock and 100% of the outstanding shares of our Class B common stock. As a result, these stockholders, if acting together, will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. They may also have interests that differ from yours and may vote in a way with which you disagree which may be adverse to your interests. This concentration of ownership could limit your ability to influence corporate matters and may have the effect of delaying, preventing or deterring a third party from acquiring control over our company, could deprive our stockholders of an opportunity to receive a premium for their Class A common stock as part of a sale of our company and might ultimately affect the market price of our Class A common stock.

The dual class stock structure of our common stock will have the effect of concentrating voting control in our founder, which will limit or preclude your ability to influence corporate matters, including the election of directors and the approval of any change of control transaction.

Our Class B common stock has 20 votes per share, and our Class A common stock, which is the stock being sold in this offering, has one vote per share. Immediately following the effectiveness of the registration statement of which this prospectus forms a part, our Founder and Chief Executive Officer, and largest stockholder, David Baszucki and his affiliates, will beneficially own 100% of our outstanding Class B common stock, together as a single class, representing    % of the voting power of our capital stock as of September 30, 2020. David Baszucki and his affiliates could exert substantial influence over matters requiring approval by our stockholders. This concentration of ownership may limit or preclude your ability to influence corporate matters for the foreseeable future, including the election of directors, amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval. In addition, this may prevent or discourage unsolicited acquisition proposals or offers for our capital stock that you may believe are in your best interest as one of our stockholders. We believe we are eligible for, but do not intend to take advantage of, the “controlled company” exemption to the corporate governance rules for New York Stock Exchange-listed companies. The dual class stock structure of our common stock which permits Mr. Baszucki and his affiliates to exert this influence will remain in place until the earlier of (i) the date that is specified by the affirmative vote of the holders of two-thirds of the then-outstanding shares of Class B common stock, (ii) the date on which less than 30% of the Class B common stock that was outstanding on the date of effectiveness of the registration statement of which this prospectus forms a part continues to remain outstanding, (iii) the date that is 15 years from the date of effectiveness of the registration statement of which this prospectus forms a part, (iv) nine months after the death or permanent disability of Mr. Baszucki, or (v) nine months after the date that Mr. Baszucki no longer serves as our Chief Executive Officer or as a member of our board of

 

61


Table of Contents
Index to Financial Statements

directors. Future transfers of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions. See the section titled “Description of Capital Stock” for additional information on the dual class stock structure of our common stock.

We cannot predict the effect our dual class structure may have on the trading price of our Class A common stock.

We cannot predict whether our dual class structure will result in a lower or more volatile trading price of our Class A common stock, in adverse publicity, or other adverse consequences. For example, certain index providers have announced restrictions on including companies with multiple-class share structures in certain of their indices. In July 2017, FTSE Russell announced that it plans to require new constituents of its indices to have greater than 5% of a company’s voting rights in the hands of public stockholders, and S&P Dow Jones announced that it will no longer admit companies with multiple-class share structures to certain of its indices. Affected indices include the Russell 2000 and the S&P 500, S&P MidCap 400, and S&P SmallCap 600, which together make up the S&P Composite 1500. Also in 2017, MSCI, a leading stock index provider, opened public consultations on their treatment of no-vote and multi-class structures and temporarily barred new multi-class listings from certain of its indices; however, in October 2018, MSCI announced its decision to include equity securities “with unequal voting structures” in its indices and to launch a new index that specifically includes voting rights in its eligibility criteria. Under such announced policies, the dual class structure of our common stock would make us ineligible for inclusion in certain indices and, as a result, mutual funds, exchange-traded funds, and other investment vehicles that attempt to passively track those indices would not invest in our Class A common stock. These policies are relatively new and it is unclear what effect, if any, they will have on the valuations of publicly-traded companies excluded from such indices, but it is possible that they may depress valuations as compared to similar companies that are included. Because of the dual class structure of our common stock, we will likely be excluded from certain indices, and we cannot assure you that other stock indices will not take similar actions. Given the sustained flow of investment funds into passive strategies that seek to track certain indices, exclusion from certain stock indices would likely preclude investment by many of these funds and would make our Class A common stock less attractive to other investors. As a result, the trading price of our Class A common stock could be adversely affected.

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Class A common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and have the option to utilize certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until the earlier of (i) the last day of the fiscal year (A) following the fifth anniversary of this offering, (B) in which we have total annual revenue of at least $1.07 billion, or (C) in which we are deemed to be a large accelerated filer, with at least $700 million of equity securities held by non-affiliates as of the prior June 30th, and (ii) the date on which we have issued more than $1 billion in non-convertible debt during the prior three-year period.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected

 

62


Table of Contents
Index to Financial Statements

to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. Further, we may take advantage of some of the other reduced regulatory and reporting requirements that will be available to us so long as we qualify as an “emerging growth company.”

Among other things, this means that our independent registered public accounting firm will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting so long as we qualify as an emerging growth company, which may increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected. Likewise, so long as we qualify as an emerging growth company, we may elect not to provide you with certain information, including certain financial information and certain information regarding compensation of our executive officers, that we would otherwise have been required to provide in filings we make with the SEC, which may make it more difficult for investors and securities analysts to evaluate our company. As a result, investor confidence in our company and the market price of our Class A common stock may be adversely affected. Further, we cannot predict if investors will find our Class A common stock less attractive because we will rely on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may be more volatile.

Delaware law and provisions in our amended and restated certificate of incorporation and amended and restated bylaws could make a merger, tender offer or proxy contest difficult, thereby depressing the market price of our Class A common stock.

Our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the date of the transaction in which the person became an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our amended and restated certificate of incorporation and amended and restated bylaws will contain provisions that may make the acquisition of our company more difficult, including the following:

 

   

any amendments to our amended and restated certificate of incorporation or our amended and restated bylaws will require the approval of at least 6623% of our then-outstanding voting power;

 

   

our board of directors is classified into three classes of directors with staggered three-year terms and stockholders will only be able to remove directors from office for cause;

 

   

upon the conversion of our Class A common stock and Class B common stock into a single class of common stock, our stockholders will only be able to take action at a meeting of stockholders and will not be able to take action by written consent for any matter;

 

   

our amended and restated certificate of incorporation will not provide for cumulative voting;

 

   

vacancies on our board of directors will be able to be filled only by our board of directors and not by stockholders;

 

   

a special meeting of our stockholders may only be called by the chairperson of our board of directors, our Chief Executive Officer, our President or a majority of our board of directors;

 

   

certain litigation against us can only be brought in Delaware;

 

63


Table of Contents
Index to Financial Statements
   

our amended and restated certificate of incorporation will authorize 100 million undesignated preferred stock, the terms of which may be established and shares of which may be issued without further action by our stockholders; and

 

   

advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders.

These provisions, alone or together, could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and to cause us to take other corporate actions they desire, any of which, under certain circumstances, could limit the opportunity for our stockholders to receive a premium for their shares of our Class A common stock, and could also affect the price that some investors are willing to pay for our Class A common stock.

Our amended and restated bylaws that will become effective upon the completion of this offering provide that the Court of Chancery of the State of Delaware and the federal district courts of the United States will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our amended and restated bylaws that will become effective upon the completion of this offering provide that the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, another State court in Delaware or the federal district court for the District of Delaware) is the exclusive forum for the following (except for any claim as to which such court determines that there is an indispensable party not subject to the jurisdiction of such court (and the indispensable party does not consent to the personal jurisdiction of such court within ten days following such determination), which is vested in the exclusive jurisdiction of a court or forum other than such court or for which such court does not have subject matter jurisdiction):

 

   

any derivative action or proceeding brought on behalf of us;

 

   

any action asserting a claim of breach of a fiduciary duty;

 

   

any action asserting a claim against us arising under the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws (as either may be amended from time to time); and

 

   

any action asserting a claim against us that is governed by the internal affairs doctrine.

This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act, or any other claim for which the U.S. federal courts have exclusive jurisdiction.

Our amended and restated bylaws further provide that the federal district courts of the U.S. will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act.

These exclusive-forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage lawsuits against us and our directors, officers and other employees. Any person or entity purchasing or otherwise acquiring any interest in any of our securities shall be deemed to have notice of and consented to these provisions. There is uncertainty as to whether a court would enforce such provisions, and the enforceability of similar choice of forum provisions in other companies’ charter documents has been challenged in legal proceedings. We also note that stockholders cannot waive compliance (or consent to noncompliance) with the federal securities laws and the rules and

 

64


Table of Contents
Index to Financial Statements

regulations thereunder. It is possible that a court could find these types of provisions to be inapplicable or unenforceable, and if a court were to find either exclusive-forum provision in our amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could significantly harm our business.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about us, our business or our market, or if they change their recommendation regarding our Class A common stock adversely, the market price and trading volume of our Class A common stock could decline.

The market price and trading volume for our Class A common stock will depend in part on the research and reports that securities or industry analysts publish about us, our business, our market or our competitors. The analysts’ estimates are based upon their own opinions and are often different from our estimates or expectations. If any of the analysts who cover us change their recommendation regarding our Class A common stock adversely, provide more favorable relative recommendations about our competitors or publish inaccurate or unfavorable research about our business, the price of our securities would likely decline. If few securities analysts commence coverage of us, or if one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets and demand for our securities could decrease, which could cause the price and trading volume of our Class A common stock to decline.

We will have broad discretion in the use of the net proceeds to us from this offering and may not use them effectively.

We will have broad discretion in the application of the net proceeds to us from this offering, including for any of the purposes described in the section titled “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, our ultimate use may vary substantially from our currently intended use. Investors will need to rely upon the judgment of our management with respect to the use of proceeds. Pending use, we may invest the net proceeds from this offering in investment-grade, interest-bearing securities, such as money market accounts, certificates of deposit, commercial paper and guaranteed obligations of the U.S. government that may not generate a high yield for our stockholders. If we do not use the net proceeds that we receive in this offering effectively, our business, financial condition, results of operations and prospects could be harmed, and the market price of our common stock could decline.

You will experience immediate and substantial dilution in the net tangible book value of the shares of Class A common stock you purchase in this offering.

The initial public offering price of our Class A common stock is substantially higher than the pro forma net tangible book value per share of our Class A common stock immediately after this offering. If you purchase shares of our Class A common stock in this offering, you will suffer immediate dilution of $            per share, or $            per share if the underwriters exercise their over-allotment option in full, representing the difference between our pro forma as adjusted net tangible book value per share after giving effect to the sale of Class A common stock in this offering and an assumed initial public offering price of $                per share, the midpoint of the estimated price range set forth on the cover page of this prospectus. See the section titled “Dilution.”

Additional issuances of our stock could result in significant dilution to our stockholders.

Additional issuances of our stock will result in dilution to existing holders of our capital stock. Also, to the extent outstanding additional shares subject to options and warrants to purchase our capital

 

65


Table of Contents
Index to Financial Statements

stock are authorized and exercised, there will be further dilution. The amount of dilution could be substantial depending upon the size of the issuance or exercise. As part of our business strategy, we may acquire or make investments in companies, products or technologies and issue equity securities to pay for any such acquisition or investment. Any such issuances of additional capital stock may cause stockholders to experience significant dilution of their ownership interests and the per share value of our common stock to decline.

We do not expect to pay dividends in the foreseeable future.

We have never declared nor paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not anticipate declaring or paying any dividends to holders of our capital stock in the foreseeable future. In addition, our credit agreement contains restrictions on our ability to pay dividends. Consequently, you may need to rely on sales of our Class A common stock after price appreciation, which may never occur, as the only way to realize any future gains on your investment.

 

66


Table of Contents
Index to Financial Statements

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “would,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Forward-looking statements contained in this prospectus include, but are not limited to, statements about:

 

   

our expectations regarding future financial performance, including but not limited to our expectations regarding revenue, cost of revenue, operating expenses, and our key metrics, and our ability to achieve and maintain future profitability;

 

   

our ability to successfully execute our business and growth strategy, including our potential to scale and grow our international users, developers, and creators;

 

   

the sufficiency of our cash, cash equivalents, and marketable securities to meet our liquidity needs;

 

   

the demand for our platform in general;

 

   

our ability to increase our number of users, developers, and creators;

 

   

our ability to develop enhancements to our platform, and bring them to market in a timely manner;

 

   

our beliefs about and objectives for future operations;

 

   

our ability to attract and retain employees and key personnel;

 

   

future acquisitions or investments;

 

   

the ability for developers to build, launch, scale, and monetize experiences for users;

 

   

our expectations regarding our ability to generate revenue from our users;

 

   

our ability to convert users into developers and creators;

 

   

our expectations regarding new target demographics;

 

   

the functionality and economics of our platform on mobile operating systems;

 

   

our ability to continue to provide a safe and civil online environment, particularly for children;

 

   

our ability to develop and protect our brand;

 

   

our ability to maintain the security and availability of our platform;

 

   

our business model and expectations and management of future growth, including expansion in international markets and expenditures associated with such growth;

 

   

our ability to compete with existing and new competitors;

 

   

our expectations regarding outstanding litigation and legal and regulatory matters;

 

   

our expectations regarding the effects of existing and developing laws and regulations, including with respect to privacy, data protection, online safety, and the regulation of Robux as a security, both in the U.S. and internationally, including how such laws and regulations may interfere with user, developer, and creator access to our platform and experiences;

 

   

Tencent’s ability to obtain regulatory licenses to operate in China through our joint venture;

 

67


Table of Contents
Index to Financial Statements
   

our expectations surrounding Robux as an attractive virtual currency and incentives to reinvest Robux in the platform;

 

   

the impact of foreign currency exchange rates on results of operations;

 

   

economic, seasonal, and industry trends;

 

   

the impact of the COVID-19 pandemic, including on our users’, developers’, and creators’ usage and spending habits, and any associated economic downturn on our business and results of operations;

 

   

the increased expenses associated with being a public company; and

 

   

our anticipated uses of net proceeds from this offering.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors, including those described in the section titled “Risk Factors” and elsewhere in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

Neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. Moreover, the forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

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

 

68


Table of Contents
Index to Financial Statements

INDUSTRY, MARKET AND OTHER DATA

Unless otherwise indicated, estimates and information contained in this prospectus concerning our industry and the market in which we operate, including our general expectations, market position, and market opportunity, are based on industry publications and reports generated by third-party providers, other publicly available studies and our internal sources and estimates. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. Although we are responsible for all of the disclosure contained in this prospectus and we believe the information from the industry publications and other third-party sources included in this prospectus is reliable, we have not independently verified the accuracy or completeness of the data contained in such sources. Similarly, while we believe our management estimates to be reasonable, they have not been verified by any independent sources. Forecasts and other forward-looking information with respect to industry are subject to the same qualifications and additional uncertainties regarding the other forward-looking statements in this prospectus. See the section titled “Special Note Regarding Forward Looking Statements.”

The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

69


Table of Contents
Index to Financial Statements

USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of shares of our Class A common stock in this offering will be approximately $            , based upon the assumed initial public offering price of $            per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares of our Class A common stock from us is exercised in full, we estimate that the net proceeds to us would be approximately $            , after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any of the proceeds from the sale of Class A common stock in this offering by the selling stockholders.

Each $1.00 increase or decrease in the assumed initial public offering price of $            per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease the net proceeds that we receive from this offering by approximately $            , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions payable by us. Similarly, each increase or decrease of 1.0 million in the number of shares of our Class A common stock offered by us would increase or decrease the net proceeds that we receive from this offering by approximately $            , assuming the assumed initial public offering price remains the same and after deducting the estimated underwriting discounts and commissions payable by us.

The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our Class A common stock, and enable access to the public equity markets for us and our stockholders.

We intend to use the net proceeds we receive from this offering for general corporate purposes, including working capital, operating expenses, and capital expenditures. Additionally, we may use a portion of the net proceeds we receive from this offering to acquire or invest in businesses, products, services, or technologies. We cannot specify with certainty the particular uses of the net proceeds that we will receive from this offering. Accordingly, we will have broad discretion in using these proceeds. Pending the use of proceeds from this offering as described above, we may invest the net proceeds that we receive in this offering in short-term, investment grade, interest-bearing instruments.

 

70


Table of Contents
Index to Financial Statements

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions and other factors that our board of directors may deem relevant. In addition, the terms of our credit facility contain restrictions on our ability to declare and pay cash dividends on our capital stock, even if no amounts are currently outstanding.

 

71


Table of Contents
Index to Financial Statements

CAPITALIZATION

The following table sets forth cash, cash equivalents, and marketable securities as well as our capitalization, as of September 30, 2020 as follows:

 

   

on an actual basis;

 

   

on a pro forma basis, giving effect to (i) the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 349,522,440 shares of our Class A common stock, as if such conversion had occurred on September 30, 2020; (ii) the subsequent conversion or exchange of certain of our Class A common stock held by entities affiliated with David Baszucki, our Founder, President, Chief Executive Officer and Chair of our board of directors, into Class B common stock; and (iii) the filing and effectiveness of our amended and restated certificate of incorporation; and

 

   

on a pro forma as adjusted basis, giving effect to (i) the pro forma adjustments set forth above and (ii) the sale and issuance by us of            shares of our Class A common stock in this offering, based upon the assumed initial public offering price of $            per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

72


Table of Contents
Index to Financial Statements

The pro forma as adjusted information set forth in the table below is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with our consolidated financial statements and related notes, and the sections titled “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are included elsewhere in this prospectus.

 

     As of September 30, 2020  
     Actual     Pro Forma     Pro Forma as
adjusted(1)
 
     (in thousands, except per share amounts)  

Cash, cash equivalents, and marketable securities

   $ 810,664     $ 810,664    
  

 

 

   

 

 

   

 

 

 

Convertible preferred stock, $0.0001 par value per share: 349,522,440 shares authorized, issued and outstanding, actual; no shares authorized, no shares issued or outstanding, pro forma and pro forma as adjusted.

     345,085      
  

 

 

   

 

 

   

 

 

 

Stockholders’ equity (deficit):

      

Preferred stock, $0.0001 par value per share: no shares authorized, issued and outstanding, actual; 100,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted.

      

Common stock, $0.0001 par value per share: 675,000,000 shares authorized, 185,297,520 issued and outstanding, actual; no shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted.

     19      

Class A common stock, $0.0001 par value per share: no shares authorized, issued and outstanding, actual; 675,000,000 shares authorized, 477,532,658 shares issued and outstanding, pro forma; 4,935,000,000 shares authorized,             shares issued and outstanding, pro forma as adjusted

       48    

Class B common stock, $0.0001 par value per share: no shares authorized, issued and outstanding, actual; 65,000,000 shares authorized, 57,287,302 shares issued and outstanding, pro forma; 65,000,000 shares authorized, 57,287,302 shares issued and outstanding, pro forma as adjusted

       6    

Additional paid-in capital

     169,956       515,006    

Accumulated other comprehensive income (loss)

     45       45    

Accumulated deficit

     (483,973     (483,973                   
  

 

 

   

 

 

   

 

 

 

Total Roblox Corporation stockholders’ equity (deficit)

     (313,953     31,132    

Noncontrolling interests

     21,745       21,745    
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     (292,208     52,877    
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 52,877     $ 52,877    
  

 

 

   

 

 

   

 

 

 

 

(1)

Each $1.00 increase or decrease in the assumed initial public offering price of $            per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the amount of our pro forma as adjusted cash, cash equivalents, and marketable securities, additional paid-in capital, total stockholders’ equity (deficit), and total capitalization by $            million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after

 

73


Table of Contents
Index to Financial Statements
  deducting estimated underwriting discounts and commissions payable by us. An increase or decrease of 1.0 million shares in the number of shares offered by us would increase or decrease, as applicable, the amount of our pro forma as adjusted cash, cash equivalents, and marketable securities, additional paid-in capital, total stockholders’ equity (deficit), and total capitalization by $            million, assuming the assumed initial public offering price remains the same, and after deducting estimated underwriting discounts and commissions payable by us.

If the underwriters’ option to purchase additional shares of our Class A common stock from us were exercised in full, pro forma as adjusted cash, cash equivalents, and marketable securities, additional paid-in capital, total stockholders’ equity (deficit), total capitalization, and shares outstanding as of September 30, 2020 would be $            , $            , $            , $            , and             , respectively.

The number of shares of our Class A common stock that will be outstanding after this offering is based on 477,532,658 shares of our Class A common stock outstanding as of September 30, 2020 (including shares of our convertible preferred stock on an as-converted basis) and 57,287,302 shares of Class B common stock outstanding as of September 30, 2020, and excludes the following:

 

   

101,340,752 shares of our Class A common stock issuable upon the exercise of options to purchase shares of our Class A common stock that were outstanding as of September 30, 2020, under our 2017 Plan and 2004 Plan, with a weighted average exercise price of $2.55 per share;

 

   

260,000 shares of our Class A common stock issuable upon the exercise of warrants to purchase Class A common stock outstanding as of September 30, 2020, with an exercise price of $3.41 per share;

 

   

64,000 additional shares of our Class A common stock issuable upon the exercise of one of the outstanding warrants after September 30, 2020 pursuant to the terms of such warrant, at an exercise price of $3.41 per share;

 

   

3,061,237 RSUs covering shares of our Class A common stock issuable upon satisfaction of both service-based and liquidity event-based vesting conditions that were granted after September 30, 2020, under our 2017 Plan; and

 

   

            shares of our Class A common stock reserved for future issuance under our equity compensation plans, consisting of:

 

   

            shares of our Class A common stock to be reserved for future issuance under our 2020 Plan, which will become effective in connection with the effectiveness of the registration statement of which this prospectus forms a part;

 

   

            shares of our Class A common stock reserved for future issuance under our 2017 Plan, which number of shares will be added to the shares of our Class A common stock to be reserved for future issuance under our 2020 Plan upon its effectiveness, at which time we will cease granting awards under our 2017 Plan; and

 

   

            shares of our Class A common stock to be reserved for future issuance under our ESPP, which will become effective in connection with the effectiveness of the registration statement of which this prospectus forms a part.

 

74


Table of Contents
Index to Financial Statements

DILUTION

If you invest in our Class A common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our Class A common stock and the pro forma as adjusted net tangible book value per share of our Class A common stock immediately after this offering. Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of our Class A common stock in this offering and the pro forma as adjusted net tangible book value per share of our Class A common stock and Class B common stock immediately after completion of this offering.

Net tangible book value per share is determined by dividing our total assets, less our net intangible assets, our total liabilities and the value of our total convertible preferred stock by the number of shares of our common stock outstanding. Our historical net tangible book value as of September 30, 2020 was $(294.7 million), or $(1.59) per share. Our pro forma net tangible book value as of September 30, 2020 was $50.3 million, or $0.09 per share, based on the total number of shares of our common stock outstanding as of September 30, 2020, after giving effect to the (i) the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 349,522,440 shares of our Class A common stock, as if such conversion had occurred on September 30, 2020 and (ii) the filing and effectiveness of our amended and restated certificate of incorporation.

After giving effect to the sale by us of              shares of our Class A common stock in this offering at the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of September 30, 2020 would have been $        , or $         per share. This represents an immediate increase in pro forma net tangible book value of $         per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $         per share to investors purchasing shares of our Class A common stock in this offering at the assumed initial public offering price. The following table illustrates this dilution:

 

Assumed initial public offering price per share

     $                

Historical net tangible book value per share as of September 30, 2020

   $ (1.59  

Increase per share attributable to the pro forma adjustments described above

   $ 1.68    

Pro forma net tangible book value per share as of September 30, 2020

   $ 0.09    

Increase in pro forma net tangible book value per share attributable to new investors purchasing shares of Class A common stock in this offering

    
  

 

 

   

Pro forma as adjusted net tangible book value per share immediately after this offering

    
    

 

 

 

Dilution in pro forma net tangible book value per share to new investors in this offering

     $    
    

 

 

 

Each $1.00 increase or decrease in the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our pro forma as adjusted net tangible book value per share after this offering by $        , and would increase or decrease, as applicable, dilution per share to new investors purchasing shares of our Class A common stock in this offering by $        , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 1.0 million shares

 

75


Table of Contents
Index to Financial Statements

in the number of shares of our Class A common stock offered by us would increase or decrease, as applicable, our pro forma as adjusted net tangible book value by approximately $         per share and increase or decrease, as applicable, the dilution to new investors purchasing shares of our Class A common stock in this offering by $         per share, assuming the assumed initial public offering price remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters’ option to purchase additional shares of our Class A common stock from us is exercised in full, the pro forma as adjusted net tangible book value per share of our Class A common stock, as adjusted to give effect to this offering, would be $         per share, and the dilution in pro forma net tangible book value per share to new investors purchasing shares of our Class A common stock in this offering would be $         per share.

The following table presents, as of September 30, 2020, on a pro forma as adjusted basis as described above and after giving effect to the sale of shares of common stock by us in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, the differences between the existing stockholders and the new investors purchasing shares of our Class A common stock in this offering with respect to the number of shares purchased from us, the total consideration paid or to be paid to us, which includes net proceeds received from the issuance of our Class A common stock and the average price per share paid or to be paid to us at the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration     Average
Price per
Share
 
     Number      Percent     Amount      Percent  

Existing stockholders

     477,532,658               $ 352,715,809.51               $ 0.74  

New investors

             $    
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

        100   $          100  
  

 

 

    

 

 

   

 

 

    

 

 

   

Each $1.00 increase or decrease in the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the total consideration paid by new investors and total consideration paid by all stockholders by approximately $        , assuming that the number of shares of our Class A common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 1.0 million in the number of shares of our Class A common stock offered by us would increase or decrease the total consideration paid by new investors and total consideration paid by all stockholders by approximately $        , assuming the assumed initial public offering price remains the same and after deducting the estimated underwriting discounts and commissions payable by us.

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional shares of our Class A common stock from us. If the underwriters’ option to purchase additional shares of our Class A common stock were exercised in full, our existing stockholders would own     % and our new investors would own     % of the total number of shares of our common stock outstanding upon completion of this offering.

Sales by the selling stockholders in this offering will cause the number of shares held by existing stockholders to be reduced to              shares, or      % of the total number of shares of our common

 

76


Table of Contents
Index to Financial Statements

stock outstanding following the completion of this offering, and will increase the number of shares held by new investors to              shares, or      % of the total number of shares outstanding following the completion of this offering.

The number of shares of our Class A common stock and Class B Common Stock that will be outstanding after this offering is based on 477,532,658 shares of our Class A common stock outstanding as of September 30, 2020 (including shares of our convertible preferred stock on an as-converted basis) and 57,287,302 shares of Class B common stock outstanding as of September 30, 2020, and excludes the following:

 

   

101,340,752 shares of our Class A common stock issuable upon the exercise of options to purchase shares of our Class A common stock that were outstanding as of September 30, 2020, under our 2017 Plan and 2004 Plan, with a weighted average exercise price of $2.55 per share;

 

   

260,000 shares of our Class A common stock issuable upon the exercise of warrants to purchase Class A common stock outstanding as of September 30, 2020, with an exercise price of $3.41 per share;

 

   

64,000 additional shares of our Class A common stock issuable upon the exercise of one of the outstanding warrants after September 30, 2020 pursuant to the terms of such warrant, at an exercise price of $3.41 per share;

 

   

3,061,237 RSUs covering shares of our Class A common stock issuable upon satisfaction of both service-based and liquidity event-based vesting conditions that were granted after September 30, 2020, under our 2017 Plan; and

 

   

             shares of our Class A common stock reserved for future issuance under our equity compensation plans, consisting of:

 

   

             shares of our Class A common stock to be reserved for future issuance under our 2020 Plan, which will become effective in connection with the effectiveness of the registration statement of which this prospectus forms a part;

 

   

             shares of our Class A common stock reserved for future issuance under our 2017 Plan, which number of shares will be added to the shares of our Class A common stock to be reserved for future issuance under our 2020 Plan upon its effectiveness, at which time we will cease granting awards under our 2017 Plan; and

 

   

             shares of our Class A common stock to be reserved for future issuance under our ESPP, which will become effective prior to the effectiveness of the registration statement of which this prospectus forms a part.

Our 2020 Plan and ESPP each provide for annual automatic increases in the number of shares of our Class A common stock reserved thereunder, and our 2020 Plan also provides for increases to the number of shares that may be granted thereunder based on shares under our 2017 Plan and 2004 Plan that expire, are tendered to or withheld by us for payment of an exercise price or for satisfying tax withholding obligations or are forfeited or otherwise repurchased by us, as more fully described in the section titled “Executive Compensation—Employee Benefit and Stock Plans.”

To the extent that any outstanding options to purchase our Class A common stock or warrants are exercised, or new awards are granted under our equity compensation plans, there will be further dilution to investors participating in this offering.

 

77


Table of Contents
Index to Financial Statements

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables set forth our selected consolidated financial and other data. The selected consolidated statements of operations data for the years ended December 31, 2018 and 2019 and the selected consolidated balance sheet data (except the pro forma share and net loss per share information) as of December 31, 2018 and 2019 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statements of operations data for the nine months ended September 30, 2019 and 2020 and the selected consolidated balance sheet data as of September 30, 2020 have been derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements, and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our financial position and results of operations. Our historical results are not necessarily indicative of the results that may be expected in the future, and our results for the nine months ended September 30, 2020 are not necessarily indicative of results to be expected for the full year or for any other period. You should read the following selected consolidated financial data below in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements included elsewhere in this prospectus. The selected consolidated financial data in this section are not intended to replace, and are qualified in their entirety by, the consolidated financial statements and related notes.

Consolidated Statements of Operations Data

 

     Year Ended
December 31,
    Nine Months Ended
September 30,
 
   2018     2019     2019     2020  
     (dollars in thousands, except per share data)  

Revenue

   $ 312,773     $ 488,223     $ 349,888     $ 588,675  

Cost and expenses:

        

Cost of revenue(1)

     69,896       117,227       82,330       154,912  

Developer exchange fees

     71,887       111,976       72,216       209,228  

Infrastructure and trust & safety(2)

     105,590       156,699       111,684       185,496  

Research and development(2)

     87,051       107,095       74,398       138,074  

General and administrative(2)

     34,460       41,945       28,913       64,940  

Sales and marketing(2)

     40,542       44,737       31,243       42,259  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost and expenses

     409,426       579,679       400,784       794,909  

Loss from operations

     (96,653     (91,456     (50,896     (206,234

Interest income

     3,759       6,546       5,085       1,758  

Other expense

     (4,279     (1,211     (494     (1,357
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (97,173     (86,121     (46,305     (205,833

Provision for income taxes

     3       9       8       25  
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net loss

     (97,176     (86,130     (46,313     (205,858

Net loss attributable to the noncontrolling interest(3)

     —         (146     25       (2,641
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (97,176   $ (85,984   $ (46,338   $ (203,217
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted

   $ (0.66   $ (0.53   $ (0.29   $ (1.14
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used in computing net loss per share attributable to common stockholders—basic and diluted(4)

     147,278       163,051       162,009       177,771  
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders—basic and diluted (unaudited)(4)

     $ (0.17     $ (0.39
    

 

 

     

 

 

 

Weighted-average shares used in computing pro forma net loss per share attributable to common stockholders—basic and diluted (unaudited)(4)

       489,003         522,617  
    

 

 

     

 

 

 

 

78


Table of Contents
Index to Financial Statements
     Year Ended
December 31,
    Nine Months Ended
September 30,
 
   2018     2019     2019     2020  
     (in thousands, except hours engaged and
ABPDAU data)
 

Non-GAAP and selected financial and operating data:

        

Bookings(5)

   $ 499,038     $ 694,262     $ 457,959     $ 1,240,232  

Loss from operations (GAAP)

   $ (96,653   $ (91,456   $ (50,896   $ (206,234

Depreciation and amortization (GAAP)

   $ 11,941     $ 27,664     $ 19,179     $ 30,232  

Stock based compensation (GAAP)

   $ 36,310     $ 17,634     $ 11,696     $ 58,631  

Change in deferred revenue (GAAP)

   $ 187,244     $ 208,086     $ 109,373     $ 656,071  

Change in deferred cost of revenue (GAAP)

   $ (45,747   $ (53,463   $ (28,854   $ (162,166

Net cash provided by operating activites (GAAP)

   $ 101,038     $ 99,185     $ 62,637     $ 345,336  

Free cash flow(5)

   $ 34,966     $ 14,456     $ 5,961     $ 292,623  

Daily active users (DAUs)(6)

     12,017       17,623       17,121       31,064  

Hours engaged (millions)(6)

     9,429       13,652       9,951       22,172  

Average Bookings per DAU (ABPDAU)(6)

   $ 41.53     $ 39.40     $ 26.75     $ 39.93  

 

(1)

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

(2)

Includes stock-based compensation as follows:

 

     Year Ended December 31,      Nine Months Ended September 30,  
          2018                2019                2019                2020       
     (dollars in thousands)  

Infrastructure and trust & safety

   $ 3,046      $ 2,085      $ 1,324      $ 4,960  

Research and development

     25,691        9,695        6,320        25,903  

General and administrative

     4,426        3,347        2,359        22,248  

Sales and marketing

     3,147        2,507        1,693        5,520  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 36,310      $ 17,634      $ 11,696      $ 58,631  
  

 

 

    

 

 

    

 

 

    

 

 

 

During the year ended December 31, 2018 and nine months ended September 30, 2020, we recorded compensation expense of $25.2 million and $35.2 million, respectively, 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, the Company 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 minority investor, Songhua, is recorded as a noncontrolling interest.

(4)

See Note 12 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to calculate our basic and diluted net loss per share attributable to common stockholders, basic and diluted pro forma net loss per share attributable to common stockholders and the weighted-average number of shares used in the computation of the per share amounts.

(5)

See the section titled “Selected Consolidated Financial and Other Data” for a reconciliation of each non-GAAP financial measure to the most directly comparable financial measure calculated in accordance with GAAP.

(6)

See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics—Operating Metrics” for more information.

 

     As of December 31,     As of September 30,  
     2018     2019     2020  
   (dollars in thousands)  

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 227,647     $ 301,493     $ 801,646  

Working capital

     45,188       45,261       193,348  

Total assets

     550,349       773,350       1,489,541  

Total deferred revenue

     435,787       643,872       1,299,946  

Accumulated Deficit

     (194,772     (280,756     (483,973

Total stockholders’ equity (deficit)

     (139,893     (154,669     (292,208

 

79


Table of Contents
Index to Financial Statements

Operating Metrics

We manage our business by tracking several operating metrics, including the following: daily active users, or DAUs, hours engaged, and average bookings per DAU, or ABPDAU. We believe each of these operating metrics provide useful information to investors and others in understanding and evaluating our results in the same manner as management. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics—Operating Metrics” for more information.

 

     Year Ended December 31,      Nine Months Ended September 30,  
          2018                2019                2019                2020       

Operating Metrics:

           

Daily Active Users (DAUs) (in thousands)

     12,017        17,623        17,121        31,064  

Hours Engaged (in millions)

     9,429        13,652        9,951        22,172  

Average Bookings per DAU (ABPDAU)

   $ 41.53      $ 39.40      $ 26.75      $ 39.93  

Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we believe the below non-GAAP measures are useful in evaluating our performance. We use the below 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.

 

     Year Ended December 31,      Nine Months Ended September 30,  
           2018                  2019                      2019                          2020            
     (dollars in thousands)  

Bookings

   $ 499,038      $ 694,262      $ 457,959      $ 1,240,232  

Net cash provided by operating activities (GAAP)

     101,038        99,185        62,637        345,336  

Free cash flow

     34,966        14,456        5,961        292,623  

A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures.

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 our virtual currency which we record as deferred revenue and then recognize that revenue over the estimated average lifetime of a paying user. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Revenue Recognition” for

 

80


Table of Contents
Index to Financial Statements

more information, including the methodology for the average lifetime of a paying user estimate. 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 revenue ratably over the 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:

 

     Year Ended December 31,     Nine Months Ended September 30,  
           2018                 2019                     2019                         2020            
   (dollars in thousands)  

Reconciliation of revenue to bookings:

        

Revenue

   $ 312,773     $ 488,223     $ 349,888     $ 588,675  

Add (deduct):

        

Change in deferred revenue

     187,244       208,086       109,373       656,071  

Other

     (979     (2,047     (1,302     (4,514
  

 

 

   

 

 

   

 

 

   

 

 

 

Bookings

   $ 499,038     $ 694,262     $ 457,959     $ 1,240,232  
  

 

 

   

 

 

   

 

 

   

 

 

 

We also break out bookings by geography to understand our performance in certain markets. Bookings by geography is apportioned to each region based on our determination of the geographic location in which the user made a purchase.

 

    Year Ended December 31,     Nine Months Ended September 30,  
    2018     2019     2019     2020  
    Amount     Percentage     Amount     Percentage     Amount     Percentage     Amount     Percentage  
    (in thousands, except percentages)  

Bookings:

               

United States and Canada

  $ 362,439       73   $ 483,165       70   $ 321,061       70   $ 847,032       68

Europe

    78,320       16       122,883       18       79,898       17       235,232       19  

Asia-Pacific, including Australia and New Zealand

    35,279       7       55,131       8       35,720       8       92,475       8  

Rest of the world

    23,000       4       33,083       4       21,280       5       65,493       5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 499,038       100   $ 694,262       100   $ 457,959       100   $ 1,240,232       100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free Cash Flow

We define free cash flow as net cash provided by operating activities less purchases of property and equipment.

We believe that free cash flow is a useful indicator of liquidity that provides information to management and investors about the amount of cash generated from our core operations that, after

 

81


Table of Contents
Index to Financial Statements

the purchases of property and equipment, can be used for strategic initiatives, including investing in our business, making strategic acquisitions, and strengthening our balance sheet.

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:

 

     Year Ended December 31,     Nine Months Ended September 30,  
           2018                 2019                 2019                 2020        
     (dollars in thousands)  

Reconciliation of net cash from operating activities to free cash flow:

        

Net cash provided by operating activities

   $ 101,038     $ 99,185     $ 62,637     $ 345,336  

Add (deduct):

        

Acquisition of property and equipment

     (66,072     (84,729     (56,676     (52,713
  

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow

   $ 34,966     $ 14,456     $ 5,961     $ 292,623  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

82


Table of Contents
Index to Financial Statements

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with the section titled “Selected Consolidated Financial and Other Data” and related notes and other financial information appearing elsewhere in this prospectus. This discussion and analysis and other parts of this prospectus 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” and “Special Note Regarding Forward-Looking Statements” included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected for any periods in the future.

Overview

The story of Roblox began in 1989 when our founders, David Baszucki and Erik Cassel, programmed a 2D simulated physics lab called Interactive Physics, which would later go on to influence our approach to building the groundwork for Roblox. Students across the world used Interactive Physics to see how two cars would crash, or how they could build destructible houses. In starting Roblox in 2004, we wanted to replicate the inspiration of imagination and creativity we saw in Interactive Physics on a much grander scale by ushering in a new category of human interaction that did not exist at the time.

An average of 36.2 million 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 nearly 7 million active 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.

Some refer to our category as the metaverse, a term often used to describe the concept of persistent, shared, 3D virtual spaces in a virtual universe. The idea of a metaverse has been written about by futurists and science fiction authors for over 30 years. With the advent of increasingly powerful consumer computing devices, cloud computing, and high bandwidth internet connections, the concept of the metaverse is materializing.

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 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 build a human co-experience platform that enables shared experiences among billions of users. 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.

 

83


Table of Contents
Index to Financial Statements

Since our inception in 2004, we have had a steadfast approach to innovation and a long-term focus that has allowed us to achieve strong growth and the following product development and company milestones.

Product Development and Company Milestones

 

 

LOGO

Our revenue grew 139% to $312.8 million in the year ended December 31, 2018 and grew 56% to $488.2 million in the year ended December 31, 2019. Our revenue grew 61% to $349.9 million in the nine months ended September 30, 2019, and grew 68% to $588.7 million for the nine months ended September 30, 2020.

Our bookings grew 62% to $499.0 million for the year ended December 31, 2018 and grew 39% to $694.3 million for the year ended December 31, 2019. Our bookings grew 28% to $458.0 million for the nine months ended September 30, 2019, and grew 171% to $1,240.2 million for the nine months ended September 30, 2020.

We had net losses of $97.2 million and $86.0 million for the years ended December 31, 2018 and 2019, respectively, and net losses of $46.3 million and $203.2 million for the nine months ended September 30, 2019 and September 30, 2020. Cash provided by operations was $101.0 million and $99.2 million for the years ended December 31, 2018 and 2019, respectively, and $62.6 million and $345.3 million for the nine months ended September 30, 2019 and September 30, 2020, respectively.

Our free cash flow was $35.0 million and $14.5 million for the years ended December 31, 2018 and 2019, respectively, and $6.0 million and $292.6 million for the nine months ended September 30, 2019 and September 30, 2020.

Our Business Model

When users sign up for Roblox, they can create an avatar and explore the vast majority of our experiences for free, although the business model for any given experience is ultimately up to its developer. Most free experiences allow users to spend Robux by purchasing experience-specific enhancements. Users can also use Robux to purchase items such as clothing accessories and simulated gestures, or emotes, from our Avatar Marketplace. Roblox retains a portion of every Robux transaction and distributes the rest to developers and creators. All Robux earned by developers and

 

84


Table of Contents
Index to Financial Statements

creators are deposited into their virtual accounts, and can be converted into U.S. dollars at an exchange rate of 1 Robux to $0.0035 as of September 30, 2020, which is determined by Roblox and is subject to change in its sole discretion.

How users purchase Robux

Users can purchase Robux in two ways, as one-time purchases or via Roblox Premium, a subscription service that is billed monthly and includes discounted Robux, access to exclusive in-experience benefits, exclusive and discounted marketplace items, and the ability to buy, sell and trade certain Avatar items. Roblox accepts payments through app stores, credit cards, and prepaid cards. The average price for a Robux for the nine months ended September 30, 2020 was $0.01.

For one-time purchases, users can purchase our virtual currency through various common channels including Apple App Store, Google Play Store, credit cards, prepaid cards, Microsoft app store, PayPal, and others. For the twelve months ended December 31, 2019, 30% and 18% of our revenue were generated on Apple App Store and Google Play Store, respectively. For the nine months ended September 30, 2020, 34% and 18% of our revenue were generated on Apple App Store and Google Play Store, respectively. For operations through both the Apple App Store and Google Play Store, we pay 30% of any money paid by users to purchase Robux to Apple or Google, as applicable.

How developers and creators earn Robux

We currently offer developers and creators four mechanisms to earn Robux:

 

   

sale of access to their experiences and enhancements in their experiences;

 

   

engagement-based payouts, which reward developers for the amount of time that Premium subscribers spend in their experiences;

 

   

sale of content and tools between developers; and

 

   

sale of items to users through the Avatar Marketplace.

As users purchase and subsequently spend Robux on Roblox, developers receive 70% of the Robux spent within their experiences and 70% of the Robux spent for items that appear in the Studio Marketplace. Creators receive 30% of the Robux spent for their items that appear in the Avatar Marketplace.

Earned Robux are deposited into the virtual accounts of the developers and creators, who can convert Robux into U.S. dollars at an exchange rate of 1 Robux to $0.0035 as of September 30, 2020 through our Developer Exchange Program. In the nine months ended September 30, 2020, developers and creators earned $209.2 million, up from $72.2 million in the nine months ended September 30, 2019.

Our developers and creators do not always cash out their Robux to real-world currency. Some choose to reinvest their Robux into developer tools from the Studio Marketplace, promoting their experiences through our internal ad network, or spend the Robux as any other user would, which investments or purchases are valued at the same exchange rate.

Our business model focus is on investment and growth of the Roblox Platform, which we believe will enable the developer and creator community to produce better and more engaging content, which in turn will drive more users to our platform over time.

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

 

85


Table of Contents
Index to Financial Statements

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. The vast majority of our costs fall into the aforementioned areas and are intentionally aligned with our goals.

To provide a deeper understanding and scale of our areas of investment and associated costs, we are providing further descriptions of the four cost areas. We also reference the magnitude of these costs in relation to bookings in the given periods, as this measurement will allow us to understand the unit economics of our sales activity without the effect of non-cash adjustments which are primarily due to the way we recognize revenue. This overview is intended for illustrative purposes. We encourage you to read our consolidated financial statements that are included in this prospectus.

Payment processing and other fees.    Payment processing and other fees primarily include payment processing costs charged by the primary distribution channels for our virtual currency. This is a large expense item for Roblox and we intend to use nearly all of any efficiencies earned in this area over time to increase earnings for our developers and creators. For the nine months ended September 30, 2019, payment processing and other fees were $111.2 million, or 24% of bookings, and grew by 185% to $317.1 million, or 26% of bookings, in the nine months ended September 30, 2020.

Compensation and benefits.    Compensation and benefits are costs related to salaries and benefits, exclusive of stock-based compensation for purposes of the information provided in this paragraph, provided to our employees as well as our agents working on our trust & safety teams. As of September 30, 2020 we employed over 830 full time employees, of which approximately 80% were engineering and product personnel, a ratio that we have maintained over time and intend to continue to maintain. In addition, we had over 1,700 trust & safety agents across the globe who are not employees, but whose related costs are included here. For the nine months ended September 30, 2019, compensation and benefits costs were $112.0 million, or 24% of bookings, and grew by 57% to $176.1 million, but declined to 14% of bookings in the nine months ended September 30, 2020.

Developer earnings.    Developer earnings are costs related to developers’ and creators’ accumulation of earned Robux and the subsequent exchange of those Robux for real-world currency. We intend to use future cost efficiencies earned in other areas of our business to increase earnings for our developers and creators thereby increasing developer earnings over time. For the nine months ended September 30, 2019, developer earnings were $70.9 million, or 15% of bookings, and grew by 190% to $205.4 million, or 17% of bookings, in the nine months ended September 30, 2020.

Direct infrastructure.    Direct infrastructure costs are those associated with delivering our platform to users, exclusive of depreciation. We operate data centers and online points of presence, or PoPs, around the world which include over 18,000 servers as of September 30, 2020. The costs to run this infrastructure include: rent and other facilities-related expenses for our co-located data centers and PoPs; network and bandwidth-related expenses; and payments to third-party service providers for cloud computing or other hosting and data storage. By building and maintaining our own technical infrastructure, as opposed to fully relying on third-party providers, we believe we are more reliable, more performant, and more cost effective. For the nine months ended September 30, 2019, direct infrastructure costs were $58.2 million, or 13% of bookings, and grew by 66% to $96.8 million, or 8% of bookings, in the nine months ended September 30, 2020.

The chart below is a visual representation of the cost data described above. We have also added an “Other” expense category which represents marketing, real estate, and other overhead costs. Each expense item, exclusive of depreciation and stock-based compensation, is shown as a percentage of bookings in the associated period of time. The remainder of bookings after subtracting the expenses

 

86


Table of Contents
Index to Financial Statements

above is a calculation that management monitors along with the timing and magnitude of capital expenditures in order to forecast our free cash flow.

Top Investments and Cost Areas

(% of Bookings)

 

LOGO

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.

Operating Metrics

We manage our business by tracking several operating metrics, including: daily active users, or DAUs, hours engaged, and average bookings per DAU, or ABPDAU. As a management team, we believe each of these operating metrics provides useful information to investors and others.

These metrics are determined by using internal company data and systems that track user account and session activity. We believe that these metrics are reasonable estimates of our user base for the applicable period of measurement, and that the methodologies we employ and update from time-to-time to create these metrics are reasonable bases to identify trends in user behavior. However, the accuracy of these metrics may be affected by certain factors relating to user activity and systems and our ability to identify and detect attempts to replicate legitimate user activity, often referred to as

 

87


Table of Contents
Index to Financial Statements

botting. See the sections titled “Risk Factors—Our user metrics and other estimates are subject to inherent challenges in measurement, and real or perceived inaccuracies in those metrics may significantly harm and negatively affect our reputation and our business” and “Risk Factors—Some developers, creators, and users on our platform may make unauthorized, fraudulent, or illegal use of Robux and other digital goods on our platform, including through unauthorized third-party websites or “cheating” programs.”

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. If a registered, logged in user visits Roblox more than once within a 24-hour period that spans two calendar days, that user is counted as a DAU only for the first calendar day. We believe this method better reflects global engagement on the platform compared to a method based purely on a calendar-day cutoff. DAUs for a specified period is the average of the DAUs for each day during that period, so 30 days, for example, in the month of September.

Other companies, including companies in our industry, may calculate DAUs differently.

We track DAUs as an indicator of the size of the audience engaged on our platform. We also break out DAUs by geographic region to help us understand the global engagement on our platform.

The geographic location data collected is based on the IP address associated with the account when an account is initially registered on Roblox. The IP address may not always accurately reflect a user’s actual location at the time they engaged with our platform. We do not collect the geographic location of our Xbox users, which are grouped into Rest of World DAUs for the purposes of our reporting.

Because DAUs measure account activity and an individual user may actively use our platform within a particular day on multiple accounts for which that individual registered, our DAU metric is not a measure of unique individuals accessing Roblox. Additionally, if undetected, fraud and unauthorized access to our platform may contribute, from time to time, to an overstatement of DAUs. In many cases, fraudulent accounts are created by bots to inflate user activity for a particular developer’s content on our platform, thus making the developer’s experience or other content appear more popular than it really is. We strive to detect and minimize fraud and unauthorized access to our platform. See the sections titled “Risk Factors—Our user metrics and other estimates are subject to inherent challenges in measurement, and real or perceived inaccuracies in those metrics may significantly harm and negatively affect our reputation and our business” and “Risk Factors—Some developers, creators, and users on our platform may make unauthorized, fraudulent, or illegal use of Robux and other digital goods on our platform, including through unauthorized third-party websites or “cheating” programs.”

 

88


Table of Contents
Index to Financial Statements

 

LOGO

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. Users are able to personalize the size and body shape of their avatars as well as equip their avatars with items acquired from the Avatar Marketplace, a marketplace that allows users to acquire items such as clothing, gear, simulated gestures, or emotes, and other accessories.

We calculate total hours engaged as the aggregate of user session lengths in a given period. We determine this length of time using internal company systems that track user activity on our platform, and aggregate discrete activities into a user session.

 

89


Table of Contents
Index to Financial Statements

We believe that the growth in hours engaged on our platform reflects the increasing value of our platform. As we continue to invest in improving the Roblox Platform, and as the developers expand the number and quality of immersive experiences as well as other features on Roblox, we believe we will attract more users who spend more time and more Robux on our platform.

 

 

LOGO

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 as more fully described in the section titled “Our Business Model.” We experience seasonality in our business with more activity in the fourth quarter of each year as described in the section titled “Seasonality”.

 

 

LOGO

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. See the section titled “Selected Consolidated Financial and Other Data—Non-GAAP Financial Measures” for more information, including the limitations of such measures and a reconciliation of each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP.

 

90


Table of Contents
Index to Financial Statements

Bookings

We define bookings as revenue plus the change in deferred revenue during the period and other non-cash adjustments. The change in deferred revenue constitutes the vast majority of the reconciling difference from revenue to bookings. Bookings is equal to the amount of virtual currency purchased by users in a given period of time. We use bookings to measure and monitor our business as we believe it enables an analysis of our performance based on the timing of actual transactions with our users and provides a more current indication of trends in our operating results than revenue alone.

 

     Year Ended December 31,      Nine Months Ended September 30,  
           2018                  2019                    2019                        2020            
     (dollars in thousands)  

Bookings

   $ 499,038      $ 694,262      $ 457,959      $ 1,240,232  

Free cash flow

We define free cash flow as net cash provided by operating activities less purchases of property and equipment. 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 and equipment, can be used for strategic initiatives.

 

     Year Ended December 31,      Nine Months Ended September 30,  
           2018                  2019                  2019                  2020        
     (dollars in thousands)  

Free cash flow

   $ 34,966      $ 14,456      $ 5,961      $ 292,623  

Key Factors Affecting Our Performance

We believe that our financial performance depends upon many key factors, including those described below.

Growth and engagement of our user base

We have experienced significant growth in our number of users over the last several years. In the nine months ended September 30, 2020, we had 31.1 million DAUs compared to 17.6 million and 12.0 million in the years ended December 31, 2019 and 2018, respectively.

Our ability to grow our user base is dependent on our ability to attract and engage users on our platform. We rely on two mutually reinforcing network effects, content and social, to drive our growth. High-quality content on the platform built by our developer community attracts more users to the platform, which in turn makes Roblox more attractive to developers. The social aspects of the platform drive organic growth as our users typically play with friends, inspiring them to invite their friends, who in turn, invite their friends. The more friends users have on the platform, the more valuable and engaging the platform becomes. This fuels developers to build higher quality experiences, driving more users to our platform.

We believe that our business performance is in part dependent on increasing our penetration and engagement across all user demographics, in particular those over the age of 13. This demographic has a higher propensity to spend on content, and our ability to increase penetration in, and user contribution from, this demographic will affect our ability to grow revenue.

 

91


Table of Contents
Index to Financial Statements

 

Daily Active users by Age Group (In Millions)    Hours Engaged by Age Group (In Millions)

 

 

LOGO              LOGO

We believe that our business performance is also dependent on our ability to expand our user base internationally. For the nine months ended September 30, 2020, approximately 67% of our DAUs were outside of the U.S. and Canada region, and our non-U.S. and Canada user base is growing faster than our U.S. and Canada user base. We see significantly more potential to grow our user base in non-U.S. and Canada regions, particularly in the Europe, Middle East and Africa region, where we have recently experienced significant growth in Germany and France, and the Asia-Pacific region, where we have recently experienced significant growth in South Korea. Our ability to increase our brand penetration in these markets will depend upon a number of factors, including our ability to translate our platform and navigate regulatory environments. In China, we believe we are uniquely positioned to grow our penetration in the market, but our performance will be dependent on Tencent Holdings Ltd.’s, or Tencent’s, success in obtaining a license to operate and publish Luobulesi, the name of the Roblox Platform in China.

 

Daily Active users by Region (In Millions)    Hours Engaged by Region (In Millions)

 

 

LOGO              LOGO

While we believe we have a significant opportunity to grow our user base, we anticipate that our user growth rate will slow over time as the size of our user base increases. To the extent our user growth or user growth rate slows, our revenue growth will become increasingly dependent on our ability to increase levels of user monetization, as measured by ABPDAU. ABPDAU monetization is dependent on the degree of user engagement, as measured by hours engaged. As such we believe our business performance will be driven in part by our ability to increase hours engaged per DAU on our platform.

Growth in monetization

We monetize our users through the sale of Robux. Our ability to grow our revenue depends in large part on our ability to increase ABPDAU. Beyond user growth and increased user engagement

 

92


Table of Contents
Index to Financial Statements

there are a number of other factors that we believe can help us grow ABPDAU, including increased payer conversion and the degree to which users choose to pay for more features and experiences on our platform.

Despite approximately 67% of our DAUs being outside the U.S. and Canada for the nine months ended September 30, 2020, our monetization is largely concentrated in users in those countries. For the nine months ended September 30, 2020, 68% of bookings were from the U.S. and Canada. Our ability to drive increased ABPDAU is in part dependent on our ability to increase payer conversion in non-U.S. and Canada regions. We believe this will depend on a number of factors including our ability to localize content and ensure the availability of payment options to non-U.S. and Canada users.

As we continue to expand our international operations, we become more exposed to the effects of fluctuations in currency exchange rates. We generally collect revenue from our international markets in the local currency. While we periodically adjust the price of Robux to account for the relative value of local currency to the U.S. dollar such adjustments are not immediate, nor do they typically track the underlying currency fluctuations. As a result, rapid appreciation of the U.S. dollar against these foreign currencies can harm our reported results and cause the revenue derived from our foreign users to decrease. In addition, even if we do adjust the cost of our Robux in foreign markets to track appreciation in the U.S. dollar such appreciation could increase the costs of purchasing Robux to our users outside of the U.S., adversely affecting our business, results of operations and financial condition.

The degree to which our users choose to pay for features or spend Robux in experiences is driven by the quality of the content on our platform. In addition to the core monetization of the platform, we recently launched an engagement-based reward program, Premium Payouts, in tandem with our subscription service, Roblox Premium. Premium Payouts rewards Robux to developers based on the number of in-experience hours spent on their experiences by Roblox Premium subscribers. These Premium Payouts rewards are in addition to any Robux spent directly by users in developers’ experiences. We believe that this initiative will incentivize developers to focus on creating content that maximizes engagement to a greater degree. We believe that growth of higher engagement content will positively affect the number of hours engaged on Roblox per user, resulting in a positive impact on Robux spend and ABPDAU.

As users continue to encounter new experiences, they remain engaged on the Roblox platform and, consequently, monetize over longer periods of time. The charts below illustrate our ability to monetize users over such extended periods by presenting the cumulative cohorted bookings per signup since 2016, across various regions. Each signup cohort includes all users that joined Roblox in a given quarter. The East Asia region consists primarily of South Korea and Japan. The West Europe region consists primarily of Germany, Spain, France, Italy, Belgium, and Portugal.

 

93


Table of Contents
Index to Financial Statements

User Cohort Analysis

 

 

LOGO

We also intend to explore other opportunities to increase ABPDAU such as immersive brand advertising for our platform. The degree to which these opportunities may increase ABPDAU are dependent on the degree to which they are implemented in a manner that is seamless and non-disruptive to our user experience.

Continued innovation of our platform

We are focused on innovation and technology leadership in order to maintain our competitive advantage. We believe we have built a unique platform for our users, developers, and creators, and our ability to maintain and increase the size and engagement of our users will depend, in part, on our ability to improve the existing features, services, and functionality on the platform. We have historically made product decisions based on long-term vision rather than short-term benefits and believe that our deliberate and systematic approach has enabled us to scale to the success that we see today.

For our developers and creators, we must regularly update and enrich Roblox Studio with tools and features to meet evolving developer behavior needs and to deliver a superior creating experience. In addition, it is important that we constantly update and improve the Roblox Cloud.

For our users, we invest heavily in developing new features and products to support and enhance user experience on our platform worldwide. Further, our users’ continued engagement is in large part dependent on the safe and civil environment offered by our platform. Our ability to attract and engage users is dependent on our ability to maintain technological leadership in safety and civility features on our platform.

Our ability to attract talent

The success of Roblox depends on our ability to hire and retain great talent, in particular technical talent. As of September 30, 2020, we employed over 830 full time employees, which represented an increase of over 275 full time employees from September 30, 2019. Approximately 79% of those employees were engineers and product professionals. In addition, as of September 30, 2020, we had over 1,700 trust & safety agents across the globe. In order to continue to evolve and grow the Roblox Platform, we must continue to invest heavily in attracting and retaining key talent, especially those focused on engineering and product, and so we expect to maintain or grow the ratio of technical talent

 

94


Table of Contents
Index to Financial Statements

to overall employees. To support and grow our business, we intend to increase our headcount for the foreseeable future to support and grow our business.

Investment in infrastructure

We intend to increase the capacity and enhance the capability and reliability of our infrastructure. We have made and will continue to make significant investments in our technical infrastructure globally to ensure that our growing user and developer base can access and can use the Roblox Platform rapidly, reliably, and effectively. In 2015, we began serving our users out of our co-located data center in Elk Grove Village, Illinois to optimize reliability and performance while reducing server expenses compared to traditional leased server and data centers. Since then, we have broadened our infrastructure strategy across the globe to incorporate multiple data centers and regional PoPs that we lease and operate.

We expect the investments and expenses associated with our infrastructure to continue to grow to support current and potential expansion of our user and developer base. These investments include costs to third-party service providers, such as cloud computing or other hosting and data storage, rent and facilities-related costs 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. We expect our reliance on third-party service providers to decrease over time as we build out our infrastructure.

Seasonality

We experience seasonality in monetization on our platform. Historically, we generate higher levels of bookings in the fourth quarter of the year due in large part to the end-of-year holiday season. In the years ended December 31, 2019 and 2018, the fourth quarter accounted for 34% and 29% of annual bookings, respectively. The significant user and monetization growth, along with COVID-19 impact, have partially masked these trends in recent historical periods, particularly in 2020, and the seasonal impacts may be more pronounced in the future or different altogether.

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 have and may continue to experience an increase in user and bookings growth following the implementation of shelter-in-place orders to mitigate the COVID-19 pandemic. We believe that the COVID-19 pandemic could accelerate adoption of our platform, which we expect will generate additional opportunities for us in the future. However, this increase in engagement and monetization may be temporary and will likely moderate over time as shelter-in-place orders and other related measures and community practices evolve. Further, as a result of global economic conditions, users may reduce their discretionary spending on Robux, may not renew their subscriptions or may otherwise reduce 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 have required or are requiring 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.

 

95


Table of Contents
Index to Financial Statements

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 recent global COVID-19 pandemic has significantly affected our business and operations.”

Components of Results of Operations

Revenue

We generate substantially all of our revenue through the sales of Robux to users. Users can spend Robux to purchase access to experiences, enhancements in experiences, and items in the Avatar Marketplace. Robux are available as one-time purchases or monthly subscriptions. We recognize revenue ratably over the estimated average lifetime of a paying user. 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 years ending December 31, 2018 and 2019, and for the nine months ended September 30, 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 developer exchange fees.

Personnel costs include salaries, benefits, travel-related expenses, and stock-based compensation for each expense category, with the exception of developer exchange fees.

During the year ended December 31, 2018 and nine months ended September 30, 2020, we recorded compensation expense of $25.2 million and $35.2 million, respectively, 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

 

96


Table of Contents
Index to Financial Statements

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.

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. As of September 30, 2020, we have data centers and PoPs around the world with over 18,000 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. As of September 30, 2020, we have a global customer service team with over 1,700 trust & safety agents supporting users.

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 over time as our business grows, 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

 

97


Table of Contents
Index to Financial Statements

engaged in maintaining and enhancing the functionality of the platform. We plan to increase the dollar amount of research and development expenses for the foreseeable future primarily for increased headcount to develop new features, functionality, and innovation of our product. However, we expect research and development expenses to decrease as a percentage of bookings as our business grows, although the percentage may fluctuate from period to period depending on fluctuations in the timing and extent of our research and development expenses and business seasonality.

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 the dollar amount of general and administrative expenses 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. However, we expect general and administrative expenses to decrease as a percentage of bookings as our business grows, although the percentage may fluctuate from period to period depending on fluctuations in the timing and extent of our general and administrative expenses and business seasonality.

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 dollar amount of sales and marketing expenses for the foreseeable future due primarily to increased headcount to support our developer relations and brand partnership teams. However, we expect sales and marketing expenses to decrease as a percentage of bookings as our business grows, although the percentage may fluctuate from period to period depending on fluctuations in the timing and extent of our sales and marketing expenses and business seasonality.

Interest Income

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

Other Expense

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 September 30, 2020, there were no outstanding convertible preferred stock warrants. Other expense also includes a minimal amount of foreign currency exchange gains and losses.

Provision for Income Taxes

Provision for 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 our federal and state

 

98


Table of Contents
Index to Financial Statements

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, 2019, we had federal and state net operating loss carryforwards of $162.0 million and $54.3 million, respectively. If not utilized, these will begin to expire in 2024 and 2027, respectively. 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 $162.0 million of our federal net operating loss, $88.8 million is carried forward indefinitely but is limited to 80% of taxable income.

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:

 

     Year Ended December 31,     Nine Months Ended September 30,  
           2018                 2019                 2019                 2020        
     (dollars in thousands, except per share data)  

Revenue

   $ 312,773     $ 488,223     $ 349,888     $ 588,675  

Cost and expenses:

        

Cost of revenue(1)

     69,896       117,227       82,330       154,912  

Developer exchange fees

     71,887       111,976       72,216       209,228  

Infrastructure and trust & safety(2)

     105,590       156,699       111,684       185,496  

Research and development(2)

     87,051       107,095       74,398       138,074  

General and administrative(2)

     34,460       41,945       28,913       64,940  

Sales and marketing(2)

     40,542       44,737       31,243       42,259  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost and expenses

     409,426       579,679       400,784       794,909  

Loss from operations

     (96,653     (91,456     (50,896     (206,234

Interest income

     3,759       6,546       5,085       1,758  

Other expense

     (4,279     (1,211     (494     (1,357
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (97,173     (86,121     (46,305     (205,833

Provision for income taxes

     3       9       8       25  
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net loss

     (97,176     (86,130     (46,313     (205,858

Net loss attributable to the noncontrolling interest(3)

     —         (146     25       (2,641
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (97,176   $ (85,984   $ (46,338   $ (203,217
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(4)

   $ (0.66   $ (0.53   $ (0.29   $ (1.14
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used in computing net loss per share attributable to common stockholders—basic and diluted(4)

     147,278       163,051       162,009       177,771  
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders—basic and diluted (unaudited)(4)

     $ (0.17     $ (0.39
    

 

 

     

 

 

 

Weighted-average shares used in computing pro forma net loss per share attributable to common stockholders—basic and diluted (unaudited)(4)

       489,003         522,617  
    

 

 

     

 

 

 

 

99


Table of Contents
Index to Financial Statements

 

(1)

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

 

(2)

Includes stock-based compensation as follows:

 

     Year Ended
December 31,
     Nine Months Ended
September 30,
 
     2018      2019      2019      2020  
    

(unaudited)

 

Infrastructure and trust & safety

   $ 3,046      $ 2,085      $ 1,324      $ 4,960  

Research and development

     25,691        9,695        6,320        25,903  

General and administrative

     4,426        3,347        2,359        22,248  

Sales and marketing

     3,147        2,507        1,693        5,520  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 36,310      $ 17,634      $ 11,696      $ 58,631  
  

 

 

    

 

 

    

 

 

    

 

 

 

During the year ended December 31, 2018 and nine months ended September 30, 2020, we recorded compensation expense of $25.2 million and $35.2 million, respectively, 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 12 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to calculate our basic and diluted net loss per share, basic and diluted pro forma net loss per share and the weighted-average number of shares used in the computation of the per share amounts.

 

100


Table of Contents
Index to Financial Statements

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.

 

     Year Ended December 31,     Nine Months Ended September 30,  
           2018                 2019                 2019                 2020        

Revenue

     100     100     100     100

Cost and expenses:

        

Cost of revenue

     22       24       24       26  

Developer exchange fees

     23       23       21       36  

Infrastructure and trust & safety

     34       32       32       32  

Research and development

     28       22       21       23  

General and administrative

     11       9       8       11  

Sales and marketing

     13       9       9       7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost and expenses

     131       119       115       135  

Loss from operations

     (31     (19     (15     (35

Interest income

     1       1       1       —    

Other expense

     (1     —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (31     (18     (14     (35

Provision for income taxes

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net loss

     (31     (18     (14     (35

Net loss attributable to the noncontrolling interest

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

     (31 %)      (18 %)      (14 %)      (35 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of the nine months ended September 30, 2019 and 2020

Revenue

 

     Nine Months Ended September 30,         
           2019                  2020            $ Change      % Change  
     (dollars in thousands)         

Revenue

   $ 349,888      $ 588,675      $ 238,787        68

Revenue increased $238.8 million, or 68%, for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019. The increase is primarily due to expansion within our daily payers, which is measured as the average number of unique payers for each day during the period. Our number of daily payers increased from roughly 168,000 in the nine months ended September 30, 2019 to roughly 455,000 for the nine months ended September 30, 2020. Bookings per daily payer for both periods remained relatively consistent but may not be reflected in the revenue recognized per daily payer as a substantial portion of revenue recognized each period is from bookings from prior periods. The payer expansion followed existing growth trends, but also included the impact of COVID-19 and shelter-in-place orders in the nine months ended September 30, 2020.

Cost of revenue

 

     Nine Months Ended September 30,         
           2019                  2020            $ Change      % Change  
     (dollars in thousands)         

Cost of revenue

   $ 82,330      $ 154,912      $ 72,582        88

 

101


Table of Contents
Index to Financial Statements

Cost of revenue increased $72.6 million, or 88%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The increase is primarily due to an increase of $61.4 million in payment processing fees primarily driven by the growth in our bookings.

Developer exchange fees

 

     Nine Months Ended September 30,         
           2019                  2020            $ Change      % Change  
     (dollars in thousands)         

Developer exchange fees

   $ 72,216      $ 209,228      $ 137,012        190

Developer exchange fees increased $137.0 million, or 190%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The increase is primarily driven by the growth in our bookings over the same period and the associated growth in Robux balances in the accounts of developers and creators. Developer exchange fees track closely 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

 

     Nine Months Ended September 30,         
           2019                  2020            $ Change      % Change  
     (dollars in thousands)         

Infrastructure and trust & safety

   $ 111,684      $ 185,496      $ 73,812        66

Infrastructure and trust & safety expenses increased $73.8 million, or 66%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The increase is primarily due to an increase of $47.9 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, personnel costs increased by $11.8 million primarily due to an increase in headcount to support our infrastructure growth and stock-based compensation expense of $4.1 million, of which $2.4 million was associated with the tender offer in the nine months ended September 30, 2020. Other increases include $11.7 million in trust & safety expenses to support the growth in users and increased traffic to our platform.

Research and development

 

     Nine Months Ended September 30,         
           2019                  2020            $ Change      % Change  
     (dollars in thousands)         

Research and development

   $ 74,398      $ 138,074      $ 63,676        86

Research and development expenses increased $63.7 million, or 86%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The increase is primarily due to an increase of $53.8 million of personnel costs, which includes $19.7 million in stock-based compensation expense of which $13.0 million was associated with the tender offer in the nine months ended September 30, 2020. The increase is also due to an increase in headcount and consultants supporting our engineering, design, and product teams. Other increases include allocated costs of $8.7 million primarily due to facilities expense associated with office expansion in our San Mateo location.

 

102


Table of Contents
Index to Financial Statements

General and administrative

 

     Nine Months Ended September 30,         
           2019                  2020            $ Change      % Change  
     (dollars in thousands)         

General and administrative

   $ 28,913      $ 64,940      $ 36,027        125

General and administrative expenses increased $36.0 million, or 125%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The increase is primarily due to an increase of $27.7 million in personnel costs, which includes $19.9 million in stock-based compensation expense of which $16.7 million was associated with the tender offer in the nine months ended September 30, 2020. The increase is also due to an increase in headcount in our finance, accounting, people, IT and legal functions associated with our anticipated public offering. Other increases include $2.5 million in charitable contributions made toward COVID relief efforts, and $2.3 million related to professional services expenses to support legal matters as well as other ongoing general and administrative activities.

Sales and marketing

 

     Nine Months Ended September 30,         
           2019                  2020            $ Change      % Change  
     (dollars in thousands)         

Sales and marketing

   $ 31,243      $ 42,259      $ 11,016        35

Sales and marketing expenses increased $11.0 million, or 35%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. This increase is due to an additional $5.9 million in personnel costs, and the stock-based compensation expense of $3.3 million of which $3.1 million was associated with the tender offer in the nine months ended September 30, 2020. This increase also includes $4.0 million related to user acquisition activities.

Interest income, other expense, and provision for income taxes

 

     Nine Months Ended September 30,        
           2019                 2020           $ Change     % Change  
     (dollars in thousands)        

Interest income

   $ 5,085     $ 1,758     $ (3,327     (65 %) 

Other expense

     (494     (1,357     (863     175  

Provision for income taxes

     8       25       17       213  

Interest income decreased $3.3 million primarily due to a reduction in U.S. interest rates during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019. Other expense increased $0.9 million for the nine months ended September 30, 2019 as compared to 2020. The increase was primarily due to an increase of $1.8 million related to the re-measurement of warrants offset by $1.0 million related to foreign exchange gains.

Comparison of the Years Ended December 31, 2018 and 2019

Revenue

 

     Year Ended December 31,         
           2018                  2019            $ Change      % Change  
     (dollars in thousands)         

Revenue

   $ 312,773      $ 488,223      $ 175,450        56

 

103


Table of Contents
Index to Financial Statements

Revenue in the year ended December 31, 2019 increased $175.5 million, or 56%, compared to the year ended December 31, 2018. The increase is primarily due to expansion within our daily payers as the number of daily payers increased from roughly 125,000 in the year ended December 31, 2018 to roughly 184,000 for the year ended December 31, 2019.

Cost of revenue

 

     Year Ended December 31,         
           2018                  2019            $ Change      % Change  
     (dollars in thousands)         

Cost of revenue

   $ 69,896      $ 117,227      $ 47,331        68

Cost of revenue increased $47.3 million, or 68%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase is primarily due to a $45.7 million increase in payment processing fees in connection with the growth in our bookings, which grew at a faster pace than revenue and grew particularly quickly in mobile channels which carry higher payment processing fees.

Developer exchange fees

 

     Year Ended December 31,         
           2018                  2019            $ Change      % Change  
     (dollars in thousands)         

Developer exchange fees

   $ 71,887      $ 111,976      $ 40,089        56

Developer exchange fees increased $40.1 million, or 56%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase is primarily driven by the growth in our bookings over the same period and the associated growth in Robux balances in the accounts of developers and creators.

Infrastructure and trust & safety

 

     Year Ended December 31,         
           2018                  2019            $ Change      % Change  
     (dollars in thousands)         

Infrastructure and trust & safety

   $ 105,590      $ 156,699      $ 51,109        48

Infrastructure and trust & safety expenses increased $51.1 million, or 48%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase is primarily due to an increase of $31.6 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. Other increases include $8.3 million in trust & safety expenses and $6.8 million in personnel costs due to increases in trust & safety consultants and headcount to support the growth of the business.

Research and development

 

     Year Ended December 31,         
           2018                  2019            $ Change      % Change  
     (dollars in thousands)         

Research and development

   $ 87,051      $ 107,095      $ 20,044        23

Research and development expenses increased $20.0 million, or 23%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase is primarily due to an

 

104


Table of Contents
Index to Financial Statements

increase of personnel costs of $16.2 million, driven by an increase of $30.2 million in headcount and consultants in our engineering, design, and product teams to support continued product innovation partially offset by $14.0 million decrease in stock-based compensation expense. The decrease in stock-based compensation expense is primarily driven by $17.6 million in stock-based compensation associated with the tender offer in the year ended December 31, 2018 that was not repeated in the year ended December 31, 2019. Other increases include $4.3 million in allocated costs primarily due to facilities expense associated with our office expansion in 2019.

General and administrative

 

     Year Ended December 31,         
           2018                  2019            $ Change      % Change  
     (dollars in thousands)         

General and administrative

   $ 34,460      $ 41,945      $ 7,485        22

General and administrative expenses increased $7.5 million, or 22%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase is primarily due to increases of $2.6 million in allocated costs associated with headcount growth, $2.0 million in professional services expenses, $1.6 million in recruiting expenses primarily due to fees associated with senior level searches as we grew our technical and senior management and $0.8 million in personnel costs driven by an increase of $4.9 million from headcount and consultants growth in our administrative teams partially offset by $4.1 million decrease in stock-based compensation expense. The decrease in stock-based compensation is primarily driven by $5.9 million in stock-based compensation associated with the tender offer in the year ended December 31, 2018 that was not repeated in the year ended December 31, 2019.

Sales and marketing

 

     Year Ended December 31,         
           2018                  2019            $ Change      % Change  
     (dollars in thousands)         

Sales and marketing

   $ 40,542      $ 44,737      $ 4,195        10

Sales and marketing expenses increased $4.2 million, or 10%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase is primarily due to $2.5 million in personnel costs due to headcount and consultant growth and $0.7 million related to allocated costs for our sales and marketing teams.

Interest income, other expense, and provision for income taxes

 

     Year Ended December 31,        
           2018                 2019           $ Change      % Change  
     (dollars in thousands)         

Interest income

   $ 3,759     $ 6,546     $ 2,787        74

Other expense

     (4,279     (1,211     3,068        (72

Provision for income taxes

     3       9       6        200  

Interest income increased $2.8 million for the year ended December 31, 2019 as compared to the year ended December 31, 2018. The increase is primarily due to a larger invested balance in marketable securities. Other expense decreased $3.1 million in the year ended December 31, 2019 as compared to year ended December 31, 2018 due to a decrease of $3.1 million related to a lower remeasurement value of warrants.

 

105


Table of Contents
Index to Financial Statements

Unaudited Quarterly Results of Operations Data

The following tables set forth our unaudited quarterly consolidated statements of operations data for each of the quarters indicated, as well as the percentage that each line item represents of our revenue for each quarter presented. The information for each quarter has been prepared on a basis consistent with our audited consolidated financial statements included in this prospectus, and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair statement of the financial information contained in those financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future. The following quarterly financial data should be read in conjunction with our consolidated financial statements included elsewhere in this prospectus.

 

    Three Months Ended  
    Mar 31,
2018
    Jun 30,
2018
    Sep 30,
2018
    Dec 31,
2018
    Mar 31,
2019
    Jun 30,
2019
    Sep 30,
2019
    Dec 31,
2019
    Mar 31,
2020
    Jun 30,
2020
    Sep 30,
2020
 
    (dollars in thousands)  

Revenue

  $ 59,722     $ 72,585     $ 84,519     $ 95,947     $ 107,082     $ 115,775     $ 127,031     $ 138,335     $ 156,782     $ 189,703     $  242,190  

Cost and expenses:

                     

Cost of revenue(1)

    12,864       16,044       19,004       21,984       24,998       26,842       30,490       34,897       40,521       50,994       63,397  

Developer exchange fees

    16,279       16,495       18,006       21,107       22,720       23,290       26,206       39,760       44,353       82,993       81,882  

Infrastructure and trust & safety(2)

    18,796       27,815       29,135       29,844       33,487       37,160       41,037       45,015       52,620       61,853       71,023  

Research and development(2)

    13,779       16,395       35,906       20,971       21,593       24,774       28,031       32,697       49,409       40,249       48,416  

General and administrative(2)

    5,662       7,165       13,521       8,112       8,773       9,838       10,302       13,032       30,558       18,707       15,675  

Sales and marketing(2)

    9,379       11,004       11,296       8,863       8,435       10,149       12,659       13,494       15,657       13,908       12,694  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost and expenses

    76,759       94,918       126,868       110,881       120,006       132,053       148,725       178,895       233,118       268,704       293,087  

Loss from operations

    (17,037     (22,333     (42,349     (14,934     (12,924     (16,278     (21,694     (40,560     (76,336     (79,001     (50,897

Interest income

    381       623       1,228       1,527       1,619       1,677       1,789       1,461       1,247       294       217  

Other expense

    (364     (3,976     (5     66       (47     (71     (376     (717     (3,157     494       1,306  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax expense

    (17,020     (25,686     (41,126     (13,341     (11,352     (14,672     (20,281     (39,816     (78,246     (78,213     (49,374

Provision for income taxes

    —         —         —         3     —         8       —         1       1       5       19  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net loss

    (17,020     (25,686     (41,126     (13,344     (11,352     (14,680     (20,281     (39,817     (78,247     (78,218     (49,393

Net loss attributable to the noncontrolling interest(2)

    —         —         —         —         —         (26     51       (171     (498     (742     (1,401
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

  $  (17,020   $  (25,686   $  (41,126)     $  (13,344)     $ (11,352)     $ (14,654   $ (20,332   $ (39,646   $ (77,749   $ (77,476   $  (47,992
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

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

(2)

Includes stock-based compensation as follows:

 

                            Three Months Ended        
    Mar 31,
2018
    Jun 30,
2018
    Sep 30,
2018
    Dec 31,
2018
    Mar 31,
2019
    Jun 30,
2019
    Sep 30,
2019
    Dec 31,
2019
    Mar 31,
2020
    Jun 30,
2020
    Sep 30,
2020
 
    (dollars in thousands)  

Infrastructure and trust & safety

  $ 318     $ 432     $ 1,693     $ 603     $ 354     $ 442     $ 527     $ 762     $ 2,804     $ 915     $ 1,241  

Research and development

    1,470       1,535       20,982       1,704       1,663       1,994       2,663       3,375       16,723       3,957       5,223  

General and administrative

    274       313