Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. ETSY INC (1370637) 10-K published on Feb 28, 2019 at 10:33 am
Reporting Period: Dec 30, 2018
Our Collection of Unique Items: The foundation of Etsy’s competitive advantage is our collection of unique items. Our marketplace features over 60 million items listed across dozens of retail categories, and boasts a large assortment of unique, handmade, vintage, and craft supply products from all over the world. This unique inventory is the result of having created a community that attracts, supports, and retains some of the world’s most talented makers. In a 2018 survey of Etsy buyers, 78% agreed that Etsy has items that you can’t find anywhere else - that something “special in a sea of sameness.” We believe our marketplace is the only place where you can find the depth and breadth of one-of-a-kind items, including millions that can be customized and personalized. The breadth and depth of the special items listed in our marketplace is the linchpin of our long-term strategy. However, the unique nature of these items requires that we invest in the other three parts of our long-term strategy: search and discovery, human connections, and our trusted brand in order deliver a best-in-class marketplace experience.
Best-in-class search and discovery: We are focused on continuing to develop a search and discovery experience that unlocks the value of the unique items in our marketplace. With millions of items listed on Etsy.com that don’t map to a catalog or a stock keeping unit (“SKU”), our challenge is delivering world-class search and discovery technology that surfaces the right product to the right buyer at the right time in order to drive sales and buyer satisfaction. We are utilizing artificial intelligence and machine learning to help personalize the search experience and enable buyers to more easily browse, filter and find the item they desire.
management, our brand and marketing campaigns, and other ways that we promote our marketplace. Lastly, we plan to deepen loyalty by creating opportunities for buyers to experience Etsy across categories and occasions.
A brand you can trust: We will continue to focus on being a brand that inspires trust in our customers across the buyer journey -- when they search, purchase, anticipate and receive their special items, and all the steps in between. Since our sellers have relatively unknown brands and unbranded items, we aim to ensure that the Etsy brand is recognized and valued for providing an excellent end-to-end experience. There are two key elements to being a trusted brand: standing for something that customers understand and rely on, and delivering a purchasing experience that feels safe and supportive. Our goal is to bolster trust in the Etsy brand, Etsy sellers, the items available in our marketplace, and in the overall Etsy experience. In 2018, we improved buyer confidence with the launch of several new products, including a new iteration of guest checkout on mobile web, an alternative payment option common to German buyers, and an improved purchase path for items that are personalized or customized. We also made significant progress in customer support by partnering with Zendesk, a customer service software company. Our Zendesk partnership has enabled us to launch live chat and dedicated 24x7 phone support, which has improved the support experience for our buyers and sellers.
Additionally, the 2018 quarterly periods will also be revised in connection with our future 2019 unaudited interim condensed Consolidated Financial Statement filings in Quarterly Reports on Form 10-Q. The Company will revise the Consolidated Statements of Cash Flows for the year-to-date periods ended September 30, 2018, June 30, 2018 and March 31, 2018 to correct the presentation of the effect of exchange rate changes on cash. This revision will result in an increase (decrease) of $(0.3) million in cash flows from operating activities, $4.0 million in cash flows from financing activities, and $(3.7) million in effect of exchange rate changes on cash in the nine months ended September 30, 2018, an increase (decrease) of $0.3 million in cash flows from operating activities, $1.0 million in cash flows from financing activities, and $(1.3) million in effect of exchange rate changes on cash in the six months ended June 30, 2018, and an increase (decrease) of $(0.3) million in cash flows from operating activities, $(2.7) million in cash flows from financing activities, and $3.0 million in effect of exchange rate changes on cash in the three months ended March 31, 2018.
These revisions do not impact the Consolidated Statements of Operations, the Consolidated Statements of Comprehensive Income (Loss), or the Consolidated Balance Sheets. The Company has concluded that the effect of this revision is not material to any of our previously issued financial statements.
Borrowings under the 2019 Credit Agreement (other than swingline loans) bear interest, at the Company’s option, at (i) a base rate equal to the highest of (a) the prime rate, (b) the federal funds rate plus 0.50%, and (c) an adjusted LIBOR rate for a one-month interest period plus 1.00%, in each case plus a margin ranging from 0.25% to 0.875% or (ii) an adjusted LIBOR rate plus a margin ranging from 1.25% to 1.875%. Swingline loans under the 2019 Credit Agreement bear interest at the same base rate (plus the margin applicable to borrowings bearing interest at the base rate). These margins are determined based on the senior secured net leverage ratio (defined as secured funded debt, net of unrestricted cash up to $100 million, to EBITDA) for the preceding four fiscal quarter period. The Company is also obligated to pay other customary fees for a credit facility of this size and type, including an unused commitment fee, ranging from 0.20% to 0.35% depending on the Company’s senior secured net leverage ratio, and fees associated with letters of credit. The 2019 Credit Agreement also permits the Company, in certain circumstances, to request an increase in the facility by an amount of up to $100.0 million at the same maturity, pricing and other terms and to request an extension of the maturity date for the facility. In connection with the 2019 Credit Agreement, the Company also paid the lenders certain upfront fees.
The 2019 Credit Agreement contains customary representations and warranties applicable to the Company and its subsidiaries and customary affirmative and negative covenants applicable to the Company and its restricted subsidiaries. The negative covenants include restrictions on, among other things, indebtedness, liens, certain fundamental changes (including mergers), investments, dispositions, restricted payments (including dividends and stock repurchases), prepayments of junior debt, and transactions with affiliates. These restrictions do not prohibit a subsidiary of the Company from making pro rata payments to the Company or any other person that owns an equity interest in such subsidiary. The 2019 Credit Agreement contains financial covenants, that require the Company and its subsidiaries to maintain (i) a secured net leverage ratio not to exceed 3.00 to 1.00, subject to an increase, at the option of the Company, to 3.50 to 1.00 for a specified period of time in the event of certain material acquisitions, tested as of the last day of each fiscal quarter and (ii) an interest coverage ratio (defined as the ratio of EBITDA to cash interest expense) of not less than 2.50 to 1.00, tested for each fiscal quarter.