We seek to protect our intellectual property rights by relying on a combination of federal, state, and common law rights in the United States and other countries, as well as on contractual measures. It is our practice to enter into confidentiality, non-disclosure, and invention assignment agreements with our employees and contractors, and into confidentiality and non-disclosure agreements with other third parties, in order to limit access to, and disclosure and use of, our confidential information and proprietary technology. In addition to these contractual measures, we also rely on a combination of trademarks, trade dress, copyrights, registered domain names, trade secrets, and patent rights to help protect our brand and our other intellectual property.
We have developed a patent program and strategy to identify, apply for, and secure patents for innovative aspects of our products, services, and technologies where appropriate. In addition to our existing patents, we intend to file additional patent applications as we continue to innovate through our research and development efforts and to pursue additional patent protection to the extent we deem it beneficial and cost-effective.
We actively pursue registration of our trademarks, logos, service marks, trade dress, and domain names in the United States and in other jurisdictions. We are the registered holder of a variety of U.S. and international trademarks and domain names that include the terms “Square,” "Cash App," "Weebly," and variations thereof.
From time to time, we also incorporate certain intellectual property licensed from third parties, including under certain open source licenses. Even if any such third-party technology did not continue to be available to us on commercially reasonable terms, we believe that alternative technologies would be available as needed in every case.
Various laws and regulations govern the payments industry in the United States and globally. For example, certain jurisdictions in the United States require a license to offer money transmission services, such as Cash App’s peer-to-peer payments, and we maintain a license in each of those jurisdictions and comply with new license requirements as they arise. We are also registered as a “Money Services Business” with the U.S. Department of Treasury’s Financial Crimes Enforcement Network.Network ("FinCen"). These licenses and registrations subject us, among other things, to record-keeping requirements, reporting requirements, bonding requirements, limitations on the investment of customer funds, and inspection by state and federal regulatory agencies.
Outside the United States, we provide localized versions of some of our services to customers, including through various foreign subsidiaries. The activities of those non-U.S. entities are, or may be, supervised by regulatory authorities in the jurisdictions in which they operate. For instance, we hold an Australian Financial Services License issued by the Australian Securities and Investments Commission to provide non-cash payments in Australia, and we are licensed as an Electronic Money Institution to provide payments services and electronic money in the United Kingdom by the Financial Conduct Authority and in the European Union by the Central Bank of Ireland and the Bank of Lithuania.
Our payments services may be or become subject to regulation by other authorities, and the laws and regulations applicable to the payments industry in any given jurisdiction are always subject to interpretation and change.
The Consumer Financial Protection Bureau and other federal, local, state, and foreign regulatory and law enforcement agencies regulate financial products and enforce consumer protection laws, including those applicable to credit, deposit, and payments services, and other similar services. These agencies have broad consumer protection mandates, and they promulgate, interpret, and enforce rules and regulations that affect our business.
We collect and use a wide variety of information for various purposes in our business, including to help ensure the integrity of our services and to provide features and functionality to our customers. This aspect of our business, including the collection, use, disclosure, and protection of the information we acquire from our own services as well as from third-party sources, is subject to laws and regulations in the United States, the European Union, and elsewhere. Accordingly, we publish our privacy policies and terms of service, which describe our practices concerning the use, transmission, and disclosure of information. As our business continues to expand in the United States and worldwide, and as laws and regulations continue to be passed and their interpretations continue to evolve in numerous jurisdictions, additional laws and regulations may become relevant to us.
We send texts, emails, and other communications in a variety of contexts, such as when providing digital receipts and marketing. Communications laws and regulations, including those promulgated by the Federal Communications Commission, apply to certain aspects of this activity in the United States and elsewhere.
Various regulatory agencies in the United States and elsewhere in our international markets continue to examine a wide variety of issues that could impact our business, including products liability, import and export compliance, accessibility for the disabled, insurance, marketing, privacy, data protection, information security, and labor and employment matters. As our business continues to develop and expand, additional rules and regulations may become relevant. For example, if we choose to offer Square Payroll in more jurisdictions, additional regulations, including tax rules, will apply.
Copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act), are available, free of charge, on our investor relations website as soon as reasonably practicable after we electronically file or furnish such material electronically with or furnish it to the Securities and Exchange Commission (SEC). The SEC also maintains a website that contains our SEC filings. The address of the site is www.sec.gov.
We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases, and blogs as part of our investor relations website. We have used, and intend to continue to use, our investor relations website, as well as the Twitter accounts @Square@Blocks and @SquareIR,@BlockIR, as means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Further corporate governance information, including our board committee charters, code of business conduct and ethics, and corporate governance guidelines, is also available on our investor relations website under the heading “Governance Documents.” The contents of our websites are not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.
Our business operations are subject to numerous risks and uncertainties, including those outside of our control, that could cause our actual results to be harmed, including risks regarding the following:
•foreign exchange rates risks; and
•any greater-than-anticipated tax liabilities or significant valuation allowances on our deferred tax assets.
Legal, regulatory, and compliance risks:
•extensive regulation and oversight in a variety of areas of our business;
•complex and evolving regulations and oversight related to privacy, data protection, and data protection;information security;
•litigation, including intellectual property claims, government investigations or inquiries, and regulatory matters or disputes;
•obligations and restrictions as a licensed money transmitter;
•regulation andregulatory scrutiny of our subsidiary Square Financial Services, which is a Utah state-chartered industrial bank, includingor changes in the requirement that we serve as a source of financial strength to it;BNPL space;
•regulation and scrutiny of our subsidiary Cash App Investing, which is a broker-dealer registered with the SEC and a member of FINRA, including net capital and other regulatory capital requirements;
•changes to our business practices imposed by FINRA based on our ownership of Cash App Investing;
•litigation,regulation and scrutiny of our subsidiary Square Financial Services, which is a Utah state-chartered industrial bank, including intellectual property claims, government investigations or inquiries,the requirement that we serve as a source of financial strength to it;
•supervision and regulatory matters or disputes;regulation of Square Financial Services, including the Dodd-Frank Act and its related regulations;
•any inability to protect our intellectual property rights;
•assertions by third parties of infringement of intellectual property rights by us; and
•our bitcoin investments being subject to volatile market prices, impairment,increased scrutiny from investors, regulators, and other risks of loss.stakeholders relating to environmental, social, and governance issues.
Risks related to ownership of our common stock:
•the dual class structure of our common stock;
•volatility of the market price of our Class A common stock;
•the dual-listing of our Class A common stock on the NYSE and our CHESS Depositary Interests ("CDIs") on the Australian Securities Exchange ("ASX");
•our convertible note hedge and warrant transactions;
•anti-takeover provisions contained in our amended and restated certificate of incorporation, our amended and restated bylaws, and provisions of Delaware law; and
•exclusive forum provisions in our bylaws.
Risks Related to Our Business and Our Industry
The ongoing COVID-19 pandemic and measures intended to prevent its spread have had, and may continue to have, a material and adverse effect on our business and results of operations.
Global health concerns relating to the COVID-19 pandemic and related government actions taken to reduce the spread of the virus have been weighing on the macroeconomic environment, and the pandemic has significantly increased economic uncertainty and reduced economic activity. Small businesses, which constitute a large part of our sellers, have been impacted particularly hard. The pandemic has resulted in government authorities and businesses implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders, school closures, and business limitations and shutdowns. Such measures have contributed significantly to increased unemployment and negatively impacted consumer and business spending.
The pandemic has adversely impacted, and is likely to continue to adversely impact, our operations and the operations of our customers and business partners. For example, our customer support for Cash App was operating at reduced levels for some time, as certain vendors we had used to perform such functions had to shut down some operations. The pandemic has caused us to modify our business practices to help minimize the risk of the virus to our employees, our customers, and the communities in which we participate, which could negatively impact our business. These measures include temporarily requiring employees to work remotely, suspending all non-essential business travel for our employees, limiting external guests visiting our offices, and canceling, postponing, or holding meetings and events virtually. Given the continually evolving situation, there is no certainty that the measures we have taken will be sufficient to mitigate the risks posed by the virus.
The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition will depend on developments that continue to be highly uncertain and difficult to predict, including, but not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or treat its impact, the availability, distribution and efficacy of vaccines, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, we may experience material and adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, bankruptcies or insolvencies of customers, and recession or economic downturn.
There are no comparable recent events that provide guidance as to the effect the COVID-19 pandemic may have, and, as a result, the ultimate impact of the pandemic is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations, or the global economy as a whole. However, the effects could have a
material impact on our results of operations and heighten many of the known risks described throughout this Risk Factors section.
Our participation in government relief programs set up in response to the COVID-19 pandemic, such as facilitating loans to businesses under the Paycheck Protection Program or unemployment benefits and stimulus payments to individuals through Cash App, may subject us to new risks and uncertainties.
Federal, state, local, and foreign governmental authorities have enacted, and may enact in the future, legislation, regulations, and programs in response to the COVID-19 pandemic intended to provide economic relief to businesses and individuals. Our participation in, or facilitation of, such programs may expose us to new risks and uncertainties.
Square Capital is an approved participant under the Paycheck Protection Program (“PPP”) administered by the Small Business Administration (“SBA”) and enacted in March 2020 under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") in response to the COVID-19 pandemic. Recently, the PPP was extended until March 31, 2021 and an additional $284 billion was allocated to fund a second round of PPP loans. The PPP was intended to provide funding for businesses so they can retain employees and includes initial loan repayment deferrals and debt forgiveness provisions for eligible borrowers. Additionally, borrowers may now qualify for a “second-draw” loan generally under the same terms and conditions as their initial loans. Small businesses who received a PPP loan previously can apply for a second loan if they: (i) employ fewer than 300 employees, (ii) experienced at least a 25% decrease in revenue in any quarter in 2020 relative to same quarter in 2019, and (iii) have already used or will use the full amount of their first PPP loan. Under the program, Square Capital, through a bank partner (and directly with respect to the second round of PPP loans), provides small businesses two-year or five-year loans at a fixed interest rate of one percent for up to 2.5 times (or 3.5 times with respect to restaurants qualifying for a second PPP loan) the borrower’s monthly payroll expenses. The loan is forgiven under the program if the loan proceeds are used for specified expenses, including payroll and benefit costs, rent payments, utilities, and mortgage and certain interest expenses; provided that at least 60% of the loan proceeds are utilized for qualifying payroll costs and the borrower maintains or rehires employees during the specified periods. As of December 31, 2020, Square Capital had facilitated approximately $857 million of PPP loans, excluding cancelled loans. Square Capital has retained some of these PPP loans in its portfolio, but also sold 100% participation rights in certain PPP loans to an institutional third-party investor. In addition, Square Capital has borrowed money from the Federal Reserve secured by PPP loans in its portfolio. Square Capital expects to continue to retain PPP loans from the second round of the PPP in its portfolio and to continue to access funds from the Federal Reserve secured by such PPP loans.
As a participant in the PPP, Square Capital is exposed to new risks and uncertainties since certain processes and program requirements are still being developed, iterated upon, and have not yet been tested, which exposes us to risks related to documentation, verification, forgiveness, and servicing of such loans. In the event that it is determined that a borrower does not qualify for loan forgiveness or if a borrower defaults on its PPP loan, Square Capital is at risk to the extent the SBA may decline to honor its guarantee or to forgive the loan due to documentation or verification errors, failure to follow regulatory requirements, or lack of adherence to underwriting standards. As a result, Square Capital’s documentation and review and underwriting processes will be subject to scrutiny, and we could incur losses if we fail to comply with the SBA documentation and other requirements. We also may become subject to litigation arising as a result of our participation in this program, which could result in significant financial liability or could adversely affect our reputation. There can be no assurance that Square Capital will be successful in mitigating all of the risks associated with the PPP or that this lending will not have a negative impact on Square Capital’s business and results of operations.
Separately, the CARES Act and the Consolidated Appropriations Act, 2021 provided for stimulus funds, called economic impact payments, to individuals, expanded eligibility for unemployment benefits, increased the amount of unemployment insurance benefits, and extended the period for such payments. Cash App has been facilitating the payment of such stimulus funds and unemployment benefits by offering account and routing numbers that customers can use to deposit such payments directly into their Cash App accounts and accepting cash-in deposits from prepaid cards issued by state governments. Cash App has also worked with partner banks to expand direct deposit eligibility for its customers. The federal stimulus programs were set up quickly and under difficult and unprecedented circumstances and the implementation of these programs at the federal, state, and local levels has been complex and difficult, causing them to be more susceptible to fraud, data breaches, technical difficulties, and other new and uncertain risks. Cash App’s facilitation of unemployment and stimulus payments may therefore expose us to operational, compliance, reputational, and legal risks, which could result in governmental action, litigation, or other forms of material and adverse loss.
Our business depends on a strong and trusted brand, and any failure to maintain, protect, and enhance our brand would hurt our business.
We have developed a strong and trusted brand that has contributed significantly to the success of our business. We believe that maintaining and promoting our brand in a cost-effective manner is critical to achieving widespread acceptance of our products and services and expanding our base of customers. Maintaining and promoting our brand will depend largely on our ability to continue to provide useful, reliable, secure, and innovative products and services, as well as our ability to maintain trust and be a technology leader. We may introduce, or make changes to, features, products, services, privacy practices, or terms of service that customers do not like, which may materially and adversely affect our brand. Our brand promotion activities may not generate customer awareness or increase revenue, and even if they do, any increase in revenue may not offset the expenses we incur in building our brand. If we fail to successfully promote and maintain our brand or if we incur excessive expenses in this effort, our business could be materially and adversely affected.
The introduction and promotion of new services, as well as the promotion of existing services, may be partly dependent on our visibility on third-party advertising platforms, such as Google, Twitter, or Facebook. Changes in the way these platforms operate or changes in their advertising prices, data use practices or other terms could make the maintenance and promotion of our products and services and our brand more expensive or more difficult. If we are unable to market and promote our brand on third-party platforms effectively, our ability to acquire new customers would be materially harmed. We also use retail partners to sell hardware and acquire customers. Our ability to acquire new customers could be materially harmed if we are unable to enter into or maintain these partnerships on terms that are commercially reasonable to us, or at all.
Harm to our brand can arise from many sources, including failure by us or our partners and service providers to satisfy expectations of service and quality; inadequate protection or misuse of sensitive information; fraud committed by third parties using our products or applications; compliance failures and claims; litigation and other claims; and misconduct by our partners, service providers, or other counterparties. We have also been from time to time in the past, and may in the future be, the target of incomplete, inaccurate, and misleading or false statements about our company and our business that could damage our brand and deter customers from adopting our services. Any negative publicity about our industry or our company, the quality and reliability of our products and services, our risk management processes, changes to our products and services, our ability to effectively manage and resolve customer complaints, our privacy, data protection, and information security practices, litigation, regulatory activity, policy positions, and the experience of our customers with our products or services could adversely affect our reputation and the confidence in and use of our products and services. If we do not successfully maintain a strong and trusted brand, our business could be materially and adversely affected.
As our revenue has increased, our growth rate has slowed at times in the past and may slow or decline in the future, and our growth rates in each of our reporting segments may vary. Future revenue growth depends on our ability to retain existing sellers and customers, attract new sellers and customers, and increase sales to both new and existing sellers as well as our ability to attract and retain Cash App customers and grow their use of Cash App services.customers.
Our rate of revenue growth has slowed at times in the past and may decline in the future, and it may slow or decline more quickly than we expect for a variety of reasons, including the risks described in this Annual Report on Form 10-K. Additionally, our rate of revenue growth may vary between our two reporting segments. For example, in recent periods our Cash App segment revenue has grown at a high rate, which has varied and may continue to vary from the growth rate of our SellerSquare segment. Our sellers and customers have no obligation to continue to use our services, and we cannot assure you that they will. We generally do not have long-term contracts with our sellers and customers, and the difficulty and costs associated with switching to a competitor may not be significant for many of the services we offer, both in the seller ecosystem and the Cash App ecosystem.offer. Our sellers’ activity with us may decrease for a variety of reasons, including sellers’ level of satisfaction with our products and services, our pricing and the pricing and quality of competing products or services, the effects of global economic conditions, or reductions in the aggregate spending of our sellers’ customers. The COVID-19 pandemic caused some sellers to close or curtail operations, which negatively impacted our Seller revenue.
The growth of our business dependsGrowth in parttransacting actives on existing sellers and Cash App customers expanding their use of our products and services. If we are unable to encourage broader use of our services by our sellers and Cash App customers, our growth may slow or stop, and our business may be materially and adversely affected. The growth of our business also depends on our ability to attract new sellers and Cash App customers, to encourage larger sellers to use our products and services, and to introduce successful new products and services. We have experienced rapid growth in the number of monthly transacting active Cash App customers in recent periods. Growth in monthly transacting active Cash App customers and such customers’ level of engagement with our products and services on Cash App are essential to our success and long-term financial
performance. However, the growth rate of monthly transacting active Cash App customersactives has fluctuated over time, and it may slow or decline in the future. A number of factors have affected and could potentially negatively affect Cash App customer growth and engagement, including our ability to introduce new products and services that are compelling to our customers, the impact on our network effects of other customers choosing whether to use Cash App, technical or other problems that affect customer experience, failure to provide sufficient customer support, fraud and scams targeting Cash App customers, and harm to our reputation and brand. Further, certain events or programs, such as government stimulus programs may correlate with periods of significant growth, but such growth may not be sustainable. Additionally, the growth rate of Cash App revenue may be distorted by the prices of bitcoin, as bitcoin revenue may increase or decrease due to changes in the price of, and demand for, bitcoin and may not correlate to customer or engagement growth rates.
The growth of our business depends in part on our existing sellers and customers expanding their use of our products and services. If we are unable to encourage broader use of our products and services within each of our ecosystems by our existing sellers and customers, our growth may slow or stop, and our business may be materially and adversely affected. The growth of our business also depends on our ability to attract new sellers and customers, to encourage sellers and customers to use our products and services, and to introduce successful new products and services. We have invested and will continue to invest in improving our Square platformbusiness in order to offer better or new features, products, and services and to adjust our product offerings to changing economic conditions, but if those features, products, services, and changes fail to be successful on the expected timeline or at all, our growth may slow or decline.
We have generated significant net losses in the past, and we intend to continue to invest substantially in our business. Thus, we may not be able to maintain profitability.
While we generated net income of $213.1 million and $375.4 million for the years ended December 31, 2020 and 2019, respectively, we generated net losses of $38.5 million forDuring the year ended December 31, 2018.2022, we generated a net loss of $540.7 million. As of December 31, 2020,2022, we had an accumulated deficit of $297.2$568.7 million.
We intend to continue to make significant investments in our business, including with respect to our employee base; sales and marketing; development of new products, services, and features; acquisitions; infrastructure; expansion of international operations; and general administration, including legal, finance, and other compliance expenses related to our business. If the costs associated with acquiring and supporting new or larger sellers, attracting and supporting new Cash App customers, or with developing and supporting our products and services materially increase in the future, including the fees we pay to third parties to advertise our products and services, our expenses may rise significantly. In addition, increases in our seller base could cause us to incur increased losses because costs associated with new sellers are generally incurred up front, while revenue is recognized in future periods as our products and services are transferredused by our sellers. Moreover, businesses we acquire may have different profitability than our existing business, which may affect our overall profitability, particularly until we are able to our sellers.realize expected synergies. For example, prior to its acquisition, Afterpay historically generated net losses. If we are unable to generate adequate revenue growth and manage our expenses, we may incur significant losses and may not maintain profitability on a consistent basis.
From time to time, we have made and may make decisions that will have a negative effect on our short-term operating results if we believe those decisions will improve our operating results over the long term. These decisions may not be consistent with the expectations of investors and may not produce the long-term benefits that we expect, in which case our business may be materially and adversely affected.
Our business depends on our ability to maintain, protect, and enhance our brands.
Having a strong and trusted brand has contributed significantly to the success of our business. We believe that maintaining, promoting, and enhancing the Square brand, the Cash App brand, the TIDAL brand, and our other brands, in a cost-effective manner is critical to achieving widespread acceptance of our products and services and expanding our base of customers. Maintaining and promoting our brands will depend largely on our ability to continue to provide useful, reliable, secure, and innovative products and services, as well as our ability to maintain trust and be a technology leader. We may introduce, or make changes to, features, products, services, privacy practices, or terms of service that customers do not like, which may materially and adversely affect our brands. Our brand promotion activities may not generate customer awareness or increase revenue, and even if they do, any increase in revenue may not offset the expenses we incur in building our brands. If we fail to successfully promote and maintain our brands or if we incur excessive expenses in this effort, our business could be materially and adversely affected.
The introduction and promotion of new products and services, as well as the promotion of existing products and services, may be partly dependent on our visibility on third-party advertising platforms, such as Google, Facebook, or Twitter. Changes in the way these platforms operate or changes in their advertising prices, data use practices or other terms could make the maintenance and promotion of our products and services and our brands more expensive or more difficult. If we are unable to market and promote our brands on third-party platforms effectively, our ability to acquire new customers would be materially harmed. We also use retail partners to sell hardware and acquire sellers for Square. Our ability to acquire new sellers could be materially harmed if we are unable to enter into or maintain these partnerships on terms that are commercially reasonable to us, or at all.
Harm to our brands can arise from many sources, including failure by us or our partners and service providers to satisfy expectations of service and quality; inadequate protection or misuse of sensitive information; fraud committed by third parties using our products or applications; compliance failures and claims; litigation and other claims; errors caused by us or our partners; and misconduct by our partners, service providers, or other counterparties. We have also been from time to time in the past, and may in the future be, the target of incomplete, inaccurate, and misleading or false statements about our company and our business that could damage our brands and deter customers from adopting our services or our products. Partners and influencers with whom we maintain relationships could engage in behavior or use their platforms to communicate directly with our sellers and customers in a manner that reflect poorly on our brands and such behavior or communications may adversely affect us. Further, negative publicity or commentary regarding the partners and influencers who are, or are perceived to be, affiliated with us may also damage our reputation, even if the negative publicity or commentary is not directly related to us. Any negative publicity about the industries we operate in or our company, the quality and reliability of our products and services, our risk management processes, changes to our products and services, our ability to effectively manage and resolve customer complaints, our privacy, data protection, and information security practices, litigation, regulatory activity, policy positions, and the experience of our customers with us, our products or services could adversely affect our reputation and the confidence in and use of our products and services. If we do not successfully maintain, protect or enhance our brands, our business could be materially and adversely affected.
Our efforts to expand our product portfolio and market reach, including through acquisitions, may not succeed and may reduce our revenue growth.growth and profitability.
While weWe have grown the proportion of revenue from newer products and services fromin each of the Cash App and SellerSquare segments and we intend to continue to broaden the scope of products and services we offer,offer. However, we may not be successful in maintaining or growing our current revenue, streams, or deriving any significant new revenue streams from these products and services. Failure to successfully broaden the scope of products and services that are attractive may inhibit our growth and harm our business. Furthermore, we expect to continue to expand our markets in the future, and we may have limited or no experience in such newer markets. We cannot assure you that any of our products or services will be widely accepted in any market or that they will continue to grow in revenue.revenue or contribute to our profitability. Our offerings may present new and difficult technological, operational, and regulatory risks, and other challenges, and if we experience service disruptions, failures, or other issues, our business may be materially and adversely affected. For example, some of our Cash App products are intended to make investing in certain assets, such as bitcoin, stocks, and exchange-traded funds, more accessible. However, as a result, our customers who use these Cash App products may experience losses or other financial impacts due to, among other things, market fluctuations in the prices of bitcoin and stocks. If our userscustomers are adversely affected by such risks, they may cease using the product or Cash App altogether and our business, brand, and reputation may be adversely affected. Further,Moreover, our customers could attempt to seek compensation from us for their financial investment losses, and those claims, even if unsuccessful, would likely be time-consuming and costly for us to address. Our expansion into newer activitiesmarkets may not lead to growth orand may require significant investment of financial resources and of management time and attention, and we may not be able to recoup our investments in a timely manner or at all and may require significant management time and attention.all. If any of this were to occur, it could damage our reputation, limit our growth, and materially and adversely affect our business.
Our long-term success depends on our ability to develop products and services to address the rapidly evolving market for payments and financial services, and, if we are not able to implement successful enhancements and new features for our products and services, our business could be materially and adversely affected.
Rapid and significant technological changes continue to confront the industries in which we operate, including developments in omnichannel commerce, proximity payment devices (including contactless payments via NFC technology), digital banking, mobile financial apps, as well as developments in cryptocurrencies and in tokenization, which replaces sensitive data (e.g., payment card information) with symbols (tokens) to keep the data safe in the event that it is stolen or viewed by unauthorized third parties.safe.
These new and evolving services and technologies may be superior to, impair, or render obsolete the products and services we currently offer or the technologies we currently use to provide them. Incorporating new technologies into our products and services may require substantial expenditures and take considerable time, and we may not be successful in realizing a return on these development efforts in a timely manner or at all. Our ability to develop new products and services may be inhibited by industry-wide standards, payment card networks, existing and future laws and regulations, resistance to change from our customers, which includes our sellers and their customers, or third parties’ intellectual property rights. Incorporating new technologies into our products and services may require substantial expenditures and take considerable time, and we may not be successful in realizing a return on our efforts in a timely manner or at all.
Our success will depend on our ability to develop new technologies and to adapt to technological changes and evolving industry standards.standards, and our ability to provide products and services that are tailored to specific needs and requirements of our customers. If we are unable to provide enhancements and new features for our products and services or to develop new products and services that achieve market acceptance or that keep pace with rapid technological developments and evolving industry standards, our business would be materially and adversely affected.
We often rely, not only on our own initiatives and innovations, but also on third parties, including some of our competitors, for the development of and access to new technologies and development of a robust market for these new products and technologies. Failure to accurately predict or to respond effectively to developments in our industry may significantly impair our business.
In addition, because our products and services are designed to operate with a variety of systems, infrastructures, and devices, we need to continuously modify and enhance our products and services to keep pace with changes in technologies. Moreover, our success may depend on our ability to provide products and services that are tailored to specific needs and requirements of our customers. Any failure of our products and services to continue to operate effectively with third-party infrastructures and technologies could reduce the demand for our products and services, result in dissatisfaction of our customers, and materially and adversely affect our business.
Substantial and increasingly intense competition in our markets and industry may harm our business.
We compete in markets characterized by vigorous competition, changing technology, evolving industry standards, changing customer needs, and frequent introductions of new products and services. We expect competition to intensify in the future as existing and new competitors introduce new services or enhance existing services. For example, companies not traditionally associated with the payments industry have introduced products or services that are or may become competitive with our business. We compete against many companies to attract customers both withinacross our seller ecosystemproducts and our Cash App ecosystem,services, and some of these companies have greater financial resources and substantially larger bases of customers than we do, which may provide them with significant competitive advantages. These companies may devote greater resources to the development, promotion, and sale of products and services, may achieve economies of scale due to the size of their customer bases, and may more effectively introduce their own innovative products and services that adversely impact our growth. MergersFor example, a number of competitors offer BNPL products similar to Afterpay’s. Existing competitors and new entrants in the BNPL space have engaged in, and may continue to engage in, aggressive consumer acquisition campaigns, may develop superior technology offerings, or consolidate with other entities and achieve benefits of scale. Such competitive pressures may materially erode our existing market share in the BNPL space and may hinder our expansion into new markets. In addition, mergers and acquisitions by, theseand collaborations between, the companies we compete against may lead to even larger competitors with more resources.
Certain sellers have long-standing exclusive, or nearly exclusive, relationships with our competitors to accept payment cards and other services that compete with what we offer. These relationships maycan make it difficult or cost-prohibitive for us to conduct material amounts of business with them. Competing services tied to established brands may engender greater confidence in the safety and efficacy of their services. If we are unable to differentiate ourselves from and successfully compete with our competitors, our business will be materially and adversely affected.
We may also face pricing pressures from competitors. Some competitors may offer lower prices to sellers for similar services by cross-subsidizing their paymentscertain services that we also provide through other servicesproducts they offer. Such competition may result in the need for us to alter theour pricing we offer to our sellers and could reduce our gross profit. In addition,Also, sellers may demand more customized and favorable pricing from us, and competitive pressures may require us to agree to such pricing, further reducing our gross profit. We currently negotiate pricing discounts and other incentive arrangements with certain large sellers to
increase acceptance and usage of our products and services. If we continue this practice and if an increasing proportion of our sellers are large sellers, we may have to increase the discounts or incentives we provide, which could also reduce our gross profit.
Expanding our business globally couldDisruptions in the cryptocurrency market subject us to new challenges andadditional risks.
We currently offer our servicesRecent financial distress in the cryptocurrency market, such as bankruptcies filed by certain cryptocurrency market participants, has increased uncertainty in the global economy. There is no certainty that the measures we have taken will be sufficient to address the risks posed by the downstream effects of continued financial distress in the cryptocurrency market, and products in multiple countrieswe may experience material and planadverse impacts to continue expanding our business further globally. Expansion, whetheras a result of the global economic impacts of such financial distress, including the loss of customer trust in our existingcryptocurrencies, including bitcoin, and any recession or new global markets, will require additional resources and controls, and offering our serviceseconomic downturn that has occurred or may occur in new geographic regions often requires substantial expenditures and takes considerable time. We may not be successful enough in these new geographies to recoup our investments in a timely manner or at all. Such expansion could also subject our business to substantial risks, including:the future.
•difficultyThe ultimate impact of the financial distress in attractingthe cryptocurrency market will depend on future developments, including, but not limited to, the downstream effects of the bankruptcies filed by certain cryptocurrency market participants, its severity, and the actions taken by regulators to address its impact. If the cryptocurrency environment further deteriorates, our customers may wish to sell their bitcoin at a sufficient numberprice or volume that exceeds the market demand for bitcoin, which could cause disruptions in our operations and have a material and adverse effect on our business and financial condition. If our customers experience losses due to market fluctuations in the prices of sellersbitcoin, they may reduce or cease their use of Cash App customers;and our results of operations may be adversely impacted.
•failureOur investments in bitcoin, our bitcoin ecosystem, and our Cash App feature that permits customers to anticipate competitive conditions and competition with service providers or other market-players that have greater experiencetransact in bitcoin, subject us to additional risks related to any further disruption in the localcryptocurrency markets than we do;
•failureand the resulting impact on customer and investor behavior. For example, any further deterioration in the cryptocurrency markets may have an adverse effect on our reputation, and any negative perception by our customers of one or more cryptocurrencies may lead to conform with applicable business customs, including translation into foreign languages, cultural context, and associated expenses;
•increased costs and difficulty in protecting intellectual property and sensitive data;
•changes to the way we do business as compared with our current operations or a lackloss of acceptance ofcustomer demand for our products and services;
•the ability to support and integrate with local third-party service providers;
•difficulties in staffing and managing foreign operations inservices, any of which could have an environment of diverse culture, laws, and customs, challenges caused by distance, language, and cultural differences, and the increased travel, infrastructure, and legal and compliance costs associated with global operations;
•difficulties in recruiting and retaining qualified employees and maintainingadverse impact on our company culture;
•difficulty in gaining acceptance from industry self-regulatory bodies;
•compliance with multiple, potentially conflicting and changing governmental laws and regulations, including with respect to payments, data privacy, data protection, and information security;
•compliance with U.S. and foreign anti-corruption, anti-bribery, and anti-money laundering laws;
•potential tariffs, sanctions, fines, or other trade restrictions;
•exchange rate risk;
•compliance with complex and potentially conflicting and changing laws of taxing jurisdictions where we conduct business and applicable U.S. tax laws;
•increased exposurefinancial condition. We may also suffer a decline in the market price of our Class A common stock due to any negative perception by our customers, investors, or the general public, health issues such asof cryptocurrencies or the current COVID-19 pandemic, and related industry and governmental actions to address these issues; and
•regional economic and political instability and other geopolitical risks.
As a result of these risks, our efforts to expand our global operations may not be successful, which could limit our ability to grow our business.cryptocurrency markets.
Any acquisitions,Acquisitions, strategic investments, entries into new businesses, joint ventures, divestitures, and other transactions we enter into could fail to achieve strategic objectives, disrupt our ongoing operations or result in operating difficulties, liabilities and expenses, harm our business, and negatively impact our results of operations.
In pursuing our business strategy, we routinely conduct discussions and evaluate opportunities for possible acquisitions, strategic investments, entries into new businesses, joint ventures, divestitures, and other transactions. We have in the past acquired or invested in, and we continue to seek to acquire or invest in, businesses, technologies, or other assets that we believe could complement or expand our business.business, including acquisitions of new lines of business that are adjacent to or outside of our existing ecosystems. As we grow, the pace and scale of our acquisitions may increase and may include larger acquisitions than we have done historically. The identification, evaluation, and negotiation of potential acquisition or strategic investment transactions may divert the attention of management and entail various expenses, whether or not such transactions are ultimately completed. There can be no assurance that we will be successful in identifying, negotiating, and consummating favorable transaction opportunities. In addition to transaction and opportunity costs, these transactions involve large challenges and risks, whether or not such transactions are completed, any of which could harm our business and negatively impact our results of operations, including risks that:
•the transaction may not advance our business strategy;strategy or may harm our growth or profitability;
•we may not be able to secure required regulatory approvals or otherwise satisfy closing conditions for a proposed transaction in a timely manner, or at all;
•the transaction may subject us to additional regulatory burdens that affect our business in potentially unanticipated and significantly negative ways;
•we may not realize a satisfactory return on our investment or increase our revenue;
•we may experience difficulty, and may not be successful in, integrating technologies, IT or business enterprise systems, culture, or management or other personnel of the acquired business;
•we may incur significant acquisition costs and transition costs, including in connection with the assumption of ongoing expenses of the acquired business;
•we may not realize the expected benefits or synergies from the transaction in the expected time period, or at all;all, which may result in impairment charges or other negative impacts to our business;
•we may be unable to retain key personnel;
•acquired businesses or businesses that we invest in may not have adequate controls, processes, and procedures to ensure compliance with laws and regulations, including with respect to data privacy, data protection, and information security, and our due diligence process may not identify compliance issues or other liabilities. Moreover, acquired businesses’ technology stacks may add complexity, resource constraints, and legacy technological debtchallenges that makesmake it difficult and time consuming to achieve such adequate controls, processes, and procedures.
•we may fail to identify or assess the magnitude of certain liabilities, shortcomings, or other circumstances prior to acquiring or investing in a business, which could result in additional financial, legal, regulatory, or regulatorytax exposure whichand may subject us to additional controls, policies, procedures, liabilities, litigation, costs of compliance or remediation, or other adverse effects on our business, operating results, or financial condition;
•we may have difficulty entering into new market segments or new geographic territories;
•we may be unable to retain the customers, vendors, and partners of acquired businesses;
•there may be lawsuits or regulatory actions resulting from the transaction;
•there may be risks associated with undetected security weaknesses, cyberattacks, or security breaches or incidents at companies that we acquire or with which we may combine or partner;
•there may be local and foreign regulations applicable to the international activities of our business and the businesses we acquire; and
•acquisitions could result in dilutive issuances of equity securities or the incurrence of debt.
We have in the past, and may in the future, also choose to divest certain businesses or product lines. If we decide to sell assets or a business, we may have difficulty obtaining terms acceptable to us in a timely manner, or at all. Additionally, we may experience difficulty separating out portions of, or entire, businesses, incur potential loss of revenue or experience negative impact on margins, or we may not achieve the desired strategic and financial benefits. For example, in 2019, we completed the sale of Caviar to DoorDash in exchange for cash and stock consideration. Following DoorDash’s initial public offering, we are required to mark to market our equity holdings each quarter, which may result in fluctuations of our results of operations due to the trading price of DoorDash’s Class A common stock. Further, because we are subject to a lock-up agreement with respect to such holdings, we are restricted from selling all of our equity holdings for a period of 180 days following DoorDash's IPO, and there can be no assurances that we will fully realize the value of the stock consideration once we are able to sell. Such potential transactions may also delay achievement of our strategic objectives, cause us to incur additional expenses, potentially disrupt customer or employee relationships, and expose us to unanticipated or ongoing obligations and liabilities, including as a result of our indemnification obligations. Further, during the pendency of a divestiture, we may be subject to risks related tosuch as a decline in the business to be divested, loss of employees, customers, or suppliers and the risk that the transaction may not close, any of which would have a material adverse effect on the business to be divested and the Company.our retained business. If a divestiture is not completed for any reason, we may not be able to find another buyer on the same terms, and we may have incurred significant costs without the corresponding benefit.
Joint ventures and minority investments inherently involve a lesser degree of control over business operations, thereby potentially increasing the financial, legal, operational, regulatory, and/or compliance risks associated with the joint venture or minority investment. In addition, we may be dependent on joint venture partners, controlling shareholders, management, or other persons or entities who control them and who may have business interests, strategies, or goals that are inconsistent with ours. Business decisions or other actions or omissions of the joint venture partners, controlling shareholders, management, or other persons or entities who control them may adversely affect the value of our investment, result in litigation or regulatory action against us, and may otherwise damage our reputation and brand.
The ongoing integration of Afterpay could disrupt our business and adversely affect our future results of operations.
Our ability to benefit from our acquisition of Afterpay depends on the successful integration of Afterpay with our business. The integration of Afterpay is complex and time consuming and there can be no assurance that the integration will be completed effectively or in a timely manner.
Difficulties that we have encountered and may continue to encounter in the integration process include the following:
•challenges and difficulties associated with managing the larger, more complex, combined company;
•conforming standards and controls and consolidating corporate infrastructures between the companies;
•integrating personnel from the two companies while maintaining focus on developing, producing and delivering consistent, high quality products and services;
•loss of key employees;
•coordinating geographically dispersed organizations;
•addressing differences in business backgrounds, corporate cultures, and management philosophies;
•potential unknown liabilities and unforeseen expenses;
•our ability to deliver on our strategy, including integrating our BNPL platform into our Cash App and Square Capitalecosystems and strengthening the connection between these ecosystems; and
•the diversion of management’s attention caused by integrating the companies’ operations.
TIDAL represents a new line of business for us and subjects us to different risks and uncertainties.
In 2021, we acquired a majority interest in TIDAL which represented a new line of business for us. TIDAL’s business is dependent on the various rights holders. We cannot provide assurances that we or TIDAL will be able to maintain or expand arrangements with partners and other third parties on acceptable terms, if at all. Further, the music industry is highly concentrated, which means we rely on a small number of entities that may take adverse actions or take advantage of their market power to pursue arduous financial or other terms that may adversely affect us or may restrict our ability to innovate and improve our streaming service. Our streaming service also competes for listeners on the basis of the presence and visibility of our app, which is distributed via app stores operated by Apple and Google. We face significant competition for listeners from these companies, which also promote their own music and content. In addition, our competitors’ streaming products may be pre-loaded or integrated into consumer electronics products or automobiles more broadly than our streaming product, which makes such competitors more visible to consumers. If we are unable to compete successfully for listeners against other media providers, then our TIDAL business may suffer.
We expect that operation of our TIDAL business will require continued investment in operating expenses, headcount, and executive time and attention, none of which will ensure that we will be successful. If we fail to successfully operate and grow our TIDAL business, we will not realize the benefits anticipated when we acquired a majority interest in the business, and any such failure could result in adverse effects on our business and financial results, including substantial impairment charges.
Expanding our business globally subjects us to new challenges and risks.
We offer our services and products in multiple countries and plan to continue expanding our business further globally. Our acquisition of Afterpay expanded our global presence. Expansion, whether in our existing or new global markets, will require additional resources and new or expanded controls, and offering our services and products in new geographic regions often requires substantial expenditures and takes considerable time. We may not be successful enough in these new geographies to recoup our investments in a timely manner or at all. Such expansion, and the ongoing operation of our global business, subject our business to substantial risks, including:
•difficulty in attracting sellers and customers, or a lack of acceptance of our products and services in foreign markets;
•failure to anticipate competitive conditions and competition with service providers or other market-players that have greater experience in the foreign markets than we do;
•failure to conform with applicable business customs, including translation into foreign languages, cultural context, and associated expenses;
•increased costs and difficulty in protecting intellectual property and sensitive data;
•changes to the way we do business as compared with our current operations;
•inability to support and integrate with local third-party service providers;
•difficulties in staffing and managing foreign operations in an environment of diverse cultures, laws, and customs, challenges caused by distance, language, and cultural differences, and the increased travel, infrastructure, and legal and compliance costs associated with global operations;
•difficulties in recruiting and retaining qualified employees and maintaining our company culture;
•difficulty in gaining acceptance from industry self-regulatory bodies;
•compliance with multiple complex, potentially conflicting and changing governmental laws and regulations, including with respect to payments, privacy, data protection, information security, and tax;
•compliance with U.S. and foreign anti-corruption, anti-bribery, and anti-money laundering laws;
•enactment of tariffs, sanctions, fines, or other trade restrictions;
•exchange rate risk;
•increased exposure to public health issues such as pandemics, and related industry and governmental actions to address these issues; and
•regional economic and political instability and other geopolitical risks.
As a result of these risks, our efforts to expand our global operations may not be successful, which could limit our ability to grow our business.
Our BNPL platform increases our exposure to consumer defaults, bad transactions, and merchant insolvency.
Revenue generated from BNPL products depends on our ability to recoup the purchase value of the goods or services that consumers have purchased using our BNPL platform. Although we rely on technology to assess consumers’ repayment capability for our BNPL products, there can be no guarantee that such processes will always accurately predict repayments. Miscalculation of consumers’ repayment ability or a material increase in repayment failures, whether due to the current inflationary environment, the possibility of a recession, market volatility, or otherwise, may adversely impact our results of operations, profitability and prospects. In addition, if consumers who have purchased products or services using our BNPL platform do not receive the products or services, they may cease payment on their outstanding balances or request a refund on previous payments, and our business may be negatively impacted.
The performance of our BNPL platform depends also on the sales of products and services by retail merchants. Merchants’ sales may decrease as a result of factors outside of their control, including deteriorating macroeconomic conditions and supply chain disruptions. If a merchant closes some or all of its locations, ceases its operations, or fails to deliver goods or services to our consumers, the merchant may not be able to reimburse us for chargebacks or refunds or may not be able to repay the funds we have advanced to them, all of which could result in higher charge-off rates than anticipated. Moreover, if the financial condition of a merchant deteriorates significantly such that the merchant becomes subject to a bankruptcy proceeding, we may not be able to recover any amounts due to us from the merchant, and our financial results would be adversely affected.
Square Banking subjects us to risks related to bank partnerships and FDIC and other regulatory obligations.
We have partnered, on a non-exclusive basis, with Sutton Bank, an Ohio-chartered, Member FDIC bank, to offer FDIC-insured, business checking accounts for our sellers. The bank is subject to oversight both by the Federal Deposit Insurance Corporation (“FDIC”) and the State of Ohio. Under the terms of our program agreement with Sutton Bank, checking accounts for our sellers are opened and maintained by Sutton Bank. We act as the service provider to, among other things, facilitate communication between our sellers and Sutton Bank. We believe our business checking account program, including applicable records maintained by us and Sutton Bank, complies with all applicable requirements for each participating seller’s deposits to be covered by FDIC insurance, up to the applicable maximum deposit insurance amount. However, if the FDIC were to disagree, the FDIC may not recognize sellers’ claims as covered by deposit insurance in the event Sutton Bank fails and enters receivership proceedings under the Federal Deposit Insurance Act (“FDIA”). If the FDIC were to determine that our checking account program is not covered by deposit insurance, or if Sutton Bank were to actually fail and enter receivership proceedings under the FDIA, participating sellers may withdraw their funds, which could adversely affect our brand, and our business. Due to the fact that we are a service-provider to our bank partner, we are subject to audit standards for third-party vendors in accordance with FDIC guidance and examinations by the FDIC.
Square Savings offers our sellers FDIC-insured, interest bearing savings accounts at Square Financial Services. The deposits held at Square Financial Services are insured by the FDIC up to legal limits. As a FDIC-insured institution, Square Financial Services is assessed a quarterly deposit insurance premium, calculated based on its average consolidated total assets. We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures, we may be required to pay higher FDIC premiums. Any future additional assessments, increases or required prepayments in FDIC insurance premiums could reduce our profitability and negatively impact our business.
We intend to continue to explore other products, models, and structures for Square Banking. For example, we recently made the Square Credit Card available to some of our sellers. Some models or structures of Square Banking may require, or be deemed to require, additional data, procedures, partnerships, licenses, regulatory approvals, or capabilities that we have not yet obtained or developed. The licenses required in connection with our lending program and other activities related to the Square Banking program subject us to reporting requirements, bonding requirements, and inspection by applicable state regulatory agencies. Should we fail to expand and evolve Square Banking in a successful manner, or should these new products, models or structures, or new regulations or interpretations of existing regulations, impose requirements on us that are cumbersome or that we cannot satisfy, our business may be materially and adversely affected.
Square Loans are subject to additional risks relatingrelated to the availability of capital, seller payments, availability and structure of its bank partnership, expansion of its products, regulatory obligations,interest rate, deposit insurance premiums, and general macroeconomic conditions.
Square Capital, which includesLoans is our wholly owned subsidiarycommercial lending program. Square Capital, LLC,Financial Services, as the originator of the loans provided by Square Loans in the U.S., is subject to risks in addition to those described elsewhere in this Annual Report on Form 10-K. Maintaining and growing our Square CapitalLoans business is dependent on institutional third-party investors purchasing the eligible business loans originated by our bank partner.us. If such third parties fail to continue to purchase such business loans or reduce the amount of future loans they purchase, then our bank partnerwe may need to reduce originations, or we would need to fund the purchase of additional business loans from our own resources. We then may have to reduce the scale of Square Capital,Financial Services, which could have a direct impact on our ability to grow. Additionally, Square CapitalFinancial Services has certain customary repurchase obligations in its loan purchase and servicing agreements with such institutional third partythird-party investors for breaches of certain eligibility representations and warranties. If third parties reduce the price they are willing to pay for these business loans or reduce the servicing fees they pay us in exchange for servicing the business loans on their behalf, then the financial performance of Square CapitalFinancial Services would be harmed.
The business loans provided by Square Loans are generally unsecured obligations of our Square sellers, who utilize Square Capital, and they are not guaranteed or insured in any way. Adverse changes in macroeconomic conditions or the credit quality of our Square sellers could cause some Square sellers who utilize Square CapitalLoans to cease operating or to experience a decline in their payment processing volume, thereby rendering them unable to make payment on the business loan and/or extend the repayment period beyond the contractual repayment terms on the business loan. To the extent a seller breaches a contractual obligation, such as the requirement to make minimum payments or other breach, the seller would be liable for an accelerated business loan repayment, where Square Capital'sour recourse is to the business and not to any individual or other asset. In addition, because the servicing fees we receive from third partythird-party investors depend on the collectability of the business loans, if there is an increase in Square sellers who utilize Square CapitalLoans who are unable to make repayment of business loans, we will be unable to collect our entire servicing fee for such loans. While our exposure to loans that we sell to third parties is more limited, we expect thatif the impactsellers who utilize Square Loans are unable to repay their loans, the risk of COVID-19 on loan performance will increase risk loss forin our owned loan portfolio.portfolio will increase and our business may be adversely affected.
In addition, adverse changes in macroeconomic conditions as a result of the COVID-19 pandemic have ledmay lead to a decrease in the number of sellers eligible for Square Capital facilitated business loansLoans and strainedmay strain our ability to correctly identify such sellers on behalf of our bank partner or manage the risk of non-payment or fraud as servicer of the business
loans. As a result, Square Capital ceased to facilitate new business loans, with the exception of PPP loans, during the second quarter of 2020. In the third quarter of 2020, Square Capital resumed offering its regular business loans under stricter eligibility criteria, but it remains uncertain at what levels Square Capital will facilitate such business loans. If we fail to correctly predict the likelihood of timely repayment or correctly price such business loans, our business may be materially and adversely affected.
We have partnered,Square Financial Services’ profitability depends, in part, on a non-exclusive basis, with a Utah-chartered, member FDIC industrial bank to originateits net interest income. Net interest income is the loans. Such bank may offer products that compete with ours. The bank is subject to oversight both bydifference between interest income earned on interest-bearing assets, such as loans and securities, and interest expense paid on interest-bearing liabilities, such as deposits and borrowed funds. Changes in interest rates and monetary policy can impact the Federal Deposit Insurance Corporation (FDIC)demand for new loans, the credit profile of our borrowers, the yields earned on loans and securities, and the Staterates paid on deposits and borrowings. The impact of Utah. Due to the fact that we are a service-provider toany sudden and substantial move in interest rates and/or increased competition may have an adverse effect on our bank partner, we are subject to audit standards for third-party vendors in accordance with FDIC guidancebusiness, financial condition and examinations by the FDIC. There has been, andresults of operations, as our net interest income may continue to be regulatory interest in and/or litigation challenging partnered lending arrangements where a bank makes loans and then sells and assigns such loans to a non-bank entity that is engaged in assisting with the origination and servicing of the loan. If our bank partner ceases to partner with us, ceases to abide by the terms of our agreement with them, or cannot partner with us on commercially reasonable terms, and we are not able to find suitable alternatives and/or make business loans ourselves pursuant to state licensing requirements, Square Capital may need to enter into a new partnership with another qualified financial institution or pursue an alternative model for originating business loans, all of which may be time-consuming and costly and/or lead to a loss of institutional third-party investors willing to purchase such business loans, and as a result Square Capital may be materially and adversely affected.
We intend to continue to explore other products, models, and structures for Square Capital, including forming a Utah industrial bank and other forms of credit and loan products. Some of those models or structures may require, or be deemed to require, additional data, procedures, partnerships, licenses, regulatory approvals, or capabilities that we have not yet obtained or developed. The licenses required
Our participation in connection with our lending program and other activities relatedgovernment relief programs set up in response to the Square Capital programCOVID-19 pandemic, such as facilitating loans to businesses under the Paycheck Protection Program may subject us to reporting requirements, bonding requirements,new risks and inspectionuncertainties.
As a participant in the Paycheck Protection Program (“PPP”) administered by applicable state regulatory agencies. Should we failthe Small Business Administration (“SBA”) and enacted in March 2020 in response to expand and evolvethe COVID-19 pandemic, Square Capital provided small businesses two-year or five-year PPP loans. Square Capital approved and funded the last remaining PPP loan applications in May 2021 upon exhaustion of the funds in the program. While the vast majority of Square Capital’s PPP loans have been forgiven or guaranteed at this point, Square Capital’s documentation, review, underwriting, and servicing processes could be subject to further scrutiny by the SBA. We also may become subject to litigation arising as a result of our participation in the PPP, which could result in significant financial liability or could adversely affect our reputation. There can be no assurance that Square Capital will be successful manner, or should these new products, models or structures, or new regulations or interpretationsin mitigating all of existing regulations, impose requirements on us that are impracticalthe risks associated with the PPP loans or that we cannot satisfy, the future growththis lending will not have a negative impact on our business and successresults of Square Capital may be materially and adversely affected.operations.
Operational Risks
We, our sellers, our partners, and others who use our services obtain and process a large amount of sensitive data. Any real or perceived improper or unauthorized use of, disclosure of, or access to such data could harm our reputation as a trusted brand, as well as have a material and adverse effect on our business.
We, our sellers, and our partners, including third-party vendors and data centers that we use, obtain and process large amounts of sensitive data, including data related to our customers, our sellers’ customers, and their transactions. We face risks, including to our reputation as a trusted brand, in the handling and protection of this data. These risks will increase as our business continues to expand to include new products, subsidiaries, and technologies, and as we and our third partythird-party vendors rely on an increasingly distributed workforce. Our operations involve the storage and transmission of sensitive informationdata of individuals and businesses using our services, including their names, addresses, social security/tax ID numbers (or their foreign equivalents), government IDs, payment card numbers and expiration dates, bank account information, loans they have applied for or obtained, and data regarding the performance of our sellers’ businesses. Additionally, certain of our products and services are subject to the Health Insurance Portability and Accountability Act of 1996 (and the rules and regulations thereunder, as amended, including with respect to the HITECH Act) (HIPAA), and therefore we are required to take measures to safeguard protected health information of our sellers and their customers.health care entity-sellers' customers when using those products. Our services also provide third partythird-party developers the opportunity to provide applications to our sellers in the Square and Weebly app marketplaces. Sellers who choose to use such applications can grant permission allowing the applications to access content created or held by sellers in their Square or Weebly account. Should our internal or third partythird-party developers experience or cause a breach, incident, or a technological bug, that could lead to a compromise of the content of data held by such sellers, including personal data.
Our products and services operate in conjunction with, and we are dependent upon, third-party products and components across a broad ecosystem. There have been and may continue to be significant attacks on third-party providers, and we cannot guarantee that our or our third-party developers or vendors’ systems and networks have not been breached or that they do not contain exploitable defects or bugs that could result in a breach of or disruption to our systems and networks or the systems and networks of third parties that support us and our products and services. If there is a security vulnerability, error, or other bug in one of these third-party products or components and if there is a security exploit targeting them, we could face increased costs, claims and liability, proceedings and litigation, reduced revenue, or harm to our reputation or competitive position. The natural sunsetting of third-party products and operating systems that we use requires our personnel to reallocate time and attention to migration and updates, during which period potential security vulnerabilities could be exploited.
More generally, if our privacy, anddata protection, or information security measures or those of third partythird-party developers andor vendors are inadequate or are breached or otherwise compromised, and, as a result, there is improper disclosure of or someone obtains unauthorized access to or exfiltrates funds, bitcoin, investments, or other assets, or other sensitive informationdata on our systems or our partners’ systems, or if we, our third partythird-party developers or vendors suffer a ransomware or advanced persistent threat attack, or if any of the foregoing is reported or perceived to have occurred, our reputation and business could be damaged. If the sensitive information isdata or assets are lost or improperly accessed, misused, disclosed, destroyed, or altered or threatened to be improperly accessed, misused, disclosed, destroyed, or altered, we could incur
significant financial losses and costs and liability associated with remediation and the implementation of additional security measures and be subject to claims, litigation, regulatory scrutiny, and investigations. For example, in April 2022 we announced that we determined that a former employee downloaded certain reports of our subsidiary Cash App Investing in December 2021 that contained some U.S. customer information without permission after the former employee’s employment ended, as disclosed in our Current Report on Form 8-K filed with the SEC on April 4, 2022. We have incurred costs related to our investigation and response to this incident, and we could incur other losses, costs, and liabilities in connection with such incident.
Under payment card rules and our contracts with our card processors and other counterparties, if there is a breach of payment card information that we store or that is stored by our sellers or other third parties with which we do business, we could be liable to the payment card issuing banks for certain of their costs and expenses. Additionally, if our own confidential business information were improperly disclosed, accessed, or breached, our business could be materially and adversely affected. A core aspect of our business is the reliability and security of our payments platforms. Any perceived or actual breach of security or other type of security incident or any type of fraud perpetrated by bad actors such as account takeovers or fake account scams, regardless of how it occurs or the extent or nature of the breach, incident, or fraud, could have a significant impact on our reputation as a trusted brand, cause us to lose existing sellers or other customers, prevent us from obtaining new sellers and other customers, require us to expend significant funds to remedy problems caused by breaches and incidents and to implement measures in an effort to prevent further breaches and incidents, and expose us to legal risk and potential liability including those resulting from governmental or regulatory investigations, class action litigation, and costs associated with remediation, such as fraud monitoring and forensics. Any actual or perceived security breach or incident at a company providing services to us or our customers on our behalf could have similar effects. Further, any actual or perceived security breach or incident with respect to the bitcoin and blockchain ledger, regardless of whether such breach or incident directly affects our products and services, could have negative reputational effects and harm customer trust in us and our products and services.
While we maintain cybersecurity insurance, our insurance may be insufficient to cover all liabilities incurred by such attacks. We cannot be certain that our insurance coverage will be adequate for data handling or datainformation security liabilities actually incurred, that insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, premiums, or deductibles could have a material adverse effect on our business, including our financial condition, operating results, and reputation.
Our products and services may not function as intended due to errors in our software, hardware, and systems, product defects, or due to security breaches or incidents or human error in administering these systems, which could materially and adversely affect our business.
Our software, hardware, systems, and processes may contain undetected errors or vulnerabilities that could have a material adverse effect on our business, particularly to the extent such errors or vulnerabilities are not detected and remedied quickly. We have from time to time found defects and errors in our customer-facing software and hardware, internal systems, external facing communications, manual processes, and technical integrations with third-party systems, and new errors or vulnerabilities may be introduced in the future. If there are such errors or defects in our software, hardware, systems, or systems,external facing communications, including as a result of human errors, our customers’ experience with us may be negatively impacted, and we may face negative publicity and harm to our brand and reputation, government inquiries or investigations, claims and litigation. Additionally, we rely on a limited number of component and product suppliers located outside of the U.S. to manufacture our products. As a result, our direct control over production and distribution is limited, and it is uncertain what effect such diminished control will have on the quality of our products. If there are defects in the manufacture of our hardware products, we may face similar negative publicity, investigations, and litigation, and we may not be fully compensated by our suppliers for any financial or other liability that we suffer as a result. As our hardware and software services continue to increase in size and complexity, and as we integrate new, acquired subsidiaries with different technology stacks and practices, these risks may correspondingly increase as well.
In addition, we provide frequent incremental releases of product and service updates and functional enhancements, which increase the possibility of errors. The products and services we provide are designed to process complex transactions and deliver reports and other information related to those transactions, all at high volumes and processing speeds. Any errors, data leaks, security breaches or incidents, disruptions in services, or other performance problems with our products or services caused by external or internal actors could hurt our reputation and damage our and our customers’ businesses. Software and system errors, or human error,errors, could delay or inhibit settlement of payments, result in oversettlement, cause reporting errors, cause pricing irregularities or prevent us from collecting transaction-based fees, or negatively impact our ability to serve our customers, all of which have occurred in the past. Similarly, security breaches such asor incidents, which may be caused by or result from cyber-attacks by hackers or others, computer viruses, worms, ransomware, other malicious software programs, security vulnerabilities, employee or service provider theft, misuse or negligence, phishing, identity theft or compromised credentials, denial-of-service attacks, or other causes, have from time to time impacted our business and could disrupt the proper functioning of our software products or services, cause errors, allow loss or unavailability of, unauthorized access to, or disclosure of, toproprietary, confidential or otherwise sensitive proprietary, or confidential informationdata of ours or our customers, and other destructive outcomes. Moreover, security breaches or incidents or errors in our hardware or software design or manufacture could cause product safety issues typical of consumer electronics devices. SuchAny of the foregoing issues could lead to product recalls and inventory shortages, result in costly and time-consuming efforts to redesign and redistribute our products, give rise to regulatory inquiries and investigations, and result in lawsuits and other liabilities and losses, any of which could have a material and adverse effect on our business.
Additionally, electronic payment, hardware, and software products and services, including ours, have been, and could continue to be in the future, specifically targeted and penetrated or disrupted by hackers and other malicious actors. Because the techniques used to obtain unauthorized access to data, products, and services and to disable, degrade, or sabotage them change frequently and may be difficult to detect or remediate for long periods of time, we and our customers may be unable to anticipate these techniques or implement adequate preventative measures to stop them. If we or our sellers or other customers are unable to anticipate or prevent these attacks, our sellers' or other customers may be harmed, our reputation could be damaged, and we could incur significant liability.
Systems failures, interruptions, delays in service, catastrophic events, and resulting interruptions in the availability of our products or services, or those of our sellers, could harm our business and our brand, and subject us to substantial liability.
Our systems and those of our third-party vendors, including data center facilities, may experience service interruptions, outages, cyber-attacks and security breaches and incidents, human error, earthquakes, hurricanes, floods, pandemics, fires, other natural disasters, power losses, disruptions in telecommunications services, fraud, military or political conflicts, terrorist attacks and other geopolitical unrest, computer viruses, ransomware, and other malicious software, changes in social, political, or regulatory conditions or in laws and policies, or other changes or events. Our systems and facilities are also subject to break-ins, sabotage, and acts of vandalism. Some of our systems are not fully redundant, and our disaster-recovery planning is not sufficient for all eventualities. In addition, as a provider of payments solutions and other financial services, we are subject to increased scrutiny by regulators that may require specific business continuity and disaster recovery plans and more rigorous testing of such plans. This increased scrutiny may be costly and time-consuming and may divert our resources from other business priorities.
We have experienced and will likely continue to experience denial-of-service and other cyber-attacks, system failures, outages, security incidents, and other events or conditions that interrupt the availability, data integrity, or reduce the speed or functionality of our products and services. These events have resulted and likely will result in loss of revenue. In addition, they could result in significant expense to repair or replace damaged equipment and remedy resultant data loss or corruption. More generally, the COVID-19 pandemic has increased attack opportunities available to criminals,The risk of security incidents is increasing as they attempt to profit from disruptions and the resulting shift in companies and individuals working remotely and online, as well as thewe experience an increase in electronic payments, e-commerce, and other online activity. As such, the riskAdditionally, due to political uncertainty and military actions associated with Russia’s invasion of cybersecurityUkraine, we and our service providers are vulnerable to heightened risks of security incidents is increasing, and wesecurity and privacy breaches from or affiliated with nation-state actors, including attacks that could materially disrupt our systems, operations, supply chain, products, and services. We cannot provide assurances that our preventative efforts against such incidents will be successful. A prolonged interruption in the availability or reduction in the speed or other functionality of our products or services could materially harm our reputation and business. Frequent or persistent interruptions in our products and services could cause customers to believe that our products and services are unreliable, leading them to switch to our competitors or to avoid our products and services, and could permanently harm our reputation and business. Moreover, to the extent that any system failure or similar event results in damages to customers or contractual counterparties, these customers and contractual counterparties could seek compensation from us for their losses, and those claims, even if unsuccessful, would likely be time-consuming and costly for us to address.
A significant natural or man-made disaster could have a material and adverse impact on our business. Our headquarters and certainCertain of our offices and data center facilities are located in the San Francisco Bay Area, a region known for seismic activity. Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems at our headquartersoffices or data centers could result in lengthy interruptions in our services or could result in related liabilities. We do not maintain insurance sufficient to compensate us for the potentially significant losses that could result from disruptions to our services.
Significant natural or other disasters, including pandemics, could also have a material and adverse impact on our sellers or other customers, which, in the aggregate, could in turn adversely affect our results of operations.
The theft, loss, or destruction of a private keykeys required to access ourthe bitcoin may be irreversible. If we are unable to access our private keys or if we experience a hack or other data loss relating to the bitcoins we hold on behalf of customers,ourselves and other parties, such as our customers and our trading partners, may be unableirreversible, and any failure to access their bitcoinssafeguard such bitcoin could materially and it could harm customer trust in usadversely affect our business, operating results, and our products.financial condition.
Bitcoins are controllable onlyWe hold bitcoin on behalf of ourselves and other parties such as our customers and our trading partners. Bitcoin can be accessed by the possessor of both the unique public key and private keycryptographic keys relating to the local or online digital wallet in which the bitcoins arebitcoin is held. While the bitcoin and blockchain ledger require a public key relating to a digital wallet to be published when used in a transaction, private keys must be safeguarded and kept private in order to prevent a third partythird-party from accessing the bitcoinsbitcoin held in such digital wallet. To the extent any of our private key iskeys are lost, destroyed, or otherwise compromised and no backup of thesuch private key is accessible, we will be unable to access the bitcoinsbitcoin we hold on behalf of ourselves and other parties. The vast majority of bitcoin we hold for ourselves and our customers is held in offline and air-gapped cold storage. To facilitate transactions, we hold a small portion of bitcoin in a networked hot wallet. At times, we may also utilize third-party custodians to custody our bitcoin or a portion of the related digital wallet. Further, webitcoin held for our customers on our behalf.
Any inappropriate access or theft of bitcoin held by us or any third-party custodian, or the third-party custodian’s failure to maintain effective controls over the custody and other settlement services provided to us, could materially and adversely affect us. We cannot provide assurance that the digital wallets used to store our walletand other parties’ bitcoin will not be hacked or compromised. The bitcoin
and blockchain ledger, as well as other cryptocurrencies and blockchain technologies, have been, and may in the future be, subject to security breaches or incidents, hacking, or other malicious activities. Any loss of private keys relating to, or hack or other compromise of, digital wallets used to store our customers’ bitcoinsbitcoin could adversely affect our customers’ ability to access or sell their bitcoinsbitcoin and could harm customer trust in us and our products, require us to expend significant funds for remediation, and expose us to litigation, regulatory enforcement actions, and other potential liability. Additionally, any loss of private keys relating to, or hack or other compromise of, digital wallets used by third parties to store bitcoinsbitcoin or other cryptocurrencies could have negative reputational effects on us and harm customer trust in us and our products. As the number of customers who use ourtransact bitcoin producton Cash App has increased and the valueamount of bitcoinsbitcoin we hold on behalf of such customers has grown, significantly, the risks and consequences of such adverse events have increased and could materially and adversely affect our business.business, operating results, and financial condition.
Our risk management efforts may not be effective, which could expose us to losses and liability and otherwise harm our business.
We offer payments and other products and services to a large number of customers. We have programs to vet and monitor these customers and the transactions we process for them as part of our risk management efforts, but such programs require continuous improvement and may not be effective in detecting and preventing fraud and illegitimate transactions. When our payments services are used to process illegitimate transactions, and we settle those funds to customers and are unable to recover them, we suffer losses and liability. As a greater number of larger sellers use our services, our exposure to material risk losses from a single seller, or from a small number of sellers, will increase. Illegitimate transactions can also expose us to governmental and regulatory enforcement actions and potentially prevent us from satisfying our contractual obligations to our third partythird-party partners, which may cause us to be in breach of our obligations. The highly automated nature of, and liquidity offered by, our payments and peer-to-peer services make us and our customers a target for illegal or improper uses, including scams and fraud directed at Cash Appour customers, fraudulent or illegal sales of goods or services, money laundering, and terrorist financing. Identity thieves and those committing fraud using stolen or fabricated credit card, debit card, or bank account numbers, or other deceptive or malicious practices such as account takeovers, potentially can steal significant amounts of money from businesses like ours or from our customers or third parties. Our risk management policies, procedures, techniques, and processes may not be sufficient to identify all of the risks to which we are exposed, to enable us to prevent or mitigate the risks we have identified, or to identify additional risks to which we may become subject in the future. Our current business, changes due to COVID-19changing and the relateduncertain economic, impact,geopolitical and regulatory environment, and anticipated domestic and international growth will continue to place significant demands on our risk management and compliance efforts, and we will need to continue developing and improving our existing risk management infrastructure, techniques, and processes. In addition, when we introduce new products or services, such as Square Banking, BNPL, and Cash App Borrow, expand existing services, including online payment acceptance and expanded methods of instantly moving money, focus on new business areas, including consumer financing and loans, or begin to operate in markets where we have a limited history of fraud loss, we may be less able to forecast and carry appropriate reserves on our books for those losses. Furthermore, whileAdditionally, we recently made certain Cash App functions available to customers between the ages of 13 through 17 with the authorization of a parent or guardian. The risks and the potential harm to our reputation are magnified in instances of fraud or unauthorized or inappropriate transactions involving minors.
While we maintain a program of insurance coverage for various types of liabilities, we may self-insure against certain business risks and expenses where we believe we can adequately self-insure against the anticipated exposure and risk or where insurance is either not deemed cost-effective or unavailable.
We are currently, and will continue to be, exposed to risks associated with chargebacks and refunds in connection with payment card fraud or relating to the goods or services provided by our sellers. In the event that a billing dispute between a cardholder and a seller is not resolved in favor of the seller, including in situations where the seller engaged in fraud, the transaction is typically “charged back” to the seller and the purchase price is credited or otherwise refunded to the cardholder. The risk of chargebacks is typically greater with our sellers that promise future delivery of goods and services. Moreover, chargebacks typically increase during economic downturns due to sellers becoming insolvent or bankrupt or otherwise unable to fulfill their commitments for goods or services. Consequently, we have seen an increase in chargebacks,Additionally, the recent global supply chain disruptions and chargebacks may rise further as a result of the economic downturn caused byshortages related to the COVID-19 pandemic.pandemic have negatively affected sellers' ability to deliver goods and services on time or at all, which increases the risk of chargebacks. If we are unable to collect chargebacks or refunds from the seller’s account, or if the seller refuses to or is unable to reimburse us for chargebacks or refunds due to closure, bankruptcy, or other reasons, we, as the merchant of record, may bear the loss for the amounts paid to the cardholder. We collect and hold reserves for a limited number of sellers whose businesses are deemed higher risk in order to help cover potential losses from chargebacks and refunds, but this practice is limited and there can be no assurances that we will be successful in mitigating such losses. Our financial results would be adversely affected to the extent sellers do not fully reimburse us for the related chargebacks and refunds. In addition, if more of our sellers, or a number of our larger sellers, become insolvent or bankrupt as a result of the global economic downturn, our potential losses from chargebacks and refunds may increase and exceed our reserves, in which case we may suffer financial losses and our business may be adversely affected. Moreover, since October 2015, businesses that cannot process EMV chip cards are held financially responsible for certain fraudulent transactions conducted using chip-enabled cards. This has shifted an increased amount of the risk for certain fraudulent transactions from the issuing banks to these sellers, which has resulted in our having to seek an increased level of reimbursement for chargebacks from our sellers that do not deploy EMV-compliant card readers. Not all of the readers we offer to merchants are EMV-compliant. If we are unable to maintain our losses from chargebacks at acceptable levels, the payment card networks could fine us, increase our
transaction-based fees, or terminate our ability to process payment cards. Any increase in our transaction-based fees could damage our business, and if we were unable to accept payment cards, our business would be materially and adversely affected. If any of our risk management policies and processes, including self-insurance or holding seller reserves, are ineffective, we may suffer large financial losses, we may be subject to civil and criminal liability, and our business may be materially and adversely affected.
We are dependent on payment card networks and acquiring processors, and any changes to their rules or practices could harm our business.
Our business depends on our ability to accept credit and debit cards, and this ability is provided by the payment card networks, including Visa, MasterCard, American Express, and Discover. InFor a majority of these cases,our transactions, we do not directly access the payment card networks that enable our acceptance of payment cards. As a result, we must rely on banks and acquiring processors to process transactions on our behalf. Our acquiring processor agreements have terms ranging from two to six years. Our three largest such agreements expire between the third quarter of 2022 and the first quarter of 2023. These banks and acquiring processors may fail or refuse to process transactions adequately, may breach their agreements with us, may terminate their agreements with us if they believe we have breached them, or may refuse to renegotiate or renew these agreements on terms that are favorable or commercially reasonable. They might also take actions that degrade the functionality of our services, impose additional costs or requirements on us, or give preferential treatment to competitive services, including their own services. If we are unsuccessful in establishing, renegotiating, or maintaining mutually beneficial relationships with these payment card networks, banks, and acquiring processors, our business may be harmed.
The payment card networks and our acquiring processors require us to comply with payment card network operating rules, including special operating rules that apply to us as a “payment facilitator” providing payment processing services to merchants. The payment card networks set these network rules and have discretion to interpret the rules and change them at any time. Changes to these network rules or how they are interpreted could have a significant impact on our business and financial results. For example, changes in the payment card network rules regarding chargebacks may affect our ability to dispute chargebacks and the amount of losses we incur from chargebacks. Any changes to or interpretations of the network rules that are inconsistent with the way we or our acquiring processors currently operate may require us to make changes to our business that could be costly or difficult to implement. If we fail to make such changes or otherwise resolve the issue with the payment card networks, the networks could fine us or prohibit us from processing payment cards. In addition, violations of the network rules or any failure to maintain good relationships with the payment card networks could impact our ability to receive incentives from them, could increase our costs, or could otherwise harm our business. If we were unable to accept payment cards or were limited in our ability to do so, our business would be materially and adversely affected.
We are required to pay interchange and assessment fees, processing fees, and bank settlement fees to third-party payment processors, payment networks, and financial institutions. From time to time, payment card networks have increased, and may increase in the future, the interchange fees and assessments that they charge for each transaction processed using their networks. In some cases, we have negotiated favorable pricing with acquiring processors and networks that are contingent on certain business commitments and other conditions. If we fail to meet such conditions, the fees we are charged will rise. Moreover, our acquiring processors and payment card networks may refuse to renew our agreements with them on terms that are favorable, commercially reasonable, or at all. Interchange fees or assessments are also subject to change from time to time due to government regulation. Because we generally charge our sellers a standard rate for our managed payments services, rather than passing through interchange fees and assessments to our sellers directly, any increase or decrease in interchange fees or assessments or in the fees we pay to our acquiringthird-party payment processors, payment networks, or financial institutions could make our pricing less competitive, lead us to change our pricing model, or adversely affect our margins, all of which could materially harm our business and financial results. Likewise, we have negotiated favorable pricing for the processing fees we pay to the payment card networks for peer-to-peer transactions on our Cash App. As such, an increase in interchange fees or assessments could raise our costs for such transactions, which could materially harm our business and financial results.
We could be, and in the past have been, subject to penalties from payment card networks if we fail to detect that sellers are engaging in activities that are illegal, contrary to the payment card network operating rules, or considered “high risk.” We must either prevent high-risk sellers from using our products and services or register such high-risk sellers with the payment card networks and conduct additional monitoring with respect to such high-risk sellers. Any such penalties could become material and could result in termination of our ability to accept payment cards or could require changes in our process for registering new sellers. This could materially and adversely affect our business.
We rely on third parties and their systems for a variety of services, including the processing of transaction data and settlement of funds to us and our sellers,customers, and these third parties’ failure to perform these services adequately could materially and adversely affect our business.
To provide our products and services, we rely on third parties that we do not control, such as the payment card networks, our acquiring and issuing processors, the payment card issuers, a carrying broker, bank partners, various financial institution partners, systems like the Federal Reserve Automated Clearing House, and other partners. We rely on these third parties for a variety of services, including the transmission of transaction data, processing of chargebacks and refunds, settlement of funds to our sellers, certain brokerage services, storing customer funds, authorizing payment transactions under our various card programs, originating loans to customers, and the provision of information and other elements of our services. For example, we currently rely on threea limited number of acquiring processors for eachin many of the United States, Canada, and Japan and two for each of Australia and the United Kingdom.jurisdictions in which we offer our services. While we believe there are other acquiring processors that could meet our needs, adding or transitioning to new providers may significantly disrupt our business and increase our costs. In the event these third parties fail to provide these services adequately, including as a result of financial difficulty or insolvency, errors in their systems, outages or events beyond their control, or refuse to provide these services on terms acceptable to us or at all, and we are not able to find suitable alternatives, our business may be materially and adversely affected. We have in the past experienced outages with third parties we have worked with, which has affected the ability to process payments for cards issued under our own brands.
We depend on key management, as well as our experienced and capable employees, and any failure to attract, motivate, and retain our employees could harm our ability to maintain and grow our business.
Our future success is significantly dependent upon the continued service of our executives and other key employees. If we lose the services of any member of management or any key personnel, we may not be able to locate a suitable or qualified replacement, and we may incur additional expenses to recruit and train a replacement, which could severely disrupt our business and growth. Jack Dorsey, our co-founder, President, and Chief Executive Officer, also serves as Chief Executive Officer of Twitter, Inc. This may at times adversely affect his ability to devote time, attention, and effort to Square.
To maintain and grow our business, we will need to identify, attract, hire, develop, motivate, and retain highly skilled employees. This requires significant time, expense, and attention. In addition, from time to time, there may be changes in our management team that may be disruptive to our business. If our management team, including any new hires that we make, fails to work together effectively and to execute our plans and strategies on a timely basis, our business could be harmed. Competition for highly skilled personnel is intense, particularly in the San Francisco Bay Area where our headquarters are located.intense. We may need to invest significant amounts of cash and equity to attract and retain new employees, and we may never realize returns on these investments. Historically, equity awards have been a key component of our employee compensation, and as a result, any decline in the price of our Class A common stock (directly or relative to the stock price of other companies with which we compete for talent) may adversely impact our ability to retain employees or to attract new employees. Additionally, potential changes in U.S. immigration policy may make it difficult to renew or obtain visas for any highly skilled personnel that we have hired or are actively recruiting. Furthermore, our international expansion and our business in general may be materially adversely affected if legislative or administrative changes to immigration or visa laws and regulations impair our hiring processes or projects involving personnel who are not citizens of the country where the work is to be performed. If we are not able to add and retain employees effectively, our ability to achieve our strategic objectives will be adversely affected, and our business and growth prospects will be harmed.
If we do not continue to improve our operational, financial, and other internal controls and systems to manage growth effectively, our business could be harmed.
Our current business and anticipated growth, as well as our entry into new lines of business and our acquisitions, will continue to place significant demands on our management and other resources. In order to manage our growth effectively, we must continue to strengthen our existing infrastructure and operational procedures, enhance our internal controls and reporting systems, and ensure we timely and accurately address issues as they arise. In particular, our continued growth will increase the challenges involved in:
•improving existing and developing new internal administrative infrastructure, particularly our operational, financial, communications, and other internal systems and procedures;
•successfully expanding and implementing internal controls as they relate to our new lines of business and any acquired businesses;
•installing enhanced management information and control systems; and
•preserving our core values, strategies, and goals and effectively communicating these to our employees worldwide.
These challenges have increased as we shift to a more distributed workforce. If we are not successful in developing and implementing the right processes and tools to manage our enterprise, our ability to compete successfully and achieve our business objectives could be impaired.
These efforts may require substantial financial expenditures, commitments of resources, developments of our processes, and other investments and innovations. As we grow and our business model evolves, we must balance the need for additional controls and systems with the ability to efficiently develop and launch new features for our products and services. However, it is likely that as we grow, we will not be able to launch new features, or respond to customer or market demands as quickly as a smaller, more efficient organization. If we do not successfully manage our growth, our business will suffer.
Additionally, our metrics are calculated using internal company data based on the activity we measure on our platforms and may be compiled from multiple systems, including systems that are organically developed or acquired through business combinations. There are inherent challenges and limitations in measuring our business globally at scale, and the methodologies used to calculate our metrics inherently require some judgment. For example, we currently identify a Cash App transacting active as a Cash App account that has at least one financial transaction using any product or service within Cash App during a specified period although certain of these accounts may share an alias identifier with one or more other transacting active accounts (for example, families sharing one alias identifier or one customer with multiple accounts). We regularly review our processes for calculating these metrics, and from time to time we may make adjustments to improve their accuracy or relevance. Further, as our business develops, we may revise or cease reporting metrics if we determine that such metrics are no longer appropriate measures of our performance. If investors do not consider our reporting metrics to accurately reflect our business or they disagree with our methodologies, our reputation may be harmed and our business may be adversely impacted.
Many of our key components are procured from a single or limited number of suppliers. Thus, we are at risk of shortage, price increases, tariffs, changes, delay, or discontinuation of key components, which could disrupt and materially and adversely affect our business.
Many of the key components used to manufacture our products, such as the custom parts of our magstripe reader, come from limited or single sources of supply. In addition, in some cases, we rely only on one manufacturer to fabricate, test, and assemble our products. For example, a single manufacturer assembles our magstripe reader and our contactless and chip reader, as well as manufactures those products’ plastic parts with custom tools that we own but that the manufacturer maintains on its premises. The term of the agreement with that manufacturer automatically renews for consecutive one-year periods unless either party provides notice of non-renewal. In general, our contract manufacturers fabricate or procure components on our behalf, subject to certain approved procedures or supplier lists, and we do not have firm commitments from all of these manufacturers to provide all components, or to provide them in quantities and on timelines that we may require. For example, pursuant to a development and supply agreement, a component supplier provides design, development, customization, and related services for components of the magnetic stripe-reading element in some of our products. The term of the agreement renews for consecutive one-year periods unless either party provides notice of non-renewal. Similarly, a component provider develops certain application-specific integrated circuits for our products pursuant to our designs and specifications. The term of our agreement with this provider renews for successive two-year terms unless either party provides notice of non-renewal.
Due to our reliance on the components or products produced by suppliers such as these, we are subject to the risk of shortages and long lead times or other disruptions in the supply of certain components or products. Our ongoing efforts to identify alternative manufacturers for the assembly of our products and for many of the single-sourced components used in our products may not be successful. In the case of off-the-shelf components, we are subject to the risk that our suppliers may discontinue or modify them, or that the components may cease to be available on commercially reasonable terms, or at all. We have in the past experienced, and may in the future experience, component shortages or delays or other problems in product assembly, and the availability of these components or products may be difficult to predict. For example, our manufacturers may experience temporary or permanent disruptions in their manufacturing operations due to equipment breakdowns, labor strikes or shortages, natural disasters, the occurrence of a contagious disease or illness, component or material shortages, cost increases, acquisitions, insolvency, bankruptcy, business shutdowns, trade restrictions, changes in legal or regulatory requirements, or other similar problems. The current global supply chain disruptions and shortages, in particular with respect to integrated circuits, have affected our supply chain and resulted in low levels of inventory for some of our hardware products. We therefore may be unable to timely fulfill orders for some hardware products. These hardware shortages could negatively affect our ability to serve and acquire sellers, and if such shortages continue for an extended period of time, could materially and adversely impact our financial results.
Additionally, various sources of supply-chain risk, including strikes or shutdowns at delivery ports or loss of or damage to our products while they are in transit or storage, intellectual property theft, losses due to tampering, third-party vendor issues with quality or sourcing control, failure by our suppliers to comply with applicable laws and regulation, potential tariffs or other trade restrictions, or other similar problems could limit or delay the supply of our products or harm our reputation. In the event of a shortage or supply interruption from suppliers of these components, such as the current global shortage of integrated circuits, we may not be able to develop alternate sources quickly, cost-effectively, or at all. Any interruption or delay in manufacturing, component supply, any increases in component costs, or the inability to obtain these parts or components from alternate sources at acceptable prices and within a reasonable amount of time, would harm our ability to provide our products to sellers on a timely basis or impact our cost of goods sold. This could harm our relationships with our sellers, prevent us from acquiring new sellers, and materially and adversely affect our business.
Some of our hardware devices manufactured in China are subject to 25% tariffs when imported to the United States, while some other hardware devices are subject to tariffs at 7.5%. These tariffs negatively affect the gross margin on the impacted products, which only partially has been offset by adjustments to the prices of some of the affected products. Any future tariffs and actions related to items imported from China or elsewhere could also negatively impact our gross margin on the impacted products, and increases in our pricing as a result of tariffs would reduce the competitiveness of our products if our competitors do not make similar pricing adjustments. The impact of any increased or new tariffs or other trade restrictions could have a material and adverse effect on our business, financial condition, and results of future operations.
Our business could be harmed if we are unable to accurately forecast demand for our products and to adequately manage our product inventory.
We invest broadly in our business, and such investments are partially driven by our expectations of the future success of a product. Our ability to accurately forecast demand for our products could be affected by many factors, including an increase or decrease in demand for our products or for our competitors’ products, and changes in general market or economic conditions.
If we underestimate demand for a particular product, our contract manufacturers and suppliers may not be able to deliver sufficient quantities of that product to meet our requirements, and we may experience a shortage of that product available for sale or distribution. If we overestimate demand for a particular product, we may experience excess inventory levels for that product and the excess inventory may become obsolete or out-of-date. Excess inventory may also result in inventory write-downs or write-offs and sales at further discounted prices, which could negatively impact our gross profit and our business.
Our services must integrate with a variety of operating systems, and the hardware that enables merchants to accept payment cards must interoperate with third-party mobile devices utilizing those operating systems. If we are unable to ensure that our services or hardware interoperate with such operating systems and devices, our business may be materially and adversely affected.
We are dependent on the ability of our products and services to integrate with a variety of operating systems, as well as web browsers, that we do not control. Any changes in these systems that degrade the functionality of our products and services, impose additional costs or requirements on us, or give preferential treatment to competitive services, including their own services, could materially and adversely affect usage of our products and services. In addition, we rely on app marketplaces, such as the Apple App Store and Google Play, to drive downloads of our mobile apps. Apple, Google, or other operators of app marketplaces regularly make changes to their marketplaces, and those changes may make access to our products and services more difficult. In the event that it is difficult for our customers to access and use our products and services, our business may be materially and adversely affected. Furthermore, Apple, Google, or other operators of app marketplaces regularly provide software updates, and such software updates may not operate effectively with our products and services, which may reduce the demand for our products and services, result in dissatisfaction by our customers, and may materially and adversely affect our business.
In addition, ourSquare hardware interoperates with wired and wireless interfaces to mobile devices developed by third parties. For example, the current versions of ourSquare’s magstripe reader plug into an audio jack or a Lightning connector. The use of these connection types could change, and such changes and other potential changes in the design of future mobile devices could limit the interoperability of our hardware and software with such devices and require modifications to our hardware or software. If we are unable to ensure that our hardware and software continue to interoperate effectively with such devices, if doing so is costly, or if existing merchants decide not to utilize additional parts necessary for interoperability, our business may be materially and adversely affected.
ManyOur TIDAL business depends upon maintaining complex licenses with copyright owners, and it is difficult to estimate the amount payable under our license agreements.
Under TIDAL’s license agreements and relevant statutes, we must pay all required royalties to record labels, music publishers, and other copyright owners in order to stream, distribute, and display content. The determination of the amount and timing of such royalty payments is complex and subject to a number of variables, including the type of content accessed, the country in which it is accessed, the service tier such content is streamed on, the identity of the license holder to whom royalties are owed, the current size of our key components are procured from a singlesubscriber base, the applicability of any most favored nations provisions, and any applicable fees, waivers, and discounts, among other variables. We may underpay/under-accrue or limited number of suppliers. Thus, we are at risk of shortage, price increases, tariffs, changes, delay, or discontinuation of key components, which could disruptoverpay/over-accrue the royalty amounts payable to record labels, music publishers, and materiallyother copyright owners. Failure to accurately pay our royalties may damage our business relationships, our reputation, and adversely affect our business.
Many of the key components used to manufacture our products, such as the custom parts of our magstripe reader come from limited or single sources of supply. In addition, in some cases, we rely only on one manufacturer to fabricate, test,business, operating results, and assemble our products. For example, a single manufacturer assembles our magstripe reader and our contactless and chip reader, as well as manufactures those products’ plastic parts with custom tools that we own but that they maintain on their premises. The term of the agreement with that manufacturer automatically renews for consecutive one-year periods unless either party provides notice of non-renewal. In general, our contract manufacturers fabricate or procure components on our behalf, subject to certain approved procedures or supplier lists, and we do not have firm commitments from all of these manufacturers to provide all components, or to provide them in quantities and on timelines that we may require. For example, pursuant to a development and supply agreement, a component supplier provides design, development, customization, and related services for components of the magnetic stripe-reading element in some of our products. The term of the agreement extends through March 2021 and then renews for consecutive one-year periods unless either party provides notice of non-renewal. Similarly, a component provider develops certain application-specific integrated circuits for our products pursuant to our designs and specifications. The term of our agreement with this provider renews for successive two-year terms unless either party provides notice of non-renewal.
Due to our reliance on the components or products produced by suppliers such as these, we are subject to the risk of shortages and long lead times or other disruptions in the supply of certain components or products. Our ongoing efforts to identify alternative manufacturers for the assembly of our products and for many of the single-sourced components used in our products may not be successful. In the case of off-the-shelf components, we are subject to the risk that our suppliers may
discontinue or modify them, or that the components may cease to be available on commercially reasonable terms, or at all. We have in the past experienced, and may in the future experience, component shortages or delays or other problems in product assembly, and the availability of these components or products may be difficult to predict. For example, our manufacturers may experience temporary or permanent disruptions in their manufacturing operations due to equipment breakdowns, labor strikes or shortages, natural disasters, the occurrence of a contagious disease or illness, such as COVID-19, component or material shortages, cost increases, acquisitions, insolvency, bankruptcy, business shutdowns, trade restrictions, changes in legal or regulatory requirements, or other similar problems. In particular, the current COVID-19 pandemic has caused disruptions in our supply chain. To the extent COVID-19 pandemic continues and results in an extended period of travel, commercial, and other similar restrictions, disruptions in our supply chain may continue and cause shortages of our hardware products, which would negatively affect our ability to serve and acquire sellers and could materially and adversely impact our financial results. Moreover, our hardware product development has been affected by the COVID-19 pandemic, as travel to our manufacturers that develop prototypes has been restricted globally.
Additionally, various sources of supply-chain risk, including strikes or shutdowns at delivery ports or loss of or damage to our products while they are in transit or storage, intellectual property theft, losses due to tampering, third-party vendor issues with quality or sourcing control, failure by our suppliers to comply with applicable laws and regulation, potential tariffs or other trade restrictions, or other similar problems could limit or delay the supply of our products or harm our reputation. In the event of a shortage or supply interruption from suppliers of these components, we may not be able to develop alternate sources quickly, cost-effectively, or at all. Any interruption or delay in manufacturing, component supply, any increases in component costs, or the inability to obtain these parts or components from alternate sources at acceptable prices and within a reasonable amount of time, would harm our ability to provide our products to sellers on a timely basis. This could harm our relationships with our sellers, prevent us from acquiring new sellers, and materially and adversely affect our business.
In September of 2018, the United States imposed tariffs on certain imports from China, including on some of our hardware devices manufactured in China. The tariffs on these products were initially set at 10%, but were increased to 25% in May 2019. On September 1, 2019, the United States imposed new tariffs at 15% on additional imports from China, including on our remaining hardware products manufactured there, but rolled back these new tariffs to 7.5% effective February 14, 2020. The tariffs negatively affect the gross margin on the impacted products, which only partially has been offset by adjustments to the prices of some of the affected products. Any future tariffs and actions related to items imported from China or elsewhere could also negatively impact our gross margin on the impacted products, and increases in our pricing as a result of tariffs would reduce the competitiveness of our products if our competitors do not make similar pricing adjustments. The impact of any increased or new tariffs or other trade restrictions could have a material and adverse effect on our business, financial condition, and results of future operations.
Our business could be harmed if we are unable to accurately forecast demand for our products and to adequately manage our product inventory.
We invest broadly in our business, and such investments are driven by our expectations of the future success of a product. For example, our products such as the Square Reader often require investments with long lead times. An inability to correctly forecast the success of a particular product could harm our business. We must forecast inventory needs and expenses and place orders sufficiently in advance with our third-party suppliers and contract manufacturers based on our estimates of future demand for particular products. Our ability to accurately forecast demand for our products could be affected by many factors, including an increase or decrease in demand for our products or for our competitors’ products, unanticipated changes in general market or economic conditions, and business closures and other actions taken to combat COVID-19.
If we underestimate demand for a particular product, our contract manufacturers and suppliers may not be able to deliver sufficient quantities of that product to meet our requirements, and we may experience a shortage of that product available for sale or distribution. If we overestimate demand for a particular product, we may experience excess inventory levels for that product and the excess inventory may become obsolete or out-of-date. Inventory levels in excess of demand may result in inventory write-downs or write-offs and the sale of excess inventory at further discounted prices, which could negatively impact our gross profit and our business.condition.
Economic, Financial, and Tax Risks
A deterioration of general macroeconomic conditions could materially and adversely affect our business and financial results.
Our performance is subject to economic conditions and their impact on levels of spending by businesses and individuals. Most of the sellers that use our services are small businesses, many of which are in the early stages of their development, and these businesses are often disproportionately adversely affected by economic downturns and may fail at a higher rate than larger or more established businesses. In fact, small businesses have been, and continue to be, disproportionately affected by the COVID-19 pandemic and the related measures taken by governments and private industry to protect the public health such as stay-at-home orders. Many businesses are experiencing reduced sales and are processing fewer payments with us, which has had a negative impact on our results of operations. If they cease to operate, they will likely stop using our products and services altogether. Small businesses frequently have limited budgets and limited access to capital, and they may choose to allocate their spending to items other than our financial or marketing services, especially in times of economic uncertainty or in recessions. In addition, if more of our sellers cease to operate, this may have an adverse impact not only on the growth of our payments services but also on our transaction and advance loss rates, and the success of our other services. For example, if sellers processing payments with usSquare receive chargebacks after they cease to operate, we may incur additional losses. Additionally,We serve sellers across a variety of industry verticals and in an economic downtown, certain verticals, particularly those that may be viewed as discretionary by consumers, may be impacted to a greater degree than others, which may harm our business and financial results.
Even after the impacts of the COVID-19 pandemic have subsided, we may experience material and adverse impacts to our business as a result of the virus’s global economic impact, including the worldwide supply chain disruption, availability of credit, bankruptcies or insolvencies of customers, and recession or economic downturn. In addition, inflation has impacted and may continue to impact consumer spending and the economy as a whole. As a result of economic conditions, the growth in the number of Square sellers qualifying for participation in the Square CapitalLoans program may slow, or business loans may be paid more slowly, or not at all. In addition, as we expand our business to offer BNPL products and consumer financingloan products, such as Cash App Borrow, those customers may also be disproportionately adversely affected by economic downturns.downturns, which could cause loss rates on such products to increase.
Further, our suppliers, distributors, and other third partythird-party partners may suffer their own financial and economic challenges. Such suppliers and third parties may demand pricing accommodations, delay payment, or become insolvent, which could harm our ability to meet end customer demands or collect revenue or otherwise could harm our business. Furthermore, our investment portfolio, which includes U.S. government and corporate securities, is subject to general credit, liquidity, market, and interest rate risks, which may be exacerbated by certain events that affect the global financial markets. If global credit and equity markets decline for extended periods, or if there is a downgrade of the securities within our portfolio, our investment portfolio may be adversely affected and we could determine that our investments have experienced an other-than-temporary decline in fair value, requiring impairment charges that could adversely affect our financial results. Thus, if general macroeconomic conditions deteriorate, our business and financial results could be materially and adversely affected.
The COVID-19 pandemic has created significant uncertainty in the global economy. The COVID-19 pandemic and health measures taken by governments and private industry in response to the pandemic, including stay-at-home orders, restrictions on business operations, and travel restrictions, have had significant negative effects on the economy. Continued uncertainty about the pandemic, associated economic consequences, and potential relief measures may have a long-term adverse effect on the economy, our sellers, customers, suppliers, and our business. For example, weWe are currently subletting some of our office space. An economic downturn or our new work from homework-from-home practices may cause us to need less office space than we are contractually committed to leasing and prevent us from finding subtenants for suchleasing. If we are unable to successfully sublease any unused office space, causing usor if we are unable to pay forsuccessfully terminate any of our leasing commitments, we may incur losses or recognize impairment charges in connection with the unused office space.
We are also monitoring developments related to the decision by the United Kingdom to leaveKingdom’s exit from the European Union .Union. Brexit could have significant implications for our business and could lead to economic and legal uncertainty and increasingly divergent laws, regulations, and licensing requirements. Any of these effects of Brexit, among others, could adversely affect our operations and financial results.
We may have exposure to greater-than-anticipated tax liabilities, which may materially and adversely affect our business.
We are subject to income taxes and non-income taxes in the United States and other countries in which we transact or conduct business, and such laws and rates vary by jurisdiction. We are subject to review and audit by U.S. federal, state, local, and foreign tax authorities. Such tax authorities may disagree with tax positions we take, and if any such tax authority were to successfully challenge any such position, our financial results and operations could be materially and adversely affected. For example, on June 15, 2020, the Texas Comptroller’s Office (the “Comptroller”) finalized its audit and informed us that it will be issuing an assessment for $38 million, including interest and penalties, following its sales and use tax audit for the period starting January 1, 2015 through April 30, 2018. The Comptroller alleges that services that we have deemed nontaxable are in fact subject to tax. We strongly disagree with the Comptroller’s classification of these services as taxable
and believe our position is supported by state case law and the Comptroller’s own policies. We plan to vigorously defend our position and pursue all available remedies, including possibly through litigation. Should we not prevail, we could be obligated to pay the additional taxes together with associated penalties and interest for the audited periods. Additional taxes, interest, and penalties for subsequent and future periods could be material as well. In addition, we currently are, and expect to continue to be, subject to numerous federal, state, and foreign tax audits relating to income, transfer pricing, sales & use, VAT, and other tax liabilities. While we have established reserves based on assumptions and estimates that we believe are reasonably sufficient to cover such eventualities, any adverse outcome of such a review or audit could have an adverse impact on our financial position and results of operations if the reserves prove to be insufficient.
Our tax liability could be adversely affected by changes in tax laws, rates, regulations, and administrative practices. Our income tax obligations are based on our corporate operating structure, including the manner in which we develop, value, and use our intellectual property and the scope of our international operations. The tax authorities of the jurisdictions in which we operate may challenge our methodologies for valuing developed technology or intercompany arrangements. For example, various levels of government and international organizations, such as the Organization for Economic Co-operation and Development (“OECD”) and the European Union (“EU”), have increasingly focused on future tax reform and any result from this development may create changes to long-standing tax principles, which could adversely affect our effective tax rate. Additionally, tax authorities at the international, federal, state, and local levels are currently reviewing the appropriate tax treatment of companies engaged in internet commerce and financial technology and attempting to broaden the classification and definitions of activities subject to taxation. For example, various states may attempt to broaden the definition of internet hosting, data processing, telecommunications, and other taxable services to capture additional types of activities. These developing changes could affect our financial position and results of operations. In particular, due to the global nature of the Internet, it is possible that tax authorities at the international, federal, state, and local levels may attempt to regulate our transactions or levy new or revised sales & use taxes, VAT, digital services taxes, income taxes, or other taxes relating to our activities in the internet commerce and financial technology space. New or revised taxes, in particular, sales & use taxes, VAT, and similar taxes, including digital service taxes, would likely increase the cost of doing business. New taxes could also create significant increases in internal costs necessary to capture data and collect and remit taxes. Any of these events could have an adverse effect on our business and results of operations. Moreover, an increasing number of states, and certain foreign jurisdictions, have considered or adopted laws or administrative practices that attempt to impose obligations for online marketplaces, payment service providers, and other intermediaries. These obligations may deem parties, such as us, to be the legal agent of merchants and therefore may require us to collect and remit taxes on the merchants behalf and take on additional reporting and record-keeping obligations. Any failure by us to prepare for and to comply with these and similar reporting and record-keeping obligations could result in substantial monetary penalties and other sanctions, adversely impact our ability to do business in certain jurisdictions, and harm our business.
The determination of our worldwide provision for income and other tax liabilities is highly complex and requires significant judgment by management, and there are many transactions during the ordinary course of business where the ultimate tax determination is uncertain. Although we believe our estimates are reasonable, the ultimate tax outcome may differ from amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.
We have in the past recorded, and may in the future record, significant valuation allowances on our deferred tax assets, which may have a material impact on our results of operations and cause fluctuations in such results.
As of December 31, 2020, we had a valuation allowance for deferred tax assets in the United States and in certain other countries. Our net deferred tax assets relate predominantly to the United States federal and state tax jurisdictions. The need for a valuation allowance requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable; such assessment is required on a jurisdiction-by-jurisdiction basis. In making such assessment, significant weight is given to evidence that can be objectively verified.
We continue to monitor the likelihood that we will be able to recover our deferred tax assets in the future. Future adjustments in our valuation allowance may be required. The recording of any future increases in our valuation allowance could have a material impact on our reported results, and both the recording and release of the valuation allowance could cause fluctuations in our quarterly and annual results of operations.
We may not be able to secure financing on favorable terms, or at all, to meet our future capital needs, and our existing credit facility contains,and our senior notes contain, and any future debt financing may contain, covenants that impact the operation of our business and pursuit of business opportunities.
We have funded our operations since inception primarily through debt and equity financings, bank credit facilities, finance lease arrangements, and cash from operations. While we believe that our existing cash and cash equivalents, marketable debt securities, and availability under our line of credit are sufficient to meet our working capital needs and planned capital expenditures, and service our debt, there is no guarantee that this will continue to be true in the future. In the future, we may require additional capital to respond to business opportunities, refinancing needs, business and financial challenges, regulatory surety bond requirements, acquisitions, or unforeseen circumstances and may decide to engage in equity, equity-linked, or debt financings or enter into additional credit facilities for other reasons. We may not be able to secure any such additional financing or refinancing on favorable terms, in a timely manner, or at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited.
Following our acquisition of Afterpay, we assumed Afterpay’s financing arrangements with financial institutions in Australia, New Zealand, the United States and the United Kingdom (collectively, the “Warehouse Facilities”). We use the Warehouse Facilities to partly fund our BNPL platform. The terms of the Warehouse Facilities contain covenants that may be triggered in certain situations (such as non-repayments on consumer borrowings exceeding certain monetary thresholds or key management resigning), which may negatively impact our ability to obtain additional funding under the Warehouse Facilities. If certain events of default occur under the Warehouse Facilities, we may not be able to draw future funding from those Warehouse Facilities or the debt outstanding under the Warehouse Facilities may be accelerated and our business and financial results could be adversely impacted.
Our credit facility contains affirmative and negative covenants, including customary limitations on the incurrence of certain indebtedness and liens, restrictions on certain inter-companyintercompany transactions, and limitations on dividends and stock repurchases. The indentures pursuant to which our 2026 Senior Notes and 2031 Senior Notes (collectively, the “Senior Notes”) were issued contain covenants that restrict or could restrict, among other things, our business and operations. Any debt financing obtained by us in the future could also involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to operate our business, obtain additional capital, and pursue business opportunities, including potential acquisitions. Our ability to comply with these covenants may be affected by events beyond our control, and breaches of these covenants could result in a default under our existing credit facility or our senior notes and any future financing agreements into which we may enter. If not waived, these defaults could cause indebtedness outstanding under our credit facility, our Senior Notes, our other outstanding indebtedness, including our 2022 Notes, 2023 Convertible Notes, 2025 Convertible Notes, 2026 Convertible Notes, and 2027 Convertible Notes (collectively, the Notes)“Convertible Notes,” and together with the Senior Notes, the “Notes”), and any future financing agreements that we may enter into to become immediately due and payable.
If we raise additional funds through further issuances of equity or other securities convertible into equity, including convertible debt securities, our existing stockholders could suffer dilution in their percentage ownership of our company, and any such securities we issue could have rights, preferences, and privileges senior to those of holders of our Class A common stock.
Changes by any rating agency to our outlook or credit rating could negatively affect the value of both our debt and equity securities and increase our borrowing costs. If our credit ratings are downgraded or other negative action is taken, our ability to obtain additional financing in the future on favorable terms or at all could be adversely affected.
Servicing our Notes may require a significant amount of cash, and we may not have sufficient cash or the ability to raise the funds necessary to settle conversions of the Convertible Notes in cash, repay the Notes at maturity, or repurchase the Notes as required following a fundamental change.
As of December 31, 2020,2022, we had $8.5$460.6 million outstanding aggregate principal amount of 2022 Notes, $862.5 million aggregate principal amount of 2023 Convertible Notes, $1.0 billion outstanding aggregate principal amount of 2025 Convertible Notes, $575.0 million outstanding aggregate principal amount of 2026 Convertible Notes, and $575.0 million outstanding aggregate principal amount of 2027 Convertible Notes, $1.0 billion outstanding aggregate principal amount of 2026 Senior Notes, and $1.0 billion outstanding aggregate principal amount of 2031 Senior Notes.
Prior to December 1, 2021, in the case of the 2022 Notes, February 15, 2023, in the case of the 2023 Notes,Convertible Notes; December 1, 2024, in the case of the 2025 Notes,Convertible Notes; February 1, 2026, in the case of the 2026 Notes,Convertible Notes; and August 1, 2027, in the case of the 2027 Notes,Convertible Notes; the applicable Convertible Notes are convertible at the option of the holders only under certain conditions or upon occurrence of certain events. Because the last reported sale price of our Class A common stock exceeded 130% of the conversion price for the 2022 Notes,After February 15, 2023, the 2023 Notes, and the 2025 Notes for the relevant period in the calendar quarter ending December 31, 2020, the 2022 Notes, 2023 Notes, and 2025Convertible Notes are convertible at the option of the holders thereof duringuntil the calendar quarter ending March 31, 2021.second scheduled trading day immediately preceding May 15, 2023, the maturity date. Whether the Convertible Notes of any series will be convertible following sucha calendar quarter will depend on the satisfaction of this condition or another conversion condition in the future. If holders of the Convertible Notes of a series elect to convert such Convertible Notes when eligible, we will be required to make cash payments in respect of the Convertible Notes being converted unless we elect to deliver solely shares of our Class A common stock to settle such conversion, we will be required to make cash payments in respect of the Notes being converted. Effective October 2018, we revised our prior stated policy of settling conversions of the 2022 Notes and 2023 Notes through combination settlement with a specified dollar amount of $1,000 per $1,000 principal amount of Notes.conversion. We currently expect to settle future conversions of the 2022 Notes and 2023our Convertible Notes solely in shares of our Class A common stock, which has the effect of including the shares of Class A common stock issuable upon conversion of the Convertible Notes of such series in our diluted earnings per share to the extent such shares are not anti-dilutive. We will reevaluate this policy from time to time as conversion notices are received from holders of the Convertible Notes.
In addition, holders of each series of Notes also have the right to require us to repurchase all or a portion of their Notes of such series upon the occurrence of a fundamental change (as defined in the applicable indenture governing the Notes) at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest.interest, or at a repurchase price equal to 101% of the principal amount of the Senior Notes to be repurchased, plus accrued and unpaid interest, as applicable. If the Notes of any series have not previously been converted or repurchased, we will be required to repay such Notes in cash at maturity.
Our ability to make required cash payments in connection with conversions of the Convertible Notes, repurchase the Notes in the event of a fundamental change, or to repay or refinance the Notes at maturity will depend on market conditions and our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. We also may not use the cash proceeds we raised through the issuance of the Notes in an optimally productive and profitable manner. Since inception, our business has generated net losses in most quarters, and we may continue to incur significant losses. As a result, we may not have enough available cash or be able to obtain financing at the time we are required to repurchase or repay the Notes or pay cash with respect to the Convertible Notes being converted.
In addition, our ability to repurchase or to pay cash upon conversion or at maturity of the Notes may be limited by law or regulatory authority. Our failure to repurchase Notes following a fundamental change or to pay cash upon conversion of our Convertible Notes (unless we elect to deliver solely shares of our Class A common stock to settle such conversion) or at maturity of the Notes as required by the applicable indenture would constitute a default under such indenture. A default under the applicable indenture or the fundamental change itself could also lead to a default under our credit facility, our other outstanding indebtedness, or agreements governing our future indebtedness and could have a material adverse effect on our business, results of operations, and financial condition. If the payment of the relatedour other outstanding indebtedness or future indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay thesuch indebtedness and repurchase the Notes or to pay cash upon conversion of the Convertible Notes or at maturity of the Notes.
We are subject to counterparty risk with respect to the convertible note hedge transactions.
In connection with the issuance of each series of our Convertible Notes, we entered into convertible note hedge transactions with certain financial institutions, which we refer to as the "option counterparties." The option counterparties are financial institutions or affiliates of financial institutions, and we will be subject to the risk that one or more of such option counterparties may default under the convertible note hedge transactions. Our exposure to the credit risk of the option counterparties will not be secured by any collateral. If any option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under the convertible note hedge transaction. Our exposure will depend on many factors but, generally, the increase in our exposure will be correlated to the increase in our Class A common stock market price and in the volatility of the market price of our Class A common stock. In addition, upon a default by any option counterparty, we may suffer adverse tax consequences and dilution with respect to our Class A common stock. We can provide no assurance as to the financial stability or viability of any option counterparty.
Our investments in bitcoin may be subject to volatile market prices, impairment, and other risks of loss.
We purchased $50 millionAs of December 31, 2022, we have made cumulative investments in bitcoin in October 2020 and another $170 million in bitcoin in February 2021, and weof $220.0 million. We may make additional bitcoin purchases in the future. The price of bitcoin has been highly volatile in the past and may continue to be volatile in the future, including as a result of various associated risks and uncertainties. For example, theThe prevalence of bitcoin is a relatively recent trend, and the long-term adoption of bitcoin by investors, consumers, and businesses remains uncertain. Moreover, itsBitcoin’s lack of a physical form, its reliance on technology for its creation, existence, and transactional validation, and its decentralization may subject its integrity to the threat of malicious attacks and technological obsolescence. IfTo the extent the market value of the bitcoin we hold decreasescontinues to decrease relative to the purchase prices, our financial condition may be adversely impacted.
Moreover, bitcoin currently is considered an indefinite-lived intangible asset under current applicable accounting rules, meaning that any decrease in its market value below our book value for such asset at any time subsequent to its acquisition will require us to recognize impairment charges, whereas we may make no upward revisions for any market price increases until a sale, which may adversely affect our operating results in any period in which such impairment occurs. We have recorded several such impairment charges. If there are future changes in applicable accounting rules that require us to change the manner in which we account for our bitcoin, there could be a material and adverse effect on our financial results and the market price of our Class A common stock.
We are exposed to fluctuations in foreign currency exchange rates.
Following our acquisition of Afterpay, our international operations account for a more significant portion of our overall operations and our exposure to fluctuations in foreign currency exchange rates has increased significantly, which could have a negative impact on our reported results of operations. From time to time, we may enter into forward contracts, options, and/or foreign exchange swaps related to foreign currency exposures that arise in the normal course of our business. These and other such hedging activities 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 may have exposure to greater-than-anticipated tax liabilities, which may materially and adversely affect our business.
We are subject to income taxes and non-income taxes in the United States and other countries in which we transact or conduct business, and such laws and rates vary by jurisdiction. We are subject to review and audit by U.S. federal, state, local, and foreign tax authorities. Such tax authorities may disagree with tax positions we take, and if any such tax authority were to successfully challenge any such position, our financial results and operations could be materially and adversely affected. In addition, we currently are, and expect to continue to be, subject to numerous federal, state, local and foreign tax audits relating to transfer pricing, income, sales & use, value-added (“VAT”), and other tax liabilities. While we have established reserves based on assumptions and estimates that we believe are reasonably sufficient to cover such eventualities, any adverse outcome of such a review or audit could have an adverse impact on our financial position and results of operations if the reserves prove to be insufficient.
Our tax liability could be adversely affected by changes in tax laws, rates, regulations, and administrative practices. For example, various levels of government and international organizations, such as in the United States, the Organisation for Economic Co-operation and Development (“OECD”), and the European Union (“EU”), have increasingly focused on tax reform and any result from this development may create changes to long-standing tax principles, which could adversely affect our effective tax rate. On October 8, 2021, the OECD announced an international agreement with more than 130 countries to implement a new global minimum effective corporate tax rate of 15% for large multinational companies starting in 2023. Additionally, under the agreement, new rules have been introduced that will result in the reallocation of certain profits from large multinational companies to market jurisdictions where customers and users are located. On December 12, 2022, the EU Council unanimously agreed to implement the 15% global minimum tax rate, which EU member countries are required to adopt into their respective tax codes by the end of 2023. Although certain implementation details have yet to be developed and the enactment of these changes has not yet taken effect, these changes may have adverse tax consequences for us.
On August 16, 2022, the Inflation Reduction Act (“IRA”) was enacted in the United States, which introduced, among provisions, a new minimum corporate income tax on certain large corporations, an excise tax of 1% on certain share repurchases by corporations, and increased funding for the Internal Revenue Service (“IRS”). Although we do not anticipate the new corporate minimum income tax will currently apply to us, changes in our business and any future regulations or other guidance on the interpretation and application of the new corporate minimum tax, as well as the potential application of the share repurchase excise tax, may result in additional taxes payable by us, which could materially and adversely affect our financial results and operations.
Our income tax obligations are based on our corporate operating structure, including the manner in which we develop, value, and use our intellectual property and the scope of our international operations. The tax authorities of the jurisdictions in which we operate may challenge our methodologies for valuing developed technology or intercompany arrangements. Additionally, tax authorities at the international, federal, state, and local levels are currently reviewing the appropriate tax treatment of companies engaged in internet commerce and financial technology and attempting to broaden the classification and definitions of activities subject to taxation. For example, various states may attempt to broaden the definition of internet hosting, data processing, telecommunications, and other services to capture additional types of activities. These developing changes could affect our financial position and results of operations. In particular, it is possible that tax authorities at the international, federal, state, and local levels may attempt to regulate our transactions or levy new or revised sales & use taxes, VAT, digital services taxes, digital advertising taxes, income taxes, loan taxes, or other taxes relating to our activities, which would likely increase the cost of doing business. New taxes could also create significant increases in internal costs necessary to capture data and collect and remit taxes. Proposed or enacted laws regarding tax compliance obligations could require us to make changes to our infrastructure or increase our compliance obligation. Any of these events could have an adverse effect on our business and results of operations. Moreover, an increasing number of states, the U.S. federal government, and certain foreign jurisdictions have considered or adopted laws or administrative practices that impose obligations for on-demand and streaming services, online marketplaces, payment service providers, and other intermediaries. These obligations may deem parties, such as us, to be the legal agent of merchants and therefore may require us to collect and remit taxes on the merchants' behalf and take on additional reporting and record-keeping obligations. For example, the American Rescue Plan Act of 2021 requires businesses that process payments, such as Cash App, to report payments for goods and services on Form 1099-K when those transactions total $600 or more in a year for a given seller. This reporting requirement applies to Cash for Business accounts, not personal Cash App accounts. The new threshold is currently expected to apply to transactions occurring in 2023, subject to any changes implemented by the IRS. Any failure by us to prepare for and to comply with these and similar reporting and record-keeping obligations could result in substantial monetary penalties and other sanctions, adversely impact our ability to do business in certain jurisdictions, and harm our business.
The determination of our worldwide provision for income and other tax liabilities is highly complex and requires significant judgment by management, and there are many transactions during the ordinary course of business where the ultimate tax determination is uncertain. Although we believe our estimates are reasonable, the ultimate tax outcome may differ from amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.
We have in the past recorded, and may in the future record, significant valuation allowances on our deferred tax assets, which may have a material impact on our results of operations and cause fluctuations in such results.
As of December 31, 2022, we had a valuation allowance for deferred tax assets in the United States and in certain other countries. Our net deferred tax assets relate predominantly to the United States federal and state tax jurisdictions. The need for a valuation allowance requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable; such assessment is required on a jurisdiction-by-jurisdiction basis. In making such an assessment, significant weight is given to evidence that can be objectively verified.
We continue to monitor the likelihood that we will be able to recover our deferred tax assets in the future. Future adjustments in our valuation allowance may be required. The recording of any future increases in our valuation allowance could have a material impact on our reported results, and both the recording and release of the valuation allowance could cause fluctuations in our quarterly and annual results of operations.
Legal, Regulatory, and Compliance Risks
Our business is subject to extensive regulation and oversight in a variety of areas, all of which are subject to change and uncertain interpretation.
We are subject to a wide variety of local, state, federal, and international laws, regulations, licensing schemes, and industry standards in the United States and in other countries in which we operate. These laws, regulations, and standards govern numerous areas that are important to our business, and include, or may in the future include, those relating to banking, lending, deposit-taking, cross-border and domestic money transmission, foreign exchange, payments services (such as payment processing and settlement services), cryptocurrency, trading in shares and fractional shares, fraud detection, consumer protection, anti-money laundering, escheatment, international sanctions regimes and export controls, privacy, data privacyprotection and information security, fiscalization and compliance with the Payment Card Industry Data Security Standard, a set of requirements designed to ensure that all companies that process, store, or transmit payment card information maintain a secure environment to protect cardholder data.
These laws, rules, regulations, and standards are enforced by multiple authorities and governing bodies in the United States, including federal agencies, such as the FDIC, andthe SEC, the Consumer Financial Protection Bureau, and Office of Foreign Assets Control, self-regulatory organizations, and numerous state and local agencies, such as the Utah Department of Financial Institutions. Outside of the United States, we are subject to additional regulators. As we expand into new jurisdictions, or expand our product offerings in existing jurisdictions, the number of foreign regulations and regulators governing our business will expand as well. In addition, asFor example, in connection with our acquisition of Afterpay we established a secondary listing on the ASX, subjecting us to additional listing requirements. As our business and products continue to develop and expand, we may become subject to additional rules, regulations, and industry standards. We may not always be able to accurately predict the scope or applicability of certain regulations to our business, particularly as we expand into new areas of operations, which could have a significant negative effect on our existing business and our ability to pursue future plans.
Laws, regulations, and standards are subject to changes and evolving interpretations and application, including by means of legislative changes and/or executive orders, and it can be difficult to predict how they may be applied to our business and the way we conduct our operations, particularly as we introduce new products and services and expand into new jurisdictions.
For example, Cash App includes a feature that permits our customers to buy and sell bitcoin. Bitcoin is not consideredwidely accepted as legal tender or backed by any government,governments around the world, and it has experienced price volatility, technological glitches, security compromises, and various law enforcement and regulatory interventions. Certain existing laws also prohibit transactions with certain persons and entities, and we have a risk-based program in place to prevent such transactions. Despite this, due to the nature of bitcoin and blockchain technology, it may be technically infeasible to prevent all such transactions, and there can be no guarantee that our measures will be viewed as sufficient. The regulation of cryptocurrency and crypto platforms is still an evolving area, and it is possible that we could become subject to additional regulations.legislation or regulation in the future. For example, Louisiana’s virtual currency regulatory scheme became effective on January 1, 2023 and requires covered entities, such as Block, to obtain a license to continue its feature permitting customers to buy and sell bitcoin. It is possible that other states may also issue similar licensing requirements. As another example, the Financial Crimes Enforcement Network (“FinCEN”) has issued a proposed rule that would require cryptocurrency providers like us to keep additional records of and file additional reports to FinCEN of certain cryptocurrency transaction information. There are substantial uncertainties on how these proposed requirements would apply in practice, and we may face substantial compliance costs to operationalize and comply with these requirements should FinCEN finalize this rule as proposed. If we fail to comply with regulations or prohibitions applicable to us, we could face regulatory or other enforcement actions, and potential fines, reputational harm, and other consequences. Further, we might not be able to continue operating the feature in Cash App, at least in current form, or might need to make other changes to our business, our products or our services, which could cause the price of our Class A common stock to decrease.
We are subject to audits, inspections, inquiries, and investigations from regulators on an ongoing basis. Although we have a compliance program focused on the laws, rules, and regulations applicable to our business, we have been and may still be subject to inquiries, investigations, fines, or other penalties in one or more jurisdictions levied by regulators, including federal agencies, state Attorneys General and private plaintiffs who may be acting as private attorneys general pursuant to various applicable laws, as well as those levied by foreign regulators. In addition to fines, penalties for failing to comply with applicable rules and regulations could include significant criminal and civil lawsuits, forfeiture of significant assets, increased licensure requirements, revocation of licenses or other enforcement actions. We could alsohave been and may be required to make changes to our business practices or compliance programs as a result of regulatory scrutiny. In addition, any perceived or actual breach of compliance by us with respect to applicable laws, rules, and regulations could have a significant impact on our reputation as a trusted brand and could cause us to lose existing customers, prevent us from obtaining new customers, require us to expend significant funds to remedy problems caused by breaches and to avert further breaches, and expose us to legal risk and potential liability.
Further, from time to time, we may leverage third parties to help conduct our businesses in the U.S. or abroad. We and our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and may be held liable for any corrupt or other illegal activities of these third-party business partners and intermediaries, our employees, partners, and agents, even if we do not explicitly authorize such activities. While we have policies and procedures to address compliance with such laws, we cannot assure you that our employees and agents will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible.
Our business is subject to complex and evolving regulations and oversight related to privacy, data protection, and data protection.information security.
We are subject to laws and regulations relating to the collection, use, retention, privacy, protection, security, and transfer of information, including personally identifiablepersonal information of our employees and customers. As with the other laws and regulations noted above, these laws and regulations may change or be interpreted and applied differently over time and from jurisdiction to jurisdiction, and it is possible they will be interpreted and applied in ways that will materially and adversely affect our business. For example, the European Union’s General Data Protection Regulation (GDPR) imposes more(“GDPR”) and similar legislation in the United Kingdom (“U.K.”) impose stringent data privacy and data protection requirements than prior EU data protection law and providesprovide for greater penalties for noncompliance of up to the greater of 4% of worldwide annual revenue or €20 million. To addressmillion or £17.5 million, as applicable. The GDPR restricts international data transfers from the EU to other jurisdictions unless the rights of the individual data subjects in respect of their personal data is protected by an approved transfer mechanism, or one of a limited number of exceptions applies. The U.K.’s data protection regime contains similar requirements. When transferring personal data from the EU to other jurisdictions, we utilize model contracts approvedstandard contractual clauses published by the EU Commission.Commission (the "SCCs"). On July 16, 2020, the Court of Justice of the European Union (CJEU)(“CJEU”) issued a decision that may impose additional obligations on companies when relying on those model contracts, in addition to invalidating another method that some companies relied on for transferring personal data from the European Economic Area (EEA) to the United States, the EU-U.S. Privacy Shield.SCCs. This CJEU decision may result in different EEA data protection regulators applying differing standards for the transfer of personal data from the EEA to the United States, and even require ad hoc verification of measures taken with respect to data flows. As a result of this CJEU decision or other developments with respect to the legal and regulatory regime affecting cross-border data transfers, we may be required to take additional steps to legitimize impacted personal data transfers. ThisBoth the EU and the U.K. have issued updated SCCs that are required to be implemented. These and other developments relating to cross-border data transfer could result in increased costs of compliance and limitations on our customers and us. More generally, we may find it necessaryAdditionally, legal or desirable to modify our data handling practices, and this CJEU decisionregulatory challenges or other legal challengesdevelopments relating to cross-border data transfer may serve as a basis for our personal data handling practices, or those of our customers and vendors, to be challenged and may otherwise adversely impact our business, financial condition, and operating results. In the United Kingdom, although aU.K., the Data Protection Act and legislation referred to as the UK GDPR substantially implementsenact the EU GDPR into U.K. law, with penalties for noncompliance of up to the greater of £17.5 million or four percent of worldwide revenues. The European Commission has issued an adequacy decision under the GDPR uncertainty remains regarding howand the Law Enforcement Directive, pursuant to which personal data transfers to and from the U.K. willgenerally may be regulated. The U.K.’s exittransferred from the EU has created uncertainty with regard to the regulation of data protectionU.K. without restriction, subject to a four-year “sunset” period, after which the European Commission’s adequacy decision may be renewed. During that period, the European Commission will continue to monitor the legal situation in the U.K. and data transfers betweenmay intervene at any time with respect to its adequacy decision. The UK’s adequacy determination therefore is subject to future uncertainty and may be subject to modification or revocation in the U.K., the EU, and other jurisdictions andfuture. We could require usbe required to make additional changes to the way we conduct our business and transmit data between the U.S., the U.K., the EU, and the rest of the world. Further, in addition to the GDPR, the European Commission has a draft regulation in the approval process that focuses on a person’s right to conduct a private life. The proposed legislation, known as the Regulation of Privacy and Electronic Communications (“ePrivacy Regulation”), would replace the current ePrivacy Directive. If adopted, the earliest date for entry into force is in 2023, with broad potential impacts on the use of internet-based services and tracking technologies, such as cookies. We expect to incur additional costs to comply with the requirements of the ePrivacy Regulation as it is finalized for implementation. Additionally, on January 13, 2022, the Austrian data protection regulator published a decision ruling that the collection of personal data and transfer to the U.S. through Google Analytics and other analytics and tracking tools used by website operators violates the GDPR. The French and Italian data protection regulators have adopted similar decisions. Other data protection regulators in the EU increasingly are focused on the use of online tracking tools. Any of these changes or other developments with respect to EU data protection law could disrupt our business and otherwise adversely impact our business, financial condition, and operating results. In addition, some countries are considering or have enacted legislation requiringaddressing matters such as requirements for local storage and processing of data that could impact our compliance obligations, expose us to liability, and increase the cost and complexity of delivering our services.
Likewise, the California Consumer Privacy Act of 2018 (CCPA)(“CCPA”) became effective on January 1, 2020 and will bewas modified by the California Privacy Rights Act (“CPRA”), which was passed in November 2020 and becomes fullybecame effective on January 1, 2023. The CCPA and CPRA impose stringent data privacy and data protection requirements for the datarelating to personal information of California residents, and providesprovide for penalties for noncompliance of up to $7,500 per violation. It remains unclear how various provisionsAspects of the interpretation and enforcement of the CCPA and CPRA will be interpreted and enforced.remain unclear. More generally, privacy, data privacyprotection, and information security continues to be a rapidly evolving area,areas, and further legislative activity has arisen and will likely continue to arise in the U.S., the EU, and other jurisdictions. For example, variousVarious states in the U.S. have proposed or enacted laws regarding privacy and data protection that contain obligations similar to the CCPA. For example, Virginia enacted the Virginia Consumer Data Protection Act in March 2021, Colorado enacted the Colorado Privacy Act in July 2021, Utah enacted the Utah Consumer Privacy Act in March 2022, and Connecticut enacted An Act Concerning Personal Data Privacy and Online Monitoring in May 2022. All of these are comprehensive privacy statutes that will become effective in 2023 and share similarities with the CCPA, the CPRA, and thelegislation proposed in other states. The U.S. federal government also is contemplating federal privacy legislation. In addition, laws and regulations directed at privacy and data security, and those that have been applied in those areas, may be subject to evolving interpretations or applications. The effects of recently proposed or enacted legislation including CCPA and CPRA, potentially are far-reaching and may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply.
We have incurred, and may continue to incur, significant expenses to comply with evolving privacy, data protection, and information security standards and protocols imposed by law, regulation, industry standards, shifting consumer expectations, or contractual obligations. Laws and regulations directed at privacy, data protection, and information security, and those that have been applied in those areas, can be challenging to comply with and may be subject to evolving interpretations or applications. In particular, with laws and regulations such as the GDPR in the EU and the CCPA, CPRA, and CPRAother laws in the U.S. imposing new and relatively burdensome obligations, and with substantial uncertainty over the interpretation and application of these and other laws and regulations subject to evolving and uncertain interpretation and application, we may face challenges in addressing their requirements and making necessary changes to our policies and practices, and we may incur significant costs and expenses in an effort to do so. Any failure, real or perceived, by us to comply with our privacy, data protection, or information security policies, changing consumer expectations, or with any evolving legal or regulatory requirements, industry standards, or contractual obligations could result in claims, demands, and litigation by private parties, investigations and other proceedings by regulatory authorities, and fines, penalties and other liabilities, may harm our reputation and competitive position, and may cause our customers to reduce their use of our products and services, disrupt our supply chain or third partythird-party vendor or developer partnerships, and materially and adversely affect our business.
We are subject to risks related to litigation, including intellectual property claims, government investigations or inquiries, and regulatory matters or disputes.
We are currently, and may continue to be, subject to claims, lawsuits (including class actions and individual lawsuits), government or regulatory investigations, subpoenas, inquiries or audits, and other proceedings. The number and significance of our legal disputes and inquiries have increased as we have grown larger, as our business has expanded in scope and geographic reach, and as our products and services have increased in complexity, and we expect that we will continue to face additional legal disputes as we continue to grow and expand. We also receive significant media attention, which could result in increased litigation or other legal or regulatory reviews and proceedings. Moreover, legal disputes or government or regulatory inquiries or findings may cause follow-on litigation or regulatory scrutiny by additional parties.
Some of the laws and regulations affecting the internet, mobile commerce, payment processing, BNPL lending, bitcoin and equity investing, streaming service, business financing, and employment were not written with businesses like ours in mind, and many of the laws and regulations, including those affecting us have been enacted relatively recently. As a result, there is substantial uncertainty regarding the scope and application of many of the laws and regulations to which we are or may be subject, which increases the risk that we will be subject to claims alleging violations of those laws and regulations. The scope, outcome, and impact of claims, lawsuits, government or regulatory investigations, subpoenas, inquiries or audits, and other proceedings to which we are subject cannot be predicted with certainty. Regardless of the outcome, such investigations and legal proceedings can have a material and adverse impact on us due to their costs, diversion of our resources, and other factors. Plaintiffs may seek, and we may become subject to, preliminary or provisional rulings in the course of litigation, including preliminary injunctions requiring us to cease some or all of our operations. We may decide to settle legal disputes on terms that are unfavorable to us. We may also be accused of having, or be found to have, infringed or violated third-party copyrights, patents, trademarks, and other intellectual property rights. For example, in December 2021, H&R Block filed a lawsuit against us for trademark infringement following our name change to Block. If any litigation to which we are a party is resolved adversely, we may be subject to an unfavorable judgment that we may not choose to appeal or that may not be reversed upon appeal. We may have to seek a license to continue practices found to be in violation of a third-party’s rights, or we may have to change or cease certain practices. If we are required, or choose to enter into, royalty or licensing arrangements, such arrangements may not be available on reasonable terms or at all and may significantly increase our operating costs and expenses. As a result, we may also be required to develop or procure alternative non-infringing technology or discontinue use of technology, and doing so could require significant effort and expense or may not be feasible. In addition, the terms of any settlement or judgment in connection with any legal claims, lawsuits, or proceedings may require us to cease some or all of our operations or to pay substantial amounts to the other party and could materially and adversely affect our business.
As a licensed money transmitter, we are subject to important obligations and restrictions.
We have obtained licenses to operate as a money transmitter (or as other financial services institutions) in the United States and in the states where this is required, as well as in some non-U.S. jurisdictions, including but not limited to the European Union, the United Kingdom, and Australia. As a licensed money transmitter, we are subject to obligations and restrictions with respect to the investment of customer funds, reporting requirements, bonding requirements, and inspection by state regulatory
agencies concerning those aspects of our business considered money transmission. Evaluation of our compliance efforts, as well as the questions of whether and to what extent our products and services are considered money transmission, are matters of regulatory interpretation and could change over time. In the past, we have been subject to fines and other penalties by regulatory authorities due to their interpretations and applications to our business of their respective state money transmission laws. In the future, as a result of the regulations applicable to our business, we could be subject to investigations and resulting liability, including governmental fines, restrictions on our business, or other sanctions, and we could be forced to cease conducting business in certain jurisdictions, be forced to otherwise change our business practices in certain jurisdictions, or be required to obtain additional licenses or regulatory approvals. There can be no assurance that we will be able to obtain any such licenses, and, even if we were able to do so, there could be substantial costs and potential product changes involved in maintaining such licenses, which could have a material and adverse effect on our business.
Our subsidiary Square Financial Services isWe are subject to a Utah state-chartered industrial bank, which requires that we serve as a sourcenumber of financial strength to it and subjects us to potential regulatory sanctions.risks in the BNPL space.
On March 17, 2020, the Board of Directors of the FDIC conditionally approved an application for federal deposit insurance for Square Financial Services, an industrial bank that we areRegulatory scrutiny or changes in the processBNPL space may impose significant compliance costs and make it uneconomical for us to continue to operate in our current markets or for us to expand into new markets. The regulation of establishingBNPL products is still an evolving area, and planit is possible that other states or countries pass new or additional regulations that could adversely impact the way we operate our BNPL platform, at least in its current form. With the geographic expansion of our BNPL platform into new markets, we may also become subject to open for business this year. The Utah Department ofadditional and changing legal, regulatory, tax, licensing, and compliance requirements and industry standards with respect to BNPL products. In addition, the Consumer Financial Institutions has also granted its conditional approval. However, there can be no assurances that Square Financial Services will become operational. The Federal Deposit Insurance Act requires that we serve as a source of financial strengthProtection Bureau (“CFPB”) recently announced plans to Square Financial Services. This means that we are required by lawregulate companies offering BNPL products. Increased compliance obligations and regulatory scrutiny may negatively impact our revenue and profitability. Our inability, or perceived inability, to provide financial assistance to Square Financial Services in the event that it experiences financial distress. In this regard, the FDIC’s approval requires that Square Financial Services has initial paid in capital of not less than approximately $56 million. Thereafter, the capital levels of Square Financial Services during the first three years of operation may not be less than the levels provided in Square Financial Services’ business plan filedcomply with the FDIC. Thereafter, the regulatory capital ratios must be annually approvedexisting or new compliance obligations issued by the FDIC,CFPB or any other regulatory authority, including with respect to BNPL products, could lead to regulatory investigations, or result in administrative or enforcement action, such as fines, penalties, and/or enforceable undertakings and in no event may Square Financial Services’ leverage ratio be less than twenty percent, as calculated in accordance with FDIC regulations. If the FDIC were to increase Square Financial Services’ capital requirements, it could have adverse effects onadversely affect us and Square Financial Services.our results of operations.
The FDIC’s approval is also contingent on us entering into a Capital and Liquidity Maintenance Agreement as well as a Parent Company Agreement. The Capital and Liquidity Maintenance Agreement would require, among other things, that we maintain the leverage ratio of Square Financial Services at a minimum of 20 percent at all times; maintain a third-party line of credit for the benefit of Square Financial Services acceptable to the FDIC; purchase any loan from Square Financial Services at the greater of the cost basis or fair market value, if deemed necessary by the FDIC or Square Financial Services; and establish and maintain a reserve deposit at an unaffiliated third-party bank that Square Financial Services could draw upon in the event that we fail to provide sufficient funds to maintain Square Financial Services’ capital ratios at the required levels. The Parent Company Agreement would require, among other things, that we consent to the FDIC’s examination of us and our subsidiaries; limit our representation on Square Financial Services’ board of directors to no more than 25 percent; submit a contingency plan to the FDIC that describes likely scenarios of significant financial or operational stress and, if we were unable to serve as a source of financial strength, options for the orderly wind down or sale of Square Financial Services; and engage a third party to review and provide periodic reports concerning the effectiveness of our complaint response system. Jack Dorsey, who is considered our controlling shareholder in this context, also agreed to cause us to perform under these agreements. Should we fail to comply with these obligations, we could be subject to regulatory sanctions. In addition, any failure by Square Financial Services to comply with applicable laws, rules, and regulations could also subject us and Square Financial Services to regulatory sanctions. These sanctions could adversely impact our reputation and our business, require us to expend significant funds for remediation, and expose us to litigation and other potential liability.
Our subsidiary Cash App Investing is a broker-dealer registered with the SEC and a member of FINRA, and therefore is subject to extensive regulation and scrutiny.
Our subsidiary Cash App Investing facilitates transactions in shares and fractionalized shares of publicly-traded stock and exchange-traded funds by users of our Cash App through a third-party clearing and carrying broker, DriveWealth LLC (“DriveWealth”). Cash App Investing is registered with the SEC as a broker-dealer under the Exchange Act and is a member of FINRA. Therefore, Cash App Investing is subject to regulation, examination, and supervision by the SEC, FINRA, and FINRA.state securities regulators. The regulations applicable to broker-dealers cover all aspects of the securities business, including sales practices, use and safekeeping of clients’ funds and securities, capital adequacy, record-keeping, and the conduct and qualification of officers, employees, and independent contractors. As part of the regulatory process, broker-dealers are subject to periodic examinations by their regulators, the purpose of which is to determine compliance with securities laws and regulations, and from time to time may be subject to additional routine and for-cause examinations. It is not uncommon for regulators to
assert, upon completion of an examination, that the broker-dealer being examined has violated certain of these rules and regulations. Depending on the nature and extent of the violations, the broker-dealer may be required to pay a fine and/or be subject to other forms of disciplinary and corrective action. Additionally, the adverse publicity arising from the imposition of sanctions could harm our reputation and cause us to lose existing customers or fail to gain new customers.
The SEC, FINRA, and state regulators have the authority to bring administrative or judicial proceedings against broker-dealers, whether arising out of examinations or otherwise, for violations of state and federal securities laws. Administrative sanctions can include cease-and-desist orders, censure, fines, and disgorgement and may even result in the suspension or expulsion of the firm from the securities industry. Similar sanctions may be imposed upon officers, directors, representatives, and employees.
Cash App Investing has adopted, and regularly reviews and updates, various policies, controls, and procedures designed for compliance with Cash App Investing’s regulatory obligations. However, appropriately addressing these issuesCash App Investing’s regulatory obligations is complex and difficult, and our reputation could be damaged if we fail, or appear to fail, to appropriately address them. Failure to adhere to these policies and procedures may also result in regulatory sanctions or litigation against us. Cash App Investing also relies on various third parties, including DriveWealth, to provide services, including managing and executing customer orders, and failure of these third parties to adequately perform these services may negatively impact customer experience, product performance, and our reputation and may also result in regulatory sanctions or litigation against us or Cash App Investing.
In the event of any regulatory action or scrutiny, we or Cash App Investing could also be required to make changes to our business practices or compliance programs. In addition, any perceived or actual breach of compliance by Cash App Investing with respect to applicable laws, rules, and regulations could have a significant impact on our reputation, could cause us to lose existing customers, prevent us from obtaining new customers, require us to expend significant funds to remedy problems caused by breaches and to avert further breaches, and expose us to legal risk, including litigation against us, and potential liability.
Cash App Investing is subject to net capital and other regulatory capital requirements; failure to comply with these rules could harm our business.
Our subsidiary Cash App Investing is subject to the net capital requirements of the SEC and FINRA. These requirements typically specify the minimum level of net capital a broker-dealer must maintain and also mandate that a significant part of its assets be kept in relatively liquid form. Failure to maintain the required net capital may subject a firm to limitation of its activities, including suspension or revocation of its registration by the SEC and suspension or expulsion by FINRA, and ultimately may require its liquidation. Currently, Cash App Investing has relatively low net capital requirements, because it does not hold customer funds or securities, but instead facilitates the transmission and delivery of those funds on behalf of customers to DriveWealth or back to the applicable customer. However, a change in the net capital rules, a change in how Cash App Investing handles or holds customer assets, or the imposition of new rules affecting the scope, coverage, calculation, or amount of net capital requirements could have adverse effects. Finally, because Cash App Investing is subject to such net capital requirements, we may be required to inject additional capital into Cash App Investing from time to time and as such, we may have liability and/or our larger business may be affected by any of these outcomes.
It is possible that FINRA will require changes to our business practices based on our ownership of Cash App Investing, which could impose additional costs or disrupt our business.
In certain cases, FINRA has required unregistered affiliates of broker-dealers to comply with additional regulatory requirements, including, among others, handling all securities or other financial transactions through the affiliated broker-dealer or conforming all marketing and advertising materials to the requirements applicable to broker-dealers. We do not currently believe that these types of requirements apply to any aspect of our business other than the securities transactions facilitated through the Cash App. It is possible that, in the future, FINRA could require us to comply with additional regulations in the conduct of other activities (i.e., beyond the securities transactions made through the Cash App). If that were to occur, it could require significant changes to our business practices. These and other changes would impose significantly greater costs on us and disrupt existing practices in ways that could negatively affect our overarching business and profitability.
Our subsidiary Square Financial Services is a Utah state-chartered industrial bank, which requires that we serve as a source of financial strength to it and subjects us to potential regulatory sanctions.
On March 1, 2021, Square Financial Services received its deposit insurance from the FDIC and charter approval from the Utah Department of Financial Institutions and became operational. The Federal Deposit Insurance Act requires that we serve as a source of financial strength to Square Financial Services. This means that we are required by law to provide financial assistance to Square Financial Services in the event that it experiences financial distress. In this regard, the FDIC’s approval requires that Square Financial Services have initial paid in capital of not less than approximately $56 million, and at all times meet or exceed the regulatory capital levels required for Square Financial Services to be considered “well capitalized” under the FDIC’s prompt corrective action rules. The regulatory total capital and leverage ratios of Square Financial Services during the first three years of operation may not be less than the levels provided in Square Financial Services’ business plan approved by the FDIC. Thereafter, the regulatory capital ratios must be annually approved by the FDIC, and in no event may Square Financial Services’ leverage ratio be less than twenty percent, as calculated in accordance with FDIC regulations. If Square Financial Services' total capital or leverage ratios fall below the levels required by the FDIC, we will need to provide sufficient capital to Square Financial Services so as to enable it to maintain its required regulatory capital ratios. If the FDIC were to increase Square Financial Services’ capital requirements, it could negatively impact our business and operations and those of Square Financial Services.
The FDIC’s approval is also contingent on us maintaining a Capital and Liquidity Maintenance Agreement as well as a Parent Company Agreement. The Capital and Liquidity Maintenance Agreement requires, among other things, that we maintain the leverage ratio of Square Financial Services at a minimum of 20 percent following the first three years of Square Financial Services’ operations; maintain a third-party line of credit for the benefit of Square Financial Services acceptable to the FDIC; purchase any loan from Square Financial Services at the greater of the cost basis or fair market value, if deemed necessary by the FDIC or Square Financial Services; and establish and maintain a reserve deposit of $50 million at an unaffiliated third-party bank that Square Financial Services could draw upon in the event that we fail to provide sufficient funds to maintain Square Financial Services’ capital ratios at the required levels. The Parent Company Agreement requires, among other things, that we consent to the FDIC’s examination of us and our subsidiaries; limit our representation on Square Financial Services’ board of directors to no more than 25 percent; submit a contingency plan to the FDIC that describes likely scenarios of significant financial or operational stress and, if we were unable to serve as a source of financial strength, options for the orderly wind down or sale of Square Financial Services; and engage a third party to review and provide periodic reports concerning the effectiveness of our complaint response system. Jack Dorsey, who is considered our controlling shareholder in this context, also agreed to cause us to perform under these agreements. Should we fail to comply with these obligations, we could be subject to regulatory sanctions. In addition, any failure by Square Financial Services to comply with applicable laws, rules, and regulations could also subject us and Square Financial Services to regulatory sanctions. These sanctions could adversely impact our reputation and our business, require us to expend significant funds for remediation, and expose us to litigation and other potential liability.
WeSquare Financial Services is subject to extensive supervision and regulation, including the Dodd-Frank Act and its related regulations, which are subject to risks related to litigation, including intellectual property claims, government investigationschange and could involve material costs or inquiries, and regulatory matters or disputes.affect operations.
WeThe Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") effected significant changes to U.S. financial regulations and required rule making by U.S. financial regulators including adding a new Section 13 to the Bank Holding Company Act known as the Volcker Rule. The Volcker Rule generally restricts certain banking entities (such as Square Financial Services) from engaging in proprietary trading activities and from having an ownership interest in or sponsoring any private equity funds or hedge funds (or certain other private issuing entities). The current activities of Square Financial Services have not been and are not expected to be materially affected by the Volcker Rule. Nevertheless, we cannot predict whether, or in what form, any other proposed regulations or statutes or changes to implementing regulations will be adopted or the extent to which the business operations of Square Financial Services may be and have been,affected by any new regulation or statute. Such changes could subject to claims, lawsuits (including class actions and individual lawsuits), government or regulatory investigations, subpoenas, inquiries or audits, and other proceedings. The number and significance of our legal disputes and inquiries have increased as we have grown larger, as our business has expanded in scopeto additional compliance burden, costs, and geographic reach,possibly limit the types of financial services and as our products and services have increased in complexity, and we expect that we will continue to face additional legal disputes as we continue to grow and expand. We also receive significant media attention, which could result in increased litigation or other legal or regulatory reviews and proceedings.may offer.
SomeSquare Financial Services is also subject to the requirements in Sections 23A and 23B of the lawsFederal Reserve Act and regulations affecting the internet, mobile commerce, payment processing, bitcoinFederal Reserve Board’s implementing Regulation W, which regulate loans, extensions of credit, purchases of assets, and equity investing, business financing,certain other transactions between an insured depository institution (such as Square Financial Services) and employment did not anticipate businesses like ours,its affiliates. The statute and many of the laws and regulations, including those affecting us have been enacted relatively recently. As a result, there is substantial uncertainty regarding the scope and application of many of the laws and regulationsregulation require Square Financial Services to which we are subject, which increases the risk that we will be subject to claims alleging violations of those laws and regulations. The scope, outcome, and impact of claims, lawsuits, government or regulatory investigations, subpoenas, inquiries or audits,impose certain quantitative limits, collateral requirements, and other proceedings to which we are subject cannotrestrictions on “covered transactions” between Square Financial Services and its affiliates and requires all transactions be predictedon “market terms” and conditions consistent with certainty. Regardless of the outcome, such investigationssafe and legal proceedings can have a material and adverse impact on us due to their costs, diversion of our resources, and other factors. Plaintiffs may seek, and we may become subject to, preliminary or provisional rulings in the course of litigation, including preliminary injunctions requiring us to cease some or all of our operations. We may decide to settle legal disputes on terms that are unfavorable to us. We may also be accused of having, or be found to have, infringed or violated third-party intellectual property rights. Furthermore, if any litigation to which we are a party is resolved adversely, we may be subject to an unfavorable judgment that we may not choose to appeal or that may not be reversed upon appeal. We may have to seek a license to continue practices found to be in violation of a third party’s rights, or we may have to change or cease certainsound banking practices. If we are required, or choose to enter into, royalty or licensing arrangements, such arrangements may not be available on reasonable terms or at all and may significantly increase our operating costs and expenses. As a result, we may also be required to develop or procure alternative non-infringing technology or discontinue use of technology, and doing so could require significant effort and expense or may not be feasible. In addition, the terms of any settlement or judgment in connection with any legal claims, lawsuits, or proceedings may require us to cease some or all of our operations or to pay substantial amounts to the other party and could materially and adversely affect our business.
Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products, services, and brand.
Our trade secrets, trademarks, copyrights, patents, and other intellectual property rights are critical to our success. We rely on, and expect to continue to rely on, a combination of confidentiality, invention assignment, and license agreements with our employees, consultants, and third parties with whom we have relationships, as well as trademark, trade dress, domain name, copyright, trade secret, and patent rights, to protect our brand and other intellectual property rights. However, various events outside of our control may pose a threat to our intellectual property rights, as well as to our products and services. Effective protection of intellectual property rights is expensive and difficult to maintain, both in terms of application and maintenance costs, as well as the costs of defending and enforcing those rights. The efforts we have taken to protect our intellectual property rights may not be sufficient or effective. Our intellectual property rights may be infringed, misappropriated, or challenged, which could result in them being narrowed in scope or declared invalid or unenforceable. Similarly, our reliance on unpatented proprietary information and technology, such as trade secrets and confidential information, depends in part on agreements we have in place with employees and third parties that place restrictions on the use and disclosure of this intellectual property. These agreements may be insufficient or may be breached, or we may not enter into sufficient agreements with such individuals in the first instance, in either case potentially resulting in the unauthorized use or disclosure of our trade secrets and other intellectual property, including to our competitors, which could cause us to lose any competitive advantage resulting from this intellectual property. Individuals not subject to invention assignment agreements may make adverse ownership claims to our current and future intellectual property. There can be no assurance that our intellectual property rights will be sufficient to protect against others offering products or services that are substantially similar to ours and that compete with our business.
We routinely apply for patents in the U.S. and internationally to protect innovative ideas in our technology, but we may not always be successful in obtaining patent grants from these applications. We also pursue registration of copyrights, trademarks, and domain names in the United States and in certain jurisdictions outside of the United States, but doing so may not always be successful or cost-effective. In general, we may be unable or, in some instances, choose not to obtain legal
protection for our intellectual property, and our existing and future intellectual property rights may not provide us with competitive advantages or distinguish our products and services from those of our competitors. The laws of some foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States, and effective intellectual property protection and mechanisms may not be available in those jurisdictions. We may need to expend additional resources to defend our intellectual property in these countries, and the inability to do so could impair our business or adversely affect our international expansion. Our intellectual property rights may be contested, circumvented, or found unenforceable or invalid, and we may not be able to prevent third parties from infringing, diluting, or otherwise violating them. Additionally, our intellectual property rights and other confidential business information are subject to risks of compromise or unauthorized disclosure if our security measures or those of our third-party service providers are unable to prevent cyber-attacks. Significant impairments of our intellectual property rights, and limitations on our ability to assert our intellectual property rights against others, could have a material and adverse effect on our business.
Assertions by third parties of infringement or other violation by us of their intellectual property rights could harm our business.
Third parties have asserted, and may in the future assert, that we have infringed, misappropriated, or otherwise violated their copyrights, patents, and other intellectual property rights. Although we expend significant resources to seek to comply with the statutory, regulatory, and judicial frameworks and the terms and conditions of statutory licenses, we cannot assure you that we are not infringing or violating any third-party intellectual property rights, or that we will not do so in the future. It is difficult to predict whether assertions of third-party intellectual property rights or any infringement or misappropriation claims arising from such assertions will substantially harm our business, operating results, and financial condition. If we are forced to defend against any infringement or misappropriation claims, whether they are with or without merit, are settled out of court, or are determined in our favor, we may be required to expend significant time and financial resources on the defense of such claims. Furthermore, an adverse outcome of a dispute may require us to pay significant damages, which may be even greater if we are found to have willfully infringed upon a party’s intellectual property; cease exploiting copyrighted content that we have previously had the ability to exploit; cease using solutions that are alleged to infringe or misappropriate the intellectual property of others; expend additional development resources to redesign our solutions; enter into potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies, content, or materials; indemnify our partners and other third parties; and/or take other actions that may have material and adverse effects on our business, operating results, and financial condition.
Increased scrutiny from investors, regulators, and other stakeholders relating to environmental, social, and governance issues could result in additional costs for us and may adversely impact our reputation.
Investors, regulators, customers, employees and other stakeholders are increasingly focused on environmental, social, and governance (“ESG”) matters. Our ESG strategy is focused on four key areas: climate action, social impact, employees and culture, and corporate governance, and we publicly report on certain commitments, initiatives, and goals regarding ESG matters in our annual Corporate Social Responsibility Report, on our website, in our SEC filings, and elsewhere. For example, we are committed to increasing the diversity of our workforce and one of our climate change goals is to have net zero carbon for operations by 2030. The implementation of our ESG commitments, initiatives, and goals may require additional investments, and in certain cases, are reliant on third-party verification and/or performance, and we cannot guarantee that we will make progress on our commitments and initiatives or achieve our goals. If we fail, or are perceived to fail, to make such progress or achievements, or to maintain ESG practices that meet evolving stakeholder expectations, or if we have to revise any of our ESG commitments, initiatives, or goals, our reputation and our ability to attract and retain employees could be harmed, and we may be negatively perceived by investors or our customers. To the extent that our required and voluntary disclosures about ESG matters increase, we could also be criticized for the accuracy, adequacy, or completeness of such disclosures and our reputation could be negatively impacted. In addition, regulatory requirements with respect to climate change and other aspects of ESG may result in increased compliance requirements on our business and supply chain, and may increase our operating costs.
Risks Related to Ownership of Our Common Stock
The dual class structure of our common stock has the effect of concentrating voting control within our stockholders who held our stock prior to our initial public offering, including many of our employees and directors and their affiliates; this will limit or preclude your ability to influence corporate matters.
Our Class B common stock has ten votes per share, and our Class A common stock has one vote per share. Stockholders who hold shares of Class B common stock, including manycertain of our executive officers, employees, and directors and their affiliates, held approximately 62.8%52.93% of the voting power of our combined outstanding capital stock as of December 31, 2020.2022. Our executive officers and directors and their affiliates held approximately 65.1%54.76% of the voting power of our combined outstanding capital stock as of December 31, 2020.2022. Because of the ten-to-one voting ratio between our Class B and Class A common stock, the holders of our Class B common stock collectively hold more than a majority of the combined voting power of our common stock, and therefore such holders are able to control all matters submitted to our stockholders for approval. When the shares of our Class B common stock represent less than 5% of the combined voting power of our Class A common stock and Class B common stock, the then-outstanding shares of Class B common stock will automatically convert into shares of Class A common stock.
Transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions. Such conversions of Class B common stock to Class A common stock upon transfer will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long term. If, for example, our Class B stockholders retain shares of Class B common stock constituting as little as 10% of all outstanding shares of our Class A and Class B common stock combined, they will continue to control a majority of the combined voting power of our outstanding capital stock.
The market price of our Class A common stock has been and will likely continue to be volatile, and you could lose all or part of your investment.
The market price of our Class A common stock has been and may continue to be subject to wide fluctuations in response to various factors, some of which are beyond our control and may not be related to our operating performance. In addition to the factors discussed in this “Risk Factors”Risk Factors section and elsewhere in this Annual Report on Form 10-K, factors that could cause fluctuations in the market price of our Class A common stock include the following:
•general economic, regulatory, and market conditions, in particular conditions that adversely affect our sellers’ business and the amount of transactions they are processing;
•public health crises and related measures to protect the public health, such as the COVID-19 pandemic;health;
•sales of shares of our common stock by us or our stockholders;
•issuance of shares of our Class A common stock, whether in connection with an acquisition or upon conversion of some or all of our outstanding Convertible Notes;
•short selling of our Class A common stock or related derivative securities;
•from time to time we make investments in equity that is, or may become, publicly held, and we may experience volatility due to changes in the market prices of such equity investments;
•fluctuations in the price of bitcoin, and potentially any impairment charges in connection with our investments in bitcoin;
•reports by securities or industry analysts that are interpreted either negatively or positively by investors, failure of securities analysts to maintain coverage and/or to provide accurate consensus results of us, changes in financial estimates by securities analysts who follow us, or our failure to meet these estimates or the expectations of investors;
•the financial or other projections we may provide to the public, any changes in those projections, or our failure to meet those projections;
•announcements by us or our competitors of new products or services;
•rumors and market speculation involving us or other companies in our industry;
•actual or perceived data security incidents that we or our service providers may suffer; and
•actual or anticipated developments in our business, our competitors’ businesses, or the competitive landscape generally.
In addition, 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. Such litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
Our Class A common stock is listed to trade on more than one stock exchange, and this may result in price variations.
Our Class A common stock is listed for trade on the NYSE and as CDIs on the ASX. Dual-listing may result in price variations between the exchanges due to a number of factors. Our Class A common stock is traded in U.S. dollars on the NYSE and our CDIs are traded in Australian Dollars on the ASX. The two exchanges also have differing vacation schedules. Differences in the trading schedules, as well as volatility in the exchange rate of the two currencies, among other factors, may result in different trading prices for our Class A common stock on the two exchanges.
The convertible note hedge and warrant transactions may affect the value of our Class A common stock.
In connection with the issuance of each series of our Convertible Notes, we entered into convertible note hedge transactions with the option counterparties. We also entered into warrant transactions with the option counterparties pursuant to which we sold warrants for the purchase of our Class A common stock. The convertible note hedge transactions are expected generally to reduce the potential dilution to our Class A common stock upon any conversion of the Convertible Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Convertible Notes, as the case may be. The warrant transactions would separately have a dilutive effect to the extent that the market price per share of our Class A common stock exceeds the strike price of any warrants unless, subject to the terms of the warrant transactions, we elect to cash settle the warrants.
From time to time, the option counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivative transactions with respect to our Class A common stock and/or purchasing or selling our Class A common stock or other securities of ours in secondary market transactions prior to the maturity of the Convertible Notes. This activity could cause or avoid an increase or a decrease in the market price of our Class A common stock.
Anti-takeover provisions contained in our amended and restated certificate of incorporation, our amended and restated bylaws, and provisions of Delaware law could impair a takeover attempt.
Our amended and restated certificate of incorporation (“certificate of incorporation”), our amended and restated bylaws (“bylaws”), and Delaware law contain provisions that could have the effect of rendering more difficult, delaying, or preventing an acquisition deemed undesirable by our board of directors and therefore depress the trading price of our Class A common stock.
Among other things, our dual-class common stock structure provides our holders of Class B common stock with the ability to significantly influence the outcome of matters requiring stockholder approval, even if they own significantly less than a majority of the shares of our outstanding shares of common stock. Further, our amended and restated certificate of incorporation and amended and restated bylaws include provisions (i) creating a classified board of directors whose members serve staggered three-year terms; (ii) authorizing “blank check” preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting, liquidation, dividend, and other rights superior to our common stock; (iii) limiting the ability of our stockholders to call special meetings; (iv) eliminating the ability of our stockholders to act by written consent without a meeting or to remove directors without cause; and (v) requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of
candidates for election to our board of directors. These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.
As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which prevents certain stockholders holding more than 15% of our outstanding capital stock from engaging in certain business combinations without the approval of our board of directors or the holders of at least two-thirds of our outstanding capital stock not held by such stockholder.
Any provision of our amended and restated certificate of incorporation, amended and restated bylaws, or Delaware law that has the effect of delaying or preventing a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our capital 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 provide that (1) the Delaware Court of Chancery ofor another state court or federal court located within the State of Delaware will be the sole and exclusive forum for substantially all disputes between us and our stockholders and (2) the federal district courts of the U.S. will be the exclusive forum for all causes of action arising under the Securities Act, which could limit our stockholders’ ability to obtain a favorablechoose the judicial forum for disputes with us or our directors, officers, or employees.
Our amended and restated bylaws provide that, unless we consent to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if the Court of Chancery of the State of Delaware does not have jurisdiction, another state court in Delaware or federal district court for the District of Delaware) is the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf; (ii) any action asserting a claim of breach of fiduciary duty owed by any of our directors, officers, or other employees to us or to our stockholders; (iii) any action asserting a claim arising pursuant to the Delaware General Corporation Law;Law, our certificate of incorporation or our bylaws; or (iv) any action asserting a claim governed by the internal affairs doctrine.doctrine, in all cases subject to the court having jurisdiction over the claims at issue and the indispensable parties. The choice of forum provision will not apply to suits brought to enforce any liability or duty created by the Exchange Act.
Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our bylaws also provide that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act.
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 the foregoing bylaw provisions. Although we believe these exclusive forum provisions benefit us by providing increased consistency in the application of Delaware law and federal securities laws in the types of lawsuits to which each applies, the exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorableof its choosing for disputes with us or any of our directors, officers, stockholders, or other employees, which may discourage lawsuits with respect to such lawsuitsclaims against us and our current and former directors, officers, andstockholders, or other employees. Alternatively, ifOur stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder as a result of our exclusive forum provisions. Further, in the event a court were to find the choice offinds either exclusive forum provision contained in our amended and restated bylaws to be inapplicableunenforceable or unenforceableinapplicable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could have a material and adverse impact onharm our business.results of operations.
ItemITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ItemITEM 2. PROPERTIES
Our corporateAs of 2021, we do not designate a headquarters which includelocation as we have adopted a distributed work model. We lease space in San Francisco, California, for product development, sales, marketing, and business operations are located in San Francisco, California. It consists of 469,056 square feet of space under a lease that expires in 2023. We also lease 59,905 square feetspace in New York, New York for a product development, sales, and business operations office under a lease that expires in 2025. In December 2018, we entered into a lease arrangement for 355,762 square feet of2025 and office space in Oakland, California under a lease that expires in 2031. In July 2019, the Company entered into a lease arrangement for 226,185 square feet of office space in St Louis, Missouri, for a term of 15.5 years with options to extend the lease term for two 5-year terms. TheIn January 2023, we informed the landlord of this property of our intention to exercise an early termination option of the lease commencement date varies by floor beginning in May 2020.with respect to approximately 50% of the leased space effective December 31, 2023. In addition, we also have offices in several other locations and believe our facilities are sufficient for our current needs.
ItemITEM 3. LEGAL PROCEEDINGS
We are currently a party to, and may in the future be involved in, various litigation matters (including intellectual property litigation), legal claims, and government investigations. For information regarding legal proceedings in which we are involved, see “Litigation” inRefer to Note 18 of20, Commitments and Contingencies within Notes to the accompanying notes to our consolidated financial statements, which is incorporated herein by reference.Consolidated Financial Statements for further information.
In addition, from time to time, we are involved in various other litigationlegal matters, investigations, claims, and disputes arising in the ordinary course of business. We cannot at this time fairly estimate a reasonable range of exposure, if any, of the potential liability with respect to these other matters. While we do not believe, at this time, that any ultimate liability resulting from any of these other matters will have a material adverse effect on our results of operations, financial position, or liquidity, we cannot give any assurance regarding the ultimate outcome of these other matters, and their resolution could be material to our operating results for any particular period.
ItemITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ItemITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information for Common Stock
Our Class A common stock began tradingtrades on the New York Stock Exchange under the symbol “SQ”. Our CDIs are traded on November 19, 2015. Prior to that date, there was no public trading market for our Class A common stock.the ASX under the symbol “SQ2”. There is no public trading market for our Class B common stock.
Holders of Record
As of February 18, 2021,17, 2023, there were 131612 holders of record of our Class A common stock and 4329 holders of record of our Class B common stock. Because many of our shares of Class A common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial owners of our Class A common stock represented by these record holders. As of February 17, 2023, we estimate that we have approximately 47,802 holders of record of our CDIs.
Dividend Policy
We have never declared nor paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not expect to pay any dividends on our capital stock in the foreseeable future. Any future determination relating to our dividend policy will be at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors considers relevant.
Unregistered Sales of Equity Securities
In connection with the acquisition of a technology company completed in the three months ended March 31, 2020, which we previously reported in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020, we issued 165,976 shares of our Class A common stock subject to certain vesting conditions, pursuant to exemptions from registration provided by Section 4(a)(2). This issuance was in addition to the 191,041 shares of our Class A common stock reported in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020 in connection with the same acquisition.
Issuer Purchases of Equity Securities
| | | | | | | | | | | | | | |
Period | Total number of Shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs |
October 1 to October 31 | 234,060 (i)
| $168.74 (ii)
| — | | — | |
November 1 to November 30 | 588,762 (iii)
| $156.55 (ii)
| — | | — | |
December 1 to December 31 | 715,028 (iv)
| $214,00 (ii)
| — | | — | |
Total | 1,537,850 | | $173.47 (ii)
| — | | — | |
(i) Includes 14,779 shares that have been withheld by the Company to satisfy its tax withholding and remittance obligations in connection with the vesting of restricted stock awards. In addition, the Company exercised a pro-rata portion of the 2022 convertible note hedges (described in Note 13, Indebtedness, of the Notes to the Consolidated Financial Statements) to offset the shares of the Company's Class A common stock issued to settle the conversion of certain 2022 Notes. The note
hedges were net shares settled and the Company received 219,281 shares of the Company's Class A common stock from the counterparties in October of 2020.
(ii) Excludes the shares received through the exercise of the note hedges.
(iii) Includes 7,586 shares that have been withheld by the Company to satisfy its tax withholding and remittance obligations in connection with the vesting of restricted stock awards. In addition, the Company exercised a pro-rata portion of the 2022 convertible note hedges (described in Note 13, Indebtedness, of the Notes to the Consolidated Financial Statements) to offset the shares of the Company's Class A common stock issued to settle the conversion of certain 2022 Notes. The note hedges were net shares settled and the Company received 581,176 shares of the Company's Class A common stock from the counterparties in November of 2020.
(iv) Includes 4,888 shares that have been withheld by the Company to satisfy its tax withholding and remittance obligations in connection with the vesting of restricted stock awards. In addition, the Company exercised a pro-rata portion of the 2022 convertible note hedges (described in Note 13, Indebtedness, of the Notes to the Consolidated Financial Statements) to offset the shares of the Company's Class A common stock issued to settle the conversion of certain 2022 Notes. The note hedges were net shares settled and the Company received 710,140 shares of the Company's Class A common stock from the counterparties in December of 2020.
Performance Graph
This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act)(the "Exchange Act"), or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Square,Block, Inc. under the Exchange Act or the Securities Act of 1933, as amended, or the Exchange Act.amended.
The following graph compares the cumulative total return to stockholders onof our common stock relative to the cumulative total returns of the Standard & Poor’s 500 Index or ("S&P 500,500"), and the S&P North American Technology Index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our Class A common stock and in each index on December 31, 20152017 and its relative performance is tracked through December 31, 2020.2022. The returns shown are based on historical results and are not intended to suggest future performance.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Company/Index | | 12/31/2015 | | 12/31/2016 | | 12/31/2017 | | 12/31/2018 | | 12/31/2019 | | 12/31/2020 |
Square, Inc. | | 100.00 | | | 104.13 | | | 264.86 | | | 428.49 | | | 477.92 | | | 1,662.64 | |
S&P 500 | | 100.00 | | | 111.96 | | | 136.4 | | | 130.42 | | | 171.49 | | | 203.04 | |
S&P North American Technology | | 100.00 | | | 113.56 | | | 156.46 | | | 160.96 | | | 229.67 | | | 333.37 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Company/Index | | 12/31/2017 | | 12/31/2018 | | 12/31/2019 | | 12/31/2020 | | 12/31/2021 | | 12/31/2022 |
Block, Inc. | | $ | 100.00 | | | $ | 161.78 | | | $ | 180.44 | | | $ | 627.75 | | | $ | 465.85 | | | $ | 181.25 | |
S&P 500 | | $ | 100.00 | | | $ | 95.62 | | | $ | 125.72 | | | $ | 148.85 | | | $ | 191.58 | | | $ | 156.89 | |
S&P North American Technology | | $ | 100.00 | | | $ | 102.88 | | | $ | 146.79 | | | $ | 213.07 | | | $ | 269.33 | | | $ | 174.09 | |
ITEM 6. [RESERVED]
Item 6. SELECTED FINANCIAL DATA
The following selected consolidated statement of operations data for the years ended December 31, 2020, 2019, and 2018, and the consolidated balance sheet data as of December 31, 2020, and 2019, have been derived from our audited consolidated financial statements and should be read 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 Annual Report on Form 10-K. The following selected consolidated statement of operations data for the years ended December 31, 2017, and 2016, and the consolidated balance sheet data as of December 31, 2018, 2017, and 2016, are derived from our audited consolidated financial statements which are not included in this Annual Report on Form 10-K.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| (in thousands, except per share data) |
Consolidated Statement of Operations Data: | | | | |
Total net revenue | 9,497,578 | | | 4,713,500 | | | 3,298,177 | | | 2,214,253 | | | 1,708,721 | |
Total cost of revenue | 6,764,169 | | | 2,823,815 | | | 1,994,477 | | | 1,374,947 | | | 1,132,683 | |
Gross profit | 2,733,409 | | | 1,889,685 | | | 1,303,700 | | | 839,306 | | | 576,038 | |
Total operating expenses | 2,752,224 | | | 1,863,128 | | | 1,340,314 | | | 893,512 | | | 746,491 | |
Operating income (loss) | (18,815) | | | 26,557 | | | (36,614) | | | (54,206) | | | (170,453) | |
Net income (loss) | $ | 213,105 | | | $ | 375,446 | | | $ | (38,453) | | | $ | (62,813) | | | $ | (171,590) | |
Net income (loss) per share: | | | | | | | | | |
Basic | $ | 0.48 | | | $ | 0.88 | | | $ | (0.09) | | | $ | (0.17) | | | $ | (0.50) | |
Diluted | $ | 0.44 | | | $ | 0.81 | | | $ | (0.09) | | | $ | (0.17) | | | $ | (0.50) | |
Weighted-average shares used to compute net income (loss) per share: | | | | | | | | | |
Basic | 443,126 | | | 424,999 | | | 405,731 | | | 379,344 | | | 341,555 | |
Diluted | 482,167 | | | 466,076 | | | 405,731 | | | 379,344 | | | 341,555 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| (in thousands) |
Consolidated Balance Sheet Data: | | | | | | | | | |
Cash and cash equivalents | $ | 3,158,058 | | | $ | 1,047,118 | | | $ | 583,173 | | | $ | 696,474 | | | $ | 452,030 | |
Total investments in debt-securities | 1,159,062 | | | 1,029,759 | | | 1,005,671 | | | 373,243 | | | 87,267 | |
Settlements receivable | 1,024,895 | | | 588,692 | | | 364,946 | | | 620,523 | | | 321,102 | |
Customer funds | 2,037,832 | | | 676,292 | | | 334,017 | | | 103,042 | | | 43,574 | |
Working capital | 3,635,525 | | | 1,525,716 | | | 1,093,364 | | | 805,467 | | | 423,961 | |
Total assets | 9,869,550 | | | 4,551,258 | | | 3,281,023 | | | 2,187,270 | | | 1,211,362 | |
Customers payable | 3,009,051 | | | 1,273,135 | | | 749,215 | | | 733,736 | | | 431,632 | |
Long-term debt | 2,586,924 | | | 938,832 | | | 899,695 | | | 358,572 | | | — | |
Total stockholders’ equity | 2,681,569 | | | 1,715,050 | | | 1,120,501 | | | 786,333 | | | 576,153 | |
Key Operating Metrics and Non-GAAP Financial Measures
We collect and analyze operating and financial data to evaluate the health of our business, allocate our resources, and assess our performance. In addition to total net revenue, net income (loss), and other results under generally accepted accounting principles (GAAP), the following table sets forth key operating metrics and non-GAAP financial measures we use to evaluate our business. We believe these metrics and measures are useful to facilitate period-to-period comparisons of our business, and to facilitate comparisons of our performance to that of other payment solution providers.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 (i) |
| (in thousands, except for GPV and per share data) |
Gross Payment Volume (GPV) (in millions) | $ | 112,295 | | | $ | 106,239 | | | $ | 84,654 | | | $ | 65,343 | | | $ | 49,683 | |
Adjusted EBITDA | $ | 474,071 | | | $ | 416,853 | | | $ | 256,523 | | | $ | 139,009 | | | $ | 44,887 | |
Adjusted Net Income Per Share: | | | | | | | | | |
Basic | $ | 0.95 | | | $ | 0.90 | | | $ | 0.55 | | | $ | 0.30 | | | $ | 0.04 | |
Diluted | $ | 0.84 | | | $ | 0.80 | | | $ | 0.47 | | | $ | 0.27 | | | $ | 0.04 | |
(i) For 2016, each of these metrics and measures excludes the effect of our processing agreement with Starbucks which transitioned to another payments solutions provider in the fourth quarter of 2016. As transactions with Starbucks have not recurred, we believe it is useful to exclude Starbucks activity to clearly show the impact Starbucks has had on our financial results historically. Our agreements with other sellers generally provide both those sellers and us the unilateral right to terminate such agreements at any time, without fine or penalty.
Gross Payment Volume (GPV)
We define GPV as the total dollar amount of all card payments processed by sellers using Square, net of refunds. Additionally, GPV includes Cash App activity related to Cash for Business and peer-to-peer payments sent from a credit card. As described above, GPV excludes card payments processed for Starbucks.
Adjusted EBITDA and Adjusted Net Income (Loss) Per Share (Adjusted EPS)
Adjusted EBITDA and Adjusted EPS are non-GAAP financial measures that represent our net income (loss) and net income (loss) per share, adjusted to eliminate the effect of items as described below. We have included these non-GAAP financial measures in this Annual Report on Form 10-K because they are key measures used by our management to evaluate our operating performance, generate future operating plans, and make strategic decisions, including those relating to operating expenses and the allocation of internal resources. Accordingly, we believe these measures provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. In addition, they provide useful measures for period-to-period comparisons of our business, as they remove the effect of certain non-cash items and certain variable charges.
•For 2016, we exclude Starbucks transaction-based revenue and Starbucks transaction-based costs. As described above, Starbucks ceased using our payments solutions altogether in the fourth quarter of 2016, and we believe that providing non-GAAP financial measures that exclude the impact of Starbucks is useful to investors.
•We believe it is useful to exclude certain non-cash charges, such as amortization of intangible assets, and share-based compensation expenses, from our non-GAAP financial measures because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations.
•In connection with the issuance of our convertible senior notes (as described in Note 13, Indebtedness, of the notes of the Consolidated Financial Statements), we are required to recognize non-cash interest expense related to amortization of debt discount and issuance costs. We believe that excluding these expenses from our non-GAAP measures is useful to investors because such incremental non-cash interest expense does not represent a current or future cash outflow for the Company and is therefore not indicative of our continuing operations or meaningful when comparing current results to past results. Additionally, for purposes of calculating diluted Adjusted EPS we
add back cash interest expense on convertible senior notes, as if converted at the beginning of the period, if the impact is dilutive.
•We exclude gain or loss on the disposal of property and equipment, gain on sale of asset group, gain or loss on revaluation of equity investment, gain or loss on debt extinguishment related to the conversion of senior notes and impairment of intangible assets, as applicable, and the litigation settlement with Robert E. Morley in 2016 from non-GAAP financial measures because we do not believe that these items are reflective of our ongoing business operations.
•We also exclude certain costs associated with acquisitions that are not normal operating expenses, including amounts paid to redeem acquirees’ unvested share-based compensation awards, and legal, accounting and due diligence costs, and we add back the impact of the acquired deferred revenue and deferred cost adjustment, which was written down to fair value in purchase accounting. Such amounts were not included in prior periods as they were immaterial or zero.
In addition to the items above, Adjusted EBITDA as a non-GAAP financial measure also excludes depreciation, other cash interest income and expense, other income and expense and provision or benefit from income taxes, as these items are not components of our core business operations.
Non-GAAP financial measures have limitations, should be considered as supplemental in nature and are not meant as a substitute for the related financial information prepared in accordance with GAAP. These limitations include the following:
•share-based compensation expense has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and an important part of our compensation strategy;
•the intangible assets being amortized may have to be replaced in the future, and the non-GAAP financial measures do not reflect cash capital expenditure requirements for such replacements or for new capital expenditures or other capital commitments; and
•non-GAAP measures do not reflect changes in, or cash requirements for, our working capital needs.
In addition to the limitations above, Adjusted EBITDA as a non-GAAP financial measure does not reflect the effect of depreciation expense and related cash capital requirements, income taxes that may represent a reduction in cash available to us, and the effect of foreign currency exchange gains or losses, which is included in other income and expense.
Other companies, including companies in our industry, may calculate the non-GAAP financial measures differently or not at all, which reduces their usefulness as comparative measures.
Because of these limitations, you should consider the non-GAAP financial measures alongside other financial performance measures, including net income (loss) and our other financial results presented in accordance with GAAP.
The following table presents a reconciliation of net income (loss) to Adjusted EBITDA for each of the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
Net income (loss) | $ | 213,105 | | | $ | 375,446 | | | $ | (38,453) | | | $ | (62,813) | | | $ | (171,590) | |
Starbucks transaction-based revenue | — | | | — | | | — | | | — | | | (78,903) | |
Starbucks transaction-based costs | — | | | — | | | — | | | — | | | 69,761 | |
Share-based compensation expense | 397,500 | | | 297,863 | | | 216,881 | | | 155,836 | | | 138,786 | |
Depreciation and amortization | 84,212 | | | 75,598 | | | 60,961 | | | 37,279 | | | 37,745 | |
Litigation settlement expense | — | | | — | | | — | | | — | | | 48,000 | |
Interest expense (income), net | 56,943 | | | 21,516 | | | 17,982 | | | 10,053 | | | (533) | |
Other (income) expense, net | (291,725) | | | 273 | | | (18,469) | | | (1,595) | | | (247) | |
Provision for income taxes | 2,862 | | | 2,767 | | | 2,326 | | | 149 | | | 1,917 | |
Loss (gain) on disposal of property and equipment | 2,570 | | | 1,008 | | | (224) | | | 100 | | | (49) | |
Gain on sale of asset group | — | | | (373,445) | | | — | | | — | | | — | |
Acquisition related and other costs | 7,482 | | | 9,739 | | | 4,708 | | | — | | | — | |
Acquired deferred revenue adjustment | 1,497 | | | 7,457 | | | 12,853 | | | — | | | — | |
Acquired deferred costs adjustment | (375) | | | (1,369) | | | (2,042) | | | — | | | — | |
Adjusted EBITDA | $ | 474,071 | | | $ | 416,853 | | | $ | 256,523 | | | $ | 139,009 | | | $ | 44,887 | |
The following table presents a reconciliation of net income (loss) to Adjusted Net Income (Loss) Per Share for each of the periods indicated (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
Net income (loss) | $ | 213,105 | | | $ | 375,446 | | | $ | (38,453) | | | $ | (62,813) | | | $ | (171,590) | |
Starbucks transaction-based revenue | — | | | — | | | — | | | — | | | (78,903) | |
Starbucks transaction-based costs | — | | | — | | | — | | | — | | | 69,761 | |
Share-based compensation expense | 397,500 | | | 297,863 | | | 216,881 | | | 155,836 | | | 138,786 | |
Amortization of intangible assets | 19,239 | | | 15,000 | | | 13,103 | | | 7,615 | | | 9,013 | |
Litigation settlement expense | — | | | — | | | — | | | — | | | 48,000 | |
Amortization of debt discount and issuance costs | 67,979 | | | 39,139 | | | 32,855 | | | 14,223 | | | — | |
Loss (gain) on revaluation of equity investments | (295,297) | | | 12,326 | | | (20,342) | | | — | | | — | |
Loss on extinguishment of long-term debt | 6,651 | | | — | | | 5,028 | | | — | | | — | |
Loss (gain) on disposal of property and equipment | 2,570 | | | 1,008 | | | (224) | | | 100 | | | (49) | |
| | | | | | | | | |
Gain on sale of asset group | — | | | (373,445) | | | — | | | — | | | — | |
Acquisition related and other costs | 7,482 | | | 9,739 | | | 4,708 | | | — | | | — | |
Acquired deferred revenue adjustment | 1,497 | | | 7,457 | | | 12,853 | | | — | | | — | |
Acquired deferred cost adjustment | (375) | | | (1,369) | | | (2,042) | | | — | | | — | |
Adjusted Net Income - basic | $ | 420,351 | | | $ | 383,164 | | | $ | 224,367 | | | $ | 114,961 | | | $ | 15,018 | |
Cash interest expense on convertible senior notes | 6,078 | | | 5,108 | | | 1,292 | | | — | | | — | |
Adjusted Net Income - diluted | $ | 426,429 | | | $ | 388,272 | | | $ | 225,659 | | | $ | 114,961 | | | $ | 15,018 | |
| | | | | | | | | |
Adjusted Net Income Per Share: | | | | | | | | | |
Basic | $ | 0.95 | | | $ | 0.90 | | | $ | 0.55 | | | $ | 0.30 | | | $ | 0.04 | |
Diluted | $ | 0.84 | | | $ | 0.80 | | | $ | 0.47 | | | $ | 0.27 | | | $ | 0.04 | |
| | | | | | | | | |
Weighted-average shares used to compute Adjusted Net Income Per Share: | | | | | | | | | |
Basic | 443,126 | | | 424,999 | | | 405,731 | | | 379,344 | | | 341,555 | |
Diluted | 507,229 | | | 486,381 | | | 478,895 | | | 426,519 | | | 370,258 | |
To calculate the diluted Adjusted EPS we adjust the weighted-average number of shares of common stock outstanding for the dilutive effect of all potential shares of common stock.
In periods when we recorded an Adjusted Net Loss, the diluted Adjusted EPS is the same as basic Adjusted EPS because the effects of potentially dilutive items were anti-dilutive given the Adjusted Net Loss position.
ItemITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should readThis management's discussion and analysis provides a review of the results of operations, key operating metrics and non-GAAP financial measures, and liquidity and capital resources of Block, Inc. on a historical basis and outlines the factors that have affected recent earnings, as well as those factors that may affect future earnings. The following discussion and analysis should be read in conjunction with the information set forth under “Selected Financial Data” and our consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. 10-K ("Form 10-K").
This section of this Form 10-K generally discusses fiscal 2022 compared to fiscal 2021. The comparison of the fiscal 2021 results with the fiscal 2020 results that are not included in this Form 10-K can be found in the "Management's Discussion and Analysis Results of Operations" section in the Company's fiscal 2021 Annual Report within Part II, Item 7 of Form 10-K, filed on February 24, 2022.
The statements in this discussion regarding our expectations of our future performance, liquidity, and capital resources; our plans, estimates, beliefs, and expectations that involve risks and uncertainties; and other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under “Risk Factors”Item 1A. Risk Factors and elsewhere in this Annual Report on Form 10-K. Our actual results may differ materially from those contained in or implied by any forward-looking statements.
Overview
On December 1, 2021, we changed our name as a corporate entity from Square, Inc. to Block, Inc. (together with its subsidiaries, "Block"). We started Block with the Square ecosystem in February 2009 to enable businesses (sellers)("sellers") to accept card payments, an important capability that was previously inaccessible to many businesses. However, sellers need many innovativea variety of solutions to thrive, and we have expanded to provide them additional products and services and to give them access to a cohesive ecosystem of tools to help them manage and grow their businesses. Similarly, with Cash App, we have built a parallelan ecosystem of financial products and services to help individuals manage their money. We also added TIDAL and TBD as businesses to contribute to our purpose of economic empowerment. TIDAL is a global platform for musicians and their fans that uses unique content, experiences, and features to bring fans closer to artists and to provide artists with tools to succeed as entrepreneurs. TBD is an open developer platform focused on making the decentralized financial world accessible for everyone. In January 2022, we completed the acquisition of Afterpay Limited ("Afterpay"), a buy now, pay later ("BNPL") platform that facilitates commerce between retail merchants and consumers by allowing its retail merchant clients to offer their customers the ability to buy goods and services on a BNPL basis.
Our Seller ecosystemSquare is a cohesive commerce ecosystem that helps sellers start, run, and grow their businesses, and consists of overmore than 30 distinct software, hardware, and financial services products. We monetize these products through a combination of transaction, subscription,that provide cohesive Commerce, Customer Relationship Management, Staff Management, and service fees.Banking capabilities. Our suite of cloud-based software solutionsproducts are designed to be self-serve and intuitive to make initial setup and new employee training fast and easy, although we also offer full-service setup and support. Our products are integrated to create a seamless experience and enable a holistic view of sales, customers, employees, and locations. With our offering,finances. Our open developer platform enables integrations with third-party applications as well. We monetize these products through a seller can accept payments in person via swipe, dip, or tapcombination of a card or online via Square Invoices, Square Virtual Terminal, or the seller’s website. We also provide hardware to facilitate commerce for sellers, which includes magstripe readers, contactlesstransaction, subscription, and chip readers, Square Stand, Square Register, Square Terminal, and third-party peripherals. Square Card is a business prepaid card that enables sellers to spend the balance they have stored with Square. Sellers can also deposit funds into their Square stored balance so they can manage all of their business expenses in one place. Sellers also gain access to business loans through Square Capital based on the seller's payment processing history. We recognize revenue upon the sale of the loans to third-party investors or over time as the sellers pay down the outstanding amounts for the loans that we hold as available for sale. service fees. We have grown rapidly to serve millions of sellers that represent a diverse set of industries (includingincluding services, food-related business,businesses, and retail businesses)businesses; and sizes, ranging from sole proprietors, such as a single vendor at a farmers’ market, to multi-location enterprise businesses. Square sellers also span geographies, including the United States, Canada, Japan, Australia, andNew Zealand, the United Kingdom.Kingdom, Ireland, France, and Spain.
Our Cash App provides an ecosystem providesof financial tools for individualsproducts and services to store, send, receive, spendhelp consumers manage their money. Cash App’s goal is to redefine the world’s relationship with money by making it more relatable, instantly available, and invest money. Withuniversally accessible. While Cash App customers can fund their accountstarted with a bank account or debit card,the single ability to send and receive P2P (peer-to-peer) payments, and receive direct deposit payments. Customers canmoney, it now provides an ecosystem of financial services focused on helping consumers make purchasestheir money go further — whether that's by storing, sending, receiving, spending, or investing their money with their Cash Card, a Visa prepaid card that is linked to the balance stored in Cash App. WithWe monetize these products through a combination of transaction and service fees. Cash Boost, customers receive instant discounts when they make Cash Card purchases at designated merchants. Customers can also use their stored funds to buyApp has a diverse mix of transacting actives across a range of demographics and sell bitcoin and equity investments within Cash App. Inregions in the fourth quarter of 2020, we acquired Credit Karma Tax, which addsUnited States, as well as a tax filing product for individuals to Cash App's ecosystem which provides a seamless, mobile-first solution for individuals to file their taxes for free.small presence in Europe.
Effective June 30, 2020, we changed from one reportable segment to two reportable segments to reflect the way management and our chief operating decision maker (“CODM”) review and assess performance of the business. Our two reportable segments are Seller and Cash App. Seller includes managed payment services, software solutions, hardware and financial services products offered to sellers, while Cash App includes financial tools available to individuals such as P2P (peer-to-peer) payments, Cash Card transactions, bitcoin and stock investing.
In April 2020, we were licensed to participate in the Paycheck Protection Program (“PPP”) administered by the Small Business Administration (“SBA”) that was enacted in March 2020 under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") in response to the COVID-19 pandemic. The PPP is intended to provide relief to eligible businesses impacted by COVID-19, and to incentivize businesses to keep their workers on the payroll. For the year ended
December 31, 2020, we facilitated the issuance of $857 million of PPP loans, excluding cancelled loans, through an external bank partner, of which we sold $399.0 million to an investor. These loans are guaranteed by the U.S. government. Additionally, the loans are eligible for forgiveness if the borrowers meet certain criteria. As of December 31, 2020, approximately $46.4 million in PPP loans held for sale on our consolidated balance sheet have been forgiven by the SBA. In February 2021, we began participating in the second round of the PPP program by accepting applications from certain existing Square customers who received a loan in the spring of 2020. Similar to the loans issued in the first round of PPP, the loans are guaranteed by the U.S. government and will be eligible for forgiveness if the borrowers meet certain criteria.
On June 2, 2020, we entered into the Paycheck Protection Program Liquidity Facility agreement with the Federal Reserve Bank of San Francisco (“First PPPLF Agreement”) to secure additional credit in an aggregate principal amount of up to $500.0 million. The program was established by the Federal Reserve to supplement the SBA's PPP to support the economy in response to the COVID-19 crisis. The facility is intended to bolster the effectiveness of the PPP and provide liquidity to credit markets, helping to stabilize financial institutions supporting COVID-19 relief efforts. Borrowings under the facility accrue interest at a rate of 0.35% and advances must be collateralized with loans originated under the PPP. The maturity date of any PPPLF advance will be the maturity date of the PPP loan pledged to secure the advance, and will be accelerated upon the occurrence of certain events of default. The advances under this facility are also repayable if the associated PPP loans are forgiven, repaid by the customer, or settled by the government guarantee. As of December 31, 2020, $464.1 million of PPPLF advances were outstanding and collateralized by the same value of the PPP loans held for sale on our consolidated balance sheet. On January 29, 2021, we entered into a second PPPLF agreement with the Federal Reserve Bank of San Francisco (“Second PPPLF Agreement” and together with the First PPPLF Agreement, “PPPLF Agreements”) to secure additional credit, collateralized by loans from the second round of the PPP program, in an aggregate principal amount of up to $1.0 billion under both PPPLF Agreements.
On March 5, 2020, we issued $1.0 billion in aggregate principal amount of convertible senior notes that mature on March 1, 2025 (2025 Notes), unless earlier converted or repurchased pursuant to their terms, and bear interest at a rate of 0.1250% payable semi-annually on March 1 and September 1 of each year. On November 13, 2020, we issued an aggregate principal amount of $1.150 billion of convertible senior notes comprised of $575 million of convertible senior notes that mature on May 1, 2026 (2026 Notes) with a 0.0% coupon interest rate, and $575 million of convertible senior notes that mature on November 1, 2027 (2027 Notes) with a 0.25% coupon interest rate. The 2026 Notes and 2027 Notes will mature on each of its respective dates, unless earlier converted or repurchased. The 2027 Notes will bear interest at a rate of 0.25% payable semi-annually on May 1 and November 1 of each year beginning on May 1, 2021. We intend to use the net proceeds from our 2025, 2026 and 2027 Notes offerings for general corporate purposes, which may include capital expenditures, investments, working capital, and potential acquisitions and strategic transactions.
Impact of COVID-19 on Current Trends and Outlook
By March 2020, the World Health Organization declared the COVID-19 pandemic a global pandemic following which, many local governments issued various mandates and public health guidelines requiring the closure of non-essential businesses and the curtailing of all unnecessary travel. These orders also required individuals to comply with various shelter-in-place and social distancing orders. As a result, the vast majority of our customers in those affected areas experienced a significant decline in sales in the first half of 2020. In the second half of 2020, as some shelter-in-place orders were relaxed, we saw modest improvements in certain areas including positive growth from higher priced card-not-present transactions as sellers adapted their businesses to contactless commerce, new sellers that joined Square, and the positive impact of various government assistance programs that led to an increase in consumer spending. However, Seller GPV trends have continued to vary by region and depended on regional shelter-in-place restrictions and COVID-19 guidelines. We also experienced an increase in Cash App engagement as a result of customer adoption of multiple products and the deposit of government stimulus funds and unemployment benefits into Cash App customer accounts.
In response to the COVID-19 pandemic, we took measures to assist our customers that we believed were in the best interests of our sellers in the long term, including refunding software subscription fees during the months of March and April 2020 as well as introducing options for sellers to temporarily pause and resume their subscriptions. While we continue to actively monitor the worldwide spread of COVID-19, the extent to which COVID-19 will ultimately impact our business remains difficult to predict. Growth trends continued to vary by region, product, and vertical, depending primarily on differences in the timing and phases of reopenings, which we expect will have a significant impact on overall GPV trends. Our priority remains the safety of our employees, customers and the communities in which we live and operate. We continue to remain in close and regular contact with our employees, customers, business partners and communities to help navigate these challenging times.
AreasWith the acquisition of Afterpay, we added a BNPL platform to our offerings. Our BNPL platform is being integrated into the Cash App and Square ecosystems, strengthening the connection between these ecosystems, expanding access to more sellers and customers, increasing Square’s omnichannel platform, and helping drive more commerce between our sellers and customers. Customers will be able to manage their installments and repayments directly within Cash App, potentially driving increased engagement, while the commerce discovery functionality from the Afterpay app will be integrated with Cash App to help drive lead generation for merchants and customer engagement. As discussed further in which we continuously evaluateNote 21, Segment and Geographical Information within Notes to the potential impact ofConsolidated Financial Statements, the COVID-19 pandemic onfinancial results from our BNPL platform have been allocated equally to the Cash App and Square segments. Afterpay results are included in our financial statements include, and are not limited to, accrued transaction losses and fair valuefrom January 31, 2022, the date of loans, and to a lesser extent, the impairment of goodwill and intangible assets, impairment of long-lived assets including operating lease right-of-use assets, and property and equipment. We have concluded that our goodwill and other long lived assets are not impaired as of December 31, 2020. We continue to revise our estimates and assumptions to reflect any changes in transaction and loan losses in our financial statements. Where applicable, we have incorporated judgments and estimates of the expected impact of COVID-19 in the preparation of the financial statements based on information currently available. These judgments and estimates are subject to change, as new developments occur and additional information is obtained and are recognized in the consolidated financial statements as they become known.
acquisition.
Components of Results of Operations
Revenue
Transaction-based revenue.Revenue
We charge our sellers a transaction fee that is generally calculated based on a percentage of the total transaction amount processed. We also selectively offer custom pricing for certain larger sellers. Transaction-based revenue also includes amounts we charge our Cash App customers for peer-to-peer transactions to business accounts and payments sent from a credit card.
Subscription and Services-based Revenue
Subscription and services-based revenue. Revenuerevenue is primarily comprised of revenue we generate from Cash App, Square Capital,Loans (formerly known as Square Capital), our BNPL platform, TIDAL, and Instant Transfers for sellers currently comprise the majority of our subscription and services-based revenue.various other software as a service (“SaaS”) products that we offer through Square. Cash App subscription and services-based revenue is primarily comprised of transaction fees from both Cash App Instant Deposit, and Cash Card. Our other subscription and services-based products include website hosting and domain name registration services, Gift Cards, Square Appointments, Customer Engagement, Employee Management, Payroll, SquareApp Card, and other productCash App financial services offerings. Prior to 2020, subscriptionsOur other SaaS products include subscription fees on our vertical software solutions (including Square for Restaurants, Square Appointments, and services-based revenue also included revenue generated from Caviar, a food orderingSquare for Retail), Customer Engagement products (including Square Loyalty, Square Marketing, Square Gift Cards), staff management products (including Square Team Management and delivery platform that we sold in the fourth quarter of 2019.Square Payroll), and other products.
Instant Deposit is a functionality within the Cash App and our managed payment solutions that enables customers, including individuals and sellers, to instantly deposit funds into their bank accounts, while accounts.
Cash App Card offers Cash App customers the ability to use their stored funds via a Visa prepaid card that is linked to the balance the customer stores in Cash App. We charge the customer a per transaction fee which we recognize as revenue when customersthey instantly deposit funds to their bank account use theiror withdraw funds from an ATM. We also earn interchange fees when a Cash App Card is used to make a purchase, or withdraw funds.purchase. These transaction and interchange fees are treated as revenue when charged.
Square Capital facilitatesLoans originates loans to sellers that are offered through a partnership bank and are generally repaid through withholding a percentage of the collections of the seller's receivables processed by us. We also facilitateus or a specified monthly amount. In April 2021, we began originating loans in the U.S. through our wholly-owned subsidiary bank, Square Financial Services. Prior to the customerslaunch of certain sellers as well as toSquare Financial Services, the sellers of its partners who do not process payments with us. The loans arewere generally originated by a bank partner, from whom we purchasepurchased the loans obtainingto obtain all rights, title, and interest. Ourinterests. We also originate loans to the customers of certain sellers which are generally repaid via ACH. For some of the loans, it is our intention is to sell the rights, title, and interest in certain loans to third-party investors for an upfront fee when the loans are sold.fee. We are retained by the third-party investors to service the loans and earn a servicing fee for facilitating the repayment of these receivablesloans through our payments solutions. In April 2020, Square Capital was licensedCertain loans, for which we have the intention and ability to participatehold through maturity, are not immediately sold to third-party investors, in which case, interest and fees earned are recognized as revenue using the effective interest method.
Cash App Borrow, the Company’s first credit product for consumers, allows customers to access short-term loans for a small fee. The loans are repaid at the end of the loan term and customers may elect to prepay all or a part of the outstanding balance. If the outstanding balance is not paid when due, late fees in the Paycheck Protection Program (“PPP”) administeredform of interest may be charged. The short-term loans are facilitated through a partnership with an industrial bank. The loans are originated by the Small Business Administration. Thesebank partner, from whom the Company purchases the loans obtaining all rights, title, and interest. Net amounts paid to the bank are guaranteed byrecorded as the U.S. governmentcost of the loans purchased, and amounts collected in excess of the carrying value are eligible for forgiveness ifrecognized as revenue over the borrowers meet certain criteria. life of the loans.
Revenue from our BNPL platform includes fees generated from consumer receivables, late fees, and certain affiliate and advertising fees. Through the use of our BNPL platform, consumers can pay for their purchases over time by splitting their purchase price generally into three or four installments, typically due in two-week increments, without paying fees (if payments are made on time). For the majority of our BNPL products, we do not charge consumers interest or fees, other than late fees, which may be charged in certain regions as an incentive to encourage consumers to pay their outstanding balances as and when they fall due. As of October 2022, we also offer the ability for consumers to pay for larger transaction sizes over a six- or twelve-month period using a monthly payment option, which includes no late fees and no compounding interest with a cap on total interest owed.
TIDAL primarily generates revenue from subscriptions to customers, and such subscriptions allow access to the song library, video library, and improved sound quality. Customers can subscribe to services directly from the TIDAL website or through the Apple store. With both offerings, we charge customers a monthly fee for those subscription services.
Hardware revenue.Revenue
Hardware revenue includes revenue from sales of magstripe readers, contactless and chip readers, Square Stand, Square Register, Square Terminal, and third-party peripherals. Third-party peripherals include cash drawers, receipt printers, scales, and barcode scanners, all of which can be integrated with Square Stand, Square Register, or Square Terminal to provide a comprehensive point-of-sale solution.
Bitcoin revenue. Revenue
Our Cash App customers have the ability to purchase bitcoin, a cryptocurrency. We recognize revenue when customers purchase bitcoin and it is transferred to the customer's account. We purchase bitcoin from private broker dealers or from Cash App customers and apply a small margin before selling it to our customers. The sale amounts received from our customers are recorded as revenue on a gross basis and the associated bitcoin cost as cost of revenues, as we are the principal in the bitcoin sale transaction. We have determined we are the principal because we control the bitcoin before delivery to the customer, we are primarily responsible for the delivery of the bitcoin to the customer, we are exposed
to risks arising from fluctuations of the market price of bitcoin before delivery to the customer, and we have discretion in setting prices charged to the customer. Bitcoin revenue may fluctuate as a result of changes in customer demand or the market price of bitcoin.
Cost of Revenue and Gross Margin
Transaction-based Costs
Transaction-based costs.
Transaction-based costs consist primarily of interchange and assessment fees, processing fees, and bank settlement fees paid to third-party payment processors and financial institutions.
Subscription and services-based costs.Services-based Costs
Subscription and services-based costs consist primarily of costsprocessing and partnership fees related to Cash App including Instant Deposit and Cash App Card, and our BNPL platform, as well as Instant Transfer for sellers. Caviar costs were also a significant component of the subscription and services-based costs, prior to the sale of Caviar on October 31, 2019.associated with TIDAL.
Hardware costs. Costs
Hardware costs consist primarily of product costs associated with magstripe readers, contactless and chip readers, Square Terminal, Square Stand, Square Register, Square Terminal, and third-party peripherals. Product costs include manufacturing-related overhead and personnelpersonnel-related costs, certain royalties, packaging, and fulfillment costs. Hardware is sold primarily as a means to grow our transaction-based revenue and, as a result, generating positive gross margins from hardware sales is not the primary goal of the hardware business.
Bitcoin Costs
Bitcoin costs. Bitcoin cost of revenue is comprised consist of the amounts we pay to purchase bitcoin which willthat is sold to customers. These costs fluctuate in line with the price of bitcoin in the market. We purchase bitcoin to facilitate customers’ access to bitcoin.revenue.
Amortization of Acquired Technology Assets
Amortization of acquired technology. These costs consist assets is primarily comprised of amortization related to technologiesthe acquired through acquisitions. These amounts were not material to our financial statements.technology assets from the acquisition of Afterpay.
Operating Expenses
Operating expenses consist of product development,development; sales and marketing,marketing; general and administrative expenses,expenses; transaction, loan, and loan losses,consumer receivable losses; bitcoin impairment losses; and amortization of customer and other acquired customerintangible assets. For product development and general and administrative expenses, the largest single component is personnel-related expenses, including salaries, commissions and bonuses, employee benefit costs, and share-based compensation. In the case of sales and marketing expenses, a significant portion is related to the Cash App peer-to-peer transactions and Cash App Card issuance costs, in addition to paid advertising and personnel-related expenses. Operating expenses also include allocated overhead costs for facilities, human resources, and IT.
Product development. Development Expenses
Product development expenses currently represent the largest component of our operating expenses and consist primarily of expenses related to our engineering, data science, and design personnel; fees and supply costs related to maintenance at third-party data center facilities; hardware related development and tooling costs; and fees for software licenses, consulting, legal, and other services that are directly related to growing and maintaining our portfolio of products and services. Additionally, product development expenses include the depreciation of product-related infrastructure and tools, including data center equipment, internally developed software, and computer equipment. We continue to focus our product development efforts on adding new features and expanding our apps, and on enhancing the functionality and ease of use of our offerings. Our ability to realize returns on these investments is substantially dependent upon our ability to successfully address current and emerging requirements of sellers, buyers, and customers through the development and introduction of these new products and services.
Sales and marketing. Marketing Expenses
Sales and marketing expenses are aggregated into two main components. The first component consists of traditional advertising costs incurred such as direct sales expense, account management, local and product marketing, retail and e-commerce, partnerships, and communications personnel. The second component of sales and marketing expenseexpenses consists of costs incurred for services, incentives, and other costs that are not directly related to revenue generating transactions that we consider to be marketing costs to encourage the usage of Cash App. These expenses include, but are not limited to, Cash App peer-to-peer processing costs and transaction losses, card issuance costs, customer referral bonuses, and promotional giveaways that are expensed as incurred.
General and administrative. Administrative Expenses
General and administrative expenses consist primarily of expenses related to our customer support, finance, legal, risk operations, human resources, and administrative personnel. General and administrative expenses also include costs related to fees paid for professional services, including legal, tax, and accounting services.
Transaction, Loan, and loan losses. We are exposed to transaction losses due to chargebacks as a result of fraud or uncollectibility. We incur loan losses whenever the amortized cost of loans that have been retained exceeds their fair value.Consumer Receivable Losses
Transaction losses include chargebacks for unauthorized credit card use and the inability to collect on disputes between buyers and sellers over the delivery of goods or services, as well as losses on Cash App activity related to peer-to-peer payments sent from a credit card, Cash for Business, and Cash App Card. We base our reserve estimates on prior chargeback history and current period data points indicative of transaction loss. We reflect additions to the reserve in current operating results, while realized losses are offset against the reserve. The establishment of appropriate reserves for transaction losses is an inherently uncertain process, and ultimate losses may vary from the current estimates. We regularly update our reserve estimates as new facts become known and events occur that may affect the settlement or recovery of losses.
Loan losses relate to Square Loans and Cash App Borrow and are recorded at the lower of amortized cost or fair value determined on an individual loan basis. To determine the fair value the Company utilizes industry-standard valuation modeling, such as discounted cash flow models, taking into account the estimated timing and amounts of periodic repayments. The Company recognizes a charge whenever the amortized cost of a loan exceeds its fair value, with suchvalue. Such charges beingare reversed for subsequent increases in fair value, but only to the extent that such reversals do not result in the amortized cost of a loan exceeding its fair value.
Amortization of acquired customer assets. Amortization of acquired customer assets includes customer relationships, restaurant relationships, courier relationships, subscriber relationships, and partner relationships. These amounts were not material to our financial statements.
GainLosses on saleconsumer receivables relate to management's estimate of asset groupexpected credit losses in the outstanding portfolio of consumer receivables. We reflect additions to the reserve in current operating results, while realized losses are offset against the reserve.
Gain onBitcoin Impairment Losses
Our investment in bitcoin is accounted for as an indefinite-lived intangible asset, and thus, is subject to impairment losses if the fair value of bitcoin decreases below the carrying value during the assessed period. Impairment losses cannot be reversed for any subsequent increase in fair value until the sale of asset group in 2019 represents the excessasset.
Amortization of Customer and Other Acquired Intangible Assets
Amortization of customer and other acquired intangible assets is primarily as a result of the consideration receivedintangible assets from the disposal of the Caviar business less the carrying values of the net assets sold.Afterpay acquisition.
Interest Expense, net, and Other Income, and Expense, net
Interest and other income and expense, net consists primarily of gains or losses arising from marking to marketremeasurements of our investments in equity investments,securities, interest expense related to our long-term debt, interest income on our investmentinvestments in marketable debt securities, and foreign currency-related gains and losses.
Provision (Benefit) for Income Taxes
The provision for income taxes consists primarily of federal, state, local, and foreign tax. Our effective tax rate fluctuates from period to period due to changes in the mix of income and losses in jurisdictions with a wide range of tax rates, the effect of acquisitions, changes resulting from the amount of recorded valuation allowance, permanent differences between U.S. generally accepted accounting principles and local tax laws, certain one-time items, and changes in tax contingencies.
Results of Operations
Revenue
(in(in thousands, except for percentages) | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | $ Change | | % Change |
Transaction-based revenue | $ | 5,701,540 | | | $ | 4,793,146 | | | $ | 908,394 | | | 19 | % |
Subscription and services-based revenue | 4,552,773 | | | 2,709,731 | | | 1,843,042 | | | 68 | % |
Hardware revenue | 164,418 | | | 145,679 | | | 18,739 | | | 13 | % |
Bitcoin revenue | 7,112,856 | | | 10,012,647 | | | (2,899,791) | | | (29) | % |
Total net revenue | $ | 17,531,587 | | | $ | 17,661,203 | | | $ | (129,616) | | | (1) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | $ Change | | % Change |
Transaction-based revenue | $ | 3,294,978 | | | $ | 3,081,074 | | | $ | 213,904 | | | 7 | % |
Subscription and services-based revenue | 1,539,403 | | | 1,031,456 | | | 507,947 | | | 49 | % |
Hardware revenue | 91,654 | | | 84,505 | | | 7,149 | | | 8 | % |
Bitcoin revenue | 4,571,543 | | | 516,465 | | | 4,055,078 | | | 785 | % |
Total net revenue | $ | 9,497,578 | | | $ | 4,713,500 | | | $ | 4,784,078 | | | 101 | % |
Total net revenue for the year ended December 31, 2020, increased2022, decreased by $4.8 billion,$129.6 million, or 101%1%, compared to the year ended December 31, 2019.2021. Bitcoin revenue increaseddecreased by $4.1$2.9 billion and represented 85%the primary driver of the increasedecrease in the total net revenue. Excluding bitcoin revenue, total net revenue increased by $729.0 million,$2.8 billion, or 17%36%, in the year ended December 31, 2020,2022, compared to the year ended December 31, 2019.2021. Revenue from our BNPL platform was $811.4 million from the date of acquisition through December 31, 2022, representing 5% of our total net revenue for the year ended December 31, 2022.
Transaction-based revenue for the year ended December 31, 20202022 increased by $213.9$908.4 million, or 7%19%, compared to the year ended December 31, 2019.2021. This increase in revenue was largely in line with the increase in GPVGross Payment Volume ("GPV") of 6%21% for the year ended December 31, 2020,2022, compared to the year ended December 31, 2019. The increase was primarily attributable2021. GPV increased due to and affected by the following events and factors:
•In January and February of 2020, we benefited from theoverall Square GPV growth as well as growth in payment volume processedCash App Business GPV, which is comprised of Cash App activity related to peer-to-peer transactions received by existing sellers,business accounts. Square GPV growth was driven by improvements in addition to meaningful contributions from new sellers, compared to the same period in the prior year, which included a benefit from the impact of the leap year;
•In the second half of March through mid-April, 2020,both card-present and card-not-present volumes as a result of the COVID-19 pandemicgrowth from in-person and subsequent shelter-in-place restrictions, we experienced a significant decline in transaction-based revenue, with GPV generated by our Seller business decreasing compared to the prior year;
•Beginning in mid-April 2020, we started to experience improving trends in GPV generated by our Seller business, as some states started to relax shelter-in-place measures, sellers adapted their businesses to contactless commerce, new sellers joined Square and various government assistance programs led to an increase in consumer spending;
•In the third and fourth quarters of 2020, we have experienced positive growth of GPV and revenue compared to the third and fourth quarters of 2019, primarily driven by higher priced card-not-present transactions as sellers continued to shift their businesses to adapt to the COVID-19 pandemic.
Despite the decrease in transaction-based revenue as a result of the COVID-19 pandemic, the overall increase in transaction-based revenue for the year ended December 31, 2020 compared to the same period in 2019 was primarily driven by growth in higher-priced card-not-present transactions as sellers shifted their businesses to adapt to the COVID-19 pandemic, and the impact from our November 2019 card-present price change,online channels, as well as growth in our international markets, and Cash App Business GPV which includes Cash for Business andgrowth was driven by increases in peer-to-peer transactions received by business accounts as well as peer-to-peer payments sent from a credit card. Cash See below in Key Operating Metrics and Non-GAAP Financial Measures for Business activity includes peer-to-peer transactions to business accounts using Cash App. The factors and events above had varying impacts on the GPV growth and may continue to impact our revenues in the future. In particular, card-present growth varies by region and product, depending primarily on differences in the timing and phasesfurther discussion of reopenings, which we expect will have a significant impact on overall GPV trends.GPV.
Subscription and services-based revenue for the year ended December 31, 20202022 increased by $507.9 million$1.8 billion, or 49%68%, compared to the year ended December 31, 2019. On October 31, 2019, we completed the sale2021. The increase was driven by:
•revenue generated from our BNPL platform of the Caviar business, and, accordingly, Caviar no longer contributes to subscription and services-based revenue. Excluding Caviar, subscription and services-based revenue grew by $653.9 million, or 74%,$811.4 million;
•an increase in the year ended year ended December 31, 2020, compared to the year ended December 31, 2019 driven predominantly by Cash App, and to a lesser extent Square Card and Instant Transfers for sellers, partially offset by a decrease in Square Capital loan volumes. Cash App subscription and services-based revenue is primarily comprised of transaction fees from bothdue to growth in Cash App Card usage, Cash App Instant Deposit andvolumes, as well as fees we charge customers who opt to use the faster bitcoin withdrawal options to move their bitcoin out of Cash Card, with a small portion generated from interest earned on customer funds. In an effort to support our sellers, we temporarily suspended charging customersApp; and
•seller banking products growth, including the increased origination volumes of Square Loans, as well as software subscriptions.
software subscription fees and refunded fees collected in March and April 2020. We resumed charging such fees in May 2020. Square Capital, which has historically been a significant component of the subscriptions and services revenue, suspended facilitating loans to sellers, other than PPP loans, in March 2020 but resumed facilitating such loans at the end of July 2020. Loan volumes remain lower than in 2019, and there is substantial uncertainty about when loan volumes will return to pre-COVID-19 levels.
Hardware revenue for the year ended December 31, 20202022 increased by $7.1$18.7 million, or 8%13%, compared to the year ended December 31, 2019.2021. The increase was primarily a result of an overall increase in sales of hardware inacross many of our international markets, as well as sales ofproduct offerings including Square Terminal, Square Register, and Square Reader for contactless hardware as a result of certain promotions offered in the second and third quarter of 2020.chip.
Bitcoin revenue for the year ended December 31, 2020 increased2022 decreased by $4.1$2.9 billion, or 785%29%, compared to the year ended December 31, 2019. The increase was due to2021. As bitcoin revenue is the market pricetotal sale amount of bitcoin growth insold to customers, the number of active bitcoin customers, as well as volume per customer. The amount of bitcoin revenue recognized will fluctuate depending on customer demand, as well as changes in the market price of bitcoin. DuringThis decrease in the year ended December 31, 2020, we saw a significant growth2022 was driven by the decline in the market price of bitcoin revenue as compared to the year ended December 31, 2019.2021. While bitcoin contributed 48%41% and 57% of the total revenue in 2020,2022 and 85% of the increase in revenues in 2020,2021, respectively, gross marginprofit generated from bitcoin was only 3.5%3% and 5% of the total gross margin.profit in 2022 and 2021, respectively.
Cost of Revenue (in(in thousands, except for percentages)
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | $ Change | | % Change |
Transaction-based costs | $ | 1,911,848 | | | $ | 1,937,971 | | | $ | (26,123) | | | (1) | % |
Subscription and services-based costs | 222,712 | | | 234,270 | | | (11,558) | | | (5) | % |
Hardware costs | 143,901 | | | 136,385 | | | 7,516 | | | 6 | % |
Bitcoin costs | 4,474,534 | | | 508,239 | | | 3,966,295 | | | 780 | % |
Amortization of acquired technology | 11,174 | | | 6,950 | | | 4,224 | | | 61 | % |
Total cost of revenue | $ | 6,764,169 | | | $ | 2,823,815 | | | $ | 3,940,354 | | | 140 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | $ Change | | % Change |
Transaction-based costs | $ | 3,364,028 | | | $ | 2,719,502 | | | $ | 644,526 | | | 24 | % |
Subscription and services-based costs | 861,745 | | | 483,056 | | | 378,689 | | | 78 | % |
Hardware costs | 286,995 | | | 221,185 | | | 65,810 | | | 30 | % |
Bitcoin costs | 6,956,733 | | | 9,794,992 | | | (2,838,259) | | | (29) | % |
Amortization of acquired technology assets | 70,194 | | | 22,645 | | | 47,549 | | | 210 | % |
Total cost of revenue | $ | 11,539,695 | | | $ | 13,241,380 | | | $ | (1,701,685) | | | (13) | % |
Total cost of revenue for the year ended December 31, 2020, increased2022 decreased by $3.9$1.7 billion, or 140%13%, compared to the year ended December 31, 2019.2021. Bitcoin costs of revenue, increasedwhich decreased by $4.0$2.8 billion, and represented 101%was the primary driver of the increasedecrease in the total cost of revenue. The decrease in total cost of revenue was offset by increased transaction-based costs related to an increase in GPV and increased costs as a result of our BNPL platform, which we acquired in the first quarter of 2022. Excluding bitcoin costs of revenue, total cost of revenue decreasedincreased by approximately $25.9 million,$1.1 billion, or 1%32%, in the year ended December 31, 2020,2022, compared to the year ended December 31, 2019.2021.
Despite an increase in GPV of 6%Transaction-based costs for the year ended December 31, 2020,2022 increased by $644.5 million, or 24%, compared to the year ended December 31, 2019, transaction-based costs decreased by $26.1 million or 1% for the year ended December 31, 2020, compared2021, exceeding GPV growth of 21%, due to the year ended December 31, 2019. The decreasean increase in transaction-based costs in the year ended December 31, 2020 was primarily attributable to growth in debitcredit card transactions and increase in average transaction sizes, which lowered the averagethat have a higher cost per transaction partially offset by the increase in GPV. We recognize that the recent shifts in the percentage ofas compared to debit card transactions, proportion of card-not-present volumes, and average value per transaction size relative to historical periods are in part, a result of changes to consumer behaviors related to COVID-19, which may not continue in future quarters.transactions.
Subscription and services-based costs for the year ended December 31, 2020 decreased2022 increased by $11.6$378.7 million, or 5%78%, compared to the year ended December 31, 2019, primarily as a result2021. The increase was driven by:
•Costs of revenues associated with our BNPL platform of $223.2 million from the saledate of the Caviar business on October 31, 2019. Caviar contributed approximately 45% total subscription and services-based costs in year endedacquisition through December 31, 2019. Excluding Caviar, subscription2022; and services-based costs increased by $92.7 million or 71%, in the year ended December 31, 2020, compared to the year ended December 31, 2019, driven mainly by
•growth in Cash App Card usage, paper money deposit activity, and related processing costs associated with Cash Card and Instant Deposit.fees.
Hardware costs for the year ended December 31, 20202022 increased by $7.5$65.8 million, or 6%30%, compared to the year ended December 31, 2019.2021. The increase was primarily due to the same drivers for the increase inincreased sales of hardware, revenue discussed above.as well as increased costs due to supply chain disruptions.
Bitcoin costs for the year ended December 31, 2020 increased2022 decreased by $4.0$2.8 billion, or 780%29%, compared to the year ended December 31, 2019.2021 due to the decline in bitcoin revenue. Bitcoin costs of revenue comprisesare comprised of the total amountsamount we pay to purchase bitcoin, which will fluctuatefluctuates in line with bitcoin revenue.
Amortization of acquired technology assets for the year ended December 31, 2022 increased by $47.5 million, or 210% compared to the year ended December 31, 2021. The increase was primarily driven by amortization related to the acquired technology assets from the acquisition of Afterpay of $43.5 million.
Product Development (inOperating Expenses (in thousands, except for percentages)
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | $ Change | | % Change |
Product development | $ | 881,826 | | | $ | 670,606 | | | $ | 211,220 | | | 31 | % |
Percentage of total net revenue | 9 | % | | 14 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | $ Change | | % Change |
Product development | $2,135,612 | | $1,383,841 | | $ | 751,771 | | | 54 | % |
% of total net revenue | 12 | % | | 8 | % | | | | |
% of total gross profit | 36 | % | | 31 | % | | | | |
Sales and marketing | $2,057,951 | | $1,617,189 | | $ | 440,762 | | | 27 | % |
% of total net revenue | 12 | % | | 9 | % | | | | |
% of total gross profit | 34 | % | | 37 | % | | | | |
General and administrative | $1,686,849 | | $982,817 | | $ | 704,032 | | | 72 | % |
% of total net revenue | 10 | % | | 6 | % | | | | |
% of total gross profit | 28 | % | | 22 | % | | | | |
Transaction, loan, and consumer receivable losses | $550,683 | | $187,991 | | $ | 362,692 | | | 193 | % |
% of total net revenue | 3 | % | | 1 | % | | | | |
% of total gross profit | 9 | % | | 4 | % | | | | |
Bitcoin impairment losses | $46,571 | | $71,126 | | $ | (24,555) | | | (35) | % |
% of total net revenue | — | % | | — | % | | | | |
% of total gross profit | 1 | % | | 2 | % | | | | |
Amortization of customer and other acquired intangible assets | $138,758 | | $15,747 | | $ | 123,011 | | | 781 | % |
% of total net revenue | 1 | % | | — | % | | | | |
% of total gross profit | 2 | % | | — | % | | | | |
Total operating expenses | $6,616,424 | | $4,258,711 | | $ | 2,357,713 | | | 55 | % |
Product development expenses for the year ended December 31, 2020,2022, increased by $211.2$751.8 million, or 31%54%, compared to the year ended December 31, 2019,2021, due primarily to the following:
•an increase of $155.4$560.3 million in personnelpersonnel-related costs for the year ended December 31, 2020, relatedprimarily due to an increase in headcount among our engineering, data science, and design teams, as we continue to improve and diversify our products. The increase was additionally driven by employees added from the acquisition of Afterpay in personnel relatedthe first quarter of 2022. The increase in product development personnel-related costs includes an increase in share-based compensation expense of $78.7$255.1 million for the year ended December 31, 2020;2022; and
•an increase of $23.5$179.4 million in software and data center costs, consulting, and certain Cash App crypto networks operating costs for the year ended December 31, 2022 as a result of increased capacity needs and expansion of our cloud-based services.
Sales and Marketing (in thousands, except for percentages)
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | $ Change | | % Change |
Sales and marketing | $ | 1,109,670 | | | $ | 624,832 | | | $ | 484,838 | | | 78 | % |
Percentage of total net revenue | 12 | % | | 13 | % | | | | |
Sales and marketing expenses for the year ended December 31, 2020,2022, increased by $484.8$440.8 million, or 78%27%, compared to the year ended December 31, 2019,2021, primarily due to the following:
•an increase in Cash App marketing costs for the year ended December 31, 2020. The increase in Cash App marketing relates to a $355.6 million increase in processing costs and related transaction losses associated with the increased volume of activity with our Cash App peer-to-peer service, increased card issuance costs and increased incentives to customers that are not directly related to revenue generating transactions. We offer services such as stock investing, and certain Cash Card and peer-to-peer services to our Cash App customers for free, and various incentives to customers that we consider to be marketing tools to encourage the usage of Cash App. Additionally, Cash App advertising costs increased by $52.5 million;
•an increase of $29.6$168.4 million in advertisingsales and marketing personnel-related costs for our Seller Ecosystem services for the year ended December 31, 2020, primarily from increased online and television marketing campaigns;to enable growth initiatives, including an increase in share-based compensation expense of $48.2 million;
•an increase of $28.3$101.0 million in SellerCash App peer-to-peer processing costs, related peer-to-peer transaction losses, and card issuance costs as a result of increased volumes of activity with our Cash App peer-to-peer service and card issuance; and
•an increase in sales and marketing personnel costs forexpenses due to the year ended December 31, 2020, to enable growth initiatives. The increaseacquisition of Afterpay in personnel related costs includes an increase in share-based compensation expensethe first quarter of $9.9 million.2022.
General and Administrative (in thousands, except for percentages)
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | $ Change | | % Change |
General and administrative | $ | 579,203 | | | $ | 436,250 | | | $ | 142,953 | | | 33 | % |
Percentage of total net revenue | 6 | % | | 9 | % | | | | |
General and administrative expenses for the year ended December 31, 2020,2022, increased by $143.0$704.0 million, or 33%72%, compared to the year ended December 31, 2019,2021, primarily due to the following:
•an increase of $58.7$482.6 million in general and administrative personnelpersonnel-related costs, for the year ended December 31, 2020, mainly as a result of additions to our customer support, human resources, finance, and legal personnel as we continuedcontinue to add resources and skills to support our long-term growth as our business continues to scale.growth. The increase was also a result of employees added from the acquisition of Afterpay in the first quarter of 2022. The increase in personnel relatedpersonnel-related costs includes an increase in share-based compensation expense of $10.8$157.9 million for the year ended December 31, 2020;2022;
•acquisition related integration and other expenses related to Afterpay of $67.3 million for the year ended December 31, 2022, as well as a $66.3 million one-time charge related to the acceleration of various share-based arrangements associated with the Afterpay acquisition during the three months ended March 31, 2022, which was in addition to ongoing share-based compensation expense for Afterpay employees; and
•the remainingan increase was primarily due to the commencement of new leases,in software, and subscription costs local business-related taxes, third-party legal and other professional fees, and other administrative expenses, as well as impact of our statutory reserves.expenses.
Transaction, loan, and Loan Losses (in thousands, except for percentages)
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | $ Change | | % Change |
Transaction and loan losses | $ | 177,670 | | | $ | 126,959 | | | $ | 50,711 | | | 40 | % |
Transaction and loanconsumer receivable losses for the year ended December 31, 2020,2022, increased by $50.7$362.7 million, or 40%193%, compared to the year ended December 31, 2019,2021, primarily due to the following:
•transactionan increase in the allowance for credit losses increased by $44.8related to consumer receivables of $197.6 million forfrom the year endeddate of the acquisition of Afterpay through December 31, 2020 due to growth in our Cash App business, as well as increased provisions for transaction losses for our Seller business due to the expected impact of the COVID-19 pandemic that resulted in a significant slowdown in business for many sellers.2022;
•an increase in transaction losses compared to the year ended December 31, 2021 of $6.0$87.0 million, primarily due to growth in Square GPV; and
•an increase in loan losses compared to the year ended December 31, 2021 of $78.1 million, primarily due to increased loan volumes.
We recorded impairment charges on our investment in bitcoin of $46.6 million in loan lossesthe year ended December 31, 2022 due to the observed market price of bitcoin decreasing below the carrying value of our investment during the period. As of December 31, 2022, the cumulative impairment charges to date were $117.7 million and the fair value of our investment in bitcoin was $132.7 million based on observable market prices, which was $30.4 million in excess of the carrying value of $102.3 million after cumulative impairment charges. Under the current accounting guidance, any unrealized gains on our investment in bitcoin will only be recognized in the financial statements when realized upon the sale of such bitcoin investment.
Amortization of customer and other acquired intangible assets increased $123.0 million for the year ended December 31, 20202022, compared to the year ended December 31, 2021, primarily due to incremental provisionsincreased amortization expense of $121.8 million as a result of the intangible assets from the Afterpay acquisition. Refer to Note 11, Acquired Intangible Assets within Notes to the Consolidated Financial Statements for loan losses associated with the COVID-19 pandemic, and to a lesser extent the aging of our Square Capital loan portfolio. The increases in loan losses were offset by decreases in loan volumes as we suspended offers for new loans, other than PPP loans, in March 2020 and resumed offering such loans at the end of July 2020 at lower volumes.more details.
Gain on Sale of Asset Group, Interest Expense, Net,net, and Other Expense (Income), Net (innet (in thousands, except for percentages)
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | $ Change | | % Change |
Interest expense, net | $ | 36,228 | | | $ | 33,124 | | | $ | 3,104 | | | 9 | % |
Other income, net | (95,443) | | | (29,474) | | | (65,969) | | | NM (i) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | $ Change | | % Change |
Gain on sale of asset group | $ | — | | | $ | (373,445) | | | $ | 373,445 | | | NM |
Interest expense, net | 56,943 | | | 21,516 | | | 35,427 | | | 165 | % |
Other expense (income), net | (291,725) | | | 273 | | | (291,998) | | | NM |
(i) Not meaningful ("NM")
Gain on sale of asset group represents the excess of the consideration received from the sale of the Caviar business in October, 2019, of $410 million less the carrying value of the net assets sold and selling expenses, as analyzed in Note 8, Sale of Asset Group, of the Notes to the Consolidated Financial Statements.
Interest expense, net, for the year ended December 31, 20202022 increased by $35.4$3.1 million, or 9%, compared to the year ended December 31, 2019. The increases were2021. This increase was primarily due to higher interest expense related to our convertible notes as a result of the issuance of the 2025 Notes in March 2020, as well as the 2026 Senior Notes and 20272031 Senior Notes, which were issued in November 2020, in additionMay 2021. Refer to a decrease in interest income earned on our investments in marketable debt securities dueNote 15, Indebtedness within Notes to lower interest rates prevailing in the market.Consolidated Financial Statements for further details.
Other expense (income), net was primarily driven by the amounts of gains or losses arising from the revaluation of our equity investments. In November 2020, upon DoorDash's initial public offering, the preferred shares held by the Company converted into common shares of DoorDash. As of December 31, 2020, the Company revalued this investment and recorded a gain of $276.3 million in the year ended December 31, 2020. Additionally, in the fourth quarter of 2020, we recorded a gain on investment in a privately held entity of $19.0 million based on observable prices for similar equity instruments issued by
the same entity. InOther income, net for the year ended December 31, 2019, we recorded2022 was primarily comprised of unrealized gains of $96.1 million arising from the revaluation of certain equity investments. Other income, net for the year ended December 31, 2021 was primarily comprised of a loss of $12.3$44.4 million on the revaluationmark to market net gain of our equity investment Eventbrite, Inc. ("Eventbrite"), offset byin DoorDash, arising from the amortizationrevaluation of and realized gains onthis investment. We completed the sale of investments in marketable securities of $9.7 million, foreign exchange gains of $1.7 million, and other sources of income. In December 2019, the Company sold its entire equityour investment in EventbriteDoorDash in June 2021, and as a result this investment willdid not impact theour results in futuresubsequent periods.
Segment Results
SellerThe Company has two reportable segments, Square and Cash App. The results of Afterpay have been equally allocated to the Square and Cash App segments as management has determined that our BNPL platform will contribute equally to both the Square and Cash App platforms. Refer to Note 21, Segment and Geographical Information within Notes to the Consolidated Financial Statements for more details.
Square Results
The following tables provide a summary of the revenue and gross profit for our SellerSquare segment for the year ended December 31, 20202022 and 2019 (in thousands)2021(in thousands, except for percentages):
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | $ Change | | % Change |
Segment net revenue | $ | 6,699,830 | | | $ | 5,193,348 | | | $ | 1,506,482 | | | 29 | % |
Segment cost of revenue | 3,698,852 | | | 2,876,677 | | | 822,175 | | | 29 | % |
Segment gross profit | $ | 3,000,978 | | | $ | 2,316,671 | | | $ | 684,307 | | | 30 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | $ Change | | % Change |
Net revenue | $ | 3,529,192 | | | $ | 3,461,988 | | | $ | 67,204 | | | 2 | % |
Cost of revenue | 2,021,361 | | | 2,071,561 | | | (50,200) | | | (2) | % |
Gross profit | $ | 1,507,831 | | | $ | 1,390,427 | | | $ | 117,404 | | | 8 | % |
Segment Net Revenue
RevenueNet revenue for the SellerSquare segment for the year ended December 31, 20202022 increased by $67.2$1.5 billion compared to the year ended December 31, 2021. The increase was primarily due to:
•growth in Square GPV and continued improvements in both card-present volumes and growth in higher-priced card-not-present transactions;
•an increase in subscription and services-based revenue, which was primarily due to the growth in seller banking products, including the increased origination volumes of Square Loans, as well as software subscriptions; and
•revenue generated from our BNPL platform following the acquisition of Afterpay.
Segment Cost of Revenue
Cost of revenue for the Square segment for the year ended December 31, 2022 increased by $822.2 million compared to the year ended December 31, 2019.
2021. The COVID-19 pandemic and the subsequent shelter-in-place orders resulted in a material decline in Seller revenues in the latter half of March 2020 through mid-April 2020increase was primarily due to loweran increase in Square GPV, processed. Additionally, Square Capital suspended facilitating loans to sellers from mid-March 2020 through the end of July 2020, other than PPP loans, further negatively impacting Seller revenues. Excluding the impact of Square Capital, other Seller subscription and services-based revenue increased due to growthas well as an increase in software subscriptions, Instant Transfers, and Square Card. This was offset by the recovery and improvements in GPV processed from mid-April through the fourth quarter of 2020 as states started relaxing the shelter-in-place orders and businesses started to adapt to the COVID-19 pandemic. Additionally, we saw a higher percentage of card-not-presentcredit card transactions from the second quarter through to the fourth quarter of 2020, whichthat have a higher cost per transaction price, as well as the impact of our November 2019 card-present price change. Recent increases in the percentage of debit, proportion of card-not-present volumes, and average transaction size relative to historical periods are in part a result of changes to consumer behaviors related to COVID-19, which may not continue in future quarters.
Cost of revenue
Cost of revenue for the Seller segment for the year ended December 31, 2020 decreased by $50.2 million compared to the year ended December 31, 2019. Seller costs benefited from a higher percentage ofthan debit card transactions and increase in average value per transaction which have lower costs.transactions.
Cash App Results
The following tables provide a summary of the revenue and gross profit for our Cash App segment for the year ended December 31, 20202022 and 20192021 (in thousands)thousands, except for percentages):
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | $ Change | | % Change |
Segment net revenue | $ | 10,626,111 | | | $ | 12,315,499 | | | $ | (1,689,388) | | | (14) | % |
Segment cost of revenue | 7,675,144 | | | 10,244,652 | | | (2,569,508) | | | (25) | % |
Segment gross profit | $ | 2,950,967 | | | $ | 2,070,847 | | | $ | 880,120 | | | 43 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | $ Change | | % Change |
Net revenue | $ | 5,968,386 | | | $ | 1,105,599 | | | $ | 4,862,787 | | | 440 | % |
Cost of revenue | 4,742,808 | | | 647,931 | | | 4,094,877 | | | 632 | % |
Gross profit | $ | 1,225,578 | | | $ | 457,668 | | | $ | 767,910 | | | 168 | % |
Segment Net Revenue
RevenueNet revenue for the Cash App segment for the year ended December 31, 2020 increased2022 decreased by $4.9$1.7 billion compared to the year ended December 31, 2019.2021. The primary drivers were growthdriver was a decrease in bitcoin revenue, and to a lesser extent,partially offset by growth in Cash App Instant Deposit, Cash App Card, and peer-to-peer transactions received by Cash for Business. BitcoinApp Business accounts. The decrease in bitcoin revenue was driven by a decline in the market price of bitcoin as compared to prior year. While bitcoin revenue contributed 67% and 81% of Cash App net revenue in 2022 and 2021, respectively, gross profit generated from bitcoin was only 5% and 11% of Cash App gross profit in 2022 and 2021, respectively.
Excluding bitcoin revenue, Cash App net revenue increased $1.2 billion, or 53%, compared to the year ended December 31, 2021, primarily due to an increasegrowth in the number of active bitcoin customers, as well as growth in customer demand and bitcoin prices. Additionally, Cash App revenue benefited from increased numbers of transacting activeaccounts, an increase in transaction fees related to Cash App customersCard and Instant Deposit, and revenue generated from disbursementsour BNPL platform following the acquisition of the CARES Act stimulus programs and unemployment benefits, including a portion of customers who direct deposited these payments into their Cash App accounts. Cash App revenue growth may not be sustained at the same levels in future quarters and may be impacted by the enactment of further stimulus relief and benefit programs, as well as the demand and market prices for bitcoin, amongst other factors.Afterpay.
Segment Cost of revenueRevenue
Cost of revenue for the Cash App segment for the year ended December 31, 2020 increased2022 decreased by $4.1$2.6 billion compared to the year ended December 31, 2019.2021. The primary driversdriver for the increase were growthdecrease was a decline in bitcoin revenue andas well as the associated costs of such bitcoin revenue, as discussed above. Excluding bitcoin cost of revenue, Cash App cost of revenue increased $268.8 million, or 60%, due to a lesser extent,the growth in Cash App Card, Cash App Instant Deposit, Cash Card, and Cash for Business.
Comparison of Years Ended December 31, 2019 and 2018
For a discussion of the 2019 Results of Operations, including a discussion of the financial results for the fiscal year ended December 31, 2019 compared to the fiscal year ended December 31, 2018, refer to Part I, Item 7 of our Form 10-K filed with the SEC on February 26, 2020.
Quarterly ResultsKey Operating Metrics and Non-GAAP Financial Measures
We collect and analyze operating and financial data to evaluate the health of Operations
The following tables set forth selected unaudited quarterly statements of operations data forour business, allocate our resources, and assess our performance. In addition to total net revenue, net income (loss), and other results under generally accepted accounting principles ("GAAP"), the last eight quarters. The information for each of these quarters has been prepared on the same basis as the audited annual financial statements included elsewhere in this Annual Report on Form 10-K and, in the opinion of management, includes all adjustments, which consist only of normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods. This data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. These quarterly operating results are not necessarily indicative of the results we may achieve in future periods.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended, |
| Dec. 31, 2020 | | Sep. 30, 2020 | | Jun. 30, 2020 | | Mar. 31, 2020 | | Dec. 31, 2019 | | Sep. 30, 2019 | | Jun. 30, 2019 | | Mar. 31, 2019 |
| (in thousands, except per share data) |
| (unaudited) |
Revenue: | | | | | | | | | | | | | | | |
Transaction-based revenue | $ | 929,011 | | | $ | 925,294 | | | $ | 682,572 | | | $ | 758,101 | | | $ | 832,180 | | | $ | 816,622 | | | $ | 775,510 | | | $ | 656,762 | |
Subscription and services-based revenue | 449,371 | | | 447,522 | | | 346,275 | | | 296,235 | | | 281,415 | | | 279,801 | | | 251,383 | | | 218,857 | |
Hardware revenue | 24,363 | | | 27,294 | | | 19,322 | | | 20,675 | | | 22,267 | | | 21,766 | | | 22,260 | | | 18,212 | |
Bitcoin revenue | 1,756,225 | | | 1,633,764 | | | 875,456 | | | 306,098 | | | 177,567 | | | 148,285 | | | 125,085 | | | 65,528 | |
Total net revenue | 3,158,970 | | | 3,033,874 | | | 1,923,625 | | | 1,381,109 | | | 1,313,429 | | | 1,266,474 | | | 1,174,238 | | | 959,359 | |
Cost of revenue: | | | | | | | | | | | | | | | |
Transaction-based costs | 535,283 | | | 522,680 | | | 388,106 | | | 465,779 | | | 519,241 | | | 519,312 | | | 490,349 | | | 409,069 | |
Subscription and services-based costs | 65,046 | | | 66,786 | | | 50,169 | | | 40,711 | | | 50,276 | | | 63,352 | | | 60,119 | | | 60,523 | |
Hardware costs | 35,994 | | | 45,220 | | | 28,315 | | | 34,372 | | | 40,504 | | | 35,672 | | | 33,268 | | | 26,941 | |
Bitcoin costs | 1,715,452 | | | 1,601,615 | | | 858,041 | | | 299,426 | | | 174,438 | | | 146,167 | | | 122,938 | | | 64,696 | |
Amortization of acquired technology | 3,505 | | | 3,118 | | | 2,231 | | | 2,320 | | | 1,921 | | | 1,934 | | | 1,719 | | | 1,376 | |
Total cost of revenue | 2,355,280 | | | 2,239,419 | | | 1,326,862 | | | 842,608 | | | 786,380 | | | 766,437 | | | 708,393 | | | 562,605 | |
Gross profit | 803,690 | | | 794,455 | | | 596,763 | | | 538,501 | | | 527,049 | | | 500,037 | | | 465,845 | | | 396,754 | |
Operating expenses: | | | | | | | | | | | | | | | |
Product development | 253,448 | | | 226,567 | | | 206,825 | | | 194,986 | | | 173,284 | | | 168,771 | | | 174,201 | | | 154,350 | |
Sales and marketing | 328,576 | | | 348,463 | | | 238,096 | | | 194,535 | | | 185,231 | | | 149,467 | | | 156,421 | | | 133,713 | |
General and administrative | 159,420 | | | 153,902 | | | 136,386 | | | 129,495 | | | 118,164 | | | 115,980 | | | 100,508 | | | 101,598 | |
Transaction and loan losses | 15,986 | | | 15,198 | | | 37,603 | | | 108,883 | | | 32,132 | | | 32,722 | | | 34,264 | | | 27,841 | |
Amortization of acquired customer assets | 1,077 | | | 983 | | | 905 | | | 890 | | | 890 | | | 1,003 | | | 1,294 | | | 1,294 | |
| | | | | | | | | | | | | | | |
Total operating expenses | 758,507 | | | 745,113 | | | 619,815 | | | 628,789 | | | 509,701 | | | 467,943 | | | 466,688 | | | 418,796 | |
Operating income (loss) | 45,183 | | | 49,342 | | | (23,052) | | | (90,288) | | | 17,348 | | | 32,094 | | | (843) | | | (22,042) | |
Gain on sale of asset group | — | | | — | | | — | | | — | | | (373,445) | | | — | | | — | | | — | |
Interest expense, net | 17,988 | | | 14,980 | | | 14,769 | | | 9,206 | | | 6,060 | | | 5,632 | | | 5,143 | | | 4,681 | |
Other expense (income), net | (271,212) | | | (784) | | | (25,591) | | | 5,862 | | | (6,715) | | | (5,541) | | | 1,230 | | | 11,299 | |
Income (loss) before income tax | 298,407 | | | 35,146 | | | (12,230) | | | (105,356) | | | 391,448 | | | 32,003 | | | (7,216) | | | (38,022) | |
Provision (benefit) for income taxes | 4,448 | | | (1,369) | | | (752) | | | 535 | | | 508 | | | 2,606 | | | (476) | | | 129 | |
Net income (loss) | $ | 293,959 | | | $ | 36,515 | | | $ | (11,478) | | | $ | (105,891) | | | $ | 390,940 | | | $ | 29,397 | | | $ | (6,740) | | | $ | (38,151) | |
| | | | | | | | | | | | | | | |
Net income (loss) per share: | | | | | | | | | | | | | | | |
Basic | $ | 0.65 | | | $ | 0.08 | | | $ | (0.03) | | | $ | (0.24) | | | $ | 0.91 | | | $ | 0.07 | | | $ | (0.02) | | | $ | (0.09) | |
Diluted | $ | 0.59 | | | $ | 0.07 | | | $ | (0.03) | | | $ | (0.24) | | | $ | 0.83 | | | $ | 0.06 | | | $ | (0.02) | | | $ | (0.09) | |
Weighted-average shares used to compute net income (loss) per share: | | | | | | | | | | | | | | | |
Basic | 452,869 | | | 444,458 | | | 440,117 | | | 434,940 | | | 430,136 | | | 427,124 | | | 423,305 | | | 419,289 | |
Diluted | 502,237 | | | 488,069 | | | 440,117 | | | 434,940 | | | 485,394 | | | 466,099 | | | 423,305 | | | 419,289 | |
| | | | | | | | | | | | | | | |
Costs and expenses include share-based compensation expense as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended, |
| Dec. 31, 2020 | | Sep. 30, 2020 | | Jun. 30, 2020 | | Mar. 31, 2020 | | Dec. 31, 2019 | | Sep. 30, 2019 | | Jun. 30, 2019 | | Mar. 31, 2019 |
| (in thousands) |
Share-Based Compensation | (unaudited) |
Cost of revenue | $ | 97 | | | $ | 100 | | | $ | 95 | | | $ | 76 | | | $ | 67 | | | $ | 38 | | | $ | 29 | | | $ | 21 | |
Product development | 83,906 | | | 78,682 | | | 69,565 | | | 57,400 | | | 55,726 | | | 56,321 | | | 56,144 | | | 42,649 | |
Sales and marketing | 9,273 | | | 12,063 | | | 8,884 | | | 6,407 | | | 6,416 | | | 6,269 | | | 7,833 | | | 6,202 | |
General and administrative | 20,352 | | | 19,544 | | | 17,636 | | | 13,420 | | | 17,674 | | | 14,798 | | | 15,460 | | | 12,216 | |
Total share-based compensation | $ | 113,628 | | | $ | 110,389 | | | $ | 96,180 | | | $ | 77,303 | | | $ | 79,883 | | | $ | 77,426 | | | $ | 79,466 | | | $ | 61,088 | |
The following table sets forth the key operating metrics and non-GAAP financial measures we use to evaluate our business. We believe these metrics and measures are useful to facilitate period-to-period comparisons of our business, and to facilitate comparisons of our performance to that of other payment solution providers.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 |
| |
Gross Payment Volume (GPV) (in millions) | $ | 203,536 | | | $ | 167,720 | | | $ | 112,295 | | | $ | 106,239 | | | $ | 84,654 | |
Adjusted EBITDA (in thousands) | $ | 990,964 | | | $ | 1,013,657 | | | $ | 474,071 | | | $ | 416,853 | | | $ | 256,523 | |
Adjusted Net Income Per Share: | | | | | | | | | |
Basic | $ | 1.05 | | | $ | 1.46 | | | $ | 0.72 | | | $ | 0.70 | | | $ | 0.47 | |
Diluted | $ | 1.00 | | | $ | 1.28 | | | $ | 0.64 | | | $ | 0.62 | | | $ | 0.40 | |
Gross Payment Volume ("GPV")
GPV includes Square GPV and Cash App Business GPV. Square GPV is defined as the total dollar amount of all card payments processed by sellers using Square, net of refunds, and ACH transfers. Cash App Business GPV is comprised of Cash App activity related to peer-to-peer transactions received by business accounts, Cash App Pay transactions, and peer-to-peer payments sent from a credit card. GPV does not include transactions from our BNPL platform because GPV is related only to transaction-based revenue and not to subscription and services-based revenue.
Adjusted EBITDA and Adjusted Net Income (Loss) Per Share ("Adjusted EPS")
Adjusted EBITDA and Adjusted EPS are non-GAAP financial measures that represent our net income (loss) and net income (loss) per share, adjusted to eliminate the effect of items as described below. We have included these non-GAAP financial measures in this Form 10-K because they are key measures used by our management to evaluate our operating performance, generate future operating plans, and make strategic decisions, including those relating to operating expenses and the allocation of internal resources. Accordingly, we believe these measures provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. In addition, they provide useful measures for eachperiod-to-period comparisons of our business, as they remove the effect of certain non-cash items and certain variable charges that do not vary with our operations.
•We believe it is useful to exclude certain non-cash charges, such as amortization of intangible assets, and share-based compensation expenses, from our non-GAAP financial measures because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations.
•In connection with the issuance of our convertible senior notes (as described in Note 15, Indebtedness within Notes to the Consolidated Financial Statements), prior to the adoption of ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity ("ASU 2020-06") on January 1, 2021, we were required to recognize non-cash interest expense related to amortization of debt discount and issuance costs. Subsequent to adoption, we only recognize non-cash interest expense related to amortization of debt issuance costs on convertible notes and unsecured notes. We believe that excluding this expense from our non-GAAP measures is useful to investors because such incremental non-cash interest expense does not represent a current or future cash outflow for the Company and is therefore not indicative of our continuing operations or meaningful when comparing current results to past results. Additionally, for purposes of calculating diluted Adjusted EPS we add back cash interest expense on convertible notes, as if converted at the beginning of the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended, |
| Dec. 31, 2020 | | Sep. 30, 2020 | | Jun. 30, 2020 | | Mar. 31, 2020 | | Dec. 31, 2019 | | Sep. 30, 2019 | | Jun. 30, 2019 | | Mar. 31, 2019 |
| (in thousands, except for GPV and per share data) |
Key Operating Metrics and non-GAAP Financial Measures | (unaudited) |
Gross Payment Volume (GPV) (in millions) | $ | 32,022 | | | $ | 31,729 | | | $ | 22,801 | | | $ | 25,743 | | | $ | 28,639 | | | $ | 28,228 | | | $ | 26,785 | | | $ | 22,587 | |
| | | | | | | | | | | | | | | |
Adjusted EBITDA | $ | 185,489 | | | $ | 181,320 | | | $ | 97,931 | | | $ | 9,331 | | | $ | 118,529 | | | $ | 131,323 | | | $ | 105,304 | | | $ | 61,697 | |
Adjusted Net Income (Loss) Per Share: | | | | | | | | | | | | | | | |
Basic | $ | 0.37 | | | $ | 0.39 | | | $ | 0.20 | | | $ | (0.02) | | | $ | 0.25 | | | $ | 0.28 | | | $ | 0.23 | | | $ | 0.13 | |
Diluted | $ | 0.32 | | | $ | 0.34 | | | $ | 0.18 | | | $ | (0.02) | | | $ | 0.23 | | | $ | 0.25 | | | $ | 0.21 | | | $ | 0.11 | |
period, if the impact is dilutive.
•We exclude the following from non-GAAP financial measures because we do not believe that these items are reflective of our ongoing business operations: gain or loss on the disposal of property and equipment; gain or loss on revaluation of equity investments; bitcoin impairment losses on our investment in bitcoin, as applicable; and prior to the adoption of ASU 2020-06 on January 1, 2021, gain or loss on debt extinguishment related to the conversion of convertible notes, as applicable.
•To aid in comparability of our results across periods and with peer companies that may not have similar expenses, we also exclude certain acquisition related and integration costs associated with business combinations, and various other costs that are not normal operating expenses. Acquisition related costs include amounts paid to redeem acquirees’ unvested share-based compensation awards, and legal, accounting, valuation, and due diligence costs. Integration costs include advisory and other professional services or consulting fees necessary to integrate acquired businesses. Other costs that are not reflective of our core business operating expenses may include contingent losses, certain litigation and regulatory charges. We also add back the impact of the acquired deferred revenue and deferred cost adjustment, which was written down to fair value in purchase accounting.
In addition to the items above, Adjusted EBITDA as a non-GAAP financial measure also excludes depreciation and amortization, other cash interest income and expense, and other income and expense.
Beginning in the first quarter of 2022, we have included the tax impact of the non-GAAP adjustments in determining Adjusted EPS. We determine the adjusted provision (benefit) for income taxes by calculating the estimated annual effective tax rate based on adjusted pre-tax income and applying it to Adjusted Net Income before income taxes. The prior period Adjusted EPS presentation has also been revised to conform with our new calculation and presentation.
Non-GAAP financial measures have limitations, should be considered as supplemental in nature, and are not meant as a substitute for the related financial information prepared in accordance with GAAP. These limitations include the following:
•share-based compensation expense has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and an important part of our compensation strategy;
•the intangible assets being amortized may have to be replaced in the future, and the non-GAAP financial measures do not reflect cash capital expenditure requirements for such replacements or for new capital expenditures or other capital commitments; and
•non-GAAP measures do not reflect changes in, or cash requirements for, our working capital needs.
In addition to the limitations above, Adjusted EBITDA as a non-GAAP financial measure does not reflect the effect of depreciation and amortization expense and related cash capital requirements, income taxes that may represent a reduction in cash available to us, and the effect of foreign currency exchange gains or losses, which is included in other income and expense.
Other companies, including companies in our industry, may calculate the non-GAAP financial measures differently or not at all, which reduces their usefulness as comparative measures.
Because of these limitations, you should consider the non-GAAP financial measures alongside other financial performance measures, including net income (loss) and our other financial results presented in accordance with GAAP.
The following table presents a reconciliation of net lossincome (loss) to Adjusted EBITDA for each of the periods indicated:indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended, |
| Dec. 31, 2020 | | Sep. 30, 2020 | | Jun. 30, 2020 | | Mar. 31, 2020 | | Dec. 31, 2019 | | Sep. 30, 2019 | | Jun. 30, 2019 | | Mar. 31, 2019 |
| (in thousands) |
Adjusted EBITDA Reconciliation | (unaudited) |
Net income (loss) | $ | 293,959 | | | $ | 36,515 | | | $ | (11,478) | | | $ | (105,891) | | | $ | 390,940 | | | $ | 29,397 | | | $ | (6,740) | | | $ | (38,151) | |
Share-based compensation expense | 113,628 | | | 110,389 | | | 96,180 | | | 77,303 | | | 79,883 | | | 77,426 | | | 79,466 | | | 61,088 | |
Depreciation and amortization | 22,471 | | | 20,624 | | | 21,056 | | | 20,061 | | | 18,719 | | | 19,125 | | | 18,783 | | | 18,971 | |
| | | | | | | | | | | | | | | |
Interest expense, net | 17,988 | | | 14,980 | | | 14,769 | | | 9,206 | | | 6,060 | | | 5,632 | | | 5,143 | | | 4,681 | |
Other expense (income), net | (271,212) | | | (784) | | | (25,591) | | | 5,862 | | | (6,715) | | | (5,541) | | | 1,230 | | | 11,299 | |
Provision (benefit) for income taxes | 4,448 | | | (1,369) | | | (752) | | | 535 | | | 508 | | | 2,606 | | | (476) | | | 129 | |
Loss on disposal of property and equipment | 475 | | | 396 | | | 1,481 | | | 218 | | | 580 | | | 128 | | | 281 | | | 19 | |
Gain on sale of asset group | — | | | — | | | — | | | — | | | (373,445) | | | — | | | — | | | — | |
Acquisition related and other costs | 3,543 | | | 359 | | | 2,056 | | | 1,524 | | | 1,260 | | | 1,564 | | | 6,133 | | | 782 | |
Acquired deferred revenue adjustment | 257 | | | 281 | | | 302 | | | 657 | | | 928 | | | 1,224 | | | 1,849 | | | 3,456 | |
Acquired deferred costs adjustment | (68) | | | (71) | | | (92) | | | (144) | | | (189) | | | (238) | | | (365) | | | (577) | |
| | | | | | | | | | | | | | | |
Adjusted EBITDA | $ | 185,489 | | | $ | 181,320 | | | $ | 97,931 | | | $ | 9,331 | | | $ | 118,529 | | | $ | 131,323 | | | $ | 105,304 | | | $ | 61,697 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 |
Net income (loss) attributable to common stockholders | $ | (540,747) | | | $ | 166,284 | | | $ | 213,105 | | | $ | 375,446 | | | $ | (38,453) | |
Net loss attributable to noncontrolling interests | (12,258) | | | (7,458) | | | — | | | — | | | — | |
Net income (loss) | (553,005) | | | 158,826 | | | 213,105 | | | 375,446 | | | (38,453) | |
Share-based compensation expense | 1,069,289 | | | 608,042 | | | 397,500 | | | 297,863 | | | 216,881 | |
Depreciation and amortization | 340,523 | | | 134,756 | | | 84,212 | | | 75,598 | | | 60,961 | |
Acquisition related, integration, and other costs | 157,264 | | | 35,474 | | | 7,482 | | | 9,739 | | | 4,708 | |
Interest expense, net | 36,228 | | | 33,124 | | | 56,943 | | | 21,516 | | | 17,982 | |
Other expense (income), net | (95,443) | | | (29,474) | | | (291,725) | | | 273 | | | (18,469) | |
Bitcoin impairment losses | 46,571 | | | 71,126 | | | — | | | — | | | — | |
Provision (benefit) for income taxes | (12,312) | | | (1,364) | | | 2,862 | | | 2,767 | | | 2,326 | |
Loss (gain) on disposal of property and equipment | 1,619 | | | 2,633 | | | 2,570 | | | 1,008 | | | (224) | |
Gain on sale of asset group | — | | | — | | | — | | | (373,445) | | | — | |
Acquired deferred revenue adjustment | 382 | | | 744 | | | 1,497 | | | 7,457 | | | 12,853 | |
Acquired deferred costs adjustment | (152) | | | (230) | | | (375) | | | (1,369) | | | (2,042) | |
Adjusted EBITDA | $ | 990,964 | | | $ | 1,013,657 | | | $ | 474,071 | | | $ | 416,853 | | | $ | 256,523 | |
The following table presents a reconciliation of net lossincome (loss) to Adjusted Net Income (Loss) Per Share for each of the periods indicated:indicated (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 |
Net income (loss) attributable to common stockholders | $ | (540,747) | | | $ | 166,284 | | | $ | 213,105 | | | $ | 375,446 | | | $ | (38,453) | |
Net loss attributable to noncontrolling interests | (12,258) | | | (7,458) | | | — | | | — | | | — | |
Net income (loss) | $ | (553,005) | | | $ | 158,826 | | | $ | 213,105 | | | $ | 375,446 | | | $ | (38,453) | |
Share-based compensation expense | 1,069,289 | | | 608,042 | | | 397,500 | | | 297,863 | | | 216,881 | |
Acquisition related, integration, and other costs | 157,264 | | | 35,474 | | | 7,482 | | | 9,739 | | | 4,708 | |
Amortization of intangible assets | 208,952 | | | 40,522 | | | 19,239 | | | 15,000 | | | 13,103 | |
Amortization of debt discount and issuance costs | 15,162 | | | 9,822 | | | 67,979 | | | 39,139 | | | 32,855 | |
Loss (gain) on revaluation of equity investments | (73,457) | | | (35,493) | | | (295,297) | | | 12,326 | | | (20,342) | |
Bitcoin impairment losses | 46,571 | | | 71,126 | | | — | | | — | | | — | |
Loss on extinguishment of long-term debt | — | | | — | | | 6,651 | | | — | | | 5,028 | |
Loss (gain) on disposal of property and equipment | 1,619 | | | 2,633 | | | 2,570 | | | 1,008 | | | (224) | |
| | | | | | | | | |
Gain on sale of asset group | — | | | — | | | — | | | (373,445) | | | — | |
Acquired deferred revenue adjustment | 382 | | | 744 | | | 1,497 | | | 7,457 | | | 12,853 | |
Acquired deferred cost adjustment | (152) | | | (230) | | | (375) | | | (1,369) | | | (2,042) | |
Tax effect of non-GAAP net income adjustments | (264,523) | | | (222,104) | | | (102,383) | | | (85,372) | | | (34,371) | |
Adjusted Net Income - basic | $ | 608,102 | | | $ | 669,362 | | | $ | 317,968 | | | $ | 297,792 | | | $ | 189,996 | |
Cash interest expense on convertible notes | 5,014 | | | 6,099 | | | 6,078 | | | 5,108 | | | 1,292 | |
Adjusted Net Income - diluted | $ | 613,116 | | | $ | 675,461 | | | $ | 324,046 | | | $ | 302,900 | | | $ | 191,288 | |
Weighted-average shares used to compute Adjusted Net Income Per Share: | | | | | | | | | |
Basic | 578,949 | | | 458,432 | | | 443,126 | | | 424,999 | | | 405,731 | |
Diluted | 615,034 | | | 525,725 | | | 507,229 | | | 486,381 | | | 478,895 | |
Adjusted Net Income Per Share: | | | | | | | | | |
Basic | $ | 1.05 | | | $ | 1.46 | | | $ | 0.72 | | | $ | 0.70 | | | $ | 0.47 | |
Diluted | $ | 1.00 | | | $ | 1.28 | | | $ | 0.64 | | | $ | 0.62 | | | $ | 0.40 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended, |
| Dec. 31, 2020 | | Sep. 30, 2020 | | Jun. 30, 2020 | | Mar. 31, 2020 | | Dec. 31, 2019 | | Sep. 30, 2019 | | Jun. 30, 2019 | | Mar. 31, 2019 |
| (in thousands, except per share data) |
Adjusted Net Income Per Share: | (unaudited) |
Net income (loss) | $ | 293,959 | | | $ | 36,515 | | | $ | (11,478) | | | $ | (105,891) | | | $ | 390,940 | | | $ | 29,397 | | | $ | (6,740) | | | $ | (38,151) | |
Share-based compensation expense | 113,628 | | | 110,389 | | | 96,180 | | | 77,303 | | | 79,883 | | | 77,426 | | | 79,466 | | | 61,088 | |
Amortization of intangible assets | 5,717 | | | 5,236 | | | 4,134 | | | 4,152 | | | 3,714 | | | 3,841 | | | 3,958 | | | 3,487 | |
| | | | | | | | | | | | | | | |
Amortization of debt discount and issuance costs | 20,355 | | | 17,516 | | | 17,580 | | | 12,528 | | | 9,963 | | | 9,843 | | | 9,725 | | | 9,608 | |
Loss (gain) on revaluation of equity investments | (274,299) | | | — | | | (20,998) | | | — | | | (4,141) | | | (2,462) | | | 4,842 | | | 14,087 | |
Loss on extinguishment of long-term debt | 4,258 | | | 1,403 | | | — | | | 990 | | | — | | | — | | | — | | | — | |
Loss (gain) on disposal of property and equipment | 475 | | | 396 | | | 1,481 | | | 218 | | | 580 | | | 128 | | | 281 | | | 19 | |
Gain on sale of asset group | — | | | — | | | — | | | — | | | (373,445) | | | — | | | — | | | — | |
Acquisition related and other costs | 3,543 | | | 359 | | | 2,056 | | | 1,524 | | | 1,260 | | | 1,564 | | | 6,133 | | | 782 | |
Acquired deferred revenue adjustment | 257 | | | 281 | | | 302 | | | 657 | | | 928 | | | 1,224 | | | 1,849 | | | 3,456 | |
Acquired deferred cost adjustment | (68) | | | (71) | | | (92) | | | (144) | | | (189) | | | (238) | | | (365) | | | (577) | |
Adjusted Net Income (Loss) - basic | $ | 167,825 | | | $ | 172,024 | | | $ | 89,165 | | | $ | (8,663) | | | $ | 109,493 | | | $ | 120,723 | | | $ | 99,149 | | | $ | 53,799 | |
Cash interest expense on convertible senior notes | 1,596 | | | 1,544 | | | 1,565 | | | — | | | 1,277 | | | 1,277 | | | 1,277 | | | 1,277 | |
Adjusted Net Income (Loss) - diluted | $ | 169,421 | | | $ | 173,568 | | | $ | 90,730 | | | $ | (8,663) | | | $ | 110,770 | | | $ | 122,000 | | | $ | 100,426 | | | $ | 55,076 | |
| | | | | | | | | | | | | | | |
Adjusted Net Income (Loss) Per Share: | | | | | | | | | | | | | | | |
Basic | $ | 0.37 | | | $ | 0.39 | | | $ | 0.20 | | | $ | (0.02) | | | $ | 0.25 | | | $ | 0.28 | | | $ | 0.23 | | | $ | 0.13 | |
Diluted | $ | 0.32 | | | $ | 0.34 | | | $ | 0.18 | | | $ | (0.02) | | | $ | 0.23 | | | $ | 0.25 | | | $ | 0.21 | | | $ | 0.11 | |
Weighted-average shares used to compute Adjusted Net Income (Loss) Per Share: | | | | | | | | | | | | | | | |
Basic | 452,869 | | | 444,458 | | | 440,117 | | | 434,940 | | | 430,136 | | | 427,124 | | | 423,305 | | | 419,289 | |
Diluted | 523,586 | | | 514,806 | | | 500,201 | | | 434,940 | | | 485,394 | | | 486,404 | | | 486,532 | | | 487,056 | |
Diluted Adjusted Net Income Per Share is computed by dividing Adjusted Net Income by the weighted-average number of shares of common stock outstanding adjusted for the dilutive effect of all potential shares of common stock. In periods when we reported an Adjusted Net Loss, diluted Adjusted Net Income Per Share is the same as basic Adjusted Net Income Per Share because the effects of potentially dilutive items were anti-dilutive.
Quarterly Trends
Transaction-based revenue is highly correlated with the level of GPV generated by sellers using our managed payments services. The increase in transaction-based revenue in 2020 was primarily attributable to and affected by the COVID-19 pandemic and subsequent shelter in place orders as discussed in more detail under results of operations.
Subscription and services-based revenue generally demonstrates less seasonality than transaction-based revenue. The sequential increases were primarily driven by continued growth of Cash App which has benefited from increased engagement by customers as well as an increase from government stimulus funds deposited into customer accounts. On October 31, 2019, we completed the salefollowing table presents a reconciliation of the Caviar business, and accordingly we will no longer recognize any revenue from Caviar.
Bitcoin revenue comprises the total sale amount we receive from bitcoin sales to customers and is recorded upon transfertax effect of bitcoin to the customer's account. The sale amount generally includes a small margin added to the price we pay to purchase bitcoin and accordingly, the amount of bitcoin revenue will fluctuate depending on the volatility of market bitcoin prices and customer demand. We saw unprecedented growth in bitcoin revenues in the second and third quarter of 2020. Various factors impact customer demand and as such, the recent periods' performance may not be indicative of future quarters.
Changes in product development expenses primarily reflect the timing of additions of engineering, product, and design personnel. To a lesser extent, they also reflect the timing of fees and supply costs related to maintenance and capacity
expansion at third-party data center facilities, development and tooling costs related to the design, testing, and shipping of our hardware products, and fees for software licenses, consulting, legal, and other services that are directly related to growing and maintaining our products and services.
Changes in sales and marketing expenses reflect the variable nature of the timing and magnitude of paid marketing and customer acquisition initiatives across our advertising channels. Changes in sales and marketing expenses are also affected by the timing of additions of direct sales, account management, local, product and paid marketing, retail and e-commerce, partnerships, and communications personnel. Additionally, sales and marketing expenses are affected by the timing and magnitude of processing costs and transaction losses relatednon-GAAP net income adjustments to our Cash App peer-to-peer transfer service and Cash Card issuance costs. We offer the Cash Card and certain peer-to-peer services to our Cash App customersprovision (benefit) for free and we consider these to be marketing tools intended to encourage the usage of Cash App. We saw a substantial increase in sales and marketing expenses in the second and third quarter of 2020 associated with the increased volume of activity with our Cash App peer-to-peer service.income taxes (in thousands, except effective tax rate):
Changes in general and administrative expenses primarily reflect the timing of additions of finance, legal, risk operations, human resources, and administrative personnel, as well as the timing of non income tax payments and reserves. They also reflect the timing of costs related to support personnel and systems, as well as fees paid for professional services, including legal and financial services. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 |
Provision (benefit) for income taxes, as reported | $ | (12,312) | | | $ | (1,364) | | | $ | 2,862 | | | $ | 2,767 | | | $ | 2,326 | |
Tax effect of non-GAAP net income adjustments | 264,523 | | | 222,104 | | | 102,383 | | | 85,372 | | | 34,371 | |
Adjusted provision for income taxes, non-GAAP | $ | 252,211 | | | $ | 220,740 | | | $ | 105,245 | | | $ | 88,139 | | | $ | 36,697 | |
Non-GAAP effective tax rate | 29% | | 25% | | 25% | | 23% | | 16% |
We recorded incremental provisionsdetermined the adjusted provision for transactionincome taxes by calculating the estimated annual effective tax rate based on adjusted pre-tax income and loan losses in the first quarter of 2020 for our Seller business dueapplying it to the expected impact of the COVID-19 pandemic and the related subsequent shelter-in-place orders that resulted in a significant slowdown in the business of many sellers. During the second quarter of 2020, we revised and lowered our estimate of transaction loss reserves recorded in the first quarter of 2020 due to better than expected realized transaction losses. Provision for transaction losses declined during the third quarter as a result of better than expected performance, and as we released previously established risk loss provisions for the first and second quarter of 2020. During the fourth quarter of 2020, we revised and lowered our estimate of transaction loss reserves recorded in the second and third quarter of 2020 due to better than expected realized transaction losses. For loan losses, during the second quarter of 2020, we noted improvements in our sellers as some states started reopening and relaxing the shelter-in place measures and have accordingly adjusted the provisions for loan losses. Additionally, other than PPP loans, we suspended offers for new loans in the second quarter of 2020 which contributed to the decrease in loan losses. During the third and fourth quarters of 2020, we continued to experience loan losses in line with the second quarter provisions for loan losses. Provisions for transaction losses increased approximately 106% in the fourth quarter of 2020, compared to the fourth quarter of 2019.
Gain on sale of asset group represents the net gain we made on the sale of the Caviar business in the fourth quarter of 2019.
Changes in interest expense (income), net are driven by interest expense related to our convertible notes and interestAdjusted Net Income before income earned on our investment in marketable debt securities.
Changes in other expense (income), net was primarily due to gains or losses arising from revaluation of our publicly traded and privately held equity investments. In the fourth quarter of 2020, we recorded a gain from the revaluation of our DoorDash investment as a result of its initial public offering in December 2020, as well as a gain in the fourth quarter of 2020 due to the revaluation of our investment in a privately held entity. In 2019, we recorded losses in the mark to market revaluation of our Eventbrite investment. In December 2019, the Company sold the investment in Eventbrite and as a result will not be impacted by mark to market revaluations related to this investment in future periods. To a lesser extent this balance is also impacted by foreign exchange gains or losses.
taxes.
Liquidity and Capital Resources
The uncertainty caused by the COVID-19 pandemic continues both in the United States and globally, with the duration and severity of the pandemic and the overall impact on consumer demand and overall economy still unknown. We are unable to forecast the full impact on our business; however, this represents a known area of uncertainty and we continue to expect the COVID-19 pandemic and its related economic disruption may have a material impact on our business, results of operations, financial condition and cash flows. We continue to evaluate our investment plans and discretionary expenditures and will make adjustments accordingly.
As of December 31, 2020,2022, we had approximately $4.9$7.5 billion in available funds, including an undrawn amountsamount of $600.0 million available under our revolving credit facility, as described in Note 13, Indebtedness, of Notes to the Consolidated Financial Statements.facility. Additionally, we had $389.4 million available under our warehouse funding facilities. We intend to continue focusing on our long-term business initiatives and believe that our available funds are sufficient to meet our liquidity needs for the foreseeable future. We are carefully monitoringAs of December 31, 2022, we were in compliance with all covenants associated with our revolving credit facility and managingsenior notes. None of our cash position in light of ongoing conditions and levels of operations.warehouse funding facilities contain financial covenants.
The following table summarizes our cash, cash equivalents, restricted cash, customer funds, and investments in marketable debt securities (in thousands):
| | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2022 | | 2021 | | |
Cash and cash equivalents | $ | 4,544,202 | | | $ | 4,443,669 | | | |
Short-term restricted cash | 639,780 | | | 18,778 | | | |
Long-term restricted cash | 71,600 | | | 71,702 | | | |
Customer funds cash and cash equivalents | 3,180,324 | | | 2,440,941 | | | |
Cash, cash equivalents, restricted cash, and customer funds | 8,435,906 | | | 6,975,090 | | | |
Investments in short-term debt securities | 1,081,851 | | | 869,283 | | | |
Investments in long-term debt securities | 573,429 | | | 1,526,430 | | | |
Cash, cash equivalents, restricted cash, customer funds, and investments in marketable debt securities | $ | 10,091,186 | | | $ | 9,370,803 | | | |
Liquidity Sources
| | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2020 | | 2019 | | |
Cash and cash equivalents | $ | 3,158,058 | | | $ | 1,047,118 | | | |
Short-term restricted cash | 30,279 | | | 38,873 | | | |
Long-term restricted cash | 13,526 | | | 12,715 | | | |
Cash, cash equivalents, and restricted cash | 3,201,863 | | | 1,098,706 | | | |
Investments in short-term debt securities | 695,112 | | | 492,456 | | | |
Investments in long-term debt securities | 463,950 | | | 537,303 | | | |
Cash, cash equivalents, restricted cash and investments in marketable debt securities | $ | 4,360,925 | | | $ | 2,128,465 | | | |
Our principal sources of liquidity are our cash and cash equivalents, and investments in marketable debt securities. As of December 31, 2020,2022, we had $4.4$10.1 billion of cash and cash equivalents, restricted cash, customer funds cash and cash equivalents, and investments in marketable debt securities. Customer funds cash and cash equivalents are separate from the Company's corporate funds and are not used for any corporate purposes. These funds are not used for Company liquidity, but rather to meet the obligations set aside for customers. Investments in marketable debt securities which were held primarily in cash deposits, money market funds, reverse repurchase agreements, U.S. government and agency securities, commercial paper, and corporate bonds. We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Our investments in marketable debt securities are classified as available-for-sale. From time to time, we have raised capital by issuing equity, equity-linked, or debt securities suchExcluding customer funds, our total liquidity as our convertible senior notes.of December 31, 2022 was $6.9 billion.
As of December 31, 2020,2022, we held $3.0 billion in aggregate principal amount of convertible senior notes, comprised of $8.5 million in aggregate principal amount of outstanding convertible senior notes that mature on March 1, 2022(2022 Notes), $862.5 million in aggregate principal amount of convertible senior notes that mature on May 15, 2023 (2023 Notes), $1.0 billion in aggregate amount of convertible senior notes that mature on March 1, 2025 (2025 Notes), and $575.0 million and $575.0 million in aggregate amount of convertible senior notes that mature on May 1, 2026, and November 1, 2027, respectively (2026 and 2027 Notes). The 2022 Notes bear interest athave purchased a rate of 0.375% payable semi-annually on March 1 and September 1 of each year, while the 2023 Notes bear interest at a rate of 0.50% payable semi-annually on May 15 and November 15 of each year, and the 2025 Notes bear interest at a rate of 0.125% payable semi-annually on March 1 and September 1 of each year. The 2026 Notes bear no interest, whereas, the 2027 notes bear interest at a rate of 0.25% payable semi-annually on May 1 and November 1 of each year. These notes can be converted or repurchased prior to maturity if certain conditions are met.
We purchased $50cumulative $220.0 million in bitcoin in October 2020 and another $170 million in February 2021, as wefor investment purposes. We believe cryptocurrency is an instrument of economic empowerment that aligns with our corporate purpose. We expect to hold these investments for the long term but will continue to reassess our investment in bitcoin relative to our balance sheet. As bitcoin is considered an indefinite livedindefinite-lived intangible asset, under the accounting policy for such assets, we will beare required to recognize
any decreases in market prices below costcarrying value as an impairment charge, with any mark up in value or reversal of impairment prohibited if the market price of bitcoin subsequently increases. We recorded impairment charges of $46.6 million in the year ended December 31, 2022 due to the observed market price of bitcoin decreasing below the carrying value during the period. As of December 31, 2022, the fair value of the investment in bitcoin was $132.7 million based on observable market prices, which is $30.4 million in excess of our carrying value of $102.3 million after cumulative impairment charges.
In September 2020, we announced our intent to invest $100$100.0 million in supporting underserved communities, particularly, racial and ethnic minority groups who have been disproportionately affected by COVID-19. This initiative further deepens our commitment toward economic empowerment to help broaden such communities' access to financial services.
In June 2020, we entered into the Paycheck Protection Program Liquidity Facility agreement with the Federal Reserve Bank of San Francisco ("First PPPLF Agreement") to secure additional credit collateralized by PPP loans. As of December 31, 2020, $464.12022, we have invested $32.0 million in aggregate towards this initiative, of PPPLF advanceswhich $10.1 million and $21.5 million were outstandinginvested in the years ended December 31, 2022 and collateralized by2021, respectively.
Our principal commitments consist of convertible notes, senior notes, revolving credit facility, warehouse funding facilities, operating leases, and purchase commitments. Refer to Note 15, Indebtedness andNote 20, Commitments and Contingencies within Notes to the same value of PPP loans. The advances under this facility are repayable if the associated PPP loans are forgiven, repaid by a customer or settled by the government guarantee. Consolidated Financial Statements for more details on these commitments.
Senior Notes and Convertible Notes
As of February 23, 2021, approximately $376.3 million of PPPLF advances were outstanding and collateralized by the same value of the PPP loans. On January 29, 2021,December 31, 2022, we entered into a Second PPPLF Agreement with the Federal Reserve Bank of San Francisco to secure additional credit, collateralized by loans from the second round of the PPP program,held $4.6 billion in an aggregate principal amount of up todebt, comprised of $460.6 million in aggregate principal amount of convertible senior notes that mature on May 15, 2023 ("2023 Convertible Notes"), $1.0 billion under both PPPLF Agreements.in aggregate amount of convertible senior notes that mature on March 1, 2025 ("2025 Convertible Notes"), $575.0 million in aggregate amount of convertible senior notes that mature on May 1, 2026 ("2026 Convertible Notes"), and $575.0 million in aggregate amount of convertible senior notes that mature on November 1, 2027 ("2027 Convertible Notes," and together with the 2023 Convertible Notes, 2025 Convertible Notes, and 2026 Convertible Notes, the “Convertible Notes”). Additionally, on May 20, 2021, we issued $1.0 billion in aggregate principal amount of outstanding senior unsecured notes that mature on June 1, 2026 ("2026 Senior Notes") and $1.0 billion in aggregate principal amount of outstanding senior unsecured notes that mature on June 1, 2031 ("2031 Senior Notes" and, together with the 2026 Senior Notes, the “Senior Notes” and, together with the Convertible Notes, the “Notes”). The 2023 Convertible Notes bear interest at a rate of 0.50% payable semi-annually on May 15 and November 15 of each year, the 2025 Convertible Notes bear interest at a rate of 0.125% payable semi-annually on March 1 and September 1 of each year, the 2026 Convertible Notes bear no interest, and the 2027 Convertible Notes bear interest at a rate of 0.25% payable semi-annually on May 1 and November 1 of each year. These Convertible Notes can be converted or repurchased prior to maturity if certain conditions are met. The 2026 Senior Notes bear interest a rate of 2.75% payable semi-annually on June 1 and December 1, while the 2031 Senior Notes bear interest at a rate of 3.50% payable semi-annually on June 1 and December 1 of each year. These Senior Notes can be redeemed or repurchased prior to maturity if certain conditions are met.
In May 2020,On January 31, 2022, we closed the acquisition of Afterpay and assumed Afterpay's outstanding convertible notes of $1.1 billion, which we redeemed in cash on March 4, 2022 at face value. Refer to Note 9, Acquisitions within Notes to the Consolidated Financial Statements for further details.
Revolving Credit Facility
We have entered into a new revolving credit agreement with certain lenders, as subsequently amended, which provides a $500$500.0 million senior unsecured revolving credit facility (the "2020 Credit Facility") maturing in May 2023.2024. On February 23, 2022, the Company entered into a sixth amendment to the Credit Agreement to, among other things, provide for a new tranche of unsecured revolving loan commitments in an aggregate principal amount of up to $100.0 million (the "Tranche B Loans"). Loans under the 2020 Credit Facility, excluding the Tranche B Loans, bear interest at our option of (i) a base rate based on the highest of the prime rate, the federal funds rate plus 0.50%, and the adjusted LIBOR rate plus 1.00%, in each case, plus a margin ranging from 0.25% to 0.75% or (ii) an adjusted LIBOR rate plus a margin ranging from 1.25% to 1.75%. The margin is determined based on our total net leverage ratio, as defined in the agreement. The Tranche B Loans bear interest at the Company's option of (i) an annual rate based on the forward-looking term rate based on the Secured Overnight Financing Rate ("Term SOFR") or (ii) a base rate. Tranche B Loans based on Term SOFR shall bear interest at a rate equal to Term SOFR plus a margin of between 1.25% and 1.75%, depending on the Company's total net leverage ratio. Tranche B Loans based on the base rate shall bear interest at a rate based on the highest of the prime rate, the federal funds rate plus 0.50%, and Term SOFR with a tenor of one-month plus 1.00%, in each case, plus a margin ranging from 0.25% to 0.75%, depending on the Company's total net leverage ratio. We are obligated to pay other customary fees for a credit facility of this size and type including an unused commitment fee of 0.15%. To date, no funds have been drawn and no letters of credit have been issued under the 2020 Credit Facility.
See Note 13, Indebtedness, of the Notes to the Consolidated Financial Statements for more details on these transactions.Warehouse Funding Facilities
Following the acquisition of Afterpay, we assumed Afterpay's existing warehouse funding facilities ("Warehouse Facilities") with an aggregate commitment amount of $1.7 billion on a revolving basis, of which $1.3 billion was drawn and $0.4 billion remained available as of December 31, 2022. The Warehouse Facilities have been arranged utilizing wholly-owned and consolidated entities formed for the sole purpose of financing the origination of consumer receivables to partly fund our BNPL platform. Borrowings under the Warehouse Facilities are secured against the respective consumer receivables.
Cash, Restricted Cash, and Working Capital
We believe that our existing cash and cash equivalents, investment in marketable debt securities, and availability under our line of credit will be sufficient to meet our working capital needs, including any expenditures related to strategic transactions and investment commitments that we may from time to time enter into, and planned capital expenditures for at least the next 12 months. From time to time, we may seek to raise additionalhave raised capital throughby issuing equity, equity-linked, or debt securities such as our convertible notes and debt financing arrangements. We cannot provide assurance that any additional financing willsenior notes; and we may do so in the future, however, such funding may not be available on terms acceptable to us on acceptable terms or at all.
When we were last rated, in the second half of 2022, we received a non-investment grade rating by S&P Global Ratings (BB), Fitch Ratings, Inc. (BB), and Moody's Corporation (Ba2). We expect that these credit rating agencies will continue to monitor our performance, including our capital structure and results of operations. Our liquidity, access to capital, and borrowing costs could be adversely impacted by declines in our credit rating.
We have entered into various non-cancelable operating leases for certain offices with contractual lease periods expiring between 2022 and 2034. We recognized total rental expenses under operating leases of $93.6 million, $80.3 million, and $75.2 million during the years ended December 31, 2022, 2021, and 2020, respectively. As of December 31, 2022, we had non-cancelable purchase obligations related to cloud computing infrastructure of $1.3 billion. We do not have any off-balance sheet arrangements during the periods presented.
Short-term restricted cash of $30.3$639.8 million as of December 31, 2020 reflects2022 primarily includes cash held by the wholly-owned consolidated entities used in the Warehouse Facilities funding arrangements, that will be used to pay the borrowings under the Warehouse Facilities or will be distributed to us. It also includes pledged cash deposited into savingsdeposits in accounts at the financial institutions that process our sellers' paymentspayment transactions and as collateral pursuant to an agreementvarious agreements with the originating bank for the Company's Square Capital loan product.banks relating to our products. We use the restricted cash to secure letters of credit with thesethe related financial institutions to provide collateral for liabilities arising from cash flow timing differences in the processing of these payments. We have recorded this amountthese amounts as a current assetassets on our consolidated balance sheetssheet given the short-term nature of these cash flow timing differences and that there is no minimum time frame during which the cash must remain restricted. Additionally, this balance includes certain amounts held as collateral pursuant to multi-year lease agreements, discussed in the paragraph below, which we expect to become unrestricted within the next year.
Long-term restricted cash of $13.5$71.6 million as of December 31, 20202022 is primarily related to cash deposited into money market funds that is usedheld as collateral pursuant to multi-year lease agreements. The Company hasas required by the FDIC for Square Financial Services. We have recorded this amountthese amounts as a non-current assetassets on theour consolidated balance sheetssheet as the lease terms extend beyond one year.
requirement by the FDIC specifies a time frame of 12 months or longer during which the cash must remain restricted.
We experience significant day-to-day fluctuations in our cash and cash equivalents due to fluctuations in settlements receivable, and customers payable, and hence working capital. These fluctuations are primarily due to:
•Timing of period end. For periods that end on a weekend or a bank holiday, our cash and cash equivalents, settlements receivable, and customers payable balances typically will be higher than for periods ending on a weekday, as we settle to our sellers for payment processing activity on business days; and
•Fluctuations in daily GPV. When daily GPV increases, our cash and cash equivalents, settlements receivable, and customers payable amounts increase. Typically our settlements receivable and customers payable balances at period end represent one to four days of receivables and disbursements to be made in the subsequent period. Customers payable, excluding amounts attributable to Cash App stored funds, and settlements receivable balances typically move in tandem, as pay-out and pay-in largely occur on the same business day. However, customers payable balances will be greater in amount than settlements receivable balances due to the fact that a subset of funds are held due to unlinked bank accounts, risk holds, and chargebacks. Also customer funds obligations, which are included in customers payable, may cause customers payable to trend differently than settlements receivable. Holidays and day-of-week may also cause significant volatility in daily GPV amounts.
Safeguarding Obligation Liability and Safeguarding Asset Related to Bitcoin Held for Other Parties
As detailed in Note 14, Bitcoin Held for Other Parties within Notes to the Consolidated Financial Statements, upon the adoption of SAB 121, we recorded a safeguarding obligation liability and a corresponding safeguarding asset related to the bitcoin held for other parties. As of December 31, 2022, the safeguarding obligation liability related to bitcoin held for other parties was $428.2 million. We have taken steps to mitigate the potential risk of loss for the bitcoin held for other parties, including holding insurance coverage specifically for certain bitcoin incidents and using secure cold storage to store materially all of the bitcoin held for other parties. SAB 121 also asks us to consider the legal ownership of the bitcoin held for other parties, including whether the bitcoin held for other parties would be available to satisfy general creditor claims in the event of Block’s bankruptcy. The legal rights of people with respect to crypto-assets held on their behalf by a custodian, such as us, upon the custodian’s bankruptcy have not yet been settled by courts and are highly fact dependent. Our contractual arrangements state that our customers and trading partners retain legal ownership of the bitcoin custodied by us on their behalf; they have the right to sell, pledge, or transfer the bitcoin; and they also benefit from the rewards and bear the risks associated with the ownership, including as a result of any bitcoin price fluctuations. We do not use any of the bitcoin held for other parties as collateral for our loans or any other financing arrangements, nor do we lend or pledge bitcoin held for others to any third parties. We have been monitoring and will continue to actively monitor legal and regulatory developments and may consider further steps, as appropriate, to support this contractual position so that in the event of Block’s bankruptcy, the bitcoin custodied by us should not be deemed to be part of Block's bankruptcy estate. We do not expect potential future cash flows associated with the bitcoin safeguarding obligation liability.
Cash Flow Activities
The following table summarizes our cash flow activities (in thousands):
| | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2020 | | 2019 | | |
Net cash provided by operating activities | $ | 381,603 | | | $ | 465,699 | | | |
Net cash provided by (used in) investing activities: | (606,636) | | | 95,193 | | | |
Net cash provided by (used in) financing activities | 2,315,195 | | | (98,874) | | | |
Effect of foreign exchange rate on cash and cash equivalents | 12,995 | | | 3,841 | | | |
Net increase in cash, cash equivalents and restricted cash | $ | 2,103,157 | | | $ | 465,859 | | | |
| | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2022 | | 2021 | | |
Net cash provided by operating activities | $ | 175,903 | | | $ | 847,830 | | | |
Net cash provided by (used in) investing activities | 1,225,696 | | | (1,310,879) | | | |
Net cash provided by financing activities | 97,580 | | | 2,652,034 | | | |
Effect of foreign exchange rate on cash and cash equivalents | (38,363) | | | (7,066) | | | |
Net increase in cash, cash equivalents, restricted cash, and customer funds | $ | 1,460,816 | | | $ | 2,181,919 | | | |
Cash Flows from Operating Activities
Cash provided by operating activities consisted of net loss adjusted for certain non-cash items including gain or loss on revaluation of equity investments, depreciation and amortization, non-cash interest and other expense, share-based compensation expense, transaction and loan losses, deferred income taxes, non-cash lease expense, gain on sale of asset group, as well as the effect of changes in operating assets and liabilities, including working capital.
For the year ended December 31, 2020,2022, cash provided by operating activities was $381.6$175.9 million, primarily due to a net income of $213.1 million, offset by PPP loans facilitated, less loans sold, of $420.8$553.0 million, adjusted for the add back of non-cash expenses of $509.4$1.4 billion consisting primarily of share-based compensation; transaction, loan, and consumer receivable losses; depreciation and amortization; non-cash interest; and bitcoin impairment losses. This was offset by a net outflow from amortization of discounts and premiums and other non-cash adjustments of $592.5 million and changes in other assets and liabilities of $674.4 million due to timing of period end.
For the year ended December 31, 2021, cash provided by operating activities was $847.8 million, primarily due to net income of $158.8 million, adjusted for the add back of non-cash expenses of $1.1 billion consisting primarily of share-based compensation, transaction and loan losses, depreciation and amortization, and non-cash interest, bitcoin impairment losses and other expenses. Whereas the increase in transaction and loan lossesThis was largely caused by estimated losses attributable to the COVID-19 pandemic, the increase in other non-cash expenses was primarily due to the growth and expansion of our business activities. Additionally, the cash generated from operating activities increased due to a net inflow from changes in other assets and liabilities of $79.9 million due to timing.
For the year ended December 31, 2019, cash provided by operating activities was $465.7 million primarily due to a net income of $375.4 million, adjusted for the add back of non-cash expenses of $574.5 million consisting primarily of share-based compensation, transaction and loan losses, depreciation and amortization, and non-cash interest and other expenses largely driven by growth and expansion of our business activities, offset in part by the gain on sale of Caviar of $373.4 million in the fourth quarter. The cash generated from operating activities was negatively affected by a net outflow from changes in other assets and liabilities of $110.8$325.2 million due to timing of period end, as well as PPP loans facilitated, less loans sold, of $56.0 million.
Cash Flows from Investing Activities
Cash flows used in investing activities primarily relate to business acquisitions, consumer receivables, capital expenditures to support our growth, and investments in marketable debt securities, investment in privately held entity, and business acquisitions.securities.
For the year ended December 31, 2020,2022, cash used inprovided by investing activities was $606.6 million,$1.2 billion, primarily due to the net proceeds from investments of marketable securities, including investments from customer funds, of $337.7 million.$1.1 billion. Additional usesinflows of cash were as a result of business acquisitions, net of cash acquired, of $539.5 million. These were partially offset by the purchase of property and equipment of $138.4$170.8 million, business acquisitions, net consumer receivable originations of cash acquired of
$79.2$169.4 million, and purchases of other investments of $51.3$56.7 million.
For the year ended December 31, 2019,2021, cash provided byused in investing activities was $95.2 million,$1.3 billion, primarily as a result ofdue to the net cash proceeds from sale of asset group of $309.3 million related to the sale of the Caviar business and proceeds from sale of equity investment in Eventbrite of $33.0 million, offset in part by the net investments of marketable securities, including investments from customer funds, of $149.0 million.$1.2 billion. Additional uses of cash in investing activities were as a result of purchasesbusiness acquisitions, net of cash acquired of $164.0 million, the purchase of bitcoin investments of $170.0 million, the purchase of property and equipment of $62.5$134.3 million, business combinations, netand purchases of cash acquired of $20.4 million, and other investments of $15.3$48.5 million. These were partially offset by proceeds from sales of equity investments of $420.6 million.
Cash Flows from Financing Activities
For the year ended December 31, 2020,2022, cash provided by financing activities was $2.3 billion,$97.6 million, primarily as a result of $1.08 billion in net proceeds from the 2026 and 2027 Note offering, $936.5warehouse facilities borrowings of $1.2 billion, a change in customer funds of $349.3 million, in net proceeds from the 2025 Note offering, proceeds from the First PPPLF Agreement advances of $464.1 million,as well as proceeds from issuances of common stock from the exercise of options and purchases under our employee share purchase plan of $162.0$81.8 million. These were offset by the payment to redeem convertible notes assumed upon the acquisition of Afterpay of $1.1 billion and repayments of the PPPLF advances of $480.7 million.
For the year ended December 31, 2021, cash provided by financing activities was $2.7 billion, primarily as a result of $2.0 billion in net proceeds from the 2031 Senior Notes and 2026 Senior Notes offerings, proceeds from issuances of common stock from the exercise of options and purchases under our employee share purchase plan of $126.7 million, offset by payments for employee tax withholding related to vesting of restricted stock units of $314.0$323.0 million.
For the year ended December 31, 2019, cash used in financing activities was $98.9 million, primarily as a result of payments for employee tax withholding related to vesting of restricted stock units of $212.3 million offset in part by proceeds from issuances of common stock from the exercise of options and purchases under the employee stock purchase plan, net of $118.5 million.
Contractual Obligations and Commitments
Our principal commitments consist of convertible senior notes, liquidity facility, operating leases, capital leases, and purchase commitments. The following table summarizes our commitments to settle contractual obligations in cash as of December 31, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments due by period |
| Total | | Less than 1 year | | 1 - 3 years | | 3 - 5 years | | More than 5 years |
| (in thousands) |
Convertible senior notes, including interest | $ | 3,044,046 | | | $ | 7,032 | | | $ | 880,733 | | | $ | 1,004,125 | | | $ | 1,152,156 | |
PPP Liquidity Facility | 464,094 | | | 464,094 | | | — | | | — | | | — | |
Operating leases | 566,328 | | | 70,774 | | | 151,202 | | | 103,525 | | | 240,827 | |
Finance leases | — | | | — | | | — | | | — | | | — | |
Purchase commitments | 40,695 | | | 40,695 | | | — | | | — | | | — | |
Total | $ | 4,115,163 | | | $ | 582,595 | | | $ | 1,031,935 | | | $ | 1,107,650 | | | $ | 1,392,983 | |
Convertible Senior Notes
On November 13, 2020, we issued $1.15 billion in aggregate principal amount of 2026 and 2027 Notes that mature on May 1, 2026 and November 1, 2027, respectively, unless earlier converted or repurchased. The 2026 Notes bear no interest, whereas, the 2027 Notes bear interest at a rate of 0.25% payable semi-annually on May 1 and November 1 of each year. See Note 13, Indebtedness, of the Notes to the Consolidated Financial Statements for more details on this transaction.
On March 5, 2020, we issued $1.0 billion in aggregate principal amount of 2025 Notes that mature on March 1, 2025, unless earlier converted or repurchased, and bear interest at a rate of 0.1250% payable semi-annually on March 1 and September 1 of each year. See Note 13, Indebtedness, of the Notes to the Consolidated Financial Statements for more details on this transaction.
On May 25, 2018, we issued $862.5 million in aggregate principal amount of 2023 Notes that mature on May 15, 2023, unless earlier converted or repurchased, and bear interest at a rate of 0.50% payable semi-annually on May 15 and
November 15 of each year. See Note 13, Indebtedness, of the Notes to the Consolidated Financial Statements for more details on this transaction.
On March 6, 2017, we issued $440.0 million in aggregate principal amount of Notes that mature on March 1, 2022, unless earlier converted or repurchased, and bear interest at a rate of 0.375% payable semi-annually on March 1 and September 1 of each year. See Note 13, Indebtedness, of the Notes to the Consolidated Financial Statements for more details on this transaction.
Paycheck Protection Program Liquidity Facility
On June 2, 2020, we entered into the First PPPLF Agreement with the Federal Reserve Bank of San Francisco to secure additional credit in an aggregate principal amount of up to $500.0 million. Borrowings under the facility accrue interest at a rate of 0.35% and must be collateralized with loans originated under the PPP. On January 29, 2021, we entered into a second PPPLF agreement with the Federal Reserve Bank of San Francisco (“Second PPPLF Agreement” and together with the First PPPLF Agreement, “PPPLF Agreements”) to secure additional credit, collateralized by loans from the second round of the PPP program, in an aggregate principal amount of up to $1.0 billion under both PPPLF Agreements. The maturity date of any PPPLF advances will be the maturity date of the PPP loan pledged to secure the advance, and will be accelerated upon the occurrence of certain events of default. Although loans originated under the PPP have a stated maturity of between two and five years from origination, some of the loans may be forgiven 24 weeks after disbursement if they meet certain specified criteria. The PPPLF advances are also repayable if the underlying PPP loan is repaid by the customer. As of December 31, 2020, $464.1 million of PPPLF advances were outstanding. As of February 23, 2021, approximately $376.3 million of PPPLF advances were outstanding and collateralized by the same value of the PPP loans. See Note 13, Indebtedness, of the Notes to the Consolidated Financial Statements for more details on this transaction.
Lease Commitments
We have entered into various non-cancelable operating leases for certain offices with contractual lease periods expiring between 2021 and 2034. We recognized total rental expenses under operating leases of $75.2 million, $32.5 million, and $23.3 million during the years ended December 31, 2020, 2019, and 2018, respectively.
Purchase commitments
We had non-cancelable purchase obligations to hardware suppliers for $40.7 million for the year ended December 31, 2020.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements during the periods presented.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. GAAP requires us to make certain estimates and judgments that affect the amounts reported in our financial statements. We base our estimates on historical experience, anticipated future trends, and other assumptions we believe to be reasonable under the circumstances. Because these accounting policies require significant judgment, our actual results may differ materially from our estimates.
We believe accounting policies and the assumptions and estimates associated with transaction losses and loan losses, especially due to uncertainties associated with the COVID-19 pandemic, and revenue recognitionbusiness combinations could potentially have the greatest potentiala material effect on our consolidated financial statements. Therefore, we consider these to be ourstatements, and therefore are critical accounting policies and estimates.
Business Combinations
As a result of the acquisitions of TIDAL, completed in the second quarter of 2021, and Afterpay, completed on January 31, 2022, we consider accounting for business combinations under ASC 805, Business Combinations, to also be a critical accounting policy and estimate as it requires management to make significant estimates and assumptions, including the valuation of intangible assets acquired, determination of fair values of liabilities assumed including pre-acquisition contingencies and valuation of contingent consideration, where applicable. Although we believe that the assumptions and estimates we have made have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results. The carrying value of our acquired intangible assets as of December 31, 2022 was $2.0 billion. Refer to Note 9, Acquisitions and Note 11, Acquired Intangible Assets within Notes to the Consolidated Financial Statements for further details.
Accrued Transaction Losses
We are exposed to transactioncredit losses related to transactions processed by sellers that are subsequently subject to chargebacks when we are unable to collect from the sellers primarily due to chargebacks asinsolvency, disputes between a result of fraudseller and their customer, or uncollectibility of transaction payments. Wedue to fraudulent transactions. Generally, we estimate accrued transaction lossesthe potential loss rates based on available data as of the reporting date, including expectations of future chargebacks, and historical trends related to loss ratesexperience that is continuously adjusted for new information and incorporates, where applicable, reasonable and supportable forecasts about future expectations. During the firstWe also consider other relevant market data in developing such estimates and second
quartersassumptions. Accrued transaction losses also include estimated losses on Cash App activity related to peer-to-peer payments sent from a credit card, Cash for Business, and Cash App Card. As of 2020, the Company revised its estimatesDecember 31, 2022, we had accrued $64.5 million related to reflect expected increased chargebacks from non-delivery of goods and services as well as increased failure rates of its sellers duetransaction losses. Additions to the COVID-19 pandemic. Duringreserve are reflected in current operating results, while realized losses are offset against the thirdreserve. These amounts are classified within transaction, loan, and fourth quartersconsumer receivable losses on the consolidated statements of 2020, the Company continued to further revise its estimates for transaction losses and as a result of better than expected performance, the Company released previously established risk loss provisionsoperations, except for the first three quartersamounts associated with the peer-to-peer service offered to Cash App customers for free that are classified within sales and marketing expenses. Refer to Note 1, Description of 2020 amountingBusiness and Summary of Significant Accounting Policies and Note 12, Other Consolidated Balance Sheet Components (Current) within Notes to $82.4 million.the Consolidated Financial Statements for further details.
Convertible NotesAllowance for Credit Losses Related to Consumer Receivables
We account forare exposed to credit losses on our consumer receivables portfolio. We estimate the convertible notes as separate debtexpected credit losses in the outstanding portfolio of consumer receivables using both quantitative and equity components. The carrying amountqualitative methods that analyze portfolio performance, uses judgment regarding the quantitative components of the debt component is calculated by measuringreserve, and considers all available information relevant to assessing collectibility. As of December 31, 2022, we had accrued $151.3 million related to allowance for credit losses. Refer to Note 1, Description of Business and Summary of Significant Accounting Policies and Note 6, Consumer Receivables, net within Notes to the fair value of a similar debt that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option is calculated by deducting the fair value of the debt component from the principal amount of the convertible notes as a whole. We estimated the fair value of the debt and equity components using a convertible bond model, which includes subjective assumptions such as the expected term and expected volatility. These assumptions involve inherent uncertainties and management judgement.Consolidated Financial Statements for further details.
Recent Accounting Pronouncements
See “Recent Accounting Pronouncements” described in Note 1, Description of theBusiness and Summary of Significant Accounting Policies within Notes to our consolidated financial statements.the Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have operations both within the United States and globally, and we are exposed to market risks in the ordinary course of our business, including the effects of interest rate changes and foreign currency fluctuations. Information relating to quantitative and qualitative disclosures about these market risks is described below.
Equity Price Risk
Marketable Equity Investments
Our marketable equity investments are investments held in publicly tradedpublicly-traded companies and are measured using quoted prices in active markets which could result in material volatility in our net incomefinancial results in future periods. As of December 31, 2020, we had $376.3 million in2022, our marketable equity investments were immaterial. Adjustments are recorded in other (expense) income, net on the consolidated statements of operations and recordedestablish a gain of $276.3 million innew carrying value for the year ended December 31, 2020.investment. A hypothetical 10% increase or decrease in the market pricefair value of our marketable equity investments as of December 31, 2020 would not have resulted in approximately $37.6 million increase or decrease in the value of the investment. Adjustments are recorded in other expense (income), neta material effect on the consolidated statements of operations.our financial results.
Non-marketableNon-Marketable Equity Investments
Our non-marketable equity investments are investments in privately-held companies that we hold for purposes other than trading. These investments are inherently risky because there is no established market for these securities and the markets for the technologies or products these companies are developing are typically in the early stages andstages. As such, we could lose our entire investment in these companies. Adjustments are recorded in other expense (income), net on the consolidated statements of operations and establish a new carrying value for the investment. As of December 31, 2020,2022, the aggregate carrying value of our non-marketable equity investments included in other non-current assets was $32.5$208.9 million. A hypothetical 10% increase or decrease in the carrying value of our non-marketable equity investments would not have a material effect on our financial results.
Bitcoin Market Price Risk
As of December 31, 2022, we had made cumulative investments in bitcoin of $220.0 million. Our investment in bitcoin is accounted for as an indefinite-lived intangible asset, and thus, is subject to impairment losses if the fair value of bitcoin decreases below the carrying value during the assessed reporting period. Impairment losses cannot be recovered for any subsequent increase in fair value until the sale of the asset. We recorded an impairment charge on our investment in bitcoin of $46.6 million in the year ended December 31, 2022 due to the observed market price of bitcoin decreasing below the carrying value during the period. As of December 31, 2022, the cumulative impairment charges to date were $117.7 million and the fair value of the investment in bitcoin was $132.7 million based on observable market prices, which is $30.4 million in excess of our carrying value of $102.3 million after impairment charges. Any decreases to the carrying value of bitcoin investments are recorded in operating expenses on the consolidated statements of operations. A hypothetical 10% increase or decrease in the market price of bitcoin would not have a material effect on our financial results.
Interest Rate Sensitivity
Our cash and cash equivalents, and marketable debt securities as of December 31, 2020,2022 were held primarily in cash deposits, money market funds, U.S. government and agency securities, commercial paper, and corporate bonds. The fair value of our cash, cash equivalents, and marketable debt securities would not be significantly affected by either an increase or decrease in interest rates due mainly to the short-term nature of a majority of these instruments. Additionally, we have the ability to hold these instruments until maturity if necessary to reduce our risk. AnyOur Warehouse Facilities borrowings and any future borrowings incurred under our credit facility wouldthe 2020 Credit Facility both accrue interest at a floating ratevariable rates based on a formulaformulas tied to certain market rates at the time of incurrence
(as described above).incurrence. A hypothetical 100 basis point10% increase or decrease in interest rates would not have a material effect on our financial results.
Foreign Currency Risk
Our consolidated financial statements are presented in U.S. dollars. Most of our revenue is earned in U.S. dollars and, therefore our revenuesubsequent to the acquisition of Afterpay, a portion is not currently subject to significant foreign currency risk.earned in Australian Dollars. Our foreign operations are denominated in the currencies of the countries in which our operations are located, and may be subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Japanese Yen, Canadian Dollar, Australian Dollar, Euro,rates. Our results of operations and British Pound. Fluctuationscash flows are, therefore, subject to fluctuations in foreign currency exchange rates and may cause us to recognize transaction gains and losses on our financial statements.
From time to time, we use foreign exchange derivative contracts to hedge a portion of our exposure to changes in currency exchange rates, which result from our statementglobal operating and financing activities. We do not use derivative financial instruments for trading or speculative purposes. Gains and losses from foreign currency transactions, as well as foreign exchange forward contracts, were not significant for the any period presented in the consolidated financial statements included in this Form 10-K. We did not have any material foreign currency derivatives outstanding as of operations.December 31, 2022. A hypothetical 10% increase or decrease in current exchange rates on our financial instruments would not have a material impacteffect on our financial results.
ItemITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SQUARE,BLOCK, INC.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
The supplementary financial information required by this Item 8 is included in Part II, Item 7 under the caption "Quarterly Results of Operations," which is incorporated herein by reference.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Square,Block, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Square,Block, Inc. and subsidiaries (the “Company”)Company) as of December 31, 20202022 and 2019,2021, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the twothree years in the period ended December 31, 2020,2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company atas of December 31, 20202022 and 2019,2021, and the results of its operations and its cash flows for each of the twothree years in the period ended December 31, 2020,2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020,2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 23, 20212023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’sCompany's financial statements based on our audits. We are a public accounting firm registered with the PCAOBPublic Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management as well as evaluating the overall presentation of the financial statements.statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The following critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the following critical audit matters, below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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| | Accrued transaction lossesBusiness Combinations - Valuation |
Description of the Matter | | As discussed in Notes 1 and 119 to the consolidated financial statements, the Company completed an acquisition of Afterpay Limited during 2022 for consideration of $13.8 billion. The Company accounted for this acquisition as a business combination. |
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| | Auditing the Company’s accounting for the acquisition was complex due to the estimation uncertainty in the Company’s determination of the fair value of acquired identifiable intangible assets, which principally consisted of customer assets, trade names, and technology assets, of $1.4 billion, $386.0 million, and $239.0 million, respectively. The estimation uncertainty for the acquired intangible assets was primarily due to the underlying assumptions about the future performance of the acquired business, which were utilized in determining the fair value of the acquired intangible assets. The significant assumptions used by management included discount rates and certain assumptions that form the basis of the forecasted results, including revenue growth rates. These significant assumptions were forward-looking and could be affected by future economic and market conditions. |
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How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s controls over its accounting for the acquisition. This included testing controls over the estimation process supporting the recognition and measurement of the intangible assets, and management’s review and evaluation of underlying assumptions and estimates with regards to the determination of the fair value of the intangible assets. |
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| | To test the Company’s estimated fair value of the acquired intangible assets, our audit procedures included, among others, reading the underlying agreements, and involving a valuation specialist to assist us in evaluating the Company’s selected valuation methodologies and testing the significant assumptions, including discount rates and revenue growth rates, used in those methodologies. We compared revenue growth rates against historical trends and to those of guideline public companies and other industry participants. We also tested the completeness and accuracy of the underlying data supporting the assumptions and estimates. |
| | | | | | | | |
| | Accrued Transaction Losses |
Description of the Matter | | As discussed in Notes 1 and 12 to the consolidated financial statements, the Company is exposed to transaction losses from chargebacks, which represent fraudulent transactions, potential losses due to disputes between a seller and its customer or due to fraudulent transactions.disputes between peer-to-peer users. The Company established a reserve for these estimated potential losses of $70.6$64.5 million at December 31, 2020.2022. The Company’s reserve is estimated based on available data as of the reporting date, including expectations of future chargebacks and historical trends related to loss rates. Due to the uncertainty in the current economic environment, the Company incorporated qualitative adjustments utilizing market data for similar historical periods of uncertainty. |
| | |
| | Auditing management’s estimate of the reserve for transaction losses was challenging because management’s estimate required a high degree of judgementjudgment in evaluating historical trends related to loss rates and expectations of future chargebacks as well asand the need for a qualitative adjustments for future impact due to uncertainty in the current economic environment.adjustment. |
| | | | | | | | |
How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s controls over the process for determining the reserve for transaction losses. For example, we tested controls over management’s review of the methodology to determine estimated losses, the completeness and accuracy of underlying loss rate data used in the estimation of potential losses from chargebacks, and the assumptions made about future chargebacks, and the appropriateness of the qualitative adjustments to the reserve methodology. This included the controls over identification and assessment of the qualitative adjustments, the completeness and accuracy of data used to estimate the qualitative aspects of the reserve, management’s evaluation of new or contradictory information, and management’s review and approval of the adjustments.chargebacks. |
| | |
| | To test the Company’s reserve for transaction losses, our audit procedures included, among others, evaluating the Company’s methodology and testing the underlying data and assumptions used by management to estimate potential losses. We compared the Company’s historical estimated potential losses with actual results to assess the Company’s methodology to estimate potential losses. We evaluated the completeness and accuracy of the loss rate data used in the calculation of the Company’s reserve for transaction losses by agreeingcomparing such data to third-party data. In addition, we evaluatedadjustments made by management to the Company’s methodology to estimate potential losses, to reflect expectations of future chargebacks and uncertainty in the current economic environment, including the basis for concluding whether such adjustments were warranted and whether new or contradictory information existed.warranted. We also reviewed subsequent events, which included actual chargebacks, and considered whether they corroborated the Company’s conclusion. |
| | | | | | | | |
| | Convertible Senior NotesAllowance for Credit Losses Related to Consumer Receivables |
Description of the Matter | | The Company’s consumer receivables and the associated allowance for credit losses were $2.0 billion and $151.3 million as of December 31, 2022, respectively. The provision for credit losses was $203.7 million for the year ended December 31, 2022. As describeddiscussed in Note 13Notes 1 and 6 to the consolidated financial statements, in March 2020 and November 2020, the Company issued $2.15 billionhas exposure to expected credit losses from consumer receivables, for which an allowance for credit losses is recorded under ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of convertible senior notes due in 2025, 2026 and 2027 (“Convertible Senior Notes”), which, upon conversion, permit the Company to pay or deliver cash, shares of its common stock, or a combination of cash and shares of common stock at the Company’s election.Credit Losses on Financial Instruments. The Company entered into separate hedge transactionsestimates the allowance for credit losses related to reduce potential dilution or offset any cash payments the Company may makeconsumer receivables using both quantitative methods, which consider historical losses and recoveries, recent and historical trends in excess of the principal amount upon conversion of the Convertible Senior Notes. These transactions are collectively referred to as the Convertible Senior Notes Transactions.delinquencies, past-due receivables and charge-offs, and qualitative methods, which consider consumer behavior, current and historical macroeconomic trends, along with other factors. |
| | |
| | Auditing management’s estimate of the allowance for credit losses related to consumer receivables was challenging because management’s estimate required a high degree of judgment in evaluating historical trends related to loss rates and an assessment of a need for a qualitative adjustment in the Company’s accounting for the Convertible Senior Notes Transactions was complex due to the significant judgment required in determining the liability component of the Convertible Senior Notes as well as the balance sheet classification of the components of the Convertible Senior Notes Transaction. The Company estimated the fair value of the liability component of the Convertible Senior Notes by measuring the fair value of similar debt instruments that do not have an associated convertible feature. Additionally, the Company performed a detailed analysis of the terms of the Convertible Senior Notes Transactions to identify whether any derivatives that required separate mark-to-market accounting under applicable accounting guidance were present.expected credit loss methodology. |
| | |
How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls overTo test the Company’s Convertible Senior Notes Transactions. For example,allowance for credit losses related to consumer receivables, we tested the Company’s controls over the initial recognitioninvolved EY specialists in testing management’s methodology and measurement of the Convertible Senior Notes Transactions, including management’s review of similar debt instruments that do not have an associated convertible feature used in determining the fair value of the liability component of the Convertible Senior Notes and the recording of the associated liability and equity components. |
| | |
| | key assumptions. Our testing of the Company’s initial accounting for the Convertible Senior Notes Transactionsaudit procedures included, among other procedures, reading the underlying agreements andothers, evaluating the Company’s accounting analysis of the initial accounting of the Convertible Senior Notes Transactions, including the determination of the balance sheet classification of each component of the Convertible Senior NotesTransaction and identification of any derivatives included in the arrangements. We involved a valuation specialist in our testing of the fair value of the liability component, including evaluating the Company’s selection of the valuation methodology and other significant assumptions used by the Company. We have evaluated the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. Specifically, when assessing the fair value assumptions, we evaluated the Company’s estimates of its credit risk, equity volatility, dividend yield and the market risk free rate as well as its analysisperforming procedures over historical losses incurred by the Company by aging category and testing recoveries. In addition, we evaluated and tested management’s conclusion for the need for a qualitative adjustment in the Company’s expected credit loss methodology including the examination of comparable issuancescurrent macroeconomic conditions such as changes in unemployment and GDP. We also reviewed subsequent events, which included actual collections on current and aged receivables as of debt securities by companies with a similarDecember 31, 2022, to consider whether they corroborated the Company’s conclusion related to the overall allowance for credit risk rating. losses related to consumer receivables. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2019.
San Francisco, California
February 23, 2021
2023
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Square,Block, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Square,Block, Inc. and subsidiaries’'s internal control over financial reporting as of December 31, 2020,2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO criteria”)COSO criteria). In our opinion, Square,Block, Inc. and subsidiaries (the “Company”)Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020,2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20202022 and 2019,2021, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the twothree years ended December 31, 2020,2022, and the related notes and our report dated February 23, 20212023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Form 10-K.Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Francisco, California
February 23, 20212023
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Square, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the year ended December 31, 2018, and the related notes (collectively, the consolidated financial statements) of Square, Inc. and subsidiaries (the Company). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of the Company’s operations and its cash flows for the year ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ KPMG LLP
We served as the Company’s auditor from 2011 to 2019.
San Francisco, California
February 27, 2019, except for Note 19, as to which the date is February 23, 2021
SQUARE,BLOCK, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data) | | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 4,544,202 | | | $ | 4,443,669 | |
Investments in short-term debt securities | 1,081,851 | | | 869,283 | |
Settlements receivable | 2,416,324 | | | 1,171,612 | |
Customer funds | 3,180,324 | | | 2,830,995 | |
Consumer receivables, net | 1,871,160 | | | — | |
Loans held for sale | 474,036 | | | 517,940 | |
Safeguarding asset related to bitcoin held for other parties | 428,243 | | | 1,100,596 | |
Other current assets | 1,627,265 | | | 687,429 | |
Total current assets | 15,623,405 | | | 11,621,524 | |
Property and equipment, net | 329,302 | | | 282,140 | |
Goodwill | 11,966,761 | | | 519,276 | |
Acquired intangible assets, net | 2,014,034 | | | 257,049 | |
Investments in long-term debt securities | 573,429 | | | 1,526,430 | |
Operating lease right-of-use assets | 373,172 | | | 449,406 | |
Other non-current assets | 484,237 | | | 370,535 | |
Total assets | $ | 31,364,340 | | | $ | 15,026,360 | |
Liabilities and Stockholders’ Equity | | | |
Current liabilities: | | | |
| | | |
Customers payable | $ | 5,548,656 | | | $ | 3,979,624 | |
Settlements payable | 462,505 | | | 254,611 | |
Accrued expenses and other current liabilities | 1,056,676 | | | 702,881 | |
Current portion of long-term debt (Note 15) | 460,356 | | | 455 | |
Warehouse funding facilities, current | 461,240 | | | — | |
Safeguarding obligation liability related to bitcoin held for other parties | 428,243 | | | 1,100,596 | |
PPP Liquidity Facility advances | 16,840 | | | 497,533 | |
Total current liabilities | 8,434,516 | | | 6,535,700 | |
Deferred tax liabilities | 132,498 | | | 15,236 | |
Warehouse funding facilities, non-current | 877,066 | | | — | |
Long-term debt (Note 15) | 4,109,829 | | | 4,559,208 | |
Operating lease liabilities, non-current | 357,419 | | | 395,017 | |
Other non-current liabilities | 201,657 | | | 207,610 | |
Total liabilities | 14,112,985 | | | 11,712,771 | |
Commitments and contingencies (Note 20) | | | |
Stockholders’ equity: | | | |
Preferred stock, $0.0000001 par value: 100,000,000 shares authorized at December 31, 2022 and December 31, 2021. None issued and outstanding at December 31, 2022 and December 31, 2021. | — | | | — | |
Class A common stock, $0.0000001 par value: 1,000,000,000 shares authorized at December 31, 2022 and December 31, 2021; 539,408,009 and 403,237,209 issued and outstanding at December 31, 2022 and December 31, 2021, respectively. | — | | | — | |
Class B common stock, $0.0000001 par value: 500,000,000 shares authorized at December 31, 2022 and December 31, 2021; 60,651,533 and 61,706,578 issued and outstanding at December 31, 2022 and December 31, 2021, respectively. | — | | | — | |
Additional paid-in capital | 18,314,681 | | | 3,317,255 | |
Accumulated other comprehensive loss | (523,090) | | | (16,435) | |
Accumulated deficit | (568,712) | | | (27,965) | |
Total stockholders’ equity attributable to common stockholders | 17,222,879 | | | 3,272,855 | |
Noncontrolling interests | 28,476 | | | 40,734 | |
Total stockholders’ equity | 17,251,355 | | | 3,313,589 | |
Total liabilities and stockholders’ equity | $ | 31,364,340 | | | $ | 15,026,360 | |
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 3,158,058 | | | $ | 1,047,118 | |
Investments in short-term debt securities | 695,112 | | | 492,456 | |
Settlements receivable | 1,024,895 | | | 588,692 | |
Customer funds | 2,037,832 | | | 676,292 | |
Loans held for sale | 462,665 | | | 164,834 | |
Other current assets | 383,067 | | | 250,409 | |
Total current assets | 7,761,629 | | | 3,219,801 | |
Property and equipment, net | 233,520 | | | 149,194 | |
Goodwill | 316,701 | | | 266,345 | |
Acquired intangible assets, net | 137,612 | | | 69,079 | |
Investments in long-term debt securities | 463,950 | | | 537,303 | |
Operating lease right-of-use assets | 456,888 | | | 113,148 | |
Other non-current assets | 499,250 | | | 196,388 | |
Total assets | $ | 9,869,550 | | | $ | 4,551,258 | |
Liabilities and Stockholders’ Equity | | | |
Current liabilities: | | | |
| | | |
Customers payable | $ | 3,009,051 | | | $ | 1,273,135 | |
Settlements payable | 239,362 | | | 95,834 | |
Accrued expenses and other current liabilities | 360,850 | | | 297,841 | |
| | | |
Operating lease liabilities, current | 52,747 | | | 27,275 | |
PPP Liquidity Facility advances | 464,094 | | | 0 | |
Total current liabilities | 4,126,104 | | | 1,694,085 | |
Long-term debt | 2,586,924 | | | 938,832 | |
Operating lease liabilities, non-current | 389,662 | | | 108,830 | |
Other non-current liabilities | 85,291 | | | 94,461 | |
Total liabilities | 7,187,981 | | | 2,836,208 | |
Commitments and contingencies (Note 18) | 0 | | 0 |
Stockholders’ equity: | | | |
Preferred stock, $0.0000001 par value: 100,000,000 shares authorized at December 31, 2020 and December 31, 2019. NaN issued and outstanding at December 31, 2020 and December 31, 2019. | 0 | | | 0 | |
Class A common stock, $0.0000001 par value: 1,000,000,000 shares authorized at December 31, 2020 and December 31, 2019; 390,187,079 and 352,386,562 issued and outstanding at December 31, 2020 and December 31, 2019, respectively. | 0 | | | 0 | |
Class B common stock,$0.0000001 par value: 500,000,000 shares authorized at December 31, 2020 and December 31, 2019; 65,997,697 and 80,410,158 issued and outstanding at December 31, 2020 and December 31, 2019, respectively. | 0 | | | 0 | |
Additional paid-in capital | 2,955,464 | | | 2,223,749 | |
Accumulated other comprehensive income | 23,328 | | | 1,629 | |
Accumulated deficit | (297,223) | | | (510,328) | |
Total stockholders’ equity | 2,681,569 | | | 1,715,050 | |
Total liabilities and stockholders’ equity | $ | 9,869,550 | | | $ | 4,551,258 | |
| | | |
SeeThe accompanying notesNotes to consolidated financial statements.the Consolidated Financial Statements are an integral part of this statement.
SQUARE,
BLOCK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data) | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Revenue: | | | | | |
Transaction-based revenue | $ | 5,701,540 | | | $ | 4,793,146 | | | $ | 3,294,978 | |
Subscription and services-based revenue | 4,552,773 | | | 2,709,731 | | | 1,539,403 | |
Hardware revenue | 164,418 | | | 145,679 | | | 91,654 | |
Bitcoin revenue | 7,112,856 | | | 10,012,647 | | | 4,571,543 | |
Total net revenue | 17,531,587 | | | 17,661,203 | | | 9,497,578 | |
Cost of revenue: | | | | | |
Transaction-based costs | 3,364,028 | | | 2,719,502 | | | 1,911,848 | |
Subscription and services-based costs | 861,745 | | | 483,056 | | | 222,712 | |
Hardware costs | 286,995 | | | 221,185 | | | 143,901 | |
Bitcoin costs | 6,956,733 | | | 9,794,992 | | | 4,474,534 | |
Amortization of acquired technology assets | 70,194 | | | 22,645 | | | 11,174 | |
Total cost of revenue | 11,539,695 | | | 13,241,380 | | | 6,764,169 | |
Gross profit | 5,991,892 | | | 4,419,823 | | | 2,733,409 | |
Operating expenses: | | | | | |
Product development | 2,135,612 | | | 1,383,841 | | | 881,826 | |
Sales and marketing | 2,057,951 | | | 1,617,189 | | | 1,109,670 | |
General and administrative | 1,686,849 | | | 982,817 | | | 579,203 | |
Transaction, loan, and consumer receivable losses | 550,683 | | | 187,991 | | | 177,670 | |
Bitcoin impairment losses | 46,571 | | | 71,126 | | | — | |
Amortization of customer and other acquired intangible assets | 138,758 | | | 15,747 | | | 3,855 | |
Total operating expenses | 6,616,424 | | | 4,258,711 | | | 2,752,224 | |
Operating income (loss) | (624,532) | | | 161,112 | | | (18,815) | |
| | | | | |
Interest expense, net | 36,228 | | | 33,124 | | | 56,943 | |
Other income, net | (95,443) | | | (29,474) | | | (291,725) | |
Income (loss) before income tax | (565,317) | | | 157,462 | | | 215,967 | |
Provision (benefit) for income taxes | (12,312) | | | (1,364) | | | 2,862 | |
Net income (loss) | (553,005) | | | 158,826 | | | 213,105 | |
Less: Net loss attributable to noncontrolling interests | (12,258) | | | (7,458) | | | — | |
Net income (loss) attributable to common stockholders | $ | (540,747) | | | $ | 166,284 | | | $ | 213,105 | |
| | | | | |
Net income (loss) per share attributable to common stockholders: | | | | | |
Basic | $ | (0.93) | | | $ | 0.36 | | | $ | 0.48 | |
Diluted | $ | (0.93) | | | $ | 0.33 | | | $ | 0.44 | |
Weighted-average shares used to compute net income (loss) per share attributable to common stockholders: | | | | | |
Basic | 578,949 | | | 458,432 | | | 443,126 | |
Diluted | 578,949 | | | 501,779 | | | 482,167 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
Revenue: | | | | | |
Transaction-based revenue | $ | 3,294,978 | | | $ | 3,081,074 | | | $ | 2,471,451 | |
Subscription and services-based revenue | 1,539,403 | | | 1,031,456 | | | 591,706 | |
Hardware revenue | 91,654 | | | 84,505 | | | 68,503 | |
Bitcoin revenue | 4,571,543 | | | 516,465 | | | 166,517 | |
Total net revenue | 9,497,578 | | | 4,713,500 | | | 3,298,177 | |
Cost of revenue: | | | | | |
Transaction-based costs | 1,911,848 | | | 1,937,971 | | | 1,558,562 | |
Subscription and services-based costs | 222,712 | | | 234,270 | | | 169,884 | |
Hardware costs | 143,901 | | | 136,385 | | | 94,114 | |
Bitcoin costs | 4,474,534 | | | 508,239 | | | 164,827 | |
Amortization of acquired technology | 11,174 | | | 6,950 | | | 7,090 | |
Total cost of revenue | 6,764,169 | | | 2,823,815 | | | 1,994,477 | |
Gross profit | 2,733,409 | | | 1,889,685 | | | 1,303,700 | |
Operating expenses: | | | | | |
Product development | 881,826 | | | 670,606 | | | 497,479 | |
Sales and marketing | 1,109,670 | | | 624,832 | | | 411,151 | |
General and administrative | 579,203 | | | 436,250 | | | 339,245 | |
Transaction and loan losses | 177,670 | | | 126,959 | | | 88,077 | |
Amortization of acquired customer assets | 3,855 | | | 4,481 | | | 4,362 | |
| | | | | |
Total operating expenses | 2,752,224 | | | 1,863,128 | | | 1,340,314 | |
Operating income (loss) | (18,815) | | | 26,557 | | | (36,614) | |
Gain on sale of asset group | 0 | | | (373,445) | | | 0 | |
Interest expense, net | 56,943 | | | 21,516 | | | 17,982 | |
Other expense (income), net | (291,725) | | | 273 | | | (18,469) | |
Income (loss) before income tax | 215,967 | | | 378,213 | | | (36,127) | |
Provision for income taxes | 2,862 | | | 2,767 | | | 2,326 | |
Net income (loss) | $ | 213,105 | | | $ | 375,446 | | | $ | (38,453) | |
Net income (loss) per share: | | | | | |
Basic | $ | 0.48 | | | $ | 0.88 | | | $ | (0.09) | |
Diluted | $ | 0.44 | | | $ | 0.81 | | | $ | (0.09) | |
Weighted-average shares used to compute net income (loss) per share: | | | | | |
Basic | 443,126 | | | 424,999 | | | 405,731 | |
Diluted | 482,167 | | | 466,076 | | | 405,731 | |
SeeThe accompanying notesNotes to consolidated financial statements.the Consolidated Financial Statements are an integral part of this statement.
SQUARE,BLOCK, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
| | | Year Ended December 31, | | Year Ended December 31, |
| | 2020 | | 2019 | | 2018 | | 2022 | | 2021 | | 2020 |
Net income (loss) | Net income (loss) | $ | 213,105 | | | $ | 375,446 | | | $ | (38,453) | | Net income (loss) | $ | (553,005) | | | $ | 158,826 | | | $ | 213,105 | |
Net foreign currency translation adjustments | Net foreign currency translation adjustments | 20,439 | | | 1,879 | | | (4,496) | | Net foreign currency translation adjustments | (471,166) | | | (24,667) | | | 20,439 | |
Net unrealized gain on revaluation of intercompany loans | 0 | | | 75 | | | 303 | | |
| Net unrealized gain (loss) on marketable debt securities | Net unrealized gain (loss) on marketable debt securities | 1,260 | | | 5,728 | | | (542) | | Net unrealized gain (loss) on marketable debt securities | (35,489) | | | (15,096) | | | 1,260 | |
Total comprehensive income (loss) | Total comprehensive income (loss) | $ | 234,804 | | | $ | 383,128 | | | $ | (43,188) | | Total comprehensive income (loss) | $ | (1,059,660) | | | $ | 119,063 | | | $ | 234,804 | |
SeeThe accompanying notesNotes to consolidated financial statements.the Consolidated Financial Statements are an integral part of this statement.
SQUARE,BLOCK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except for number of shares)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Convertible preferred stock | | Class A and B common stock | | Additional paid-in | | Accumulated other comprehensive | | Accumulated | | Total stockholders’ |
| | Shares | | Amount | | Shares | | Amount | | capital | | income (loss) | | deficit | | equity |
Balance at December 31, 2017 | 0 | | | $ | 0 | | | 395,194,075 | | | $ | 0 | | | $ | 1,630,386 | | | $ | (1,318) | | | $ | (842,735) | | | $ | 786,333 | |
| Net loss | — | | | — | | | — | | | — | | | — | | | — | | | (38,453) | | | (38,453) | |
Shares issued in connection with employee stock plans | — | | | — | | | 22,275,676 | | | — | | | 134,027 | | | — | | | — | | | 134,027 | |
Issuance of common stock in connection with business combination | — | | | — | | | 2,649,590 | | | — | | | 140,107 | | | — | | | — | | | 140,107 | |
Replacement stock awards issued in connection with acquisition | — | | | — | | | 24,613 | | | — | | | 899 | | | — | | | — | | | 899 | |
| | | | | | | | | | | | | | | |
Change in other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (4,735) | | | — | | | (4,735) | |
Share-based compensation | — | | | — | | | — | | | — | | | 226,182 | | | — | | | — | | | 226,182 | |
Tax withholding related to vesting of restricted stock units | — | | | — | | | (3,013,394) | | | — | | | (189,124) | | | — | | | — | | | (189,124) | |
Conversion feature of convertible senior notes, due 2023, net of allocated costs | — | | | — | | | — | | | — | | | 154,019 | | | — | | | — | | | 154,019 | |
Purchase of bond hedges in conjunction with issuance of convertible senior notes, due 2023 | — | | | — | | | — | | | — | | | (172,586) | | | — | | | — | | | (172,586) | |
Sale of warrants in conjunction with issuance of convertible senior notes, due 2023 | — | | | — | | | — | | | — | | | 112,125 | | | — | | | — | | | 112,125 | |
Issuance of common stock in conjunction with the conversion of senior notes, due 2022 | — | | | — | | | 7,288,907 | | | — | | | (20,962) | | | — | | | — | | | (20,962) | |
Exercise of bond hedges in conjunction with the conversion of senior notes, due 2022 | — | | | — | | | (6,901,567) | | | — | | | — | | | — | | | — | | | — | |
Cumulative adjustment due to adoption of ASC 606 | — | | | — | | | — | | | — | | | — | | | — | | | (4,586) | | | (4,586) | |
Recovery of common stock in connection with indemnification settlement agreement | — | | | — | | | (469,894) | | | — | | | (2,745) | | | — | | | — | | | (2,745) | |
Balance at December 31, 2018 | 0 | | | $ | 0 | | | 417,048,006 | | | $ | 0 | | | $ | 2,012,328 | | | $ | (6,053) | | | $ | (885,774) | | | $ | 1,120,501 | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | 375,446 | | | 375,446 | |
Shares issued in connection with employee stock plans | — | | | — | | | 19,097,950 | | | — | | | 118,550 | | | — | | | — | | | 118,550 | |
| | | | | | | | | | | | | | | |
Change in other comprehensive loss | — | | | — | | | — | | | — | | | — | | | 7,682 | | | — | | | 7,682 | |
Share-based compensation | — | | | — | | | — | | | — | | | 306,201 | | | — | | | — | | | 306,201 | |
Tax withholding related to vesting of restricted stock units | — | | | — | | | (3,077,807) | | | — | | | (212,264) | | | — | | | — | | | (212,264) | |
Issuance of common stock in conjunction with the conversion of senior notes, due 2022 | — | | | — | | | 127 | | | — | | | 3 | | | — | | | — | | | 3 | |
Exercise of bond hedges in conjunction with the conversion of senior notes, due 2022 | — | | | — | | | (250,763) | | | — | | | — | | | — | | | — | | | — | |
Recovery of common stock in connection with indemnification settlement agreement | — | | | — | | | (20,793) | | | — | | | (1,069) | | | — | | | — | | | (1,069) | |
Balance at December 31, 2019 | 0 | | | $ | 0 | | | 432,796,720 | | | $ | 0 | | | $ | 2,223,749 | | | $ | 1,629 | | | $ | (510,328) | | | $ | 1,715,050 | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | 213,105 | | | 213,105 | |
Shares issued in connection with employee stock plans | — | | | — | | | 19,013,638 | | | — | | | 161,984 | | | — | | | — | | | 161,984 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Class A and B common stock | | Additional paid-in | | Accumulated other comprehensive | | Accumulated | | Noncontrolling | | Total stockholders’ |
| | | | | | Shares | | Amount | | capital | | income (loss) | | deficit | | interests | | equity |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Balance at December 31, 2019 | | | | | 432,796,720 | | | $ | — | | | $ | 2,223,749 | | | $ | 1,629 | | | $ | (510,328) | | | $ | — | | | $ | 1,715,050 | |
| Net income | | | | | — | | | — | | | — | | | — | | | 213,105 | | | — | | | 213,105 | |
Shares issued in connection with employee stock plans | | | | | 19,013,638 | | | — | | | 161,984 | | | — | | | — | | | — | | | 161,984 | |
Issuance of common stock in connection with business combination | | | | | 607,974 | | | — | | | 35,319 | | | — | | | — | | | — | | | 35,319 | |
Change in other comprehensive income | | | | | — | | | — | | | — | | | 21,699 | | | — | | | — | | | 21,699 | |
Share-based compensation | | | | | — | | | — | | | 411,673 | | | — | | | — | | | — | | | 411,673 | |
Tax withholding related to vesting of restricted stock units | | | | | (2,852,127) | | | — | | | (314,019) | | | — | | | — | | | — | | | (314,019) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Conversion feature of convertible notes, net of allocated costs | | | | | — | | | — | | | 347,059 | | | — | | | — | | | — | | | 347,059 | |
Purchase of bond hedges in conjunction with issuance of convertible notes | | | | | — | | | — | | | (338,145) | | | — | | | — | | | — | | | (338,145) | |
Sale of warrants in conjunction with issuance of convertible notes | | | | | — | | | — | | | 232,095 | | | — | | | — | | | — | | | 232,095 | |
Issuance of common stock in conjunction with the conversion of convertible notes | | | | | 8,853,484 | | | — | | | 195,749 | | | — | | | — | | | — | | | 195,749 | |
Exercise of bond hedges in conjunction with the conversion of convertible notes | | | | | (2,234,913) | | | — | | | — | | | — | | | — | | | — | | | — | |
Balance at December 31, 2020 | | | | | 456,184,776 | | | $ | — | | | $ | 2,955,464 | | | $ | 23,328 | | | $ | (297,223) | | | $ | — | | | $ | 2,681,569 | |
Cumulative adjustment due to adoption of ASU 2020-06 | | | | | — | | | — | | | (502,707) | | | — | | | 102,974 | | | — | | | (399,733) | |
| Net income (loss) | | | | | — | | | — | | | — | | | — | | | 166,284 | | | (7,458) | | | 158,826 | |
Shares issued in connection with employee stock plans | | | | | 11,975,907 | | | — | | | 126,829 | | | — | | | — | | | — | | | 126,829 | |
Issuance of common stock in connection with business combination | | | | | 118,443 | | | — | | | 28,735 | | | — | | | — | | | — | | | 28,735 | |
Change in other comprehensive loss | | | | | — | | | — | | | — | | | (39,763) | | | — | | | — | | | (39,763) | |
Share-based compensation | | | | | — | | | — | | | 623,067 | | | — | | | — | | | — | | | 623,067 | |
Tax withholding related to vesting of restricted stock units | | | | | (1,403,146) | | | — | | | (323,012) | | | — | | | — | | | — | | | (323,012) | |
Issuance of common stock in conjunction with the conversion of convertible notes | | | | | 5,514,727 | | | — | | | 408,879 | | | — | | | — | | | — | | | 408,879 | |
Exercise of bond hedges in conjunction with the conversion of convertible notes | | | | | (7,446,920) | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
Noncontrolling interests in connection with business combination | | | | | — | | | — | | | — | | | — | | | — | | | 48,192 | | | 48,192 | |
Balance at December 31, 2021 | | | | | 464,943,787 | | | $ | — | | | $ | 3,317,255 | | | $ | (16,435) | | | $ | (27,965) | | | $ | 40,734 | | | $ | 3,313,589 | |
| Net loss | | | | | — | | | — | | | — | | | — | | | (540,747) | | | (12,258) | | | (553,005) | |
Shares issued in connection with employee stock plans | | | | | 11,824,138 | | | — | | | 81,768 | | | — | | | — | | | — | | | 81,768 | |
Issuance of common stock in connection with business combination | | | | | 113,617,352 | | | — | | | 13,827,929 | | | — | | | — | | | — | | | 13,827,929 | |
Change in other comprehensive loss | | | | | — | | | — | | | — | | | (506,655) | | | — | | | — | | | (506,655) | |
Share-based compensation | | | | | — | | | — | | | 1,092,010 | | | — | | | — | | | — | | | 1,092,010 | |
Tax withholding related to vesting of restricted stock units | | | | | (37,629) | | | — | | | (4,735) | | | — | | | — | | | — | | | (4,735) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Convertible preferred stock | | Class A and B common stock | | Additional paid-in | | Accumulated other comprehensive | | Accumulated | | Total stockholders’ |
| | Shares | | Amount | | Shares | | Amount | | capital | | income (loss) | | deficit | | equity |
Issuance of common stock in connection with business combination | — | | | — | | | 607,974 | | | — | | | 35,319 | | | — | | | — | | | 35,319 | |
Change in other comprehensive loss | — | | | — | | | — | | | — | | | — | | | 21,699 | | | — | | | 21,699 | |
Share-based compensation | — | | | — | | | — | | | — | | | 411,673 | | | — | | | — | | | 411,673 | |
Tax withholding related to vesting of restricted stock units | — | | | — | | | (2,852,127) | | | — | | | (314,019) | | | — | | | — | | | (314,019) | |
Conversion feature of convertible senior notes, due 2027, net of allocated costs | — | | | — | | | — | | | — | | | 109,207 | | | — | | | — | | | 109,207 | |
Purchase of bond hedges in conjunction with issuance of convertible senior notes, due 2027 | — | | | — | | | — | | | — | | | (104,305) | | | — | | | — | | | (104,305) | |
Sale of warrants in conjunction with issuance of convertible senior notes, due 2027 | — | | | — | | | — | | | — | | | 68,022 | | | — | | | — | | | 68,022 | |
Conversion feature of convertible senior notes, due 2026, net of allocated costs | — | | | — | | | — | | | — | | | 85,594 | | | — | | | — | | | 85,594 | |
Purchase of bond hedges in conjunction with issuance of convertible senior notes, due 2026 | — | | | — | | | — | | | — | | | (84,640) | | | — | | | — | | | (84,640) | |
Sale of warrants in conjunction with issuance of convertible senior notes, due 2026 | — | | | — | | | — | | | — | | | 64,573 | | | — | | | — | | | 64,573 | |
Conversion feature of convertible senior notes, due 2025, net of allocated costs | — | | | — | | | — | | | — | | | 152,258 | | | — | | | — | | | 152,258 | |
Purchase of bond hedges in conjunction with issuance of convertible senior notes, due 2025 | — | | | — | | | — | | | — | | | (149,200) | | | — | | | — | | | (149,200) | |
Sale of warrants in conjunction with issuance of convertible senior notes, due 2025 | — | | | — | | | — | | | — | | | 99,500 | | | — | | | — | | | 99,500 | |
Issuance of common stock in conjunction with the conversion of senior notes, due 2022 | — | | | — | | | 8,853,484 | | | — | | | 195,749 | | | — | | | — | | | 195,749 | |
Exercise of bond hedges in conjunction with the conversion of senior notes, due 2022 | — | | | — | | | (2,234,913) | | | — | | | — | | | — | | | — | | | — | |
Balance at December 31, 2020 | 0 | | | $ | 0 | | | 456,184,776 | | | $ | 0 | | | $ | 2,955,464 | | | $ | 23,328 | | | $ | (297,223) | | | $ | 2,681,569 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Class A and B common stock | | Additional paid-in | | Accumulated other comprehensive | | Accumulated | | Noncontrolling | | Total stockholders’ |
| | | | | | Shares | | Amount | | capital | | income (loss) | | deficit | | interests | | equity |
Issuance of common stock in conjunction with the conversion of convertible notes | | | | | 20,055 | | | — | | | 454 | | | — | | | — | | | — | | | 454 | |
Exercise of bond hedges in conjunction with the conversion of convertible notes | | | | | (1,188,734) | | | — | | | — | | | — | | | — | | | — | | | — | |
Issuance of common stock in connection with the exercise of common stock warrants | | | | | 10,880,573 | | | — | | | — | | | — | | | — | | | — | | | — | |
Balance at December 31, 2022 | | | | | 600,059,542 | | | $ | — | | | $ | 18,314,681 | | | $ | (523,090) | | | $ | (568,712) | | | $ | 28,476 | | | $ | 17,251,355 | |
SeeThe accompanying notesNotes to consolidated financial statements.the Consolidated Financial Statements are an integral part of this statement.
SQUARE,BLOCK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
Cash flows from operating activities: | | | | | |
Net income (loss) | $ | 213,105 | | | $ | 375,446 | | | $ | (38,453) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | |
Depreciation and amortization | 84,212 | | | 75,598 | | | 60,961 | |
Non-cash interest and other | 76,129 | | | 33,478 | | | 28,512 | |
Loss on extinguishment of long-term debt | 6,651 | | | 0 | | | 5,047 | |
Non-cash lease expense | 70,253 | | | 29,696 | | | 0 | |
Share-based compensation | 397,800 | | | 297,863 | | | 216,881 | |
Replacement stock awards issued in connection with acquisition | 0 | | | 0 | | | 899 | |
Gain on sale of asset group | 0 | | | (373,445) | | | 0 | |
Loss (gain) on revaluation of equity investment | (295,297) | | | 12,326 | | | (20,342) | |
| | | | | |
Transaction and loan losses | 177,670 | | | 126,959 | | | 88,077 | |
Change in deferred income taxes | (8,016) | | | (1,376) | | | (646) | |
| | | | | |
| | | | | |
Changes in operating assets and liabilities: | | | | | |
Settlements receivable | (473,871) | | | (248,271) | | | 245,795 | |
Customer funds | (1,151,536) | | | (204,208) | | | (131,004) | |
Purchase of loans held for sale | (1,837,137) | | | (2,266,738) | | | (1,609,611) | |
Sales and principal payments of loans held for sale | 1,505,406 | | | 2,168,682 | | | 1,579,834 | |
| | | | | |
| | | | | |
| | | | | |
Customers payable | 1,733,138 | | | 523,795 | | | 15,597 | |
Settlements payable | 143,528 | | | 41,697 | | | (60,651) | |
Charge-offs to accrued transaction losses | (73,613) | | | (78,325) | | | (58,192) | |
Other assets and liabilities | (186,819) | | | (47,478) | | | (27,624) | |
| | | | | |
| | | | | |
| | | | | |
Net cash provided by operating activities | 381,603 | | | 465,699 | | | 295,080 | |
Cash flows from investing activities: | | | | | |
Purchase of marketable debt securities | (1,322,362) | | | (992,583) | | | (1,000,346) | |
Proceeds from maturities of marketable debt securities | 607,134 | | | 430,888 | | | 197,454 | |
Proceeds from sale of marketable debt securities | 585,427 | | | 548,619 | | | 171,992 | |
Purchase of marketable debt securities from customer funds | (642,252) | | | (311,499) | | | (148,096) | |
Proceeds from maturities of marketable debt securities from customer funds | 382,887 | | | 158,055 | | | 0 | |
Proceeds from sale of marketable debt securities from customer funds | 51,430 | | | 17,493 | | | 48,334 | |
Purchase of property and equipment | (138,402) | | | (62,498) | | | (61,203) | |
Purchase of other investments | (51,277) | | | (15,250) | | | 0 | |
Proceeds from sale of equity investment | 0 | | | 33,016 | | | 0 | |
Purchase of intangible assets | 0 | | | 0 | | | (1,584) | |
Proceeds from sale of asset group | 0 | | | 309,324 | | | 0 | |
Business combinations, net of cash acquired | (79,221) | | | (20,372) | | | (112,399) | |
Net cash provided by (used in) investing activities: | (606,636) | | | 95,193 | | | (905,848) | |
Cash flows from financing activities: | | | | | |
Proceeds from issuance of convertible senior notes, net | 2,116,544 | | | 0 | | | 855,663 | |
Purchase of convertible senior note hedges | (338,145) | | | 0 | | | (172,586) | |
Proceeds from issuance of warrants | 232,095 | | | 0 | | | 112,125 | |
Principal payment on conversion of senior notes | 0 | | | 0 | | | (219,384) | |
Proceeds from PPP Liquidity Facility advances | 464,094 | | | 0 | | | 0 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Proceeds from the exercise of stock options and purchases under the employee stock purchase plan, net | 161,985 | | | 118,514 | | | 133,850 | |
Payments for tax withholding related to vesting of restricted stock units | (314,019) | | | (212,264) | | | (189,124) | |
Other financing activities | (7,359) | | | (5,124) | | | (4,789) | |
Net cash provided by (used in) financing activities | 2,315,195 | | | (98,874) | | | 515,755 | |
Effect of foreign exchange rate on cash and cash equivalents | 12,995 | | | 3,841 | | | (7,221) | |
Net increase (decrease) in cash, cash equivalents and restricted cash | 2,103,157 | | | 465,859 | | | (102,234) | |
Cash, cash equivalents and restricted cash, beginning of the year | 1,098,706 | | | 632,847 | | | 735,081 | |
Cash, cash equivalents and restricted cash, end of the year | $ | 3,201,863 | | | $ | 1,098,706 | | | $ | 632,847 | |
See | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Cash flows from operating activities: | | | | | |
Net income (loss) | $ | (553,005) | | | $ | 158,826 | | | $ | 213,105 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | |
Depreciation and amortization | 340,523 | | | 134,757 | | | 84,212 | |
Amortization of discounts and premiums and other non-cash adjustments | (592,489) | | | 31,104 | | | 76,129 | |
Loss on extinguishment of long-term debt | — | | | — | | | 6,651 | |
Non-cash lease expense | 129,811 | | | 83,137 | | | 70,253 | |
Share-based compensation | 1,071,278 | | | 608,040 | | | 397,800 | |
| | | | | |
| | | | | |
Gains on revaluation of equity investments | (73,457) | | | (35,492) | | | (295,297) | |
| | | | | |
Transaction, loan, and consumer receivable losses | 550,683 | | | 187,991 | | | 177,670 | |
Bitcoin impairment losses | 46,571 | | | 71,126 | | | — | |
Change in deferred income taxes | (69,593) | | | (10,435) | | | (8,016) | |
| | | | | |
| | | | | |
Changes in operating assets and liabilities: | | | | | |
Settlements receivable | (1,499,057) | | | (346,217) | | | (547,484) | |
Purchases and originations of loans | (6,114,847) | | | (3,227,172) | | | (1,837,137) | |
Proceeds from payments and forgiveness of loans | 6,040,369 | | | 3,067,344 | | | 1,505,406 | |
| | | | | |
| | | | | |
| | | | | |
Customers payable | 1,060,861 | | | 171,555 | | | 371,598 | |
Settlements payable | 207,894 | | | 15,249 | | | 143,528 | |
Other assets and liabilities | (369,639) | | | (61,983) | | | (185,308) | |
| | | | | |
| | | | | |
| | | | | |
Net cash provided by operating activities | 175,903 | | | 847,830 | | | 173,110 | |
Cash flows from investing activities: | | | | | |
Purchases of marketable debt securities | (755,697) | | | (2,714,560) | | | (1,322,362) | |
Proceeds from maturities of marketable debt securities | 999,569 | | | 831,019 | | | 607,134 | |
Proceeds from sale of marketable debt securities | 449,723 | | | 617,097 | | | 585,427 | |
Purchases of marketable debt securities from customer funds | — | | | (488,851) | | | (642,252) | |
Proceeds from maturities of marketable debt securities from customer funds | 73,000 | | | 505,501 | | | 382,887 | |
Proceeds from sale of marketable debt securities from customer funds | 316,576 | | | 35,071 | | | 51,430 | |
Payments for originations of consumer receivables | (18,361,871) | | | — | | | — | |
Proceeds from principal repayments and sales of consumer receivables | 18,192,470 | | | — | | | — | |
Purchases of property and equipment | (170,815) | | | (134,320) | | | (138,402) | |
Purchases of bitcoin investments | — | | | (170,000) | | | (50,000) | |
Purchases of other investments | (56,712) | | | (48,510) | | | (1,277) | |
Proceeds from sale of equity investments | — | | | 420,644 | | | — | |
| | | | | |
| | | | | |
Business combinations, net of cash acquired | 539,453 | | | (163,970) | | | (79,221) | |
Net cash provided by (used in) investing activities | 1,225,696 | | | (1,310,879) | | | (606,636) | |
The accompanying notesNotes to consolidated financial statements.the Consolidated Financial Statements are an integral part of this statement.
BLOCK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(In thousands)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Cash flows from financing activities: | | | | | |
Proceeds from issuance of convertible notes, net | — | | | — | | | 2,116,544 | |
Purchases of senior note hedges | — | | | — | | | (338,145) | |
Proceeds from issuance of warrants | — | | | — | | | 232,095 | |
Proceeds from issuance of senior notes, net | — | | | 1,971,828 | | | — | |
Payments to redeem convertible notes | (1,071,788) | | | — | | | — | |
Proceeds from PPP Liquidity Facility advances | — | | | 681,539 | | | 464,094 | |
Repayments of PPP Liquidity Facility advances | (480,694) | | | (648,100) | | | — | |
Proceeds from warehouse facilities borrowings | 1,620,805 | | | — | | | — | |
Repayments of warehouse facilities borrowings | (391,463) | | | — | | | — | |
Proceeds from the exercise of stock options and purchases under the employee stock purchase plan | 81,768 | | | 126,719 | | | 161,985 | |
Payments for tax withholding related to vesting of restricted stock units | (4,735) | | | (323,011) | | | (314,019) | |
Net increase in interest-bearing deposits | 82,049 | | | 59,844 | | | — | |
Other financing activities | (87,692) | | | (9,948) | | | (7,359) | |
| | | | | |
Change in customer funds, restricted from use in the Company's operations | 349,330 | | | 793,163 | | | 1,361,540 | |
Net cash provided by financing activities | 97,580 | | | 2,652,034 | | | 3,676,735 | |
Effect of foreign exchange rate on cash and cash equivalents | (38,363) | | | (7,066) | | | 12,995 | |
Net increase in cash, cash equivalents, restricted cash, and customer funds | 1,460,816 | | | 2,181,919 | | | 3,256,204 | |
Cash, cash equivalents, restricted cash, and customer funds, beginning of the period | 6,975,090 | | | 4,793,171 | | | 1,536,967 | |
Cash, cash equivalents, restricted cash, and customer funds, end of the period | $ | 8,435,906 | | | $ | 6,975,090 | | | $ | 4,793,171 | |
| | | | | |
Reconciliation of cash, cash equivalents, restricted cash, and customer funds: | | | | | |
Cash and cash equivalents | $ | 4,544,202 | | | $ | 4,443,669 | | | $ | 3,158,058 | |
Short-term restricted cash | 639,780 | | | 18,778 | | | 30,279 | |
Long-term restricted cash | 71,600 | | | 71,702 | | | 13,526 | |
Customer funds cash and cash equivalents | 3,180,324 | | | 2,440,941 | | | 1,591,308 | |
Total | $ | 8,435,906 | | | $ | 6,975,090 | | | $ | 4,793,171 | |
The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement.
SQUARE,BLOCK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Square,Block, Inc. (together with its subsidiaries, Square"Block" or the Company)"Company") creates tools that empower businesses, sellers, and individuals to participate in the economy. Block is comprised of two reportable segments, Square enablesand Cash App. Square is a cohesive commerce ecosystem that helps sellers start, run, and grow their businesses, including enabling sellers to accept card payments, and also providesprovide reporting and analytics, and facilitate next-day settlement. Square’s point-of-sale software and other business services help sellers manage inventory, locations, and employees; access financing; engage buyers; build a website or online store; and grow sales. Cash App is an easy wayecosystem of financial products and services to help consumers manage their money by providing financial tools that allow individuals to store, send, receive, spend, and storeinvest their money. Cash App seeks to redefine the world’s relationship with money by making it more relatable, instantly available, and universally accessible.
On OctoberJanuary 31, 2019,2022, the Company completed the saleacquisition of the Caviar business, a food ordering service. SquareAfterpay Limited (“Afterpay”), to strengthen its position to better deliver compelling financial products and services that expand access to more consumers and drive incremental revenue for merchants of all sizes. Refer to Note 9, Acquisitions for further details.
Block was founded in 2009 and is headquarteredhas offices globally. The Company does not designate a headquarters location as it adopted a distributed work model in San Francisco, with offices in the United States, Canada, Japan, Australia, Ireland, the United Kingdom, Spain, and Lithuania.2021.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP)("U.S. GAAP") and the applicable rules and regulations of the Securities and Exchange Commission ("SEC"). The consolidated financial statements include the accountsfinancial statements of the CompanyBlock and its wholly-owned and majority-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Minority interests are recorded as a noncontrolling interest, which is reported as a component of stockholders' equity on the consolidated balance sheets.
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, as well as related disclosure of contingent assets and liabilities. Actual results could differ from the Company’s estimates. To the extent that there are material differences between these estimates and actual results, the Company’s financial condition or operating results will be materially affected. The Company bases its estimates on current and past experience, to the extent that historical experience is predictive of future performance and other assumptions that the Company believes are reasonable under the circumstances. The Company evaluates these estimates on an ongoing basis.
Estimates, judgments, and assumptions in these consolidated financial statements include, but are not limited to, those related to revenue recognition, accrued transaction losses, contingencies, valuation of the debt component of convertible senior notes, valuation of loans held for sale including loans under the Paycheck Protection Program ("PPP"), valuation of goodwill and acquired intangible assets, deferred revenue,accrued transaction losses, valuation of loans held for sale and investment, determination of allowance for loan loss reserves for loans held for investment, determination of allowance for credit losses for consumer receivables, pre-acquisition contingencies associated with business combinations, allocation of acquired goodwill to reporting units, assessing contingencies including the likelihood of adverse outcomes from claims and disputes, accrued royalties, income and other taxes, operating and financing lease right-of-use assets and related liabilities, assessing the likelihood of adverse outcomes from claims and disputes, and share-based compensation.
In March 2020, the World Health Organization declared the COVID-19 pandemic a global pandemic. The Company operates in geographic locations that have been impacted by COVID-19 and that are subject to various mandated public health ordinances, which have impacted the business operations of the Company and its customers. As a consequence of the pandemic and evolving public health orders, the Company’s customers will continue to be exposed to various uncertainties that could negatively impact their ability to repay outstanding amounts, or even continue in business. The Company continues to revise and update the carrying values of its assets or liabilities based on estimates, judgments and circumstances it is aware of, particularly, the expected impact of COVID-19.
Due to the impact of the COVID-19 pandemic, the Company’sCompany's estimates of accrued transaction losses and valuation of loans held for sale were subject to greater uncertainty. The Company's estimates wereand investment, allowance for credit losses associated with consumer receivables, and accrued transaction losses are based on historical experience, adjusted for market data relevant to the current economic environment. Additionally, theThe Company incorporated market data for similar historical periods of unprecedented economic conditionswill continue to update its estimates as developments occur and uncertainty in developing such estimates and assumptions. See Note 11 Other Consolidated Balance Sheet Components (Current), for further details on transaction losses andadditional information is obtained. Refer to Note 5, Fair Value of Financial InstrumentsMeasurements, for further details on amortized cost over fair value of the loans. These estimates may change, as new events developloans; Note 6, Consumer Receivables, net for further details on consumer receivables; and additional information is obtained. The Company has continued to refine its estimatesNote 12, Other Consolidated Balance Sheet Components (Current) for further details on transaction and loan losses based on actual realized results. Actual results could differ from the estimates, and such differences may be material to the Company's financial statements.
losses.
Reclassification to Statement of Operations
Beginning in the second quarter of 2022, the Company reclassified its consolidated statements of operations to present the amortization of acquired technology assets and amortization of customer and other acquired intangible assets as separate line items. Previously, these expenses were classified within transaction-based costs and subscription and services-based costs in cost of revenue; and product development and general and administrative operating expenses, respectively. Prior period amounts have been revised to reflect these reclassifications to the presentation. There were no changes to gross profit, total operating expenses, operating income (loss), income (loss) before income tax, or net income (loss) as a result of these reclassifications.
Concentration of Credit Risk
For the years ended December 31, 2022, 2021, and 2020, the Company had no customer that accounted for greater than 10% of total net revenue.
As of December 31, 2022, the Company had two third-party payment processors that represented approximately 54% and 31% of settlements receivable. As of December 31, 2021, these two parties represented approximately 52% and 30% of settlements receivable. In both years, all other third-party processors were insignificant.
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, marketable debt securities, settlements receivable, customer funds, consumer receivables, loans held for sale, and loans held for investment. The extentassociated risk of concentration for cash and cash equivalents and restricted cash is mitigated by banking with creditworthy institutions. At certain times, amounts on deposit exceed federal deposit insurance limits. The associated risk of concentration for marketable debt securities is mitigated by holding a diversified portfolio of highly rated investments. Settlements receivable are amounts due from well-established payment processing companies and normally take one or two business days to settle which mitigates the associated risk of concentration. The associated risk of concentration for loans and consumer receivables is partially mitigated by credit evaluations that are performed prior to facilitating the offering of loans and receivables and ongoing performance monitoring of the impact of COVID-19 on the Company's operational and financial performance will depend on certain developments, including, but not limited to, the duration, extent of spread and severity of the outbreak, duration and changes to local, state and federal issued public health orders, impact on our customers and our sales cycles, impact on our employees, various government stimulus assistance programs, and impact on regional and worldwide economies and financial markets in generaCompany’s loan customers.
l,
all of which are uncertain and cannot be predicted.
Significant Accounting Policies
Revenue Recognition
Revenue is recognized when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.
Transaction-based revenueRevenue
The Company charges its sellers a transaction fee for managed payments solutions that is generally calculated as a percentage of the total transaction amount processed. The Company selectively offers custom pricing for certain large sellers. The Company collects the transaction amount from the seller's customer's bank, net of acquiring interchange and assessment fees, processing fees, and bank settlement fees paid to third-party payment processors and financial institutions. The Company retains its fees and remits the net amount to the sellers.
The Company acts as the merchant of record for its sellers and works directly with payment card networks and banks so that its sellers do not need to manage the complex systems, rules, and requirements of the payments industry. The Company satisfies its performance obligations and therefore recognizes the transaction fees as revenue upon authorization of a transaction by the seller's customer's bank. The Company applies the optional exemption allowed under ASC 606 not to disclose consideration attributable to performance obligations for future transaction processing since the term of the contract with a seller is not defined and any future consideration on the contract would be dependent on the value and volume of transactions processed in the future, which are not determinable.
Revenue is recognized net of refunds, which arise from reversals of transactions initiated by sellers.
The transaction fees collected from sellers are recognized as revenue on a gross basis as the Company is the principal in the delivery of the managed payments solutions to the sellers. The Company has concluded it is the principal because as the merchant of record, it controls the services before delivery to the seller, it is primarily responsible for the delivery of the services to its sellers, and it has discretion in setting prices charged to sellers. The Company also has the unilateral ability to accept or reject a transaction based on criteria established by the Company. As the merchant of record, Square is liable for the costs of processing the transactions for its sellers, and records such costs within cost of revenue.
The Company also charges certain Cash App customers making peer-to-peer transactions using business accounts, or funding transactions with a credit card, a transaction fee that is generally calculated as a percentage of the total transaction amount processed. The Company collects the transaction amount from the customer's Cash App account, net of incurring interchange and assessment fees, processing fees, and bank settlement fees paid to third-party payment processors and financial institutions. The Company retains its fees and remits the net amount to the customers.
Subscription and services-based revenueServices-based Revenue
Subscription and services-based revenue is primarily comprised of revenue the Company generates from Cash App including Instant Deposit and Cash App Card, Square Capital,Loans, Afterpay's buy now, pay later ("BNPL") platform, website hosting and domain name registration services, TIDAL, and various other software as a service (SaaS)("SaaS") products.
Instant Deposit is a functionality within the Cash App and the Company's managed payments solution that enables customers, including individuals and sellers, to instantly deposit funds into their bank accounts.
The Company charges a per transaction fee which is recognized as revenue when customers instantly deposit funds to their bank account. The Company alsoCash App Card offers Cash App customers the ability to use fundstheir stored in the Cash Appfunds via a Visa prepaid card (Cash Card), for whichthat is linked to the balance the customer stores in Cash App. The Company charges the customer a per transaction fee thatwhen they instantly deposit funds to their bank account or withdraw funds from an ATM. The Company also earns interchange fees when a Cash App Card is recordedused to make a purchase. These transaction and interchange fees are treated as revenue.revenue when charged.
Square CapitalLoans (formerly Square Capital) facilitates a loan thatloans to qualified Square sellers through the Company's subsidiary, Square Financial Services ("SFS"), which is offered through a partnership with an industrial bank that isloan corporation. The loans are either repaid through withholding a percentage of the collections of the seller's receivables processed by the Company or a specified monthly amount. The Company generally facilitates loans to its sellers throughutilizes a pre-qualification process that includes an analysis of the aggregated data of the seller’s business which includes, but is not limited to, the seller’s historical processing volumes, transaction count, chargebacks, growth, and length of time as a Square customer. The Company also facilitates loans toGenerally, the customers of certain sellers as well as to the sellers of its partners who do not process payments through the Company. The loans are generally originated by a bank partner, from whom the Company purchases the loans obtaining all rights, title, and interest. The loans have no stated coupon rate but the seller is charged a one-time origination fee by the bank partner based upon their risk rating, which is derived primarily from processing activity. ItFor some of the loans, it is the Company’s intent to sell all
of its rights, title, and interest of these loans to third-party investors for an upfront fee when the loans are sold. The Company records the amounts advanced to the customers or the net amounts paid to purchase the bankloans as the cost of the loans purchased and subsequentlyloans. Subsequently, the Company records a gain on sale of the loans to the third-party investors as revenue upon transfer of title. The Company is retained by the third-party investors to service the loans and earns a servicing fee for facilitating the repayment of these receivables through its managed payments solutions. The Company records servicing revenue as servicing is delivered. For the loans which are not immediately sold to third-party investors or for which the Company recognizeshas the intent and ability to hold through maturity, interest and fees earned are recognized as revenue using the effective interest method.
Cash App Borrow, the Company’s first credit product for consumers, allows customers to access short-term loans for a portionsmall fee. The loans are repaid at the end of the expected seller repayments overloan term and customers may elect to prepay all or a part of the outstanding balance. If the outstanding balance is not paid when due, late fees in the form of interest may be charged. The short-term loans are facilitated through a partnership with an industrial bank. The loans are originated by the bank partner, from whom the Company purchases the loans obtaining all rights, title, and interest. Net amounts paid to the bank are recorded as the cost of the loans purchased, and amounts collected in excess of the carrying value are recognized as revenue in proportion toover the life of the loans. The loan principal reduction.fee and late fees are recorded within subscription and services-based revenue on the consolidated statement of operations.
Through the BNPL platform, consumers can pay for their purchases over time by splitting their purchase price into generally three or four installments, typically due in two-week increments, without paying fees (if payments are made on time). The Company offers customers website hosting services forgenerally pays the seller the full order value upfront, less taxes, if applicable, and a merchant fee, that is generally billed at inception.which consists of fixed and variable rates as contracted with the sellers. The Company also actsincurs other costs such as fees paid to third-party partners and processing fees to complete the consumer purchase transaction. The Company generally assumes non-repayment risk from the consumers. The Company initially recognizes a resellerconsumer receivable equal to net amounts paid to the seller plus any costs incurred to originate the consumer receivable. The Company recognizes the merchant fee less costs incurred to originate the consumer receivables as revenue using the effective interest method. This revenue is included within subscription and services-based revenue on the consolidated statement of domain names registrationoperations. The effective interest rate is determined based on estimated future cash receipts over the expected life of the consumer receivable, having consideration for the historical repayment pattern of the consumer receivables on a portfolio basis. For the majority of the Company's BNPL products, consumers are not charged interest or fees, other than late fees which may be charged in certain regions by the Company as an incentive to encourage consumers to pay their outstanding balances as and when they fall due. As of October 2022, the Company also offers the ability for consumers to pay for larger transaction sizes over a six- or twelve-month period using a monthly payment option, which includes no late fees and no compounding interest with a cap on total interest owed.
TIDAL primarily generates revenue from subscriptions to its customers, and such subscriptions allow access to the song library, video library, and improved sound quality. Customers can subscribe to services directly from the TIDAL website or through the Apple store. With both offerings, the Company charges customers a monthly fee for a registrar for a fee,those subscription services, which is also generally billed at inception. The Company considers that it satisfies its performance obligations over time andrecognized ratably as such recognizes revenue ratably overas the term of the relevant arrangements, which vary from one month to twenty four months for website hosting, and one year to ten years for domain name registration.service is provided.
SaaS represents software products and solutions that provide customers with access to various technologies for a fee which is recognized as revenue ratably as the service is provided. The Company's contracts with customers are generally for a term of one month and renew automatically each month. The Company invoices its customers monthly. The Company considers that it satisfies its performance obligations over time each month as it provides the SaaS services to customers and hence recognizes revenue ratably over the month.
Subscription and services revenue also included revenue generated from Caviar, a food ordering platform that facilitated food delivery services that was sold by the Company on October 31, 2019. The performance obligations were the delivery of food orders from restaurants to customers and the provision of catered meals to corporate customers. For delivery of food orders, the Company charged fees to restaurants, as sellers, and also charged delivery and service fees to individuals. For provision of catered meals the Company charged corporate customers a fee. All fees were billed upon delivery of food orders or catered meals, when the Company considers that it has satisfied its performance obligations.Hardware Revenue was recognized upon delivery of the food orders or catered meals, net of refunds. Refunds were estimated based on historical experience.
Hardware revenue
includes revenue from sales of magstripe readers, contactless and chip readers, Square Stand, Square Register, Square Terminal, and third-party peripherals. Third-party peripherals include cash drawers, receipt printers, scales, and barcode scanners, all of which can be integrated with Square Stand, Square Register, or Square Terminal to provide a comprehensive point-of-sale solution. The Company generates revenue through the sale of hardware through e-commerce and through its retail distribution channels. The Company satisfies its performance obligation upon delivery of hardware to its customers whowhich include end user customers, distributors, and retailers. The Company allows for customer returns which are accounted for as variable consideration. The Company estimates these amounts based on historical experience and reduces revenue recognized. The Company invoices end user customers upon delivery of the products to customers, and payments from such customers are due upon invoicing. Distributors and retailers have payment terms that range from 30 to 90 days after delivery.
The Company offers hardware installment sales to customers with terms ranging from three to twenty four months. The Company allocates a portion of the consideration received from these arrangements to a financing component when it determines that a significant financing component exists. The financing component is subsequently recognized as financing revenue separate from hardware revenue, within subscription and services-based revenue, over the terms of the arrangement with the customer. Pursuant to practical expedients afforded under ASC 606, the Company does not recognize a financing component for hardware installment sales that have a term of one year or less.
Bitcoin revenueRevenue
The Company offers its Cash App customers the ability to purchase bitcoin, a cryptocurrency denominated asset, from the Company. The Company satisfies its performance obligation and records revenue when bitcoin is transferred to the customer's account. The Company purchases bitcoin from private broker dealers or from Cash App customers and applies a small marginmarginal fee before selling it to its customers. The sale amounts received from customers are recorded as revenue on a gross basis and the associated bitcoin cost as cost of revenues, as the Company is the principal in the bitcoin sale transaction. The Company has concluded it is the principal because it controls the bitcoin before delivery to the customers, it is primarily responsible for the delivery of the bitcoin to the customers, it is exposed to risks arising from fluctuations of the market price of bitcoin before delivery to customers, and has discretion in setting prices charged to customers.
Arrangements with Multiple Performance Obligations
The Company's contracts with customers generally do not include multiple performance obligations with differing patterns of revenue recognition, except for domain name registration offered with website hosting services. The Company offers its customers the option to buy website hosting bundled with domain name registration, and infrequently the Company has offered its hardware customers free managed payments solutions with the purchase of its hardware as part of a marketing promotion. For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price. The Company determines standalone selling prices based on the prices charged to customers since the Company's products and services are normally sold on a stand alone basis.
Cost of Revenue
Transaction-based costsCosts
Transaction-based costs consist primarily of interchange and assessment fees, processing fees and bank settlement fees paid to third-party payment processors and financial institutions.
Subscription and services-based costsServices-based Costs
SubscriptionSubscriptions and services-based costs consist primarily of Caviar-related costs, which included processing and partnership fees paymentsrelated to third-party couriers for deliveries and the cost of equipment provided to sellers. Caviar-related costs for catered meals also included food costs and personnel costs. Subscriptions and services-based costs also includeCash App including Instant Deposit, Cash App Card, as well as costs associated with Cash Cardthe Company's BNPL platform, and Instant Deposit. The Caviar business was sold in the fourth quarter of 2019.TIDAL.
Hardware costsCosts
Hardware costs consist of all product costs associated with contactless and chip readers, chip card readers, Square Stand, Square Register, Square Terminal, and third-party peripherals. Product costs consist ofinclude third-party manufacturingmanufacturing-related overhead and personnel-related costs, certain royalties, packaging, and fulfillment costs.
Bitcoin costsCosts
Bitcoin cost of revenue comprisescosts consist of the amountstotal amount the Company pays to purchase bitcoin which willthat is sold to customers. These costs fluctuate in line with the price of bitcoin in the market.revenue.
Other Costs
OtherGenerally, other costs such as employeepersonnel-related costs, rent, and occupancy charges are generally not allocated to cost of revenues and are reflected in operating expenses.
expenses and are not material.
Sales and Marketing Expenses
Advertising costs are expensed as incurred and included in sales and marketing expense inexpenses on the consolidated statements of operations. Total advertising costs for the years ended December 31, 2022, 2021, and 2020 2019, and 2018 were $544.2 million, $435.8 million, and $224.7 million, $142.7 million, and $101.9 million, respectively. In addition, The Company also records services, incentives, and other costs to customers that are not directly related to a revenue generating transaction are recorded as sales and marketing expenses, as the Company considers these to be marketing costs to encourage the usage of Cash App. These expenses include, but are not limited to, Cash App peer-to-peer processing costs and related transaction losses, card issuance costs, customer referral bonuses, and promotional giveaways, and were $635.3giveaways. These costs are expensed as incurred. The Company recorded $840.0 million, $279.7$778.3 million, and $149.0$635.3 million, for the years ended December 31, 2022, 2021, and 2020, 2019, and 2018, respectively.respectively, for such expenses.
Share-based Compensation
Share-based compensation expense relates to stock options, restricted stock awards (RSAs)("RSAs"), restricted stock units (RSUs)("RSUs"), and purchases under the Company’s 2015 Employee Stock Purchase Plan (ESPP)("ESPP") which is measured based on the grant-date fair value. The fair value of RSAs and RSUs is determined by the closing price of the Company’s common stock on each grant date. The fair value of stock options and ESPP shares granted to employees is estimated on the date of grant
using the Black-Scholes-Merton option valuation model. This share-based compensation expense valuation model requires the Company to make assumptions and judgments regarding the variables used in the calculation. These variables include the expected term (weighted average(weighted-average period of time that the options granted are expected to be outstanding), the expected volatility of the Company’s stock, expected risk-free interest rate, and expected dividends. The Company uses the simplified calculation of expected term, defined as an average of the vesting term and the contractual term to maturity. Expected volatility is based on a weighted averageweighted-average of the historical volatilities of the Company's common stock along with several entities with characteristics similar to those of the Company. In May 2020, the Company began using its own volatility, as the Company uses its own historical stock price information, such that a peer group is no longer considered necessary.stock. The expected risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. Share-basedGenerally, share-based compensation expense is recorded on a straight-line basis over the requisite service period. The Company accounts for forfeitures as they occur.
Interest Income and Expense net
Interest income consists of interest income from the Company's investment in marketable debt securities and interest expense relatesrelating to the Company's long-term debt. Interest income and interest expense were both immaterial for the years ended December 31, 2020, 2019,2022, 2021, and 2018 were $18.3 million, $23.4 million,2020.
Foreign Currency
The functional currency for most subsidiaries outside of the United States is the local currency. For purposes of the Company's consolidated financial statements, the assets and $19.8 million, respectively. Interest expenseliabilities of these subsidiaries, including goodwill and acquired intangible assets, are translated into U.S. dollars using the exchange rates at the balance sheet dates. Gains and losses resulting from these translations are reported as a component of accumulated other comprehensive income (loss) on the consolidated statements of comprehensive income (loss). Revenue, expenses, and gains or losses are translated into U.S. dollars using average exchange rates for each period.
Gains and losses from the years ended December 31, 2020, 2019, and 2018 were $75.2 million, $44.9 million, and $37.8 million, respectively.remeasurement of foreign currency transactions into the functional currency are recognized as a component of other income, net on the consolidated statements of operations.
Income and Other Taxes
The Company reports income taxes under the asset and liability approach. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating loss and tax credit carryforwards. Deferred tax amounts are determined by using the enacted tax rates expected to be in effect when the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
A valuation allowance reduces the deferred tax assets to the amount that is more likely than not to be realized. The Company considers historical information, tax planning strategies, the expected timing of the reversal of existing temporary differences, and may rely on financial projections to support its position on the recoverability of deferred tax assets. The Company’s judgment regarding future profitability contains significant assumptions and estimates of future operations. If such assumptions were to differ significantly from actual future results of operations, it may have a material impact on the Company’s ability to realize its deferred tax assets. At the end of each period, the Company assesses the ability to realize the deferred tax assets. If it is more likely than not that the Company wouldwill not realize the deferred tax assets, then the Company would establishestablishes a valuation allowance for all or a portion of the deferred tax assets.
The Company recognizes the effect of uncertain income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that has a greater than 50% likelihood of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to uncertain tax positions in the provision (benefit) for income tax expense on the consolidated statements of operations.
Cash and Cash Equivalents, and Restricted Cash, and Customer Funds
Cash and Cash Equivalents
The Company considers all highly liquid investments, including money market funds, with an original maturity of three months or less when purchased to be cash equivalents.
AsRestricted Cash
The Company records restricted cash amounts as a current asset on the consolidated balance sheets if the restriction expires in less than 12 months, or as a non-current asset if the restriction is 12 months or longer. If there is no minimum time frame during which the cash must remain restricted, the nature of the transactions related to the restriction determine the classification.
The Company's short-term restricted cash was $639.8 million and $18.8 million as of December 31, 20202022 and 2019,2021, respectively. The balance as of December 31, 2022 was primarily comprised of cash held by the wholly-owned consolidated entities used in the warehouse funding facility arrangements. This restricted cash of $30.3 million and $38.9 million, respectively, is relatedwill be used to pay the borrowings under the warehouse funding facilities or will be distributed to the Company. The Company's total restricted cash also includes pledged cash deposited into savingsdeposits in accounts at the financial institutions that process the Company's sellers' payment transactions and as collateral pursuant to an agreementvarious agreements with the originating bank forbanks relating to the Company's loan product.products. The Company uses the restricted cash to secure letters of credit with the related financial institutioninstitutions to provide collateral for cash flow timing differences in the processing of these payments. The Company has recorded this amount as a current asset on the consolidated balance sheets due to the short-term nature of these cash flow timing differences and that there is no minimum time frame during which the cash must remain restricted. Additionally, this balance includes certain amounts held as
collateral pursuant to multi-year lease agreements, discussed in the paragraph below that we expect to become unrestricted within the next year.
AsThe Company's long-term restricted cash of $71.6 million and $71.7 million as of December 31, 20202022 and 2019, the remaining restricted cash of $13.5 million and $12.7 million,December 31, 2021, respectively, is primarily related to cash held as collateral pursuant to multi-year lease agreements (Note 18).as required by the FDIC for Square Financial Services. The Company has recorded this amountthese amounts as a non-current assetassets on the consolidated balance sheets as the termsrequirement by the FDIC specifies a time frame of 12 months or longer during which the related leases extend beyond one year.cash must remain restricted.
Concentration of Credit Risk
For the years ended December 31, 2020, 2019 and 2018, the Company had 0 customer that accounted for greater than 10% of total net revenue.
The Company had 2 third-party payment processors that represented approximately 59% and 27% of settlements receivable as of December 31, 2020. As of December 31, 2019, there were 3 parties that represented approximately 48%, 29%, and 9% of settlements receivable. All other third-party processors were insignificant.Customer Funds
Financial instrumentsCustomer funds represent customers' stored balances that potentially subjectcustomers would later use to send money or make payments, or customers cash in transit. Under the terms of service associated with these funds, the Company to concentrationsis restricted from using the funds in the Company's operations. Interest income from customer funds is recorded as a component of credit risk consist primarilysubscription and services-based revenue on the consolidated statements of cashoperations, and cash equivalents, restricted cash,was immaterial for the year ended December 31, 2022. The Company may invest a portion of these stored balances in short-term marketable debt securities, settlements receivable, customer funds, and loans heldsecurities. Refer to Note 4, Customer Funds for sale. The associated risk of concentration for cash and cash equivalents and restricted cash is mitigated by banking with creditworthy institutions. At certain times, amounts on deposit exceed federal deposit insurance limits. The associated risk of concentration for marketable debt securities is mitigated by holding a diversified portfolio of highly rated investments. Settlements receivable are amounts due from well-established payment processing companies and normally take one or two business days to settle which mitigates the associated risk of concentration. The associated risk of concentration for loans held for sale is partially mitigated by credit evaluations that are performed prior to facilitating the offering of loans and ongoing performance monitoring of the Company’s loan customers. The risk associated with the PPP loans is considered low due to government guarantees on those loans.more details.
Investments in marketable debt securitiesMarketable Debt Securities
The Company's short-term and long-term investments include marketable debt securities such as government and agency securities, corporate bonds, commercial paper, and municipal securities. The Company determines the appropriate classification of its investments in marketable debt securities at the time of purchase and reevaluates such designation at each balance sheet date. The Company has classified and accounted for its marketable debt securities as available-for-sale and carries these investments at fair value, reporting the unrealized gains and losses, net of taxes, as a component of stockholders’ equity. The U.S. government and U.S. agency securities are either explicitly or implicitly guaranteed by the U.S. government and are highly rated by major rating agencies. The corporate bonds are issued by highly rated entities. The foreign government securities are issued by highly rated international entities. The Company has the ability and intent to hold these investments with unrealized losses for a reasonable period of time, sufficient for the recovery of their amortized cost bases, which may be at maturity. The Company determines any realized gains or losses on the sale of marketable debt securities on a specific identification method, and records such gains and losses as a component of other expense (income), net.net on the consolidated statements of operations.
Investments in equity securitiesEquity Securities
The Company holds marketable and non-marketable equity investments, over which the Company does not have a controlling interest or significant influence.investments. Marketable equity investments are measured using quoted prices in active markets with changes recorded in other expense (income), net on the consolidated statements of operations.
Non-marketable equity investments, which have no readily determinable fair values, and are measured using the measurement alternative, which is defined as cost, less impairment, adjusted for observable price changes from orderly transactions for identical or similar investments of the same issuer. Adjustments are recorded in other expense (income),income, net on the consolidated statements of operations.
Non-marketable equity investments are valued using significant unobservable inputs or data in an inactive market and the valuation requires our judgment due to the absence of market prices and inherent lack of liquidity. The carrying value for these investments is not adjusted if there are no observable transactions for identical or similar investments of the same issuer or if there are no identified events or changes in circumstances that may indicate impairment. The Company will adjust for changes resulting from observable price changes in orderly transactions for an identical or similar investment in the same issue. Valuations of non-marketable equity investments are inherently complex due to the lack of readily available market data. In addition, the determination of whether an orderly transaction is for an identical or similar investment requires significant management
judgment, including understanding the differences in the rights and obligations of the investments and the extent to which those differences would affect the fair values of those investments.
The Company assesses the impairment of its non-marketable equity investments on a quarterly basis. The impairment analysis encompasses an assessment of the severity and duration of the impairment and a qualitative and quantitative analysis of other key factors including the investee’s financial metrics, market acceptance of the investee’s product or technology, other competitive products or technology in the market, general market conditions, and the rate at which the investee is using its cash. If the investment is considered to be impaired, the Company will record an impairment in other income, (expense), net on the consolidated statements of operations and establish a new carrying value for the investment.
Customer funds
Customer funds held in deposit represent customers' stored balances that customers would later use to send money or make payments, or customers cash in transit. The Company invests a portion of these stored balances in short-term marketable debt securities (Note 4). The Company determines the appropriate classification of the investments in marketable debt securities within customer funds at the time of purchase and reevaluates such designation at each balance sheet date. The Company has classified and accounted for its marketable debt securities within customer funds as available-for-sale.
Fair Value of Financial InstrumentsMeasurements
The Company applies fair value accounting for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. Fair value accounting establishes a three-level hierarchy priority for disclosure of assets and liabilities recorded at fair value. The ordering of priority reflects the degree to which objective prices in external active markets are available to measure fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable.
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
•Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
•Level 2 Inputs: Other than quoted prices included in Level 1 Inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
•Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
Customer Loans Held for Sale
The Company classifies customer loans as loans held for sale upon purchase from an industrial bank partner, as there is an available market for such loans and it iswhen the Company’sCompany has the intent to sell all of its rights, title, and interest in these loans to third-party investors. investors, and there is an available market for such loans. The Company classifies customer loans as loans held for investment when the Company has both the intent and ability to hold for the foreseeable future, or until maturity or payoff.
Loans Held for Sale
Loans held for sale are recorded at the lower of amortized cost or fair value determined on an individual loan basis. To determine the fair value the Company utilizes industry-standard valuation modeling, such as discounted cash flow models,valuation modeling, taking into account the probability of default and estimated timing and amounts of periodic repayments. In estimating the expected timing and amounts of the future periodic repayments for the loans outstanding, as of December 31, 2020, the Company considered other relevant market data, including the impact of the COVID-19 pandemic, as well as the conditions and uncertainty experienced during similar historical periods of recessionary economic conditions. With respect to PPP loans, the Company also considers the impact of government guarantees and loan forgiveness on the timing and amounts of future cash flows.data. The Company recognizes a charge within transaction, loan, and loanconsumer receivable losses inon the consolidated statement of operations whenever the amortized cost of a loan exceeds its fair value, with such charges being reversed for subsequent increases in fair value, but only to the extent that such reversals do not result in the amortized cost of a loan exceeding its fair value. A loan that is initially
designated as held for sale may be reclassified to held for investment if and when the Company's intent for that loan changes. There have been no reclassifications madeFor the year ended December 31, 2022, $357.4 million of total loan balances was reclassified from loans held for sale to loans held for investment. Upon origination, the Company's loans are designated as available for sale. The majority of loans are subsequently sold. For the years ended December 31, 2022 and 2021, net gains on sales of loans were $164.3 million and $95.5 million, respectively. Net gains on sales of loans were immaterial in the year ended December 31, 2020. Loans that are not sold within one to two business days from origination are reclassified as held for investment.
Loans Held for Investment
Loans held for investment are recorded at amortized cost, less an allowance for potential uncollectible amounts. Amortized cost basis represents principal amounts outstanding, net of unearned income, unamortized deferred fees and costs on originated loans, premiums or discounts on purchased loans and charge-offs. The Company’s intent and ability to designate loans as held for investment in the future may change based on changes in business strategies, the economic environment, and market conditions.
The Company calculates an allowance for losses on the loans held for investment portfolio in accordance with ASU No. 2016-13, Financial Instruments - Credit Losses(Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). The Company assesses impairment of its financial instruments based on current estimates of expected credit losses over the contractual term of its loans held for investment portfolio as of each balance sheet date. The Company determines the allowance for loan losses using both quantitative and qualitative methods and considers all available information relevant to assessing collectability. This includes, but is not limited to, historical loss and recovery experience, recent and historical trends in delinquencies, past-due loans and charge-offs, borrower behavior and repayment speed, underwriting and collection management changes, changes in the legal and regulatory environment, changes in risk and underwriting standards, current and historical macroeconomic conditions such as changes in unemployment and GDP, and various other factors that may affect the sellers’ ability to make future payments.
Settlements Receivable
Settlements receivable represents amounts due from third-party payment processors for customer transactions. Settlements receivable are typically received within one or two business days of the transaction date. No valuation allowances have been established, as funds are due from large, well-established financial institutions with no historical collections issue.
Consumer Receivables
The Company evaluates the consumer receivables as a single homogeneous portfolio as it is comprised of a single product type, point-of-sale unsecured installment loans. The Company classifies consumer receivables as held for investment when the Company has the intent and ability to hold these investments for the foreseeable future or until maturity or payoff. The Company classifies consumer receivables as held for sale when the Company has the intent to sell all of its rights, title, and interest in these receivables to third-party investors, and there is an available market for such receivables. Consumer receivables are reported at amortized cost, which includes the cost to originate the consumer receivables, adjusted for unearned merchant fees, origination costs, charge-offs, and the allowance for credit losses. Refer to Note 6, Consumer Receivables, net for more information.
Allowance for Credit Losses Related to Consumer Receivables
The Company calculates an allowance for credit losses on the consumer receivables portfolio in accordance with ASU 2016-13. The guidance requires an entity to assess impairment of its financial instruments based on the entity's current estimates of expected credit losses over the contractual term of its loans held for investment portfolio as of each balance sheet date.
Allowance for credit losses related to consumer receivables represents management’s estimate of the expected credit losses in the outstanding portfolio of consumer receivables, as of the balance sheet date. The Company determines the allowance for credit losses using both quantitative and qualitative methods that analyze portfolio performance, uses judgment regarding the quantitative components of the reserve, and considers all available information relevant to assessing collectibility. This includes, but is not limited to, historical loss and recovery experience, recent and historical trends in delinquencies, past-due receivables and charge-offs, consumer behavior and repayment speed, underwriting and collection management changes, changes in the legal and regulatory environment, changes in risk and underwriting standards, current and historical macroeconomic conditions such as changes in unemployment and GDP, and various other factors that may affect the consumers’ ability to make future payments. When available information confirms that specific consumer receivables or portions thereof are uncollectible, identified amounts are charged off against the allowance for credit losses. Consumer receivables are charged off when management considers amounts to be uncollectible, which is generally determined by the number of days past due and is typically no later than 180 days past due.
Inventory
Inventory is comprisedconsists of contactless and chip readers, chip card readers, Square Stand, Square Register, Square Terminal, and third-party peripherals, as well as component parts that are used to manufacture these products. Inventory is stated at the lower of cost (generally on a first-in, first-out basis) or net realizable value. Inventory that is obsolete or in excess of forecasted usage is written down to its net realizable value based on the estimated selling prices in the ordinary course of business. The Company's inventory is held at third partythird-party warehouses and contract manufacturer premises.
Deferred Revenue
Deferred revenue is primarily comprised of payments for website hosting and domain name registration received from customers at inception of the arrangements prior to the services being rendered. Deferred revenue also includes unearned revenue related to managed payments services offeredInvestment in conjunction with hardware sales for which the cash payments from customers are received and due upon the sale of the hardware.
Investments in bitcoinBitcoin
Bitcoin is a cryptocurrency that is considered to be an indefinite livedindefinite-lived intangible asset because bitcoin lacks physical form and there is no limit to its useful life. Accordingly, the Company's investment in bitcoin is not subject to amortization but is tested for impairment continuously to assess if it is more likely than not that it is impaired.on a daily basis. The Company has concluded that because bitcoin is traded in an active market where there are observable prices, a decline in the quoted price below cost is generally viewed as an impairment indicator, in which case the fair value is determined to assess whether an impairment loss should be recorded.indicator. If the fair value of bitcoin decreases below the carrying value during the assessed period, an impairment charge is recognized at that time. After an impairment loss is recognized, the adjusted carrying amount of bitcoinvalue becomes itsthe new accounting basis. Abasis of the Company's investment in bitcoin. Impairment losses cannot be reversed for any subsequent reversal of a previously recognized impairment loss is prohibitedincrease in fair value until the sale of the asset. In the fourth quarter of 2020, the Company acquired $50 million ofThe Company's investment in bitcoin that it expects to hold as an investmentdoes not include any bitcoin held for the foreseeable future. There was 0 impairment loss recorded on bitcoin for the year ended December 31, 2020.other parties.
Property and Equipment
Property and equipment are recorded at historical cost less accumulated depreciation, which is computed on a straight-line basis over the asset’s estimated useful life. The estimated useful lives of property and equipment are described below:
| | | | | | | | |
Property and Equipment | | Useful Life |
Capitalized software | | 18 months |
Computer and data center equipment | | Two to threeThree years
|
Furniture and fixtures | | Seven years |
Leasehold improvements | | Lesser of ten years or remaining lease term |
When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from their respective accounts, and any gain or loss on such sale or disposal is reflected in operating expenses.
Capitalized Software
The Company capitalizes certain costs incurred in developing internal-use software when capitalization
requirements have been met. Costs prior to meeting the capitalization requirements are expensed as incurred. Capitalized costs are included in property and equipment, net, and amortized on a straight-lined basis over the estimated useful life of the software and included in product development costs on the consolidated statements of operations. The Company capitalized $42.0 million and $22.5 million of internally developed software during the years ended December 31, 2020 and 2019, respectively, and recognized $19.8 million, $18.9 million and $10.6 million of amortization expense during the years ended December 31, 2020, 2019 and 2018, respectively.
Leases
The Company leases office space and equipment under non-cancellable finance and operating leases with various expiration dates.
The Company adopted Accounting Standards Codification (ASC) 842, Leases (ASC 842)on January 1, 2019, and elected the optional transition method to apply the transition provisions from the effective date of adoption, which requires the Company to report the cumulative effect of the adoption of the standard on the date of adoption with no changes to the prior period balances. Pursuant to the practical expedients, the Company elected not to reassess: (i)determines whether expired or existing contracts are or contain leases, (ii) thean arrangement is a lease classification for any expired or existing leases, or, (iii) initial direct costs for any existing leases. The Company elected to apply the short-term lease measurement and recognition exemption to its leases where applicable.accounting purposes at contract inception. Operating lease right-of-use (“ROU”) assets and operating lease liabilities are recognized at the present value of the future lease payments, generally for the base noncancellable lease term, at the lease commencement date for each lease. The interest rate used to determine the present value of the future lease payments is the Company's incremental borrowing rate because the interest rate implicit in most of the Company's leases is not readily determinable. The Company's incremental borrowing rate is estimated to approximate the interest rate that the Company would pay to borrow on a collateralized basis with similar terms and payments as the lease, and in economic environments where the leased asset is located. Operating lease right-of-useROU assets also include any prepaid lease payments and lease incentives. The Company's lease agreements generally contain lease and non-lease components. The Company applies the practical expedient to account for the lease and non-lease components as a single lease component for all leases, where applicable. Non-lease components which primarily include payments for maintenance and utilities, are combined with lease payments and accounted for as a single lease component.utilities. The Company includes the fixed non-lease components in the determination of the right-of-useROU assets and operating lease liabilities. Variable lease payments that are not based on a rate or index are not included in the calculation of the ROU asset and lease liability, and they are recognized as lease expense in the period in which the obligation for those payments is incurred. Variable lease payments predominantly relate to variable operating expenses, taxes, parking, and electricity. The Company records the amortization of the right of useROU asset and the accretion of lease liability as a component of rent expense in the consolidated statementstatements of operations. The accounting for finance leases remained substantially unchanged.
Upon adoptionThe Company evaluates ROU assets related to leases for indicators of ASC 842,impairment whenever events or changes in circumstances indicate that the carrying amount of an ROU asset may not be recoverable. When a decision has been made to exit a lease prior to the contractual term or to sublease that space, the Company recognized $112.0 million of operating right-of-use lease assetsevaluates the asset for impairment and $135.6 million of operating lease liabilities on its consolidated balance sheet. Additionally,recognizes the Company derecognized $149.0 million relatedassociated impact to the build-to-suitROU asset and liability upon adoptionrelated expense, if applicable. The evaluation is performed at the asset group level initially and when appropriate, at the lowest level of this standard becauseidentifiable cash flows, which is at the Company was no longer deemedindividual lease level. Undiscounted cash flows expected to be generated by the ownerrelated ROU assets are estimated over the ROU assets’ useful lives. If the evaluation indicates that the carrying amount of the ROU assets may not be recoverable, any potential impairment is measured based upon the fair value of the related ROU asset under construction under the new standard.or asset group as determined by appropriate valuation techniques.
When lease agreements provide allowances for leasehold improvements, the Company assesses whether it is the owner of the leasehold improvements for accounting purposes. When the Company concludes that it is the owner, it capitalizes the leasehold improvement assets and recognizes the related depreciation expense on a straight-line basis over the lesser of the lease term or the estimated useful life of the asset. Additionally, the Company recognizes the amounts of allowances to be received from the lessor as a reduction of the lease liability and the associated right of useROU asset. When the Company concludes that it is not the owner, the payments that the Company makes towards the leasehold improvements are accounted as a component of the lease payments.
The Company records a liability for the estimated fair value for any asset retirement obligation (ARO) associated with its leases, with an offsetting asset. In the determination of the fair value of AROs, the Company uses various assumptions and judgments, including such factors as the existence of a legal obligation, estimated amounts and timing of settlements, and discount and inflation rates. The liability is subsequently accreted while the asset is depreciated. As of December 31, 2020, the Company had a liability for AROs, gross of accretion, of $3.7 million and an associated asset, net of depreciation, of $1.1 million.
Business Combinations
The purchase price of an acquisition is allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition dates. The excess of total consideration over the fair values of the assets acquired and the liabilities assumed is recorded as goodwill. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments would be recorded on the consolidated statements of operations.
Long-Lived Assets, including Goodwill and Acquired IntangiblesIntangible Assets
The Company evaluates the recoverability of property and equipment and finite livedfinite-lived intangible assets for impairment whenever events or circumstances indicate that the carrying amounts of such assets may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset or an asset group to estimated undiscounted future net cash flows expected to be generated. If the carrying amount of the long–lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third–party independent appraisals, as considered necessary. For the periods presented, the Company had recorded 0no impairment charges.
The Company performs a goodwill impairment test annually on December 31 and more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the reporting unit’s fair value. Effective June 30, 2020, the Company changed its operating and reporting segments to reflect the manner in which the Chief Operating Decision Maker (CODM) reviews and assesses performance. Accordingly, the Company has 2 operating and reportable segments, which are Seller and Cash App. The Company has the option to first assessassesses qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount and determine whether further action is needed. If, after assessing the totality of events or circumstances, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. For the periods presented, the Company had recorded 0no impairment charges.
Acquired intangiblesintangible assets consist of acquired technology and customer relationships associated with various acquisitions. Acquired technology is amortized over its estimated useful life on a straight-line basis withinand included as a component of cost of revenue. Customerrevenue on the consolidated statements of operations. Acquired customer relationships acquiredand other intangible assets are amortized on a straight-line basis over their estimated useful lives, withinand included as a component of operating expenses.expenses on the consolidated statements of operations. The Company evaluates the remaining estimated useful life of its intangible assets being amortized on an ongoing basis to determine whether events and circumstances warrant a revision to the remaining period of amortization.
Customers Payable
Customers payable represents the transaction amounts, less revenue earned by the Company, owed to sellers or Cash App customers. The payable amount comprisesconsists of amounts owed to customers due to timing differences as the Company typically settles within one business day, amounts held by the Company in accordance with its risk management policies, and amounts held for customers who have not yet linked a bank account. This balance also includes the Company's liability for customer funds held on deposit in the Cash App.
Accrued Transaction Losses
The Company is exposed to potential credit losses related to transactions processed by sellers that are subsequently subject to chargebacks when the Company is unable to collect from the sellers primarily due to insolvency, disputes between a seller and their customer, or due to fraudulent transactions. Accrued transaction losses also include estimated losses on Cash App activity related to peer-to-peer payments sent from a credit card, Cash for Business, and Cash App Card. Generally, the Company estimates the potential loss rates based on historical experience that is continuously adjusted for new information and incorporates, where applicable, reasonable and supportable forecasts about future expectations. The Company also considers other relevant market data in developing such estimates and assumptions, including the impact of the COVID-19 pandemic, as well as the conditions and uncertainty experienced during similar historical periods of recessionary economic conditions.assumptions. Additions to the reserve are reflected in current operating results, while realized losses are offset against the
reserve. These amounts are classified within transaction, loan, and loanconsumer receivable losses on the consolidated statements of operations, except for the amounts associated with the peer-to-peer service offered to Cash App customers for free that are classified within sales and marketing expenses.
Segments
Effective on June 30, 2020, theThe Company changedreports its operating segments to reflect the manner in which the Company's CODMchief operating decision maker ("CODM") reviews and assesses performance. The Company has 2two reportable segments, which are SellerSquare (formerly Seller) and Cash App. SellerThe results of Afterpay have been equally allocated to the Cash App and Square segments as management has concluded that Afterpay's BNPL platform will contribute equally to both the Cash App and Square platforms. Rather, the operations of Afterpay are managed by the segment managers of Cash App and Square, who are responsible for allocating resources and evaluating the performance of Afterpay. Products and services that are not assigned to a specific reportable segment, including but not limited to TIDAL, TBD, and Spiral, are aggregated and presented within a general corporate and other category. Square and Cash App are defined as follows:
• Cash App includes the financial tools available to individuals within the mobile Cash App, including peer-to-peer payments, bitcoin and stock investments. Cash App also includes Cash App Card which is linked to customer stored balances that customers can use to pay for purchases or withdraw funds from an ATM.
• Square includes managed payment services, software solutions, hardware, and financial services products offered to sellers, whileexcluding those that involve Cash App includesApp.
The primary financial tools availablemeasures used by the CODM to individualsevaluate performance and allocate resources are revenue and gross profit. The CODM does not evaluate performance or allocate resources based on segment asset data, and therefore such as P2P (peer-to-peer) payments, Cash Card transactions, bitcoin and stock investing that enable customers to easily send, spend, and store money.information is not included.
Recent Accounting Pronouncements
Recently adopted accounting pronouncementsAdopted Accounting Pronouncements
In August 2020,July 2021, the Financial Accounting Standards Board (FASB)("FASB") issued Accounting Standards Update (ASU)("ASU") No. 2020-06,2021-05, AccountingLeases (Topic 842): Lessors—Certain Leases with Variable Lease Payments ("ASU 2021-05"), which amends the lease classification requirements for Convertible Instrumentslessors with certain leases containing variable payments. In accordance with ASU 2021-05, a lessor should classify and Contracts inaccount for a lease with variable lease payments that do not depend on an Entity's Own Equity,index or a rate as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulnessan operating lease if both of the information provided to users of financial statements. Among other changes,following criteria are met: 1) the new guidance removes from GAAP separation models for convertible debt that require the convertible debt to be separated into a debt and equity component, unless the conversion feature is required to be bifurcated and accounted forlease would have been classified as a derivativesales-type lease or a direct financing lease; and 2) the debt is issued atlessor would have otherwise recognized a substantial premium. As a result, after adopting the guidance, entities will no longer separately present such embedded conversion featuresday-one loss. The amendments in equity, and will instead account for the convertible debt wholly as debt. The new guidance also requires use of the "if-converted" method when calculating the dilutive impact of convertible debt on earnings per share, which is consistent with the Company’s current accounting treatment under the current guidance. The guidance isASU 2021-05 are effective for financial statements issued for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted, but only at the beginning of the fiscal year.permitted. The Company plans to early adopt the newadopted this guidance oneffective January 1, 2021 using2022, and has applied the modified retrospective approach and expects to record a cumulative effect of adoption of $103.5 million reduction to retained earnings.guidance prospectively. The Company expects the impact of adoption to result in a reduction to other paid in capital of $502.7 million related to amounts attributable to conversion options that had previously been recorded in equity. Additionally, the Company also expects to record an increase to its convertible notes balance by an aggregate amount of $399.2 million as a result of reversal of the separation of the convertible debt between debt and equity. There is no expected impact to the Company’s statements of operations or cash flows as the result of the adoption of this ASU.
Recently issued accounting pronouncementsguidance did not yet adoptedhave a material impact on the Company’s financial statements and related disclosures.
In October 2020,May 2021, the FASB issued ASU 2020-10,No. 2021-04, Codification ImprovementsEarnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) . The update(“ASU 2021-04”), which provides incremental improvementsguidance on various topicsmodifications or exchanges of a freestanding equity-classified written call option that is not within the scope of another Topic. An entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as an exchange of the original instrument for a new instrument, and provides further guidance on measuring the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. ASU 2021-04 also provides guidance on the recognition of the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange on the basis of the substance of the transaction, in the Codification to provide clarification, correct errors in, and simplification on a variety of topics. Among other things, the guidance includes presentation disclosures for the amount of income tax expense or benefit related to other comprehensive income.same manner as if cash had been paid as consideration. The amendments are effective for publicall entities infor fiscal years beginning after December 15, 2020,2021, including interim periods within those fiscal years. Early adoption is permitted. The Company adopted this guidance effective January 1, 2022, and has applied the guidance prospectively. The adoption of this guidance did not have a material impact on the Company’s financial statements and related disclosures.
In March 2022, the SEC staff released Staff Accounting Bulletin No. 121 ("SAB 121"), which expressed the views of the SEC staff regarding the accounting for obligations to safeguard crypto-assets an entity holds for users of its crypto platform. This guidance requires entities that hold crypto-assets on behalf of platform users to recognize a liability to reflect the entity’s obligation to safeguard the crypto-assets held for its platform users. The liability should be measured at initial recognition and each reporting date at the fair value of the crypto-assets that the entity is evaluatingresponsible for holding for its platform users. The entity should also recognize an asset at the effectsame time that it recognizes the safeguarding liability, measured at initial recognition and each reporting date at the fair value of adoptingthe crypto-assets held for its platform users, subject to adjustments to reflect any actual or potential safeguarding loss events. The entity should also describe the asset and the corresponding liability in the footnotes to the financial statements and consider including information regarding who (e.g., the company, its agent, or another third party) holds the cryptographic key information, maintains the internal recordkeeping of those assets, and is obligated to secure the assets and protect them from loss or theft. This guidance is effective from the first interim period after June 15, 2022 and should be applied retrospectively. The Company adopted this new accounting guidance buteffective June 30, 2022. Refer to Note 14, Bitcoin Held for Other Parties for more details.
Recently Issued Accounting Pronouncements Not Yet Adopted
In March 2022, the FASB issued ASU No. 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method ("ASU 2022-01") related to the portfolio layer method of hedge accounting. The amendments allow nonprepayable financial assets to be included in a closed portfolio hedge using the portfolio layer method. ASU 2022-01 also allows for multiple hedged layers to be designated for a single closed portfolio of financial assets or one or more beneficial interests secured by a portfolio of financial instruments The amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption to have a material impact on the Company's financial statements.
In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) related to troubled debt restructuring and vintage disclosures for financing receivables. The amendments eliminate recognition and measurement guidance for troubled debt restructurings for creditors and requires entities to evaluate if the modification represents a new loan or a continuation of the existing loan. ASU 2022-02 also enhances disclosure requirements for certain loan refinancing and restructurings made to borrowers experiencing financial difficulty and requires disclosure of current period write-offs by year of origination for financing receivables. The amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption to have a material impact on the Company’s financial statements.
In June 2022, the FASB issued ASU No. 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions ("ASU 2022-03") related to equity securities. The amendments clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. An entity is prohibited from recognizing a contractual sale restriction as a separate unit of account. ASU 2022-03 also requires specific disclosures related to equity securities that are subject to contractual restrictions, including the fair value of such equity securities, the nature and remaining duration of the corresponding restrictions, and any circumstances that could cause a lapse in the restrictions. The amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption to have a material impact on the Company's financial statements.
NOTE 2 - REVENUE
The following table presents the Company's net revenue disaggregated by revenue source (in thousands):
| | | Year Ended December 31, | | Year Ended December 31, |
| | 2020 | | 2019 | | 2018 | | 2022 | | 2021 | | 2020 |
Revenue from Contracts with Customers: | | | | | | |
Revenue from contracts with customers: | | Revenue from contracts with customers: | | | | | |
Transaction-based revenue | Transaction-based revenue | $ | 3,294,978 | | | $ | 3,081,074 | | | $ | 2,471,451 | | Transaction-based revenue | $ | 5,701,540 | | | $ | 4,793,146 | | | $ | 3,294,978 | |
Subscription and services-based revenue | Subscription and services-based revenue | 1,447,188 | | | 883,922 | | | 499,010 | | Subscription and services-based revenue | 3,385,784 | | | 2,445,811 | | | 1,447,188 | |
Hardware revenue | Hardware revenue | 91,654 | | | 84,505 | | | 68,503 | | Hardware revenue | 164,418 | | | 145,679 | | | 91,654 | |
Bitcoin revenue | Bitcoin revenue | 4,571,543 | | | 516,465 | | | 166,517 | | Bitcoin revenue | 7,112,856 | | | 10,012,647 | | | 4,571,543 | |
Revenue from other sources: | Revenue from other sources: | | Revenue from other sources: | |
Subscription and services-based revenue | $ | 92,215 | | | $ | 147,534 | | | $ | 92,696 | | |
Subscription and services-based revenue (i) | | Subscription and services-based revenue (i) | 1,166,989 | | | 263,920 | | | 92,215 | |
Total net revenue | | Total net revenue | $ | 17,531,587 | | | $ | 17,661,203 | | | $ | 9,497,578 | |
The deferred(i) Subscription and services-based revenue balances were as follows (in thousands):
| | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 |
Deferred revenue, beginning of the period | $ | 44,331 | | | $ | 36,451 | |
Deferred revenue, end of the period | 51,804 | | | 44,331 | |
Deferred revenue arising from business combination | 800 | | | 0 | |
Revenue recognized in the period from amounts included in deferred revenue at the beginning of the period | $ | 38,190 | | | $ | 31,510 | |
from other sources relates to revenue generated from the Company's Square Loans and, for 2022 amounts, also includes revenue generated from consumer receivables originated through the BNPL platform, following the acquisition of Afterpay.
NOTE 3 - INVESTMENTS IN DEBT SECURITIES
The Company's short-term and long-term investments as of December 31, 2020 are2022 were as follows (in thousands):
| | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Short-term debt securities: | Short-term debt securities: | | | | | | | | Short-term debt securities: | | | | | | | |
U.S. agency securities | U.S. agency securities | $ | 153,386 | | | $ | 782 | | | $ | (164) | | | $ | 154,004 | | U.S. agency securities | $ | 96,545 | | | $ | 16 | | | $ | (2,120) | | | $ | 94,441 | |
Corporate bonds | Corporate bonds | 76,957 | | | 256 | | | (14) | | | 77,199 | | Corporate bonds | 368,110 | | | 2 | | | (7,475) | | | 360,637 | |
Commercial paper | Commercial paper | 4,999 | | | 0 | | | 0 | | | 4,999 | | Commercial paper | 31,503 | | | — | | | — | | | 31,503 | |
Municipal securities | Municipal securities | 10,377 | | | 57 | | | (3) | | | 10,431 | | Municipal securities | 9,884 | | | — | | | (191) | | | 9,693 | |
Certificates of deposit | | Certificates of deposit | 6,400 | | | — | | | — | | | 6,400 | |
U.S. government securities | U.S. government securities | 404,194 | | | 1,244 | | | (4) | | | 405,434 | | U.S. government securities | 580,568 | | | 6 | | | (8,937) | | | 571,637 | |
Foreign government securities | Foreign government securities | 42,988 | | | 139 | | | (82) | | | 43,045 | | Foreign government securities | 7,795 | | | — | | | (255) | | | 7,540 | |
Total | Total | $ | 692,901 | | | $ | 2,478 | | | $ | (267) | | | $ | 695,112 | | Total | $ | 1,100,805 | | | $ | 24 | | | $ | (18,978) | | | $ | 1,081,851 | |
| Long-term debt securities: | Long-term debt securities: | | Long-term debt securities: | |
U.S. agency securities | U.S. agency securities | $ | 168,762 | | | $ | 519 | | | $ | (3) | | | $ | 169,278 | | U.S. agency securities | $ | 74,097 | | | $ | — | | | $ | (3,782) | | | $ | 70,315 | |
Corporate bonds | Corporate bonds | 174,655 | | | 1,401 | | | (42) | | | 176,014 | | Corporate bonds | 245,891 | | | 6 | | | (9,171) | | | 236,726 | |
Municipal securities | Municipal securities | 1,045 | | | 15 | | | 0 | | | 1,060 | | Municipal securities | 10,415 | | | 3 | | | (664) | | | 9,754 | |
U.S. government securities | U.S. government securities | 91,642 | | | 433 | | | (2) | | | 92,073 | | U.S. government securities | 268,902 | | | — | | | (13,210) | | | 255,692 | |
Foreign government securities | Foreign government securities | 25,351 | | | 184 | | | (10) | | | 25,525 | | Foreign government securities | 1,000 | | | — | | | (58) | | | 942 | |
Total | Total | $ | 461,455 | | | $ | 2,552 | | | $ | (57) | | | $ | 463,950 | | Total | $ | 600,305 | | | $ | 9 | | | $ | (26,885) | | | $ | 573,429 | |
The Company's short-term and long-term investments as of December 31, 20192021 are as follows (in thousands):
| | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Short-term debt securities: | Short-term debt securities: | | | | | | | | Short-term debt securities: | | | | | | | |
U.S. agency securities | U.S. agency securities | $ | 131,124 | | | $ | 409 | | | $ | (11) | | | $ | 131,522 | | U.S. agency securities | $ | 73,986 | | | $ | 150 | | | $ | (8) | | | $ | 74,128 | |
Corporate bonds | Corporate bonds | 67,169 | | | 580 | | | (28) | | | 67,721 | | Corporate bonds | 293,460 | | | 128 | | | (269) | | | 293,319 | |
| Commercial paper | | Commercial paper | 36,088 | | | — | | | — | | | 36,088 | |
Municipal securities | Municipal securities | 6,667 | | | 109 | | | 0 | | | 6,776 | | Municipal securities | 5,543 | | | 5 | | | — | | | 5,548 | |
Certificates of deposit | | Certificates of deposit | 9,200 | | | — | | | — | | | 9,200 | |
U.S. government securities | U.S. government securities | 264,069 | | | 1,083 | | | (17) | | | 265,135 | | U.S. government securities | 430,992 | | | 106 | | | (255) | | | 430,843 | |
Foreign government securities | Foreign government securities | 21,270 | | | 48 | | | (16) | | | 21,302 | | Foreign government securities | 20,256 | | | 19 | | | (118) | | | 20,157 | |
Total | Total | $ | 490,299 | | | $ | 2,229 | | | $ | (72) | | | $ | 492,456 | | Total | $ | 869,525 | | | $ | 408 | | | $ | (650) | | | $ | 869,283 | |
| Long-term debt securities: | Long-term debt securities: | | Long-term debt securities: | |
U.S. agency securities | U.S. agency securities | $ | 63,645 | | | $ | 612 | | | $ | (189) | | | $ | 64,068 | | U.S. agency securities | $ | 154,454 | | | $ | 26 | | | $ | (1,160) | | | $ | 153,320 | |
Corporate bonds | Corporate bonds | 141,307 | | | 1,832 | | | (61) | | | 143,078 | | Corporate bonds | 667,699 | | | 80 | | | (4,572) | | | 663,207 | |
Municipal securities | Municipal securities | 9,594 | | | 151 | | | (39) | | | 9,706 | | Municipal securities | 22,541 | | | 2 | | | (126) | | | 22,417 | |
U.S. government securities | U.S. government securities | 294,682 | | | 1,287 | | | (190) | | | 295,779 | | U.S. government securities | 678,553 | | | 3 | | | (4,080) | | | 674,476 | |
Foreign government securities | Foreign government securities | 24,625 | | | 86 | | | (39) | | | 24,672 | | Foreign government securities | 13,084 | | | — | | | (74) | | | 13,010 | |
Total | Total | $ | 533,853 | | | $ | 3,968 | | | $ | (518) | | | $ | 537,303 | | Total | $ | 1,536,331 | | | $ | 111 | | | $ | (10,012) | | | $ | 1,526,430 | |
The amortized cost of investments classified as cash equivalents approximated the fair value due to the short-term nature of the investments.
The Company's gross unrealized losses and fair values for those investments that were in an unrealized loss position as of December 31, 20202022 and 2019,2021, aggregated by investment category and the length of time that individual securities have been in a continuous loss position arewere as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Less than 12 months | | Greater than 12 months | | Total |
| Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
Short-term debt securities: | | | | | | | | | | | |
U.S. agency securities | $ | 8,572 | | | $ | (24) | | | $ | 84,628 | | | $ | (2,096) | | | $ | 93,200 | | | $ | (2,120) | |
Corporate bonds | 34,795 | | | (423) | | | 320,748 | | | (7,052) | | | 355,543 | | | (7,475) | |
Municipal securities | 587 | | | (13) | | | 5,811 | | | (178) | | | 6,398 | | | (191) | |
U.S. government securities | 146,974 | | | (839) | | | 394,880 | | | (8,098) | | | 541,854 | | | (8,937) | |
Foreign government securities | — | | | — | | | 7,540 | | | (255) | | | 7,540 | | | (255) | |
Total | $ | 190,928 | | | $ | (1,299) | | | $ | 813,607 | | | $ | (17,679) | | | $ | 1,004,535 | | | $ | (18,978) | |
| | | | | | | | | | | |
Long-term debt securities: | | | | | | | | | | | |
U.S. agency securities | $ | 11,501 | | | $ | (20) | | | $ | 58,814 | | | $ | (3,762) | | | $ | 70,315 | | | $ | (3,782) | |
Corporate bonds | 33,862 | | | (262) | | | 201,791 | | | (8,909) | | | 235,653 | | | (9,171) | |
Municipal securities | 467 | | | (33) | | | 8,784 | | | (631) | | | 9,251 | | | (664) | |
U.S. government securities | 54,405 | | | (590) | | | 201,288 | | | (12,620) | | | 255,693 | | | (13,210) | |
Foreign government securities | — | | | — | | | 942 | | | (58) | | | 942 | | | (58) | |
Total | $ | 100,235 | | | $ | (905) | | | $ | 471,619 | | | $ | (25,980) | | | $ | 571,854 | | | $ | (26,885) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Less than 12 months | | Greater than 12 months | | Total |
| Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
Short-term debt securities: | | | | | | | | | | | |
U.S. agency securities | $ | 41,711 | | | $ | (162) | | | $ | 2,505 | | | $ | (2) | | | $ | 44,216 | | | $ | (164) | |
Corporate bonds | 15,255 | | | (14) | | | 0 | | | 0 | | | 15,255 | | | (14) | |
Municipal securities | 2,566 | | | (3) | | | 0 | | | 0 | | | 2,566 | | | (3) | |
U.S. government securities | 45,970 | | | (4) | | | 0 | | | 0 | | | 45,970 | | | (4) | |
Foreign government securities | 21,341 | | | (82) | | | 0 | | | 0 | | | 21,341 | | | (82) | |
Total | $ | 126,843 | | | $ | (265) | | | $ | 2,505 | | | $ | (2) | | | $ | 129,348 | | | $ | (267) | |
| | | | | | | | | | | |
Long-term debt securities: | | | | | | | | | | | |
U.S. agency securities | $ | 1,406 | | | $ | (3) | | | $ | 0 | | | $ | 0 | | | $ | 1,406 | | | $ | (3) | |
Corporate bonds | 28,189 | | | (42) | | | 0 | | | 0 | | | 28,189 | | | (42) | |
| | | | | | | | | | | |
U.S. government securities | 8,658 | | | (2) | | | 0 | | | 0 | | | 8,658 | | | (2) | |
Foreign government securities | 10,929 | | | (10) | | | 0 | | | 0 | | | 10,929 | | | (10) | |
Total | $ | 49,182 | | | $ | (57) | | | 0 | | $ | 0 | | | $ | 49,182 | | | $ | (57) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| Less than 12 months | | Greater than 12 months | | Total |
| Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
Short-term debt securities: | | | | | | | | | | | |
U.S. agency securities | $ | 23,896 | | | $ | (9) | | | $ | 4,996 | | | $ | (2) | | | $ | 28,892 | | | $ | (11) | |
Corporate bonds | 5,507 | | | (27) | | | 2,502 | | | (1) | | | 8,009 | | | (28) | |
| | | | | | | | | | | |
U.S. government securities | 21,481 | | | (8) | | | 14,984 | | | (9) | | | 36,465 | | | (17) | |
Foreign government securities | 13,499 | | | (16) | | | 0 | | | 0 | | | 13,499 | | | (16) | |
Total | $ | 64,383 | | | $ | (60) | | | $ | 22,482 | | | $ | (12) | | | $ | 86,865 | | | $ | (72) | |
| | | | | | | | | | | |
Long-term debt securities: | | | | | | | | | | | |
U.S. agency securities | $ | 16,740 | | | $ | (189) | | | $ | 0 | | | $ | 0 | | | $ | 16,740 | | | $ | (189) | |
Corporate bonds | 16,708 | | | (61) | | | 0 | | | 0 | | | 16,708 | | | (61) | |
Municipal securities | 1,005 | | | (39) | | | 0 | | | 0 | | | 1,005 | | | (39) | |
U.S. government securities | 42,210 | | | (162) | | | 0 | | | (28) | | | 42,210 | | | (190) | |
Foreign government securities | 16,383 | | | (39) | | | 0 | | | 0 | | | 16,383 | | | (39) | |
Total | $ | 93,046 | | | $ | (490) | | | $ | 0 | | | $ | (28) | | | $ | 93,046 | | | $ | (518) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Less than 12 months | | Greater than 12 months | | Total |
| Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
Short-term debt securities: | | | | | | | | | | | |
U.S. agency securities | $ | 26,749 | | | $ | (8) | | | $ | — | | | $ | — | | | $ | 26,749 | | | $ | (8) | |
Corporate bonds | 241,792 | | | (269) | | | 311 | | | — | | | 242,103 | | | (269) | |
| | | | | | | | | | | |
U.S. government securities | 347,380 | | | (255) | | | — | | | — | | | 347,380 | | | (255) | |
Foreign government securities | 12,734 | | | (118) | | | — | | | — | | | 12,734 | | | (118) | |
Total | $ | 628,655 | | | $ | (650) | | | $ | 311 | | | $ | — | | | $ | 628,966 | | | $ | (650) | |
| | | | | | | | | | | |
Long-term debt securities: | | | | | | | | | | | |
U.S. agency securities | $ | 151,472 | | | $ | (1,160) | | | $ | — | | | $ | — | | | $ | 151,472 | | | $ | (1,160) | |
Corporate bonds | 627,467 | | | (4,572) | | | — | | | — | | | 627,467 | | | (4,572) | |
Municipal securities | 18,616 | | | (126) | | | — | | | — | | | 18,616 | | | (126) | |
U.S. government securities | 639,473 | | | (4,080) | | | — | | | — | | | 639,473 | | | (4,080) | |
Foreign government securities | 13,010 | | | (74) | | | — | | | — | | | 13,010 | | | (74) | |
Total | $ | 1,450,038 | | | $ | (10,012) | | | $ | — | | | $ | — | | | $ | 1,450,038 | | | $ | (10,012) | |
The Company does not have any available for saleintend to sell nor anticipate that it will be required to sell these securities before recovery of the amortized cost basis. Unrealized losses on available-for-sale debt securities for which the Company has recordedwere determined not to be related to credit related losses.losses, therefore, an allowance for credit losses is not required.
The contractual maturities of the Company's short-term and long-term investments as of December 31, 2020 are2022 were as follows (in thousands):
| | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Due in one year or less | Due in one year or less | $ | 692,901 | | | $ | 695,112 | | Due in one year or less | $ | 1,100,805 | | | $ | 1,081,851 | |
Due in one to five years | Due in one to five years | 461,455 | | | 463,950 | | Due in one to five years | 600,305 | | | 573,429 | |
Total | Total | $ | 1,154,356 | | | $ | 1,159,062 | | Total | $ | 1,701,110 | | | $ | 1,655,280 | |
The following table presents the assets underlying customer funds (in thousands):