filings.toolsItem 1. Financial Statements
198K characters. Original on sec.gov · Markdown
Item 1. Financial Statements
SQUARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (In thousands, except share and per share data)
| September 30, 2021 | December 31, 2020 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 4,514,609 | $ | 3,158,058 | |||||||
| Investments in short-term debt securities | 868,809 | 695,112 | |||||||||
| Settlements receivable | 1,211,886 | 1,024,895 | |||||||||
| Customer funds | 2,649,114 | 2,037,832 | |||||||||
| Loans held for sale | 708,086 | 462,665 | |||||||||
| Other current assets | 609,533 | 383,067 | |||||||||
| Total current assets | 10,562,037 | 7,761,629 | |||||||||
| Property and equipment, net | 275,286 | 233,520 | |||||||||
| Goodwill | 519,548 | 316,701 | |||||||||
| Acquired intangible assets, net | 268,692 | 137,612 | |||||||||
| Investments in long-term debt securities | 1,451,107 | 463,950 | |||||||||
| Operating lease right-of-use assets | 448,248 | 456,888 | |||||||||
| Other non-current assets | 384,508 | 499,250 | |||||||||
| Total assets | $ | 13,909,426 | $ | 9,869,550 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Customers payable | $ | 3,858,708 | $ | 3,009,051 | |||||||
| Settlements payable | 249,802 | 239,362 | |||||||||
| Accrued expenses and other current liabilities | 654,495 | 360,850 | |||||||||
| Operating lease liabilities, current | 60,482 | 52,747 | |||||||||
| PPP Liquidity Facility advances | 725,658 | 464,094 | |||||||||
| Total current liabilities | 5,549,145 | 4,126,104 | |||||||||
| Long-term debt | 4,737,829 | 2,586,924 | |||||||||
| Operating lease liabilities, non-current | 390,690 | 389,662 | |||||||||
| Other non-current liabilities | 227,048 | 85,291 | |||||||||
| Total liabilities | 10,904,712 | 7,187,981 | |||||||||
| Commitments and contingencies (Note 18) | |||||||||||
| Stockholders’ equity: | |||||||||||
| Preferred stock, $0.0000001 par value: 100,000,000 shares authorized at September 30, 2021 and December 31, 2020. None issued and outstanding at September 30, 2021 and December 31, 2020. | — | — | |||||||||
| Class A common stock, $0.0000001 par value: 1,000,000,000 shares authorized at September 30, 2021 and December 31, 2020; 398,878,883 and 390,187,079 issued and outstanding at September 30, 2021 and December 31, 2020, respectively. | — | — | |||||||||
| Class B common stock, $0.0000001 par value: 500,000,000 shares authorized at September 30, 2021 and December 31, 2020; 62,100,770 and 65,997,697 issued and outstanding at September 30, 2021 and December 31, 2020, respectively. | — | — | |||||||||
| Additional paid-in capital | 2,918,372 | 2,955,464 | |||||||||
| Accumulated other comprehensive income (loss) | (7,411) | 23,328 | |||||||||
| Retained earnings (accumulated deficit) | 48,864 | (297,223) | |||||||||
| Total stockholders’ equity attributable to common stockholders | 2,959,825 | 2,681,569 | |||||||||
| Noncontrolling interests | 44,889 | — | |||||||||
| Total stockholders’ equity | 3,004,714 | 2,681,569 | |||||||||
| Total liabilities and stockholders’ equity | $ | 13,909,426 | $ | 9,869,550 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SQUARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Transaction-based revenue | $ | 1,297,040 | $ | 925,294 | $ | 3,484,245 | $ | 2,365,967 | |||||||||||||||
| Subscription and services-based revenue | 694,770 | 447,522 | 1,937,629 | 1,090,032 | |||||||||||||||||||
| Hardware revenue | 37,255 | 27,294 | 109,769 | 67,291 | |||||||||||||||||||
| Bitcoin revenue | 1,815,662 | 1,633,764 | 8,051,026 | 2,815,318 | |||||||||||||||||||
| Total net revenue | 3,844,727 | 3,033,874 | 13,582,669 | 6,338,608 | |||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||
| Transaction-based costs | 754,276 | 524,056 | 1,965,894 | 1,379,658 | |||||||||||||||||||
| Subscription and services-based costs | 132,046 | 68,528 | 346,144 | 161,801 | |||||||||||||||||||
| Hardware costs | 51,150 | 45,220 | 153,035 | 108,348 | |||||||||||||||||||
| Bitcoin costs | 1,774,040 | 1,601,615 | 7,879,816 | 2,759,082 | |||||||||||||||||||
| Total cost of revenue | 2,711,512 | 2,239,419 | 10,344,889 | 4,408,889 | |||||||||||||||||||
| Gross profit | 1,133,215 | 794,455 | 3,237,780 | 1,929,719 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Product development | 366,587 | 227,550 | 1,003,238 | 631,156 | |||||||||||||||||||
| Sales and marketing | 407,850 | 348,463 | 1,132,411 | 781,094 | |||||||||||||||||||
| General and administrative | 267,476 | 153,902 | 684,405 | 419,783 | |||||||||||||||||||
| Transaction and loan losses | 62,306 | 15,198 | 130,874 | 161,684 | |||||||||||||||||||
| Bitcoin impairment losses | 6,000 | — | 71,126 | — | |||||||||||||||||||
| Total operating expenses | 1,110,219 | 745,113 | 3,022,054 | 1,993,717 | |||||||||||||||||||
| Operating income (loss) | 22,996 | 49,342 | 215,726 | (63,998) | |||||||||||||||||||
| Interest expense, net | 13,409 | 14,980 | 20,126 | 38,955 | |||||||||||||||||||
| Other expense (income), net | 12,011 | (784) | (36,249) | (20,513) | |||||||||||||||||||
| Income (loss) before income tax | (2,424) | 35,146 | 231,849 | (82,440) | |||||||||||||||||||
| Provision (benefit) for income taxes | 452 | (1,369) | (7,961) | (1,586) | |||||||||||||||||||
| Net income (loss) | (2,876) | 36,515 | 239,810 | (80,854) | |||||||||||||||||||
| Net income (loss) attributable to noncontrolling interests | (2,960) | — | (3,303) | — | |||||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | 84 | $ | 36,515 | $ | 243,113 | $ | (80,854) | |||||||||||||||
| Net income (loss) per share attributable to common stockholders: | |||||||||||||||||||||||
| Basic | $ | 0.00 | $ | 0.08 | $ | 0.53 | $ | (0.18) | |||||||||||||||
| Diluted | $ | 0.00 | $ | 0.07 | $ | 0.48 | $ | (0.18) | |||||||||||||||
| Weighted-average shares used to compute net income (loss) per share attributable to common stockholders: | |||||||||||||||||||||||
| Basic | 460,654 | 444,458 | 457,039 | 439,855 | |||||||||||||||||||
| Diluted | 504,120 | 488,069 | 520,204 | 439,855 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SQUARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net income (loss) | $ | (2,876) | $ | 36,515 | $ | 239,810 | $ | (80,854) | |||||||||||||||
| Net foreign currency translation adjustments | (14,145) | 9,111 | (25,656) | 7,090 | |||||||||||||||||||
| Net unrealized gain (loss) on marketable debt securities | (1,104) | (1,567) | (5,083) | 3,191 | |||||||||||||||||||
| Total comprehensive income (loss) | $ | (18,125) | $ | 44,059 | $ | 209,071 | $ | (70,573) | |||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SQUARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| Nine Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | 239,810 | $ | (80,854) | |||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 95,707 | 61,741 | |||||||||
| Non-cash interest and other | 20,368 | 52,384 | |||||||||
| Loss on extinguishment of long-term debt | — | 2,393 | |||||||||
| Share-based compensation | 429,999 | 284,129 | |||||||||
| Gain on revaluation of equity investment | (41,007) | (20,999) | |||||||||
| Bitcoin impairment losses | 71,126 | — | |||||||||
| Non-cash lease expense | 61,978 | 50,782 | |||||||||
| Transaction and loan losses | 130,874 | 161,684 | |||||||||
| Change in deferred income taxes | (5,224) | (3,375) | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Settlements receivable | (337,893) | (340,010) | |||||||||
| Customer funds | (591,982) | (885,259) | |||||||||
| Purchases and originations of loans | (2,285,306) | (1,620,057) | |||||||||
| Sales, principal payments, and forgiveness of loans | 1,952,142 | 1,226,994 | |||||||||
| Customers payable | 846,906 | 1,445,608 | |||||||||
| Settlements payable | 10,440 | 54,871 | |||||||||
| Other assets and liabilities | 74,838 | (129,155) | |||||||||
| Net cash provided by operating activities | 672,776 | 260,877 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchase of marketable debt securities | (2,343,446) | (966,278) | |||||||||
| Proceeds from maturities of marketable debt securities | 609,377 | 404,931 | |||||||||
| Proceeds from sale of marketable debt securities | 558,724 | 432,162 | |||||||||
| Purchase of marketable debt securities from customer funds | (488,851) | (552,411) | |||||||||
| Proceeds from maturities of marketable debt securities from customer funds | 456,481 | 237,000 | |||||||||
| Proceeds from sale of marketable debt securities from customer funds | 10,000 | 28,457 | |||||||||
| Purchase of property and equipment | (98,028) | (86,353) | |||||||||
| Purchase of bitcoin investments | (170,000) | — | |||||||||
| Purchase of other investments | (47,550) | — | |||||||||
| Proceeds from sale of equity investments | 420,644 | — | |||||||||
| Business combinations, net of cash acquired | (163,970) | (29,221) | |||||||||
| Net cash used in investing activities | (1,256,619) | (531,713) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from issuance of convertible senior notes, net | — | 986,241 | |||||||||
| Purchase of convertible senior note hedges | — | (149,200) | |||||||||
| Proceeds from issuance of warrants | — | 99,500 | |||||||||
| Proceeds from issuance of senior unsecured notes, net | 1,971,828 | — | |||||||||
| Proceeds from PPP Liquidity Facility advances | 681,542 | 473,496 | |||||||||
| Repayments of PPP Liquidity Facility advances | (419,978) | — | |||||||||
| Payments for tax withholding related to vesting of restricted stock units | (312,406) | (182,607) | |||||||||
| Proceeds from the exercise of stock options and purchases under the employee stock purchase plan | 84,866 | 106,600 | |||||||||
| Other financing activities | (7,112) | (2,606) | |||||||||
| Net cash provided by financing activities | 1,998,740 | 1,331,424 | |||||||||
| Effect of foreign exchange rate on cash and cash equivalents | (14,311) | 772 | |||||||||
| Net increase in cash, cash equivalents, and restricted cash | 1,400,586 | 1,061,360 | |||||||||
| Cash, cash equivalents, and restricted cash, beginning of period | 3,201,863 | 1,098,706 | |||||||||
| Cash, cash equivalents, and restricted cash, end of period | $ | 4,602,449 | $ | 2,160,066 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SQUARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands, except for number of shares)
| Class A and B common stock | Additional paid-in | Accumulated other comprehensive | Retained earnings (Accumulated | Noncontrolling | Total stockholders’ | |||||||||||||||||||||||||||||||||||||||
| Shares | Amount | capital | income | deficit) | interests | equity | ||||||||||||||||||||||||||||||||||||||
| 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 No. 2020-06 | — | — | (502,708) | — | 102,974 | — | (399,734) | |||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 39,008 | — | 39,008 | |||||||||||||||||||||||||||||||||||||
| Shares issued in connection with employee stock plans | 4,311,094 | — | 32,891 | — | — | — | 32,891 | |||||||||||||||||||||||||||||||||||||
| Change in other comprehensive loss | — | — | — | (13,129) | — | — | (13,129) | |||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 121,965 | — | — | — | 121,965 | |||||||||||||||||||||||||||||||||||||
| Tax withholding related to vesting of restricted stock units | (669,076) | — | (152,013) | — | — | — | (152,013) | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock in conjunction with the conversion of convertible notes | 166,967 | — | 3,816 | — | — | — | 3,816 | |||||||||||||||||||||||||||||||||||||
| Exercise of bond hedges in conjunction with the conversion of convertible notes | (5,325,320) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | 454,668,441 | $ | — | $ | 2,459,415 | $ | 10,199 | $ | (155,241) | $ | — | $ | 2,314,373 | |||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 204,021 | (343) | 203,678 | |||||||||||||||||||||||||||||||||||||
| Shares issued in connection with employee stock plans | 2,410,350 | — | 39,526 | — | — | — | 39,526 | |||||||||||||||||||||||||||||||||||||
| Change in other comprehensive loss | — | — | — | (2,361) | — | — | (2,361) | |||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 150,367 | — | — | — | 150,367 | |||||||||||||||||||||||||||||||||||||
| Tax withholding related to vesting of restricted stock units | (602,961) | — | (140,212) | — | — | — | (140,212) | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock in conjunction with the conversion of convertible notes | 1,456,748 | — | 113,067 | — | — | — | 113,067 | |||||||||||||||||||||||||||||||||||||
| Exercise of bond hedges in conjunction with the conversion of convertible notes | (150,299) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with business combination | 41,138 | — | 10,071 | — | — | — | 10,071 | |||||||||||||||||||||||||||||||||||||
| Noncontrolling interests in connection with business combination | — | — | — | — | — | 48,192 | 48,192 | |||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | 457,823,417 | — | $ | 2,632,234 | $ | 7,838 | $ | 48,780 | $ | 47,849 | $ | 2,736,701 | ||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | 84 | (2,960) | (2,876) | |||||||||||||||||||||||||||||||||||||
| Shares issued in connection with employee stock plans | 3,065,151 | 12,711 | — | — | — | 12,711 | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with business combination | 77,305 | 18,664 | — | — | — | 18,664 |
| Change in other comprehensive loss | — | — | (15,249) | — | — | (15,249) | ||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | 168,585 | — | — | — | 168,585 | ||||||||||||||||||||||||||||||||||||||
| Tax withholding related to vesting of restricted stock units | (82,374) | (20,181) | — | — | — | (20,181) | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in conjunction with the conversion of convertible notes | 1,371,519 | 106,359 | — | — | — | 106,359 | ||||||||||||||||||||||||||||||||||||||
| Exercise of bond hedges in conjunction with the conversion of convertible notes | (1,275,365) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | 460,979,653 | — | $ | 2,918,372 | $ | (7,411) | $ | 48,864 | $ | 44,889 | $ | 3,004,714 |
| 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 loss | — | — | — | — | (105,891) | — | (105,891) | |||||||||||||||||||||||||||||||||||||
| Shares issued in connection with employee stock plans | 5,222,525 | — | 31,406 | — | — | — | 31,406 | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with business combination | 357,017 | — | 14,999 | — | — | — | 14,999 | |||||||||||||||||||||||||||||||||||||
| Change in other comprehensive loss | — | — | — | (5,061) | — | — | (5,061) | |||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 79,562 | — | — | — | 79,562 | |||||||||||||||||||||||||||||||||||||
| Tax withholding related to vesting of restricted stock units | (722,606) | — | (48,772) | — | — | — | (48,772) | |||||||||||||||||||||||||||||||||||||
| 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 convertible notes | 1,109,980 | — | 24,094 | — | — | — | 24,094 | |||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | 438,763,636 | $ | — | $ | 2,427,596 | $ | (3,432) | $ | (616,219) | $ | — | $ | 1,807,945 | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (11,478) | — | (11,478) | |||||||||||||||||||||||||||||||||||||
| Shares issued in connection with employee stock plans | 4,802,969 | — | 46,679 | — | — | — | 46,679 | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with business combination | 250,957 | — | 20,320 | — | — | — | 20,320 | |||||||||||||||||||||||||||||||||||||
| Change in other comprehensive loss | — | — | — | 7,798 | — | — | 7,798 | |||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 99,925 | — | — | — | 99,925 | |||||||||||||||||||||||||||||||||||||
| Tax withholding related to vesting of restricted stock units | (703,895) | — | (44,882) | — | — | — | (44,882) |
| Exercise of bond hedges in conjunction with the conversion of convertible notes | (724,316) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | 442,389,351 | $ | — | $ | 2,549,638 | $ | 4,366 | $ | (627,697) | $ | — | $ | 1,926,307 | |||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 36,515 | — | 36,515 | |||||||||||||||||||||||||||||||||||||
| Shares issued in connection with employee stock plans | 4,246,489 | — | 28,514 | — | — | — | 28,514 | |||||||||||||||||||||||||||||||||||||
| Change in other comprehensive loss | — | — | — | 7,544 | — | — | 7,544 | |||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 114,172 | — | — | — | 114,172 | |||||||||||||||||||||||||||||||||||||
| Tax withholding related to vesting of restricted stock units | (694,266) | — | (88,953) | — | — | — | (88,953) | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock in conjunction with the conversion of convertible notes | 1,753,623 | — | 38,736 | — | — | — | 38,736 | |||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | 447,695,197 | $ | — | $ | 2,642,107 | $ | 11,910 | $ | (591,182) | $ | — | $ | 2,062,835 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SQUARE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Square, Inc. (together with its subsidiaries, "Square" or the "Company") creates tools that empower businesses, sellers and individuals to participate in the economy. Square enables sellers to accept card payments and also provides reporting and analytics, and 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 way for people to store, send, receive, spend, and invest money.
On March 1, 2021, Square Financial Services, Inc. ("Square Financial Services"), a wholly-owned subsidiary of the Company, began its banking operations after its industrial loan company charter was approved by the Federal Deposit Insurance Corporation ("FDIC") and the State of Utah. On April 30, 2021, the Company completed the acquisition of a majority ownership interest in TIDAL, a global music and entertainment platform that brings fans and artists together through unique music, content, and experiences. In the second quarter of 2021, Square launched TBD, a bitcoin-focused business established to build an open developer platform with the goal of making it easy to create non-custodial, permissionless, and decentralized financial services.
Square was founded in 2009 and is headquartered in San Francisco, with offices in the United States, Canada, Japan, Australia, Ireland, the United Kingdom, Spain, Lithuania, and Norway.
Proposed acquisition of Afterpay Limited
On August 1, 2021, the Company entered into a definitive agreement with Afterpay Limited (“Afterpay”) to acquire Afterpay by way of a court-approved Scheme of Arrangement. See Note 8, Acquisitions for further details.
Basis of Presentation
The accompanying interim condensed consolidated financial statements of the Company are unaudited. These interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") and the applicable rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The December 31, 2020 condensed consolidated balance sheet was derived from the audited financial statements as of that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
The accompanying unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature considered necessary to state fairly the Company's consolidated financial position, results of operations, comprehensive income (loss), and cash flows for the interim periods. The condensed consolidated financial statements include the financial statements of Square 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 condensed consolidated balance sheets. The interim results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021, or for any other future annual or interim period.
The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Consolidated Financial Statements and related notes in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.
Use of Estimates
The preparation of the Company’s condensed 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 condensed 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"), the allowance for loan loss reserves for loans held for investment, valuation of goodwill and acquired intangible assets, the determination of pre-acquisition contingencies associated with business combinations, accrued royalties, deferred revenue, determination of 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.
The Company continues to be impacted by the COVID-19 pandemic. The Company continued to experience improvements in its business as the majority of U.S. markets transitioned to varying states of economic recovery and reopenings. However, the emergence of new and more transmissible variants of COVID-19 could lead to a possible resurgence of the virus, particularly in populations with low vaccination rates, and has resulted in new restrictions in certain geographies and among certain businesses. The Company will continue to monitor the carrying values of its assets and liabilities based on estimates, judgments and circumstances it is aware of and consider the effects and trends of COVID-19.
The Company's estimates of accrued transaction losses and valuation of loans held for sale are based on historical experience, adjusted for market data relevant to the current economic environment including COVID-19 trends. The Company will continue to update its estimates as developments occur and additional information is obtained. See Note 11, Other Consolidated Balance Sheet Components (Current), for further details on transaction losses and Note 5, Fair Value of Financial Instruments, for further details on amortized cost over fair value of the loans.
Concentration of Credit Risk
For the three and nine months ended September 30, 2021 and September 30, 2020, the Company had no customer that accounted for greater than 10% of total net revenue.
The Company had two third-party payment processors that represented approximately 50% and 34% of settlements receivable as of September 30, 2021. As of December 31, 2020, there were two parties that represented approximately 59% and 27% of settlements receivable. 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, reverse repurchase agreements, loans held for sale, and loans held for investment. 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 with reverse repurchase agreements is mitigated by the securities held as collateral and their short-term nature. The associated risk of concentration for loans held for sale and loans held for investment are partially mitigated by credit evaluations that are performed prior to facilitating the offering of and origination 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.
Sales and Marketing Expenses
Advertising costs are expensed as incurred and included in sales and marketing expense in the condensed consolidated statements of operations. Total advertising costs were $123.1 million and $296.4 million for the three and nine
months ended September 30, 2021, respectively, compared to $75.7 million and $145.8 million for the three and nine months ended September 30, 2020, respectively.
In addition, 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, which include, but are not limited to, Cash App peer-to-peer processing costs and related transaction losses, card issuance costs, customer referral bonuses, promotional giveaways, and certain Cash App crypto network operating costs were $183.2 million and $555.9 million, for the three and nine months ended September 30, 2021, respectively, compared to $208.4 million and $465.1 million for the three and nine months ended September 30, 2020, respectively.
Recent Accounting Pronouncements
Recently adopted accounting pronouncements
In August 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. The guidance is 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. The Company early adopted the new guidance on January 1, 2021 using the modified retrospective approach and recorded a cumulative effect upon adoption of $103.0 million as a reduction to accumulated deficit and 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 recorded an increase to its convertible notes balance by an aggregate amount of $399.7 million as a result of the reversal of the separation of the convertible debt between debt and equity. The adoption of this standard also significantly decreased the amount of non-cash interest expense to be recognized in future periods as a result of eliminating the discount associated with the equity component. There was no impact to the Company’s statements of cash flows as the result of the adoption of ASU No. 2020-06.
In October 2020, the FASB issued ASU No. 2020-10, Codification Improvements ("Codification"). The update provides incremental improvements on various topics in the Codification to provide clarification, correct errors in, and to provide simplification on a variety of topics. Among other items, the guidance includes presentation disclosures for the amount of income tax expense or benefit related to other comprehensive income. The amendments are effective for public entities in fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The Company adopted this guidance effective January 1, 2021 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.
Recently issued accounting pronouncements not yet adopted In July 2021, the FASB issued ASU No. 2021-05 ("ASU 2021-05") "Lease (Topic 842): Lessors - Certain Leases with Variable Lease Payments" which amends the lease classification requirements for lessors with certain leases containing variable payments. A lessor should classify and account for a lease with variable lease payments that do not depend on an index or a rate as an operating lease if both of the following criteria are met: 1) the lease would have been classified as a sales-type lease or a direct financing lease; and 2) the lessor would have otherwise recognized a day-one loss. The amendments in ASU 2021-05 are effective for fiscal years beginning after December 15, 2021, with early adoption permitted. The Company is evaluating the effect of adopting this new accounting guidance, but does not expect the adoption to have a material impact on the Company’s financial statements.
In May 2021, the FASB issued ASU No. 2021-04 (“ASU 2021-04”) “Earnings 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)” which provides guidance on modifications 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 same manner as if cash had been paid as consideration. The amendments are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the effect of adopting this new accounting guidance, but does not expect adoption to have a material impact on the Company’s financial statements.
NOTE 2 - REVENUE
The following table presents the Company's revenue disaggregated by revenue source (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Revenue from Contracts with Customers: | |||||||||||||||||||||||
| Transaction-based revenue | $ | 1,297,040 | $ | 925,294 | $ | 3,484,245 | $ | 2,365,967 | |||||||||||||||
| Subscription and services-based revenue | 636,841 | 430,010 | 1,793,308 | 1,032,168 | |||||||||||||||||||
| Hardware revenue | 37,255 | 27,294 | 109,769 | 67,291 | |||||||||||||||||||
| Bitcoin revenue | 1,815,662 | 1,633,764 | 8,051,026 | 2,815,318 | |||||||||||||||||||
| Revenue from other sources: | |||||||||||||||||||||||
| Subscription and services-based revenue | 57,929 | 17,512 | 144,321 | 57,864 | |||||||||||||||||||
| Total net revenue | $ | 3,844,727 | $ | 3,033,874 | $ | 13,582,669 | $ | 6,338,608 |
The deferred revenue balances were as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Deferred revenue, beginning of the period | $ | 59,501 | $ | 51,549 | $ | 51,804 | $ | 44,331 | |||||||||||||||
| Deferred revenue, end of the period | 58,684 | 53,166 | 58,684 | 53,166 | |||||||||||||||||||
| Deferred revenue arising from business combination | 1,068 | 800 | 6,448 | 800 | |||||||||||||||||||
| Revenue recognized in the period from amounts included in deferred revenue at the beginning of the period | $ | 25,867 | $ | 17,560 | $ | 40,293 | $ | 33,885 |
NOTE 3 - INVESTMENTS IN DEBT SECURITIES
The Company's short-term and long-term investments as of September 30, 2021 are as follows (in thousands):
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||
| Short-term debt securities: | |||||||||||||||||||||||
| U.S. agency securities | $ | 93,867 | $ | 227 | $ | (6) | $ | 94,088 | |||||||||||||||
| Corporate bonds | 290,231 | 369 | (77) | 290,523 | |||||||||||||||||||
| Commercial paper | 141,551 | — | — | 141,551 | |||||||||||||||||||
| Municipal securities | 15,738 | 12 | — | 15,750 | |||||||||||||||||||
| Certificates of deposit | 8,200 | — | — | 8,200 | |||||||||||||||||||
| U.S. government securities | 308,080 | 248 | (5) | 308,323 | |||||||||||||||||||
| Foreign government securities | 10,495 | 19 | (140) | 10,374 | |||||||||||||||||||
| Total | $ | 868,162 | $ | 875 | $ | (228) | $ | 868,809 | |||||||||||||||
| Long-term debt securities: | |||||||||||||||||||||||
| U.S. agency securities | $ | 152,820 | $ | 46 | $ | (175) | $ | 152,691 | |||||||||||||||
| Corporate bonds | 704,676 | 337 | (916) | 704,097 | |||||||||||||||||||
| Municipal securities | 21,952 | 23 | (10) | 21,965 | |||||||||||||||||||
| U.S. government securities | 543,483 | 34 | (337) | 543,180 | |||||||||||||||||||
| Foreign government securities | 29,139 | 59 | (24) | 29,174 | |||||||||||||||||||
| Total | $ | 1,452,070 | $ | 499 | $ | (1,462) | $ | 1,451,107 |
The Company's short-term and long-term investments as of December 31, 2020 are as follows (in thousands):
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||
| Short-term debt securities: | |||||||||||||||||||||||
| U.S. agency securities | $ | 153,386 | $ | 782 | $ | (164) | $ | 154,004 | |||||||||||||||
| Corporate bonds | 76,957 | 256 | (14) | 77,199 | |||||||||||||||||||
| Commercial paper | 4,999 | — | — | 4,999 | |||||||||||||||||||
| Municipal securities | 10,377 | 57 | (3) | 10,431 | |||||||||||||||||||
| U.S. government securities | 404,194 | 1,244 | (4) | 405,434 | |||||||||||||||||||
| Foreign government securities | 42,988 | 139 | (82) | 43,045 | |||||||||||||||||||
| Total | $ | 692,901 | $ | 2,478 | $ | (267) | $ | 695,112 | |||||||||||||||
| Long-term debt securities: | |||||||||||||||||||||||
| U.S. agency securities | $ | 168,762 | $ | 519 | $ | (3) | $ | 169,278 | |||||||||||||||
| Corporate bonds | 174,655 | 1,401 | (42) | 176,014 | |||||||||||||||||||
| Municipal securities | 1,045 | 15 | — | 1,060 | |||||||||||||||||||
| U.S. government securities | 91,642 | 433 | (2) | 92,073 | |||||||||||||||||||
| Foreign government securities | 25,351 | 184 | (10) | 25,525 | |||||||||||||||||||
| Total | $ | 461,455 | $ | 2,552 | $ | (57) | $ | 463,950 |
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 September 30, 2021 and December 31, 2020, aggregated by investment category and the length of time that individual securities have been in a continuous loss position are as follows (in thousands):
| September 30, 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 | $ | 23,705 | $ | (6) | $ | — | $ | — | $ | 23,705 | $ | (6) | |||||||||||||||||||||||
| Corporate bonds | 166,579 | (73) | 925 | (3) | 167,504 | (76) | |||||||||||||||||||||||||||||
| Municipal securities | 750 | — | — | — | 750 | — | |||||||||||||||||||||||||||||
| U.S. government securities | 96,705 | (5) | — | — | 96,705 | (5) | |||||||||||||||||||||||||||||
| Foreign government securities | 8,049 | (140) | — | — | 8,049 | (140) | |||||||||||||||||||||||||||||
| Total | $ | 295,788 | $ | (224) | $ | 925 | $ | (3) | $ | 296,713 | $ | (227) | |||||||||||||||||||||||
| Long-term debt securities: | |||||||||||||||||||||||||||||||||||
| U.S. agency securities | $ | 124,811 | $ | (175) | $ | — | $ | — | $ | 124,811 | $ | (175) | |||||||||||||||||||||||
| Corporate bonds | 533,286 | (916) | — | — | 533,286 | (916) | |||||||||||||||||||||||||||||
| Municipal securities | 4,054 | (10) | — | — | 4,054 | (10) | |||||||||||||||||||||||||||||
| U.S. government securities | 470,202 | (337) | — | — | 470,202 | (337) | |||||||||||||||||||||||||||||
| Foreign government securities | 14,087 | (24) | — | — | 14,087 | (24) | |||||||||||||||||||||||||||||
| Total | $ | 1,146,440 | $ | (1,462) | $ | — | $ | — | $ | 1,146,440 | $ | (1,462) |
| 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) | — | — | 15,255 | (14) | |||||||||||||||||||||||||||||
| Municipal securities | 2,566 | (3) | — | — | 2,566 | (3) | |||||||||||||||||||||||||||||
| U.S. government securities | 45,970 | (4) | — | — | 45,970 | (4) | |||||||||||||||||||||||||||||
| Foreign government securities | 21,341 | (82) | — | — | 21,341 | (82) | |||||||||||||||||||||||||||||
| Total | $ | 126,843 | $ | (265) | $ | 2,505 | $ | (2) | $ | 129,348 | $ | (267) | |||||||||||||||||||||||
| Long-term debt securities: | |||||||||||||||||||||||||||||||||||
| U.S. agency securities | $ | 1,406 | $ | (3) | $ | — | $ | — | $ | 1,406 | $ | (3) | |||||||||||||||||||||||
| Corporate bonds | 28,189 | (42) | — | — | 28,189 | (42) | |||||||||||||||||||||||||||||
| U.S. government securities | 8,658 | (2) | — | — | 8,658 | (2) | |||||||||||||||||||||||||||||
| Foreign government securities | 10,929 | (10) | — | — | 10,929 | (10) | |||||||||||||||||||||||||||||
| Total | $ | 49,182 | $ | (57) | $ | — | $ | — | $ | 49,182 | $ | (57) |
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, net.
The Company does not have any available for sale debt securities for which the Company has recorded credit related losses.
The contractual maturities of the Company's short-term and long-term investments as of September 30, 2021 are as follows (in thousands):
| Amortized Cost | Fair Value | ||||||||||
| Due in one year or less | $ | 868,162 | $ | 868,809 | |||||||
| Due in one to five years | 1,452,070 | 1,451,107 | |||||||||
| Total | $ | 2,320,232 | $ | 2,319,916 |
NOTE 4 - CUSTOMER FUNDS
The following table presents the assets underlying customer funds (in thousands):
| September 30, 2021 | December 31, 2020 | ||||||||||
| Cash | $ | 162,247 | $ | 145,577 | |||||||
| Customer funds in transit | — | 262,562 | |||||||||
| Cash Equivalents: | |||||||||||
| Money market funds | 1,485,002 | 777,193 | |||||||||
| Reverse repurchase agreement (i) | 402,097 | 246,880 | |||||||||
| U.S. agency securities | — | 47,300 | |||||||||
| U.S. government securities | 133,944 | 111,796 | |||||||||
| Short-term debt securities: | |||||||||||
| U.S. agency securities | 53,563 | 113,178 | |||||||||
| U.S. government securities | 412,261 | 333,346 | |||||||||
| Total | $ | 2,649,114 | $ | 2,037,832 |
(i) The Company has accounted for the reverse repurchase agreement with a third party as an overnight lending arrangement, collateralized by the securities subject to the repurchase agreement. The Company classifies the amounts due from the counterparty as cash equivalents due to the short-term nature.
The Company's investments within customer funds as of September 30, 2021 are as follows (in thousands):
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||
| Short-term debt securities: | |||||||||||||||||||||||
| U.S. agency securities | $ | 53,568 | $ | — | $ | (5) | $ | 53,563 | |||||||||||||||
| U.S. government securities | 412,268 | 18 | (25) | 412,261 | |||||||||||||||||||
| Total | $ | 465,836 | $ | 18 | $ | (30) | $ | 465,824 |
The Company's investments within customer funds as of December 31, 2020 are as follows (in thousands):
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||
| Short-term debt securities: | |||||||||||||||||||||||
| U.S. agency securities | $ | 113,156 | $ | 22 | $ | — | $ | 113,178 | |||||||||||||||
| U.S. government securities | 333,323 | 28 | (5) | 333,346 | |||||||||||||||||||
| Total | $ | 446,479 | $ | 50 | $ | (5) | $ | 446,524 |
The amortized cost of investments classified as cash equivalents approximated the fair value due to the short-term nature of the investments.
The gross unrealized losses and fair values for those investments that were in an unrealized loss position as of September 30, 2021 and December 31, 2020, aggregated by investment category and the length of time that individual securities have been in a continuous loss position are as follows (in thousands):
| September 30, 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 | $ | 30,045 | $ | (5) | $ | — | $ | — | $ | 30,045 | $ | (5) | |||||||||||||||||||||||
| U.S. government securities | 247,634 | (25) | — | — | 247,634 | (25) | |||||||||||||||||||||||||||||
| Total | $ | 277,679 | $ | (30) | $ | — | $ | — | $ | 277,679 | $ | (30) |
| 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. government securities | $ | 73,609 | $ | (5) | $ | — | $ | — | $ | 73,609 | $ | (5) | |||||||||||||||||||||||
| Total | $ | 73,609 | $ | (5) | $ | — | $ | — | $ | 73,609 | $ | (5) |
The unrealized losses above were caused by interest rate changes. The U.S. government securities are either explicitly or implicitly guaranteed by the U.S. government and are highly rated by major rating agencies. 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, net.
The Company does not have any available for sale debt securities for which the Company has recorded credit related losses.
The contractual maturities of the Company's investments within customer funds as of September 30, 2021 are as follows (in thousands):
| Amortized Cost | Fair Value | ||||||||||
| Due in one year or less | $ | 465,836 | $ | 465,824 | |||||||
| Due in one to five years | — | — | |||||||||
| Total | $ | 465,836 | $ | 465,824 |
NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company measures its cash equivalents, customer funds, short-term and long-term marketable debt securities, and marketable equity investment at fair value. The Company classifies these investments within Level 1 or Level 2 of the fair value hierarchy because the Company values these investments using quoted market prices or alternative pricing sources and models utilizing market observable inputs.
The Company’s financial assets and liabilities that are measured at fair value on a recurring basis are classified as follows (in thousands):
| September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||||
| Cash Equivalents: | |||||||||||||||||||||||||||||||||||
| Money market funds | $ | 2,495,120 | $ | — | $ | — | $ | 1,694,736 | $ | — | $ | — | |||||||||||||||||||||||
| U.S. agency securities | — | — | — | — | 41,186 | — | |||||||||||||||||||||||||||||
| Certificates of deposit | — | 1,500 | — | — | — | — | |||||||||||||||||||||||||||||
| Commercial paper | — | 46,150 | — | — | — | — | |||||||||||||||||||||||||||||
| Corporate bonds | — | 1,500 | — | — | — | — | |||||||||||||||||||||||||||||
| U.S. government securities | — | — | — | 15,000 | — | — | |||||||||||||||||||||||||||||
| Customer funds: | |||||||||||||||||||||||||||||||||||
| Money market funds | 1,485,002 | — | — | 777,193 | — | — | |||||||||||||||||||||||||||||
| Reverse repurchase agreement | 402,097 | — | — | 246,880 | — | — | |||||||||||||||||||||||||||||
| U.S. agency securities | — | 53,564 | — | — | 160,478 | — | |||||||||||||||||||||||||||||
| U.S. government securities | 546,205 | — | — | 445,142 | — | — | |||||||||||||||||||||||||||||
| Short-term debt securities: | |||||||||||||||||||||||||||||||||||
| U.S. agency securities | — | 94,088 | — | — | 154,004 | — | |||||||||||||||||||||||||||||
| Certificates of deposit | — | 8,200 | — | — | — | — | |||||||||||||||||||||||||||||
| Corporate bonds | — | 290,523 | — | — | 77,199 | — | |||||||||||||||||||||||||||||
| Commercial paper | — | 141,551 | — | — | 4,999 | — | |||||||||||||||||||||||||||||
| Municipal securities | — | 15,750 | — | — | 10,431 | — | |||||||||||||||||||||||||||||
| U.S. government securities | 308,323 | — | — | 405,434 | — | — | |||||||||||||||||||||||||||||
| Foreign government securities | — | 10,374 | — | — | 43,045 | — | |||||||||||||||||||||||||||||
| Long-term debt securities: | |||||||||||||||||||||||||||||||||||
| U.S. agency securities | — | 152,691 | — | — | 169,278 | — | |||||||||||||||||||||||||||||
| Corporate bonds | — | 704,097 | — | — | 176,014 | — | |||||||||||||||||||||||||||||
| Municipal securities | — | 21,965 | — | — | 1,060 | — | |||||||||||||||||||||||||||||
| U.S. government securities | 543,180 | — | — | 92,073 | — | — | |||||||||||||||||||||||||||||
| Foreign government securities | — | 29,174 | — | — | 25,525 | — | |||||||||||||||||||||||||||||
| Other: | |||||||||||||||||||||||||||||||||||
| Investment in marketable equity security | — | — | — | 376,258 | — | — | |||||||||||||||||||||||||||||
| Total | $ | 5,779,927 | $ | 1,571,127 | $ | — | $ | 4,052,716 | $ | 863,219 | $ | — |
The carrying amounts of certain financial instruments, including settlements receivable, loans held for investment, accounts payable, customers payable, accrued expenses and settlements payable, approximate their fair values due to their short-term nature.
The Company estimates the fair value of its convertible and senior notes based on their last actively traded prices (Level 1) or market observable inputs (Level 2). The estimated fair value and carrying value of the convertible and senior notes were as follows (in thousands):
| September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||
| Carrying Value | Fair Value (Level 2) | Carrying Value | Fair Value (Level 2) | ||||||||||||||||||||
| 2031 Senior Notes | $ | 986,420 | $ | 1,032,250 | $ | — | $ | — | |||||||||||||||
| 2026 Senior Notes | 986,924 | 1,017,070 | — | — | |||||||||||||||||||
| 2027 Convertible Notes | 566,873 | 685,297 | 458,496 | 644,000 | |||||||||||||||||||
| 2026 Convertible Notes | 567,195 | 659,404 | 482,204 | 638,250 | |||||||||||||||||||
| 2025 Convertible Notes | 989,599 | 2,051,760 | 858,332 | 1,912,440 | |||||||||||||||||||
| 2023 Convertible Notes | 640,818 | 1,982,159 | 780,046 | 2,417,820 | |||||||||||||||||||
| 2022 Convertible Notes | 4,637 | 48,830 | 7,846 | 80,731 | |||||||||||||||||||
| Total | $ | 4,742,466 | $ | 7,476,770 | $ | 2,586,924 | $ | 5,693,241 |
The estimated fair value and carrying value of loans held for sale and loans held for investment is as follows (in thousands):
| September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||
| Carrying Value | Fair Value (Level 3) | Carrying Value | Fair Value (Level 3) | ||||||||||||||||||||
| Loans held for sale | $ | 708,086 | $ | 824,640 | $ | 462,665 | $ | 467,805 | |||||||||||||||
| Loans held for investment | 79,482 | 83,760 | — | — | |||||||||||||||||||
| Total | $ | 787,568 | $ | 908,400 | $ | 462,665 | $ | 467,805 |
As of September 30, 2021, $605.4 million of the carrying value of loans held for sale was attributable to loans under the PPP. As the loans under the PPP qualify for forgiveness if certain criteria are met or are guaranteed by the U.S. government through the Small Business Administration ("SBA"), the related credit losses as of September 30, 2021 were immaterial. As of September 30, 2021, $434.2 million in PPP loans held for sale have been forgiven by the SBA, of which $97.6 million and $387.9 million have been forgiven in the three and nine months ended September 30, 2021, respectively. The loan forgiveness resulted in the recognition of $13.3 million and $37.6 million revenue associated with the forgiveness of the PPP loans for the three and nine months ended September 30, 2021, respectively. The Company approved and funded the last of its remaining PPP applications upon exhaustion of the funds in the program on May 21, 2021.
For the three and nine months ended September 30, 2021, the Company recorded a charge for the excess of amortized cost over fair value of the loans held for sale of $4.4 million and $6.0 million, respectively. For the three and nine months ended September 30, 2020, the Company recorded a charge for the excess of amortized cost over fair value of the loans of $3.2 million and $25.7 million, respectively. To determine the fair value of the loans held for sale, the Company utilizes industry-standard valuation modeling, such as discounted cash flow models, taking into account the 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 September 30, 2021, the Company considered other relevant market data in developing such estimates and assumptions, including the continuing impact of the COVID-19 pandemic. 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. As of September 30, 2021, there were no material changes to our estimates, and the Company will continue to evaluate facts and circumstances that could impact our estimates and affect our results of operations in future periods.
If applicable, the Company will recognize transfers into and out of levels within the fair value hierarchy at the end of the reporting period in which the actual event or change in circumstance occurs. During the three and nine months ended September 30, 2021 and 2020, the Company did not have any transfers in or out of Level 1, Level 2, or Level 3 assets or liabilities.
NOTE 6 - LOANS HELD FOR INVESTMENT
In April 2021, the Company began originating loans in the U.S. through its wholly-owned subsidiary bank, Square Financial Services. The Company sells the majority of the loans to institutional investors with a portion retained on its balance sheet. Loans retained by the Company are classified as held for investment as the Company has both the intent and ability to hold them for the foreseeable future, until maturity, or until payoff. The Company’s intent and ability in the future may change based on changes in business strategies, the economic environment, and market conditions. As of September 30, 2021, the Company held $79.5 million as loans held for investment, net within other current assets on the condensed consolidated balance sheet, see Note 11, Other Consolidated Balance Sheet Components.
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 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. 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. 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. There were no charge-offs or recoveries recorded as of September 30, 2021. The allowance for loan losses as of September 30, 2021 was immaterial.
The Company considers loans that are greater than 60 days past due to be delinquent, and loans 90 days or more past due to be nonperforming. When a loan is identified as nonperforming, recognition of income is discontinued. Loans are restored to performing status after total overdue unpaid amounts are repaid and the Company has reasonable assurance that performance under the terms of the loan will continue. As of September 30, 2021, the Company had no loans that were identified as nonperforming loans.
The Company closely monitors economic conditions and loan performance trends to assess and manage its exposure to credit risk. The criteria the Company monitors when assessing the credit quality and risk of its loan portfolio is primarily based on internal risk ratings, as they provide insight into borrower risk profiles and are useful as early indicators of potential future credit losses.
There were no loans outstanding classified as held for investment prior to June 8, 2021.
NOTE 7 - PROPERTY AND EQUIPMENT, NET
The following is a summary of property and equipment, less accumulated depreciation and amortization (in thousands):
| September 30, 2021 | December 31, 2020 | ||||||||||
| Leasehold improvements | $ | 202,430 | $ | 168,125 | |||||||
| Computer equipment | 161,880 | 139,174 | |||||||||
| Capitalized software | 107,200 | 119,452 | |||||||||
| Office furniture and equipment | 41,131 | 34,890 | |||||||||
| Total | 512,641 | 461,641 | |||||||||
| Less: Accumulated depreciation and amortization | (237,355) | (228,121) | |||||||||
| Property and equipment, net | $ | 275,286 | $ | 233,520 |
Depreciation and amortization expense on property and equipment was $27.0 million and $15.4 million for the three months ended September 30, 2021 and 2020 respectively, and $68.4 million and $48.2 million for the nine months ended September 30, 2021 and 2020, respectively.
NOTE 8 - ACQUISITIONS
Afterpay
On August 1, 2021, the Company entered into a definitive agreement (the “Afterpay Agreement”) with Afterpay Limited (“Afterpay”) to acquire Afterpay by way of a court-approved Scheme of Arrangement (the “Scheme”) for 0.375 share of the Company’s Class A common stock or 0.375 CHESS Depositary Interests, traded on the Australian Stock Exchange, representing ownership interest in Square Class A common stock for each outstanding Afterpay ordinary share (the “Afterpay Transaction”). Based on the Company's closing Class A common stock price of $239.84 as of September 30, 2021 and the outstanding shares of Afterpay as of the same date, the aggregate consideration, excluding the value of replacement equity awards, is estimated at $26.6 billion, comprising approximately 111 million shares of Class A common stock of the Company. The determination of the final value of the purchase consideration will depend on the Company's stock price and the outstanding shares of Afterpay at the closing of the Afterpay Transaction.
The Afterpay Transaction is subject to customary closing conditions, including, among others: (i) approval by Afterpay shareholders of the Scheme by the requisite majorities under the Australian Corporations Act, (ii) approval by Company stockholders of the issuance of new shares of Class A common stock of the Company in connection with the Afterpay Transaction by the requisite majority (which approval was obtained at the special meeting of Company stockholders on November 3, 2021), (iii) expiration or earlier termination of any applicable waiting period and receipt of regulatory consents, approvals and clearances under relevant antitrust/competition and foreign investment legislation in the United States and other relevant jurisdictions, (iv) the absence of any final and non-appealable order, decree or law preventing, making illegal or prohibiting the completion of the Afterpay Transaction and (v) no events having occurred that would have a material adverse effect on Afterpay or the Company.
The Afterpay Agreement may be terminated by either the Company or Afterpay under certain circumstances including but not limited to: (i) an adverse change in recommendation for the Afterpay Transaction by the other party’s board of directors, (ii) a material breach of a term of the Afterpay Agreement by the other party, or (iii) if the Scheme has not become effective on or before August 2, 2022, in each case in accordance with the Afterpay Agreement. Afterpay may also terminate the Afterpay Agreement if Afterpay’s board of directors determines in accordance with the Afterpay Agreement that an Afterpay Competing Transaction is an Afterpay Superior Proposal (in each case as defined in the Afterpay Agreement). Either the Company or Afterpay may be required to pay a termination fee of A$385 million (approximately $283 million) to the other party in connection with the termination of the Afterpay Agreement under certain circumstances.
TIDAL
On April 30, 2021, the Company acquired an 86.23% ownership interest in TIDAL, a global music and entertainment platform that brings fans and artists together through unique music, content, and experiences. The acquisition extends Square’s purpose of economic empowerment to musicians. The Company has the option, but not the obligation, to acquire any portion of the remaining noncontrolling interest any time after a three year period has elapsed from the execution of the merger agreement at a price based on the fair value of TIDAL shares.
The purchase consideration was comprised of $227.2 million in cash and 41,138 shares of the Company’s Class A common stock with an aggregate fair value of $10.1 million based on the closing price of the Company’s Class A common stock on the acquisition date. The purchase consideration is subject to adjustments for the final determination of the closing working capital. Third-party acquisition-related costs were immaterial. The results of TIDAL’s operations have been included in the condensed consolidated financial statements since the closing date.
The acquisition was accounted for as a business combination. This method requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date and that the difference between the fair value of the consideration paid for the acquired entity and the fair value of the net assets acquired be recorded as goodwill, which is not amortized but is tested at least annually for impairment.
The table below summarizes the consideration paid for TIDAL and the preliminary assessment of the fair value of the assets acquired and liabilities assumed at the closing date (in thousands, except share data).The Company is in the process of completing the determination of the fair values of certain intangible assets acquired, liabilities assumed and noncontrolling interests, including reviewing third party valuations, and accordingly, the preliminary values reflected in the table are subject to change. These changes will primarily relate to the fair value assigned to intangible assets acquired, royalty liabilities assumed, and evaluation of contingencies and tax effects related to the acquisition.
| Consideration: | |||||
| Cash | $ | 176,663 | |||
| Deferred consideration | 50,528 | ||||
| Stock (41,138 shares of Class A common stock) | 10,071 | ||||
| $ | 237,262 | ||||
| Recognized amounts of identifiable assets acquired and liabilities assumed: | |||||
| Current assets (inclusive of cash acquired of $12,358) | $ | 33,294 | |||
| Intangible customer assets | 69,000 | ||||
| Intangible technology assets | 29,000 | ||||
| Intangible trade name | 35,000 | ||||
| Intangible other assets | 8,000 | ||||
| Other non-current assets | 33,443 | ||||
| Accrued expenses and other current liabilities | (67,789) | ||||
| Other non-current liabilities | (52,547) | ||||
| Total identifiable net assets acquired | 87,401 | ||||
| Noncontrolling interests | (48,192) | ||||
| Goodwill | 198,053 | ||||
| Total | $ | 237,262 |
Goodwill from the acquisition was primarily attributable to the value of expected synergies created by incorporating TIDAL product and operations into the Company's technology platform and the value of the assembled workforce. An estimated amount of approximately $90.3 million of the goodwill generated from the TIDAL acquisition and approximately $112.3 million of the acquired intangible assets are expected to be deductible for US tax purposes based on the preliminary values. Additionally, the acquisition would have resulted in the recognition of US deferred tax assets; however, the realization of such deferred tax assets depends primarily on the Company's ability, post-acquisition, to generate taxable income in future periods of which there is not sufficient evidence of such income as of September 30, 2021. Accordingly, a valuation allowance was recorded against the net acquired deferred tax asset in accounting for the acquisition.
Deferred consideration in the aggregate amount of $50.5 million relates to pre-acquisition contingencies, and includes a portion of purchase consideration withheld, for a period of up to 4 years, as security for TIDAL's indemnification obligations related to general representations and warranties, in addition to certain potential exposures. The Company recognized certain liabilities for acquired pre-existing potential exposures, and an indemnification receivable in the amount of $24.5 million has been recorded related to such exposures in accordance with the terms of the indemnification agreement. Such amounts may change depending on the outcomes associated with the exposures, including the determination of claims that would be attributed to pre-acquisition matters. The amounts have been determined in accordance with ASC 740, Income Taxes, and ASC 450, Contingencies.
The Company prepared an initial determination of the fair value of the assets acquired and liabilities assumed as of the acquisition date using preliminary information. Subsequently, the Company has recognized measurement period adjustments to the purchase consideration and the jurisdictional allocation of the fair value of certain assets and liabilities assumed as a result of further refinements in the Company’s estimates. The net effect of these adjustments on the preliminary purchase price allocation was an increase of $13.2 million in both goodwill and deferred tax liabilities assumed, respectively. There was no impact to the consolidated statements of operations as result of these adjustments. The Company continues the
process of completing the evaluation of contingencies and tax effects related to the acquisition. Accordingly, the preliminary values reflected in the table above are subject to change.
In addition to the deferred consideration, an additional amount of $30.5 million in purchase consideration has been withheld related to defined post-acquisition activities. Because these amounts relate to post-acquisition activities, in accordance with ASC 805, Business Combinations, such amounts will be recognized as expenses in future periods, as incurred.
The noncontrolling interest was recorded based on the fair value on the date of acquisition.
The acquisition of TIDAL did not have a material impact on the Company's condensed consolidated financial statements. Accordingly, pro forma financial information has not been presented.
Other Acquisitions
On July 13, 2021 the Company completed an acquisition for total consideration of $20.5 million which resulted in the recognition of additional intangible assets and goodwill. None of the goodwill generated from the acquisition or acquired intangible assets are expected to be deductible for tax purposes.
NOTE 9 - GOODWILL
Goodwill is recorded when the consideration paid for an acquisition of a business exceeds the fair value of identifiable net tangible and intangible assets acquired.
The change in carrying value of goodwill in the period was as follows (in thousands):
| Balance at December 31, 2020 | $ | 316,701 | |||
| Acquisitions | 203,247 | ||||
| Other | (400) | ||||
| Balance at September 30, 2021 | $ | 519,548 |
The Company performs an annual goodwill impairment test on December 31 and more frequently if events and circumstances indicate that the asset might be impaired.
The Company has two operating and reportable segments, which are Seller and Cash App (defined further in Note 19, Segment and Geographical Information). The change in carrying value of goodwill allocated to the reportable segments in the period was as follows (in thousands):
| Cash App | Seller | Corporate and Other | Total | ||||||||||||||||||||
| Balance at December 31, 2020 | $ | 128,838 | $ | 187,863 | $ | — | $ | 316,701 | |||||||||||||||
| Acquisitions | — | 5,194 | 198,053 | 203,247 | |||||||||||||||||||
| Other | (400) | — | — | (400) | |||||||||||||||||||
| Balance at September 30, 2021 | $ | 128,438 | $ | 193,057 | $ | 198,053 | $ | 519,548 |
NOTE 10 - ACQUIRED INTANGIBLE ASSETS
The following table presents the detail of acquired intangible assets as of the periods presented (in thousands):
| Balance at September 30, 2021 | |||||||||||||||||||||||
| Weighted Average Estimated Useful Life | Cost | Accumulated Amortization | Net | ||||||||||||||||||||
| Technology assets | 5 years | $ | 165,255 | $ | (59,085) | $ | 106,170 | ||||||||||||||||
| Customer assets | 15 years | 128,418 | (16,805) | 111,613 | |||||||||||||||||||
| Trade name | 9 years | 53,194 | (12,355) | 40,839 | |||||||||||||||||||
| Other | 9 years | 13,710 | (3,640) | 10,070 | |||||||||||||||||||
| Total | $ | 360,577 | $ | (91,885) | $ | 268,692 |
| Balance at December 31, 2020 | |||||||||||||||||||||||
| Weighted Average Estimated Useful Life | Cost | Accumulated Amortization | Net | ||||||||||||||||||||
| Technology assets | 5 years | $ | 119,508 | $ | (43,084) | $ | 76,424 | ||||||||||||||||
| Customer assets | 11 years | 58,556 | (10,796) | 47,760 | |||||||||||||||||||
| Trade name | 6 years | 18,529 | (8,031) | 10,498 | |||||||||||||||||||
| Other | 8 years | 5,733 | (2,803) | 2,930 | |||||||||||||||||||
| Total | $ | 202,326 | $ | (64,714) | $ | 137,612 |
All intangible assets are amortized over their estimated useful lives.
The changes to the carrying value of intangible assets were as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Acquired intangible assets, net, beginning of the period | $ | 262,196 | $ | 99,802 | $ | 137,612 | $ | 69,079 | |||||||||||||||
| Acquisitions | 18,100 | 12,100 | 159,100 | 51,109 | |||||||||||||||||||
| Amortization expense | (11,140) | (5,236) | (27,258) | (13,522) | |||||||||||||||||||
| Other | (464) | 896 | (762) | 896 | |||||||||||||||||||
| Acquired intangible assets, net, end of the period | $ | 268,692 | $ | 107,562 | $ | 268,692 | $ | 107,562 |
The estimated future amortization expense of intangible assets in future periods as of September 30, 2021 is as follows (in thousands):
| Remainder of 2021 | $ | 11,250 | |||
| 2022 | 42,971 | ||||
| 2023 | 41,720 | ||||
| 2024 | 38,742 | ||||
| 2025 | 31,915 | ||||
| Thereafter | 102,094 | ||||
| Total | $ | 268,692 |
NOTE 11 - OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (CURRENT)
Other Current Assets
The following table presents the detail of other current assets (in thousands):
| September 30, 2021 | December 31, 2020 | ||||||||||
| Loans held for investment, net of allowance for loan losses (i) | $ | 79,482 | $ | — | |||||||
| Inventory, net | 73,413 | 61,129 | |||||||||
| Restricted cash | 14,420 | 30,279 | |||||||||
| Processing costs receivable | 215,886 | 148,606 | |||||||||
| Prepaid expenses | 70,591 | 34,279 | |||||||||
| Accounts receivable, net | 78,401 | 41,960 | |||||||||
| Other | 77,340 | 66,814 | |||||||||
| Total | $ | 609,533 | $ | 383,067 |
(i) In April 2021, the Company began originating loans in the U.S. through its wholly-owned subsidiary bank, Square Financial Services, Inc., and discontinued a prior arrangement with an industrial bank partner. Refer to Note 6, Loans Held for Investment for further details*.*
Accrued Expenses and Other Current Liabilities
The following table presents the detail of accrued expenses and other current liabilities (in thousands):
| September 30, 2021 | December 31, 2020 | ||||||||||
| Accrued expenses | $ | 231,853 | $ | 126,710 | |||||||
| Square Payroll payable (i) | 68,959 | 16,990 | |||||||||
| Accrued royalties | 51,747 | — | |||||||||
| Accrued transaction losses (ii) | 47,737 | 70,557 | |||||||||
| Accounts payable | 94,215 | 47,089 | |||||||||
| Customer deposits | 40,092 | — | |||||||||
| Deferred revenue, current | 51,655 | 44,908 | |||||||||
| Current portion of long-term debt | 4,637 | — | |||||||||
| Other | 63,600 | 54,596 | |||||||||
| Total | $ | 654,495 | $ | 360,850 |
(i) Square Payroll payable represents amounts received from Square Payroll product customers that will be utilized to settle the customers' employee payroll and related obligations.
(ii) 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. 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 following table summarizes the activities of the Company’s reserve for transaction losses (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Accrued transaction losses, beginning of the period | $ | 48,480 | $ | 109,061 | $ | 70,557 | $ | 34,771 | |||||||||||||||
| Provision for transaction losses | 17,364 | (4,549) | 38,406 | 107,524 | |||||||||||||||||||
| Charge-offs to accrued transaction losses | (18,107) | (17,577) | (61,226) | (55,360) | |||||||||||||||||||
| Accrued transaction losses, end of the period | $ | 47,737 | $ | 86,935 | $ | 47,737 | $ | 86,935 |
In addition to amounts reflected in the table above, the Company recognized additional provision for transaction losses that were realized and written-off within the same period. The Company recorded $89.8 million and $252.2 million for the three and nine months ended September 30, 2021, respectively, compared to $103.9 million and $200.9 million for the three and nine months ended September 30, 2020, respectively, for such losses.
NOTE 12 - OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (NON-CURRENT)
Other Non-Current Assets
The following table presents the detail of other non-current assets (in thousands):
| September 30, 2021 | December 31, 2020 | ||||||||||
| Investment in non-marketable equity securities (i) | $ | 82,181 | $ | 32,510 | |||||||
| Investment in marketable equity security (ii) | — | 376,258 | |||||||||
| Investment in bitcoin, net (iii) | 148,910 | 50,000 | |||||||||
| Restricted cash | 73,420 | 13,526 | |||||||||
| Other | 79,997 | 26,956 | |||||||||
| Total | $ | 384,508 | $ | 499,250 |
(i) Investment in non-marketable equity securities includes the Company's investments in equity instruments of non-public entities. These investments are measured using the measurement alternative and are therefore carried at cost, less impairment, adjusted for observable price changes. Additionally, the Company holds a non-marketable common stock warrant in a public entity. The warrant is carried at fair value, with changes in fair value being recorded within other expense (income), net on the condensed consolidated statement of operations. During the three and nine months ended September 30, 2021, the Company recorded a net loss of $6.8 million, arising from the revaluation of the non-marketable investments.
(ii) In December 2020, upon completion of the initial public offering of DoorDash Inc. ("DoorDash"), the shares of preferred stock held by the Company converted into Class A common stock of DoorDash. The investment was carried at fair value, with changes in fair value being recorded within other income or expense on the condensed consolidated statement of operations. During the nine months ended September 30, 2021, the Company recorded a net gain of $44.4 million, arising from the revaluation of the investment. In June 2021, the Company completed the sale of its remaining investment in DoorDash, which will have no further impact on the Company's results in future periods.
(iii) The Company invested $50.0 million and $170.0 million in bitcoin in the fourth quarter of 2020 and the first quarter of 2021, respectively. 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 recovered for any subsequent increase in fair value until the sale of the asset.
The Company recorded impairment charges of $6.0 million and $71.1 million in the three and nine months ended September 30, 2021 due to the observed market price of bitcoin decreasing below the carrying value during the period. As of September 30, 2021, the fair value of the investment in bitcoin was $351.7 million based on observable market prices which is $202.8 million in excess of the Company's carrying value of $148.9 million.
In the second quarter of 2021, the Company began lending a portion of its bitcoin investments to third parties. As of September 30, 2021, $6.0 million of the Company's investments in bitcoin had been loaned to third party borrowers. Bitcoin is an indefinite-lived intangible asset and under the terms of the lending arrangement it must be returned to the Company. As such, the bitcoin lent will not be derecognized and will continue to be carried at cost less impairment losses.
Other Non-Current Liabilities
The following table presents the detail of other non-current liabilities (in thousands):
| September 30, 2021 | December 31, 2020 | ||||||||||
| Statutory liabilities (i) | $ | 135,568 | $ | 75,370 | |||||||
| Other (ii) | 91,480 | 9,921 | |||||||||
| Total | $ | 227,048 | $ | 85,291 |
(i) Statutory liabilities represent loss contingencies that may arise from the Company's interpretation and application of certain guidelines and rules issued by various federal, state, local, and foreign regulatory authorities.
(ii) Other non-current liabilities includes deferred purchase consideration associated with the acquisition of TIDAL.
NOTE 13 - INDEBTEDNESS
Revolving Credit Facility
In May 2020, the Company entered into a revolving credit agreement with certain lenders, which provided a $500.0 million senior unsecured revolving credit facility (the "2020 Credit Facility") maturing in May 2023. On May 28, 2020, the Company amended the credit agreement for the 2020 Credit Facility (the "Credit Agreement") to permit the Company’s wholly owned subsidiary, Square Capital, LLC (“Square Capital”), to incur indebtedness in an aggregate principal amount of up to $500.0 million pursuant to the Paycheck Protection Program Liquidity Facility (“PPPLF”) authorized under the Federal Reserve Act of 1913. In connection with its convertible debt offerings in November 2020, the Company entered into a second amendment to the Credit Agreement on November 9, 2020 to permit convertible debt in an aggregate principal amount not to exceed $3.6 billion. On January, 28, 2021, the Company entered into a third amendment to the Credit Agreement to increase the amount of indebtedness that Square Capital is permitted to incur pursuant to the PPPLF from an aggregate principal amount of up to $500 million to an aggregate principal amount of up to $1.0 billion. On May 25, 2021, the Company entered into a fourth amendment to the Credit Agreement to, among other things, extend the maturity date of the loans advanced to May 1, 2024. The Credit Agreement also contains a financial covenant that requires the Company to maintain a quarterly minimum liquidity amount (consisting of the sum of Unrestricted cash and Cash Equivalents plus Marketable Securities, each as defined in the Credit Agreement) of at least $250.0 million, tested on a quarterly basis. The Company is obligated to pay 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. As of September 30, 2021, $500.0 million remained available for draw. The Company incurred $0.2 million and $0.6 million in unused commitment fees during the three and nine months ended September 30, 2021, respectively, compared to $0.2 million for the three and nine months ended September 30, 2020, respectively. As of September 30, 2021, the Company was in compliance with all financial covenants associated with the 2020 Credit Facility.
Loans under the 2020 Credit Facility bear interest at the Company's 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 Credit Agreement includes provisions allowing the Company to replace or update LIBOR with a replacement rate. The margin is determined based on the Company’s total leverage ratio, as defined in the Credit Agreement. The Credit Agreement also contains customary affirmative and negative covenants typical for a financing of this type that, among other things, restricts the Company and certain of its subsidiaries’ ability to incur additional indebtedness, create liens, merge or consolidate or
make certain dispositions, pay dividends and make distributions, enter into restrictive agreements, enter into agreements with affiliates, and make certain investments and acquisitions.
Paycheck Protection Program Liquidity Facility
On June 2, 2020, Square Capital was approved to borrow under the PPPLF with the Federal Reserve Bank of San Francisco (“First PPPLF Agreement”) at an annual interest rate of 0.35%. The PPPLF extends credit to eligible financial institutions that have originated or purchased PPP loans. Advances under the PPPLF are non-recourse and are secured by a pledge of PPP loans held by Square Capital. The maturity date of any PPPLF loan will be the maturity date of the PPP loans pledged to secure such PPPLF loan. The maturity date of any PPPLF loan will be accelerated on and to the extent of (i) the date of any loan forgiveness reimbursement by the SBA for any PPP loan securing such PPPLF loan; or (ii) the date of purchase by the SBA from Square Capital of any PPP loan securing such PPPLF loan to realize on the SBA’s guarantee of such PPP loan. The maturity date of all PPPLF loans shall be accelerated upon the occurrence of certain events of default by Square Capital, including but not limited to the failure to comply with a requirement of the PPPLF agreement or any representation, warranty, or covenant of Square Capital under the PPPLF agreement being inaccurate on or as of the date it is deemed to be made or on any date on which an PPPLF loan remains outstanding. The Company can also at its option prepay the advances in full or in part without penalty. Square Capital also shall prepay PPPLF loans so that the amount of any PPPLF loans outstanding does not exceed the outstanding amount of PPP loans pledged to secure such PPPLF loans.
On January 29, 2021, Square Capital entered into a second PPPLF agreement with the Federal Reserve Bank of San Francisco (“Second PPPLF Agreement”) to secure additional credit collateralized by loans from the subsequent rounds of the PPP program in an aggregate principal amount of up to $1.0 billion under both PPPLF agreements. As of September 30, 2021, $725.7 million of PPPLF advances were outstanding and are, generally, collateralized by the same value of PPP loans. Any differences between the amounts are generally due to the timing of PPP loan repayment or forgiveness, and repayment of PPPLF advances.
Senior Unsecured Notes due in 2026 and 2031
On May 20, 2021, the Company issued an aggregate principal amount of $2.0 billion senior unsecured notes comprised of $1.0 billion of senior unsecured notes due 2026 ("2026 Senior Notes") and $1.0 billion senior unsecured notes due 2031 ("2031 Senior Notes" and, together with the 2026 Senior Notes, the “Senior Notes”). The 2026 Senior Notes mature on June 1, 2026, unless earlier redeemed or repurchased, and bear interest a rate of 2.75% payable semi-annually on June 1 and December 1 of each year. The 2031 Senior Notes mature on June 1, 2031, unless earlier redeemed or repurchased, and bear interest at a rate of 3.50% payable semi-annually on June 1 and December 1 of each year. The Senior Notes are subject to optional redemption provisions. At any time prior to May 1, 2026, in the case of the 2026 Senior Notes, and March 1, 2031, in the case of the 2031 Senior Notes, the Company may redeem the applicable series in whole or part at a price equal to 100% of the principal amount of the notes to be redeemed plus an applicable premium and accrued and unpaid interest, if any, to but excluding the redemption date. The applicable premium for any note is the greater of: (1) 1.0% of the principal amount of such note, and (2) the excess, if any, of (a) the present value at the redemption date of all scheduled payments of interest plus principal on such note (excluding accrued but unpaid interest, if any, to, but excluding, the redemption date) computed using a discount rate equal to the Treasury Rate as of such redemption date plus 50 basis points, over (b) the principal amount of such note. At any time on or after May 1, 2026, in the case of the 2026 Senior Notes, and March 1, 2031, in the case of the 2031 Senior Notes, the Company may redeem the notes of the applicable series in whole or part at a price of 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest, if any, to but excluding the redemption date. If the Company experiences a change of control triggering event (as defined in the applicable indenture governing the applicable Senior Notes), the Company must offer to repurchase each series of Senior Notes at a repurchase price equal to 101% of the principal amount of the applicable notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the applicable repurchase date. In the event of default, the trustee or holders of at least 25% in aggregate principal amount of the applicable series of outstanding Senior Notes under the applicable indenture may declare all of the notes of the applicable series to be due and immediately payable. If the event of default is the result of specified events of bankruptcy, insolvency or reorganization, all of the notes of the applicable series will become due without any declaration or action by the trustee or holders. If there is a default in the payment of interest, the Company shall pay the defaulted interest plus, to the extent lawful, interest payable on the defaulted interest at the rate provided in the Senior Notes.
Debt issuance costs related to the 2026 Senior Notes and 2031 Senior Notes were comprised of discounts and commissions payable to the initial purchasers of $22.5 million and third party offering costs of $5.7 million. Issuance costs are amortized to interest expense using the effective interest method at an effective interest rate of 3.06% and 3.69% for each of the respective terms of the 2026 Senior Notes and 2031 Senior Notes, respectively.
Convertible Notes due in 2026 and 2027
On November 13, 2020, the Company issued an aggregate principal amount of $1.15 billion of convertible senior notes comprised of $575.0 million of convertible senior notes due 2026 ("2026 Convertible Notes") and $575.0 million of convertible senior notes due 2027 ("2027 Convertible Notes"). The 2026 Convertible Notes mature on May 1, 2026, unless earlier converted or repurchased, and bears a zero rate of interest. The 2027 Convertible Notes mature on November 1, 2027, unless earlier converted or repurchased, and bear interest at a rate of 0.25% payable semi-annually on May 1 and November 1 of each year. Both the 2026 Convertible Notes and 2027 Convertible Notes are convertible at an initial conversion rate of 3.3430 shares of the Company's Class A common stock per $1,000 principal amount, which is equivalent to an initial conversion price of approximately $299.13 per share of Class A common stock. Holders may convert their relevant series of notes at any time prior to the close of business on the business day immediately preceding February 1, 2026 and August 1, 2027 for the 2026 Convertible Notes and 2027 Convertible Notes, respectively, only under the following circumstances: (1) during any calendar quarter, commencing after the calendar quarter ending on March 31, 2021 (and only during such calendar quarter), if the last reported sale price of the Company’s Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the "measurement period") in which the trading price (as defined in the indenture governing the 2026 Convertible Notes and 2027 Convertible Notes) per $1,000 principal amount of 2026 Convertible Notes and 2027 Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s Class A common stock and the conversion rate on each such trading day; (3) if the Company calls any or all of the 2026 Convertible Notes and 2027 Convertible Notes for redemption, such relevant series of notes called for redemption may be converted at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events, including certain distributions, the occurrence of a fundamental change (as defined in the indenture governing the 2026 Convertible Notes and 2027 Convertible Notes) or a transaction resulting in the Company’s Class A common stock converting into other securities or property or assets. In addition, upon occurrence of the specified corporate events prior to the maturity date, the Company would increase the conversion rate for a holder who elects to convert their relevant series of notes in connection with such an event in certain circumstances. On or after February 1, 2026 in the case of the 2026 Convertible Notes, and on or after August 1, 2027 in the case of the 2027 Convertible Notes, up until the close of business on the second scheduled trading day immediately preceding the maturity date, a holder of the relevant series of notes may convert all or any portion of its 2026 Convertible Notes or 2027 Convertible Notes regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of its Class A common stock, or a combination of cash and shares of its Class A common stock, at the Company’s election. The circumstances required to allow the holders to convert their 2026 Convertible Notes and 2027 Convertible Notes were not met during the nine months ended September 30, 2021. On or after November 5, 2023 for the 2026 Convertible Notes, and on or after November 5, 2024 for the 2027 Convertible Notes, the Company may redeem all or a portion of each series of convertible notes for cash at its option, if the last reported sale price of the Company's Class A common stock has been at least 130% of the conversion price for the relevant series of notes then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the 2026 Convertible Notes and 2027 Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
In accounting for the issuance of the 2026 Convertible Notes and 2027 Convertible Notes, prior to the adoption of ASU No. 2020-06, the Company separated the relevant series of convertible notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was $198.0 million and was determined by deducting the fair value of the liability component from the par value of the 2026 Convertible Notes and the 2027 Convertible Notes. The equity component was not re-measured as long as it continued to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount ("debt discount") was amortized to interest expense at an effective interest rate of 3.35% and 3.66% for the 2026
Convertible Notes and 2027 Convertible Notes, respectively. Upon adoption of ASU No. 2020-06 on January 1, 2021, the Company reversed the separation of the debt and equity components and accounted for the Notes wholly as debt. The Company also reversed the amortization of the debt discount, with a cumulative adjustment to retained earnings on the adoption date.
Debt issuance costs related to the 2026 Convertible Notes and 2027 Convertible Notes were comprised of discounts and commissions payable to the initial purchasers of $17.5 million and third party offering costs of $1.0 million. Prior to the adoption of ASU No. 2020-06, the Company allocated the total amount incurred to the liability and equity components of the 2026 Convertible Notes and 2027 Convertible Notes based on their relative values. Issuance costs attributable to the liability component were $15.4 million and were amortized to interest expense using the effective interest method. Issuance costs attributable to the equity component were netted with the equity component in stockholders’ equity. Upon adoption of ASU No. 2020-06 on January 1, 2021, the Company reversed the allocation of the issuance costs to the equity component and accounted for the entire amount as debt issuance cost that will be amortized as interest expense at an effective interest rate of 0.49% and 0.30% for each of the respective terms of the 2026 Convertible Notes and 2027 Convertible Notes, respectively, with a cumulative adjustment to retained earnings on the adoption date.
Upon adoption of ASU No. 2020-06, the difference between the estimated fair value and the carrying value upon conversion is accounted for as a reduction to the related debt issuance costs, with the remainder recognized as additional paid in capital to reflect the par value of the shares issued. As of September 30, 2021, there has been no principal converted on either the 2026 Convertible Notes or 2027 Convertible Notes.
As of September 30, 2021, the if-converted value of the 2026 Convertible Notes and 2027 Convertible Notes did not exceed the outstanding principal amount.
Convertible Senior Notes due in 2025
On March 5, 2020, the Company issued an aggregate principal amount of $1.0 billion of convertible senior notes ("2025 Convertible Notes"). The 2025 Convertible Notes 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. The 2025 Convertible Notes are convertible at an initial conversion rate of 8.2641 shares of the Company's Class A common stock per $1,000 principal amount of 2025 Convertible Notes, which is equivalent to an initial conversion price of approximately $121.01 per share of Class A common stock. Holders may convert their 2025 Convertible Notes at any time prior to the close of business on the business day immediately preceding December 1, 2024 only under the following circumstances: (1) during any calendar quarter, commencing after the calendar quarter ending on June 30, 2020 (and only during such calendar quarter), if the last reported sale price of the Company’s Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the "measurement period") in which the trading price (as defined in the indenture governing the 2025 Convertible Notes) per $1,000 principal amount of 2025 Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s Class A common stock and the conversion rate on each such trading day; (3) if the Company calls any or all of the 2025 Convertible Notes for redemption, such 2025 Convertible Notes called for redemption may be converted at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events, including certain distributions, the occurrence of a fundamental change (as defined in the indenture governing the 2025 Convertible Notes) or a transaction resulting in the Company’s Class A common stock converting into other securities or property or assets. In addition, upon occurrence of the specified corporate events prior to the maturity date, the Company would increase the conversion rate for a holder who elects to convert their 2025 Convertible Notes in connection with such an event in certain circumstances. On or after December 1, 2024, up until the close of business on the second scheduled trading day immediately preceding the maturity date, a holder may convert all or any portion of its 2025 Convertible Notes regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of its Class A common stock, or a combination of cash and shares of its Class A common stock, at the Company’s election. The Company may redeem for cash all or any part of the 2025 Convertible Notes, at its option, on or after March 5, 2023, if the last reported sale price of the Company's Class A common stock has been at least 130% of the conversion price for the 2025 Convertible Notes then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the 2025 Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. The circumstances to allow the holders to convert their 2025 Convertible Notes were met in the first quarter of 2021.
In accounting for the issuance of the 2025 Convertible Notes, prior to the adoption of ASU No. 2020-06, the Company separated the 2025 Convertible Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was $154.6 million and was determined by deducting the fair value of the liability component from the par value of the 2025 Convertible Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount ("debt discount") is amortized to interest expense over the term of the 2025 Convertible Notes at an effective interest rate of 3.81% over the contractual terms of the 2025 Convertible Notes. Upon adoption of ASU No. 2020-06 on January 1, 2021, the Company reversed the separation of the debt and equity components and accounted for the 2025 Convertible Notes wholly as debt. The Company also reversed the amortization of the debt discount, with a cumulative adjustment to retained earnings on the adoption date.
Debt issuance costs related to the 2025 Convertible Notes were comprised of discounts and commissions payable to the initial purchasers of $14.3 million and third party offering costs of $0.9 million. Prior to the adoption of ASU No. 2020-06, the Company allocated the total amount incurred to the liability and equity components of the 2025 Convertible Notes based on their relative values. Issuance costs attributable to the liability component were $12.8 million and will be amortized to interest expense using the effective interest method over the contractual term. Issuance costs attributable to the equity component were netted with the equity component in stockholders’ equity. Upon adoption of ASU No. 2020-06 on January 1, 2021, the Company reversed the allocation of the issuance costs to the equity component and accounted for the
entire amount as debt issuance cost that will be amortized as interest expense over the remaining term at an effective interest rate of 0.43% for the 2025 Convertible Notes with a cumulative adjustment to retained earnings on the adoption date.
Upon adoption of ASU No. 2020-06, the difference between the estimated fair value and the carrying value upon conversion is accounted for as a reduction to the related debt issuance costs, with the remainder recognized as additional paid in capital to reflect the par value of the shares issued. As of September 30, 2021, there has been no principal converted on the 2025 Convertible Notes.
As of September 30, 2021, the if-converted value of the 2025 Convertible Notes exceeded the outstanding principal amount by $1.0 billion.
Convertible Senior Notes due in 2023
On May 25, 2018, the Company issued an aggregate principal amount of $862.5 million of convertible senior notes ("2023 Convertible Notes"). The 2023 Convertible Notes 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. The 2023 Convertible Notes are convertible at an initial conversion rate of 12.8456 shares of the Company's Class A common stock per $1,000 principal amount of 2023 Convertible Notes, which is equivalent to an initial conversion price of approximately $77.85 per share of Class A common stock. Holders may convert their 2023 Convertible Notes at any time prior to the close of business on the business day immediately preceding February 15, 2023 only under the following circumstances: (1) during any calendar quarter (and only during such calendar quarter), if the last reported sale price of the Company’s Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the "measurement period") in which the trading price (as defined in the indenture governing the 2023 Convertible Notes) per $1,000 principal amount of 2023 Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s Class A common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events, including certain distributions, the occurrence of a fundamental change (as defined in the indenture governing the 2023 Convertible Notes) or a transaction resulting in the Company’s Class A common stock converting into other securities or property or assets. On or after February 15, 2023, up until the close of business on the second scheduled trading day immediately preceding the maturity date, a holder may convert all or any portion of its 2023 Convertible Notes regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of its Class A common stock, or a combination of cash and shares of its Class A common stock, at the Company’s election. The circumstances to allow the holders to convert their 2023 Convertible Notes were met in the fourth quarter of 2020 and continued to be met through September 30, 2021. As of September 30, 2021, certain holders of the 2023 Convertible Notes have converted an aggregate principal amount of $220.0 million of their 2023 Convertible Notes. The Company has settled the conversions through the issuance of 2.8 million shares of the Company's Class A common stock.
In accounting for the issuance of the 2023 Convertible Notes, prior to the adoption of ASU No. 2020-06, the Company separated the 2023 Convertible Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was $155.3 million and was determined by deducting the fair value of the liability component from the par value of the 2023 Convertible Notes. The equity component is not re-measured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount ("debt discount") is amortized to interest expense over the term of the 2023 Convertible Notes at an effective interest rate of 4.69% over the contractual terms of the 2023 Convertible Notes. Upon adoption of ASU No. 2020-06 on January 1, 2021, the Company reversed the separation of the debt and equity components and accounted for the 2023 Convertible Notes wholly as debt. The Company also reversed the amortization of the debt discount, with a cumulative adjustment to retained earnings on the adoption date.
Debt issuance costs related to the 2023 Convertible Notes comprised of discounts and commissions payable to the initial purchasers of $6.0 million and third party offering costs of $0.8 million. Prior to the adoption of ASU No. 2020-06, the Company allocated the total amount incurred to the liability and equity components of the 2023 Convertible Notes based on their relative values. Issuance costs attributable to the liability component were $5.6 million and will be amortized to interest expense using the effective interest method over the contractual term. Issuance costs attributable to the equity component
were netted with the equity component in stockholders’ equity. Upon adoption of ASU No. 2020-06 on January 1, 2021, the Company reversed the allocation of the issuance costs to the equity component and accounted for the entire amount as debt issuance cost that will be amortized as interest expense over the remaining term at an effective interest rate of 0.66% for the 2023 Convertible Notes with a cumulative adjustment to retained earnings on the adoption date.
Upon adoption of ASU No. 2020-06, the difference between the estimated fair value and the carrying value upon conversion is accounted for as a reduction to the related debt issuance costs, with the remainder recognized as additional paid in capital to reflect the par value of the shares issued.
As of September 30, 2021, the if-converted value of the 2023 Convertible Notes exceeded the outstanding principal amount by $1.3 billion.
Convertible Senior Notes due in 2022
On March 6, 2017, the Company issued an aggregate principal amount of $440.0 million of convertible senior notes ("2022 Convertible Notes"). The 2022 Convertible Notes 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. The 2022 Convertible Notes are convertible at an initial conversion rate of 43.5749 shares of the Company's Class A common stock per $1,000 principal amount of 2022 Convertible Notes, which is equivalent to an initial conversion price of approximately $22.95 per share of Class A common stock. Holders may convert their 2022 Convertible Notes at any time prior to the close of business on the business day immediately preceding December 1, 2021 only under the following circumstances: (1) during any calendar quarter (and only during such calendar quarter), if the last reported sale price of the Company’s Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the "measurement period") in which the trading price (as defined in the indenture governing the 2022 Convertible Notes) per $1,000 principal amount of 2022 Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s Class A common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events, including certain distributions, the occurrence of a fundamental change (as defined in the indenture governing the 2022 Convertible Notes) or a transaction resulting in the Company’s Class A common stock converting into other securities or property or assets. On or after December 1, 2021, up until the close of business on the second scheduled trading day immediately preceding the maturity date, a holder may convert all or any portion of its 2022 Convertible Notes regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of its Class A common stock, or a combination of cash and shares of its Class A common stock, at the Company’s election. The circumstances required to allow the holders to convert their 2022 Convertible Notes were met in the fourth quarter of 2017 and continued to be met through September 30, 2021. As of September 30, 2021, certain holders of the 2022 Convertible Notes have converted an aggregate principal amount of $435.3 million of their 2022 Convertible Notes, of which $3.9 million was converted during the nine months ended September 30, 2021. The Company has settled the conversions through a combination of $219.4 million in cash and issuance of 16.3 million shares of the Company's Class A common stock. The conversions during the nine months ended September 30, 2021 were settled entirely in shares of the Company's Class A common stock.
In accounting for the issuance of the 2022 Convertible Notes, prior to the adoption of ASU No. 2020-06, the Company separated the 2022 Convertible Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was $86.2 million and was determined by deducting the fair value of the liability component from the par value of the 2022 Convertible Notes. The equity component is not re-measured as long as it continues to meet the conditions for equity classification. The debt discount is amortized to interest expense over the term of the 2022 Convertible Notes at an effective interest rate of 5.34% over the contractual terms of the 2022 Convertible Notes. Upon adoption of ASU No. 2020-06 on January 1, 2021, the Company reversed the separation of the debt and equity components and accounted for the 2022 Convertible Notes wholly as debt. The Company also reversed the amortization of the debt discount, with a cumulative adjustment to retained earnings on the adoption date.
Debt issuance costs related to the 2022 Convertible Notes comprised of discounts and commissions payable to the initial purchasers of $11.0 million and third party offering costs of $0.8 million. Prior to the adoption of ASU No. 2020-06, the Company allocated the total amount incurred to the liability and equity components of the 2022 Convertible Notes based
on their relative values. Issuance costs attributable to the liability component were $9.4 million and will be amortized to interest expense using the effective interest method over the contractual term. Issuance costs attributable to the equity component were netted with the equity component in stockholders’ equity. Upon adoption of ASU No. 2020-06 on January 1, 2021, the Company reversed the allocation of the issuance costs to the equity component and accounted for the entire amount as debt issuance cost that will be amortized as interest expense over the remaining term at an effective interest rate of 0.93% for the 2022 Convertible Notes with a cumulative adjustment to retained earnings on the adoption date.
Prior to the adoption of ASU No. 2020-06, the debt component associated with the 2022 Convertible Notes that were converted was accounted for as an extinguishment of debt, with the Company recording loss on extinguishment as the difference between the estimated fair value and the carrying value of such 2022 Convertible Notes. The equity component associated with the 2022 Convertible Notes that were converted was accounted for as a reacquisition of equity upon the conversion of such 2022 Convertible Notes. Upon adoption of ASU No. 2020-06, the difference between the estimated fair value and the carrying value upon conversion is accounted for as a reduction to the related debt issuance costs, with the remainder recognized as additional paid in capital to reflect the par value of the shares issued. There no longer is a gain or loss on extinguishment of debt recognized upon conversion, as the debt is settled in equity.
As of September 30, 2021, the if-converted value of the 2022 Convertible Notes exceeded the outstanding principal amount by $44.1 million.
The net carrying amount of the Notes were as follows (in thousands):
| Principal outstanding | Unamortized debt issuance costs | Net carrying value | |||||||||||||||||||||
| September 30, 2021 | |||||||||||||||||||||||
| 2031 Senior Notes | $ | 1,000,000 | $ | (13,580) | $ | 986,420 | |||||||||||||||||
| 2026 Senior Notes | 1,000,000 | (13,076) | 986,924 | ||||||||||||||||||||
| 2027 Convertible Notes | 575,000 | (8,127) | 566,873 | ||||||||||||||||||||
| 2026 Convertible Notes | 575,000 | (7,805) | 567,195 | ||||||||||||||||||||
| 2025 Convertible Notes | 1,000,000 | (10,401) | 989,599 | ||||||||||||||||||||
| 2023 Convertible Notes | 642,488 | (1,670) | 640,818 | ||||||||||||||||||||
| 2022 Convertible Notes | 4,665 | (28) | 4,637 | ||||||||||||||||||||
| Total | $ | 4,797,153 | $ | (54,687) | $ | 4,742,466 | |||||||||||||||||
As discussed above, upon the adoption of ASU No. 2020-06, the Company reversed the separation of the debt and equity components of the Convertible Notes, and accounted for the Convertible Notes wholly as debt. Additionally, the issuance costs of the Notes were accounted for as debt issuance costs in its entirety. Refer to Note 1, Description of Business and Summary of Significant Accounting Policies for further details on the impact of adoption.
| Principal outstanding | Unamortized debt discount | Unamortized debt issuance costs | Net carrying value | ||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| 2027 Convertible Notes | $ | 575,000 | $ | (109,134) | $ | (7,370) | $ | 458,496 | |||||||||||||||
| 2026 Convertible Notes | 575,000 | (85,085) | (7,711) | 482,204 | |||||||||||||||||||
| 2025 Convertible Notes | 1,000,000 | (130,335) | (11,333) | 858,332 | |||||||||||||||||||
| 2023 Convertible Notes | 862,500 | (79,980) | (2,474) | 780,046 | |||||||||||||||||||
| 2022 Convertible Notes | 8,545 | (629) | (70) | 7,846 | |||||||||||||||||||
| Total | $ | 3,021,045 | $ | (405,163) | $ | (28,958) | $ | 2,586,924 |
The net carrying amount of the equity component of the Convertible Notes as of December 31, 2020 were as follows (in thousands):
| Amount allocated to conversion option | Less: allocated issuance costs | Equity component, net | |||||||||||||||
| December 31, 2020 | |||||||||||||||||
| 2027 Convertible Notes | $ | 111,000 | $ | (1,793) | $ | 109,207 | |||||||||||
| 2026 Convertible Notes | 87,000 | (1,405) | 85,595 | ||||||||||||||
| 2025 Convertible Notes | 154,600 | (2,342) | 152,258 | ||||||||||||||
| 2023 Convertible Notes | 155,250 | (1,231) | 154,019 | ||||||||||||||
| 2022 Convertible Notes | 1,674 | (45) | 1,629 | ||||||||||||||
| Total | $ | 509,524 | $ | (6,816) | $ | 502,708 |
The Company recognized interest expense on the Notes as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Contractual interest expense | $ | 17,047 | $ | 1,544 | $ | 27,272 | $ | 4,482 | |||||||||||||||
| Amortization of debt issuance costs (i) | 2,868 | 17,516 | 7,005 | 47,624 | |||||||||||||||||||
| Total | $ | 19,915 | $ | 19,060 | $ | 34,277 | $ | 52,106 |
(i) Upon adoption of ASU No. 2020-06, the debt discount associated with the equity component on convertible debt outstanding was reversed which resulted in a decrease in the amount of non-cash interest expense to be recognized going forward.
Prior to the adoption of ASU No. 2020-06, the effective interest rate for the 2027 Convertible Notes, 2026 Convertible Notes, 2025 Convertible Notes, 2023 Convertible Notes, and 2022 Convertible Notes was 3.66%, 3.35%, 3.81%, 4.69%, and 5.34%, respectively. After the adoption of ASU No. 2020-06, the effective interest rates for the 2027 Convertible Notes, 2026 Convertible Notes, 2025 Convertible Notes, 2023 Convertible Notes, and 2022 Convertible Notes are 0.30%, 0.49%, 0.43%, 0.66%, and 0.93%, respectively.
Convertible Note Hedge and Warrant Transactions
In connection with the offering of the 2027 Convertible Notes, the Company entered into convertible note hedge transactions ("2027 convertible note hedges") with certain financial institution counterparties ("2027 Convertible Notes Counterparties") whereby the Company has the option to purchase a total of approximately 1.92 million shares of its Class A common stock at a price of approximately $299.13 per share. The total cost of the 2027 convertible note hedge transactions was $104.3 million. In addition, the Company sold warrants ("2027 warrants") to the 2027 Convertible Notes Counterparties whereby the 2027 Convertible Notes Counterparties have the option to purchase a total of 1.92 million shares of the Company’s Class A common stock at a price of approximately $414.18 per share for the 2027 warrants. The Company received $68.0 million in cash proceeds from the sale of the 2027 warrants. Taken together, the purchase of the 2027 convertible note hedges and sale of the 2027 warrants are intended to reduce dilution from the conversion of the 2027 Convertible Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of the converted 2027 Convertible Notes, as the case may be, and to effectively increase the overall conversion price from approximately $299.13 per share to approximately $414.18 per share for the 2027 warrants. As these instruments are considered indexed to the Company's own stock and are considered equity classified, the 2027 convertible note hedges and 2027 warrants are recorded in stockholders’ equity, are not accounted for as derivatives and are not re-measured each reporting period. The net costs incurred in connection with the 2027 convertible note hedges and 2027 warrant transactions were recorded as a reduction to additional paid-in capital on the condensed consolidated balance sheets.
In connection with the offering of the 2026 Convertible Notes, the Company entered into convertible note hedge transactions ("2026 convertible note hedges") with certain financial institution counterparties ("2026 Convertible Notes Counterparties") whereby the Company has the option to purchase a total of approximately 1.92 million shares of its Class A common stock at a price of approximately $299.13 per share. The total cost of the 2026 convertible note hedges was $84.6 million. In addition, the Company sold warrants ("2026 warrants") to the 2026 Convertible Notes Counterparties whereby the 2026 Convertible Notes Counterparties have the option to purchase a total of 1.92 million shares of the Company’s Class A common stock at a price of approximately $368.16 per share for the 2026 warrants. The Company received $64.6 million in cash proceeds from the sale of the 2026 warrants. Taken together, the purchase of the 2026 convertible note hedges and sale of the 2026 warrants are intended to reduce dilution from the conversion of the 2026 Convertible Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of the converted 2026 Convertible Notes, as the case may be, and to effectively increase the overall conversion price from approximately $299.13 per share to approximately $368.16 per share for the 2026 warrants. As these instruments are considered indexed to the Company's own stock and are considered equity classified, the 2026 convertible note hedges and 2026 warrants are recorded in stockholders’ equity, are not accounted for as derivatives and are not remeasured each reporting period. The net costs incurred in connection with the 2026 convertible note hedges and 2026 warrants were recorded as a reduction to additional paid-in capital on the condensed consolidated balance sheets.
In connection with the offering of the 2025 Convertible Notes, the Company entered into convertible note hedge transactions ("2025 convertible note hedges") with certain financial institution counterparties ("2025 Convertible Notes Counterparties") whereby the Company has the option to purchase a total of approximately 8.26 million shares of its Class A common stock at a price of approximately $121.01 per share. The total cost of the 2025 convertible note hedges was $149.2 million. In addition, the Company sold warrants ("2025 warrants") to the 2025 Convertible Notes Counterparties whereby the 2025 Convertible Notes Counterparties have the option to purchase a total of 8.26 million shares of the Company’s Class A common stock at a price of approximately $161.34 per share. The Company received $99.5 million in cash proceeds from the sale of the 2025 warrants. Taken together, the purchase of the 2025 convertible note hedges and sale of the 2025 warrants are intended to reduce dilution from the conversion of the 2025 Convertible Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of the converted 2025 Convertible Notes, as the case may be, and to effectively increase the overall conversion price from approximately $121.01 per share to approximately $161.34 per share. As these instruments are considered indexed to the Company's own stock and are considered equity classified, the 2025 convertible note hedges and 2025 warrants are recorded in stockholders’ equity, are not accounted for as derivatives and are not remeasured each reporting period. The net costs incurred in connection with the 2025 convertible note hedges and 2025 warrants were recorded as a reduction to additional paid-in capital on the condensed consolidated balance sheets.
In connection with the offering of the 2023 Convertible Notes, the Company entered into convertible note hedge transactions ("2023 convertible note hedges") with certain financial institution counterparties ("2018 Counterparties") whereby the Company has the option to purchase a total of approximately 11.1 million shares of its Class A common stock at a price of approximately $77.85 per share. The total cost of the 2023 convertible note hedges was $172.6 million. In addition, the Company sold warrants ("2023 warrants") to the 2018 Counterparties whereby the 2018 Counterparties have the option to purchase a total of 11.1 million shares of the Company’s Class A common stock at a price of approximately $109.26 per share. The Company received $112.1 million in cash proceeds from the sale of the 2023 warrants. Taken together, the purchase of the 2023 convertible note hedges and sale of the 2023 warrants are intended to reduce dilution from the conversion of the 2023 Convertible Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of the converted 2023 Convertible Notes, as the case may be, and to effectively increase the overall conversion price from approximately $77.85 per share to approximately $109.26 per share. As these instruments are considered indexed to the Company's own stock and are considered equity classified, the 2023 convertible note hedges and 2023 warrants are recorded in stockholders’ equity, are not accounted for as derivatives and are not remeasured each reporting period. The net costs incurred in connection with the 2023 convertible note hedges and 2023 warrants were recorded as a reduction to additional paid-in capital on the condensed consolidated balance sheets. The Company also exercised a pro-rata portion of the 2023 convertible note hedges to offset the shares of the Company's Class A common stock issued to settle the conversion of the 2023 Convertible Notes. The Company has received 1.3 million shares of the Company's Class A common stock from the 2018 Counterparties as of September 30, 2021
In connection with the offering of the 2022 Convertible Notes, the Company entered into convertible note hedge transactions ("2022 convertible note hedges") with certain financial institution counterparties ("2017 Counterparties") whereby the Company has the option to purchase a total of approximately 19.2 million shares of its Class A common stock at a price of approximately $22.95 per share. The total cost of the 2022 convertible note hedge transactions was $92.1 million.
In addition, the Company sold warrants ("2022 warrants") to the 2017 Counterparties whereby the 2017 Counterparties have the option to purchase a total of 19.2 million shares of the Company’s Class A common stock at a price of approximately $31.18 per share. The Company received $57.2 million in cash proceeds from the sale of the 2022 warrants. Taken together, the purchase of the 2022 convertible note hedges and sale of the 2022 warrants are intended to reduce dilution from the conversion of the 2022 Convertible Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of the converted 2022 Convertible Notes, as the case may be, and to effectively increase the overall conversion price from approximately $22.95 per share to approximately $31.18 per share. As these instruments are considered indexed to the Company's own stock and are considered equity classified, the 2022 convertible note hedges and 2022 warrants are recorded in stockholders’ equity, are not accounted for as derivatives and are not remeasured each reporting period. The net costs incurred in connection with the 2022 convertible note hedges and 2022 warrants were recorded as a reduction to additional paid-in capital on the condensed consolidated balance sheets. The Company has exercised a pro-rata portion of the 2022 convertible note hedges to offset the shares of the Company's Class A common stock issued to settle the conversion of the 2022 Convertible Notes discussed above. The 2022 convertible note hedges were net share settled, and as of September 30, 2021, the Company has received 14.9 million shares of the Company's Class A common stock from the 2017 Counterparties, of which 5.5 million was received in the nine months ended September 30, 2021.
NOTE 14 - INCOME TAXES
The Company recorded an income tax expense of $0.5 million and an income tax benefit of $8.0 million for the three and nine months ended September 30, 2021, respectively, compared to an income tax benefit of $1.4 million and $1.6 million for the three and nine months ended September 30, 2020, respectively. The difference between income before income tax and the income tax benefit recorded for the three and nine months ended September 30, 2021 is primarily due to a change in the valuation allowance in the U.S. and excess share-based compensation tax deductions. The difference between the income tax benefit for the three and nine months ended September 30, 2021 and the income tax benefit for the three and nine months ended September 30, 2020 primarily relates to an increase in excess share-based compensation deductions.
The tax provision for the three and nine months ended September 30, 2021 and September 30, 2020, is calculated on a jurisdictional basis. The Company estimated the worldwide income tax provision using the estimated annual effective income tax rate expected to be applicable for the full year. The Company’s effective tax rate may be subject to fluctuations during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of forecasted pre-tax earnings in the various jurisdictions in which the Company operates, changes in valuation allowances against deferred tax assets, the recognition and de-recognition of tax benefits related to uncertain tax positions, and changes in or the interpretation of tax laws in jurisdictions where the Company conducts business.
As of September 30, 2021, the Company retains a full valuation allowance on its net deferred tax assets in the U.S. and certain foreign jurisdictions. The realization of the Company’s deferred tax assets depends primarily on its ability to generate taxable income in future periods. The amount of deferred tax assets considered realizable in future periods may change as management continues to reassess the underlying factors it uses in estimating future taxable income.
NOTE 15 - STOCKHOLDERS’ EQUITY
Common Stock
The Company has two classes of authorized common stock outstanding; Class A common stock and Class B common stock. Class A common stock and Class B common stock are referred to as "common stock" throughout these Notes to the Condensed Consolidated Financial Statements, unless otherwise noted. Holders of shares of Class A common stock are entitled to one vote per share, while holders of shares of Class B common stock are entitled to ten votes per share. Shares of the Company's Class B common stock are convertible into an equivalent number of shares of its Class A common stock and generally convert into shares of its Class A common stock upon transfer. The holders of Class A common stock and Class B common stock have no preemptive or other subscription rights and there are no redemption or sinking fund provisions with respect to such shares. As of September 30, 2021, the Company was authorized to issue 1,000,000,000 shares of Class A common stock and 500,000,000 shares of Class B common stock, each with a par value of $0.0000001 per share. As of September 30, 2021, there were 398,878,883 shares of Class A common stock and 62,100,770 shares of Class B common stock outstanding. Options and awards granted following the Company's initial public offering are related to underlying Class A common stock.
Warrants
In conjunction with the 2022 Convertible Notes offering, the Company sold the 2022 warrants whereby the counterparties have the option to purchase a total of approximately 19.2 million shares of the Company’s Class A common stock at a price of $31.18 per share, and expire on June 1, 2022. None of the warrants were exercised as of September 30, 2021.
In conjunction with the 2023 Convertible Notes offering, the Company sold the 2023 warrants whereby the counterparties have the option to purchase a total of approximately 11.1 million shares of the Company’s Class A common stock at a price of $109.26 per share, and expire on August 15, 2023. None of the warrants were exercised as of September 30, 2021.
In conjunction with the 2025 Convertible Notes offering, the Company sold the 2025 warrants whereby the counterparties have the option to purchase a total of approximately 8.3 million shares of the Company’s Class A common stock at a price of $161.34 per share, and expire on June 1, 2025. None of the warrants were exercised as of September 30, 2021.
In conjunction with the 2026 Convertible Notes offering, the Company sold the 2026 warrants whereby the counterparties have the option to purchase a total of approximately 1.9 million shares of the Company’s Class A common stock at a price of $368.16 per share, and expire on August 1, 2026. None of the warrants were exercised as of September 30, 2021.
In conjunction with the 2027 Convertible Notes offering, the Company sold the 2027 warrants whereby the counterparties have the option to purchase a total of approximately 1.9 million shares of the Company’s Class A common stock at a price of $414.18 per share, and expire on February 1, 2028. None of the warrants were exercised as of September 30, 2021.
Conversion of Convertible Notes and Exercise of Convertible Note Hedges
In connection with the conversion of the 2022 Convertible Notes, the Company issued 16.3 million shares of Class A common stock, of which 0.2 million shares were issued in the nine months ended September 30, 2021. The Company also exercised a pro-rata portion of the 2022 convertible note hedges and received 14.9 million shares of Class A common stock from the 2017 Counterparties to offset the shares issued, of which 5.5 million shares were received in the nine months ended September 30, 2021.
In connection with the conversion of the 2023 Convertible Notes, the Company issued 2.8 million shares of Class A common stock in the nine months ended September 30, 2021. The Company also exercised a pro-rata portion of the 2023 convertible note hedges and received 1.3 million shares of Class A common stock from the 2018 Counterparties to offset the shares issued as of September 30, 2021.
Stock Plans
The Company maintains two share-based employee compensation plans: the 2009 Stock Plan (2009 Plan) and the 2015 Equity Incentive Plan (2015 Plan). The 2015 Plan serves as the successor to the 2009 Plan. The 2015 Plan became effective as of November 17, 2015. Outstanding awards under the 2009 Plan continue to be subject to the terms and conditions of the 2009 Plan. Since November 17, 2015, no additional awards have been nor will be granted in the future under the 2009 Plan.
Under the 2015 Plan, shares of the Company's Class A common stock are reserved for the issuance of incentive and nonstatutory stock options (ISOs and NSOs, respectively), restricted stock awards (RSAs), restricted stock units (RSUs), performance shares, and stock bonuses to qualified employees, directors, and consultants. The awards must be granted at a price per share not less than the fair market value at the date of grant. Initially, 30,000,000 shares were reserved under the 2015 Plan and any shares subject to options or other similar awards granted under the 2009 Plan that expire, are forfeited, are repurchased by the Company or otherwise terminate unexercised, will become available under the 2015 Plan. The number of shares available for issuance under the 2015 Plan has been and will be increased on the first day of each fiscal year, in an amount equal to the least of (i) 40,000,000 shares, (ii) 5% of the outstanding shares on the last day of the immediately preceding fiscal year, or (iii) such number of shares determined by the administrator of the Plan. The administrator consists of the Board of Directors who then delegates the responsibilities to the Compensation Committee. As of September 30, 2021, the total number of shares subject to stock options, RSAs and RSUs outstanding under the 2015 Plan was 16,570,814, and 118,883,836 shares were available for future issuance. As of September 30, 2021, the total number of shares subject to stock options, RSAs and RSUs outstanding under the 2009 Plan was 6,797,068.
A summary of stock option activity for the nine months ended September 30, 2021 is as follows (in thousands, except share and per share data):
| Number of Stock Options Outstanding | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value | ||||||||||||||||||||
| Balance at December 31, 2020 | 13,630,882 | $ | 17.84 | 3.84 | $ | 2,723,394 | |||||||||||||||||
| Granted | 198,771 | 255.22 | |||||||||||||||||||||
| Exercised | (4,417,087) | 11.64 | |||||||||||||||||||||
| Forfeited | (2,895) | 71.99 | |||||||||||||||||||||
| Balance at September 30, 2021 | 9,409,671 | $ | 25.75 | 4.19 | $ | 2,017,556 | |||||||||||||||||
| Options exercisable as of September 30, 2021 | 8,099,979 | $ | 15.57 | 3.52 | $ | 1,816,899 |
Restricted Stock Activity
Activity related to RSAs and RSUs during the nine months ended September 30, 2021 is set forth below:
| Number of shares | Weighted Average Grant Date Fair Value | ||||||||||
| Unvested as of December 31, 2020 | 15,622,645 | $ | 71.71 | ||||||||
| Granted | 4,256,680 | 246.06 | |||||||||
| Vested | (5,179,004) | 68.22 | |||||||||
| Forfeited | (742,110) | 101.77 | |||||||||
| Unvested as of September 30, 2021 | 13,958,211 | $ | 124.57 |
Share-Based Compensation
The fair value of stock options and employee stock purchase plan rights are estimated on the date of grant using the Black-Scholes-Merton option valuation model. The fair value of RSAs and RSUs is determined by the closing price of the Company’s common stock on each grant date.
The following table summarizes the effects of share-based compensation on the Company's condensed consolidated statements of operations (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Cost of revenue | $ | 99 | $ | 100 | $ | 310 | $ | 271 | |||||||||||||||
| Product development | 121,209 | 78,682 | 314,265 | 205,647 | |||||||||||||||||||
| Sales and marketing | 16,023 | 12,063 | 40,680 | 27,354 | |||||||||||||||||||
| General and administrative | 27,680 | 19,544 | 74,744 | 50,600 | |||||||||||||||||||
| Total | $ | 165,011 | $ | 110,389 | $ | 429,999 | $ | 283,872 |
The Company recorded $7.6 million and $24.4 million of share-based compensation expense related to the Company's 2015 Employee Stock Purchase Plan during the three and nine months ended September 30, 2021, respectively, compared to $3.3 million and $12.1 million during the three and nine months ended September 30, 2020, respectively, which are included in the table above.
The Company capitalized $3.6 million and $11.0 million of share-based compensation expense related to capitalized software costs during the three and nine months ended September 30, 2021 and 2020, respectively, compared to $3.8 million and $9.5 million during the three and nine months ended September 30, 2020, respectively.
As of September 30, 2021, there was $1.7 billion of total unrecognized compensation cost related to outstanding stock options and restricted stock awards that are expected to be recognized over a weighted-average period of 2.94 years.
NOTE 16 - NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing the net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share is computed by dividing 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 the Company reported a net loss, diluted net loss per share is the same as basic net loss per share because the effects of potentially dilutive items were anti-dilutive.
The following table presents the calculation of basic and diluted net income (loss) per share (in thousands, except per share data):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income (loss) | $ | (2,876) | $ | 36,515 | $ | 239,810 | $ | (80,854) | |||||||||||||||
| Net income (loss) attributable to noncontrolling interests | (2,960) | — | (3,303) | — | |||||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | 84 | $ | 36,515 | $ | 243,113 | $ | (80,854) | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Basic shares: | |||||||||||||||||||||||
| Weighted-average common shares outstanding | 460,948 | 445,074 | 457,414 | 440,540 | |||||||||||||||||||
| Weighted-average unvested shares | (294) | (616) | (375) | (685) | |||||||||||||||||||
| Weighted-average shares used to compute basic net income per share: | 460,654 | 444,458 | 457,039 | 439,855 | |||||||||||||||||||
| Diluted shares: | |||||||||||||||||||||||
| Stock options, restricted stock, and employee stock purchase plan | 17,180 | 26,166 | 18,991 | — | |||||||||||||||||||
| Convertible senior notes | — | — | 18,727 | — | |||||||||||||||||||
| Common stock warrants | 26,286 | 17,445 | 25,447 | — | |||||||||||||||||||
| Weighted-average shares used to compute diluted net income per share: | 504,120 | 488,069 | 520,204 | 439,855 | |||||||||||||||||||
| Net income (loss) per share attributable to common stockholders: | |||||||||||||||||||||||
| Basic | $ | 0.00 | $ | 0.08 | $ | 0.53 | $ | (0.18) | |||||||||||||||
| Diluted | $ | 0.00 | $ | 0.07 | $ | 0.48 | $ | (0.18) |
The following potential common shares were excluded from the calculation of diluted net income (loss) per share because their effect would have been anti-dilutive for the periods presented (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Stock options, restricted stock, and employee stock purchase plan | 7,652 | 10,309 | 7,161 | 37,445 | |||||||||||||||||||
| Common stock warrants | 16,075 | 21,071 | 16,914 | 36,556 | |||||||||||||||||||
| Convertible senior notes | 20,884 | 26,738 | 3,845 | 25,532 | |||||||||||||||||||
| Total anti-dilutive securities | 44,611 | 58,118 | 27,920 | 99,533 |
NOTE 17 - RELATED PARTY TRANSACTIONS
In July 2019, the Company entered into a lease agreement to lease certain office space located in St. Louis, Missouri, from an affiliate of one of the Company’s co-founders and current member of its board and directors, Mr. Jim McKelvey, under an operating lease agreement as discussed in Note 18, Commitments and Contingencies. The lease commencement date varies by floor beginning in May 2020. The term of the agreement is 15.5 years with total minimum lease payments over the term of approximately $42.7 million. As of September 30, 2021, the Company had recorded right-of-use assets of $21.0 million and associated lease liabilities of $33.7 million related to this lease arrangement.
NOTE 18 - COMMITMENTS AND CONTINGENCIES
Litigation
The Company is currently subject to, and may in the future be involved in, various litigation matters, legal claims, and investigations. The Company is subject to various legal matters and disputes arising in the ordinary course of business. The Company cannot at this time fairly estimate a reasonable range of exposure, if any, of the potential liability with respect to these matters. Although occasional adverse decisions or settlements may occur, the Company does not believe that the final disposition of any of these matters will have a material adverse effect on its results of operations, financial position, or liquidity. The Company cannot give any assurance regarding the ultimate outcome of these other matters, and their resolution could be material to the Company's operating results for any particular period.
Other contingencies
We are under examination, or may be subject to examination, by several tax authorities. These examinations may lead to proposed adjustments to our taxes or net operating losses with respect to years under examination, as well as subsequent periods. We regularly assess the likelihood of adverse outcomes resulting from tax examinations to determine the adequacy of our provision for direct and indirect taxes. We continue to monitor the progress of ongoing discussions with tax authorities and the effect, if any, on our provision for direct and indirect taxes.
We believe that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in our tax audits are resolved in a manner not consistent with the Company’s expectations, we could be required to adjust our provision for direct and indirect taxes in the period such resolution occurs.
NOTE 19 - SEGMENT AND GEOGRAPHICAL INFORMATION
The Company reports its operating segments to reflect the manner in which the Company's CODM reviews and assesses performance. Accordingly, the Company has two reportable segments, which are Seller and Cash App. Seller and Cash App are defined as follows:
-
Seller includes managed payment services, software solutions, hardware, and financial services offered to sellers, excluding those that involve Cash App.
-
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 Card which is linked to customer stored balances that customers can use to pay for purchases or withdraw funds from an ATM.
The primary financial measures used by the CODM to evaluate 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 information is not included.
Information on the reportable segments revenue and segment gross profit are as follows (in thousands):
| Three Months Ended September 30, 2021 | Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Cash App | Seller | Corporate and Other (i) | Total | Cash App | Seller | Corporate and Other (i) | Total | ||||||||||||||||||||||||||||||||||||||||
| Revenue | |||||||||||||||||||||||||||||||||||||||||||||||
| Transaction-based revenue | $ | 103,192 | $ | 1,193,848 | $ | — | $ | 1,297,040 | $ | 306,101 | $ | 3,178,144 | $ | — | $ | 3,484,245 | |||||||||||||||||||||||||||||||
| Subscription and services-based revenue | 474,779 | 162,341 | 57,650 | 694,770 | 1,406,313 | 434,673 | 96,643 | 1,937,629 | |||||||||||||||||||||||||||||||||||||||
| Hardware revenue | — | 37,255 | — | 37,255 | — | 109,769 | — | 109,769 | |||||||||||||||||||||||||||||||||||||||
| Bitcoin revenue | 1,815,662 | — | — | 1,815,662 | 8,051,026 | — | — | 8,051,026 | |||||||||||||||||||||||||||||||||||||||
| Segment revenue | $ | 2,393,633 | $ | 1,393,444 | $ | 57,650 | $ | 3,844,727 | $ | 9,763,440 | $ | 3,722,586 | $ | 96,643 | $ | 13,582,669 | |||||||||||||||||||||||||||||||
| Segment gross profit | $ | 511,717 | $ | 606,225 | $ | 15,273 | $ | 1,133,215 | $ | 1,553,255 | $ | 1,659,378 | $ | 25,147 | $ | 3,237,780 |
| Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| Cash App | Seller | Corporate and Other (i) | Total | Cash App | Seller | Corporate and Other (i) | Total | ||||||||||||||||||||||||||||||||||||||||
| Revenue | |||||||||||||||||||||||||||||||||||||||||||||||
| Transaction-based revenue | $ | 80,721 | $ | 844,573 | $ | — | $ | 925,294 | $ | 162,197 | $ | 2,203,770 | $ | — | $ | 2,365,967 | |||||||||||||||||||||||||||||||
| Subscription and services-based revenue | 354,110 | 93,412 | — | 447,522 | 818,991 | 271,041 | — | 1,090,032 | |||||||||||||||||||||||||||||||||||||||
| Hardware revenue | — | 27,294 | — | 27,294 | — | 67,291 | — | 67,291 | |||||||||||||||||||||||||||||||||||||||
| Bitcoin revenue | 1,633,764 | — | — | 1,633,764 | 2,815,318 | — | — | 2,815,318 | |||||||||||||||||||||||||||||||||||||||
| Segment revenue | $ | 2,068,595 | $ | 965,279 | $ | — | $ | 3,033,874 | $ | 3,796,506 | $ | 2,542,102 | $ | — | $ | 6,338,608 | |||||||||||||||||||||||||||||||
| Segment gross profit | $ | 385,124 | $ | 409,331 | $ | — | $ | 794,455 | $ | 848,919 | $ | 1,080,800 | $ | — | $ | 1,929,719 |
(i) Corporate and other represents results related to products and services that are not assigned to a specific reportable segment. Comparable prior period amounts have not been disclosed as they were not material.
A reconciliation of total segment gross profit to the Company’s income (loss) before applicable income taxes is as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Total segment gross profit | $ | 1,133,215 | $ | 794,455 | $ | 3,237,780 | $ | 1,929,719 | |||||||||||||||
| Less: Product development | 366,587 | 227,550 | 1,003,238 | 631,156 | |||||||||||||||||||
| Less: Sales and marketing | 407,850 | 348,463 | 1,132,411 | 781,094 | |||||||||||||||||||
| Less: General and administrative | 267,476 | 153,902 | 684,405 | 419,783 | |||||||||||||||||||
| Less: Transaction and loan losses | 62,306 | 15,198 | 130,874 | 161,684 | |||||||||||||||||||
| Less: Bitcoin impairment losses | 6,000 | — | 71,126 | — | |||||||||||||||||||
| Less: Interest expense, net | 13,409 | 14,980 | 20,126 | 38,955 | |||||||||||||||||||
| Less: Other expense (income), net | 12,011 | (784) | (36,249) | (20,513) | |||||||||||||||||||
| Income (loss) before applicable income taxes | $ | (2,424) | $ | 35,146 | $ | 231,849 | $ | (82,440) |
Revenue
Revenue by geography is based on the addresses of the sellers or customers. The following table sets forth revenue by geographic area (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| United States | $ | 3,679,609 | $ | 2,947,400 | $ | 13,179,547 | $ | 6,126,971 | |||||||||||||||
| International | 165,118 | 86,474 | 403,122 | 211,637 | |||||||||||||||||||
| Total net revenue | $ | 3,844,727 | $ | 3,033,874 | $ | 13,582,669 | $ | 6,338,608 |
No individual country from the international markets contributed in excess of 10% of total revenue for the three and nine months ended September 30, 2021 and 2020.
Long-Lived Assets
The following table sets forth long-lived assets by geographic area (in thousands):
| September 30, 2021 | December 31, 2020 | ||||||||||
| Long-lived assets | |||||||||||
| United States | $ | 1,420,358 | $ | 1,086,379 | |||||||
| International | 91,416 | 58,342 | |||||||||
| Total long-lived assets | $ | 1,511,774 | $ | 1,144,721 |
Assets by reportable segment were not included, as this information is not reviewed by the CODM to make operating decisions or allocate resources and is reviewed on a consolidated basis.
NOTE 20 - SUPPLEMENTAL CASH FLOW INFORMATION
The supplemental disclosures of cash flow information consist of the following (in thousands):
| Nine Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Analysis of cash, cash equivalents, and restricted cash | |||||||||||
| Cash and cash equivalents | $ | 4,514,609 | $ | 2,118,808 | |||||||
| Short-term restricted cash | 14,420 | 27,556 | |||||||||
| Long-term restricted cash | 73,420 | 13,702 | |||||||||
| Cash, cash equivalents, and restricted cash | $ | 4,602,449 | $ | 2,160,066 |
| Nine Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Supplemental Cash Flow Data: | |||||||||||
| Cash paid for interest | $ | 4,770 | $ | 3,665 | |||||||
| Cash paid for income taxes | 9,071 | 4,452 | |||||||||
| Supplemental disclosures of non-cash investing and financing activities: | |||||||||||
| Right-of-use assets obtained in exchange for operating lease obligations | 40,712 | 321,245 | |||||||||
| Purchases of property and equipment in accounts payable and accrued expenses | 21,746 | (4,207) | |||||||||
| Unpaid business combination purchase price | 54,132 | 8,974 | |||||||||
| Fair value of common stock issued and issuable in future related to business combination | (28,735) | (35,318) | |||||||||
| Fair value of common stock issued to settle the conversion of senior notes | (742,174) | (323,891) | |||||||||
| Fair value of shares received to settle senior note hedges | 1,623,095 | — | |||||||||
| Bitcoin lent to third party borrowers | $ | (5,994) | $ | — |
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