filings.toolsItem 1. Financial Statements
210K characters. Original on sec.gov · Markdown
Item 1. Financial Statements
BLOCK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| March 31, 2022 | December 31, 2021 | ||||||||||
| (Unaudited) | |||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 3,993,565 | $ | 4,443,669 | |||||||
| Investments in short-term debt securities | 796,749 | 869,283 | |||||||||
| Settlements receivable | 1,341,852 | 1,171,612 | |||||||||
| Customer funds | 3,190,905 | 2,830,995 | |||||||||
| Consumer receivables, net | 1,304,300 | — | |||||||||
| Loans held for sale | 357,115 | 517,940 | |||||||||
| Other current assets | 876,198 | 687,429 | |||||||||
| Total current assets | 11,860,684 | 10,520,928 | |||||||||
| Property and equipment, net | 302,247 | 282,140 | |||||||||
| Goodwill | 12,428,930 | 519,276 | |||||||||
| Acquired intangible assets, net | 2,275,199 | 257,049 | |||||||||
| Investments in long-term debt securities | 1,333,139 | 1,526,430 | |||||||||
| Operating lease right-of-use assets | 455,914 | 449,406 | |||||||||
| Other non-current assets | 471,354 | 370,535 | |||||||||
| Total assets | $ | 29,127,467 | $ | 13,925,764 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Customers payable | $ | 4,634,657 | $ | 3,979,624 | |||||||
| Settlements payable | 264,971 | 254,611 | |||||||||
| Accrued expenses and other current liabilities | 934,364 | 639,309 | |||||||||
| Operating lease liabilities, current | 71,393 | 64,027 | |||||||||
| PPP Liquidity Facility advances | 124,636 | 497,533 | |||||||||
| Total current liabilities | 6,030,021 | 5,435,104 | |||||||||
| Deferred tax liabilities | 238,683 | 15,236 | |||||||||
| Warehouse funding facilities | 208,141 | — | |||||||||
| Long-term debt | 4,561,911 | 4,559,208 | |||||||||
| Operating lease liabilities, non-current | 395,602 | 395,017 | |||||||||
| Other non-current liabilities | 242,717 | 207,610 | |||||||||
| Total liabilities | 11,677,075 | 10,612,175 | |||||||||
| Commitments and contingencies (Note 19) | |||||||||||
| Stockholders’ equity: | |||||||||||
| Preferred stock, $0.0000001 par value: 100,000,000 shares authorized at March 31, 2022 and December 31, 2021. None issued and outstanding at March 31, 2022 and December 31, 2021. | — | — | |||||||||
| Class A common stock, $0.0000001 par value: 1,000,000,000 shares authorized at March 31, 2022 and December 31, 2021; 517,799,568 and 403,237,209 issued and outstanding at March 31, 2022 and December 31, 2021, respectively. | — | — | |||||||||
| Class B common stock, $0.0000001 par value: 500,000,000 shares authorized at March 31, 2022 and December 31, 2021; 61,696,578 and 61,706,578 issued and outstanding at March 31, 2022 and December 31, 2021, respectively. | — | — | |||||||||
| Additional paid-in capital | 17,426,629 | 3,317,255 | |||||||||
| Accumulated other comprehensive income (loss) | 218,357 | (16,435) | |||||||||
| Accumulated deficit | (232,164) | (27,965) | |||||||||
| Total stockholders’ equity attributable to common stockholders | 17,412,822 | 3,272,855 | |||||||||
| Noncontrolling interests | 37,570 | 40,734 | |||||||||
| Total stockholders’ equity | 17,450,392 | 3,313,589 | |||||||||
| Total liabilities and stockholders’ equity | $ | 29,127,467 | $ | 13,925,764 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
BLOCK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Transaction-based revenue | $ | 1,232,969 | $ | 959,733 | |||||||||||||||||||
| Subscription and services-based revenue | 959,557 | 557,681 | |||||||||||||||||||||
| Hardware revenue | 37,326 | 28,788 | |||||||||||||||||||||
| Bitcoin revenue | 1,730,793 | 3,511,068 | |||||||||||||||||||||
| Total net revenue | 3,960,645 | 5,057,270 | |||||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||
| Transaction-based costs | 718,700 | 526,779 | |||||||||||||||||||||
| Subscription and services-based costs | 195,862 | 90,373 | |||||||||||||||||||||
| Hardware costs | 63,664 | 40,482 | |||||||||||||||||||||
| Bitcoin costs | 1,687,459 | 3,436,135 | |||||||||||||||||||||
| Total cost of revenue | 2,665,685 | 4,093,769 | |||||||||||||||||||||
| Gross profit | 1,294,960 | 963,501 | |||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Product development | 484,761 | 310,141 | |||||||||||||||||||||
| Sales and marketing | 501,562 | 349,460 | |||||||||||||||||||||
| General and administrative | 444,276 | 195,909 | |||||||||||||||||||||
| Transaction, loan, and consumer receivable losses | 91,150 | 20,395 | |||||||||||||||||||||
| Bitcoin impairment losses | — | 19,860 | |||||||||||||||||||||
| Total operating expenses | 1,521,749 | 895,765 | |||||||||||||||||||||
| Operating income (loss) | (226,789) | 67,736 | |||||||||||||||||||||
| Interest expense, net | 15,748 | 253 | |||||||||||||||||||||
| Other expense (income), net | (33,472) | 27,528 | |||||||||||||||||||||
| Income (loss) before income tax | (209,065) | 39,955 | |||||||||||||||||||||
| Provision (benefit) for income taxes | (1,702) | 947 | |||||||||||||||||||||
| Net income (loss) | (207,363) | 39,008 | |||||||||||||||||||||
| Less: Net loss attributable to noncontrolling interests | (3,164) | — | |||||||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | (204,199) | $ | 39,008 | |||||||||||||||||||
| Net income (loss) per share attributable to common stockholders: | |||||||||||||||||||||||
| Basic | $ | (0.38) | $ | 0.09 | |||||||||||||||||||
| Diluted | $ | (0.38) | $ | 0.08 | |||||||||||||||||||
| Weighted-average shares used to compute net income (loss) per share attributable to common stockholders: | |||||||||||||||||||||||
| Basic | 541,435 | 454,973 | |||||||||||||||||||||
| Diluted | 541,435 | 501,353 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
BLOCK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Net income (loss) | $ | (207,363) | $ | 39,008 | |||||||||||||||||||
| Net foreign currency translation adjustments | 264,746 | (10,595) | |||||||||||||||||||||
| Net unrealized loss on marketable debt securities | (29,954) | (2,534) | |||||||||||||||||||||
| Total comprehensive income | $ | 27,429 | $ | 25,879 | |||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
BLOCK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | (207,363) | $ | 39,008 | |||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||||||
| Depreciation and amortization | 70,056 | 29,201 | |||||||||
| Non-cash interest and other | (64,351) | 5,207 | |||||||||
| Non-cash lease expense | 22,696 | 20,432 | |||||||||
| Share-based compensation | 275,423 | 118,623 | |||||||||
| Loss (gain) on revaluation of equity investments | (49,741) | 28,900 | |||||||||
| Transaction, loan, and consumer receivable losses | 91,150 | 20,395 | |||||||||
| Bitcoin impairment losses | — | 19,860 | |||||||||
| Change in deferred income taxes | (7,653) | (60) | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Settlements receivable | (220,361) | (114,458) | |||||||||
| Purchases and originations of loans | (951,665) | (812,492) | |||||||||
| Proceeds from payments and forgiveness of loans | 1,112,266 | 531,716 | |||||||||
| Customers payable | 136,474 | 80,310 | |||||||||
| Settlements payable | 10,360 | 24,564 | |||||||||
| Other assets and liabilities | 12,132 | (20,399) | |||||||||
| Net cash provided by (used in) operating activities | 229,423 | (29,193) | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchase of marketable debt securities | (209,981) | (401,161) | |||||||||
| Proceeds from maturities of marketable debt securities | 262,559 | 139,353 | |||||||||
| Proceeds from sale of marketable debt securities | 178,352 | 249,342 | |||||||||
| Purchase of marketable debt securities from customer funds | — | (119,411) | |||||||||
| Proceeds from maturities of marketable debt securities from customer funds | 73,000 | 187,500 | |||||||||
| Proceeds from sale of marketable debt securities from customer funds | 316,576 | — | |||||||||
| Originations of consumer receivables | (1,946,468) | — | |||||||||
| Principal repayments of consumer receivables | 1,943,554 | — | |||||||||
| Purchase of property and equipment | (41,187) | (34,149) | |||||||||
| Purchase of bitcoin investments | — | (170,000) | |||||||||
| Purchase of other investments | (16,495) | (28,470) | |||||||||
| Proceeds from sale of equity investments | — | 18,973 | |||||||||
| Net cash acquired through business combination | 570,703 | — | |||||||||
| Net cash provided by (used in) investing activities | 1,130,613 | (158,023) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
BLOCK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(Unaudited)
(In thousands)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from PPP Liquidity Facility advances | — | 494,300 | |||||||||
| Repayments of PPP Liquidity Facility advances | (372,897) | (194,186) | |||||||||
| Payments to redeem convertible notes | (1,071,788) | — | |||||||||
| Proceeds from warehouse facilities borrowings | 183,440 | — | |||||||||
| Repayments of warehouse facilities borrowings | (90,491) | — | |||||||||
| Proceeds from the exercise of stock options and purchases under the employee stock purchase plan | 4,093 | 32,891 | |||||||||
| Payments for tax withholding related to vesting of restricted stock units | (2,456) | (152,013) | |||||||||
| Net increase in non-interest bearing deposits | 21,633 | — | |||||||||
| Change in customer funds, restricted from use in the Company's operations | 359,910 | 938,596 | |||||||||
| Net cash provided by (used in) financing activities | (968,556) | 1,119,588 | |||||||||
| Effect of foreign exchange rate on cash and cash equivalents | (948) | (8,206) | |||||||||
| Net increase in cash, cash equivalents, restricted cash, and customer funds | 390,532 | 924,166 | |||||||||
| Cash, cash equivalents, restricted cash, and customer funds, beginning of period | 6,975,090 | 4,793,171 | |||||||||
| Cash, cash equivalents, restricted cash, and customer funds, end of period | $ | 7,365,622 | $ | 5,717,337 | |||||||
| Reconciliation of cash, cash equivalents, restricted cash, and customer funds: | |||||||||||
| Cash and cash equivalents | $ | 3,993,565 | $ | 3,022,485 | |||||||
| Short-term restricted cash | 109,450 | 32,891 | |||||||||
| Long-term restricted cash | 71,702 | 63,509 | |||||||||
| Customer funds cash and cash equivalents | 3,190,905 | 2,598,452 | |||||||||
| Total | $ | 7,365,622 | $ | 5,717,337 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
BLOCK, 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 | Accumulated | Noncontrolling | Total stockholders’ | |||||||||||||||||||||||||||||||||||||||
| Shares | Amount | capital | income (loss) | deficit | interests | equity | ||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | 464,943,787 | $ | — | $ | 3,317,255 | $ | (16,435) | $ | (27,965) | $ | 40,734 | $ | 3,313,589 | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (204,199) | (3,164) | (207,363) | |||||||||||||||||||||||||||||||||||||
| Shares issued in connection with employee stock plans | 2,119,899 | — | 4,093 | — | — | — | 4,093 | |||||||||||||||||||||||||||||||||||||
| Change in other comprehensive income | — | — | — | 234,792 | — | — | 234,792 | |||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 279,354 | — | — | — | 279,354 | |||||||||||||||||||||||||||||||||||||
| Tax withholding related to vesting of restricted stock units | (16,003) | — | (2,456) | — | — | — | (2,456) | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with business combination | 113,617,352 | — | 13,827,929 | — | — | — | 13,827,929 | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock in conjunction with the conversion of convertible notes | 19,865 | — | 454 | — | — | — | 454 | |||||||||||||||||||||||||||||||||||||
| Exercise of bond hedges in conjunction with the conversion of convertible notes | (1,188,754) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | 579,496,146 | $ | — | $ | 17,426,629 | $ | 218,357 | $ | (232,164) | $ | 37,570 | $ | 17,450,392 | |||||||||||||||||||||||||||||||
| Class A and B common stock | Additional paid-in | Accumulated other comprehensive | 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 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 connection with business combination | 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 | |||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
BLOCK, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Block, Inc. (together with its subsidiaries, "Block" or the "Company") creates tools that empower businesses, sellers, and individuals to participate in the economy. Block is comprised of two operating and reportable segments, Square and Cash App. 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 provides an ecosystem of financial products and services to help individuals manage their money by providing financial services that allow individuals to store, send, receive, spend, and invest their money. Cash App’s goal is to redefine the world’s relationship with money by making it more relatable, instantly available, and universally accessible.
On January 31, 2022, the Company completed the acquisition of Afterpay Limited (“Afterpay”), to strengthen its position to better deliver compelling financial products and services that expand access to more consumers and drive incremental revenue for merchants of all sizes. See Note 9, Acquisitions for further details.
Block was founded in 2009 and has offices in the United States, Canada, Japan, Australia, New Zealand, Ireland, the United Kingdom, Spain, Lithuania, China, Italy, and Norway. The Company does not designate a headquarters location after it adopted a distributed work model in 2021.
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, 2021 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, and cash flows for the interim periods. The condensed consolidated financial statements include the financial statements of Block 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 months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022, 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, 2021.
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 accrued transaction losses, contingencies, valuation of loans held for sale, valuation of goodwill
and acquired intangible assets, the determination of allowance for loan loss reserves for loans held for investment, determination of allowance for credit losses for consumer receivables, pre-acquisition contingencies associated with business combinations, allocation of acquired goodwill to segments, assessing the likelihood of adverse outcomes from claims and disputes, accrued royalties, income and other taxes, operating and financing lease right-of-use assets and related liabilities, and share-based compensation.
The Company's estimates of accrued transaction losses, valuation of loans held for sale, and allowance for credit losses associated with consumer receivables are based on historical experience, adjusted for market data relevant to the current economic environment. The Company will continue to update its estimates as developments occur and additional information is obtained. Refer to Note 6, Consumer Receivables, net for further details on consumer receivables, Note 5, Fair Value of Financial Instruments for further details on amortized cost over fair value of the loans, and Note 12, Other Consolidated Balance Sheet Components (Current) for further details on transaction losses.
Adjustment to Statement of Cash Flows
Beginning in the fourth quarter of 2021, the Company adjusted its consolidated statement of cash flows to include changes in customer funds and cash and cash equivalents associated with customers payable as financing activities. Previously, the changes in customer funds and customers payable were presented within operating activities in the Company's consolidated statements of cash flows. The adjustment results in the portion of customer funds that is held in cash and cash equivalents, restricted cash, and customer funds to be included in the beginning and ending period totals of cash, cash equivalents, restricted cash, and customer funds. The Company holds customer funds separate from its corporate funds and does not use customer funds for any corporate purposes.
The condensed consolidated statements of cash flows for the three months ended March 31, 2021 has been revised to reflect this adjustment to the presentation. These changes have been concluded to be immaterial to the consolidated financial statements and have no impact on previously reported condensed consolidated statements of operations and balance sheets. The adjusted presentation shows all changes associated with customer funds in the condensed consolidated statements of cash flows instead of in the notes to the condensed consolidated financial statements.
The following table presents the effects of the changes on the presentation of these cash flows to the previously reported condensed consolidated statements of cash flows (in thousands):
| Three Months Ended March 31, 2021 | ||||||||||||||||||||
| Net cash provided by (used in): | As Previously Reported (i) | Adjustments | As Adjusted | |||||||||||||||||
| Operating activities (ii) | $ | (97,741) | $ | 68,548 | $ | (29,193) | ||||||||||||||
| Investing activities | (158,023) | — | (158,023) | |||||||||||||||||
| Financing activities (iii) | 180,992 | 938,596 | 1,119,588 | |||||||||||||||||
| Effect of foreign exchange rate on cash and cash equivalents | (8,206) | — | (8,206) | |||||||||||||||||
| Net increase (decrease) in cash, cash equivalents, restricted cash, and customer funds | (82,978) | 1,007,144 | 924,166 | |||||||||||||||||
| Cash, cash equivalents, restricted cash, and customer funds, beginning of the period | 3,201,863 | 1,591,308 | 4,793,171 | |||||||||||||||||
| Cash, cash equivalents, restricted cash, and customer funds, end of period | $ | 3,118,885 | $ | 2,598,452 | $ | 5,717,337 | ||||||||||||||
| _______________ | ||||||||||||||||||||
| (i) | As reported in our 2021 Form 10-Q filed with the SEC on May 6, 2021. | |||||||||||||||||||
| (ii) | Financial statement lines impacted in operating activities were Customer funds and Customers payable. | |||||||||||||||||||
| (iii) | Financial statement line impacted in financing activities was the addition of a new line called Change in customer funds, restricted from use in the Company's operations. |
Concentration of Credit Risk
For the three months ended March 31, 2022 and March 31, 2021, 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 48% and 34% of settlements receivable as of March 31, 2022. As of December 31, 2021, there were two parties that represented approximately 52% and 30% 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, consumer receivables, 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 of concentration for loans and consumer receivables is partially mitigated by credit evaluations that are performed prior to facilitating the offering of loans and receivables and ongoing performance monitoring of the Company’s loan customers. The risk associated with the Paycheck Protection Program ("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 expenses in the condensed consolidated statements of operations. Total advertising costs were $156.3 million for the three months ended March 31, 2022, compared to $85.9 million for the three months ended March 31, 2021.
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 include, but are not limited to, Cash App peer-to-peer processing costs and related transaction losses, card issuance costs, customer referral bonuses, and promotional giveaways, and were $202.3 million for the three months ended March 31, 2022, compared to $183.6 million for the three months ended March 31, 2021.
Significant Accounting Policies
Following the acquisition of Afterpay, the Company adopted the following significant accounting policies, in addition to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Afterpay Revenue
Through Afterpay's buy now pay later ("BNPL") platform, the Company enables consumers the ability to pay for purchases by splitting their payments into four installments over six weeks. The Company generally pays the seller the net amount of the consumer order value less a merchant fee, which consists of fixed and variable rates as contracted with the sellers. The Company also incurs other costs such as fees paid to third-party partners and processing fees to complete the consumer purchase transaction. The Company generally assumes non-repayment risk from the consumers. The Company initially recognizes a consumer receivable equal to net amounts paid to the seller plus any costs incurred to originate the consumer receivable. The Company recognizes the merchant fee less costs incurred to originate the consumer receivables as revenue using the effective interest method and is included within subscriptions and services-based revenue in the condensed consolidated statement of operations. The effective interest rate is determined based on estimated future cash receipts over the expected life of the consumer receivable, having consideration for the historical repayment pattern of the consumer receivables on a portfolio basis. The Company does not charge interest or fees to the consumers, other than late fees which are used by the Company as an incentive to encourage consumers to pay their outstanding balances as and when they fall due**.** Late fees are recognized and included within subscriptions and services-based revenue in the condensed consolidated statement of operations when chargeable to consumers and collectibility is reasonably assured based on, among other factors, consumer behavior and historical recovery experience.
Consumer Receivables
The Company classifies consumer receivables as held for investment as the Company has the intent and ability to hold these investments for the foreseeable future or until maturity or payoff. These consumer receivables are reported at amortized cost, which includes the cost to originate the consumer receivables, adjusted for unearned merchant fees, origination costs, charge-offs, and the allowance for credit losses. Refer to Note 6, Consumer Receivables, net for more information.
Allowance for Credit Losses
The Company calculates an allowance for credit losses on the consumer receivables portfolio in accordance with ASU 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.
Allowance for credit losses relating to consumer receivables represents management’s best estimate of the expected credit losses in the outstanding portfolio of consumer receivables, as of the balance sheet date. The Company determines the allowance for credit losses using both quantitative and qualitative methods that analyze portfolio performance, uses judgment regarding the quantitative components of the reserve, and considers all available information relevant to assessing collectibility. This includes but is not limited to historical loss and recovery experience, recent and historical trends in delinquencies, past-due receivables and charge-offs, consumer behavior and repayment speed, underwriting and collection management changes, changes in the legal and regulatory environment, changes in risk and underwriting standards, current and historical macroeconomic conditions such as changes in unemployment and GDP, and various other factors that may affect the consumers’ ability to make future payments. When available information confirms that specific consumer receivables or portions thereof are uncollectible, identified amounts are charged against the allowance for credit losses. Consumer receivables are charged off when management considers amounts to be uncollectible, which is generally determined by the number of days past due and is typically no later than 180 days past due.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements In July 2021, the FASB issued ASU No. 2021-05, Lease (Topic 842): Lessors—Certain Leases with Variable Lease Payments ("ASU 2021-05"), 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 adopted this guidance effective January 1, 2022, and has applied the guidance prospectively. The adoption of this guidance did not have a material impact on the Company’s financial statements and related disclosures.
In May 2021, the FASB issued ASU No. 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) (“ASU 2021-04”), 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 adopted this guidance effective January 1, 2022, and has applied the guidance prospectively. The adoption of this guidance did not have a material impact on the Company’s financial statements and related disclosures.
Recently Issued Accounting Pronouncements Not Yet Adopted In March 2022, the FASB issued ASU No. 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method ("ASU 2022-01") related to the portfolio layer method of hedge accounting. The amendments allow nonprepayable financial assets to be included in a closed portfolio hedge using the portfolio layer method. ASU 2022-01 also allows for multiple hedged layers to be designated for a single closed portfolio of financial assets or one or more beneficial interests secured by a portfolio of financial instruments The amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company 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 March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) related to troubled debt restructuring and vintage disclosures for financing receivables. The amendments eliminate recognition and measurement guidance for troubled debt restructurings for creditors and requires entities to evaluate if the modification represents a new loan or a continuation of the existing loan. ASU 2022-02 also enhances disclosure requirements for certain loan refinancing and restructurings made to borrowers experiencing financial difficulty and requires disclosure of current period write-offs by year of origination for financing receivables. The amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption 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 March 2022, the SEC staff released Staff Accounting Bulletin No. 121 ("SAB 121"), which expressed the views of the SEC staff regarding the accounting for obligations to safeguard crypto-assets an entity holds for users of its crypto platform. This guidance requires entities that hold crypto-assets on behalf of platform users to recognize liability to reflect the entity’s obligation to safeguard the crypto-assets held for its platform users. The liability should be measured at initial recognition and each reporting date at the fair value of the crypto-assets that the entity is responsible for holding for its platform users. The entity should also recognize an asset at the same time that it recognizes the safeguarding liability, measured at initial recognition and each reporting date at the fair value of the crypto-assets held for its platform users. The entity should also describe the asset and the corresponding liability in the footnotes to the financial statements and consider
including information regarding who (e.g. the company, its agent, or another third party) holds the cryptographic key information, maintains the internal recordkeeping of those assets, and is obligated to secure the assets and protect them from loss or theft. This guidance is effective from the first interim period after June 15, 2022 and should be applied retrospectively. The adoption of this guidance will result in the Company recognizing an asset and liability related to the bitcoin held by the Company on behalf of the Company’s customers. The adoption of this guidance will have no impact to the Company's condensed consolidated statements of operations and condensed consolidated statements of cash flows. If the Company had adopted this standard, the Company's assets and liabilities would have increased by $1.1 billion as of March 31, 2022 and December 31, 2021.
NOTE 2 - REVENUE
The following table presents the Company's revenue disaggregated by revenue source (in thousands):
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Revenue from contracts with customers: | |||||||||||||||||||||||
| Transaction-based revenue | $ | 1,232,969 | $ | 959,733 | |||||||||||||||||||
| Subscription and services-based revenue | 724,745 | 525,065 | |||||||||||||||||||||
| Hardware revenue | 37,326 | 28,788 | |||||||||||||||||||||
| Bitcoin revenue | 1,730,793 | 3,511,068 | |||||||||||||||||||||
| Revenue from other sources: | |||||||||||||||||||||||
| Subscription and services-based revenue (i) | 234,812 | 32,616 | |||||||||||||||||||||
| Total net revenue | $ | 3,960,645 | $ | 5,057,270 |
(i) 2022 amount includes Afterpay revenue.
NOTE 3 - INVESTMENTS IN DEBT SECURITIES
The Company's short-term and long-term investments as of March 31, 2022 are as follows (in thousands):
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||
| Short-term debt securities: | |||||||||||||||||||||||
| U.S. agency securities | $ | 27,774 | $ | — | $ | (117) | $ | 27,657 | |||||||||||||||
| Corporate bonds | 301,285 | 22 | (1,637) | 299,670 | |||||||||||||||||||
| Commercial paper | 13,763 | — | — | 13,763 | |||||||||||||||||||
| Municipal securities | 4,074 | — | (39) | 4,035 | |||||||||||||||||||
| Certificates of deposit | 8,495 | — | — | 8,495 | |||||||||||||||||||
| U.S. government securities | 425,679 | 3 | (2,589) | 423,093 | |||||||||||||||||||
| Foreign government securities | 20,187 | 3 | (154) | 20,036 | |||||||||||||||||||
| Total | $ | 801,257 | $ | 28 | $ | (4,536) | $ | 796,749 | |||||||||||||||
| Long-term debt securities: | |||||||||||||||||||||||
| U.S. agency securities | $ | 148,553 | $ | 8 | $ | (4,463) | $ | 144,098 | |||||||||||||||
| Corporate bonds | 581,770 | 10 | (14,881) | 566,899 | |||||||||||||||||||
| Municipal securities | 19,124 | — | (606) | 18,518 | |||||||||||||||||||
| U.S. government securities | 606,465 | 106 | (15,700) | 590,871 | |||||||||||||||||||
| Foreign government securities | 13,013 | — | (260) | 12,753 | |||||||||||||||||||
| Total | $ | 1,368,925 | $ | 124 | $ | (35,910) | $ | 1,333,139 |
The Company's short-term and long-term investments as of December 31, 2021 are as follows (in thousands):
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||
| Short-term debt securities: | |||||||||||||||||||||||
| U.S. agency securities | $ | 73,986 | $ | 150 | $ | (8) | $ | 74,128 | |||||||||||||||
| Corporate bonds | 293,460 | 128 | (269) | 293,319 | |||||||||||||||||||
| Commercial paper | 36,088 | — | — | 36,088 | |||||||||||||||||||
| Municipal securities | 5,543 | 5 | — | 5,548 | |||||||||||||||||||
| Certificates of deposit | 9,200 | — | — | 9,200 | |||||||||||||||||||
| U.S. government securities | 430,992 | 106 | (255) | 430,843 | |||||||||||||||||||
| Foreign government securities | 20,256 | 19 | (118) | 20,157 | |||||||||||||||||||
| Total | $ | 869,525 | $ | 408 | $ | (650) | $ | 869,283 | |||||||||||||||
| Long-term debt securities: | |||||||||||||||||||||||
| U.S. agency securities | $ | 154,454 | $ | 26 | $ | (1,160) | $ | 153,320 | |||||||||||||||
| Corporate bonds | 667,699 | 80 | (4,572) | 663,207 | |||||||||||||||||||
| Municipal securities | 22,541 | 2 | (126) | 22,417 | |||||||||||||||||||
| U.S. government securities | 678,553 | 3 | (4,080) | 674,476 | |||||||||||||||||||
| Foreign government securities | 13,084 | — | (74) | 13,010 | |||||||||||||||||||
| Total | $ | 1,536,331 | $ | 111 | $ | (10,012) | $ | 1,526,430 |
The amortized cost of investments classified as cash equivalents approximated the fair value due to the short-term nature of the investments.
The Company's gross unrealized losses and fair values for those investments that were in an unrealized loss position as of March 31, 2022 and December 31, 2021, aggregated by investment category and the length of time that individual securities have been in a continuous loss position, are as follows (in thousands):
| March 31, 2022 | |||||||||||||||||||||||||||||||||||
| Less than 12 Months | Greater than 12 Months | Total | |||||||||||||||||||||||||||||||||
| Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||||||||||||||||||||
| Short-term debt securities: | |||||||||||||||||||||||||||||||||||
| U.S. agency securities | $ | 27,657 | $ | (117) | $ | — | $ | — | $ | 27,657 | $ | (117) | |||||||||||||||||||||||
| Corporate bonds | 259,332 | (1,637) | — | — | 259,332 | (1,637) | |||||||||||||||||||||||||||||
| Municipal securities | 3,267 | (39) | — | — | 3,267 | (39) | |||||||||||||||||||||||||||||
| U.S. government securities | 390,493 | (2,589) | — | — | 390,493 | (2,589) | |||||||||||||||||||||||||||||
| Foreign government securities | 18,730 | (154) | — | — | 18,730 | (154) | |||||||||||||||||||||||||||||
| Total | $ | 699,479 | $ | (4,536) | $ | — | $ | — | $ | 699,479 | $ | (4,536) | |||||||||||||||||||||||
| Long-term debt securities: | |||||||||||||||||||||||||||||||||||
| U.S. agency securities | $ | 138,033 | $ | (4,295) | $ | 4,832 | $ | (168) | $ | 142,865 | $ | (4,463) | |||||||||||||||||||||||
| Corporate bonds | 545,068 | (14,400) | 16,767 | (481) | 561,835 | (14,881) | |||||||||||||||||||||||||||||
| Municipal securities | 15,418 | (606) | — | — | 15,418 | (606) | |||||||||||||||||||||||||||||
| U.S. government securities | 491,148 | (15,700) | — | — | 491,148 | (15,700) | |||||||||||||||||||||||||||||
| Foreign government securities | 12,753 | (260) | — | — | 12,753 | (260) | |||||||||||||||||||||||||||||
| Total | $ | 1,202,420 | $ | (35,261) | $ | 21,599 | $ | (649) | $ | 1,224,019 | $ | (35,910) |
| December 31, 2021 | |||||||||||||||||||||||||||||||||||
| Less than 12 Months | Greater than 12 Months | Total | |||||||||||||||||||||||||||||||||
| Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||||||||||||||||||||
| Short-term debt securities: | |||||||||||||||||||||||||||||||||||
| U.S. agency securities | $ | 26,749 | $ | (8) | $ | — | $ | — | $ | 26,749 | $ | (8) | |||||||||||||||||||||||
| Corporate bonds | 241,792 | (269) | 311 | — | 242,103 | (269) | |||||||||||||||||||||||||||||
| U.S. government securities | 347,380 | (255) | — | — | 347,380 | (255) | |||||||||||||||||||||||||||||
| Foreign government securities | 12,734 | (118) | — | — | 12,734 | (118) | |||||||||||||||||||||||||||||
| Total | $ | 628,655 | $ | (650) | $ | 311 | $ | — | $ | 628,966 | $ | (650) | |||||||||||||||||||||||
| Long-term debt securities: | |||||||||||||||||||||||||||||||||||
| U.S. agency securities | $ | 151,472 | $ | (1,160) | $ | — | $ | — | $ | 151,472 | $ | (1,160) | |||||||||||||||||||||||
| Corporate bonds | 627,467 | (4,572) | — | — | 627,467 | (4,572) | |||||||||||||||||||||||||||||
| Municipal securities | 18,616 | (126) | — | — | 18,616 | (126) | |||||||||||||||||||||||||||||
| U.S. government securities | 639,473 | (4,080) | — | — | 639,473 | (4,080) | |||||||||||||||||||||||||||||
| Foreign government securities | 13,010 | (74) | — | — | 13,010 | (74) | |||||||||||||||||||||||||||||
| Total | $ | 1,450,038 | $ | (10,012) | $ | — | $ | — | $ | 1,450,038 | $ | (10,012) |
The Company does not intend to sell nor anticipate that it will be required to sell the securities before recovery of the amortized cost basis. Unrealized losses related to available-for-sale debt securities were determined not to be due to credit related losses, therefore, an allowance for credit losses is not required.
The contractual maturities of the Company's short-term and long-term investments as of March 31, 2022 are as follows (in thousands):
| Amortized Cost | Fair Value | ||||||||||
| Due in one year or less | $ | 801,257 | $ | 796,749 | |||||||
| Due in one to five years | 1,368,925 | 1,333,139 | |||||||||
| Total | $ | 2,170,182 | $ | 2,129,888 |
NOTE 4 - CUSTOMER FUNDS
The following table presents the assets underlying customer funds (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Cash | $ | 2,332,936 | $ | 242,243 | |||||||
| Cash equivalents: | |||||||||||
| Money market funds | 187,782 | 2,126,579 | |||||||||
| Reverse repurchase agreement (i) | 670,187 | 72,119 | |||||||||
| Short-term debt securities: | |||||||||||
| U.S. agency securities | — | 29,994 | |||||||||
| U.S. government securities | — | 360,060 | |||||||||
| Total | $ | 3,190,905 | $ | 2,830,995 |
(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 classified the amounts due from the counterparty as cash equivalents due to the short-term nature.
The Company's investments within customer funds as of December 31, 2021 are as follows (in thousands):
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||
| Short-term debt securities: | |||||||||||||||||||||||
| U.S. agency securities | $ | 30,002 | $ | — | $ | (8) | $ | 29,994 | |||||||||||||||
| U.S. government securities | 360,251 | — | (191) | 360,060 | |||||||||||||||||||
| Total | $ | 390,253 | $ | — | $ | (199) | $ | 390,054 |
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 December 31, 2021, aggregated by investment category and the length of time that individual securities have been in a continuous loss position are as follows (in thousands):
| 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 | $ | 29,994 | $ | (8) | $ | — | $ | — | $ | 29,994 | $ | (8) | |||||||||||||||||||||||
| U.S. government securities | 360,060 | (191) | — | — | 360,060 | (191) | |||||||||||||||||||||||||||||
| Total | $ | 390,054 | $ | (199) | $ | — | $ | — | $ | 390,054 | $ | (199) |
The Company does not have any available-for-sale debt securities for which the Company has recorded credit related losses.
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):
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||||||||||||||
| Money market funds | $ | 1,259,739 | $ | — | $ | — | $ | 2,344,768 | $ | — | $ | — | |||||||||||||||||||||||
| U.S. agency securities | — | — | — | — | 22,999 | — | |||||||||||||||||||||||||||||
| Certificates of deposit | — | — | — | — | 4,983 | — | |||||||||||||||||||||||||||||
| Commercial paper | — | 16,991 | — | — | — | — | |||||||||||||||||||||||||||||
| Corporate bonds | — | 4,944 | — | — | 790 | — | |||||||||||||||||||||||||||||
| U.S. government securities | 56,999 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Municipal securities | — | 3,914 | — | — | — | — | |||||||||||||||||||||||||||||
| Customer funds: | |||||||||||||||||||||||||||||||||||
| Money market funds | 187,782 | — | — | 2,126,579 | — | — | |||||||||||||||||||||||||||||
| Reverse repurchase agreement | 670,187 | — | — | 72,119 | — | — | |||||||||||||||||||||||||||||
| U.S. agency securities | — | — | — | — | 29,994 | — | |||||||||||||||||||||||||||||
| U.S. government securities | — | — | — | 360,060 | — | — | |||||||||||||||||||||||||||||
| Short-term debt securities: | |||||||||||||||||||||||||||||||||||
| U.S. agency securities | — | 27,657 | — | — | 74,128 | — | |||||||||||||||||||||||||||||
| Certificates of deposit | — | 8,495 | — | — | 9,200 | — | |||||||||||||||||||||||||||||
| Corporate bonds | — | 299,670 | — | — | 293,319 | — | |||||||||||||||||||||||||||||
| Commercial paper | — | 13,763 | — | — | 36,088 | — | |||||||||||||||||||||||||||||
| Municipal securities | — | 4,035 | — | — | 5,548 | — | |||||||||||||||||||||||||||||
| U.S. government securities | 423,093 | — | — | 430,843 | — | ||||||||||||||||||||||||||||||
| Foreign government securities | — | 20,036 | — | — | 20,157 | — | |||||||||||||||||||||||||||||
| Long-term debt securities: | |||||||||||||||||||||||||||||||||||
| U.S. agency securities | — | 144,098 | — | — | 153,320 | — | |||||||||||||||||||||||||||||
| Corporate bonds | — | 566,899 | — | — | 663,207 | — | |||||||||||||||||||||||||||||
| Municipal securities | — | 18,518 | — | — | 22,417 | — | |||||||||||||||||||||||||||||
| U.S. government securities | 590,871 | — | — | 674,476 | — | — | |||||||||||||||||||||||||||||
| Foreign government securities | — | 12,753 | — | — | 13,010 | — | |||||||||||||||||||||||||||||
| Other: | |||||||||||||||||||||||||||||||||||
| Investment in marketable equity security | 22,186 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Total | $ | 3,210,857 | $ | 1,141,773 | $ | — | $ | 6,008,845 | $ | 1,349,160 | $ | — |
The carrying amounts of certain financial instruments, including settlements receivable, consumer receivables, loans held for investment, accounts payable, customers payable, accrued expenses, and settlements payable, approximate their fair values due to their short-term nature. The carrying amounts of the Company's warehouse funding facilities approximate their fair values.
The Company estimates the fair value of its convertible and senior notes based on their last actively traded prices or significant other market observable inputs (Level 2). The estimated fair value and carrying value of the convertible and senior notes were as follows (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Carrying Value | Fair Value (Level 2) | Carrying Value | Fair Value (Level 2) | ||||||||||||||||||||
| 2031 Senior Notes | $ | 987,116 | $ | 908,966 | $ | 986,774 | $ | 1,018,113 | |||||||||||||||
| 2026 Senior Notes | 988,312 | 932,917 | 987,626 | 994,579 | |||||||||||||||||||
| 2027 Convertible Notes | 567,535 | 518,840 | 567,208 | 614,286 | |||||||||||||||||||
| 2026 Convertible Notes | 568,039 | 525,134 | 567,621 | 595,548 | |||||||||||||||||||
| 2025 Convertible Notes | 991,109 | 1,297,846 | 990,361 | 1,477,302 | |||||||||||||||||||
| 2023 Convertible Notes | 459,800 | 839,083 | 459,618 | 958,927 | |||||||||||||||||||
| 2022 Convertible Notes | — | — | 455 | 3,192 | |||||||||||||||||||
| Total | $ | 4,561,911 | $ | 5,022,786 | $ | 4,559,663 | $ | 5,661,947 |
The estimated fair value and carrying value of loans held for sale and loans held for investment were as follows (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Carrying Value | Fair Value (Level 3) | Carrying Value | Fair Value (Level 3) | ||||||||||||||||||||
| Loans held for sale | $ | 357,115 | $ | 386,169 | $ | 517,940 | $ | 574,982 | |||||||||||||||
| Loans held for investment | 90,051 | 93,851 | 91,447 | 95,746 | |||||||||||||||||||
| Total | $ | 447,166 | $ | 480,020 | $ | 609,387 | $ | 670,728 |
As of March 31, 2022, $105.6 million of the carrying value of loans held for sale was attributable to loans under the Paycheck Protection Program ("PPP"). The PPP was intended to provide relief to eligible businesses impacted by COVID-19, and to incentivize businesses to keep their workers on the payroll. These loans are guaranteed by the U.S. government and are eligible for forgiveness if the borrowers meet certain criteria. 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 March 31, 2022 were immaterial. As of March 31, 2022, the Company had facilitated the issuance of $1.5 billion of loans in the aggregate under the program, of which it had sold $399.1 million to an investor since the commencement of the PPP. As of March 31, 2022, $1.0 billion in PPP loans held for sale have been forgiven by the SBA, of which $299.7 million have been forgiven in the three months ended March 31, 2022. Overall, in the three months ended March 31, 2022, the Company recognized $51.5 million of revenue associated with PPP loans, primarily as a result of forgiveness. The Company approved and funded the last of its remaining PPP applications upon exhaustion of the funds in the program on May 21, 2021.
To determine the fair value of the loans held for sale, the Company utilizes discounted cash flow valuation modeling, taking into account the probability of default and estimated timing and amounts of periodic repayments. In estimating the expected timing and amounts of the future periodic repayments for the loans outstanding, the Company considered other relevant market data in developing such estimates and assumptions. 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 March 31, 2022, there were no material changes to the Company's estimates of fair value and the Company will continue to evaluate facts and circumstances that could impact its estimates and affect its results of operations in future periods. The charges for the excess of amortized cost over fair value of the loans held for sale were immaterial for the three months ended March 31, 2022,
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 months ended March 31, 2022 and 2021, the Company did not have any transfers in or out of Level 1, Level 2, or Level 3 assets or liabilities.
NOTE 6 - CONSUMER RECEIVABLES, NET
Following the acquisition of Afterpay, described in Note 9, Acquisitions, the Company assumed Afterpay's existing consumer receivables, which are amounts due from consumers for outstanding installment payments on orders processed on the BNPL platform. Further discussed in Note 1, Description of Business and Summary of Significant Accounting Policies, consumer receivables are classified as held for investment. These receivables are interest free and are generally due within 14 to 56 days. The Company evaluates the consumer receivables as a single homogeneous portfolio as it is comprised of a single product type, point-of-sale unsecured installment loans.
The Company closely monitors credit quality for the consumer receivables to manage and evaluate its related exposure to credit risk. The criteria the Company monitors when assessing the credit quality and risk of its consumer receivables portfolio is primarily based on internal risk assessments, as they provide insight into customer risk profiles and are useful as indicators of potential future credit losses. Consumer receivables are internally rated as "Pass" rated or "Classified." Pass rated consumer receivables generally consist of consumer receivables that are current or up to 60 days past due. Classified consumer receivables generally comprise of consumer receivables that are 60 days or greater past due and have a higher risk of default. Internal risk ratings are reviewed and, generally, updated at least once a year. As of March 31, 2022, the amortized cost of Pass rated consumer receivables was $1.4 billion and the amount of Classified consumer receivables was less than $0.1 billion.
For consumer receivables, an allowance for credit losses is determined based on the probability of a default event occurring over the life of the receivables. When a consumer has not paid by the due date, it is an indication that credit risk has increased. As a result, the allowance for credit losses for that receivable is measured at an amount equal to the lifetime allowance for credit losses for increased credit risk. Lifetime allowance for credit losses is the expected credit losses that result from all possible default events over the expected life of the receivables.
When the consumer receivable is greater than 61 days past due, there is considered to be objective evidence of impairment. Aging greater than 61 days is considered to have an adverse impact on the estimated future cash flows of the receivable.
Consumer receivables are charged off when they are over 180 days past due and the Company has no reasonable expectation of recovery.
The following table presents an aging analysis of the amortized cost of consumer receivables held for investment by delinquency status (in thousands):
| March 31, 2022 | |||||||||||
| Non-delinquent loans | $ | 1,206,259 | |||||||||
| 1 - 60 days past due | 149,913 | ||||||||||
| 61 - 90 days past due | 49,194 | ||||||||||
| 90+ days past due | 8,758 | ||||||||||
| Total amortized cost | $ | 1,414,124 |
When consumer receivables are charged off, the Company recognizes the charge against the allowance for credit losses. The Company may continue to attempt to recover amounts from the respective consumers. Any subsequent recoveries following charge-off are credited to transaction, loan, and consumer receivable losses within the condensed consolidated statement of operation in the period in which they were recovered. The amount of recoveries for the three months ended March 31, 2022 were immaterial. The allowance for credit losses on consumer receivables is a valuation account that is deducted from the carrying value of the consumer receivables.
The following table details activity in the allowance for credit losses subsequent to the acquisition of Afterpay (in thousands):
| Allowance for credit losses, recorded from acquisition (i) | $ | 115,552 | |||||||||
| Provision for credit losses | 36,505 | ||||||||||
| Charge-offs and other adjustments | (42,233) | ||||||||||
| Allowance for credit losses, balance at March 31, 2022 | $ | 109,824 |
(i) Consumer receivables acquired from Afterpay that reflect a more-than-insignificant deterioration of credit from origination are considered purchased credit deteriorated ("PCD") receivables. For PCD consumer receivables, the initial estimate of expected credit losses is recognized in the allowance for credit losses on the date of acquisition using the same methodology as other consumer receivables.
NOTE 7 - 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 March 31, 2022, the Company held $90.1 million as loans held for investment, net of allowance, included in other current assets on the condensed consolidated balance sheet. Refer to Note 12, Other Consolidated Balance Sheet Components for more details.
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 allowance for loan losses and amount of charge-offs recorded as of March 31, 2022 were immaterial. There were no recoveries recorded as of March 31, 2022.
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. Loans that are 120 days or more past due are generally considered to be uncollectible and are charged off. 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 March 31, 2022, the amount of loans that were identified as nonperforming loans was immaterial.
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 indicators of potential future credit losses. Loans are internally rated as "Pass" rated or "Classified." Pass rated loans generally consist of loans that are current or up to 60 days past due. Classified loans generally comprise of loans that are 60 days or greater past due and have a higher risk of default. Internal risk ratings are reviewed and, generally, updated at least once a year. As of March 31, 2022, the amortized cost of Pass rated loans was $94.1 million and the amount of Classified loans was immaterial.
NOTE 8 - PROPERTY AND EQUIPMENT, NET
The following is a summary of property and equipment, less accumulated depreciation and amortization (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Leasehold improvements | $ | 215,870 | $ | 208,228 | |||||||
| Computer equipment | 192,964 | 174,004 | |||||||||
| Capitalized software | 132,215 | 116,827 | |||||||||
| Office furniture and equipment | 44,134 | 42,393 | |||||||||
| Total | 585,183 | 541,452 | |||||||||
| Less: Accumulated depreciation and amortization | (282,936) | (259,312) | |||||||||
| Property and equipment, net | $ | 302,247 | $ | 282,140 |
Depreciation and amortization expense on property and equipment was $27.9 million and $22.3 million for the three months ended March 31, 2022 and 2021 respectively.
NOTE 9 - ACQUISITIONS
Afterpay
On January 31, 2022 (February 1, 2022 Australian Eastern Daylight Time), the Company completed the acquisition of Afterpay, a global BNPL platform. In connection with the acquisition, the Company issued 113,617,352 shares of the Company’s Class A common stock. The shares issued included a deemed vested component of outstanding employee awards, based on the ratio of time served in relation to the vesting term of each award, with the unvested portion being replaced with Block’s unvested replacement awards, with the same terms. The aggregate fair value of the shares issued was $13.8 billion based on the closing price of the Company’s Class A common stock on the acquisition date, of which $66.3 million was attributed to acceleration of various share-based arrangements and was accounted for as an expense immediately post-acquisition, included as a component of general and administrative expenses in the consolidated statement of operations. As of the completion of the acquisition, certain convertible notes with an outstanding principal amount of AU $1.5 billion (U.S. $1.1 billion based on the closing exchange rate on the acquisition date) remained outstanding, and were redeemed on March 4, 2022.
The acquisition meets the criteria to be accounted for as a business combination in accordance with ASC 805, Business Combinations (“ASC 805”). 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 Company is in the process of completing the determination of the fair values of certain tangible and intangible assets acquired and liabilities assumed, including reviewing third-party valuations and the allocation of the intangibles and goodwill to various operating units. 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 and certain assumed contingent consideration of Afterpay, and evaluation of contingencies and tax effects related to the acquisition.
The table below summarizes the consideration paid for Afterpay and the preliminary assessment of the fair value of the assets acquired and liabilities assumed at the closing date (in thousands, except share data).
| Consideration: | |||||
| Stock (113,617,352 shares of Class A common stock, excluding value accounted as post-combination expense of $66,337) | $ | 13,827,929 | |||
| Cash paid to settle tax withholding in connection with replacement awards | 8,693 | ||||
| $ | 13,836,622 | ||||
| Recognized amounts of identifiable assets acquired and liabilities assumed: | |||||
| Current assets (inclusive of cash, cash equivalents, and restricted cash acquired) | $ | 653,709 | |||
| Consumer receivables | 1,245,508 | ||||
| Intangible customer assets | 1,378,000 | ||||
| Intangible technology assets | 239,000 | ||||
| Intangible trade name | 408,000 | ||||
| Other non-current assets | 74,232 | ||||
| Long-term debt - current (i) | (1,058,065) | ||||
| Current liabilities | (394,433) | ||||
| Warehouse funding facilities (ii) | (107,996) | ||||
| Deferred tax liabilities | (234,949) | ||||
| Other non-current liabilities | (55,374) | ||||
| Total identifiable net assets acquired | 2,147,632 | ||||
| Goodwill | 11,688,990 | ||||
| Total | $ | 13,836,622 | |||
(i) Long-term debt - current is comprised of the aforementioned Afterpay convertible notes, which were redeemed on March 4, 2022 at face value.
(ii) Refer to Note 14, Indebtedness for further details.
Goodwill from the acquisition was primarily attributable to the value of expected synergies created by incorporating Afterpay's technology platform, its business, and operations into the Company's Cash App and Square ecosystems and the value of the assembled workforce. The goodwill has no amortizable basis for income tax purposes. Additionally, the acquisition resulted in the recognition of $131.0 million of deferred tax assets in Australia; 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 positive evidence of such income as of March 31, 2022. Accordingly, a valuation allowance of $131.0 million was recorded against the acquired Australian deferred tax assets. Additionally, the other non-current liabilities include an estimate of $34.0 million in unrecognized tax benefits as of March 31, 2022.
Pro Forma Financial Information
The following table summarizes the unaudited pro forma consolidated financial information of the Company as if the Afterpay acquisition had occurred on January 1, 2021. Pro forma adjustments have been made to reflect, among other things, the incremental intangible asset amortization to be incurred based on the preliminary values of each identifiable
intangible asset, stock-based compensation expense related to replacement equity awards, and the tax effects of such adjustments for the respective periods.
The unaudited pro forma financial results are as follows (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net revenue | $ | 4,030,674 | $ | 5,227,467 | |||||||
| Net loss | $ | (116,936) | $ | (205,261) |
The unaudited pro forma financial information is not intended to present or be indicative of what the results of operations or financial position would have been had the events actually occurred on the dates indicated, nor is it meant to be indicative of future results of operations or financial position for any future period or as of any future date. The unaudited pro forma financial information does not give effect to the potential impact of current financial conditions, or any anticipated revenue enhancements, cost savings, or operating synergies that may result from the acquisition.
Pro forma net loss for the three months ended March 31, 2022 excludes $42.4 million of transaction costs directly attributable to the acquisition and $66.3 million of incremental stock-based compensation expense, incurred by Block, that were included in the determination of the net loss for that period. Pro forma net loss for the three months ended March 31, 2021 includes $149.0 million of transaction costs directly attributable to the acquisition incurred by both Afterpay and Block, and $66.3 million of incremental stock-based compensation expense.
TIDAL
On April 30, 2021, the Company acquired an 86.8% 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 the Company's purpose of economic empowerment to musicians and other artists. 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 transaction agreement at a price based on the fair value of TIDAL shares, as determined in accordance with certain agreements between the Company and certain legacy shareholders of TIDAL.
The purchase consideration was comprised of $223.1 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. 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 in accordance with ASC 805. 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 fair value of the assets acquired and liabilities assumed at the closing date (in thousands, except share data).
| Consideration: | |||||
| Cash | $ | 176,663 | |||
| Deferred consideration | 46,475 | ||||
| Stock (41,138 shares of Class A common stock) | 10,071 | ||||
| $ | 233,209 | ||||
| Recognized amounts of identifiable assets acquired and liabilities assumed: | |||||
| Current assets (inclusive of cash acquired of $12,358) | $ | 29,621 | |||
| 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 | (52,759) | ||||
| Total identifiable net assets acquired | 83,516 | ||||
| Noncontrolling interests | (48,192) | ||||
| Goodwill | 197,885 | ||||
| Total | $ | 233,209 |
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 $70.7 million of the goodwill generated from the TIDAL acquisition and approximately $126.7 million of the acquired intangible assets are expected to be deductible for U.S. tax purposes based on the preliminary values. Additionally, the acquisition would have resulted in the recognition of U.S. 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 March 31, 2022. 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 $46.5 million primarily 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 $22.8 million has been recorded related to such exposures in accordance with the terms of the indemnification agreement. The amounts have been determined in accordance with ASC 740, Income Taxes, and ASC 450, Contingencies.
In addition to the deferred consideration, an additional amount of $32.2 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, 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.
NOTE 10 - 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, 2021 | $ | 519,276 | |||
| Acquisitions | 11,688,990 | ||||
| Foreign currency translation adjustments | 220,664 | ||||
| Balance at March 31, 2022 | $ | 12,428,930 |
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 Square and Cash App (defined further in Note 20, Segment and Geographical Information). Goodwill arising from the acquisition of Afterpay has been equally allocated to Square and Cash App as management expects that the BNPL platform will contribute equally to each of these segments.
The change in carrying value of goodwill allocated to the reportable segments in the period was as follows (in thousands):
| Cash App | Square | Corporate and Other | Total | ||||||||||||||||||||
| Balance at December 31, 2021 | $ | 128,334 | $ | 193,057 | $ | 197,885 | $ | 519,276 | |||||||||||||||
| Acquisitions | 5,844,495 | 5,844,495 | — | 11,688,990 | |||||||||||||||||||
| Foreign currency translation adjustments | 110,253 | 110,411 | — | 220,664 | |||||||||||||||||||
| Balance at March 31, 2022 | $ | 6,083,082 | $ | 6,147,963 | $ | 197,885 | $ | 12,428,930 |
NOTE 11 - ACQUIRED INTANGIBLE ASSETS
The following table presents the detail of acquired intangible assets as of the periods presented (in thousands):
| Balance at March 31, 2022 | |||||||||||||||||||||||
| Weighted Average Estimated Useful Life | Cost | Accumulated Amortization | Net | ||||||||||||||||||||
| Technology assets | 5 years | $ | 409,899 | $ | (80,170) | $ | 329,729 | ||||||||||||||||
| Customer assets | 15 years | 1,534,937 | (38,137) | 1,496,800 | |||||||||||||||||||
| Trade name | 9 years | 460,942 | (21,600) | 439,342 | |||||||||||||||||||
| Other | 9 years | 13,701 | (4,373) | 9,328 | |||||||||||||||||||
| Total | $ | 2,419,479 | $ | (144,280) | $ | 2,275,199 |
| Balance at December 31, 2021 | |||||||||||||||||||||||
| Weighted Average Estimated Useful Life | Cost | Accumulated Amortization | Net | ||||||||||||||||||||
| Technology assets | 5 years | $ | 164,977 | $ | (65,619) | $ | 99,358 | ||||||||||||||||
| Customer assets | 15 years | 128,316 | (19,244) | 109,072 | |||||||||||||||||||
| Trade name | 9 years | 53,051 | (14,169) | 38,882 | |||||||||||||||||||
| Other | 9 years | 13,743 | (4,006) | 9,737 | |||||||||||||||||||
| Total | $ | 360,087 | $ | (103,038) | $ | 257,049 |
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 March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Acquired intangible assets, net, beginning of the period | $ | 257,049 | $ | 137,612 | |||||||||||||||||||
| Acquisitions | 2,025,000 | — | |||||||||||||||||||||
| Amortization expense | (42,160) | (6,884) | |||||||||||||||||||||
| Foreign currency translation adjustments | 35,310 | (932) | |||||||||||||||||||||
| Acquired intangible assets, net, end of the period | $ | 2,275,199 | $ | 129,796 |
The estimated future amortization expense of intangible assets in future periods as of March 31, 2022 is as follows (in thousands):
| Remainder of 2022 | $ | 172,804 | |||
| 2023 | 229,737 | ||||
| 2024 | 226,760 | ||||
| 2025 | 219,932 | ||||
| 2026 | 206,281 | ||||
| Thereafter | 1,219,685 | ||||
| Total | $ | 2,275,199 |
NOTE 12 - OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (CURRENT)
Other Current Assets
The following table presents the detail of other current assets (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Inventory, net | $ | 72,340 | $ | 77,058 | |||||||
| Restricted cash | 109,450 | 18,778 | |||||||||
| Processing costs receivable | 236,044 | 228,914 | |||||||||
| Prepaid expenses | 123,306 | 63,341 | |||||||||
| Accounts receivable, net | 107,200 | 89,702 | |||||||||
| Loans held for investment, net of allowance for loan losses (i) | 90,051 | 91,447 | |||||||||
| Other | 137,807 | 118,189 | |||||||||
| Total | $ | 876,198 | $ | 687,429 |
(i) Refer to Note 7, 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):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Accrued expenses | $ | 368,739 | $ | 254,900 | |||||||
| Accrued royalties | 61,593 | 53,616 | |||||||||
| Accrued transaction losses (i) | 53,659 | 55,167 | |||||||||
| Accounts payable | 123,982 | 82,173 | |||||||||
| Deferred revenue, current | 52,973 | 48,462 | |||||||||
| Pagantis deferred consideration (ii) | 43,195 | — | |||||||||
| Other | 230,223 | 144,991 | |||||||||
| Total | $ | 934,364 | $ | 639,309 |
(i) 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.
(ii) On March 9, 2021, prior to acquisition by the Company, Afterpay completed the acquisition of Pagantis SAU and PMT Technology SLA (collectively, "Pagantis"). Pursuant to the acquisition agreement, Afterpay issued a convertible note to the sellers for deferred and contingent consideration. Under the terms of the note, upon a change in control, Afterpay had the option to redeem and convert the convertible note. The settlement amount consists of two components: a deferred consideration portion of €40.3 million that is a fixed contractual amount, and an additional amount that is contingent on the underlying equity value of Pagantis exceeding certain agreed upon thresholds at the settlement date. The Company has commenced discussions with the convertible note holder in relation to settlement of the note, but an agreement as to the value of the note has yet been reached. As of March 31, 2022, the Company determined that based on the underlying value of Pagantis, the contingent consideration had no value. The Company accrued $43.2 million related to the deferred consideration, which is included within other current liabilities.
The following table summarizes the activities of the Company’s reserve for transaction losses (in thousands):
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Accrued transaction losses, beginning of the period | $ | 55,167 | $ | 70,557 | |||||||||||||||||||
| Provision for transaction losses | 20,721 | (6,742) | |||||||||||||||||||||
| Charge-offs to accrued transaction losses | (22,229) | (15,193) | |||||||||||||||||||||
| Accrued transaction losses, end of the period | $ | 53,659 | $ | 48,622 |
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 $87.3 million and $82.1 million for the three months ended March 31, 2022 and 2021, respectively, for such losses.
NOTE 13 - OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (NON-CURRENT)
Other Non-Current Assets
The following table presents the detail of other non-current assets (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Investment in non-marketable equity securities (i) | $ | 156,231 | $ | 81,919 | |||||||
| Investment in bitcoin, net (ii) | 148,984 | 149,000 | |||||||||
| Restricted cash | 71,702 | 71,702 | |||||||||
| Other | 94,437 | 67,914 | |||||||||
| Total | $ | 471,354 | $ | 370,535 |
(i) Investment in non-marketable equity securities represents the Company's investments in equity of non-public entities. The Company also holds a non-marketable common stock warrant in a publicly-traded entity. These investments are measured using the measurement alternative and are therefore carried at cost, less impairment, adjusted for observable price changes from orderly transactions for identical or similar investments of the same issuer. Adjustments are recorded within other expense (income), net on the condensed consolidated statement of operations. During the three months ended March 31, 2022, the Company recorded an unrealized gain of $59.8 million, with a cumulative unrealized gain of $78.8 million as of March 31, 2022, arising from the revaluation of non-marketable investment. Unrealized losses were immaterial as of March 31, 2022.
(ii) The Company had invested $220.0 million in bitcoin as of December 31, 2021, with no additional investments during the three months ended March 31, 2022. 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 did not record any impairment charges in the three months ended March 31, 2022 due to the observed market price of bitcoin decreasing below the carrying value during the period. As of March 31, 2022, the fair value of the investment in bitcoin was $365.5 million based on observable market prices which is $216.5 million in excess of the Company's carrying value of $149.0 million.
Other Non-Current Liabilities
The following table presents the detail of other non-current liabilities (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Statutory liabilities (i) | $ | 172,003 | $ | 117,784 | |||||||
| Other | 70,714 | 89,826 | |||||||||
| Total | $ | 242,717 | $ | 207,610 |
(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.
NOTE 14 - 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 $500.0 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. On January 28, 2022, the Company entered into a fifth amendment to the Credit Agreement to permit certain existing obligations of Afterpay and its subsidiaries to remain outstanding as of and after the completion of the Afterpay acquisition. On February 23, 2022, the Company entered into a sixth amendment to the Credit Agreement to, among other things, provide for a new tranche of unsecured revolving loan commitments in an aggregate principal amount of up to $100.0 million (the "Tranche B Loans). 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 a commitment fee of 0.15% per annum on the undrawn portion available under the 2020 Credit Facility. To date, no funds have been drawn and no letters of credit have been issued under the 2020 Credit Facility. As of March 31, 2022, $600.0 million remained available for draw. The Company incurred $0.2 million and $0.2 million in unused commitment fees during the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, the Company was in compliance with all financial covenants associated with the 2020 Credit Facility.
Loans under the 2020 Credit Facility, excluding the Tranche B Loans, 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 Tranche B Loans bear interest at the Company's option of (i) an annual rate based on the forward-looking term rate based on the Secured Overnight Financing Rate ("Term SOFR") or (ii) a base rate. Tranche B Loans based on Term SOFR shall bear interest at a rate equal to Term SOFR plus a margin of between 1.25% and 1.75%, depending on the Company's total net leverage ratio. Tranche B Loans based on the base rate shall bear interest at a rate based on the highest of the prime rate, the federal funds rate plus 0.50%, and Term SOFR with a tenor of one-month plus 1.00%, in each case, plus a margin ranging from 0.25% to 0.75%, depending on the Company's total net leverage ratio. 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.
Warehouse Funding Facilities
Following the acquisition of Afterpay, the Company assumed Afterpay's existing warehouse funding facilities. The Company has financing arrangements with financial institutions in Australia, New Zealand, the United States, and the United Kingdom (collectively, the “Warehouse Facilities”). The Warehouse Facilities have been arranged utilizing wholly-owned and consolidated entities formed for the sole purpose of financing the origination of consumer receivables to partly fund the Company's BNPL platform. Borrowings under the Warehouse Facilities are secured against the respective consumer receivables.
These Warehouse Facilities have maturity dates ranging from June 2023 to December 2024. As of March 31, 2022, the aggregate commitment amount of the Warehouse Facilities using the prevailing spot rate was $1.8 billion on a revolving basis, of which $0.2 billion was drawn and $1.6 billion remained available. All facilities contain portfolio parameters based on performance of the underlying consumer receivables, which each respective region has satisfied as of March 31, 2022. None of the Warehouse Facilities contain corporate financial covenants.
All Warehouse Facilities are on a variable rate basis which aligns closely to the weighted average life of the consumer receivables they finance. Borrowings under these facilities bear interest at (i) a base rate aligned to either the local risk free rate, such as Term SOFR and the Sterling Overnight Index Average ("SONIA") or similar and (ii) a margin which is set for the term of the availability period. In addition, each facility requires payment of immaterial commitment fees.
The table below summarizes the amounts drawn on these facilities by year of maturity (in thousands):
| March 31, 2022 | |||||||||||
| 2023 | $ | 64,558 | |||||||||
| 2024 | 144,439 | ||||||||||
| Total | $ | 208,997 | |||||||||
| Deferred debt issuance costs | (248) | ||||||||||
| Total funding debt, net of deferred debt issuance costs | $ | 208,749 |
Of the total balance outstanding at March 31, 2022, $0.6 million is current and recorded within other current liabilities on the Company's condensed consolidated balance sheet.
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 March 31, 2022, $124.6 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 at 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: (i) 1.0% of the principal amount of such note, and (ii) 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: (i) 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; (ii) 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; (iii) 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 (iv) 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 three months ended March 31, 2022. 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 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity ("ASU 2020-06"), 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 remeasured 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 2020-06 on January 1, 2021, the Company reversed the separation of the debt and equity components and accounted for the 2026 Convertible Notes and 2027 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 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 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 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 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 March 31, 2022, there has been no principal converted on either the 2026 Convertible Notes or 2027 Convertible Notes.
As of March 31, 2022, the if-converted value of the 2026 Convertible Notes and 2027 Convertible Notes did not exceed the outstanding principal amount.
Convertible 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: (i) 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; (ii) 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; (iii) 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 (iv) 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 and continued to be met through March 31, 2022. As of March 31, 2022, certain holders of the 2025 Convertible Notes have converted an immaterial aggregate principal amount of their 2025 Convertible Notes. The Company has settled the conversions through the issuance of an immaterial amount of shares of the Company's Class A common stock.
In accounting for the issuance of the 2025 Convertible Notes, prior to the adoption of ASU 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 was not remeasured as long as it continued to meet the conditions for equity classification. The debt discount was 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 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 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 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 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 March 31, 2022, the if-converted value of the 2025 Convertible Notes exceeded the outstanding principal amount by $120.6 million.
Convertible 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: (i) 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; (ii) 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 (iii) 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 March 31, 2022. As of March 31, 2022, certain holders of the 2023 Convertible Notes have converted an aggregate principal amount of $401.9 million of their 2023 Convertible Notes. The Company has settled the conversions through the issuance of 5.2 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 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 was not remeasured as long as it continued to meet the conditions for equity classification. The debt discount was 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 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 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 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 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 March 31, 2022, the if-converted value of the 2023 Convertible Notes exceeded the outstanding principal amount by $341.7 million.
Convertible 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 matured on March 1, 2022, unless earlier converted or repurchased, and bore an interest at a rate of 0.375% payable semi-annually on March 1 and September 1 of each year. The 2022 Convertible Notes were 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 had the option to 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: (i) 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; (ii) 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 (iii) 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 had the option to convert all or any portion of its 2022 Convertible Notes regardless of the foregoing circumstances. Upon conversion, the Company delivered shares of its Class A common stock. 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 March 1, 2022.
As of the maturity date on March 1, 2022, holders of the 2022 Convertible Notes had converted the full aggregate principal amount of $440.0 million of the 2022 Convertible Notes, of which $0.5 million was converted during the three months ended March 31, 2022. The Company settled the conversions through a combination of $219.4 million in cash and issuance of 16.5 million shares of the Company's Class A common stock. The conversions that occurred during the three months ended March 31, 2022 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 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 was not remeasured as long as it met the conditions for equity classification. The debt discount was 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 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 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 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 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 2020-06, the difference between the estimated fair value and the carrying value upon conversion was 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.
Notes
The 2022 Convertible Notes, 2023 Convertible Notes, 2025 Convertible Notes, 2026 Convertible Notes, and 2027 Convertible Notes (collectively, the “Convertible Notes”), together with the Senior Notes, are collectively referred to as the “Notes.”
The net carrying amount of the Notes were as follows (in thousands):
| Principal Outstanding | Unamortized Debt Issuance Costs | Net Carrying Value | |||||||||||||||||||||
| March 31, 2022 | |||||||||||||||||||||||
| 2031 Senior Notes | $ | 1,000,000 | $ | (12,884) | $ | 987,116 | |||||||||||||||||
| 2026 Senior Notes | 1,000,000 | (11,688) | 988,312 | ||||||||||||||||||||
| 2027 Convertible Notes | 575,000 | (7,465) | 567,535 | ||||||||||||||||||||
| 2026 Convertible Notes | 575,000 | (6,961) | 568,039 | ||||||||||||||||||||
| 2025 Convertible Notes | 1,000,000 | (8,891) | 991,109 | ||||||||||||||||||||
| 2023 Convertible Notes | 460,630 | (830) | 459,800 | ||||||||||||||||||||
| Total | $ | 4,610,630 | $ | (48,719) | $ | 4,561,911 | |||||||||||||||||
| Principal Outstanding | Unamortized Debt Issuance Costs | Net Carrying Value | |||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| 2031 Senior Notes | $ | 1,000,000 | $ | (13,226) | $ | 986,774 | |||||||||||||||||
| 2026 Senior Notes | 1,000,000 | (12,374) | 987,626 | ||||||||||||||||||||
| 2027 Convertible Notes | 575,000 | (7,792) | 567,208 | ||||||||||||||||||||
| 2026 Convertible Notes | 575,000 | (7,379) | 567,621 | ||||||||||||||||||||
| 2025 Convertible Notes | 1,000,000 | (9,639) | 990,361 | ||||||||||||||||||||
| 2023 Convertible Notes | 460,630 | (1,012) | 459,618 | ||||||||||||||||||||
| 2022 Convertible Notes | 455 | — | 455 | ||||||||||||||||||||
| Total | $ | 4,611,085 | $ | (51,422) | $ | 4,559,663 |
The Company recognized interest expense on the Notes as follows (in thousands, except for percentages):
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Contractual interest expense | $ | 16,466 | $ | 1,728 | |||||||||||||||||||
| Amortization of debt issuance costs (i) | 2,703 | 1,832 | |||||||||||||||||||||
| Total | $ | 19,169 | $ | 3,560 |
(i) Upon adoption of ASU 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.
Effective interest rates for the Company's Convertible Notes prior to and after the adoption of ASU 2020-06 were as follows:
| Prior to Adoption of ASU 2020-06 | Post Adoption of ASU 2020-06 | ||||||||||
| 2027 Convertible Notes | 3.66 | % | 0.30 | % | |||||||
| 2026 Convertible Notes | 3.35 | % | 0.49 | % | |||||||
| 2025 Convertible Notes | 3.81 | % | 0.43 | % | |||||||
| 2023 Convertible Notes | 4.69 | % | 0.66 | % | |||||||
| 2022 Convertible Notes | 5.34 | % | 0.93 | % |
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 Note Hedge Counterparties") whereby the Company has the option to purchase a total of approximately 1.9 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 Note Hedge Counterparties whereby the 2027 Note Hedge Counterparties have the option to purchase a total of 1.9 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 remeasured 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 Note Hedge Counterparties") whereby the Company has the option to purchase a total of approximately 1.9 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 Note Hedge Counterparties whereby the 2026 Note Hedge Counterparties have the option to purchase a total of 1.9 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 Note Hedge Counterparties") whereby the Company has the option to purchase a total of approximately 8.3 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 Note Hedge Counterparties whereby the 2025 Note Hedge 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 ("2023 Note Hedge 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 2023 Note Hedge Counterparties whereby the 2023 Note Hedge 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 3.0 million shares of the Company's Class A common stock from the 2023 Note Hedge Counterparties, all of which were received in fiscal 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 ("2022 Note Hedge 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 2022 Note Hedge Counterparties whereby the 2022 Note Hedge 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 March 31, 2022, the Company has received 15.0 million shares of the Company's Class A common stock from the 2022 Note Hedge Counterparties, of which 0.2 million shares were received in the three months ended March 31, 2022.
NOTE 15 - INCOME TAXES
The Company recorded an income tax benefit of $1.7 million for the three months ended March 31, 2022 compared to an income tax expense of $0.9 million for the three months ended March 31, 2021. The income tax benefit recorded for the three months ended March 31, 2022 is driven by a change in the valuation allowance in the U.S. and certain foreign jurisdictions, offset by the post-acquisition tax benefit from Afterpay entities that is not included in the Company’s estimated annual effective income tax rate. The difference between the income tax benefit for the three months ended March 31, 2022 and the income tax expense for the three months ended March 31, 2021 primarily relates to the post-acquisition tax benefit from Afterpay entities that are not included in the Company’s estimated annual effective income tax rate.
The tax provision for the three months ended March 31, 2022 and March 31, 2021 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. Due to the difficulty in forecasting the fiscal year 2022 mix of income by jurisdiction for the Afterpay entities, the Company determined that the estimated annual effective rate method would not provide a reliable estimate and the Company applied the actual effective tax rate for the year to the Afterpay entities' year to date income as its best estimate.
As of March 31, 2022, 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 16 - STOCKHOLDERS’ EQUITY
Preferred Stock
As of March 31, 2022, the Company is authorized to issue 100,000,000 shares of preferred stock, with a $0.0000001 par value. No shares of preferred stock are outstanding as of March 31, 2022.
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 March 31, 2022, 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 March 31, 2022, there were 517,799,568 shares of Class A common stock and 61,696,578 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 March 31, 2022.
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 March 31, 2022.
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 March 31, 2022.
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 March 31, 2022.
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 March 31, 2022.
Conversion of Convertible Notes and Exercise of Convertible Note Hedges
In connection with the conversion of the 2022 Convertible Notes, the Company issued 16.5 million shares of Class A common stock, of which an immaterial number of shares were issued in the three months ended March 31, 2022. The Company also exercised a pro-rata portion of the 2022 Convertible Note Hedges and received 15.0 million shares of Class A common stock from the 2022 Note Hedge Counterparties to offset the shares issued, of which 0.2 million shares were received in the three months ended March 31, 2022.
In connection with the conversion of the 2023 Convertible Notes, the Company issued 5.2 million shares of Class A common stock in the three months ended March 31, 2022. The Company also exercised a pro-rata portion of the 2023 Convertible Note Hedges and received 3.0 million shares of Class A common stock from the 2023 Note Hedge Counterparties to offset the shares issued as of March 31, 2022.
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 March 31, 2022, the total number of shares subject to stock options, RSAs and RSUs outstanding under the 2015 Plan was 16,635,548, and 138,604,728 shares were available for future issuance. As of March 31, 2022, the total number of shares subject to stock options, RSAs and RSUs outstanding under the 2009 Plan was 6,080,636.
A summary of stock option activity for the three months ended March 31, 2022 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, 2021 | 8,916,100 | $ | 26.09 | 3.89 | $ | 1,226,105 | |||||||||||||||||
| Granted | 264,897 | 44.98 | |||||||||||||||||||||
| Exercised | (407,887) | 10.03 | |||||||||||||||||||||
| Forfeited | (44,692) | 55.37 | |||||||||||||||||||||
| Balance at March 31, 2022 | 8,728,418 | $ | 27.27 | 3.63 | $ | 970,780 | |||||||||||||||||
| Options exercisable as of March 31, 2022 | 7,565,229 | $ | 18.10 | 3.12 | $ | 894,398 |
Restricted Stock Activity
Activity related to RSAs and RSUs during the three months ended March 31, 2022 is set forth below:
| Number of Shares | Weighted Average Grant Date Fair Value | ||||||||||
| Unvested as of December 31, 2021 | 13,221,953 | $ | 137.86 | ||||||||
| Granted | 3,019,011 | 114.52 | |||||||||
| Vested | (1,593,198) | 105.33 | |||||||||
| Forfeited | (660,000) | 124.84 | |||||||||
| Unvested as of March 31, 2022 | 13,987,766 | $ | 137.14 |
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 March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Cost of revenue | $ | 109 | $ | 99 | |||||||||||||||||||
| Product development | 145,075 | 86,895 | |||||||||||||||||||||
| Sales and marketing | 21,256 | 10,880 | |||||||||||||||||||||
| General and administrative | 108,983 | 20,749 | |||||||||||||||||||||
| Total | $ | 275,423 | $ | 118,623 |
The Company recorded $13.0 million and $8.8 million of share-based compensation expense related to the Company's 2015 Employee Stock Purchase Plan during the three months ended March 31, 2022 and 2021, respectively, which are included in the table above. The total share-based compensation expense for the three months ended March 31,
2022 also includes $66.3 million related to the acceleration of various share-based arrangements associated with the acquisition of Afterpay.
The Company capitalized $3.9 million and $3.4 million of share-based compensation expense related to capitalized software costs during the three months ended March 31, 2022 and 2021, respectively.
As of March 31, 2022, there was $1.8 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 2.74 years.
NOTE 17 - 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 March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income (loss) | $ | (207,363) | $ | 39,008 | |||||||||||||||||||
| Less: Net loss attributable to noncontrolling interests | (3,164) | — | |||||||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | (204,199) | $ | 39,008 | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Basic shares: | |||||||||||||||||||||||
| Weighted-average common shares outstanding | 541,767 | 455,414 | |||||||||||||||||||||
| Weighted-average unvested shares | (332) | (441) | |||||||||||||||||||||
| Weighted-average shares used to compute basic net income (loss) per share: | 541,435 | 454,973 | |||||||||||||||||||||
| Diluted shares: | |||||||||||||||||||||||
| Stock options, restricted stock, and employee stock purchase plan | — | 20,972 | |||||||||||||||||||||
| Convertible senior notes | — | 322 | |||||||||||||||||||||
| Common stock warrants | — | 25,086 | |||||||||||||||||||||
| Weighted-average shares used to compute diluted net income (loss) per share: | 541,435 | 501,353 | |||||||||||||||||||||
| Net income (loss) per share attributable to common stockholders: | |||||||||||||||||||||||
| Basic | $ | (0.38) | $ | 0.09 | |||||||||||||||||||
| Diluted | $ | (0.38) | $ | 0.08 |
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 March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Stock options, restricted stock, and employee stock purchase plan | 23,402 | 6,109 | |||||||||||||||||||||
| Convertible senior notes | 18,038 | 3,845 | |||||||||||||||||||||
| Common stock warrants | 42,361 | 17,275 | |||||||||||||||||||||
| Total anti-dilutive securities | 83,801 | 27,229 |
NOTE 18 - 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. The lease commencement date varies by floor beginning in May 2020. The term of the agreement is 15.5 years with total future minimum lease payments over the term of approximately $42.7 million. As of March 31, 2022, the Company had recorded right-of-use assets of $20.6 million and associated lease liabilities of $33.6 million related to this lease arrangement.
NOTE 19 - COMMITMENTS AND CONTINGENCIES
Litigation and Regulatory Matters
The Company is currently subject to, and may in the future be involved in, various litigation matters, legal claims, investigations, and regulatory proceedings.
The Company has received Civil Investigative Demands (“CIDs”) from the Consumer Financial Protection Bureau (“CFPB”), as well as from Attorneys General from multiple states, seeking the production of information related to, among other things, Cash App’s handling of customer complaints and disputes. The Company is cooperating with the CFPB and the state Attorneys General in connection with these CIDs. During the three months ended December 31, 2021, the Company accrued an immaterial loss reserve in connection with the CFPB CIDs. There were no changes to the reserve balance as of March 31, 2022. Given the status of these matters, it is not possible to reliably determine the potential liability, if any, or reliably estimate the range of any potential liability in excess of the accrued amounts, that could result from these investigations. The Company regularly assesses the likelihood of adverse outcomes resulting from litigation and regulatory proceedings and adjusts the financial statements based on such assessments. The eventual outcome of these matters could differ materially from the estimates of loss reserves the Company has currently accrued in the financial statements.
On December 16, 2021, H&R Block, Inc. and HRB Innovations, Inc. (collectively, “HRB”) filed a complaint for trademark infringement against the Company in the United States District Court for the Western District of Missouri. HRB alleges that the Company’s rebranding to Block, Inc. and use of a green square logo in connection with the Company’s Cash App Taxes product infringe HRB’s trademarks and are likely to cause consumer confusion. HRB demands that the Company stop using the Block name and associated branding, and further demands that the Company stop using the green square Cash App logo. On April 28, 2022, the court granted a preliminary injunction preventing the Company from using its Block, Inc. name in connection with Cash App Taxes. The Company continues to believe this lawsuit is without merit and intends to vigorously defend itself in this matter.
In addition, the Company is subject to various legal matters, investigations, claims, 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 other 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 matters, and their resolution could be material to the Company's operating results for any particular period.
Other Contingencies
The Company is under examination, or may be subject to examination, by several tax authorities. These examinations may lead to proposed adjustments to the Company's taxes or net operating losses with respect to years under examination, as well as subsequent periods. The Company regularly assesses the likelihood of adverse outcomes resulting from tax examinations to determine the adequacy of the Company's provision for direct and indirect taxes. The Company continues to monitor the progress of ongoing discussions with tax authorities and the effect, if any, on the Company's provision for direct and indirect taxes.
Management believes 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 the Company's tax audits are resolved in a manner not consistent with the Company’s expectations, the Company could be required to adjust the Company's provision for direct and indirect taxes in the period such resolution occurs.
NOTE 20 - SEGMENT AND GEOGRAPHICAL INFORMATION
The Company reports its operating segments to reflect the manner in which the Company's chief operating decision maker ("CODM") reviews and assesses performance. Accordingly, the Company has two reportable segments: Square and Cash App. The results of Afterpay have been equally allocated to the Cash App and Square segments as management has concluded that Afterpay's BNPL platform will contribute equally to both the Cash App and Square platforms. Further, Afterpay does not have a segment manager who reports to the CODM. Rather, the operations of Afterpay are managed by the segment managers of Cash App and Square, who are responsible for allocating resources and evaluating the performance of Afterpay. Products and services that are not assigned to a specific reportable segment including but not limited to TIDAL, TBD, and Spiral are aggregated and presented within a general corporate and other category. Square and Cash App are defined as follows:
-
Cash App includes the financial tools available to individuals within the mobile Cash App, including peer-to-peer payments, bitcoin and stock investments. Cash App also includes Cash Card which is linked to customer stored balances that customers can use to pay for purchases or withdraw funds from an ATM.
-
Square includes managed payment services, software solutions, hardware, and financial services offered to sellers, excluding those that involve Cash App.
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 March 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash App | Square | Corporate and Other (i) | Total | ||||||||||||||||||||||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||||||||||||||||||||
| Transaction-based revenue | $ | 109,241 | $ | 1,123,728 | $ | — | $ | 1,232,969 | |||||||||||||||||||||||||||||||||||||||
| Subscription and services-based revenue | 622,309 | 282,650 | 54,598 | 959,557 | |||||||||||||||||||||||||||||||||||||||||||
| Hardware revenue | — | 37,326 | — | 37,326 | |||||||||||||||||||||||||||||||||||||||||||
| Bitcoin revenue | 1,730,793 | — | — | 1,730,793 | |||||||||||||||||||||||||||||||||||||||||||
| Segment revenue (ii) | $ | 2,462,343 | $ | 1,443,704 | $ | 54,598 | $ | 3,960,645 | |||||||||||||||||||||||||||||||||||||||
| Segment gross profit (iii) | $ | 623,659 | $ | 661,221 | $ | 10,080 | $ | 1,294,960 |
| Three Months Ended March 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash App | Square | Corporate and Other (i) | Total | ||||||||||||||||||||||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||||||||||||||||||||
| Transaction-based revenue | $ | 91,959 | $ | 867,774 | $ | — | $ | 959,733 | |||||||||||||||||||||||||||||||||||||||
| Subscription and services-based revenue | 436,589 | 121,092 | — | 557,681 | |||||||||||||||||||||||||||||||||||||||||||
| Hardware revenue | — | 28,788 | — | 28,788 | |||||||||||||||||||||||||||||||||||||||||||
| Bitcoin revenue | 3,511,068 | — | — | 3,511,068 | |||||||||||||||||||||||||||||||||||||||||||
| Segment revenue | $ | 4,039,616 | $ | 1,017,654 | $ | — | $ | 5,057,270 | |||||||||||||||||||||||||||||||||||||||
| Segment gross profit | $ | 495,485 | $ | 468,016 | $ | — | $ | 963,501 |
(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.
(ii) The revenue for both Cash App and Square for the three months ended March 31, 2022 includes $64.9 million each from Afterpay post-acquisition results.
(iii) The gross profit for both Cash App and Square for the three months ended March 31, 2022 includes $46.1 million each from Afterpay post-acquisition results.
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 March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Total segment gross profit | $ | 1,294,960 | $ | 963,501 | |||||||||||||||||||
| Less: Product development | 484,761 | 310,141 | |||||||||||||||||||||
| Less: Sales and marketing | 501,562 | 349,460 | |||||||||||||||||||||
| Less: General and administrative | 444,276 | 195,909 | |||||||||||||||||||||
| Less: Transaction, loan, and consumer receivable losses | 91,150 | 20,395 | |||||||||||||||||||||
| Less: Bitcoin impairment losses | — | 19,860 | |||||||||||||||||||||
| Less: Interest expense, net | 15,748 | 253 | |||||||||||||||||||||
| Less: Other expense (income), net | (33,472) | 27,528 | |||||||||||||||||||||
| Income (loss) before applicable income taxes | $ | (209,065) | $ | 39,955 |
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 March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| United States | $ | 3,721,597 | $ | 4,963,335 | |||||||||||||||||||
| International | 239,048 | 93,935 | |||||||||||||||||||||
| Total net revenue | $ | 3,960,645 | $ | 5,057,270 |
No individual country from the international markets contributed in excess of 10% of total revenue for the three months ended March 31, 2022 and 2021.
Long-Lived Assets
The following table sets forth long-lived assets by geographic area (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| United States | $ | 8,250,330 | $ | 1,426,103 | |||||||
| Australia | 5,008,040 | 26,680 | |||||||||
| Other international | 2,203,920 | 55,088 | |||||||||
| Total long-lived assets | $ | 15,462,290 | $ | 1,507,871 |
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 21 - SUPPLEMENTAL CASH FLOW INFORMATION
The supplemental disclosures of cash flow information consist of the following (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Supplemental cash flow data: | |||||||||||
| Cash paid for interest | $ | 2,725 | $ | 828 | |||||||
| Cash paid for income taxes | 1,611 | 6,376 | |||||||||
| Supplemental disclosures of non-cash investing and financing activities: | |||||||||||
| Right-of-use assets obtained in exchange for operating lease obligations | 26,090 | 22,715 | |||||||||
| Purchases of property and equipment in accounts payable and accrued expenses | 16,338 | 19,580 | |||||||||
| Fair value of common stock issued related to business combination | (13,827,929) | — | |||||||||
| Fair value of common stock issued to settle the conversion of senior notes | (2,496) | (37,204) | |||||||||
| Fair value of shares received to settle senior note hedges | 133,141 | 1,260,718 | |||||||||
Previous: Cover and table of contents · Next: Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations