Various laws and regulations govern lending in the United States and internationally. In the United States, Square Capital, LLC holds and maintains lending and collections licenses with state regulators to support lending products offered across the United States. Afterpay US Services, LLC holds and maintains lending licenses to support its product offerings. These lending licenses subject us to the supervision and examination authority of state regulators, and our partnerships with FDIC-insured financial institutions to offer certain lending products to customers subjects us to federal regulatory supervision.
Outside the United States, we provide localized versions of some of our lending services to customers, including through our various foreign subsidiaries. The activities of our foreign subsidiaries are, or may be, supervised by regulatory authorities in the jurisdictions in which they operate. For example, we hold an Australian Credit Licence issued by the Australian Securities and Investments Commission.
Our lending services may be, or may become, subject to regulation by other applicable authorities or jurisdictions, and the laws and regulations applicable to the lending industry in any given jurisdiction are always subject to interpretation and change.
Broker-Dealer Regulation
One of our subsidiaries,Our subsidiary, Cash App Investing LLC (Cash("Cash App Investing)Investing"), operates as a broker-dealer and is therefore registered with the Securities and Exchange Commission (SEC)("SEC") and a member of the Financial Industry Regulatory Authority (FINRA)("FINRA"). As a broker-dealer, Cash App Investing is subject to SEC and FINRA ruleslaws and regulations that apply to its business. Among other steps designed to ensure compliance, Cash App Investing has adopted written supervisory procedures (WSPs), which govern Cash App Investing’s operations, including, without limitation, how it markets its services, handles customer assets, keeps records, and reports to the SEC and FINRA. Cash App Investing’s compliance with its WSPsInvesting is also registered in each state where we conduct business, and general SEC and FINRA regulation is overseen by its Chief Compliance Officer, who conducts required reviews of Cash App Investing’s compliance. To the extent any applicable SEC or FINRA rules or regulations change, Cash App Investing will need to adaptsubject to those changes.states’ securities laws and regulations.
Virtual Currency Regulation
We are subject to certain licensing and regulatorysupervisory frameworks triggered byas a result of our Cash App offering, through which customers can use their stored funds to buy, hold and sell Bitcoin,bitcoin, and transfer Bitcoinbitcoin to and from Cash App. We currently hold a New York State Bitlicense.BitLicense. The laws and regulations applicable to virtual currency are evolving and subject to interpretation and change. Therefore, our current and future virtual currency services may be or become subject to regulationadditional licensing and regulatory requirements by other authoritiesstate and may subject us to additional requirements.federal authorities.
Protection and Use of Information
We collect and use a wide variety of information for various purposes in our business, including to help ensure the integrity of our services and to provide features and functionality to our customers. This aspect of our business, including the collection, use, disclosure, and protection of the information we acquire from our own services as well as from third-party sources, is subject to laws and regulations in the United States, the European Union, and elsewhere. Accordingly, we publish our privacy policies and terms of service, which describe our practices concerning the use, transmission, and disclosure of information. As our business continues to expand in the United States and worldwide, and as laws and regulations continue to be passed and their interpretations continue to evolve in numerous jurisdictions, additional laws and regulations may become relevant to us.
Communications Regulation
We send texts, emails, and other communications in a variety of contexts, such as when providing digital receipts and marketing. Communications laws and regulations, including those promulgated by the Federal Communications Commission, apply to certain aspects of this activity in the United States and elsewhere.
Additional Developments
Various regulatory agencies in the United States and elsewhere in our international markets continue to examine a wide variety of issues that could impact our business, including products liability, import and export compliance, accessibility for the disabled, insurance, marketing, privacy, data protection, information security, and labor and employment matters. As our business continues to develop and expand, additional rules and regulations may become relevant. For example, if we choose to offer Square Payroll in more jurisdictions, additional regulations, including tax rules, will apply.
Seasonality
Historically, for our Square ecosystem transaction-based revenue has been strongest in our fourth quarter and weakest in our first quarter, as our sellers typically generate additional GPV during the holiday season. Subscription and services-based revenue generally demonstrates less seasonality than transaction-based revenue. Hardware revenue generally demonstrates less seasonality than transaction-based revenue, with most fluctuations tied to periodic product launches, promotions, or other arrangements with our retail partners. We have not historically experienced meaningfulIn 2020 and 2021, typical seasonality with respect to total net revenuetrends for the Square ecosystem were impacted as this effect has been offset by our revenue growth. No individual quarter in 2019 or 2018 accounted for more than 30%a result of annual total net revenue.the COVID-19 pandemic and related shelter-in-place restrictions.
14Historically, our Cash App ecosystem has experienced improvements in revenue and gross profit related to the distribution of government funds as customers have deposited more funds into Cash App during these times, including during the first quarter when U.S. tax refunds are typically distributed. During the year ended December 31, 2022, typical seasonality trends for the Cash App ecosystem were impacted by a decline in bitcoin revenue. The primary drivers of bitcoin revenue are customer demand and the current market price of bitcoin, and as such, may not be indicative of future performance and skew typical seasonality trends in the Cash App ecosystem.
Our EmployeesHuman Capital
Our employees are a driving force behind our purpose of economic empowerment. Attracting, developing, and retaining top talent remain a focus in the development of our human capital programs. As of December 31, 2019,2022, we had 3,83512,428 full-time employees.employees worldwide with 3,074 full-time employees outside the US. We also engage temporary employees and consultants as needed to support our operations. None
We have a purpose-driven culture, with a focus on employee input and well-being, which we believe enables us to attract and retain exceptional talent. We offer learning and development programs for all employees, as well as a robust manager training program. Employees are able to actively voice their questions and thoughts through many internal channels, including our company townhall meetings and bi-annual employee engagement surveys. While we have been in support of a distributed work model for years, in the COVID-19 pandemic we were able to increase our focus on this model more quickly. For Block, the distributed work model means that we no longer have a designated headquarters location and, for the vast majority of roles, employees have the flexibility to work within or outside a Block office space. This model has unlocked opportunities to hire and retain talent in more locations, as we can hire employees in locations where we do not have office space, and employees can continue to work for us if they need or want to relocate.
A key focus of our human capital management approach is our commitment to promoting inclusion and diversity in our workplace. In 2022, we equipped managers with tools to build and lead inclusive teams, expanded professional development opportunities for employees from traditionally underrepresented backgrounds, and continued to elevate diversity as a central component of our recruiting strategy. Each year, we publish our workforce demographics to show how far we have come, where there is room to grow, and how our workforce is evolving. The 2022 report is available at: https://block.xyz/inclusion/workforce-data-2022. The contents of the report and our websites are either representednot incorporated by reference into this Annual Report on Form 10-K.
From a labor union or subject tototal rewards perspective, Block offers a collective bargaining agreement. We have not experienced any work stoppages,competitive compensation and we consider our relationsbenefits package, which is reviewed and updated each year. Our annual compensation planning coincides with our feedback cycle during which employees and managers have performance conversations to be good.facilitate learning and career development. As part of our compensation review program, pay equity analyses are conducted annually.
Corporate Information
SquareBlock was incorporated in Delaware in June 2009. OurIn 2020, we adopted a distributed work model and we no longer have a designated headquarters are located at 1455 Market Street, Suite 600, San Francisco, California 94103.location. Our telephone number is (415) 375-3176. Our website is located at www.squareup.com,www.block.xyz, and our investor relations website is located at www.squareup.com/about/investors.investors.block.xyz. The information contained in, or accessible through, our website is not part of and is notor incorporated into, this Annual Report on Form 10-K.
We use various trademarks and trade names in our business, including “Square”“Block,” “Square,” “Cash App” and Square®,“Afterpay,” which we have registered in the United States and in various other countries. This Annual Report on Form 10-K also contains trademarks and trade names of other businesses that are the property of their respective holders. We have omitted the ® and ™ designations, as applicable, for the trademarks we name in this Annual Report on Form 10-K.
Available Information
Copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act), are available, free of charge, on our investor relations website as soon as reasonably practicable after we electronically file or furnish such material electronically with or furnish it to the Securities and Exchange Commission (SEC). The SEC also maintains a website that contains our SEC filings. The address of the site is www.sec.gov.
We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases, and blogs as part of our investor relations website. We have used, and intend to continue to use, our investor relations website, as well as the Twitter accounts @Square@Blocks and @SquareIR,@BlockIR, as means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Further corporate governance information, including our board committee charters, code of business conduct and ethics, and corporate governance guidelines, is also available on our investor relations website under the heading “Governance Documents.” The contents of our websites are not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.
ItemITEM 1A. RISK FACTORS
Investing in our securities involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Annual Report on Form 10-K, including the section titled “Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations”Operations and our consolidated financial statements and related notes, before making any investment decision with respect to our securities. The risks and uncertainties described below may not be the only ones we face. If any of the risks actually occur, our business could be materially and adversely affected. In that event, the market price of our Class A common stock could decline, and you could lose part or all of your investment.
Risk Factors Summary
Our business operations are subject to numerous risks and uncertainties, including those outside of our control, that could cause our actual results to be harmed, including risks regarding the following:
Risks related to our business and our industry:
•our ability to retain existing sellers and customers, attract new sellers and customers, and increase sales to both new and existing sellers and customers;
•our investments in our business and ability to maintain profitability;
•our ability to maintain, protect, and enhance our brands;
•our efforts to expand our product portfolio and market reach;
•our ability to develop products and services to address the rapidly evolving market for payments and financial services;
•competition in our markets and industry;
•risks related to disruptions in the cryptocurrency market;
•any acquisitions, strategic investments, new businesses, joint ventures, divestitures, and other transactions that we may undertake;
•the ongoing integration of Afterpay with our business;
•additional risks related to our majority interest in TIDAL;
•expanding our business globally;
•risks related to our BNPL platform;
•additional risks of Square Banking relating to the structure of bank partnerships, and FDIC and other regulatory obligations;
•additional risks of Square Loans related to the availability of capital, seller payments, interest rate, deposit insurance premiums, and general macroeconomic conditions; and
•our participation in government relief programs set up in response to the COVID-19 pandemic.
Operational risks:
•real or perceived improper or unauthorized use of, disclosure of, or access to sensitive data;
•real or perceived security breaches or incidents or human error in administering our software, hardware, and systems;
•systems failures, interruptions, delays in service, catastrophic events, and resulting interruptions in the availability of our products or services or those of our sellers;
•any failure to safeguard the bitcoin we hold on behalf of ourselves and other parties;
•our risk management efforts;
•our dependence on payment card networks and acquiring processors;
•our reliance on third parties and their systems for a variety of services, including the processing of transaction data and settlement of funds;
•our dependence on key management and any failure to attract, motivate, and retain our employees;
•our operational, financial, and other internal controls and systems;
•any shortage, price increases, tariffs, changes, delay or discontinuation of our key components;
•our ability to accurately forecast demand for our products and adequately manage our product inventory;
•the integration of our services with a variety of operating systems and the interoperation of our hardware that enables merchants to accept payment cards with third-party mobile devices utilizing such operating systems; and
•difficulties estimating the amount payable under TIDAL's license agreements.
Economic, financial, and tax risks:
•a deterioration of general macroeconomic conditions;
•any inability to secure financing on favorable terms, or at all, or comply with covenants in our existing credit agreement, the indentures, or future agreements;
•our ability to service our debt, including our convertible notes and our senior notes;
•counterparty risk with respect to our convertible note hedge transactions;
•our bitcoin investments being subject to volatile market prices, impairment, and other risks of loss;
•foreign exchange rates risks; and
•any greater-than-anticipated tax liabilities or significant valuation allowances on our deferred tax assets.
Legal, regulatory, and compliance risks:
•extensive regulation and oversight in a variety of areas of our business;
•complex and evolving regulations and oversight related to privacy, data protection, and information security;
•litigation, including intellectual property claims, government investigations or inquiries, and regulatory matters or disputes;
•obligations and restrictions as a licensed money transmitter;
•regulatory scrutiny or changes in the BNPL space;
•regulation and scrutiny of our subsidiary Cash App Investing, which is a broker-dealer registered with the SEC and a member of FINRA, including net capital and other regulatory capital requirements;
•changes to our business practices imposed by FINRA based on our ownership of Cash App Investing;
•regulation and scrutiny of our subsidiary Square Financial Services, which is a Utah state-chartered industrial bank, including the requirement that we serve as a source of financial strength to it;
•supervision and regulation of Square Financial Services, including the Dodd-Frank Act and its related regulations;
•any inability to protect our intellectual property rights;
•assertions by third parties of infringement of intellectual property rights by us; and
•increased scrutiny from investors, regulators, and other stakeholders relating to environmental, social, and governance issues.
Risks related to ownership of our common stock:
•the dual class structure of our common stock;
•volatility of the market price of our Class A common stock;
•the dual-listing of our Class A common stock on the NYSE and our CHESS Depositary Interests ("CDIs") on the Australian Securities Exchange ("ASX");
•our convertible note hedge and warrant transactions;
•anti-takeover provisions contained in our amended and restated certificate of incorporation, our amended and restated bylaws, and provisions of Delaware law; and
•exclusive forum provisions in our bylaws.
Risks Related to Our Business and Our Industry
Our growth rate has slowed at times and may slow or decline in the future, and our growth rates in each of our reporting segments may vary. Future revenue growth depends on our ability to retain existing sellers and customers, attract new sellers and customers, and increase sales to both new and existing sellers and customers.
Our rate of revenue growth has slowed at times and may decline in the future, and it may slow or decline more quickly than we expect for a variety of reasons, including the risks described in this Annual Report on Form 10-K. Additionally, our rate of revenue growth may vary between our reporting segments. For example, in recent periods our Cash App segment revenue has grown at a high rate, which has varied and may continue to vary from the growth rate of our Square segment. Our sellers and customers have no obligation to continue to use our services, and we cannot assure you that they will. We generally do not have long-term contracts with our sellers and customers, and the difficulty and costs associated with switching to a competitor may not be significant for many of the services we offer. Our sellers’ activity with us may decrease for a variety of reasons, including sellers’ level of satisfaction with our products and services, our pricing and the pricing and quality of competing products or services, the effects of economic conditions, or reductions in the aggregate spending of our sellers’ customers. Growth in transacting actives on Cash App and customers’ level of engagement with our products and services on Cash App are essential to our success and long-term financial performance. However, the growth rate of transacting actives has fluctuated over time, and it may slow or decline in the future. A number of factors have affected and could potentially negatively affect Cash App customer growth and engagement, including our ability to introduce new products and services that are compelling to our customers, the impact on our network of other customers choosing whether to use Cash App, technical or other problems that affect customer experience, failure to provide sufficient customer support, fraud and scams targeting Cash App customers, and harm to our reputation and brand. Further, certain events or programs, such as government stimulus programs may correlate with periods of significant growth, but such growth may not be sustainable. Additionally, the growth rate of Cash App revenue may be distorted by the prices of bitcoin, as bitcoin revenue may increase or decrease due to changes in the price of, and demand for, bitcoin and may not correlate to customer or engagement growth rates.
The growth of our business depends in part on our existing sellers and customers expanding their use of our products and services. If we are unable to encourage broader use of our products and services within each of our ecosystems by our existing sellers and customers, our growth may slow or stop, and our business may be materially and adversely affected. The growth of our business also depends on our ability to attract new sellers and customers, to encourage sellers and customers to use our products and services, and to introduce successful new products and services. We have invested and will continue to invest in our business in order to offer better or new features, products, and services and to adjust our product offerings to changing economic conditions, but if those features, products, services, and changes fail to be successful on the expected timeline or at all, our growth may slow or decline.
We have generated significant net losses in the past, and we intend to continue to invest in our business. Thus, we may not be able to maintain profitability.
During the year ended December 31, 2022, we generated a net loss of $540.7 million. As of December 31, 2022, we had an accumulated deficit of $568.7 million.
We intend to continue to make investments in our business, including with respect to our employee base; sales and marketing; development of new products, services, and features; acquisitions; infrastructure; expansion of international operations; and general administration, including legal, finance, and other compliance expenses related to our business. If the costs associated with acquiring and supporting new or larger sellers, attracting and supporting new Cash App customers, or with developing and supporting our products and services materially increase in the future, including the fees we pay to third parties to advertise our products and services, our expenses may rise significantly. In addition, increases in our seller base could cause us to incur increased losses because costs associated with new sellers are generally incurred up front, while revenue is recognized in future periods as our products and services are used by our sellers. Moreover, businesses we acquire may have different profitability than our existing business, which may affect our overall profitability, particularly until we are able to realize expected synergies. For example, prior to its acquisition, Afterpay historically generated net losses. If we are unable to generate adequate revenue growth and manage our expenses, we may incur significant losses and may not maintain profitability on a consistent basis.
From time to time, we have made and may make decisions that will have a negative effect on our short-term operating results if we believe those decisions will improve our operating results over the long term. These decisions may not be consistent with the expectations of investors and may not produce the long-term benefits that we expect, in which case our business may be materially and adversely affected.
Our business depends on a strong and trusted brand, and any failureour ability to maintain, protect, and enhance our brand would hurt our business.brands.
We have developedHaving a strong and trusted brand that has contributed significantly to the success of our business. We believe that maintaining, promoting, and promotingenhancing the Square brand, the Cash App brand, the TIDAL brand, and our brandother brands, in a cost-effective manner is critical to achieving widespread acceptance of our products and services and expanding our base of customers. Maintaining and promoting our brandbrands will depend largely on our ability to continue to provide useful, reliable, secure, and innovative products and services, as well as our ability to maintain trust and be a technology leader. We may introduce, or make changes to, features, products, services, privacy practices, or terms of service that customers do not like, which may materially and adversely affect our brand.brands. Our brand promotion activities may not generate customer awareness or increase revenue, and even if they do, any increase in revenue may not offset the expenses we incur in building our brand.brands. If we fail to successfully promote and maintain our brandbrands or if we incur excessive expenses in this effort, our business could be materially and adversely affected.
The introduction and promotion of new products and services, as well as the promotion of existing products and services, may be partly dependent on our visibility on third-party advertising platforms, such as Google, Twitter,Facebook, or Facebook.Twitter. Changes in the way these platforms operate or changes in their advertising prices, data use practices or other terms could make the maintenance and promotion of our products and services and our brandbrands more expensive or more difficult. If we are unable to market and promote our brandbrands on third-party platforms effectively, our ability to acquire new customers would be materially harmed. We also use retail partners to sell hardware and acquire customers.sellers for Square. Our ability to acquire new customerssellers could be materially harmed if we are unable to enter into or maintain these partnerships on terms that are commercially reasonable to us, or at all.
Harm to our brandbrands can arise from many sources, including failure by us or our partners and service providers to satisfy expectations of service and quality; inadequate protection or misuse of sensitive information; fraud committed by third parties using our products or applications; compliance failures and claims; litigation and other claims; errors caused by us or our partners; and misconduct by our partners, service providers, or other counterparties. We have also been from time to time in the past, and may in the future be, the target of incomplete, inaccurate, and misleading or false statements about our company and our business that could damage our brandbrands and deter customers from adopting our services.services or our products. Partners and influencers with whom we maintain relationships could engage in behavior or use their platforms to communicate directly with our sellers and customers in a manner that reflect poorly on our brands and such behavior or communications may adversely affect us. Further, negative publicity or commentary regarding the partners and influencers who are, or are perceived to be, affiliated with us may also damage our reputation, even if the negative publicity or commentary is not directly related to us. Any negative publicity about our industrythe industries we operate in or our company, the quality and reliability of our products and services, our risk management processes, changes to our products and services, our ability to effectively manage and resolve customer complaints, our privacy, data protection, and information security practices, litigation, regulatory activity, policy positions, and the experience of our customers with us, our products or services could adversely affect our reputation and the confidence in and use of our products and services. If we do not successfully maintain, a strong and trusted brand,protect or enhance our brands, our business could be materially and adversely affected.
As our revenue has increased, our growth rate has slowed at times in the past and may slow or decline in the future. Future revenue growth depends on our ability to retain existing sellers, attract new sellers, and increase sales to both new and existing sellers.
Our rate of revenue growth has slowed at times in the past and may decline in the future, and it may slow or decline more quickly than we expect for a variety of reasons, including the risks described in this Annual Report on Form 10-K. Our customers have no obligation to continue to use our services, and we cannot assure you that they will. We generally do not have long-term contracts with our customers, and the difficulty and costs associated with switching to a competitor may not be significant for many of the services we offer, both in the seller ecosystem and the Cash App ecosystem. Our sellers’ payment processing activity with us may decrease for a variety of reasons, including sellers’ level of satisfaction with our products and services, our pricing and the pricing and quality of competing products or services, the effects of global economic conditions, or reductions in our sellers’ customer spending levels. In addition, the growth of our business depends
in part on existing sellers expanding their use of our products and services. If we are unable to encourage sellers to broaden their use of our services, our growth may slow or stop, and our business may be materially and adversely affected. The growth of our business also depends on our ability to attract new sellers and Cash App customers, to encourage larger sellers to use our products and services, and to introduce successful new products and services. We have invested and will continue to invest in improving our Square platform in order to offer better or new features, products and services, but if those features, products and services fail to be successful, our growth may slow or decline.
We have generated significant net losses in the past, and we intend to continue to invest substantially in our business. Thus, we may not be able to maintain profitability.
While we generated net income of $375.4 million for the year ended December 31, 2019, we generated net losses of $38.5 million and $62.8 million for the years ended December 31, 2018 and 2017, respectively. As of December 31, 2019, we had an accumulated deficit of $510.3 million.
We intend to continue to make significant investments in our business, including with respect to our employee base; sales and marketing; development of new products, services, and features; acquisitions; expansion of office space and other infrastructure; expansion of international operations; and general administration, including legal, finance, and other compliance expenses related to being a public company. If the costs associated with acquiring and supporting new or larger sellers, attracting and supporting new Cash App customers, or with developing and supporting our products and services materially rise in the future, including the fees we pay to third parties to advertise our products and services, our expenses may rise significantly. In addition, increases in our seller base could cause us to incur increased losses because costs associated with new sellers are generally incurred up front, while revenue is recognized thereafter as our products and services are transferred to our sellers. If we are unable to generate adequate revenue growth and manage our expenses, we may incur significant losses and may not maintain profitability.
From time to time, we have made and may make decisions that will have a negative effect on our short-term operating results if we believe those decisions will improve the experiences of our customers, which we believe will improve our operating results over the long term. These decisions may not be consistent with the expectations of investors and may not produce the long-term benefits that we expect, in which case our business may be materially and adversely affected.
We derive a significant portion of our revenue from managed payments services. Our efforts to expand our product portfolio and market reach, including through acquisitions, may not succeed and may reduce our revenue growth.growth and profitability.
We derive a significant portionhave grown the proportion of our revenue from transaction-based fees we collectnewer products and services in connection with managed payments services. Whileeach of the Cash App and other products and services we offer have grown in importance to usSquare segments and we intend to continue to broaden the scope of products and services we offer,offer. However, we may not be successful in maintaining or growing our current revenue, or deriving any significant new revenue streams from these products and services or in maintaining or growing current revenue streams.services. Failure to successfully broaden the scope of products and services that are attractive may inhibit our growth and harm our business. Furthermore, we expect to continue to expand our markets in the future, and we may have limited or no experience in oursuch newer markets. For example, weWe cannot assure you that any of our products or services will be widely accepted in any market or that they will continue to grow in revenue.revenue or contribute to our profitability. Our offerings may present new and difficult technological, operational, and regulatory risks, and other challenges, and if we experience service disruptions, failures, or other issues, our business may be materially and adversely affected. For example, some of our Cash App products are intended to make investing in certain assets, such as bitcoin, stocks, and exchange-traded funds, more accessible. However, as a result, our customers who use these Cash App products may experience losses or other financial impacts due to, among other things, market fluctuations in the prices of bitcoin and stocks. If our customers are adversely affected by such risks, they may cease using Cash App altogether and our business, brand, and reputation may be adversely affected. Moreover, our customers could attempt to seek compensation from us for their financial investment losses, and those claims, even if unsuccessful, would likely be time-consuming and costly for us to address. Our expansion into newer activitiesmarkets may not lead to growth and may require significant investment of financial resources and of management time and attention, and we may not be able to recoup our investments in a timely manner or at all. If any of this were to occur, it could damage our reputation, limit our growth, and materially and adversely affect our business.
Our long-term success depends on our ability to develop products and services to address the rapidly evolving market for payments and point-of-sale, financial and marketing services, and, if we are not able to implement successful enhancements and new features for our products and services, our business could be materially and adversely affected.
Rapid and significant technological changes continue to confront the industries in which we operate, including developments in omnichannel commerce, proximity payment devices (including contactless payments via NFC technology), digital banking, mobile financial apps, as well as developments in cryptocurrencies and in tokenization, which replaces sensitive data (e.g., payment card information) with symbols (tokens) to keep the data safe in the event that it ends up in the wrong hands.safe.
These new and evolving services and technologies may be superior to, impair, or render obsolete the products and services we currently offer or the technologies we currently use to provide them. Incorporating new technologies into our products and services may require substantial expenditures and take considerable time, and we may not be successful in realizing a return
on these development efforts in a timely manner or at all. Our ability to develop new products and services may be inhibited by industry-wide standards, payment card networks, existing and future laws and regulations, resistance to change from our customers, which includes our sellers and their buyers,customers, or third parties’ intellectual property rights. Incorporating new technologies into our products and services may require substantial expenditures and take considerable time, and we may not be successful in realizing a return on our efforts in a timely manner or at all.
Our success will depend on our ability to develop new technologies and to adapt to technological changes and evolving industry standards.standards, and our ability to provide products and services that are tailored to specific needs and requirements of our customers. If we are unable to provide enhancements and new features for our products and services or to develop new products and services that achieve market acceptance or that keep pace with rapid technological developments and evolving industry standards, our business would be materially and adversely affected.
We often rely, not only on our own initiatives and innovations, but also on third parties, including some of our competitors, for the development of and access to new technologies and development of a robust market for these new products and technologies. Failure to accurately predict or to respond effectively to developments in our industry may significantly impair our business.
In addition, because our products and services are designed to operate with a variety of systems, infrastructures, and devices, we need to continuously modify and enhance our products and services to keep pace with changes in technologies. Moreover, our success may depend on our ability to provide products and services that are tailored to specific needs and requirements of our customers. Any failure of our products and services to continue to operate effectively with third-party infrastructures and technologies could reduce the demand for our products and services, result in dissatisfaction of our customers, and materially and adversely affect our business.
Substantial and increasingly intense competition in our markets and industry may harm our business.
We compete in markets characterized by vigorous competition, changing technology, evolving industry standards, changing customer needs, evolving industry standards, and frequent introductions of new products and services. We expect competition to intensify in the future as existing and new competitors introduce new services or enhance existing services. For example, in 2019, Apple introduced Apple Card, and other companies not traditionally associated with the payments industry may also introducehave introduced products or services that are or may become competitive with our business. We compete against many companies both within our seller ecosystem and our Cash App ecosystem to attract customers across our products and services, and some of these companies have greater financial resources and substantially larger bases of customers than we do, which may provide them with significant competitive advantages. These companies may devote greater resources to the development, promotion, and sale of products and services, may achieve economies of scale due to the size of their customer bases, and may more effectively introduce their own innovative products and services that adversely impact our growth. MergersFor example, a number of competitors offer BNPL products similar to Afterpay’s. Existing competitors and new entrants in the BNPL space have engaged in, and may continue to engage in, aggressive consumer acquisition campaigns, may develop superior technology offerings, or consolidate with other entities and achieve benefits of scale. Such competitive pressures may materially erode our existing market share in the BNPL space and may hinder our expansion into new markets. In addition, mergers and acquisitions by, theseand collaborations between, the companies we compete against may lead to even larger competitors with more resources.
Certain sellers have long-standing exclusive, or nearly exclusive, relationships with our competitors to accept payment cards and other services that compete with what we offer. These relationships maycan make it difficult or cost-prohibitive for us to conduct material amounts of business with them. Competing services tied to established brands may engender greater confidence in the safety and efficacy of their services. If we are unable to differentiate ourselves from and successfully compete with our competitors, our business will be materially and adversely affected.
We may also face pricing pressures from competitors. Some potential competitors are able tomay offer lower prices to sellers for similar services by cross-subsidizing their paymentscertain services that we also provide through other servicesproducts they offer. Such competition may result in the need for us to alter theour pricing we offer to our sellers and could reduce our gross profit. In addition, as we grow,Also, sellers may demand more customized and favorable pricing from us, and competitive pressures may require us to agree to such pricing, further reducing our gross profit. We currently negotiate pricing discounts and other incentive arrangements with certain large sellers to increase acceptance and usage of our products and services. If we continue this practice and if an increasing proportion of our sellers are large sellers, we may have to increase the discounts or incentives we provide, which could also reduce our gross profit.
Disruptions in the cryptocurrency market subject us to additional risks.
Recent financial distress in the cryptocurrency market, such as bankruptcies filed by certain cryptocurrency market participants, has increased uncertainty in the global economy. There is no certainty that the measures we have taken will be sufficient to address the risks posed by the downstream effects of continued financial distress in the cryptocurrency market, and we may experience material and adverse impacts to our business as a result of the global economic impacts of such financial distress, including the loss of customer trust in cryptocurrencies, including bitcoin, and any recession or economic downturn that has occurred or may occur in the future.
The ultimate impact of the financial distress in the cryptocurrency market will depend on future developments, including, but not limited to, the downstream effects of the bankruptcies filed by certain cryptocurrency market participants, its severity, and the actions taken by regulators to address its impact. If the cryptocurrency environment further deteriorates, our customers may wish to sell their bitcoin at a price or volume that exceeds the market demand for bitcoin, which could cause disruptions in our operations and have a material and adverse effect on our business and financial condition. If our customers experience losses due to market fluctuations in the prices of bitcoin, they may reduce or cease their use of Cash App and our results of operations may be adversely impacted.
Our investments in bitcoin, our bitcoin ecosystem, and our Cash App feature that permits customers to transact in bitcoin, subject us to additional risks related to any further disruption in the cryptocurrency markets and the resulting impact on customer and investor behavior. For example, any further deterioration in the cryptocurrency markets may have an adverse effect on our reputation, and any negative perception by our customers of one or more cryptocurrencies may lead to a loss of customer demand for our products and services, any of which could have an adverse impact on our business and financial condition. We may also suffer a decline in the market price of our Class A common stock due to any negative perception by our customers, investors, or the general public, of cryptocurrencies or the cryptocurrency markets.
Acquisitions, strategic investments, new businesses, joint ventures, divestitures, and other transactions we enter into could fail to achieve strategic objectives, disrupt our ongoing operations or result in operating difficulties, liabilities and expenses, harm our business, and negatively impact our results of operations.
In pursuing our business strategy, we routinely conduct discussions and evaluate opportunities for possible acquisitions, strategic investments, new businesses, joint ventures, divestitures, and other transactions. We have in the past acquired or invested in, and we continue to seek to acquire or invest in, businesses, technologies, or other assets that we believe could complement or expand our business, including acquisitions of new lines of business that are adjacent to or outside of our existing ecosystems. As we grow, the pace and scale of our acquisitions may increase and may include larger acquisitions than we have done historically. The identification, evaluation, and negotiation of potential acquisition or strategic investment transactions may divert the attention of management and entail various expenses, whether or not such transactions are ultimately completed. There can be no assurance that we will be successful in identifying, negotiating, and consummating favorable transaction opportunities. In addition to transaction and opportunity costs, these transactions involve large challenges and risks, whether or not such transactions are completed, any of which could harm our business and negatively impact our results of operations, including risks that:
•the transaction may not advance our business strategy or may harm our growth or profitability;
•we may not be able to secure required regulatory approvals or otherwise satisfy closing conditions for a proposed transaction in a timely manner, or at all;
•the transaction may subject us to additional regulatory burdens that affect our business in potentially unanticipated and significantly negative ways;
•we may not realize a satisfactory return on our investment or increase our revenue;
•we may experience difficulty, and may not be successful in, integrating technologies, IT or business enterprise systems, culture, or management or other personnel of the acquired business;
•we may incur significant acquisition costs and transition costs, including in connection with the assumption of ongoing expenses of the acquired business;
•we may not realize the expected benefits or synergies from the transaction in the expected time period, or at all, which may result in impairment charges or other negative impacts to our business;
•we may be unable to retain key personnel;
•acquired businesses or businesses that we invest in may not have adequate controls, processes, and procedures to ensure compliance with laws and regulations, including with respect to data privacy, data protection, and information security, and our due diligence process may not identify compliance issues or other liabilities. Moreover, acquired businesses’ technology stacks may add complexity, resource constraints, and legacy technological challenges that make it difficult and time consuming to achieve such adequate controls, processes, and procedures.
•we may fail to identify or assess the magnitude of certain liabilities, shortcomings, or other circumstances prior to acquiring or investing in a business, which could result in additional financial, legal, regulatory, or tax exposure and may subject us to additional controls, policies, procedures, liabilities, litigation, costs of compliance or remediation, or other adverse effects on our business, operating results, or financial condition;
•we may have difficulty entering into new market segments or new geographic territories;
•we may be unable to retain the customers, vendors, and partners of acquired businesses;
•there may be lawsuits or regulatory actions resulting from the transaction;
•there may be risks associated with undetected security weaknesses, cyberattacks, or security breaches or incidents at companies that we acquire or with which we may combine or partner;
•there may be local and foreign regulations applicable to the international activities of our business and the businesses we acquire; and
•acquisitions could result in dilutive issuances of equity securities or the incurrence of debt.
We have in the past, and may in the future, also choose to divest certain businesses or product lines. If we decide to sell assets or a business, we may have difficulty obtaining terms acceptable to us in a timely manner, or at all. Additionally, we may experience difficulty separating out portions of, or entire, businesses, incur loss of revenue or experience negative impact on margins, or we may not achieve the desired strategic and financial benefits. Such potential transactions may also delay achievement of our strategic objectives, cause us to incur additional expenses, disrupt customer or employee relationships, and expose us to unanticipated or ongoing obligations and liabilities, including as a result of our indemnification obligations. Further, during the pendency of a divestiture, we may be subject to risks such as a decline in the business to be divested, loss of employees, customers, or suppliers and the risk that the transaction may not close, any of which would have a material adverse effect on the business to be divested and our retained business. If a divestiture is not completed for any reason, we may not be able to find another buyer on the same terms, and we may have incurred significant costs without the corresponding benefit.
Joint ventures and minority investments inherently involve a lesser degree of control over business operations, thereby potentially increasing the financial, legal, operational, regulatory, and/or compliance risks associated with the joint venture or minority investment. In addition, we may be dependent on joint venture partners, controlling shareholders, management, or other persons or entities who control them and who may have business interests, strategies, or goals that are inconsistent with ours. Business decisions or other actions or omissions of the joint venture partners, controlling shareholders, management, or other persons or entities who control them may adversely affect the value of our investment, result in litigation or regulatory action against us, and may otherwise damage our reputation and brand.
The ongoing integration of Afterpay could disrupt our business and adversely affect our future results of operations.
Our ability to benefit from our acquisition of Afterpay depends on the successful integration of Afterpay with our business. The integration of Afterpay is complex and time consuming and there can be no assurance that the integration will be completed effectively or in a timely manner.
Difficulties that we have encountered and may continue to encounter in the integration process include the following:
•challenges and difficulties associated with managing the larger, more complex, combined company;
•conforming standards and controls and consolidating corporate infrastructures between the companies;
•integrating personnel from the two companies while maintaining focus on developing, producing and delivering consistent, high quality products and services;
•loss of key employees;
•coordinating geographically dispersed organizations;
•addressing differences in business backgrounds, corporate cultures, and management philosophies;
•potential unknown liabilities and unforeseen expenses;
•our ability to deliver on our strategy, including integrating our BNPL platform into our Cash App and Square ecosystems and strengthening the connection between these ecosystems; and
•the diversion of management’s attention caused by integrating the companies’ operations.
TIDAL represents a new line of business for us and subjects us to different risks and uncertainties.
In 2021, we acquired a majority interest in TIDAL which represented a new line of business for us. TIDAL’s business is dependent on the various rights holders. We cannot provide assurances that we or TIDAL will be able to maintain or expand arrangements with partners and other third parties on acceptable terms, if at all. Further, the music industry is highly concentrated, which means we rely on a small number of entities that may take adverse actions or take advantage of their market power to pursue arduous financial or other terms that may adversely affect us or may restrict our ability to innovate and improve our streaming service. Our streaming service also competes for listeners on the basis of the presence and visibility of our app, which is distributed via app stores operated by Apple and Google. We face significant competition for listeners from these companies, which also promote their own music and content. In addition, our competitors’ streaming products may be pre-loaded or integrated into consumer electronics products or automobiles more broadly than our streaming product, which makes such competitors more visible to consumers. If we are unable to compete successfully for listeners against other media providers, then our TIDAL business may suffer.
We expect that operation of our TIDAL business will require continued investment in operating expenses, headcount, and executive time and attention, none of which will ensure that we will be successful. If we fail to successfully operate and grow our TIDAL business, we will not realize the benefits anticipated when we acquired a majority interest in the business, and any such failure could result in adverse effects on our business and financial results, including substantial impairment charges.
Expanding our business globally subjects us to new challenges and risks.
We offer our services and products in multiple countries and plan to continue expanding our business further globally. Our acquisition of Afterpay expanded our global presence. Expansion, whether in our existing or new global markets, will require additional resources and new or expanded controls, and offering our services and products in new geographic regions often requires substantial expenditures and takes considerable time. We may not be successful enough in these new geographies to recoup our investments in a timely manner or at all. Such expansion, and the ongoing operation of our global business, subject our business to substantial risks, including:
•difficulty in attracting sellers and customers, or a lack of acceptance of our products and services in foreign markets;
•failure to anticipate competitive conditions and competition with service providers or other market-players that have greater experience in the foreign markets than we do;
•failure to conform with applicable business customs, including translation into foreign languages, cultural context, and associated expenses;
•increased costs and difficulty in protecting intellectual property and sensitive data;
•changes to the way we do business as compared with our current operations;
•inability to support and integrate with local third-party service providers;
•difficulties in staffing and managing foreign operations in an environment of diverse cultures, laws, and customs, challenges caused by distance, language, and cultural differences, and the increased travel, infrastructure, and legal and compliance costs associated with global operations;
•difficulties in recruiting and retaining qualified employees and maintaining our company culture;
•difficulty in gaining acceptance from industry self-regulatory bodies;
•compliance with multiple complex, potentially conflicting and changing governmental laws and regulations, including with respect to payments, privacy, data protection, information security, and tax;
•compliance with U.S. and foreign anti-corruption, anti-bribery, and anti-money laundering laws;
•enactment of tariffs, sanctions, fines, or other trade restrictions;
•exchange rate risk;
•increased exposure to public health issues such as pandemics, and related industry and governmental actions to address these issues; and
•regional economic and political instability and other geopolitical risks.
As a result of these risks, our efforts to expand our global operations may not be successful, which could limit our ability to grow our business.
Our BNPL platform increases our exposure to consumer defaults, bad transactions, and merchant insolvency.
Revenue generated from BNPL products depends on our ability to recoup the purchase value of the goods or services that consumers have purchased using our BNPL platform. Although we rely on technology to assess consumers’ repayment capability for our BNPL products, there can be no guarantee that such processes will always accurately predict repayments. Miscalculation of consumers’ repayment ability or a material increase in repayment failures, whether due to the current inflationary environment, the possibility of a recession, market volatility, or otherwise, may adversely impact our results of operations, profitability and prospects. In addition, if consumers who have purchased products or services using our BNPL platform do not receive the products or services, they may cease payment on their outstanding balances or request a refund on previous payments, and our business may be negatively impacted.
The performance of our BNPL platform depends also on the sales of products and services by retail merchants. Merchants’ sales may decrease as a result of factors outside of their control, including deteriorating macroeconomic conditions and supply chain disruptions. If a merchant closes some or all of its locations, ceases its operations, or fails to deliver goods or services to our consumers, the merchant may not be able to reimburse us for chargebacks or refunds or may not be able to repay the funds we have advanced to them, all of which could result in higher charge-off rates than anticipated. Moreover, if the financial condition of a merchant deteriorates significantly such that the merchant becomes subject to a bankruptcy proceeding, we may not be able to recover any amounts due to us from the merchant, and our financial results would be adversely affected.
Square Banking subjects us to risks related to bank partnerships and FDIC and other regulatory obligations.
We have partnered, on a non-exclusive basis, with Sutton Bank, an Ohio-chartered, Member FDIC bank, to offer FDIC-insured, business checking accounts for our sellers. The bank is subject to oversight both by the Federal Deposit Insurance Corporation (“FDIC”) and the State of Ohio. Under the terms of our program agreement with Sutton Bank, checking accounts for our sellers are opened and maintained by Sutton Bank. We act as the service provider to, among other things, facilitate communication between our sellers and Sutton Bank. We believe our business checking account program, including applicable records maintained by us and Sutton Bank, complies with all applicable requirements for each participating seller’s deposits to be covered by FDIC insurance, up to the applicable maximum deposit insurance amount. However, if the FDIC were to disagree, the FDIC may not recognize sellers’ claims as covered by deposit insurance in the event Sutton Bank fails and enters receivership proceedings under the Federal Deposit Insurance Act (“FDIA”). If the FDIC were to determine that our checking account program is not covered by deposit insurance, or if Sutton Bank were to actually fail and enter receivership proceedings under the FDIA, participating sellers may withdraw their funds, which could adversely affect our brand, and our business. Due to the fact that we are a service-provider to our bank partner, we are subject to audit standards for third-party vendors in accordance with FDIC guidance and examinations by the FDIC.
Square Savings offers our sellers FDIC-insured, interest bearing savings accounts at Square Financial Services. The deposits held at Square Financial Services are insured by the FDIC up to legal limits. As a FDIC-insured institution, Square Financial Services is assessed a quarterly deposit insurance premium, calculated based on its average consolidated total assets. We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures, we may be required to pay higher FDIC premiums. Any future additional assessments, increases or required prepayments in FDIC insurance premiums could reduce our profitability and negatively impact our business.
We intend to continue to explore other products, models, and structures for Square Banking. For example, we recently made the Square Credit Card available to some of our sellers. Some models or structures of Square Banking may require, or be deemed to require, additional data, procedures, partnerships, licenses, regulatory approvals, or capabilities that we have not yet obtained or developed. The licenses required in connection with our lending program and other activities related to the Square Banking program subject us to reporting requirements, bonding requirements, and inspection by applicable state regulatory agencies. Should we fail to expand and evolve Square Banking in a successful manner, or should these new products, models or structures, or new regulations or interpretations of existing regulations, impose requirements on us that are cumbersome or that we cannot satisfy, our business may be materially and adversely affected.
Square Loans are subject to additional risks related to availability of capital, seller payments, interest rate, deposit insurance premiums, and general macroeconomic conditions.
Square Loans is our commercial lending program. Square Financial Services, as the originator of the loans provided by Square Loans in the U.S., is subject to risks in addition to those described elsewhere in this Annual Report on Form 10-K. Maintaining and growing our Square Loans business is dependent on institutional third-party investors purchasing the eligible business loans originated by us. If such third parties fail to continue to purchase such business loans or reduce the amount of future loans they purchase, then we may need to reduce originations, or we would need to fund the purchase of additional business loans from our own resources. We then may have to reduce the scale of Square Financial Services, which could have a direct impact on our ability to grow. Additionally, Square Financial Services has certain customary repurchase obligations in its loan purchase and servicing agreements with such institutional third-party investors for breaches of certain eligibility representations and warranties. If third parties reduce the price they are willing to pay for these business loans or reduce the servicing fees they pay us in exchange for servicing the business loans on their behalf, then the financial performance of Square Financial Services would be harmed.
The business loans provided by Square Loans are generally unsecured obligations of our sellers, and they are not guaranteed or insured in any way. Adverse changes in macroeconomic conditions or the credit quality of our sellers could cause some sellers who utilize Square Loans to cease operating or to experience a decline in their payment processing volume, thereby rendering them unable to make payment on the business loan and/or extend the repayment period beyond the contractual repayment terms on the business loan. To the extent a seller breaches a contractual obligation, such as the requirement to make minimum payments or other breach, the seller would be liable for an accelerated business loan repayment, where our recourse is to the business and not to any individual or other asset. In addition, because the servicing fees we receive from third-party investors depend on the collectability of the business loans, if there is an increase in sellers who utilize Square Loans who are unable to make repayment of business loans, we will be unable to collect our entire servicing fee for such loans. While our exposure to loans that we sell to third parties is more limited, if the sellers who utilize Square Loans are unable to repay their loans, the risk of loss in our owned loan portfolio will increase and our business may be adversely affected.
In addition, adverse changes in macroeconomic conditions may lead to a decrease in the number of sellers eligible for Square Loans and may strain our ability to correctly identify such sellers or manage the risk of non-payment or fraud as servicer of the business loans. If we fail to correctly predict the likelihood of timely repayment or correctly price such business loans, our business may be materially and adversely affected.
Square Financial Services’ profitability depends, in part, on its net interest income. Net interest income is the difference between interest income earned on interest-bearing assets, such as loans and securities, and interest expense paid on interest-bearing liabilities, such as deposits and borrowed funds. Changes in interest rates and monetary policy can impact the demand for new loans, the credit profile of our borrowers, the yields earned on loans and securities, and the rates paid on deposits and borrowings. The impact of any sudden and substantial move in interest rates and/or increased competition may have an adverse effect on our business, financial condition and results of operations, as our net interest income may be adversely affected.
Our participation in government relief programs set up in response to the COVID-19 pandemic, such as facilitating loans to businesses under the Paycheck Protection Program may subject us to new risks and uncertainties.
As a participant in the Paycheck Protection Program (“PPP”) administered by the Small Business Administration (“SBA”) and enacted in March 2020 in response to the COVID-19 pandemic, Square Capital provided small businesses two-year or five-year PPP loans. Square Capital approved and funded the last remaining PPP loan applications in May 2021 upon exhaustion of the funds in the program. While the vast majority of Square Capital’s PPP loans have been forgiven or guaranteed at this point, Square Capital’s documentation, review, underwriting, and servicing processes could be subject to further scrutiny by the SBA. We also may become subject to litigation arising as a result of our participation in the PPP, which could result in significant financial liability or could adversely affect our reputation. There can be no assurance that Square Capital will be successful in mitigating all of the risks associated with the PPP loans or that this lending will not have a negative impact on our business and results of operations.
Operational Risks
We, our sellers, our partners, and others who use our services obtain and process a large amount of sensitive data. Any real or perceived improper or unauthorized use of, disclosure of, or access to such data could harm our reputation as a trusted brand, as well as have a material and adverse effect on our business.
We, our sellers, and our partners, including third-party vendors and data centers that we use, obtain and process large amounts of sensitive data, including data related to our customers, our sellers’ customers, and their transactions. We face risks, including to our reputation as a trusted brand, in the handling and protection of this data, and thesedata. These risks will increase as our business continues to expand to include new products, subsidiaries, and technologies.technologies, and as we and our third-party vendors rely on an increasingly distributed workforce. Our operations involve the storage and transmission of sensitive informationdata of individuals and businesses using our services, including their names, addresses, social security
security/tax ID numbers (or their foreign equivalents), government IDs, payment card numbers and expiration dates, bank account information, loans they have applied for or obtained, and data regarding the performance of our sellers’ businesses. Additionally, certain of our products and services are subject to the Health Insurance Portability and Accountability Act of 1996 (and the rules and regulations thereunder, as amended, including with respect to the HITECH Act) (HIPAA), and therefore we are required to take measures to safeguard protected health information of our sellers and their customers.health care entity-sellers' customers when using those products. Our services also provide third partythird-party developers the opportunity to provide applications to our sellers in the Square and Weebly app marketplaces. Sellers who choose to use such applications can grant permission allowing the applications to access content created or held by sellers in their Square or Weebly account. Should such third partyour internal or third-party developers experience or cause a breach, incident, or a technological bug, that could lead to a compromise of the content of data held by such sellers, including personal data.
Our products and services operate in conjunction with, and we are dependent upon, third-party products and components across a broad ecosystem. There have been and may continue to be significant attacks on third-party providers, and we cannot guarantee that our or our third-party developers or vendors’ systems and networks have not been breached or that they do not contain exploitable defects or bugs that could result in a breach of or disruption to our systems and networks or the systems and networks of third parties that support us and our products and services. If there is a security vulnerability, error, or other bug in one of these third-party products or components and if there is a security exploit targeting them, we could face increased costs, claims and liability, proceedings and litigation, reduced revenue, or harm to our reputation or competitive position. The natural sunsetting of third-party products and operating systems that we use requires our personnel to reallocate time and attention to migration and updates, during which period potential security vulnerabilities could be exploited.
More generally, if our privacy, anddata protection, or information security measures or those of third partythird-party developers andor vendors are inadequate or are breached or otherwise compromised, and, as a result, there is improper disclosure of or someone obtains unauthorized access to or exfiltrates funds, bitcoin, investments, or other assets, or other sensitive informationdata on our systems or our partners’ systems, or if we, our third-party developers or vendors suffer a ransomware or advanced persistent threat attack, or if any of the foregoing is reported or perceived to have occurred, our reputation and business could be damaged. If the sensitive information isdata or assets are lost or improperly accessed, misused, disclosed, destroyed, or altered or threatened to be improperly accessed, misused, disclosed, destroyed, or altered, we could incur significant financial losses and costs and liability associated with remediation and the implementation of additional security measures and be subject to claims, litigation, regulatory scrutiny, and investigations. For example, in April 2022 we announced that we determined that a former employee downloaded certain reports of our subsidiary Cash App Investing in December 2021 that contained some U.S. customer information without permission after the former employee’s employment ended, as disclosed in our Current Report on Form 8-K filed with the SEC on April 4, 2022. We have incurred costs related to our investigation and response to this incident, and we could incur other losses, costs, and liabilities in connection with such incident.
Under payment card rules and our contracts with our card processors and other counterparties, if there is a breach of payment card information that we store or that is stored by our sellers or other third parties with which we do business, we could be liable to the payment card issuing banks for certain of their costs and expenses. Additionally, if our own confidential business information were improperly disclosed, accessed, or breached, our business could be materially and adversely affected. A core aspect of our business is the reliability and security of our payments platforms. Any perceived or actual breach of security or other type of security incident or any type of fraud perpetrated by bad actors such as account takeovers or fake account scams, regardless of how it occurs or the extent or nature of the breach, incident, or fraud, could have a significant impact on our reputation as a trusted brand, cause us to lose existing sellers or other customers, prevent us from obtaining new sellers and other customers, require us to expend significant funds to remedy problems caused by breaches and incidents and to implement measures in an effort to prevent further breaches and incidents, and expose us to legal risk and potential liability including those resulting from governmental or regulatory investigations, class action litigation, and costs associated with remediation, such as fraud monitoring and forensics. Any actual or perceived security breach or incident at a company providing services to us or our customers on our behalf could have similar effects. Further, any actual or perceived security breach or incident with respect to the bitcoin and blockchain ledger, regardless of whether such breach or incident directly affects our products and services, could have negative reputational effects and harm customer trust in us and our products and services.
While we maintain cybersecurity insurance, our insurance may be insufficient to cover all liabilities incurred by such attacks. We cannot be certain that our insurance coverage will be adequate for data handling or datainformation security liabilities actually incurred, that insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, premiums, or deductibles could have a material adverse effect on our business, including our financial condition, operating results, and reputation.
Our products and services may not function as intended due to errors in our software, hardware, and systems, product defects, or due to security breaches or incidents or human error in administering these systems, which could materially and adversely affect our business.
Our software, hardware, systems, and processes may contain undetected errors or vulnerabilities that could have a material adverse effect on our business, particularly to the extent such errors or vulnerabilities are not detected and remedied quickly. We have from time to time found defects and errors in our customer-facing software and hardware, internal systems, external facing communications, manual processes, and technical integrations with third-party systems, and new errors or vulnerabilities may be introduced in the future. If there are such errors or defects in our software, hardware, systems, or systems,external facing communications, including as a result of human errors, our customers’ experience with us may be negatively impacted, and we may face negative publicity and harm to our brand and reputation, government inquiries or investigations, claims and litigation. Additionally, we rely on a limited number of component and product suppliers located outside of the U.S. to manufacture our products. As a result, our direct control over production and distribution is limited, and it is uncertain what effect such diminished control will have on the quality of our products. If there are defects in the manufacture of our hardware products, we may face similar negative publicity, investigations, and litigation, and we may not be fully compensated by our suppliers for any financial or other liability that we suffer as a result. As our hardware continuesand software services continue to increase in size and complexity, and as we integrate new, acquired subsidiaries with different technology stacks and practices, these risks may correspondingly increase as well.
In addition, we provide frequent incremental releases of product and service updates and functional enhancements, which increase the possibility of errors. The products and services we provide are designed to process complex transactions and deliver reports and other information related to those transactions, all at high volumes and processing speeds. Any errors, data leaks, security breaches or incidents, disruptions in services, or other performance problems with our products or services caused by external or internal actors could hurt our reputation and damage our and our customers’ businesses. Software and system errors, or human error,errors, could delay or inhibit settlement of payments, result in oversettlement, cause reporting errors, cause pricing irregularities or prevent us from collecting transaction-based fees, or negatively impact our ability to serve our customers, all of which have occurred in the past. Similarly, security breaches such asor incidents, which may be caused by or result from cyber-attacks by hackers or others, computer viruses, worms, ransomware, other malicious software programs, security vulnerabilities, employee or service provider theft, misuse or negligence, phishing, identity theft or compromised credentials, denial-of-service attacks, or other causes, have from time to time impacted our business and could disrupt the proper functioning of our software products or services, cause errors, allow loss or unavailability of, unauthorized access to, or disclosure of, toproprietary, confidential or otherwise sensitive proprietary, or confidential informationdata of ours or our customers, and other destructive outcomes. Moreover, security breaches or incidents or errors in our hardware or software design or manufacture could cause product safety issues typical of consumer electronics devices. SuchAny of the foregoing issues could lead to product recalls and inventory shortages, result in costly and time-consuming efforts to redesign and redistribute our products, give rise to regulatory inquiries and investigations, and result in lawsuits and other liabilities and losses, any of which could have a material and adverse effect on our business.
Additionally, electronic payment, hardware, and software products and services, including ours, have been, and could continue to be in the future, specifically targeted and penetrated or disrupted by hackers.hackers and other malicious actors. Because the techniques used to obtain unauthorized access to data, products, and services and to disable, degrade, or sabotage them change frequently and may be difficult to detect or remediate for long periods of time, we and our customers may be unable to anticipate these techniques or implement adequate preventative measures to stop them. If we or our sellers or other customers are unable to anticipate or prevent these attacks, our sellers' or other customers’ businessescustomers may be harmed, our reputation could be damaged, and we could incur significant liability.
Systems failures, interruptions, delays in service, catastrophic events, and resulting interruptions in the availability of our products or services, or those of our sellers, could harm our business and our brand, and subject us to substantial liability.
Our systems and those of our third-party vendors, including data center facilities, may experience service interruptions, outages, cyber-attacks and security breaches and incidents, human error, earthquakes, hurricanes, floods, pandemics, fires, other natural disasters, power losses, disruptions in telecommunications services, fraud, military or political conflicts, terrorist attacks and other geopolitical unrest, computer viruses, ransomware, and other malicious software, changes in social, political, or regulatory conditions or in laws and policies, or other changes or events. Our systems and facilities are also subject to break-ins, sabotage, and acts of vandalism. Some of our systems are not fully redundant, and our disaster-recovery planning is not sufficient for all eventualities. In addition, as a provider of payments solutions and other financial services, we are subject to increased scrutiny by regulators that may require specific business continuity and disaster recovery plans and more rigorous testing of such plans. This increased scrutiny may be costly and time-consuming and may divert our resources from other business priorities.
We have experienced and will likely continue to experience denial-of-service and other cyber-attacks, system failures, outages, security incidents, and other events or conditions that interrupt the availability, data integrity, or reduce the speed or functionality of our products and services. These events have resulted and likely will result in loss of revenue. In addition, they could result in significant expense to repair or replace damaged equipment and remedy resultant data loss or corruption. The risk of security incidents is increasing as we experience an increase in electronic payments, e-commerce, and other online activity. Additionally, due to political uncertainty and military actions associated with Russia’s invasion of Ukraine, we and our service providers are vulnerable to heightened risks of security incidents and security and privacy breaches from or affiliated with nation-state actors, including attacks that could materially disrupt our systems, operations, supply chain, products, and services. We cannot provide assurances that our preventative efforts against such incidents will be successful. A prolonged interruption in the availability or reduction in the speed or other functionality of our products or services could materially harm our reputation and business. Frequent or persistent interruptions in our products and services could cause customers to believe that our products and services are unreliable, leading them to switch to our competitors or to avoid our products and services, and could permanently harm our reputation and business. Moreover, to the extent that any system failure or similar event results in damages to customers or their businesses,contractual counterparties, these customers and contractual counterparties could seek compensation from us for their losses, and those claims, even if unsuccessful, would likely be time-consuming and costly for us to address.
A significant natural or man-made disaster could have a material and adverse impact on our business. Our headquarters and certainCertain of our offices and data center facilities are located in the San Francisco Bay Area, a region known for seismic activity. Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems at our headquartersoffices or data centers could result in lengthy interruptions in our services or could result in related liabilities. We do not maintain insurance sufficient to compensate us for the potentially significant losses that could result from disruptions to our services.
Significant natural or other disasters, including pandemics, could also have a material and adverse impact on our sellers or other customers, which, in the aggregate, could in turn adversely affect our results of operations.
The theft, loss, or destruction of a private keykeys required to access ourthe bitcoin may be irreversible. If we are unable to access our private keys or if we experience a hack or other data loss relating to the bitcoins we hold on behalf of customers,ourselves and other parties, such as our customers and our trading partners, may be unableirreversible, and any failure to access their bitcoinssafeguard such bitcoin could materially and it could harm customer trust in usadversely affect our business, operating results, and our products.financial condition.
Bitcoins are controllable onlyWe hold bitcoin on behalf of ourselves and other parties such as our customers and our trading partners. Bitcoin can be accessed by the possessor of both the unique public key and private keycryptographic keys relating to the local or online digital wallet in which the bitcoins arebitcoin is held. While the bitcoin and blockchain ledger require a public key relating to a digital wallet to be published when used in a transaction, private keys must be safeguarded and kept private in order to prevent a third partythird-party from accessing the bitcoinsbitcoin held in such digital wallet. To the extent any of our private key iskeys are lost, destroyed, or otherwise compromised and no backup of thesuch private key is accessible, we will be unable to access the bitcoinsbitcoin we hold on behalf of ourselves and other parties. The vast majority of bitcoin we hold for ourselves and our customers is held in offline and air-gapped cold storage. To facilitate transactions, we hold a small portion of bitcoin in a networked hot wallet. At times, we may also utilize third-party custodians to custody our bitcoin or a portion of the related digital wallet. Further, webitcoin held for our customers on our behalf.
Any inappropriate access or theft of bitcoin held by us or any third-party custodian, or the third-party custodian’s failure to maintain effective controls over the custody and other settlement services provided to us, could materially and adversely affect us. We cannot provide assurance that the digital wallets used to store our walletand other parties’ bitcoin will not be hacked or compromised. The bitcoin and blockchain ledger, as well as other cryptocurrencies and blockchain technologies, have been, and may in the future be, subject to security breaches or incidents, hacking, or other malicious activities. Any loss of private keys relating to, or hack or other compromise of, digital wallets used to store our customers’ bitcoinsbitcoin could adversely affect our customers’ ability to access or sell their bitcoinsbitcoin and could harm customer trust in us and our products.products, require us to expend significant funds for remediation, and expose us to litigation, regulatory enforcement actions, and other potential liability. Additionally, any loss of private keys relating to, or hack or other compromise of, digital wallets used by third parties to store bitcoinsbitcoin or other cryptocurrencies could have negative reputational effects on us and harm customer trust in us and our products. As the number of customers who transact bitcoin on Cash App has increased and the amount of bitcoin we hold on behalf of such customers has grown, the risks and consequences of such adverse events have increased and could materially and adversely affect our business, operating results, and financial condition.
Our risk management efforts may not be effective, which could expose us to losses and liability and otherwise harm our business.
We offer managed payments and other products and services to a large number of customers. We have programs to vet and monitor these customers and the payments transactions we process for them as part of our risk management efforts.efforts, but such programs require continuous improvement and may not be effective in detecting and preventing fraud and illegitimate transactions. When our products andpayments services are used to process illegitimate transactions, and we settle those funds to sellerscustomers and are unable to recover them, we suffer losses and liability. These typesAs a greater number of illegitimatelarger sellers use our services, our exposure to material risk losses from a single seller, or from a small number of sellers, will increase. Illegitimate transactions can also expose us to governmental and regulatory sanctionsenforcement actions and potentially prevent us from satisfying our contractual obligations to our third partythird-party partners, which may cause us to be in breach of our obligations. The highly automated nature of, and liquidity offered by, our payments and peer-to-peer services make us and our customers a target for illegal or improper uses, including scams and fraud directed at our customers, fraudulent or illegal sales of goods or services, money laundering, and terrorist financing. Identity thieves and those committing fraud using stolen or fabricated credit card, debit card, or bank account numbers, or other deceptive or malicious practices such as account takeovers, potentially can steal significant amounts of money from businesses like ours.ours or from our customers or third parties. Our risk management policies, procedures, techniques, and processes may not be sufficient to identify all of the risks to which we are exposed, to enable us to prevent or mitigate the risks we have identified, or to identify additional risks to which we may become subject in the future. As a greater number of larger sellers use our services, our exposure to material risk losses from a single seller, or from a small number of sellers, will increase. Our current business, changing and uncertain economic, geopolitical and regulatory environment, and anticipated domestic and international growth will continue to place significant demands on our risk management and compliance efforts, and we will need to continue developing and improving our existing risk management infrastructure, techniques, and processes. In addition, when we introduce new products or services, such as Square Banking, BNPL, and Cash App Borrow, expand existing services, including online payment acceptance and expanded methods of instantly moving money, focus on new business areas, including consumer financing and installment loans, or begin to operate in markets where we have a limited history of fraud loss, we may be less able to forecast and carry appropriate reserves inon our books for those losses. Furthermore, ifAdditionally, we recently made certain Cash App functions available to customers between the ages of 13 through 17 with the authorization of a parent or guardian. The risks and the potential harm to our risk management policies and processesreputation are ineffective,magnified in instances of fraud or unauthorized or inappropriate transactions involving minors.
While we maintain a program of insurance coverage for various types of liabilities, we may suffer large financial losses,self-insure against certain business risks and expenses where we may be subject to civilbelieve we can adequately self-insure against the anticipated exposure and criminal liability, and our business may be materially and adversely affected.risk or where insurance is either not deemed cost-effective or unavailable.
We are currently, and will continue to be, exposed to risks associated with chargebacks and refunds in connection with payment card fraud or relating to the goods or services provided by our sellers. In the event that a billing dispute between a cardholder and a seller is not resolved in favor of the seller, including in situations where the seller engaged in fraud, the transaction is typically “charged back” to the seller and the purchase price is credited or otherwise refunded to the cardholder. The risk of chargebacks is typically greater with our sellers that promise future delivery of goods and services. Moreover, chargebacks typically increase during economic downturns due to sellers becoming insolvent or bankrupt or otherwise unable to fulfill their commitments for goods or services. Additionally, the recent global supply chain disruptions and shortages related to the COVID-19 pandemic have negatively affected sellers' ability to deliver goods and services on time or at all, which increases the risk of chargebacks. If we are unable to collect chargebacks or refunds from the seller’s account, or if the seller refuses to or is unable to reimburse us for chargebacks or refunds due to closure, bankruptcy, or other reasons, we, as the merchant of record, may bear the loss for the amounts paid to the cardholder. SinceWe collect and hold reserves for a limited number of sellers whose businesses are deemed higher risk in order to help cover potential losses from chargebacks and refunds, but this practice is limited and there can be no assurances that we will be successful in mitigating such losses. Our financial results would be adversely affected to the extent sellers do not fully reimburse us for the related chargebacks and refunds. In addition, if more of our sellers, or a number of our larger sellers, become insolvent or bankrupt as a result of the global economic downturn, our potential losses from chargebacks and refunds may increase and exceed our reserves, in which case we may suffer financial losses and our business may be adversely affected. Moreover, since October 2015, businesses that cannot process EMV chip cards are held financially responsible for certain fraudulent transactions conducted using chip-enabled cards. This has shifted an increased amount of the risk for certain fraudulent transactions from the issuing banks to these sellers, which has resulted in our having to seek an increased level of reimbursement for chargebacks from our sellers that do not deploy EMV-compliant card readers. Not all of the readers we offer to merchants are EMV-compliant. Our financial results would be adversely affected to the extent sellers do not fully reimburse us for the related chargebacks. We do not collect and maintain reserves from our sellers to cover these potential losses, and for customer relations purposes we sometimes decline to seek reimbursement for certain chargebacks. The risk of chargebacks is typically greater with those of our sellers that promise future delivery of goods and services, which we allow on our Square platform. If we are unable to maintain our losses from chargebacks at acceptable levels, the payment card networks could fine us, increase our transaction-based fees, or terminate our ability to process payment cards. Any
increase in our transaction-based fees could damage our business, and if we were unable to accept payment cards, our business would be materially and adversely affected. If any of our risk management policies and processes, including self-insurance or holding seller reserves, are ineffective, we may suffer large financial losses, we may be subject to civil and criminal liability, and our business may be materially and adversely affected.
We are dependent on payment card networks and acquiring processors, and any changes to their rules or practices could harm our business.
Our business depends on our ability to accept credit and debit cards, and this ability is provided by the payment card networks, including Visa, MasterCard, American Express, and Discover. InFor a majority of these cases,our transactions, we do not directly access the payment card networks that enable our acceptance of payment cards. As a result, we must rely on banks and acquiring processors to process transactions on our behalf. Our acquiring processor agreements have terms ranging from two to six years. Our three largest such agreements expire between the third quarter of 2022 and the first quarter of 2023. These banks and acquiring processors may fail or refuse to process transactions adequately, may breach their agreements with us, may terminate their agreements with us if they believe we have breached them, or may refuse to renegotiate or renew these agreements on terms that are favorable or commercially reasonable. They might also take actions that degrade the functionality of our services, impose additional costs or requirements on us, or give preferential treatment to competitive services, including their own services. If we are unsuccessful in establishing, renegotiating, or maintaining mutually beneficial relationships with these payment card networks, banks, and acquiring processors, our business may be harmed.
The payment card networks and our acquiring processors require us to comply with payment card network operating rules, including special operating rules that apply to us as a “payment facilitator” providing payment processing services to merchants. The payment card networks set these network rules and have discretion to interpret the rules and change them at any time. Changes to these network rules or how they are interpreted could have a significant impact on our business and financial results. For example, changes in the payment card network rules regarding chargebacks may affect our ability to dispute chargebacks and the amount of losses we incur from chargebacks. Any changes to or interpretations of the network rules that are inconsistent with the way we or our acquiring processors currently operate may require us to make changes to our business that could be costly or difficult to implement. If we fail to make such changes or otherwise resolve the issue with the payment card networks, the networks could fine us or prohibit us from processing payment cards. In addition, violations of the network rules or any failure to maintain good relationships with the payment card networks could impact our ability to receive incentives from them, could increase our costs, or could otherwise harm our business. If we were unable to accept payment cards or were limited in our ability to do so, our business would be materially and adversely affected.
We are required to pay interchange and assessment fees, processing fees, and bank settlement fees to third-party payment processors, payment networks, and financial institutions. From time to time, payment card networks have increased, and may increase in the future, the interchange fees and assessments that they charge for each transaction processed using their networks. In some cases, we have negotiated favorable pricing with acquiring processors and networks that are contingent on certain business commitments and other conditions. OurIf we fail to meet such conditions, the fees we are charged will rise. Moreover, our acquiring processors and payment card networks may refuse to renew our agreements with them on terms that are favorable, commercially reasonable, or at all. Interchange fees or assessments are also subject to change from time to time due to government regulation. Because we generally charge our sellers a standard rate for our managed payments services, rather than passing through interchange fees and assessments to our sellers directly, any increase or decrease in interchange fees or assessments or in the fees we pay to our acquiringthird-party payment processors, payment networks, or financial institutions could make our pricing less competitive, lead us to change our pricing model, or adversely affect our margins, all of which could materially harm our business and financial results. Likewise, we have negotiated favorable pricing for the processing fees we pay to the payment card networks for peer-to-peer transactions on our Cash App. As such, an increase in interchange fees or assessments could raise our costs for such transactions, which could materially harm our business and financial results.
We could be, and in the past have been, subject to penalties from payment card networks if we fail to detect that sellers are engaging in activities that are illegal, contrary to the payment card network operating rules, or considered “high risk.” We must either prevent high-risk sellers from using our products and services or register such high-risk sellers with the payment card networks and conduct additional monitoring with respect to such high-risk sellers. Any such penalties could become material and could result in termination of our ability to accept payment cards or could require changes in our process for registering new sellers. This could materially and adversely affect our business.
We rely on third parties and their systems for a variety of services, including the processing of transaction data and settlement of funds to us and our sellers,customers, and these third parties’ failure to perform these services adequately could materially and adversely affect our business.
To provide our managed payments solution and other products and services, (including those for Cash App and Square Capital), we rely on third parties that we do not control, such as the payment card networks, our acquiring and issuing processors, the payment card issuers, a carrying broker, bank partners, various financial institution partners, systems like the Federal
Reserve Automated Clearing House, and other partners. We rely on these third parties for a variety of services, including the transmission of transaction data, processing of chargebacks and refunds, settlement of funds to our sellers, certain brokerage services, storing customer funds, authorizing payment transactions under our various card programs, originating loans to customers, and the provision of information and other elements of our services. For example, we currently rely on threea limited number of acquiring processors for eachin many of the United States, Canada, and Japan and two for each of Australia and the United Kingdom.jurisdictions in which we offer our services. While we believe there are other acquiring processors that could meet our needs, adding or transitioning to new providers may significantly disrupt our business and increase our costs. In the event these third parties fail to provide these services adequately, including as a result of financial difficulty or insolvency, errors in their systems, outages or events beyond their control, or refuse to provide these services on terms acceptable to us or at all, and we are not able to find suitable alternatives, our business may be materially and adversely affected. We have in the past experienced outages with third parties we have worked with, which has affected the ability to process payments for cards we issued.issued under our own brands.
We depend on key management, as well as our experienced and capable employees, and any failure to attract, motivate, and retain our employees could harm our ability to maintain and grow our business.
Our future success is significantly dependent upon the continued service of our executives and other key employees. If we lose the services of any member of management or any key personnel, we may not be able to locate a suitable or qualified replacement, and we may incur additional expenses to recruit and train a replacement, which could severely disrupt our business and growth. Jack Dorsey, our co-founder, President, and Chief Executive Officer, also serves as Chief Executive Officer of Twitter, Inc. This may at times adversely affect his ability to devote time, attention, and effort to Square.
To maintain and grow our business, we will need to identify, attract, hire, develop, motivate, and retain highly skilled employees. This requires significant time, expense, and attention. In addition, from time to time, there may be changes in our management team that may be disruptive to our business. If our management team, including any new hires that we make, fails to work together effectively and to execute our plans and strategies on a timely basis, our business could be harmed. Competition for highly skilled personnel is intense, particularly in the San Francisco Bay Area where our headquarters are located.intense. We may need to invest significant amounts of cash and equity to attract and retain new employees, and we may never realize returns on these investments. Historically, equity awards have been a key component of our employee compensation, and as a result, any decline in the price of our Class A common stock (directly or relative to the stock price of other companies with which we compete for talent) may adversely impact our ability to retain employees or to attract new employees. Additionally, potential changes in U.S. immigration policy may make it difficult to renew or obtain visas for any highly skilled personnel that we have hired or are actively recruiting. Furthermore, our international expansion and our business in general may be materially adversely affected if legislative or administrative changes to immigration or visa laws and regulations impair our hiring processes or projects involving personnel who are not citizens of the country where the work is to be performed. If we are not able to add and retain employees effectively, our ability to achieve our strategic objectives will be adversely affected, and our business and growth prospects will be harmed.
A deterioration of general macroeconomic conditions could materially and adversely affect our business and financial results.
Our performance is subject to economic conditions and their impact on levels of spending by businesses and their customers. Most of the sellers that use our services are small businesses, many of which are in the early stages of their development, and these businesses may be disproportionately adversely affected by economic downturns and may fail at a higher rate than larger or more established businesses. If spending by their customers declines, these businesses would experience reduced sales and process fewer payments with us or, if they cease to operate, stop using our products and services altogether. Small businesses frequently have limited budgets and limited access to capital, and they may choose to allocate their spending to items other than our financial or marketing services, especially in times of economic uncertainty or in recessions. In addition, if more of our sellers cease to operate, this may have an adverse impact not only on the growth of our payments services but also on our transaction and advance loss rates, and the success of our other services. For example, if sellers processing payments with us receive chargebacks after they cease to operate, we may incur additional losses. Additionally, the growth in the number of sellers qualifying for participation in the Square Capital program may slow, or business loans may be paid more slowly, or not at all. In addition, as we expand our business to offer consumer financing products, those customers may also be disproportionately adversely affected by economic downturns.
Further, our suppliers, distributors, and other third party partners may suffer their own financial and economic challenges. Such suppliers and third parties may demand pricing accommodations, delay payment, or become insolvent, which could harm our ability to meet end customer demands or collect revenue or otherwise could harm our business. Furthermore, our investment portfolio, which includes U.S. government and corporate securities, is subject to general credit, liquidity, market, and interest rate risks, which may be exacerbated by certain events that affect the global financial markets. If global credit and equity markets decline for extended periods, or if there is a downgrade of the securities within our portfolio, the investment portfolio may be adversely affected and we could determine that our investments have experienced
an other-than-temporary decline in fair value, requiring impairment charges that could adversely affect our financial results. Moreover, we are currently subletting some office space to subtenants. An economic downturn may cause us to need less office space than we are contractually committed to leasing and prevent us from finding subtenants for such unused office space. Thus, if general macroeconomic conditions deteriorate, our business and financial results could be materially and adversely affected.
We are also monitoring developments related to the decision by the U.K. to leave the European Union (EU) on January 31, 2020 and commence a transition period during which the UK and EU negotiate their future relationship. Brexit could have significant implications for our business and could lead to economic and legal uncertainty, including significant volatility in global stock markets and currency exchange rates, and increasingly divergent laws, regulations, and licensing requirements for the Company as the United Kingdom determines which EU laws to replace or replicate. Any of these effects of Brexit, among others, could adversely affect our operations and financial results.
We may have exposure to greater-than-anticipated tax liabilities, which may materially and adversely affect our business.
We are subject to income taxes and non-income taxes in the United States and other countries in which we transact or conduct business, and such laws and rates vary by jurisdiction. We are subject to review and audit by U.S. federal, state, local, and foreign tax authorities. Such tax authorities may disagree with tax positions we take, and if any such tax authority were to successfully challenge any such position, our financial results and operations could be materially and adversely affected. For example, the Office of the Treasurer and Tax Collector of the City and County of San Francisco (the "Tax Collector") has issued decisions regarding the Company's classification of its business activities. Although we disagree with the Tax Collector and contest this classification, the ultimate resolution is uncertain. We are taking steps to vigorously pursue all available remedies, including challenging the classification of our primary business activity, challenging the applicable tax rate used, and filing lawsuits against the Tax Collector. See “Litigation” in Note 18 of the accompanying notes to our condensed consolidated financial statements. If the Company does not prevail and is otherwise unable to mitigate the impact of this tax, we could be obligated to pay additional taxes, together with any associated penalties and interest. This may adversely affect our cash flows, financial condition, and results of operations. An unfavorable outcome in this tax dispute may also limit our ability to retain and grow our work force in San Francisco. In addition, we currently are, and expect to continue to be, subject to numerous federal, state, and foreign tax audits relating to income, transfer pricing, sales & use, VAT, and other tax liabilities. While we have established reserves based on assumptions and estimates that we believe are reasonably sufficient to cover such eventualities, any adverse outcome of such a review or audit could have an adverse impact on our financial position and results of operations if the reserves prove to be insufficient.
Our tax liability could be adversely affected by changes in tax laws, rates, regulations, and administrative practices. Our income tax obligations are based on our corporate operating structure, including the manner in which we develop, value, and use our intellectual property and the scope of our international operations. The tax authorities of the jurisdictions in which we operate may challenge our methodologies for valuing developed technology or intercompany arrangements. For example, various levels of government and international organizations, such as the Organization for Economic Co-operation and Development (“OECD”) and the European Union (“EU”), increasingly focus on future tax reform and any result from this development may create changes to long-standing tax principles, which could adversely affect our effective tax rate. Additionally, tax authorities at the international, federal, state, and local levels are currently reviewing the appropriate tax treatment of companies engaged in internet commerce and financial technology. These developing changes could affect our financial position and results of operations. In particular, due to the global nature of the Internet, it is possible that tax authorities at the international, federal, state, and local levels may attempt to regulate our transactions or levy new or revised sales & use taxes, VAT, digital services taxes, income taxes, or other taxes relating to our activities in the internet commerce and financial technology space. New or revised taxes, in particular, sales & use taxes, VAT, and similar taxes, including digital service taxes, would likely increase the cost of doing business. New taxes could also create significant increases in internal costs necessary to capture data and collect and remit taxes. Any of these events could have an adverse effect on our business and results of operations.
The determination of our worldwide provision for income and other tax liabilities is highly complex and requires significant judgment by management, and there are many transactions during the ordinary course business where the ultimate tax determination is uncertain. Although we believe our estimates are reasonable, the ultimate tax outcome may differ from amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.
We have in the past recorded, and may in the future record, significant valuation allowances on our deferred tax assets, which may have a material impact on our results of operations and cause fluctuations in such results.
As of December 31, 2019, we had a valuation allowance for deferred tax assets in the United States, Canada, Ireland and Singapore. Our net deferred tax assets relate predominantly to the United States federal and state tax jurisdictions. The need for a valuation allowance requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable; such assessment is required on a jurisdiction-by-jurisdiction basis. In making such assessment, significant weight is given to evidence that can be objectively verified.
We continue to monitor the likelihood that we will be able to recover our deferred tax assets in the future. Future adjustments in our valuation allowance may be required. The recording of any future increases in our valuation allowance could have a material impact on our reported results, and both the recording and release of the valuation allowance could cause fluctuations in our quarterly and annual results of operations.
If we do not continue to improve our operational, financial, and other internal controls and systems to manage growth effectively, our business could be harmed.
Our current business and anticipated growth, as well as our entry into new lines of business and our acquisitions, will continue to place significant demands on our management and other resources. In order to manage our growth effectively, we must continue to strengthen our existing infrastructure and operational procedures, enhance our internal controls and reporting systems, and ensure we timely and accurately address issues as they arise. In particular, our continued growth will increase the challenges involved in:
•improving existing and developing new internal administrative infrastructure, particularly our operational, financial, communications, and other internal systems and procedures;
•successfully expanding and implementing internal controls as they relate to our new lines of business and any acquired businesses;
•installing enhanced management information and control systems; and
•preserving our core values, strategies, and goals and effectively communicating these to our employees worldwide.
These challenges have increased as we shift to a more distributed workforce. If we are not successful in developing and implementing the right processes and tools to manage our enterprise, our ability to compete successfully and achieve our business objectives could be impaired.
These efforts may require substantial financial expenditures, commitments of resources, developments of our processes, and other investments and innovations. As we grow and our business model evolves, we must balance the need for additional controls and systems with the ability to efficiently develop and launch new features for our products and services. However, it is likely that as we grow, we will not be able to launch new features, or respond to customer or market demands as quickly as a smaller, more efficient organization. If we do not successfully manage our growth, our business will suffer.
ExpandingAdditionally, our metrics are calculated using internal company data based on the activity we measure on our platforms and may be compiled from multiple systems, including systems that are organically developed or acquired through business combinations. There are inherent challenges and limitations in measuring our business globally could subject usat scale, and the methodologies used to new challengescalculate our metrics inherently require some judgment. For example, we currently identify a Cash App transacting active as a Cash App account that has at least one financial transaction using any product or service within Cash App during a specified period although certain of these accounts may share an alias identifier with one or more other transacting active accounts (for example, families sharing one alias identifier or one customer with multiple accounts). We regularly review our processes for calculating these metrics, and risks.
We currently offer our services and products in multiple countries and planfrom time to continue expandingtime we may make adjustments to improve their accuracy or relevance. Further, as our business further globally. Expansion, whether indevelops, we may revise or cease reporting metrics if we determine that such metrics are no longer appropriate measures of our existing or new global markets, will require additional resources and controls, and offeringperformance. If investors do not consider our services in new geographic regions often requires substantial expenditures and takes considerable time. We may not be successful enough in these new geographiesreporting metrics to recoup our investments in a timely manner or at all. Such expansion could also subjectaccurately reflect our business to substantial risks, including:
•difficulty in attracting a sufficient number of sellers;
•failure to anticipate competitive conditions and competition with service providers or other entrenched market-players that have greater experience in the local markets than we do;
•conformity with applicable business customs, including translation into foreign languages and associated expenses;
•increased costs and difficulty in protecting intellectual property and sensitive data;
•changes to the way we do business as comparedthey disagree with our current operations or a lack of acceptance ofmethodologies, our productsreputation may be harmed and services;our business may be adversely impacted.
•the ability to support and integrate with local third-party service providers;
•difficulties in staffing and managing foreign operations in an environmentMany of diverse culture, laws, and customs, challenges caused by distance, language, and cultural differences, and the increased travel, infrastructure, and legal and compliance costs associated with global operations;
•difficulties in recruiting and retaining qualified employees and maintaining our company culture;
•difficulty in gaining acceptancekey components are procured from industry self-regulatory bodies;
•compliance with multiple, potentially conflicting and changing governmental laws and regulations, including with respect to payments, data privacy, data protection, and information security;
•compliance with U.S. and foreign anti-corruption, anti-bribery, and anti-money laundering laws;
•potentiala single or limited number of suppliers. Thus, we are at risk of shortage, price increases, tariffs, sanctions, fines,changes, delay, or other trade restrictions;
•exchange rate risk;
•compliance with complex and potentially conflicting and changing lawsdiscontinuation of taxing jurisdictions where we conduct business and applicable U.S. tax laws; and
•regional economic and political instability.
As a result of these risks, our efforts to expand our global operations may not be successful,key components, which could limit our ability to growdisrupt and materially and adversely affect our business.
Any acquisitions, strategic investments, entries into new businesses, joint ventures, divestitures,Many of the key components used to manufacture our products, such as the custom parts of our magstripe reader, come from limited or single sources of supply. In addition, in some cases, we rely only on one manufacturer to fabricate, test, and other transactions could failassemble our products. For example, a single manufacturer assembles our magstripe reader and our contactless and chip reader, as well as manufactures those products’ plastic parts with custom tools that we own but that the manufacturer maintains on its premises. The term of the agreement with that manufacturer automatically renews for consecutive one-year periods unless either party provides notice of non-renewal. In general, our contract manufacturers fabricate or procure components on our behalf, subject to achieve strategic objectives, disruptcertain approved procedures or supplier lists, and we do not have firm commitments from all of these manufacturers to provide all components, or to provide them in quantities and on timelines that we may require. For example, pursuant to a development and supply agreement, a component supplier provides design, development, customization, and related services for components of the magnetic stripe-reading element in some of our ongoing operations or result in operating difficulties, liabilitiesproducts. The term of the agreement renews for consecutive one-year periods unless either party provides notice of non-renewal. Similarly, a component provider develops certain application-specific integrated circuits for our products pursuant to our designs and expenses, harmspecifications. The term of our business, and negatively impact our resultsagreement with this provider renews for successive two-year terms unless either party provides notice of operations.non-renewal.
Due to our reliance on the components or products produced by suppliers such as these, we are subject to the risk of shortages and long lead times or other disruptions in the supply of certain components or products. Our ongoing efforts to identify alternative manufacturers for the assembly of our products and for many of the single-sourced components used in our products may not be successful. In pursuingthe case of off-the-shelf components, we are subject to the risk that our business strategy, we routinely conduct discussions and evaluate opportunities for possible acquisitions, strategic investments, entries into new businesses, joint ventures, divestitures, and other transactions.suppliers may discontinue or modify them, or that the components may cease to be available on commercially reasonable terms, or at all. We have in the past acquiredexperienced, and may in the future experience, component shortages or invested in, and we continue to seek to acquire or invest, in businesses technologiesdelays or other assets that we believe could complementproblems in product assembly, and the availability of these components or expand our business. The identification, evaluation, and negotiation of potential transactionsproducts may divert the attention of management and entail various expenses, whether or not such transactions are ultimately completed. There can be no assurance that we will be successful in identifying, negotiating, and consummating favorable transaction opportunities.difficult to predict. For example, our manufacturers may experience temporary or permanent disruptions in 2019, we completedtheir manufacturing operations due to equipment breakdowns, labor strikes or shortages, natural disasters, the saleoccurrence of Caviara contagious disease or illness, component or material shortages, cost increases, acquisitions, insolvency, bankruptcy, business shutdowns, trade restrictions, changes in legal or regulatory requirements, or other similar problems. The current global supply chain disruptions and shortages, in particular with respect to DoorDashintegrated circuits, have affected our supply chain and resulted in exchangelow levels of inventory for cashsome of our hardware products. We therefore may be unable to timely fulfill orders for some hardware products. These hardware shortages could negatively affect our ability to serve and stock consideration. As DoorDash is a privately-held company, there can be no assurances that we will fully realize the valueacquire sellers, and if such shortages continue for an extended period of the stock consideration. In addition to transactiontime, could materially and opportunity costs, these transactions involve large challenges and risks, whether or not such transactions are completed, any of which could harm our business and negativelyadversely impact our results of operations, including risks that:financial results.
•Additionally, various sources of supply-chain risk, including strikes or shutdowns at delivery ports or loss of or damage to our products while they are in transit or storage, intellectual property theft, losses due to tampering, third-party vendor issues with quality or sourcing control, failure by our suppliers to comply with applicable laws and regulation, potential tariffs or other trade restrictions, or other similar problems could limit or delay the transaction may not advancesupply of our business strategy;
•products or harm our reputation. In the event of a shortage or supply interruption from suppliers of these components, such as the current global shortage of integrated circuits, we may not be able to secure required regulatory approvalsdevelop alternate sources quickly, cost-effectively, or otherwise satisfy closing conditions forat all. Any interruption or delay in manufacturing, component supply, any increases in component costs, or the inability to obtain these parts or components from alternate sources at acceptable prices and within a proposed transaction inreasonable amount of time, would harm our ability to provide our products to sellers on a timely manner,basis or at all;impact our cost of goods sold. This could harm our relationships with our sellers, prevent us from acquiring new sellers, and materially and adversely affect our business.
•Some of our hardware devices manufactured in China are subject to 25% tariffs when imported to the transaction mayUnited States, while some other hardware devices are subject us to additional regulatory burdens thattariffs at 7.5%. These tariffs negatively affect the gross margin on the impacted products, which only partially has been offset by adjustments to the prices of some of the affected products. Any future tariffs and actions related to items imported from China or elsewhere could also negatively impact our gross margin on the impacted products, and increases in our pricing as a result of tariffs would reduce the competitiveness of our products if our competitors do not make similar pricing adjustments. The impact of any increased or new tariffs or other trade restrictions could have a material and adverse effect on our business, in potentially unanticipatedfinancial condition, and significantly negative ways;
•we may not realize a satisfactory return or increase our revenue;
•we may experience difficulty, and may not be successful in, integrating technologies, IT or business enterprise systems, culture, or management or other personnelresults of the acquired business;
•we may incur significant acquisition costs and transition costs, including in connection with the assumption of ongoing expenses of the acquired business;future operations.
•Our business could be harmed if we may not realize the expected benefits or synergies from the transaction in the expected time period, or at all;
•we may beare unable to retain key personnel;
•acquired businesses or businesses that we invest in may not have adequate controls, processes,accurately forecast demand for our products and procedures to ensure compliance with laws and regulations, including with respect to data privacy and security, andadequately manage our due diligence process may not identify compliance issues or other liabilities;
•we may fail to identify or assess the magnitude of certain liabilities, shortcomings, or other circumstances prior to acquiring or investing in a business, which could result in additional financial, legal, or regulatory exposure, which may subject us to additional controls, policies, procedures, liabilities, litigation, costs of compliance or remediation, or other adverse effects on our business, operating results, or financial condition;
•we may have difficulty entering into new market segments;
•we may be unable to retain the customers, vendors, and partners of acquired businesses;
•there may be lawsuits or regulatory actions resulting from the transaction;
•there may be risks associated with undetected security weaknesses, cyberattacks, or security breaches at companies that we acquire or with which we may combine or partner;
•there may be local and foreign regulations applicable to the international activities of our business and the businesses we acquire; and
•acquisitions could result in dilutive issuances of equity securities or the incurrence of debt.product inventory.
We may also chooseinvest broadly in our business, and such investments are partially driven by our expectations of the future success of a product. Our ability to divest certain businessesaccurately forecast demand for our products could be affected by many factors, including an increase or product lines. decrease in demand for our products or for our competitors’ products, and changes in general market or economic conditions.
If we decide to sell assets orunderestimate demand for a business, we may have difficulty obtaining terms acceptable to us in a timely manner, or at all. Additionally, we may experience difficulty separating out portions of or entire businesses, incur potential loss of revenue or experience negative impact on margins, or we may not achieve the desired strategicparticular product, our contract manufacturers and financial benefits. Such potential transactions may also delay achievement of our strategic objectives, cause us to incur additional expenses, potentially disrupt customer or employee relationships, and expose us to unanticipated or ongoing obligations and liabilities, including as a result of our indemnification obligations. Further, during the pendency of a divestiture, we may be subject to risks related to a decline in the business, loss of employees, customers, or suppliers and the risk that the transaction may not close, any of which would have a material adverse effect on the business to be divested and the Company. If a divestiture is not completed for any reason, we may not be able to find another buyer on the same terms,deliver sufficient quantities of that product to meet our requirements, and we may have incurred significant costs withoutexperience a shortage of that product available for sale or distribution. If we overestimate demand for a particular product, we may experience excess inventory levels for that product and the corresponding benefit.excess inventory may become obsolete or out-of-date. Excess inventory may also result in inventory write-downs or write-offs and sales at further discounted prices, which could negatively impact our gross profit and our business.
Joint ventures and minority investments inherently involve a lesser degree of control over business operations, thereby potentially increasing the financial, legal, operational, regulatory, and/or compliance risks associated with the joint venture or minority investment. In addition, we may be dependent on joint venture partners, controlling shareholders, management, or other persons or entities who control them and who may have business interests, strategies, or goals that are inconsistent with ours. Business decisions or other actions or omissions of the joint venture partners, controlling shareholders, management, or other persons or entities who control them may adversely affect the value of our investment, result in litigation or regulatory action against us, and may otherwise damage our reputation and brand.
Our services must integrate with a variety of operating systems, and the hardware that enables merchants to accept payment cards must interoperate with third-party mobile devices utilizing those operating systems. If we are unable to ensure that our services or hardware interoperate with such operating systems and devices, our business may be materially and adversely affected.
We are dependent on the ability of our products and services to integrate with a variety of operating systems, as well as web browsers, that we do not control. Any changes in these systems that degrade the functionality of our products and services, impose additional costs or requirements on us, or give preferential treatment to competitive services, including their own services, could materially and adversely affect usage of our products and services. In addition, we rely on app marketplaces, such as the Apple App Store and Google Play, to drive downloads of our mobile apps, such as Square Point of
Sale, Square Payroll, Square Invoices, Cash App, and any future apps. Apple, Google, or other operators of app marketplaces regularly make changes to their marketplaces, and those changes may make access to our products and services more difficult. In the event that it is difficult for our customers to access and use our products and services, our business may be materially and adversely affected. Furthermore, Apple, Google, or other operators of app marketplaces regularly provide software updates, and such software updates may not operate effectively with our products and services, which may reduce the demand for our products and services, result in dissatisfaction by our customers, and may materially and adversely affect our business.
In addition, ourSquare hardware interoperates with wired and wireless interfaces to mobile devices developed by third parties. For example, the current versions of ourSquare’s magstripe reader plug into an audio jack or a Lightning connector. The use of these connection types could change, and such changes and other potential changes in the design of future mobile devices could limit the interoperability of our hardware and software with such devices and require modifications to our hardware or software. If we are unable to ensure that our hardware and software continue to interoperate effectively with such devices, if doing so is costly, or if existing merchants decide not to utilize additional parts necessary for interoperability, our business may be materially and adversely affected.
ManyOur TIDAL business depends upon maintaining complex licenses with copyright owners, and it is difficult to estimate the amount payable under our license agreements.
Under TIDAL’s license agreements and relevant statutes, we must pay all required royalties to record labels, music publishers, and other copyright owners in order to stream, distribute, and display content. The determination of the amount and timing of such royalty payments is complex and subject to a number of variables, including the type of content accessed, the country in which it is accessed, the service tier such content is streamed on, the identity of the license holder to whom royalties are owed, the current size of our key componentssubscriber base, the applicability of any most favored nations provisions, and any applicable fees, waivers, and discounts, among other variables. We may underpay/under-accrue or overpay/over-accrue the royalty amounts payable to record labels, music publishers, and other copyright owners. Failure to accurately pay our royalties may damage our business relationships, our reputation, and adversely affect our business, operating results, and financial condition.
Economic, Financial, and Tax Risks
A deterioration of general macroeconomic conditions could materially and adversely affect our business and financial results.
Our performance is subject to economic conditions and their impact on levels of spending by businesses and individuals. Most of the sellers that use our services are procured fromsmall businesses, many of which are in the early stages of their development, and these businesses are often disproportionately adversely affected by economic downturns and may fail at a singlehigher rate than larger or more established businesses. Small businesses frequently have limited budgets and limited access to capital, and they may choose to allocate their spending to items other than our financial or marketing services, especially in times of economic uncertainty or in recessions. In addition, if our sellers cease to operate, this may have an adverse impact not only on the growth of our payments services but also on our transaction and advance loss rates, and the success of our other services. For example, if sellers processing payments with Square receive chargebacks after they cease to operate, we may incur additional losses. We serve sellers across a variety of industry verticals and in an economic downtown, certain verticals, particularly those that may be viewed as discretionary by consumers, may be impacted to a greater degree than others, which may harm our business and financial results.
Even after the impacts of the COVID-19 pandemic have subsided, we may experience material and adverse impacts to our business as a result of the virus’s global economic impact, including the worldwide supply chain disruption, availability of credit, bankruptcies or insolvencies of customers, and recession or economic downturn. In addition, inflation has impacted and may continue to impact consumer spending and the economy as a whole. As a result of economic conditions, the growth in the number of suppliers.Square sellers qualifying for participation in the Square Loans program may slow, or business loans may be paid more slowly, or not at all. In addition, as we expand our business to offer BNPL products and consumer loan products, such as Cash App Borrow, those customers may also be disproportionately adversely affected by economic downturns, which could cause loss rates on such products to increase.
Further, our suppliers, distributors, and other third-party partners may suffer their own financial and economic challenges. Such suppliers and third parties may demand pricing accommodations, delay payment, or become insolvent, which could harm our ability to meet end customer demands or collect revenue or otherwise could harm our business. Furthermore, our investment portfolio, which includes U.S. government and corporate securities, is subject to general credit, liquidity, market, and interest rate risks, which may be exacerbated by certain events that affect the global financial markets. If global credit and equity markets decline for extended periods, or if there is a downgrade of the securities within our portfolio, our investment portfolio may be adversely affected and we could determine that our investments have experienced an other-than-temporary decline in fair value, requiring impairment charges that could adversely affect our financial results. Thus, if general macroeconomic conditions deteriorate, our business and financial results could be materially and adversely affected.
We are currently subletting some of our office space. An economic downturn or our work-from-home practices may cause us to need less office space than we are contractually committed to leasing. If we are unable to successfully sublease any unused office space, or if we are unable to successfully terminate any of our leasing commitments, we may incur losses or recognize impairment charges in connection with the unused office space.
We are also monitoring developments related to the United Kingdom’s exit from the European Union. Brexit could have significant implications for our business and could lead to economic and legal uncertainty and increasingly divergent laws, regulations, and licensing requirements. Any of these effects of Brexit, among others, could adversely affect our operations and financial results.
We may not be able to secure financing on favorable terms, or at all, to meet our future capital needs, and our existing credit facility and our senior notes contain, and any future debt financing may contain, covenants that impact the operation of our business and pursuit of business opportunities.
We have funded our operations since inception primarily through debt and equity financings, bank credit facilities, finance lease arrangements, and cash from operations. While we believe that our existing cash and cash equivalents, marketable debt securities, and availability under our line of credit are sufficient to meet our working capital needs and planned capital expenditures, and service our debt, there is no guarantee that this will continue to be true in the future. In the future, we may require additional capital to respond to business opportunities, refinancing needs, business and financial challenges, regulatory surety bond requirements, acquisitions, or unforeseen circumstances and may decide to engage in equity, equity-linked, or debt financings or enter into additional credit facilities for other reasons. We may not be able to secure any such additional financing or refinancing on favorable terms, in a timely manner, or at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited.
Following our acquisition of Afterpay, we assumed Afterpay’s financing arrangements with financial institutions in Australia, New Zealand, the United States and the United Kingdom (collectively, the “Warehouse Facilities”). We use the Warehouse Facilities to partly fund our BNPL platform. The terms of the Warehouse Facilities contain covenants that may be triggered in certain situations (such as non-repayments on consumer borrowings exceeding certain monetary thresholds or key management resigning), which may negatively impact our ability to obtain additional funding under the Warehouse Facilities. If certain events of default occur under the Warehouse Facilities, we may not be able to draw future funding from those Warehouse Facilities or the debt outstanding under the Warehouse Facilities may be accelerated and our business and financial results could be adversely impacted.
Our credit facility contains affirmative and negative covenants, including customary limitations on the incurrence of certain indebtedness and liens, restrictions on certain intercompany transactions, and limitations on dividends and stock repurchases. The indentures pursuant to which our 2026 Senior Notes and 2031 Senior Notes (collectively, the “Senior Notes”) were issued contain covenants that restrict or could restrict, among other things, our business and operations. Any debt financing obtained by us in the future could also involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to operate our business, obtain additional capital, and pursue business opportunities, including potential acquisitions. Our ability to comply with these covenants may be affected by events beyond our control, and breaches of these covenants could result in a default under our existing credit facility or our senior notes and any future financing agreements into which we may enter. If not waived, these defaults could cause indebtedness outstanding under our credit facility, our Senior Notes, our other outstanding indebtedness, including our 2023 Convertible Notes, 2025 Convertible Notes, 2026 Convertible Notes, and 2027 Convertible Notes (collectively, the “Convertible Notes,” and together with the Senior Notes, the “Notes”), and any future financing agreements that we may enter into to become immediately due and payable.
If we raise additional funds through further issuances of equity or other securities convertible into equity, including convertible debt securities, our existing stockholders could suffer dilution in their percentage ownership of our company, and any such securities we issue could have rights, preferences, and privileges senior to those of holders of our Class A common stock.
Changes by any rating agency to our outlook or credit rating could negatively affect the value of both our debt and equity securities and increase our borrowing costs. If our credit ratings are downgraded or other negative action is taken, our ability to obtain additional financing in the future on favorable terms or at all could be adversely affected.
Servicing our Notes may require a significant amount of cash, and we may not have sufficient cash or the ability to raise the funds necessary to settle conversions of the Convertible Notes in cash, repay the Notes at maturity, or repurchase the Notes as required following a fundamental change.
As of December 31, 2022, we had $460.6 million outstanding aggregate principal amount of 2023 Convertible Notes, $1.0 billion outstanding aggregate principal amount of 2025 Convertible Notes, $575.0 million outstanding aggregate principal amount of 2026 Convertible Notes, and $575.0 million outstanding aggregate principal amount of 2027 Convertible Notes, $1.0 billion outstanding aggregate principal amount of 2026 Senior Notes, and $1.0 billion outstanding aggregate principal amount of 2031 Senior Notes.
Prior to February 15, 2023, in the case of the 2023 Convertible Notes; December 1, 2024, in the case of the 2025 Convertible Notes; February 1, 2026, in the case of the 2026 Convertible Notes; and August 1, 2027, in the case of the 2027 Convertible Notes; the applicable Convertible Notes are convertible at the option of the holders only under certain conditions or upon occurrence of certain events. After February 15, 2023, the 2023 Convertible Notes are convertible at the option of the holders thereof until the second scheduled trading day immediately preceding May 15, 2023, the maturity date. Whether the Convertible Notes of any series will be convertible following a calendar quarter will depend on the satisfaction of this condition or another conversion condition in the future. If holders of the Convertible Notes of a series elect to convert such Convertible Notes when eligible, we will be required to make cash payments in respect of the Convertible Notes being converted unless we elect to deliver solely shares of our Class A common stock to settle such conversion. We currently expect to settle future conversions of our Convertible Notes solely in shares of our Class A common stock, which has the effect of including the shares of Class A common stock issuable upon conversion of the Convertible Notes of such series in our diluted earnings per share to the extent such shares are not anti-dilutive. We will reevaluate this policy from time to time as conversion notices are received from holders of the Convertible Notes.
In addition, holders of each series of Notes also have the right to require us to repurchase all or a portion of their Notes of such series upon the occurrence of a fundamental change (as defined in the applicable indenture governing the Notes) at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest, or at a repurchase price equal to 101% of the principal amount of the Senior Notes to be repurchased, plus accrued and unpaid interest, as applicable. If the Notes of any series have not previously been converted or repurchased, we will be required to repay such Notes in cash at maturity.
Our ability to make required cash payments in connection with conversions of the Convertible Notes, repurchase the Notes in the event of a fundamental change, or to repay or refinance the Notes at maturity will depend on market conditions and our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. We also may not use the cash proceeds we raised through the issuance of the Notes in an optimally productive and profitable manner. Since inception, our business has generated net losses in most quarters, and we may continue to incur significant losses. As a result, we may not have enough available cash or be able to obtain financing at the time we are required to repurchase or repay the Notes or pay cash with respect to the Convertible Notes being converted.
In addition, our ability to repurchase or to pay cash upon conversion or at maturity of the Notes may be limited by law or regulatory authority. Our failure to repurchase Notes following a fundamental change or to pay cash upon conversion of our Convertible Notes (unless we elect to deliver solely shares of our Class A common stock to settle such conversion) or at maturity of the Notes as required by the applicable indenture would constitute a default under such indenture. A default under the applicable indenture or the fundamental change itself could also lead to a default under our credit facility, our other outstanding indebtedness, or agreements governing our future indebtedness and could have a material adverse effect on our business, results of operations, and financial condition. If the payment of our other outstanding indebtedness or future indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay such indebtedness and repurchase the Notes or to pay cash upon conversion of the Convertible Notes or at maturity of the Notes.
We are subject to counterparty risk with respect to the convertible note hedge transactions.
In connection with the issuance of each series of our Convertible Notes, we entered into convertible note hedge transactions with certain financial institutions, which we refer to as the "option counterparties." The option counterparties are financial institutions or affiliates of financial institutions, and we will be subject to the risk that one or more of such option counterparties may default under the convertible note hedge transactions. Our exposure to the credit risk of shortage,the option counterparties will not be secured by any collateral. If any option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under the convertible note hedge transaction. Our exposure will depend on many factors but, generally, the increase in our exposure will be correlated to the increase in our Class A common stock market price and in the volatility of the market price of our Class A common stock. In addition, upon a default by any option counterparty, we may suffer adverse tax consequences and dilution with respect to our Class A common stock. We can provide no assurance as to the financial stability or viability of any option counterparty.
Our investments in bitcoin may be subject to volatile market prices, impairment, and other risks of loss.
As of December 31, 2022, we have made cumulative investments in bitcoin of $220.0 million. We may make additional bitcoin purchases in the future. The price of bitcoin has been highly volatile and may continue to be volatile in the future, including as a result of various associated risks and uncertainties. The prevalence of bitcoin is a relatively recent trend, and the long-term adoption of bitcoin by investors, consumers, and businesses remains uncertain. Bitcoin’s lack of a physical form, its reliance on technology for its creation, existence, and transactional validation, and its decentralization may subject its integrity to the threat of malicious attacks and technological obsolescence. To the extent the market value of the bitcoin we hold continues to decrease relative to the purchase prices, our financial condition may be adversely impacted.
Moreover, bitcoin currently is considered an indefinite-lived intangible asset under current applicable accounting rules, meaning that any decrease in its market value below our book value for such asset at any time subsequent to its acquisition will require us to recognize impairment charges, whereas we may make no upward revisions for any market price increases tariffs,until a sale, which may adversely affect our operating results in any period in which such impairment occurs. We have recorded several such impairment charges. If there are future changes delay, or discontinuationin applicable accounting rules that require us to change the manner in which we account for our bitcoin, there could be a material and adverse effect on our financial results and the market price of key components,our Class A common stock.
We are exposed to fluctuations in foreign currency exchange rates.
Following our acquisition of Afterpay, our international operations account for a more significant portion of our overall operations and our exposure to fluctuations in foreign currency exchange rates has increased significantly, which could disrupthave a negative impact on our reported results of operations. From time to time, we may enter into forward contracts, options, and/or foreign exchange swaps related to foreign currency exposures that arise in the normal course of our business. These and other such hedging activities may not eliminate our exposure to foreign exchange fluctuations. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments.
We may have exposure to greater-than-anticipated tax liabilities, which may materially and adversely affect our business.
Many ofWe are subject to income taxes and non-income taxes in the key components usedUnited States and other countries in which we transact or conduct business, and such laws and rates vary by jurisdiction. We are subject to manufacturereview and audit by U.S. federal, state, local, and foreign tax authorities. Such tax authorities may disagree with tax positions we take, and if any such tax authority were to successfully challenge any such position, our products, such as the custom parts of our magstripe reader come from limited or single sources of supply.financial results and operations could be materially and adversely affected. In addition, in some cases, we rely onlycurrently are, and expect to continue to be, subject to numerous federal, state, local and foreign tax audits relating to transfer pricing, income, sales & use, value-added (“VAT”), and other tax liabilities. While we have established reserves based on one manufacturer to fabricate, test,assumptions and assemble our products. For example, a single manufacturer assembles our magstripe reader and our contactless and chip reader, as well as manufactures those products’ plastic parts with custom toolsestimates that we own but that they maintain on their premises. The termbelieve are reasonably sufficient to cover such eventualities, any adverse outcome of the agreement with that manufacturer automatically renews for consecutive one-year periods unless either party provides notice of non-renewal. In general, our contract manufacturers fabricatesuch a review or procure componentsaudit could have an adverse impact on our behalf, subjectfinancial position and results of operations if the reserves prove to certain approved procedures or supplier lists, and we do not have firm commitments from all of these manufacturers to provide all components, or to provide them in quantities and on timelines that we may require. For example, pursuant to a development and supply agreement, a component supplier provides design, development, customization, and related services for components of the magnetic stripe-reading element in some of our products. The term of the agreement extends through March 2021 and then renews for consecutive one-year periods unless either party provides notice of non-renewal. Similarly, a component provider develops certain application-specific integrated circuits for our products pursuant to our designs and specifications. The term of our agreement with this provider renews for successive two-year terms unless either party provides notice of non-renewal.be insufficient.
Due to our reliance on the components or products producedOur tax liability could be adversely affected by supplierschanges in tax laws, rates, regulations, and administrative practices. For example, various levels of government and international organizations, such as these, we are subject to the risk of shortages and long lead times in the supplyUnited States, the Organisation for Economic Co-operation and Development (“OECD”), and the European Union (“EU”), have increasingly focused on tax reform and any result from this development may create changes to long-standing tax principles, which could adversely affect our effective tax rate. On October 8, 2021, the OECD announced an international agreement with more than 130 countries to implement a new global minimum effective corporate tax rate of 15% for large multinational companies starting in 2023. Additionally, under the agreement, new rules have been introduced that will result in the reallocation of certain components or products. Our ongoing effortsprofits from large multinational companies to identify alternative manufacturers formarket jurisdictions where customers and users are located. On December 12, 2022, the assemblyEU Council unanimously agreed to implement the 15% global minimum tax rate, which EU member countries are required to adopt into their respective tax codes by the end of our products and for many of the single-sourced components used in our products may not be successful. In the case of off-the-shelf components, we are subject to the risk that our suppliers may discontinue or modify them, or that the components may cease2023. Although certain implementation details have yet to be available on commercially reasonable terms, or at all. We have in the past experienced, and may in the future experience, component shortages or delays or other problems in product assembly,developed and the availabilityenactment of these components or productschanges has not yet taken effect, these changes may be difficult to predict. For example, our manufacturers may experience temporary or permanent disruptions in their manufacturing operations due to equipment breakdowns, labor strikes or shortages, natural disasters, the occurrence of a contagious disease or illness, such as the coronavirus, component or material shortages, cost increases, acquisitions, insolvency, trade restrictions, changes in legal or regulatory requirements, or other similar problems. In particular, if the current coronavirus outbreak continues and results in a prolonged period of travel, commercial, and other similar restrictions, we could experience disruptions in our supply chain and shortages of our hardware products, which could affect our ability to grow and acquire new sellers and materially and adversely impact our financial results. Moreover, our product development might be delayed, as we work with manufacturers in China to develop new hardware products.have adverse tax consequences for us.
Additionally, various sources of supply-chain risk, including strikes or shutdowns at delivery ports or loss of or damage to our products while they are in transit or storage, intellectual property theft, losses due to tampering, third-party vendor issues with quality or sourcing control, failure by our suppliers to comply with applicable laws and regulation, potential tariffs or other trade restrictions, or other similar problems could limit or delay the supply of our products or harm our reputation. In the event of a shortage or supply interruption from suppliers of these components, we may not be able to develop alternate sources quickly, cost-effectively, or at all. Any interruption or delay in manufacturing, component supply,
On August 16, 2022, the Inflation Reduction Act (“IRA”) was enacted in the United States, which introduced, among provisions, a new minimum corporate income tax on certain large corporations, an excise tax of 1% on certain share repurchases by corporations, and increased funding for the Internal Revenue Service (“IRS”). Although we do not anticipate the new corporate minimum income tax will currently apply to us, changes in our business and any increasesfuture regulations or other guidance on the interpretation and application of the new corporate minimum tax, as well as the potential application of the share repurchase excise tax, may result in component costs, or the inability to obtain these parts or components from alternate sources at acceptable prices and within a reasonable amount of time, would harm our ability to provide our products to sellers on a timely basis. Thisadditional taxes payable by us, which could harm our relationships with our sellers, prevent us from acquiring new sellers, and materially and adversely affect our business.financial results and operations.
In September of 2018,Our income tax obligations are based on our corporate operating structure, including the United States imposed tariffs on certain imports from China, including on somemanner in which we develop, value, and use our intellectual property and the scope of our hardware devices manufactured in China.international operations. The tariffs on these products were initially set at 10%, but were increased to 25% in May 2019. On September 1, 2019, the United States imposed new tariffs at 15% on additional imports from China, including on our remaining hardware products manufactured there, but rolled back these new tariffs to 7.5% effective February 14, 2020.The tariffs negatively affect the gross margin on the impacted products, which only partially has been offset by adjustments to the prices of sometax authorities of the affected products. Any future tariffsjurisdictions in which we operate may challenge our methodologies for valuing developed technology or intercompany arrangements. Additionally, tax authorities at the international, federal, state, and actions relatedlocal levels are currently reviewing the appropriate tax treatment of companies engaged in internet commerce and financial technology and attempting to items imported from Chinabroaden the classification and definitions of activities subject to taxation. For example, various states may attempt to broaden the definition of internet hosting, data processing, telecommunications, and other services to capture additional types of activities. These developing changes could affect our financial position and results of operations. In particular, it is possible that tax authorities at the international, federal, state, and local levels may attempt to regulate our transactions or elsewherelevy new or revised sales & use taxes, VAT, digital services taxes, digital advertising taxes, income taxes, loan taxes, or other taxes relating to our activities, which would likely increase the cost of doing business. New taxes could also negatively impact our gross margin on the impacted products, andcreate significant increases in internal costs necessary to capture data and collect and remit taxes. Proposed or enacted laws regarding tax compliance obligations could require us to make changes to our pricing as a resultinfrastructure or increase our compliance obligation. Any of tariffs would reduce the competitiveness of our products if our competitors do not make similar pricing adjustments. The impact of any increased or new tariffs or other trade restrictionsthese events could have a materialan adverse effect on our business financial condition, and results of future operations.
Our business could Moreover, an increasing number of states, the U.S. federal government, and certain foreign jurisdictions have considered or adopted laws or administrative practices that impose obligations for on-demand and streaming services, online marketplaces, payment service providers, and other intermediaries. These obligations may deem parties, such as us, to be harmed if we are unablethe legal agent of merchants and therefore may require us to accurately forecast demandcollect and remit taxes on the merchants' behalf and take on additional reporting and record-keeping obligations. For example, the American Rescue Plan Act of 2021 requires businesses that process payments, such as Cash App, to report payments for our productsgoods and services on Form 1099-K when those transactions total $600 or more in a year for a given seller. This reporting requirement applies to Cash for Business accounts, not personal Cash App accounts. The new threshold is currently expected to apply to transactions occurring in 2023, subject to any changes implemented by the IRS. Any failure by us to prepare for and to adequately managecomply with these and similar reporting and record-keeping obligations could result in substantial monetary penalties and other sanctions, adversely impact our product inventory.
We invest broadly in our business, and such investments are driven by our expectations of the future success of a product. For example, our products such as the Square Reader often require investments with long lead times. An inability to correctly forecast the success of a particular product could harm our business. We must forecast inventory needs and expenses and place orders sufficiently in advance with our third-party suppliers and contract manufacturers based on our estimates of future demand for particular products. Our ability to accurately forecast demand for our products could be affected by many factors, including an increase or decreasedo business in demand for our products or for our competitors’ products, unanticipated changes in general market conditions,certain jurisdictions, and a change in economic conditions.
If we underestimate demand for a particular product, our contract manufacturers and suppliers may not be able to deliver sufficient quantities of that product to meet our requirements, and we may experience a shortage of that product available for sale or distribution. If we overestimate demand for a particular product, we may experience excess inventory levels for that product and the excess inventory may become obsolete or out-of-date. Inventory levels in excess of demand may result in inventory write-downs or write-offs and the sale of excess inventory at further discounted prices, which could negatively impact our gross profit andharm our business.
Square CapitalThe determination of our worldwide provision for income and other tax liabilities is subject to additional risks relating tohighly complex and requires significant judgment by management, and there are many transactions during the availabilityordinary course of capital, seller payments, availabilitybusiness where the ultimate tax determination is uncertain. Although we believe our estimates are reasonable, the ultimate tax outcome may differ from amounts recorded in our financial statements and structure of its bank partnership, expansion of its products, and general macroeconomic conditions.may materially affect our financial results in the period or periods for which such determination is made.
Square Capital,We have in the past recorded, and may in the future record, significant valuation allowances on our deferred tax assets, which includesmay have a material impact on our wholly owned subsidiary Square Capital, LLC,results of operations and cause fluctuations in such results.
As of December 31, 2022, we had a valuation allowance for deferred tax assets in the United States and in certain other countries. Our net deferred tax assets relate predominantly to the United States federal and state tax jurisdictions. The need for a valuation allowance requires an assessment of both positive and negative evidence when determining whether it is subjectmore likely than not that deferred tax assets are recoverable; such assessment is required on a jurisdiction-by-jurisdiction basis. In making such an assessment, significant weight is given to risks in addition to those described elsewhere in this Annual Report on Form 10-K. Maintaining and growing Square Capital is dependent on institutional third-party investors purchasing the eligible business loans originated by our bank partner. If such third parties fail toevidence that can be objectively verified.
We continue to purchase such business loans or reducemonitor the amountlikelihood that we will be able to recover our deferred tax assets in the future. Future adjustments in our valuation allowance may be required. The recording of any future loans they purchase, thenincreases in our bank partner may need to reduce originations, or we would need to fund the purchase of additional business loans from our own resources. We then may have to reduce the scale of Square Capital, whichvaluation allowance could have a directmaterial impact on our ability to grow. Additionally, Square Capital has certain customary repurchase obligationsreported results, and both the recording and release of the valuation allowance could cause fluctuations in its loan purchaseour quarterly and servicing agreements with such institutional third party investors for breachesannual results of certain eligibility representations and warranties. If third parties reduce the price they are willing to pay for these business loans or reduce the servicing fees they pay us in exchange for servicing the business loans on their behalf, then the financial performance of Square Capital would be harmed.operations.
The business loans are generally unsecured obligations of our Square sellers who utilize Square Capital, and they are not guaranteed or insured in any way. Adverse changes in macroeconomic conditions or the credit quality of our Square sellers could cause some Square sellers who utilize Square Capital to cease operating or to experience a decline in their payment processing volume, thereby rendering them unable to make payment on the business loan and/or extend the repayment period beyond the contractual repayment terms on the business loan. To the extent a seller breaches a contractual obligation, such as the requirement to make minimum payments or other breach, the seller would be liable for an accelerated business loan repayment, where Square Capital's recourse is to the business and not to any individual or other asset. In addition, because the servicing fees we receive from third party investors depend on the collectability of the business loans, if
there is an increase in Square sellers who utilize Square Capital who are unable to make repayment of business loans, we will be unable to collect our entire servicing fee for such loans.
In addition, adverse changes in macroeconomic conditions could lead to a decrease in the number of sellers eligible for Square Capital facilitated business loansLegal, Regulatory, and strain our ability to correctly identify such sellers on behalf of our bank partner or manage the risk of non-payment or fraud as servicer of the business loans. Similarly, if we fail to correctly predict the likelihood of timely repayment of the business loans or correctly price the business loans to sellers utilizing Square Capital, our business may be materially and adversely affected. As we expand our business to offer consumer financing products and business loans to merchants outside of Square sellers, those customers may also be adversely affected by economic downturns. Moreover, we continue to train our risk models for these newer loan products, and the loss rate for these loans have been, and may continue to be, higher than for our core business loan product.
We have partnered, on a non-exclusive basis, with a Utah-chartered, member FDIC industrial bank to originate the loans. Such bank may offer products that compete with ours. The bank is subject to oversight both by the FDIC and the State of Utah. Due to the fact that we are a service-provider to our bank partner, we are subject to audit standards for third-party vendors in accordance with FDIC guidance and examinations by the FDIC. There has been, and may continue to be, regulatory interest in and/or litigation challenging partnered lending arrangements where a bank makes loans and then sells and assigns such loans to a non-bank entity that is engaged in assisting with the origination and servicing of the loan. If our bank partner ceases to partner with us, ceases to abide by the terms of our agreement with them, or cannot partner with us on commercially reasonable terms, and we are not able to find suitable alternatives and/or make business loans ourselves pursuant to state licensing requirements, Square Capital may need to enter into a new partnership with another qualified financial institution or pursue an alternative model for originating business loans, all of which may be time-consuming and costly and/or lead to a loss of institutional third-party investors willing to purchase such business loans, and as a result Square Capital may be materially and adversely affected.
We intend to continue to explore other products, models, and structures for Square Capital, including forming a Utah industrial loan corporation, offering consumer financing, and other forms of credit and loan products. Some of those models or structures may require, or be deemed to require, additional data, procedures, partnerships, licenses, regulatory approvals, or capabilities that we have not yet obtained or developed. The licenses required in connection with our lending program and other activities related to the Square Capital program subject us to reporting requirements, bonding requirements, and inspection by applicable state regulatory agencies. Should we fail to expand and evolve Square Capital in this manner, or should these new products, models or structures, or new regulations or interpretations of existing regulations, impose requirements on us that are impractical or that we cannot satisfy, the future growth and success of Square Capital may be materially and adversely affected.Compliance Risks
Our business is subject to extensive regulation and oversight in a variety of areas, all of which are subject to change and uncertain interpretation.
We are subject to a wide variety of local, state, federal, and international laws, regulations, licensing schemes, and industry standards in the United States and in other countries in which we operate. These laws, regulations, and standards govern numerous areas that are important to our business, and include, or may in the future include, those relating to banking, lending, deposit-taking, cross-border and domestic money transmission, foreign exchange, payments services (such as payment processing and settlement services), cryptocurrency, trading in shares and fractional shares, fraud detection, consumer protection, anti-money laundering, escheatment, international sanctions regimes and export controls, privacy, data privacyprotection and information security, fiscalization and compliance with the Payment Card Industry Data Security Standard, a set of requirements designed to ensure that all companies that process, store, or transmit payment card information maintain a secure environment to protect cardholder data.
These laws, rules, regulations, and standards are enforced by multiple authorities and governing bodies in the United States, including federal agencies, such as the FDIC, the SEC, the Consumer Financial Protection Bureau, and Office of Foreign Assets Control, self-regulatory organizations, and numerous state and local agencies.agencies, such as the Utah Department of Financial Institutions. Outside of the United States, we are subject to additional regulators. As we expand into new jurisdictions, or expand our product offerings in existing jurisdictions, the number of foreign regulations and regulators governing our business will expand as well. In addition, asFor example, in connection with our acquisition of Afterpay we established a secondary listing on the ASX, subjecting us to additional listing requirements. As our business and products continue to develop and expand, we may become subject to additional rules, regulations, and industry standards. We may not always be able to accurately predict the scope or applicability of certain regulations to our business, particularly as we expand into new areas of operations, which could have a significant negative effect on our existing business and our ability to pursue future plans.
Laws, regulations, and standards are subject to changes and evolving interpretations and application, including by means of legislative changes and/or executive orders, and it can be difficult to predict how they may be applied to our business and the way we conduct our operations, particularly as we introduce new products and services and expand into new jurisdictions.
For example, Cash App includes a feature that permits our customers to buy and sell bitcoin. Bitcoin is not consideredwidely accepted as legal tender or backed by any government,governments around the world, and it has experienced price volatility, technological glitches, security compromises, and various law enforcement and regulatory interventions. Certain existing laws also prohibit transactions with certain persons and entities, and we have a risk-based program in place to prevent such transactions. Despite this, due to the nature of bitcoin and blockchain technology, it may be technically infeasible to prevent all such transactions, and there can be no guarantee that our measures will be viewed as sufficient. The regulation of cryptocurrency and crypto platforms is still an evolving area, and it is possible that we could become subject to additional regulations.legislation or regulation in the future. For example, Louisiana’s virtual currency regulatory scheme became effective on January 1, 2023 and requires covered entities, such as Block, to obtain a license to continue its feature permitting customers to buy and sell bitcoin. It is possible that other states may also issue similar licensing requirements. As another example, the Financial Crimes Enforcement Network (“FinCEN”) has issued a proposed rule that would require cryptocurrency providers like us to keep additional records of and file additional reports to FinCEN of certain cryptocurrency transaction information. There are substantial uncertainties on how these proposed requirements would apply in practice, and we may face substantial compliance costs to operationalize and comply with these requirements should FinCEN finalize this rule as proposed. If we fail to comply with regulations or prohibitions applicable to us, we could face regulatory or other enforcement actions, and potential fines, reputational harm, and other consequences. Further, we might not be able to continue operating the feature in Cash App, at least in current form, or might need to make other changes to our business, our products or our services, which could cause the price of our Class A common stock to decrease.
We are subject to audits, inspections, inquiries, and investigations from regulators on an ongoing basis. Although we have a compliance program focused on the laws, rules, and regulations applicable to our business, we have been and may still be subject to inquiries, investigations, fines, or other penalties in one or more jurisdictions levied by regulators, including federal agencies, state Attorneys General and private plaintiffs who may be acting as private attorneys general pursuant to various applicable laws, as well as those levied by foreign regulators. In addition to fines, penalties for failing to comply with applicable rules and regulations could include significant criminal and civil lawsuits, forfeiture of significant assets, increased licensure requirements, revocation of licenses or other enforcement actions. We could alsohave been and may be required to make changes to our business practices or compliance programs as a result of regulatory scrutiny. In addition, any perceived or actual breach of compliance by us with respect to applicable laws, rules, and regulations could have a significant impact on our reputation as a trusted brand and could cause us to lose existing customers, prevent us from obtaining new customers, require us to expend significant funds to remedy problems caused by breaches and to avert further breaches, and expose us to legal risk and potential liability.
Further, from time to time, we may leverage third parties to help conduct our businesses in the U.S. or abroad. We and our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and may be held liable for any corrupt or other illegal activities of these third-party business partners and intermediaries, our employees, partners, and agents, even if we do not explicitly authorize such activities. While we have policies and procedures to address compliance with such laws, we cannot assure you that our employees and agents will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible.
Our business is subject to complex and evolving regulations and oversight related to privacy, data protection, and data protection.information security.
We are subject to laws and regulations relating to the collection, use, retention, privacy, protection, security, and transfer of information, including personally identifiablepersonal information of our employees and customers. As with the other laws and regulations noted above, these laws and regulations may change or be interpreted and applied differently over time and from jurisdiction to jurisdiction, and it is possible they will be interpreted and applied in ways that will materially and adversely affect our business. For example, the European Parliament and the Council of the European Union adopted aUnion’s General Data Protection Regulation (GDPR), which became effective(“GDPR”) and similar legislation in May 2018. The GDPR imposes morethe United Kingdom (“U.K.”) impose stringent data privacy and data protection requirementsthan prior EU data protection law and providesprovide for greater penalties for noncompliance of up to the greater of 4% of worldwide annual revenue or €20 million. To addressmillion or £17.5 million, as applicable. The GDPR restricts international data transfers from the EU to other jurisdictions weunless the rights of the individual data subjects in certain cases utilize model contractsrespect of their personal data is protected by an approved by the EU Commission. These model contracts have been legally challenged, and it is possible that they will be voidedtransfer mechanism, or modified, which could materially impact our ability to transferone of a limited number of exceptions applies. The U.K.’s data protection regime contains similar requirements. When transferring personal data from the EU to other jurisdictions.jurisdictions, we utilize standard contractual clauses published by the EU Commission (the "SCCs"). On July 16, 2020, the Court of Justice of the European Union (“CJEU”) issued a decision that may impose additional obligations on companies when relying on those SCCs. This CJEU decision may result in different EEA data protection regulators applying differing standards for the transfer of personal data from the EEA to the United States, and even require ad hoc verification of measures taken with respect to data flows. As a result of this CJEU decision or other developments with respect to the legal and regulatory regime affecting cross-border data transfers, we may be required to take additional steps to legitimize impacted personal data transfers. Both the EU and the U.K. have issued updated SCCs that are required to be implemented. These and other developments relating to cross-border data transfer could result in increased costs of compliance and limitations on our customers and us. Additionally, legal or regulatory challenges or other developments relating to cross-border data transfer may serve as a basis for our personal data handling practices, or those of our customers and vendors, to be challenged and may otherwise adversely impact our business, financial condition, and operating results. In the United Kingdom, although aU.K., the Data Protection Act and legislation referred to as the UK GDPR substantially implementsenact the EU GDPR into U.K. law, with penalties for noncompliance of up to the greater of £17.5 million or four percent of worldwide revenues. The European Commission has issued an adequacy decision under the GDPR uncertainty remains regarding howand the Law Enforcement Directive, pursuant to which personal data transfers to and from the U.K. willgenerally may be regulated.The U.K.’s exittransferred from the EU has created uncertainty with regard to the regulation of data protectionU.K. without restriction, subject to a four-year “sunset” period, after which the European Commission’s adequacy decision may be renewed. During that period, the European Commission will continue to monitor the legal situation in the UKU.K. and data transfers betweenmay intervene at any time with respect to its adequacy decision. The UK’s adequacy determination therefore is subject to future uncertainty and may be subject to modification or revocation in the U.K., the EU, and other jurisdictions andfuture. We could require usbe required to make additional changes to the way we conduct our business and transmit data between the U.S., the U.K., the EU, and the rest of the world. Further, in addition to the GDPR, the European Commission has a draft regulation in the approval process that focuses on a person’s right to conduct a private life. The proposed legislation, known as the Regulation of Privacy and Electronic Communications (“ePrivacy Regulation”), would replace the current ePrivacy Directive. If adopted, the earliest date for entry into force is in 2023, with broad potential impacts on the use of internet-based services and tracking technologies, such as cookies. We expect to incur additional costs to comply with the requirements of the ePrivacy Regulation as it is finalized for implementation. Additionally, on January 13, 2022, the Austrian data protection regulator published a decision ruling that the collection of personal data and transfer to the U.S. through Google Analytics and other analytics and tracking tools used by website operators violates the GDPR. The French and Italian data protection regulators have adopted similar decisions. Other data protection regulators in the EU increasingly are focused on the use of online tracking tools. Any of these changes or other developments with respect to EU data protection law could disrupt our business and otherwise adversely impact our business, financial condition, and operating results. In addition, some countries are considering or have enacted legislation addressing matters such as requirements for local storage and processing of data that could impact our compliance obligations, expose us to liability, and increase the cost and complexity of delivering our services.
Likewise, the California Consumer Privacy Act of 2018 (CCPA)(“CCPA”) became effective on January 1, 2020.2020 and was modified by the California Privacy Rights Act (“CPRA”), which was passed in November 2020 and became effective on January 1, 2023. The CCPA imposesand CPRA impose stringent data privacy and data protection requirements for the datarelating to personal information of California residents, and providesprovide for penalties for noncompliance of up to $7,500 per violation. It remains unclear how various provisionsAspects of the interpretation and enforcement of the CCPA will be interpreted and enforced.CPRA remain unclear. More generally, privacy, data privacyprotection, and information security continues to be a rapidly evolving area,areas, and further legislative activity has arisen and will likely continue to arise in the U.S., the EU, and other jurisdictions. For example, a California ballot initiative that builds upon CCPA has been introduced for the November 2020 election,otherVarious states in the U.S. have proposed or enacted laws regarding privacy and data protection that contain obligations similar to the CCPA. For example, Virginia enacted the Virginia Consumer Data Protection Act in March 2021, Colorado enacted the Colorado Privacy Act in July 2021, Utah enacted the Utah Consumer Privacy Act in March 2022, and Connecticut enacted An Act Concerning Personal Data Privacy and Online Monitoring in May 2022. All of these are comprehensive privacy statutes that will become effective in 2023 and share similarities with the CCPA, the CPRA, and thelegislation proposed in other states. The U.S. federal
government also is contemplating federal privacy legislation. In addition, laws and regulations directed at privacy and data security, and those that have been applied in those areas, may be subject to evolving interpretations or applications. The effects of recently proposed or enacted legislation including CCPA, potentially are far-reaching and may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply.
We have incurred, and may continue to incur, significant expenses to comply with evolving mandatory privacy, data protection, and information security standards and protocols imposed by law, regulation, industry standards, shifting consumer expectations, or contractual obligations. Laws and regulations directed at privacy, data protection, and information security, and those that have been applied in those areas, can be challenging to comply with and may be subject to evolving interpretations or applications. In particular, with laws and regulations such as the GDPR in the EU and the CCPA, CPRA, and other laws in the U.S. imposing new and relatively burdensome obligations, and with substantial uncertainty over the interpretation and application of these and other laws and regulations subject to evolving and uncertain interpretation and application, we may face challenges in addressing their requirements and making necessary changes to our policies and practices, and we may incur significant costs and expenses in an effort to do so. Any failure, real or perceived, by us to comply with our privacy, data protection, or information security policies, changing consumer expectations, or with any evolving legal or regulatory requirements, industry standards, or contractual obligations could result in claims, demands, and litigation by private parties, investigations and other proceedings by regulatory authorities, and fines, penalties and other liabilities, may harm our reputation and competitive position, and may cause our customers to reduce their use of our products and services, disrupt our supply chain or third partythird-party vendor or developer partnerships, and materially and adversely affect our business.
We are subject to risks related to litigation, including intellectual property claims, government investigations or inquiries, and regulatory matters or disputes.
We are currently, and may continue to be, subject to claims, lawsuits (including class actions and individual lawsuits), government or regulatory investigations, subpoenas, inquiries or audits, and other proceedings. The number and significance of our legal disputes and inquiries have increased as we have grown larger, as our business has expanded in scope and geographic reach, and as our products and services have increased in complexity, and we expect that we will continue to face additional legal disputes as we continue to grow and expand. We also receive significant media attention, which could result in increased litigation or other legal or regulatory reviews and proceedings. Moreover, legal disputes or government or regulatory inquiries or findings may cause follow-on litigation or regulatory scrutiny by additional parties.
Some of the laws and regulations affecting the internet, mobile commerce, payment processing, BNPL lending, bitcoin and equity investing, streaming service, business financing, and employment were not written with businesses like ours in mind, and many of the laws and regulations, including those affecting us have been enacted relatively recently. As a result, there is substantial uncertainty regarding the scope and application of many of the laws and regulations to which we are or may be subject, which increases the risk that we will be subject to claims alleging violations of those laws and regulations. The scope, outcome, and impact of claims, lawsuits, government or regulatory investigations, subpoenas, inquiries or audits, and other proceedings to which we are subject cannot be predicted with certainty. Regardless of the outcome, such investigations and legal proceedings can have a material and adverse impact on us due to their costs, diversion of our resources, and other factors. Plaintiffs may seek, and we may become subject to, preliminary or provisional rulings in the course of litigation, including preliminary injunctions requiring us to cease some or all of our operations. We may decide to settle legal disputes on terms that are unfavorable to us. We may also be accused of having, or be found to have, infringed or violated third-party copyrights, patents, trademarks, and other intellectual property rights. For example, in December 2021, H&R Block filed a lawsuit against us for trademark infringement following our name change to Block. If any litigation to which we are a party is resolved adversely, we may be subject to an unfavorable judgment that we may not choose to appeal or that may not be reversed upon appeal. We may have to seek a license to continue practices found to be in violation of a third-party’s rights, or we may have to change or cease certain practices. If we are required, or choose to enter into, royalty or licensing arrangements, such arrangements may not be available on reasonable terms or at all and may significantly increase our operating costs and expenses. As a result, we may also be required to develop or procure alternative non-infringing technology or discontinue use of technology, and doing so could require significant effort and expense or may not be feasible. In addition, the terms of any settlement or judgment in connection with any legal claims, lawsuits, or proceedings may require us to cease some or all of our operations or to pay substantial amounts to the other party and could materially and adversely affect our business.
As a licensed money transmitter, we are subject to important obligations and restrictions.
We have obtained licenses to operate as a money transmitter (or its equivalent)as other financial services institutions) in the United States and in the states where this is required.required, as well as in some non-U.S. jurisdictions, including but not limited to the European Union, the United Kingdom, and Australia. As a licensed money transmitter, we are subject to obligations and restrictions with respect to the investment of customer funds, reporting requirements, bonding requirements, and inspection by state regulatory agencies concerning those aspects of our business considered money transmission. Evaluation of our compliance efforts, as well as the questions of whether and to what extent our products and services are considered money transmission, are matters of regulatory interpretation and could change over time. In the past, we have been subject to fines and other penalties by regulatory authorities due to their interpretations and applications to our business of their respective state money transmission laws. In the future, as a result of the regulations applicable to our business, we could be subject to investigations and resulting liability, including governmental fines, restrictions on our business, or other sanctions, and we could be forced to cease conducting business in certain jurisdictions, be forced to otherwise change our business practices in certain jurisdictions, or be required to obtain additional licenses or regulatory approvals. There can be no assurance that we will be able to obtain any such licenses, and, even if we were able to do so, there could be substantial costs and potential product changes involved in maintaining such licenses, which could have a material and adverse effect on our business.
We are subject to a number of regulatory risks in the BNPL space.
Regulatory scrutiny or changes in the BNPL space may impose significant compliance costs and make it uneconomical for us to continue to operate in our current markets or for us to expand into new markets. The regulation of BNPL products is still an evolving area, and it is possible that other states or countries pass new or additional regulations that could adversely impact the way we operate our BNPL platform, at least in its current form. With the geographic expansion of our BNPL platform into new markets, we may also become subject to additional and changing legal, regulatory, tax, licensing, and compliance requirements and industry standards with respect to BNPL products. In addition, the Consumer Financial Protection Bureau (“CFPB”) recently announced plans to regulate companies offering BNPL products. Increased compliance obligations and regulatory scrutiny may negatively impact our revenue and profitability. Our inability, or perceived inability, to comply with existing or new compliance obligations issued by the CFPB or any other regulatory authority, including with respect to BNPL products, could lead to regulatory investigations, or result in administrative or enforcement action, such as fines, penalties, and/or enforceable undertakings and adversely affect us and our results of operations.
Our subsidiary Cash App Investing is a broker-dealer registered with the SEC and a member of FINRA, and therefore is subject to extensive regulation and scrutiny.
Our subsidiary Cash App Investing facilitates transactions in shares and fractionalized shares of publicly-traded stock and exchange-traded funds by users of our Cash App through a third-party clearing and carrying broker, DriveWealth LLC (“DriveWealth”). Cash App Investing is registered with the SEC as a broker-dealer under the Exchange Act and is a member of FINRA. Therefore, Cash App Investing is subject to regulation, examination, and supervision by the SEC, FINRA, and FINRA.state securities regulators. The regulations applicable to broker-dealers cover all aspects of the securities business, including sales practices, use and safekeeping of clients’ funds and securities, capital adequacy, record-keeping, and the conduct and qualification of officers, employees, and independent contractors. As part of the regulatory process, broker-dealers are subject to periodic examinations by their regulators, the purpose of which is to determine compliance with securities laws and regulations, and from time to time may be subject to additional routine and for-cause examinations. It is not uncommon for regulators to assert, upon completion of an examination, that the broker-dealer being examined has violated certain of these rules and regulations. Depending on the nature and extent of the violations, the broker-dealer may be required to pay a fine and/or be subject to other forms of disciplinary and corrective action. Additionally, the adverse publicity arising from the imposition of sanctions could harm our reputation and cause us to lose existing customers or fail to gain new customers.
The SEC, FINRA, and state regulators have the authority to bring administrative or judicial proceedings against broker-dealers, whether arising out of examinations or otherwise, for violations of thestate and federal securities laws. Administrative sanctions can include cease-and-desist orders, censure, fines, and disgorgement and may even result in the suspension or expulsion of the firm from the securities industry. Similar sanctions may be imposed upon officers, directors, representatives, and employees.
Cash App Investing has adopted, and regularly reviews and updates, various policies, controls, and procedures designed for compliance with Cash App Investing’s regulatory obligations. However, appropriately addressing these issuesCash App Investing’s regulatory obligations is complex
and difficult, and our reputation could be damaged if we fail, or appear to fail, to appropriately address them. Failure to adhere to these policies and procedures may also result in regulatory sanctions or litigation against us. Cash App Investing also relies on various third parties, including DriveWealth, to provide services, including managing and executing customer orders, and failure of these third parties to adequately perform these services may negatively impact customer experience, product performance, and our reputation and may also result in regulatory sanctions or litigation against us or Cash App Investing.
In the event of any regulatory action or scrutiny, we or Cash App Investing could also be required to make changes to our business practices or compliance programs. In addition, any perceived or actual breach of compliance by Cash App Investing with respect to applicable laws, rules, and regulations could have a significant impact on our reputation, could cause us to lose existing customers, prevent us from obtaining new customers, require us to expend significant funds to remedy problems caused by breaches and to avert further breaches, and expose us to legal risk, including litigation against us, and potential liability.
Cash App Investing is subject to net capital and other regulatory capital requirements; failure to comply with these rules could harm our business.
Our subsidiary Cash App Investing is subject to the net capital requirements of the SEC and FINRA. These requirements typically specify the minimum level of net capital a broker-dealer must maintain and also mandate that a significant part of its assets be kept in relatively liquid form. Failure to maintain the required net capital may subject a firm to limitation of its activities, including suspension or revocation of its registration by the SEC and suspension or expulsion by FINRA, and ultimately may require its liquidation. Currently, Cash App Investing has relatively low net capital requirements, because it does not hold customer funds or securities, but instead facilitates the transmission and delivery of those funds on behalf of customers to DriveWealth or back to the applicable customer. However, a change in the net capital rules, a change in how Cash App Investing handles or holds customer assets, or the imposition of new rules affecting the scope, coverage, calculation, or amount of net capital requirements could have adverse effects. Finally, because Cash App Investing is subject to such net capital requirements, we may be required to inject additional capital into Cash App Investing from time to time and as such, we may have liability and/or our larger business may be affected by any of these outcomes.
It is possible that FINRA will require changes to our business practices based on our ownership of Cash App Investing, which could impose additional costs or disrupt our business.
In certain cases, FINRA has required unregistered affiliates of broker-dealers to comply with additional regulatory requirements, including, among others, handling all securities or other financial transactions through the affiliated broker-dealer or conforming all marketing and advertising materials to the requirements applicable to broker-dealers. We do not currently believe that these types of requirements apply to any aspect of our business other than the securities transactions facilitated through the Cash App. It is possible that, in the future, FINRA could require us to comply with additional regulations in the conduct of other activities (i.e., beyond the securities transactions made through the Cash App). If that were to occur, it could require significant changes to our business practices. These and other changes would impose significantly greater costs on us and disrupt existing practices in ways that could negatively affect our overarching business and profitability.
We are subjectOur subsidiary Square Financial Services is a Utah state-chartered industrial bank, which requires that we serve as a source of financial strength to risks relatedit and subjects us to litigation, including intellectual property claims, government investigations or inquiries, andpotential regulatory matters or disputes.sanctions.
WeOn March 1, 2021, Square Financial Services received its deposit insurance from the FDIC and charter approval from the Utah Department of Financial Institutions and became operational. The Federal Deposit Insurance Act requires that we serve as a source of financial strength to Square Financial Services. This means that we are required by law to provide financial assistance to Square Financial Services in the event that it experiences financial distress. In this regard, the FDIC’s approval requires that Square Financial Services have initial paid in capital of not less than approximately $56 million, and at all times meet or exceed the regulatory capital levels required for Square Financial Services to be considered “well capitalized” under the FDIC’s prompt corrective action rules. The regulatory total capital and leverage ratios of Square Financial Services during the first three years of operation may not be less than the levels provided in Square Financial Services’ business plan approved by the FDIC. Thereafter, the regulatory capital ratios must be annually approved by the FDIC, and have been, subjectin no event may Square Financial Services’ leverage ratio be less than twenty percent, as calculated in accordance with FDIC regulations. If Square Financial Services' total capital or leverage ratios fall below the levels required by the FDIC, we will need to claims, lawsuits (including class actions and individual lawsuits), government orprovide sufficient capital to Square Financial Services so as to enable it to maintain its required regulatory investigations, subpoenas, inquiries or audits, and other proceedings. The number and significance of our legal disputes and inquiries have increased as we have grown larger, ascapital ratios. If the FDIC were to increase Square Financial Services’ capital requirements, it could negatively impact our business has expanded in scope and geographic reach,operations and as our products and services have increased in complexity, and we expect that we will continue to face additional legal disputes as we continue to grow and expand. We also receive significant media attention, which could result in increased litigation or other legal or regulatory proceedings.those of Square Financial Services.
SomeThe FDIC’s approval is also contingent on us maintaining a Capital and Liquidity Maintenance Agreement as well as a Parent Company Agreement. The Capital and Liquidity Maintenance Agreement requires, among other things, that we maintain the leverage ratio of Square Financial Services at a minimum of 20 percent following the first three years of Square Financial Services’ operations; maintain a third-party line of credit for the benefit of Square Financial Services acceptable to the FDIC; purchase any loan from Square Financial Services at the greater of the lawscost basis or fair market value, if deemed necessary by the FDIC or Square Financial Services; and regulations affectingestablish and maintain a reserve deposit of $50 million at an unaffiliated third-party bank that Square Financial Services could draw upon in the internet, mobile commerce, payment processing, business financing, and employment did not anticipate businesses like ours, and many of the laws and regulations, including those affecting us have been enacted relatively recently. As a result, there is substantial uncertainty regarding the scope and application of many of the laws and regulations to which we are subject, which increases the riskevent that we willfail to provide sufficient funds to maintain Square Financial Services’ capital ratios at the required levels. The Parent Company Agreement requires, among other things, that we consent to the FDIC’s examination of us and our subsidiaries; limit our representation on Square Financial Services’ board of directors to no more than 25 percent; submit a contingency plan to the FDIC that describes likely scenarios of significant financial or operational stress and, if we were unable to serve as a source of financial strength, options for the orderly wind down or sale of Square Financial Services; and engage a third party to review and provide periodic reports concerning the effectiveness of our complaint response system. Jack Dorsey, who is considered our controlling shareholder in this context, also agreed to cause us to perform under these agreements. Should we fail to comply with these obligations, we could be subject to claims alleging violations of thoseregulatory sanctions. In addition, any failure by Square Financial Services to comply with applicable laws, rules, and regulations. Evolving case lawregulations could also subject us and legislation over worker classification, including California Assembly Bill 5, increases litigation in this areaSquare Financial Services to regulatory sanctions. These sanctions could adversely impact our reputation and may have ramifications as to how we operate certain segments of our business, require us to expend significant funds for remediation, and our engagement with independent contractors. For example, a determination in, or settlement of, any legal proceeding involvingexpose us or others that determines that workers of the type we maintain are independent contractors instead are employees could harm our business, financial condition,to litigation and results of operations, including, but not necessarily limited
33other potential liability.
Square Financial Services is subject to as a result of monetary exposure arising fromextensive supervision and regulation, including the Dodd-Frank Act and its related regulations, which are subject to change and could involve material costs or relating to penalties, defense costs, taxes, wages, and other matters, as well as potential costs of such workers unionizing or attempting to unionize.affect operations.
The scope, outcome,Dodd-Frank Wall Street Reform and impactConsumer Protection Act of claims, lawsuits, government2010 (the "Dodd-Frank Act") effected significant changes to U.S. financial regulations and required rule making by U.S. financial regulators including adding a new Section 13 to the Bank Holding Company Act known as the Volcker Rule. The Volcker Rule generally restricts certain banking entities (such as Square Financial Services) from engaging in proprietary trading activities and from having an ownership interest in or regulatory investigations, subpoenas, inquiriessponsoring any private equity funds or audits,hedge funds (or certain other private issuing entities). The current activities of Square Financial Services have not been and are not expected to be materially affected by the Volcker Rule. Nevertheless, we cannot predict whether, or in what form, any other proposed regulations or statutes or changes to implementing regulations will be adopted or the extent to which the business operations of Square Financial Services may be affected by any new regulation or statute. Such changes could subject our business to additional compliance burden, costs, and possibly limit the types of financial services and products we may offer.
Square Financial Services is also subject to the requirements in Sections 23A and 23B of the Federal Reserve Act and the Federal Reserve Board’s implementing Regulation W, which regulate loans, extensions of credit, purchases of assets, and certain other transactions between an insured depository institution (such as Square Financial Services) and its affiliates. The statute and regulation require Square Financial Services to impose certain quantitative limits, collateral requirements, and other proceedings to which we are subject cannotrestrictions on “covered transactions” between Square Financial Services and its affiliates and requires all transactions be predictedon “market terms” and conditions consistent with certainty. Regardless of the outcome, such investigationssafe and legal proceedings can have a material and adverse impact on us due to their costs, diversion of our resources, and other factors. Plaintiffs may seek, and we may become subject to, preliminary or provisional rulings in the course of litigation, including preliminary injunctions requiring us to cease some or all of our operations. We may decide to settle legal disputes on terms that are unfavorable to us. We may also be accused of having, or be found to have, infringed or violated third-party intellectual property rights. Furthermore, if any litigation to which we are a party is resolved adversely, we may be subject to an unfavorable judgment that we may not choose to appeal or that may not be reversed upon appeal. We may have to seek a license to continue practices found to be in violation of a third party’s rights, or we may have to change or cease certainsound banking practices. If we are required, or choose to enter into, royalty or licensing arrangements, such arrangements may not be available on reasonable terms or at all and may significantly increase our operating costs and expenses. As a result, we may also be required to develop or procure alternative non-infringing technology or discontinue use of technology, and doing so could require significant effort and expense or may not be feasible. In addition, the terms of any settlement or judgment in connection with any legal claims, lawsuits, or proceedings may require us to cease some or all of our operations or to pay substantial amounts to the other party and could materially and adversely affect our business.
Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products, services, and brand.
Our trade secrets, trademarks, copyrights, patents, and other intellectual property rights are critical to our success. We rely on, and expect to continue to rely on, a combination of confidentiality, invention assignment, and license agreements with our employees, consultants, and third parties with whom we have relationships, as well as trademark, trade dress, domain name, copyright, trade secret, and patent rights, to protect our brand and other intellectual property rights. However, various events outside of our control may pose a threat to our intellectual property rights, as well as to our products and services. Effective protection of intellectual property rights is expensive and difficult to maintain, both in terms of application and maintenance costs, as well as the costs of defending and enforcing those rights. The efforts we have taken to protect our intellectual property rights may not be sufficient or effective. Our intellectual property rights may be infringed, misappropriated, or challenged, which could result in them being narrowed in scope or declared invalid or unenforceable. Similarly, our reliance on unpatented proprietary information and technology, such as trade secrets and confidential information, depends in part on agreements we have in place with employees and third parties that place restrictions on the use and disclosure of this intellectual property. These agreements may be insufficient or may be breached, or we may not enter into sufficient agreements with such individuals in the first instance, in either case potentially resulting in the unauthorized use or disclosure of our trade secrets and other intellectual property, including to our competitors, which could cause us to lose any competitive advantage resulting from this intellectual property. Individuals not subject to invention assignment agreements may make adverse ownership claims to our current and future intellectual property. There can be no assurance that our intellectual property rights will be sufficient to protect against others offering products or services that are substantially similar to ours and that compete with our business.
As of December 31, 2019, we had 687 issued
We routinely apply for patents in forcethe U.S. and internationally to protect innovative ideas in the United States and abroad and 584 filedour technology, but we may not always be successful in obtaining patent applications pending in the United States and abroad, though there can be no assurance that any or all ofgrants from these pending applications will ultimately be issued as patents.applications. We also pursue registration of copyrights, trademarks, and domain names in the United States and in certain jurisdictions outside of the United States, but doing so may not always be successful or cost-effective. In general, we may be unable or, in some instances, choose not to obtain legal protection for our intellectual property, and our existing and future intellectual property rights may not provide us with competitive advantages or distinguish our products and services from those of our competitors. The laws of some foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States, and effective intellectual property protection and mechanisms may not be available in those jurisdictions. We may need to expend additional resources to defend our intellectual property in these countries, and the inability to do so could impair our business or adversely affect our international expansion. Our intellectual property rights may be contested, circumvented, or found unenforceable or invalid, and we may not be able to prevent third parties from infringing, diluting, or otherwise violating them. Additionally, our intellectual property rights and other confidential business information are subject to risks of compromise or unauthorized disclosure if our security measures or those of our third-party service providers are unable to prevent cyber-attacks. Significant impairments of our intellectual property rights, and limitations on our ability to assert our intellectual property rights against others, could have a material and adverse effect on our business.
34Assertions by third parties of infringement or other violation by us of their intellectual property rights could harm our business.
Third parties have asserted, and may in the future assert, that we have infringed, misappropriated, or otherwise violated their copyrights, patents, and other intellectual property rights. Although we expend significant resources to seek to comply with the statutory, regulatory, and judicial frameworks and the terms and conditions of statutory licenses, we cannot assure you that we are not infringing or violating any third-party intellectual property rights, or that we will not do so in the future. It is difficult to predict whether assertions of third-party intellectual property rights or any infringement or misappropriation claims arising from such assertions will substantially harm our business, operating results, and financial condition. If we are forced to defend against any infringement or misappropriation claims, whether they are with or without merit, are settled out of court, or are determined in our favor, we may be required to expend significant time and financial resources on the defense of such claims. Furthermore, an adverse outcome of a dispute may require us to pay significant damages, which may be even greater if we are found to have willfully infringed upon a party’s intellectual property; cease exploiting copyrighted content that we have previously had the ability to exploit; cease using solutions that are alleged to infringe or misappropriate the intellectual property of others; expend additional development resources to redesign our solutions; enter into potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies, content, or materials; indemnify our partners and other third parties; and/or take other actions that may have material and adverse effects on our business, operating results, and financial condition.
Increased scrutiny from investors, regulators, and other stakeholders relating to environmental, social, and governance issues could result in additional costs for us and may adversely impact our reputation.
Investors, regulators, customers, employees and other stakeholders are increasingly focused on environmental, social, and governance (“ESG”) matters. Our ESG strategy is focused on four key areas: climate action, social impact, employees and culture, and corporate governance, and we publicly report on certain commitments, initiatives, and goals regarding ESG matters in our annual Corporate Social Responsibility Report, on our website, in our SEC filings, and elsewhere. For example, we are committed to increasing the diversity of our workforce and one of our climate change goals is to have net zero carbon for operations by 2030. The implementation of our ESG commitments, initiatives, and goals may require additional investments, and in certain cases, are reliant on third-party verification and/or performance, and we cannot guarantee that we will make progress on our commitments and initiatives or achieve our goals. If we fail, or are perceived to fail, to make such progress or achievements, or to maintain ESG practices that meet evolving stakeholder expectations, or if we have to revise any of our ESG commitments, initiatives, or goals, our reputation and our ability to attract and retain employees could be harmed, and we may be negatively perceived by investors or our customers. To the extent that our required and voluntary disclosures about ESG matters increase, we could also be criticized for the accuracy, adequacy, or completeness of such disclosures and our reputation could be negatively impacted. In addition, regulatory requirements with respect to climate change and other aspects of ESG may result in increased compliance requirements on our business and supply chain, and may increase our operating costs.
We may not be able to secure financing on favorable terms, or at all, to meet our future capital needs, and our existing credit facility contains, and any future debt financing may contain, covenants that impact the operation of our business and pursuit of business opportunities.
We have funded our operations since inception primarily through debt and equity financings, bank credit facilities, and finance lease arrangements. While we believe that our existing cash and cash equivalents, marketable debt securities, and availability under our line of credit are sufficient to meet our working capital needs and planned capital expenditures, and service our debt, there is no guarantee that this will continue to be true in the future. In the future, we may require additional capital to respond to business opportunities, refinancing needs, business and financial challenges, regulatory surety bond requirements, acquisitions, or unforeseen circumstances and may decide to engage in equity, equity-linked, or debt financings or enter into additional credit facilities for other reasons, and we may not be able to secure any such additional financing or refinancing on favorable terms, in a timely manner, or at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited.
Our credit facility contains affirmative and negative covenants, including customary limitations on the incurrence of certain indebtedness and liens, restrictions on certain inter-company transactions, and limitations on dividends and stock repurchases. Any debt financing obtained by us in the future could also involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to operate our business, obtain additional capital, and pursue business opportunities, including potential acquisitions. Our ability to comply with these covenants may be affected by events beyond our control, and breaches of these covenants could result in a default under our existing credit facility and any future financing agreements into which we may enter. If not waived, these defaults could cause indebtedness outstanding under our credit facility, our other outstanding indebtedness, including our 2022 Notes and 2023 Notes (collectively, the Notes) and any future financing agreements that we may enter into to become immediately due and payable.
If we raise additional funds through further issuances of equity or other securities convertible into equity, including convertible debt securities, our existing stockholders could suffer dilution in their percentage ownership of our company, and any such securities we issue could have rights, preferences, and privileges senior to those of holders of our Class A common stock.
Servicing our Notes may require a significant amount of cash, and we may not have sufficient cash or the ability to raise the funds necessary to settle conversions of the Notes in cash, repay the Notes at maturity, or repurchase the Notes as required following a fundamental change.
As of December 31, 2019, we had $211.7 million outstanding aggregate principal amount of 2022 Notes, and $862.5 million aggregate principal amount of 2023 Notes.
Prior to December 1, 2021, in the case of the 2022 Notes, and prior to February 15, 2023, in the case of the 2023 Notes, the applicable Notes are convertible at the option of the holders only under certain conditions or upon occurrence of certain events. Because the last reported sale price of our Class A common stock exceeded 130% of the conversion price for the 2022 Notes for the relevant period in the calendar quarter ending December 31, 2019, the 2022 Notes are convertible at the option of the holders thereof during the calendar quarter ending March 31, 2020. Whether the Notes of either series will be convertible following such calendar quarter will depend on the satisfaction of this condition or another conversion condition in the future. If holders of the Notes elect to convert their Notes, unless we elect to deliver solely shares of our Class A common stock to settle such conversion, we will be required to make cash payments in respect of the Notes being converted. Effective October 2018, we revised our prior stated policy of settling conversions through combination settlement with a specified dollar amount of $1,000 per $1,000 principal amount of Notes. We currently expect to settle future conversions solely in shares of our Class A common stock, which has the effect of including the shares of Class A common stock issuable upon conversion of the Notes in our diluted earnings per share to the extent such shares are not anti-dilutive. We will reevaluate this policy from time to time as conversion notices are received from holders of the Notes. Holders of the Notes also have the right to require us to repurchase all or a portion of their Notes upon the occurrence of a fundamental change (as defined in the applicable indenture governing the Notes) at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest. If the Notes have not previously been converted or repurchased, we will be required to repay the Notes in cash at maturity.
Our ability to make required cash payments in connection with conversions of the Notes, repurchase the Notes in the event of a fundamental change, or to repay or refinance the Notes at maturity will depend on market conditions and our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. We also may not use the cash proceeds we raised through the issuance of the Notes in an optimally productive and profitable manner. Since inception, our business has generated net losses, and we may continue to incur significant losses. As a result, we may not have enough available cash or be able to obtain financing at the time we are required to repurchase or repay the Notes or pay cash with respect to Notes being converted.
In addition, our ability to repurchase or to pay cash upon conversion or at maturity of the Notes may be limited by law or regulatory authority. Our failure to repurchase Notes following a fundamental change or to pay cash upon conversion (unless we elect to deliver solely shares of our Class A common stock to settle such conversion) or at maturity of the Notes as required by the applicable indenture would constitute a default under such indenture. A default under the applicable indenture or the fundamental change itself could also lead to a default under our credit facility, our other outstanding indebtedness, or agreements governing our future indebtedness and could have a material adverse effect on our business, results of operations, and financial condition. If the payment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Notes or to pay cash upon conversion or at maturity of the Notes.
We are subject to counterparty risk with respect to the convertible note hedge transactions.
In connection with the issuance of the 2022 Notes and the 2023 Notes, we entered into convertible note hedge transactions with certain financial institutions, which we refer to as the "option counterparties." The option counterparties are financial institutions or affiliates of financial institutions, and we will be subject to the risk that one or more of such option counterparties may default under the convertible note hedge transactions. Our exposure to the credit risk of the option counterparties will not be secured by any collateral. If any option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under the convertible note hedge transaction. Our exposure will depend on many factors but, generally, the increase in our exposure will be correlated to the increase in our Class A common stock market price and in the volatility of the market price of our Class A common stock. In addition, upon a default by any option counterparty, we may suffer adverse tax consequences and dilution with respect to our Class A common stock. We can provide no assurance as to the financial stability or viability of any option counterparty.
Our reported financial statements and results may be materially and adversely affected by changes in accounting principles generally accepted in the United States.
Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board (FASB), the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial statements and results and could materially and adversely affect the transactions completed before the announcement of a change. Additionally, the adoption of new or revised accounting principles may require that we make significant changes to our systems, processes, and controls.
For example, in February 2016, the FASB issued a new accounting standard for leasing. We adopted this new guidance on January 1, 2019, and elected the optional transition method to apply the transition provisions from the effective date of adoption. We recognized $112.0 million of operating right-of-use lease assets and $135.6 million of operating lease liabilities on our consolidated balance sheet. Additionally, we derecognized $149 million related to the build-to-suit asset and liability upon adoption of this standard because we are no longer deemed to be the owner of the related asset under construction under the new standard. Changes resulting from this and other new standards may result in materially different financial statements and results and may require that we change how we process, analyze, and report financial information and that we change financial reporting controls.
If currency exchange rates fluctuate substantially in the future, our financial results, which are reported in U.S. dollars, could be adversely affected.
As we continue to expand our global operations, we become more exposed to the effects of fluctuations in currency exchange rates. Our contracts are denominated primarily in U.S. dollars, and therefore the majority of our revenue is not subject to foreign currency risk. However, fluctuations in exchange rates of the U.S. dollar against foreign currencies could
adversely affect our business, results of operations, and financial condition. We incur expenses for employee compensation and other operating expenses at our non-U.S. locations in the local currency. Fluctuations in the exchange rates between the U.S. dollar and other currencies could result in the dollar equivalent of such expenses being higher. This could have a negative impact on our reported results of operations. From time to time, we may enter into forward contracts, options, and/or foreign exchange swaps related to specific transaction exposures that arise in the normal course of our business, though we are not currently a party to any such hedging transactions. These and other such hedging activities may not eliminate our exposure to foreign exchange fluctuations. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments.
Risks Related to Ownership of Our Common Stock
The dual class structure of our common stock has the effect of concentrating voting control within our stockholders who held our stock prior to our initial public offering, including many of our employees and directors and their affiliates; this will limit or preclude your ability to influence corporate matters.
Our Class B common stock has ten votes per share, and our Class A common stock has one vote per share. Stockholders who hold shares of Class B common stock, including manycertain of our executive officers, employees, and directors and their affiliates, held approximately 69.5%52.93% of the voting power of our combined outstanding capital stock as of December 31, 2019.2022. Our executive officers and directors and their affiliates held approximately 73.9%54.76% of the voting power of our combined outstanding capital stock as of December 31, 2019.2022. Because of the ten-to-one voting ratio between our Class B and Class A common stock, the holders of our Class B common stock collectively hold more than a majority of the combined voting power of our common stock, and therefore such holders are able to control all matters submitted to our stockholders for approval. When the shares of our Class B common stock represent less than 5% of the combined voting power of our Class A common stock and Class B common stock, the then-outstanding shares of Class B common stock will automatically convert into shares of Class A common stock.
Transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions. Such conversions of Class B common stock to Class A common stock upon transfer will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long term. If, for example, our Class B stockholders retain shares of Class B common stock constituting as little as 10% of all outstanding shares of our Class A and Class B common stock combined, they will continue to control a majority of the combined voting power of our outstanding capital stock.
If we are unable to maintain effective disclosure controls and internal controls over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, and the market price of our Class A common stock may be materially and adversely affected.
We are continuing to develop and refine our disclosure controls and improve our internal controls over financial reporting. We have expended, and anticipate that we will continue to expend, significant resources in order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting.
Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, to the extent we acquire other businesses, the acquired company may not have a sufficiently robust system of internal controls and we may discover deficiencies. If we identify material weaknesses in our disclosure controls or internal control over financial reporting in the future, we will be unable to assert that our internal controls are effective. If we are unable to do so, or if our auditors are unable to attest to management’s report on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which could cause the price of our Class A common stock to decline. In the past, we have identified significant deficiencies in our internal control over financial reporting and have taken steps to remediate such deficiencies. However, such efforts may not be effective or prevent any future deficiency in our internal controls. Any failure to maintain effective disclosure controls and internal control over financial reporting could have a material and adverse effect on our business and operating results and cause a decline in the market price of our Class A common stock.
The market price of our Class A common stock has been and will likely continue to be volatile, and you could lose all or part of your investment.
The market price of our Class A common stock has been and may continue to be subject to wide fluctuations in response to various factors, some of which are beyond our control and may not be related to our operating performance. In addition to the factors discussed in this “Risk Factors”Risk Factors section and elsewhere in this Annual Report on Form 10-K, factors that could cause fluctuations in the market price of our Class A common stock include the following:
•price and volume fluctuations in the overall stock market from time to time;
•volatilitygeneral economic, regulatory, and market conditions, in particular conditions that adversely affect our sellers’ business and the market prices and trading volumesamount of companies in our industry or companies that investors consider comparable;transactions they are processing;
•changes in operating performancepublic health crises and stock market valuations of other companies generally or of those in our industry in particular;related measures to protect the public health;
•sales of shares of our common stock by us or our stockholders;
•issuance of shares of our Class A common stock, whether in connection with an acquisition or upon conversion of some or all of our outstanding Convertible Notes;
•short selling of our Class A common stock or related derivative securities;
•from time to time we make investments in equity that is, or may become, publicly held, and we may experience volatility due to changes in the market prices of such equity investments;
•fluctuations in the price of bitcoin, and potentially any impairment charges in connection with our investments in bitcoin;
•reports by securities or industry analysts that are interpreted either negatively or positively by investors, failure of securities analysts to maintain coverage and/or to provide accurate consensus results of us, changes in financial estimates by securities analysts who follow us, or our failure to meet these estimates or the expectations of investors;
•the financial or other projections we may provide to the public, any changes in those projections, or our failure to meet those projections;
•announcements by us or our competitors of new products or services;
•public reaction to our press releases, other public announcements, and filings with the SEC;
•rumors and market speculation involving us or other companies in our industry;
•actual or anticipated changes in our results of operations;
•actual or perceived data security incidents that we or our service providers may suffer; and
•actual or anticipated developments in our business, our competitors’ businesses, or the competitive landscape generally;
•seasonality in our business or our sellers' business, including seasonal fluctuations in the amount of transactions our sellers are processing; and
•from time to time we make investments in equity that is, or may become, publicly held, and we may experience volatility due to changes in the market prices of such equity investments.generally.
In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. ThisSuch litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
Our Class A common stock is listed to trade on more than one stock exchange, and this may result in price variations.
Our Class A common stock is listed for trade on the NYSE and as CDIs on the ASX. Dual-listing may result in price variations between the exchanges due to a number of factors. Our Class A common stock is traded in U.S. dollars on the NYSE and our CDIs are traded in Australian Dollars on the ASX. The two exchanges also have differing vacation schedules. Differences in the trading schedules, as well as volatility in the exchange rate of the two currencies, among other factors, may result in different trading prices for our Class A common stock on the two exchanges.
The convertible note hedge and warrant transactions may affect the value of our Class A common stock.
In connection with the issuance of the 2022 Notes and the 2023each series of our Convertible Notes, we entered into convertible note hedge transactions with the option counterparties. We also entered into warrant transactions with the option counterparties pursuant to which we sold warrants for the purchase of our Class A common stock. The convertible note hedge transactions are expected generally to reduce the potential dilution to our Class A common stock upon any conversion of the Convertible Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Convertible Notes, as the case may be.
The warrant transactions would separately have a dilutive effect to the extent that the market price per share of our Class A common stock exceeds the strike price of any warrants unless, subject to the terms of the warrant transactions, we elect to cash settle the warrants.
From time to time, the option counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivative transactions with respect to our Class A common stock and/or purchasing or selling our Class A common stock or other securities of ours in secondary market transactions prior to the maturity of the Convertible Notes. This activity could cause or avoid an increase or a decrease in the market price of our Class A common stock.
Anti-takeover provisions contained in our amended and restated certificate of incorporation, our amended and restated bylaws, and provisions of Delaware law could impair a takeover attempt.
Our amended and restated certificate of incorporation (“certificate of incorporation”), our amended and restated bylaws (“bylaws”), and Delaware law contain provisions that could have the effect of rendering more difficult, delaying, or preventing an acquisition deemed undesirable by our board of directors and therefore depress the trading price of our Class A common stock.
Among other things, our dual-class common stock structure provides our holders of Class B common stock with the ability to significantly influence the outcome of matters requiring stockholder approval, even if they own significantly less than a majority of the shares of our outstanding shares of common stock. Further, our amended and restated certificate of incorporation and amended and restated bylaws include provisions (i) creating a classified board of directors whose members serve staggered three-year terms; (ii) authorizing “blank check” preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting, liquidation, dividend, and other rights superior to our common stock; (iii) limiting the ability of our stockholders to call special meetings; (iv) eliminating the ability of our stockholders to act by written consent without a meeting or to remove directors without cause; and (v) requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors. These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.
As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which prevents certain stockholders holding more than 15% of our outstanding capital stock from engaging in certain business combinations without the approval of our board of directors or the holders of at least two-thirds of our outstanding capital stock not held by such stockholder.
Any provision of our amended and restated certificate of incorporation, amended and restated bylaws, or Delaware law that has the effect of delaying or preventing a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our capital stock and could also affect the price that some investors are willing to pay for our Class A common stock.
Our amended and restated bylaws provide that (1) the Delaware Court of Chancery ofor another state court or federal court located within the State of Delaware will be the sole and exclusive forum for substantially all disputes between us and our stockholders and (2) the federal district courts of the U.S. will be the exclusive forum for all causes of action arising under the Securities Act, which could limit our stockholders’ ability to obtain a favorablechoose the judicial forum for disputes with us or our directors, officers, or employees.
Our amended and restated bylaws provide that, unless we consent to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if the Court of Chancery of the State of Delaware does not have jurisdiction, another state court in Delaware or federal district court for the District of Delaware) is the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf; (ii) any action asserting a claim of breach of fiduciary duty owed by any of our directors, officers, or other employees to us or to our stockholders; (iii) any action asserting a claim arising pursuant to the Delaware General Corporation Law;Law, our certificate of incorporation or our bylaws; or (iv) any action asserting a claim governed by the internal affairs doctrine.doctrine, in all cases subject to the court having jurisdiction over the claims at issue and the indispensable parties. The choice of forum provision will not apply to suits brought to enforce any liability or duty created by the Exchange Act.
Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our bylaws also provide that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act.
Any person or entity purchasing or otherwise acquiring any interest in any of our securities shall be deemed to have notice of and consented to the foregoing bylaw provisions. Although we believe these exclusive forum provisions benefit us by providing increased consistency in the application of Delaware law and federal securities laws in the types of lawsuits to which each applies, the exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorableof its choosing for disputes with us or any of our directors, officers, stockholders, or other employees, which may discourage lawsuits with respect to such lawsuitsclaims against us and our current and former directors, officers, andstockholders, or other employees. Alternatively, ifOur stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder as a result of our exclusive forum provisions. Further, in the event a court were to find the choice offinds either exclusive forum provision contained in our amended and restated bylaws to be inapplicableunenforceable or unenforceableinapplicable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could have a material and adverse impact onharm our business.
We do not intend to pay dividends for the foreseeable future.
We currently intend to retain any future earnings to finance the operation and expansionresults of our business, and we do not expect to declare or pay any dividends in the foreseeable future. As a result, you may only receive a return on youroperations.
investment in our common stock if the trading price of our common stock increases. Investors seeking cash dividends should not purchase shares of our common stock. Our ability to pay dividends is restricted by the terms of our revolving credit facility and is also subject to limitations imposed by certain financial regulations.
ItemITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ItemITEM 2. PROPERTIES
Our corporateAs of 2021, we do not designate a headquarters which includelocation as we have adopted a distributed work model. We lease space in San Francisco, California, for product development, sales, marketing, and business operations are located in San Francisco, California. It consists of 469,056 square feet of space under a lease that expires in 2023. We also lease 59,905 square feetspace in New York, New York for a product development, sales, and business operations office under a lease that expires in 2025. In December 2018, we entered into a lease arrangement for 355,762 square feet of2025 and office space in Oakland, California under a lease that expires in 2031. In July 2019, the Company entered into a lease arrangement for 226,258 square feet of office space in St Louis, Missouri, for a term of 15.5 years with options to extend the lease term for two 5-year terms,terms. In January 2023, we informed the landlord of this property of our intention to exercise an early termination option of the lease with a commencement date expectedrespect to be in July 2020.approximately 50% of the leased space effective December 31, 2023. In addition, we also have offices in several other locations and believe our facilities are sufficient for our current needs.
ItemITEM 3. LEGAL PROCEEDINGS
We are currently a party to, and may in the future be involved in, various litigation matters (including intellectual property litigation), legal claims, and government investigations. For information regarding legal proceedings in which we are involved, see “Litigation” inRefer to Note 18 of20, Commitments and Contingencies within Notes to the accompanying notes to our consolidated financial statements, which is incorporated herein by reference.Consolidated Financial Statements for further information.
In addition, from time to time, we are involved in various other litigationlegal matters, investigations, claims, and disputes arising in the ordinary course of business. We cannot at this time fairly estimate a reasonable range of exposure, if any, of the potential liability with respect to these other matters. While we do not believe, at this time, that any ultimate liability resulting from any of these other matters will have a material adverse effect on our results of operations, financial position, or liquidity, we cannot give any assurance regarding the ultimate outcome of these other matters, and their resolution could be material to our operating results for any particular period.
ItemITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ItemITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information for Common Stock
Our Class A common stock began tradingtrades on the New York Stock Exchange under the symbol “SQ”. Our CDIs are traded on November 19, 2015. Prior to that date, there was no public trading market for our Class A common stock.the ASX under the symbol “SQ2”. There is no public trading market for our Class B common stock.
Holders of Record
As of February 21, 2020,17, 2023, there were 102612 holders of record of our Class A common stock and 5829 holders of record of our Class B common stock. Because many of our shares of Class A common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial owners of our Class A common stock represented by these record holders. As of February 17, 2023, we estimate that we have approximately 47,802 holders of record of our CDIs.
Dividend Policy
We have never declared nor paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not expect to pay any dividends on our capital stock in the foreseeable future. Any future determination relating to our dividend policy will be at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors considers relevant.
Issuer Purchases of Equity Securities
| | | | | | | | | | | | | | |
Period | Total number of Shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs |
October 1 to October 31 | 18,812 (i)
| 61.63 | — | | — | |
November 1 to November 30 | — | | — | | — | | — | |
December 1 to December 31 | 26 (ii)
| | — | | — | |
Total | 18,838 | | 61.63 (iii)
| — | | — | |
(i) Represents shares that have been withheld by the Company to satisfy its tax withholding and remittance obligations in connection with the vesting of restricted stock awards.
(ii) The Company exercised a pro-rata portion of the 2022 convertible note hedges (described in Note 13, Indebtedness, of the Notes to the Consolidated Financial Statements) to offset the shares of the Company's common stock issued to settle the conversion of the 2022 Notes. The note hedges were net shares settled and the Company received 26 shares of the Company's common stock from the counterparties in December of 2019.
(iii) Excludes the shares received through the exercise of the note hedges.
Performance Graph
This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act)(the "Exchange Act"), or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Square,Block, Inc. under the Exchange Act or the Securities Act of 1933, as amended, or the Exchange Act.amended.
The following graph compares the cumulative total return to stockholders onof our common stock relative to the cumulative total returns of the Standard & Poor’s 500 Index or ("S&P 500,500"), and the S&P North American Technology Index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our Class A common stock and in each index on November 19, 2015, the date our Class A common stock began trading on the NYSE,December 31, 2017 and its relative performance is tracked through December 31, 2019.2022. The returns shown are based on historical results and are not intended to suggest future performance.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Company/Index | | 11/19/2015 | | 12/31/2015 | | 12/31/2016 | | 12/31/2017 | | 12/31/2018 | | 12/31/2019 |
Square, Inc. | | 100 | | | 100.15 | | | 104.28 | | | 265.26 | | | 429.15 | | | 478.65 | |
S&P 500 | | 100 | | | 98.72 | | | 110.52 | | | 134.65 | | | 128.75 | | | 169.28 | |
S&P North American Technology | | 100 | | | 99.2 | | | 111.15 | | | 151.43 | | | 154.26 | | | 217.99 | |
Item 6. SELECTED FINANCIAL DATA | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Company/Index | | 12/31/2017 | | 12/31/2018 | | 12/31/2019 | | 12/31/2020 | | 12/31/2021 | | 12/31/2022 |
Block, Inc. | | $ | 100.00 | | | $ | 161.78 | | | $ | 180.44 | | | $ | 627.75 | | | $ | 465.85 | | | $ | 181.25 | |
S&P 500 | | $ | 100.00 | | | $ | 95.62 | | | $ | 125.72 | | | $ | 148.85 | | | $ | 191.58 | | | $ | 156.89 | |
S&P North American Technology | | $ | 100.00 | | | $ | 102.88 | | | $ | 146.79 | | | $ | 213.07 | | | $ | 269.33 | | | $ | 174.09 | |
The following selected consolidated statement of operations data for the years ended December 31, 2019, 2018, and 2017, and the consolidated balance sheet data as of December 31, 2019, and 2018, have been derived from our audited consolidated financial statements and should be read in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The following selected consolidated statement of operations data for the years ended December 31, 2016, and 2015, and the consolidated balance sheet data as of December 31, 2017, 2016, and 2015, are derived from our audited consolidated financial statements which are not included in this Annual Report on Form 10-K.
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| Year Ended December 31, | | | | | | | | |
| 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| (in thousands, except per share data) | | | | | | | | |
Consolidated Statement of Operations Data: | | | | | | | | | |
Total net revenue | 4,713,500 | | | 3,298,177 | | | 2,214,253 | | | 1,708,721 | | | 1,267,118 | |
Total cost of revenue | 2,823,815 | | | 1,994,477 | | | 1,374,947 | | | 1,132,683 | | | 897,088 | |
Gross profit | 1,889,685 | | | 1,303,700 | | | 839,306 | | | 576,038 | | | 370,030 | |
Total operating expenses | 1,863,128 | | | 1,340,314 | | | 893,512 | | | 746,491 | | | 544,488 | |
Operating income (loss) | 26,557 | | | (36,614) | | | (54,206) | | | (170,453) | | | (174,458) | |
Net income (loss) | 375,446 | | | (38,453) | | | (62,813) | | | (171,590) | | | (179,817) | |
Deemed dividend on Series E preferred stock | — | | | — | | | — | | | — | | | (32,200) | |
Net income (loss) attributable to common stockholders | $ | 375,446 | | | $ | (38,453) | | | $ | (62,813) | | | $ | (171,590) | | | $ | (212,017) | |
Net income (loss) per share attributable to common stockholders: | | | | | | | | | |
Basic | $ | 0.88 | | | $ | (0.09) | | | $ | (0.17) | | | $ | (0.50) | | | $ | (1.24) | |
Diluted | $ | 0.81 | | | $ | (0.09) | | | $ | (0.17) | | | $ | (0.50) | | | $ | (1.24) | |
Weighted-average shares used to compute net income (loss) per share attributable to common stockholders: | | | | | | | | | |
Basic | 424,999 | | | 405,731 | | | 379,344 | | | 341,555 | | | 170,498 | |
Diluted | 466,076 | | | 405,731 | | | 379,344 | | | 341,555 | | | 170,498 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, | | | | | | | | |
| 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| (in thousands) | | | | | | | | | |
Consolidated Balance Sheet Data: | | | | | | | | | |
Cash and cash equivalents | $ | 1,047,118 | | | $ | 583,173 | | | $ | 696,474 | | | $ | 452,030 | | | $ | 461,329 | |
Total Investments | 1,029,759 | | | 1,005,671 | | | 373,243 | | | 87,267 | | | — | |
Settlements receivable | 588,692 | | | 364,946 | | | 620,523 | | | 321,102 | | | 142,727 | |
Customer funds | 676,292 | | | 334,017 | | | 103,042 | | | 43,574 | | | 9,446 | |
Working capital | 1,525,716 | | | 1,093,364 | | | 805,467 | | | 423,961 | | | 371,361 | |
Total assets | 4,551,258 | | | 3,281,023 | | | 2,187,270 | | | 1,211,362 | | | 894,772 | |
Customers payable | 1,273,135 | | | 749,215 | | | 733,736 | | | 431,632 | | | 224,811 | |
Long-term debt | 938,832 | | | 899,695 | | | 358,572 | | | — | | | — | |
Total stockholders’ equity | 1,715,050 | | | 1,120,501 | | | 786,333 | | | 576,153 | | | 508,048 | |
ITEM 6. [RESERVED]
The statements in this discussion regarding our expectations of our future performance, liquidity, and capital resources; our plans, estimates, beliefs, and expectations that involve risks and uncertainties; and other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under “Risk Factors”Item 1A. Risk Factors and elsewhere in this Annual Report on Form 10-K. Our actual results may differ materially from those contained in or implied by any forward-looking statements.
We charge our sellers a transaction fee that is generally calculated based on a percentage of the total transaction amount processed. We also selectively offer custom pricing for certain larger sellers. Transaction-based revenue also includes amounts we charge our Cash App customers for peer-to-peer transactions to business accounts and payments sent from a credit card.
Instant Deposit is a functionality within the Cash App and our managed payment solutions that enables customercustomers, including individuals and sellers, to instantly deposit funds into their bank accounts, while accounts.
Transaction-based costs consist primarily of interchange and assessment fees, processing fees, and bank settlement fees paid to third-party payment processors and financial institutions.
Product development expenses currently represent the largest component of our operating expenses and consist primarily of expenses related to our engineering, data science, and design personnel; fees and supply costs related to maintenance and capacity expansion at third-party data center facilities; hardware related development and tooling costs; and fees for software licenses, consulting, legal, and other services that are directly related to growing and maintaining our portfolio of products and services. Additionally, product development expenses include the depreciation of product-related infrastructure and tools, including data center equipment, internally developed software, and computer equipment. We continue to focus our product development efforts on adding new features and expanding our apps, and on enhancing the functionality and ease of use of our offerings. Our ability to realize returns on these investments is substantially dependent upon our ability to successfully address current and emerging requirements of sellers, buyers, and buyerscustomers through the development and introduction of these new products and services.
Interest and other income and expense, net consists primarily of gains or losses arising from marking to marketremeasurements of anour investments in equity investment,securities, interest expense related to our long-term debt, interest income on our investmentinvestments in marketable debt securities, and foreign currency-related gains and losses.
The provision for income taxes consists primarily of federal, state, local, and foreign tax. Our effective tax rate fluctuates from period to period due to changes in the mix of income and losses in jurisdictions with a wide range of tax rates, the effect of acquisitions, changes resulting from the amount of recorded valuation allowance, permanent differences between U.S. generally accepted accounting principles and local tax laws, certain one-time items, and changes in tax contingencies.
General and Administrative (in thousands, except for percentages)
| | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | | | 2018 to 2019 | | |
| 2019 | | 2018 | | | | % Change | | |
General and administrative | $ | 436,250 | | | $ | 339,245 | | | | | 29 | % | | |
Percentage of total net revenue | 9 | % | | 10 | % | | | | | | |
General and administrative expenses for the year ended December 31, 2019,2022, increased by $97.0$704.0 million, or 29%72%, compared to the year ended December 31, 2018,2021, primarily due to the following:
•an increase of $43.5$482.6 million in general and administrative personnelpersonnel-related costs, for the year ended December 31, 2019, mainly as a result of additions to our customer support, human resources, finance, and legal personnel as we continuedcontinue to add resources and skills to support our long-term growth as our business continues to scale.growth. The increase was also a result of employees added from the acquisition of Afterpay in the first quarter of 2022. The increase in personnel relatedpersonnel-related costs includes an increase in share-based compensation expense of $10.8$157.9 million for the year ended December 31, 2019;2022;
•acquisition related integration and other expenses related to Afterpay of $67.3 million for the year ended December 31, 2022, as well as a $66.3 million one-time charge related to the acceleration of various share-based arrangements associated with the Afterpay acquisition during the three months ended March 31, 2022, which was in addition to ongoing share-based compensation expense for Afterpay employees; and
•the remainingan increase is primarily due toin software, and subscription costs local business-related taxes, facilities expenses, third-party legal and other professional fees, and other administrative expenses.
Transaction, loan, and Loan Losses (in thousands, except for percentages)
| | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | | | 2018 to 2019 | | |
| 2019 | | 2018 | | | | % Change | | |
Transaction and loan losses | $ | 126,959 | | | $ | 88,077 | | | | | 44 | % | | |
Transaction and loanconsumer receivable losses for the year ended December 31, 2019,2022, increased by $38.9$362.7 million, or 44%193%, compared to the year ended December 31, 2018,2021, primarily due to the following:
•an increase in the allowance for credit losses related to consumer receivables of $197.6 million from the date of the acquisition of Afterpay through December 31, 2022;
•an increase in transaction losses increased by $28.9 million forcompared to the year ended December 31, 2019,2021 of $87.0 million, primarily due to growth in GPV in our seller business as well as growth of our Cash App platform. Seller transaction losses remained below 0.1% of GPV, underscoring our continued discipline in risk management;Square GPV; and
•an increase in loan losses compared to the year ended December 31, 2021 of $10.0$78.1 million, primarily due to increased loan volumes.
We recorded impairment charges on our investment in bitcoin of $46.6 million in loan lossesthe year ended December 31, 2022 due to the observed market price of bitcoin decreasing below the carrying value of our investment during the period. As of December 31, 2022, the cumulative impairment charges to date were $117.7 million and the fair value of our investment in bitcoin was $132.7 million based on observable market prices, which was $30.4 million in excess of the carrying value of $102.3 million after cumulative impairment charges. Under the current accounting guidance, any unrealized gains on our investment in bitcoin will only be recognized in the financial statements when realized upon the sale of such bitcoin investment.
Amortization of customer and other acquired intangible assets increased $123.0 million for the year ended December 31, 2019,2022, compared to the year ended December 31, 2021, primarily due to increased amortization expense of $121.8 million as a result of the growth and aging of our Square Capital loan portfolio as well as certain new loan products for which we continueintangible assets from the Afterpay acquisition. Refer to train our risk models.
Gain on Sale of Asset Group, Interest Expense, Net, and Other Income, Net (in thousands, except for percentages)
| | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | | | 2018 to 2019 | | |
| 2019 | | 2018 | | | | % Change | | |
Gain on sale of asset group | $ | (373,445) | | | $ | — | | | | | NM | | | |
Interest expense, net | 21,516 | | | 17,982 | | | | | 20 | % | | |
Other expense (income), net | 273 | | | (18,469) | | | | | NM | | | |
Gain on sale of asset group represents the excess of the proceeds from sale of the Caviar business of $410 million less the carrying value of the net assets sold and selling expenses, as analyzed in Note 8, Sale of Asset Group,11, of theAcquired Intangible Assets within Notes to the Consolidated Financial Statements.Statements for more details.
Interest Expense, net, and Other Expense (Income), net (in thousands, except for percentages)
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | $ Change | | % Change |
Interest expense, net | $ | 36,228 | | | $ | 33,124 | | | $ | 3,104 | | | 9 | % |
Other income, net | (95,443) | | | (29,474) | | | (65,969) | | | NM (i) |
(i) Not meaningful ("NM")
Interest expense, net, for the year ended December 31, 20192022 increased by $3.5$3.1 million, or 9%, compared to the year ended December 31, 2021. This increase was primarily due to interest expense related to our 2026 Senior Notes and 2031 Senior Notes, which were issued in May 2021. Refer to Note 15, Indebtedness within Notes to the Consolidated Financial Statements for further details.
Other income, net for the year ended December 31, 2022 was primarily comprised of unrealized gains of $96.1 million arising from the revaluation of certain equity investments. Other income, net for the year ended December 31, 2021 was primarily comprised of a $44.4 million mark to market net gain of our equity investment in DoorDash, arising from the revaluation of this investment. We completed the sale of our investment in DoorDash in June 2021, and as a result this investment did not impact our results in subsequent periods.
Segment Results
The Company has two reportable segments, Square and Cash App. The results of Afterpay have been equally allocated to the Square and Cash App segments as management has determined that our BNPL platform will contribute equally to both the Square and Cash App platforms. Refer to Note 21, Segment and Geographical Information within Notes to the Consolidated Financial Statements for more details.
Square Results
The following tables provide a summary of the revenue and gross profit for our Square segment for the year ended December 31, 2022 and 2021(in thousands, except for percentages):
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | $ Change | | % Change |
Segment net revenue | $ | 6,699,830 | | | $ | 5,193,348 | | | $ | 1,506,482 | | | 29 | % |
Segment cost of revenue | 3,698,852 | | | 2,876,677 | | | 822,175 | | | 29 | % |
Segment gross profit | $ | 3,000,978 | | | $ | 2,316,671 | | | $ | 684,307 | | | 30 | % |
Segment Net Revenue
Net revenue for the Square segment for the year ended December 31, 2022 increased by $1.5 billion compared to the year ended December 31, 2021. The increase was primarily due to:
•growth in Square GPV and continued improvements in both card-present volumes and growth in higher-priced card-not-present transactions;
•an increase in subscription and services-based revenue, which was primarily due to the growth in seller banking products, including the increased origination volumes of Square Loans, as well as software subscriptions; and
•revenue generated from our BNPL platform following the acquisition of Afterpay.
Segment Cost of Revenue
Cost of revenue for the Square segment for the year ended December 31, 2022 increased by $822.2 million compared to the year ended December 31, 2018. These changes were2021. The increase was primarily due to interest expense related to our convertible notes offsetan increase in part by interest income earned on our investmentsSquare GPV, as well as an increase in marketable debt securities. credit card transactions that have a higher cost per transaction than debit card transactions.
Cash App Results
The interest expense related to the convertible notes isfollowing tables provide a functionsummary of the average balance of convertible notes outstanding in each of the periods. The issuance of the convertible notes in May 2018 resulted in a higher average balance inrevenue and gross profit for our Cash App segment for the year ended December 31, 2019 compared to the year ended December 31, 2018.2022 and 2021 (in thousands, except for percentages):
Other expense (income), net was primarily driven by the amounts of gains or losses arising from the revaluation of our equity investment in Eventbrite, Inc. ("Eventbrite") and income earned from our marketable debt securities. In the year ended December 31, 2019, we recorded a loss of $12.3 million on the revaluation of the investment in Eventbrite, offset by the amortization of and realized gains on the sale of investments in marketable securities of $9.7 million, foreign exchange gains of $1.7 million, and other sources of income. In December 2019, the Company sold its entire equity investment in Eventbrite and as a result this investment will not impact the results in future periods. In the year ended December 31, 2018, we recorded a gain on revaluation of equity investment in Eventbrite of $20.3 million and a gain of $4.4 million in amortization of investments in marketable securities, offset in part by a $5.0 million loss on extinguishment of long-term debt associated with the 2022 Notes due to the difference between the estimated fair value and the carrying value.
Comparison of Years Ended December 31, 2018 and 2017
For a discussion of the 2017 Results of Operations, including a discussion of the financial results for the fiscal year ended December 31, 2018 compared to the fiscal year ended December 31, 2017, refer to Part I, Item 7 of our Form 10-K filed with the SEC on February 27, 2019.
57 | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | $ Change | | % Change |
Segment net revenue | $ | 10,626,111 | | | $ | 12,315,499 | | | $ | (1,689,388) | | | (14) | % |
Segment cost of revenue | 7,675,144 | | | 10,244,652 | | | (2,569,508) | | | (25) | % |
Segment gross profit | $ | 2,950,967 | | | $ | 2,070,847 | | | $ | 880,120 | | | 43 | % |
Quarterly Results of Operations
The following tables set forth selected unaudited quarterly statements of operations data for the last eight quarters. The information for each of these quarters has been prepared on the same basis as the audited annual financial statements included elsewhere in this Annual Report on Form 10-K and, in the opinion of management, includes all adjustments, which consist only of normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods. This data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. These quarterly operating results are not necessarily indicative of the results we may achieve in future periods.
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| Three Months Ended, | | | | | | | | | | | | | | |
| Dec. 31, 2019 | | Sep. 30, 2019 | | Jun. 30, 2019 | | Mar. 31, 2019 | | Dec. 31, 2018 | | Sep. 30, 2018 | | Jun. 30, 2018 | | Mar. 31, 2018 |
| (in thousands, except per share data) | | | | | | | | | | | | | | |
| (unaudited) | | | | | | | | | | | | | | |
Revenue: | | | | | | | | | | | | | | | |
Transaction-based revenue | $ | 832,180 | | | $ | 816,622 | | | $ | 775,510 | | | $ | 656,762 | | | $ | 667,802 | | | $ | 655,384 | | | $ | 625,228 | | | $ | 523,037 | |
| | | | | | | | | | | | | | | |
Subscription and services-based revenue | 281,415 | | | 279,801 | | | 251,383 | | | 218,857 | | | 194,117 | | | 166,203 | | | 134,332 | | | 97,054 | |
Hardware revenue | 22,267 | | | 21,766 | | | 22,260 | | | 18,212 | | | 18,166 | | | 17,558 | | | 18,362 | | | 14,417 | |
Bitcoin revenue | 177,567 | | | 148,285 | | | 125,085 | | | 65,528 | | | 52,443 | | | 42,963 | | | 37,016 | | | 34,095 | |
Total net revenue | 1,313,429 | | | 1,266,474 | | | 1,174,238 | | | 959,359 | | | 932,528 | | | 882,108 | | | 814,938 | | | 668,603 | |
Cost of revenue: | | | | | | | | | | | | | | | |
Transaction-based costs | 519,241 | | | 519,312 | | | 490,349 | | | 409,069 | | | 420,846 | | | 414,456 | | | 395,349 | | | 327,911 | |
| | | | | | | | | | | | | | | |
Subscription and services-based costs | 50,276 | | | 63,352 | | | 60,119 | | | 60,523 | | | 52,654 | | | 47,078 | | | 39,784 | | | 30,368 | |
Hardware costs | 40,504 | | | 35,672 | | | 33,268 | | | 26,941 | | | 25,647 | | | 23,229 | | | 25,536 | | | 19,702 | |
Bitcoin costs | 174,438 | | | 146,167 | | | 122,938 | | | 64,696 | | | 51,951 | | | 42,408 | | | 36,596 | | | 33,872 | |
Amortization of acquired technology | 1,921 | | | 1,934 | | | 1,719 | | | 1,376 | | | 1,376 | | | 2,277 | | | 1,857 | | | 1,580 | |
Total cost of revenue | 786,380 | | | 766,437 | | | 708,393 | | | 562,605 | | | 552,474 | | | 529,448 | | | 499,122 | | | 413,433 | |
Gross profit | 527,049 | | | 500,037 | | | 465,845 | | | 396,754 | | | 380,054 | | | 352,660 | | | 315,816 | | | 255,170 | |
Operating expenses: | | | | | | | | | | | | | | | |
Product development | 173,284 | | | 168,771 | | | 174,201 | | | 154,350 | | | 141,811 | | | 135,773 | | | 114,800 | | | 105,095 | |
Sales and marketing | 185,231 | | | 149,467 | | | 156,421 | | | 133,713 | | | 119,305 | | | 116,337 | | | 98,243 | | | 77,266 | |
General and administrative | 118,164 | | | 115,980 | | | 100,508 | | | 101,598 | | | 95,445 | | | 85,527 | | | 82,772 | | | 75,501 | |
Transaction and loan losses | 32,132 | | | 32,722 | | | 34,264 | | | 27,841 | | | 24,474 | | | 23,596 | | | 21,976 | | | 18,031 | |
Amortization of acquired customer assets | 890 | | | 1,003 | | | 1,294 | | | 1,294 | | | 2,127 | | | 1,294 | | | 672 | | | 269 | |
| | | | | | | | | | | | | | | |
Total operating expenses | 509,701 | | | 467,943 | | | 466,688 | | | 418,796 | | | 383,162 | | | 362,527 | | | 318,463 | | | 276,162 | |
Operating income (loss) | 17,348 | | | 32,094 | | | (843) | | | (22,042) | | | (3,108) | | | (9,867) | | | (2,647) | | | (20,992) | |
Gain on sale of asset group | (373,445) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Interest expense, net | 6,060 | | | 5,632 | | | 5,143 | | | 4,681 | | | 5,176 | | | 7,224 | | | 3,470 | | | 2,112 | |
Other expense (income), net | (6,715) | | | (5,541) | | | 1,230 | | | 11,299 | | | 19,439 | | | (37,800) | | | (815) | | | 707 | |
Income (loss) before income tax | 391,448 | | | 32,003 | | | (7,216) | | | (38,022) | | | (27,723) | | | 20,709 | | | (5,302) | | | (23,811) | |
Provision (benefit) for income taxes | 508 | | | 2,606 | | | (476) | | | 129 | | | 481 | | | 1,066 | | | 604 | | | 175 | |
Net income (loss) | $ | 390,940 | | | $ | 29,397 | | | $ | (6,740) | | | $ | (38,151) | | | $ | (28,204) | | | $ | 19,643 | | | $ | (5,906) | | | $ | (23,986) | |
| | | | | | | | | | | | | | | |
Net income (loss) per share: | | | | | | | | | | | | | | | | | | | | | | | |
Basic | $ | 0.91 | | | $ | 0.07 | | | $ | (0.02) | | | $ | (0.09) | | | $ | (0.07) | | | $ | 0.05 | | | $ | (0.01) | | | $ | (0.06) | |
Diluted | $ | 0.83 | | | $ | 0.06 | | | $ | (0.02) | | | $ | (0.09) | | | $ | (0.07) | | | $ | 0.04 | | | $ | (0.01) | | | $ | (0.06) | |
Weighted-average shares used to compute net income (loss) per share: | | | | | | | | | | | | | | | |
Basic | 430,136 | | | 427,124 | | | 423,305 | | | 419,289 | | | 413,984 | | | 409,690 | | | 403,301 | | | 395,948 | |
Diluted | 485,394 | | | 466,099 | | | 423,305 | | | 419,289 | | | 413,984 | | | 474,915 | | | 403,301 | | | 395,948 | |
| | | | | | | | | | | | | | | |
Costs and expenses include share-based compensation expense as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended, | | | | | | | | | | | | | | |
| Dec. 31, 2019 | | Sep. 30, 2019 | | Jun. 30, 2019 | | Mar. 31, 2019 | | Dec. 31, 2018 | | Sep. 30, 2018 | | Jun. 30, 2018 | | Mar. 31, 2018 |
| (in thousands) | | | | | | | | | | | | | | |
Share-Based Compensation | | (unaudited) | | | | | | | | | | | | | | |
Cost of revenue | | $ | 67 | | | $ | 38 | | | $ | 29 | | | $ | 21 | | | $ | 18 | | | $ | 18 | | | $ | 30 | | | $ | 31 | |
Product development | | 55,726 | | | 56,321 | | | 56,144 | | | 42,649 | | | 40,788 | | | 39,525 | | | 33,806 | | | 30,482 | |
Sales and marketing | | 6,416 | | | 6,269 | | | 7,833 | | | 6,202 | | | 6,094 | | | 6,108 | | | 5,634 | | | 4,961 | |
General and administrative | | 17,674 | | | 14,798 | | | 15,460 | | | 12,216 | | | 12,125 | | | 13,262 | | | 12,649 | | | 11,350 | |
Total share-based compensation | $ | 79,883 | | | $ | 77,426 | | | $ | 79,466 | | | $ | 61,088 | | | $ | 59,025 | | | $ | 58,913 | | | $ | 52,119 | | | $ | 46,824 | |
Segment Net Revenue
Net revenue for the Cash App segment for the year ended December 31, 2022 decreased by $1.7 billion compared to the year ended December 31, 2021. The primary driver was a decrease in bitcoin revenue, partially offset by growth in Cash App Instant Deposit, Cash App Card, and peer-to-peer transactions received by Cash App Business accounts. The decrease in bitcoin revenue was driven by a decline in the market price of bitcoin as compared to prior year. While bitcoin revenue contributed 67% and 81% of Cash App net revenue in 2022 and 2021, respectively, gross profit generated from bitcoin was only 5% and 11% of Cash App gross profit in 2022 and 2021, respectively.
Excluding bitcoin revenue, Cash App net revenue increased $1.2 billion, or 53%, compared to the year ended December 31, 2021, primarily due to growth in the number of active Cash App accounts, an increase in transaction fees related to Cash App Card and Instant Deposit, and revenue generated from our BNPL platform following the acquisition of Afterpay.
Segment Cost of Revenue
Cost of revenue for the Cash App segment for the year ended December 31, 2022 decreased by $2.6 billion compared to the year ended December 31, 2021. The primary driver for the decrease was a decline in bitcoin revenue as well as the associated costs of such bitcoin revenue, as discussed above. Excluding bitcoin cost of revenue, Cash App cost of revenue increased $268.8 million, or 60%, due to the growth in Cash App Card, Cash App Instant Deposit, and Cash for Business.
Key Operating Metrics and Non-GAAP Financial Measures
We collect and analyze operating and financial data to evaluate the health of our business, allocate our resources, and assess our performance. In addition to total net revenue, net income (loss), and other results under generally accepted accounting principles ("GAAP"), the following table sets forth the key operating metrics and non-GAAP financial measures we use to evaluate our business. We believe these metrics and measures are useful to facilitate period-to-period comparisons of our business, and to facilitate comparisons of our performance to that of other payment solution providers.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 |
| |
Gross Payment Volume (GPV) (in millions) | $ | 203,536 | | | $ | 167,720 | | | $ | 112,295 | | | $ | 106,239 | | | $ | 84,654 | |
Adjusted EBITDA (in thousands) | $ | 990,964 | | | $ | 1,013,657 | | | $ | 474,071 | | | $ | 416,853 | | | $ | 256,523 | |
Adjusted Net Income Per Share: | | | | | | | | | |
Basic | $ | 1.05 | | | $ | 1.46 | | | $ | 0.72 | | | $ | 0.70 | | | $ | 0.47 | |
Diluted | $ | 1.00 | | | $ | 1.28 | | | $ | 0.64 | | | $ | 0.62 | | | $ | 0.40 | |
Gross Payment Volume ("GPV")
GPV includes Square GPV and Cash App Business GPV. Square GPV is defined as the total dollar amount of all card payments processed by sellers using Square, net of refunds, and ACH transfers. Cash App Business GPV is comprised of Cash App activity related to peer-to-peer transactions received by business accounts, Cash App Pay transactions, and peer-to-peer payments sent from a credit card. GPV does not include transactions from our BNPL platform because GPV is related only to transaction-based revenue and not to subscription and services-based revenue.
Adjusted EBITDA and Adjusted Net Income (Loss) Per Share ("Adjusted EPS")
Adjusted EBITDA and Adjusted EPS are non-GAAP financial measures that represent our net income (loss) and net income (loss) per share, adjusted to eliminate the effect of items as described below. We have included these non-GAAP financial measures in this Form 10-K because they are key measures used by our management to evaluate our operating performance, generate future operating plans, and make strategic decisions, including those relating to operating expenses and the allocation of internal resources. Accordingly, we believe these measures provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. In addition, they provide useful measures for eachperiod-to-period comparisons of our business, as they remove the effect of certain non-cash items and certain variable charges that do not vary with our operations.
•We believe it is useful to exclude certain non-cash charges, such as amortization of intangible assets, and share-based compensation expenses, from our non-GAAP financial measures because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations.
•In connection with the issuance of our convertible senior notes (as described in Note 15, Indebtedness within Notes to the Consolidated Financial Statements), prior to the adoption of ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity ("ASU 2020-06") on January 1, 2021, we were required to recognize non-cash interest expense related to amortization of debt discount and issuance costs. Subsequent to adoption, we only recognize non-cash interest expense related to amortization of debt issuance costs on convertible notes and unsecured notes. We believe that excluding this expense from our non-GAAP measures is useful to investors because such incremental non-cash interest expense does not represent a current or future cash outflow for the Company and is therefore not indicative of our continuing operations or meaningful when comparing current results to past results. Additionally, for purposes of calculating diluted Adjusted EPS we add back cash interest expense on convertible notes, as if converted at the beginning of the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended, | | | | | | | | | | | | | | |
| Dec. 31, 2019 | | Sep. 30, 2019 | | Jun. 30, 2019 | | Mar. 31, 2019 | | Dec. 31, 2018 | | Sep. 30, 2018 | | Jun. 30, 2018 | | Mar. 31, 2018 |
| (in thousands, except for GPV and per share data) | | | | | | | | | | | | | | |
Key Operating Metrics and non-GAAP Financial Measures | | (unaudited) | | | | | | | | | | | | | | |
Gross Payment Volume (GPV) (in millions) | | $ | 28,639 | | | $ | 28,228 | | | $ | 26,785 | | | $ | 22,587 | | | $ | 22,958 | | | $ | 22,498 | | | $ | 21,372 | | | $ | 17,827 | |
| | | | | | | | | | | | | | | |
Adjusted EBITDA | | $ | 118,529 | | | $ | 131,323 | | | $ | 105,304 | | | $ | 61,697 | | | $ | 81,310 | | | $ | 70,997 | | | $ | 68,322 | | | $ | 35,894 | |
Adjusted Net Income Per Share: | | | | | | | | | | | | | | | | |
Basic | $ | 0.25 | | | $ | 0.28 | | | $ | 0.23 | | | $ | 0.13 | | | $ | 0.16 | | | $ | 0.16 | | | $ | 0.15 | | | $ | 0.07 | |
Diluted | $ | 0.23 | | | $ | 0.25 | | | $ | 0.21 | | | $ | 0.11 | | | $ | 0.14 | | | $ | 0.13 | | | $ | 0.13 | | | $ | 0.06 | |
period, if the impact is dilutive.
•We exclude the following from non-GAAP financial measures because we do not believe that these items are reflective of our ongoing business operations: gain or loss on the disposal of property and equipment; gain or loss on revaluation of equity investments; bitcoin impairment losses on our investment in bitcoin, as applicable; and prior to the adoption of ASU 2020-06 on January 1, 2021, gain or loss on debt extinguishment related to the conversion of convertible notes, as applicable.
•To aid in comparability of our results across periods and with peer companies that may not have similar expenses, we also exclude certain acquisition related and integration costs associated with business combinations, and various other costs that are not normal operating expenses. Acquisition related costs include amounts paid to redeem acquirees’ unvested share-based compensation awards, and legal, accounting, valuation, and due diligence costs. Integration costs include advisory and other professional services or consulting fees necessary to integrate acquired businesses. Other costs that are not reflective of our core business operating expenses may include contingent losses, certain litigation and regulatory charges. We also add back the impact of the acquired deferred revenue and deferred cost adjustment, which was written down to fair value in purchase accounting.
In addition to the items above, Adjusted EBITDA as a non-GAAP financial measure also excludes depreciation and amortization, other cash interest income and expense, and other income and expense.
Beginning in the first quarter of 2022, we have included the tax impact of the non-GAAP adjustments in determining Adjusted EPS. We determine the adjusted provision (benefit) for income taxes by calculating the estimated annual effective tax rate based on adjusted pre-tax income and applying it to Adjusted Net Income before income taxes. The prior period Adjusted EPS presentation has also been revised to conform with our new calculation and presentation.
Non-GAAP financial measures have limitations, should be considered as supplemental in nature, and are not meant as a substitute for the related financial information prepared in accordance with GAAP. These limitations include the following:
•share-based compensation expense has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and an important part of our compensation strategy;
•the intangible assets being amortized may have to be replaced in the future, and the non-GAAP financial measures do not reflect cash capital expenditure requirements for such replacements or for new capital expenditures or other capital commitments; and
•non-GAAP measures do not reflect changes in, or cash requirements for, our working capital needs.
In addition to the limitations above, Adjusted EBITDA as a non-GAAP financial measure does not reflect the effect of depreciation and amortization expense and related cash capital requirements, income taxes that may represent a reduction in cash available to us, and the effect of foreign currency exchange gains or losses, which is included in other income and expense.
Other companies, including companies in our industry, may calculate the non-GAAP financial measures differently or not at all, which reduces their usefulness as comparative measures.
Because of these limitations, you should consider the non-GAAP financial measures alongside other financial performance measures, including net income (loss) and our other financial results presented in accordance with GAAP.
The following table presents a reconciliation of net lossincome (loss) to Adjusted EBITDA for each of the periods indicated:indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended, | | | | | | | | | | | | | | |
| Dec. 31, 2019 | | Sep. 30, 2019 | | Jun. 30, 2019 | | Mar. 31, 2019 | | Dec. 31, 2018 | | Sep. 30, 2018 | | Jun. 30, 2018 | | Mar. 31, 2018 |
| (in thousands) | | | | | | | | | | | | | | |
Adjusted EBITDA Reconciliation | | (unaudited) | | | | | | | | | | | | | | |
Net income (loss) | | $ | 390,940 | | | $ | 29,397 | | | $ | (6,740) | | | $ | (38,151) | | | $ | (28,204) | | | $ | 19,643 | | | $ | (5,906) | | | $ | (23,986) | |
Share-based compensation expense | | 79,883 | | | 77,426 | | | 79,466 | | | 61,088 | | | 59,025 | | | 58,913 | | | 52,119 | | | 46,824 | |
Depreciation and amortization | | 18,719 | | | 19,125 | | | 18,783 | | | 18,971 | | | 22,638 | | | 15,835 | | | 12,328 | | | 10,160 | |
| | | | | | | | | | | | | | | |
Interest expense, net | | 6,060 | | | 5,632 | | | 5,143 | | | 4,681 | | | 5,176 | | | 7,224 | | | 3,470 | | | 2,112 | |
Other expense (income), net | | (6,715) | | | (5,541) | | | 1,230 | | | 11,299 | | | 19,439 | | | (37,800) | | | (815) | | | 707 | |
Provision (benefit) for income taxes | | 508 | | | 2,606 | | | (476) | | | 129 | | | 481 | | | 1,066 | | | 604 | | | 175 | |
Loss (gain) on disposal of property and equipment | | 580 | | | 128 | | | 281 | | | 19 | | | (1,005) | | | 806 | | | 73 | | | (98) | |
Gain on sale of asset group | | (373,445) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Acquisition related and other costs | | 1,260 | | | 1,564 | | | 6,133 | | | 782 | | | — | | | 345 | | | 4,363 | | | — | |
Acquired deferred revenue adjustment | | 928 | | | 1,224 | | | 1,849 | | | 3,456 | | | 4,521 | | | 5,892 | | | 2,440 | | | — | |
Acquired deferred costs adjustment | | (189) | | | (238) | | | (365) | | | (577) | | | (761) | | | (927) | | | (354) | | | — | |
| | | | | | | | | | | | | | | |
Adjusted EBITDA | $ | 118,529 | | | $ | 131,323 | | | $ | 105,304 | | | $ | 61,697 | | | $ | 81,310 | | | $ | 70,997 | | | $ | 68,322 | | | $ | 35,894 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 |
Net income (loss) attributable to common stockholders | $ | (540,747) | | | $ | 166,284 | | | $ | 213,105 | | | $ | 375,446 | | | $ | (38,453) | |
Net loss attributable to noncontrolling interests | (12,258) | | | (7,458) | | | — | | | — | | | — | |
Net income (loss) | (553,005) | | | 158,826 | | | 213,105 | | | 375,446 | | | (38,453) | |
Share-based compensation expense | 1,069,289 | | | 608,042 | | | 397,500 | | | 297,863 | | | 216,881 | |
Depreciation and amortization | 340,523 | | | 134,756 | | | 84,212 | | | 75,598 | | | 60,961 | |
Acquisition related, integration, and other costs | 157,264 | | | 35,474 | | | 7,482 | | | 9,739 | | | 4,708 | |
Interest expense, net | 36,228 | | | 33,124 | | | 56,943 | | | 21,516 | | | 17,982 | |
Other expense (income), net | (95,443) | | | (29,474) | | | (291,725) | | | 273 | | | (18,469) | |
Bitcoin impairment losses | 46,571 | | | 71,126 | | | — | | | — | | | — | |
Provision (benefit) for income taxes | (12,312) | | | (1,364) | | | 2,862 | | | 2,767 | | | 2,326 | |
Loss (gain) on disposal of property and equipment | 1,619 | | | 2,633 | | | 2,570 | | | 1,008 | | | (224) | |
Gain on sale of asset group | — | | | — | | | — | | | (373,445) | | | — | |
Acquired deferred revenue adjustment | 382 | | | 744 | | | 1,497 | | | 7,457 | | | 12,853 | |
Acquired deferred costs adjustment | (152) | | | (230) | | | (375) | | | (1,369) | | | (2,042) | |
Adjusted EBITDA | $ | 990,964 | | | $ | 1,013,657 | | | $ | 474,071 | | | $ | 416,853 | | | $ | 256,523 | |
The following table presents a reconciliation of net lossincome (loss) to Adjusted Net Income (Loss) Per Share for each of the periods indicated:indicated (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 |
Net income (loss) attributable to common stockholders | $ | (540,747) | | | $ | 166,284 | | | $ | 213,105 | | | $ | 375,446 | | | $ | (38,453) | |
Net loss attributable to noncontrolling interests | (12,258) | | | (7,458) | | | — | | | — | | | — | |
Net income (loss) | $ | (553,005) | | | $ | 158,826 | | | $ | 213,105 | | | $ | 375,446 | | | $ | (38,453) | |
Share-based compensation expense | 1,069,289 | | | 608,042 | | | 397,500 | | | 297,863 | | | 216,881 | |
Acquisition related, integration, and other costs | 157,264 | | | 35,474 | | | 7,482 | | | 9,739 | | | 4,708 | |
Amortization of intangible assets | 208,952 | | | 40,522 | | | 19,239 | | | 15,000 | | | 13,103 | |
Amortization of debt discount and issuance costs | 15,162 | | | 9,822 | | | 67,979 | | | 39,139 | | | 32,855 | |
Loss (gain) on revaluation of equity investments | (73,457) | | | (35,493) | | | (295,297) | | | 12,326 | | | (20,342) | |
Bitcoin impairment losses | 46,571 | | | 71,126 | | | — | | | — | | | — | |
Loss on extinguishment of long-term debt | — | | | — | | | 6,651 | | | — | | | 5,028 | |
Loss (gain) on disposal of property and equipment | 1,619 | | | 2,633 | | | 2,570 | | | 1,008 | | | (224) | |
| | | | | | | | | |
Gain on sale of asset group | — | | | — | | | — | | | (373,445) | | | — | |
Acquired deferred revenue adjustment | 382 | | | 744 | | | 1,497 | | | 7,457 | | | 12,853 | |
Acquired deferred cost adjustment | (152) | | | (230) | | | (375) | | | (1,369) | | | (2,042) | |
Tax effect of non-GAAP net income adjustments | (264,523) | | | (222,104) | | | (102,383) | | | (85,372) | | | (34,371) | |
Adjusted Net Income - basic | $ | 608,102 | | | $ | 669,362 | | | $ | 317,968 | | | $ | 297,792 | | | $ | 189,996 | |
Cash interest expense on convertible notes | 5,014 | | | 6,099 | | | 6,078 | | | 5,108 | | | 1,292 | |
Adjusted Net Income - diluted | $ | 613,116 | | | $ | 675,461 | | | $ | 324,046 | | | $ | 302,900 | | | $ | 191,288 | |
Weighted-average shares used to compute Adjusted Net Income Per Share: | | | | | | | | | |
Basic | 578,949 | | | 458,432 | | | 443,126 | | | 424,999 | | | 405,731 | |
Diluted | 615,034 | | | 525,725 | | | 507,229 | | | 486,381 | | | 478,895 | |
Adjusted Net Income Per Share: | | | | | | | | | |
Basic | $ | 1.05 | | | $ | 1.46 | | | $ | 0.72 | | | $ | 0.70 | | | $ | 0.47 | |
Diluted | $ | 1.00 | | | $ | 1.28 | | | $ | 0.64 | | | $ | 0.62 | | | $ | 0.40 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended, | | | | | | | | | | | | | | |
| Dec. 31, 2019 | | Sep. 30, 2019 | | Jun. 30, 2019 | | Mar. 31, 2019 | | Dec. 31, 2018 | | Sep. 30, 2018 | | Jun. 30, 2018 | | Mar. 31, 2018 |
| (in thousands, except per share data) | | | | | | | | | | | | | | |
Adjusted Net Income Per Share: | | (unaudited) | | | | | | | | | | | | | | |
Net income (loss) | | $ | 390,940 | | | $ | 29,397 | | | $ | (6,740) | | | $ | (38,151) | | | $ | (28,204) | | | $ | 19,643 | | | $ | (5,906) | | | $ | (23,986) | |
Share-based compensation expense | | 79,883 | | | 77,426 | | | 79,466 | | | 61,088 | | | 59,025 | | | 58,913 | | | 52,119 | | | 46,824 | |
Amortization of intangible assets | | 3,714 | | | 3,841 | | | 3,958 | | | 3,487 | | | 4,028 | | | 4,384 | | | 2,816 | | | 1,875 | |
| | | | | | | | | | | | | | | |
Amortization of debt discount and issuance costs | | 9,963 | | | 9,843 | | | 9,725 | | | 9,608 | | | 10,005 | | | 11,627 | | | 6,830 | | | 4,393 | |
Loss (gain) on revaluation of equity investment | | (4,141) | | | (2,462) | | | 4,842 | | | 14,087 | | | 16,566 | | | (36,908) | | | — | | | — | |
Loss on extinguishment of long-term debt | | — | | | — | | | — | | | — | | | 3,403 | | | 1,625 | | | — | | | — | |
Loss (gain) on disposal of property and equipment | | 580 | | | 128 | | | 281 | | | 19 | | | (1,005) | | | 806 | | | 73 | | | (98) | |
Gain on sale of asset group | | (373,445) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Acquisition related and other costs | | 1,260 | | | 1,564 | | | 6,133 | | | 782 | | | — | | | 345 | | | 4,363 | | | — | |
Acquired deferred revenue adjustment | | 928 | | | 1,224 | | | 1,849 | | | 3,456 | | | 4,521 | | | 5,892 | | | 2,440 | | | — | |
Acquired deferred cost adjustment | | (189) | | | (238) | | | (365) | | | (577) | | | (761) | | | (927) | | | (354) | | | — | |
Adjusted Net Income - basic | $ | 109,493 | | | $ | 120,723 | | | $ | 99,149 | | | $ | 53,799 | | | $ | 67,578 | | | $ | 65,400 | | | $ | 62,381 | | | $ | 29,008 | |
Cash interest expense on convertible senior notes | | 1,277 | | | 1,277 | | | 1,277 | | | 1,277 | | | 1,292 | | | — | | | — | | | — | |
Adjusted Net Income - diluted | $ | 110,770 | | | $ | 122,000 | | | $ | 100,426 | | | $ | 55,076 | | | $ | 68,870 | | | $ | 65,400 | | | $ | 62,381 | | | $ | 29,008 | |
| | | | | | | | | | | | | | | |
Adjusted Net Income Per Share: | | | | | | | | | | | | | | | |
Basic | $ | 0.25 | | | $ | 0.28 | | | $ | 0.23 | | | $ | 0.13 | | | $ | 0.16 | | | $ | 0.16 | | | $ | 0.15 | | | $ | 0.07 | |
Diluted | $ | 0.23 | | | $ | 0.25 | | | $ | 0.21 | | | $ | 0.11 | | | $ | 0.14 | | | $ | 0.13 | | | $ | 0.13 | | | $ | 0.06 | |
Weighted-average shares used to compute Adjusted Net Income Per Share: | | | | | | | | | | | | | | | |
Basic | 430,136 | | | 427,124 | | | 423,305 | | | 419,289 | | | 413,984 | | | 409,690 | | | 403,301 | | | 395,948 | |
Diluted | 485,394 | | | 486,404 | | | 486,532 | | | 487,056 | | | 488,177 | | | 495,621 | | | 470,022 | | | 461,761 | |
Diluted Adjusted Net Income Per Share is computed by dividing Adjusted Net Income by the weighted-average number of shares of common stock outstanding adjusted for the dilutive effect of all potential shares of common stock. In periods when we reported an Adjusted Net Loss, diluted Adjusted Net Income Per Share is the same as basic Adjusted Net Income Per Share because the effects of potentially dilutive items were anti-dilutive.
Quarterly TrendsThe following table presents a reconciliation of the tax effect of non-GAAP net income adjustments to our provision (benefit) for income taxes (in thousands, except effective tax rate):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 |
Provision (benefit) for income taxes, as reported | $ | (12,312) | | | $ | (1,364) | | | $ | 2,862 | | | $ | 2,767 | | | $ | 2,326 | |
Tax effect of non-GAAP net income adjustments | 264,523 | | | 222,104 | | | 102,383 | | | 85,372 | | | 34,371 | |
Adjusted provision for income taxes, non-GAAP | $ | 252,211 | | | $ | 220,740 | | | $ | 105,245 | | | $ | 88,139 | | | $ | 36,697 | |
Non-GAAP effective tax rate | 29% | | 25% | | 25% | | 23% | | 16% |
Transaction-based revenue is highly correlated withWe determined the level of GPV generatedadjusted provision for income taxes by sellers using our managed payments services. Historically our transaction-based revenue has been strongest in our fourth quartercalculating the estimated annual effective tax rate based on adjusted pre-tax income and weakest in our first quarter, as our sellers typically generate additional GPV during the holiday season. We believe that this seasonality has affected and will continueapplying it to affect our quarterly results; however, to date its effect has been masked by our rapid growth.
Subscription and services-based revenue generally demonstrates less seasonality than transaction-based revenue. The sequential increase was primarily driven by continued growth of Cash App, Square Capital, and Instant Deposit for sellers. On October 31, 2019, we completed the sale of the Caviar business, and accordingly we will no longer recognize any revenue from Caviar.
Hardware revenue generally demonstrates less seasonality than transaction-based revenue, with most fluctuations tied to periodic product launches, promotions, or other arrangements with our retail partners. Recent product launches include Square Register in the fourth quarter of 2017 and Square Terminal during the fourth quarter of 2018.
During the fourth quarter of 2017, we started offering our Cash App customers the ability to purchase bitcoin from us. Bitcoin revenue comprises the total sale amount we receive from bitcoin sales to customers and is recorded upon transfer of bitcoin to the customer's account. The sale amount generally includes a small margin added to the price we pay to purchase bitcoin and accordingly, the amount of bitcoin revenue will fluctuate depending on the volatility of market bitcoin prices and customer demand.
Adjusted Net Income before income taxes.
Changes in product development expenses primarily reflect the timing of additions of engineering, product, and design personnel. To a lesser extent, they also reflect the timing of fees and supply costs related to maintenance and capacity expansion at third-party data center facilities, development and tooling costs related to the design, testing, and shipping of our hardware products, and fees for software licenses, consulting, legal, and other services that are directly related to growing and maintaining our products and services.
Changes in sales and marketing expenses reflect the variable nature of the timing and magnitude of paid marketing and customer acquisition initiatives across our advertising channels. Changes in sales and marketing expenses are also affected by the timing of additions of direct sales, account management, local, product and paid marketing, retail and ecommerce, partnerships, and communications personnel. Additionally, sales and marketing expenses are affected by the timing and magnitude of costs related to our Cash App peer-to-peer transfer service and Cash Card issuance costs. We offer the Cash Card and peer-to-peer service to our Cash App customers for free and we consider these to be marketing tools intended to encourage the usage of Cash App.
Changes in general and administrative expenses primarily reflect the timing of additions of finance, legal, risk operations, human resources, and administrative personnel, as well as the timing of non income tax payments and reserves. They also reflect the timing of costs related to support personnel and systems, as well as fees paid for professional services, including legal and financial services.
Gain on sale of asset group represents the net gain we made on the sale of the Caviar business. Changes in interest expense (income), net are driven by interest expense related to our convertible notes and interest income earned on our investment in marketable debt securities. Changes in other expense (income), net was primarily due to gains or losses arising from revaluation of a publicly traded equity investment in Eventbrite and the subsequent mark to market of this investment. In December 2019, the Company sold the investment in Eventbrite and as a result will not be impacted by mark to market revaluations related to this investment in future periods. To a lesser extent this balance is also impacted by foreign exchange gains or losses.
Liquidity and Capital Resources
As of December 31, 2022, we had approximately $7.5 billion in available funds, including an undrawn amount of $600.0 million available under our revolving credit facility. Additionally, we had $389.4 million available under our warehouse funding facilities. We intend to continue focusing on our long-term business initiatives and believe that our available funds are sufficient to meet our liquidity needs for the foreseeable future. As of December 31, 2022, we were in compliance with all covenants associated with our revolving credit facility and senior notes. None of our warehouse funding facilities contain financial covenants.
The following table summarizes our cash, cash equivalents, restricted cash, customer funds, and investments in marketable debt securities (in thousands):
| | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2022 | | 2021 | | |
Cash and cash equivalents | $ | 4,544,202 | | | $ | 4,443,669 | | | |
Short-term restricted cash | 639,780 | | | 18,778 | | | |
Long-term restricted cash | 71,600 | | | 71,702 | | | |
Customer funds cash and cash equivalents | 3,180,324 | | | 2,440,941 | | | |
Cash, cash equivalents, restricted cash, and customer funds | 8,435,906 | | | 6,975,090 | | | |
Investments in short-term debt securities | 1,081,851 | | | 869,283 | | | |
Investments in long-term debt securities | 573,429 | | | 1,526,430 | | | |
Cash, cash equivalents, restricted cash, customer funds, and investments in marketable debt securities | $ | 10,091,186 | | | $ | 9,370,803 | | | |
Liquidity Sources
| | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2019 | | 2018 | | |
Cash and cash equivalents | $ | 1,047,118 | | | $ | 583,173 | | | |
Short-term restricted cash | 38,873 | | | 33,838 | | | |
Long-term restricted cash | 12,715 | | | 15,836 | | | |
Cash, cash equivalents, and restricted cash | 1,098,706 | | | 632,847 | | | |
Investments in short-term debt securities | 492,456 | | | 540,991 | | | |
Investments in long-term debt securities | 537,303 | | | 464,680 | | | |
Cash, cash equivalents, restricted cash and investments in marketable debt securities | $ | 2,128,465 | | | $ | 1,638,518 | | | |
Our principal sources of liquidity are our cash and cash equivalents, and investments in marketable debt securities. As of December 31, 2019,2022, we had $2.1$10.1 billion of cash and cash equivalents, restricted cash, customer funds cash and cash equivalents, and investments in marketable debt securities. Customer funds cash and cash equivalents are separate from the Company's corporate funds and are not used for any corporate purposes. These funds are not used for Company liquidity, but rather to meet the obligations set aside for customers. Investments in marketable debt securities which were held primarily in cash deposits, money market funds, reverse repurchase agreements, U.S. government and agency securities, commercial paper, and corporate bonds. We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Our investments in marketable debt securities are classified as available-for-sale. Excluding customer funds, our total liquidity as of December 31, 2022 was $6.9 billion.
As of December 31, 2022, we have purchased a cumulative $220.0 million in bitcoin for investment purposes. We believe cryptocurrency is an instrument of economic empowerment that aligns with our corporate purpose. We expect to hold these investments for the long term but will continue to reassess our investment in bitcoin relative to our balance sheet. As bitcoin is considered an indefinite-lived intangible asset, under the accounting policy for such assets, we are required to recognize any decreases in market prices below carrying value as an impairment charge, with any mark up in value or reversal of impairment prohibited if the market price of bitcoin subsequently increases. We recorded impairment charges of $46.6 million in the year ended December 31, 2022 due to the observed market price of bitcoin decreasing below the carrying value during the period. As of December 31, 2022, the fair value of the investment in bitcoin was $132.7 million based on observable market prices, which is $30.4 million in excess of our carrying value of $102.3 million after cumulative impairment charges.
In September 2020, we announced our intent to invest $100.0 million in supporting underserved communities, particularly, racial and ethnic minority groups who have been disproportionately affected by COVID-19. This initiative further deepens our commitment toward economic empowerment to help broaden such communities' access to financial services. As of December 31, 2022, we have invested $32.0 million in aggregate towards this initiative, of which $10.1 million and $21.5 million were invested in the years ended December 31, 2022 and 2021, respectively.
Our principal commitments consist of convertible notes, senior notes, revolving credit facility, warehouse funding facilities, operating leases, and purchase commitments. Refer to Note 15, Indebtedness andNote 20, Commitments and Contingencies within Notes to the Consolidated Financial Statements for more details on these commitments.
Senior Notes and Convertible Notes
As of December 31, 2019,2022, we held $1.1$4.6 billion in aggregate principal amount of convertible senior notes,debt, comprised of $211.7 million in aggregate principal amount of convertible senior notes that mature on March 1, 2022(2022 Notes) and $862.5$460.6 million in aggregate principal amount of convertible senior notes that mature on May 15, 2023 (2023 Notes). The 2022 Notes bear interest at a rate("2023 Convertible Notes"), $1.0 billion in aggregate amount of 0.375% payable semi-annuallyconvertible senior notes that mature on March 1, 2025 ("2025 Convertible Notes"), $575.0 million in aggregate amount of convertible senior notes that mature on May 1, 2026 ("2026 Convertible Notes"), and September$575.0 million in aggregate amount of convertible senior notes that mature on November 1, of each year, while2027 ("2027 Convertible Notes," and together with the 2023 Convertible Notes, 2025 Convertible Notes, and 2026 Convertible Notes, the “Convertible Notes”). Additionally, on May 20, 2021, we issued $1.0 billion in aggregate principal amount of outstanding senior unsecured notes that mature on June 1, 2026 ("2026 Senior Notes") and $1.0 billion in aggregate principal amount of outstanding senior unsecured notes that mature on June 1, 2031 ("2031 Senior Notes" and, together with the 2026 Senior Notes, the “Senior Notes” and, together with the Convertible Notes, the “Notes”). The 2023 Convertible Notes bear interest at a rate of 0.50% payable semi-annually on May 15 and November 15 of each year, the 2025 Convertible Notes bear interest at a rate of 0.125% payable semi-annually on March 1 and September 1 of each year, the 2026 Convertible Notes bear no interest, and the 2027 Convertible Notes bear interest at a rate of 0.25% payable semi-annually on May 1 and November 1 of each year. These notesConvertible Notes can be converted or repurchased prior to maturity if certain conditions are met. We currently expectThe 2026 Senior Notes bear interest a rate of 2.75% payable semi-annually on June 1 and December 1, while the 2031 Senior Notes bear interest at a rate of 3.50% payable semi-annually on June 1 and December 1 of each year. These Senior Notes can be redeemed or repurchased prior to settle future conversionsmaturity if certain conditions are met.
On January 31, 2022, we closed the acquisition of Afterpay and assumed Afterpay's outstanding convertible notes of $1.1 billion, which we redeemed in cash on March 4, 2022 at face value. Refer to Note 9, Acquisitions within Notes to the notes entirely in shares of the Company's Class A common stock and will reevaluate this policy from time to time as conversion notices are received from holders of the notes.Consolidated Financial Statements for further details.
In addition, weRevolving Credit Facility
We have entered into a revolving securedcredit agreement with certain lenders, as subsequently amended, which provides a $500.0 million senior unsecured revolving credit facility that matures(the "2020 Credit Facility") maturing in November 2020. To date, no funds have been drawn under the credit facility, with $375.0 million remaining available. HistoricallyMay 2024. On February 23, 2022, the Company has amended and extendedentered into a sixth amendment to the maturityCredit Agreement to, among other things, provide for a new tranche of this facility and plansunsecured revolving loan commitments in an aggregate principal amount of up to extend or renew prior to its maturity in November 2020.$100.0 million (the "Tranche B Loans"). Loans under the credit facility2020 Credit Facility, excluding the Tranche B Loans, bear interest at our option of (i) a base rate based on the highest of the prime rate, the federal funds rate plus 0.50%, and anthe adjusted LIBOR rate for a one-month interest period,plus 1.00%, in each case, plus a margin ranging from 0.00%0.25% to 1.00%,0.75% or (ii) an adjusted LIBOR rate plus a margin ranging from 1.00%1.25% to 2.00%1.75%. ThisThe margin is determined based on our total net leverage ratio, foras defined in the preceding four fiscal quarters.agreement. The Tranche B Loans bear interest at the Company's option of (i) an annual rate based on the forward-looking term rate based on the Secured Overnight Financing Rate ("Term SOFR") or (ii) a base rate. Tranche B Loans based on Term SOFR shall bear interest at a rate equal to Term SOFR plus a margin of between 1.25% and 1.75%, depending on the Company's total net leverage ratio. Tranche B Loans based on the base rate shall bear interest at a rate based on the highest of the prime rate, the federal funds rate plus 0.50%, and Term SOFR with a tenor of one-month plus 1.00%, in each case, plus a margin ranging from 0.25% to 0.75%, depending on the Company's total net leverage ratio. We are obligated to pay other customary fees for a credit facility of this size and type including an annual administrative agent fee of $0.1 million and an unused commitment fee of 0.15%. To date, no funds have been drawn and no letters of credit have been issued under the 2020 Credit Facility.
Warehouse Funding Facilities
Following the acquisition of Afterpay, we assumed Afterpay's existing warehouse funding facilities ("Warehouse Facilities") with an aggregate commitment amount of $1.7 billion on a revolving basis, of which $1.3 billion was drawn and $0.4 billion remained available as of December 31, 2022. The Warehouse Facilities have been arranged utilizing wholly-owned and consolidated entities formed for the sole purpose of financing the origination of consumer receivables to partly fund our BNPL platform. Borrowings under the Warehouse Facilities are secured against the respective consumer receivables.
Cash, Restricted Cash, and Working Capital
See Note 13, Indebtedness, of the Notes to the Consolidated Financial Statements for more details on these transactions.
As described above, on July 31, 2019, we entered into a definitive agreement with DoorDash, Inc. for the sale of the Caviar business. The sale closed on October 31, 2019, and the Company received $410 million in gross proceeds comprised of a combination of $310 million in cash and $100 million in DoorDash, Inc.'s preferred stock.
We believe that our existing cash and cash equivalents, investment in marketable debt securities, and availability under our line of credit will be sufficient to meet our working capital needs, including any expenditures related to strategic transactions and investment commitments that we may from time to time enter into, and planned capital expenditures for at least the next 12 months. From time to time, we may seek to raise additionalhave raised capital throughby issuing equity, equity-linked, or debt securities such as our convertible notes and debt
62
senior notes; and we may do so in the future, however, such funding may not be available on terms acceptable to us or at all.
When we were last rated, in the second half of 2022, we received a non-investment grade rating by S&P Global Ratings (BB), Fitch Ratings, Inc. (BB), and Moody's Corporation (Ba2). We expect that these credit rating agencies will continue to monitor our performance, including our capital structure and results of operations. Our liquidity, access to capital, and borrowing costs could be adversely impacted by declines in our credit rating.
financing arrangements. We cannot provide assurance thathave entered into various non-cancelable operating leases for certain offices with contractual lease periods expiring between 2022 and 2034. We recognized total rental expenses under operating leases of $93.6 million, $80.3 million, and $75.2 million during the years ended December 31, 2022, 2021, and 2020, respectively. As of December 31, 2022, we had non-cancelable purchase obligations related to cloud computing infrastructure of $1.3 billion. We do not have any additional financing will be available to us on acceptable terms or at all.off-balance sheet arrangements during the periods presented.
Short-term restricted cash of $38.9$639.8 million as of December 31, 2019 reflects2022 primarily includes cash held by the wholly-owned consolidated entities used in the Warehouse Facilities funding arrangements, that will be used to pay the borrowings under the Warehouse Facilities or will be distributed to us. It also includes pledged cash deposited into savingsdeposits in accounts at the financial institutions that process our sellers' paymentspayment transactions and as collateral pursuant to an agreementvarious agreements with the originating bank for the Company's loan product.banks relating to our products. We use the restricted cash to secure letters of credit with thesethe related financial institutions to provide collateral for liabilities arising from cash flow timing differences in the processing of these payments. We have recorded this amountthese amounts as a current assetassets on our consolidated balance sheetssheet given the short-term nature of these cash flow timing differences and that there is no minimum time frame during which the cash must remain restricted. Additionally, this balance includes certain amounts held as collateral pursuant to multi-year lease agreements, discussed in the paragraph below, which we expect to become unrestricted within the next year.
Long-term restricted cash of $12.7$71.6 million as of December 31, 20192022 is primarily related to cash deposited into money market funds that is usedheld as collateral pursuant to multi-year lease agreements. The Company hasas required by the FDIC for Square Financial Services. We have recorded this amountthese amounts as a non-current assetassets on theour consolidated balance sheetssheet as the lease terms extend beyond one year.
requirement by the FDIC specifies a time frame of 12 months or longer during which the cash must remain restricted.
We experience significant day-to-day fluctuations in our cash and cash equivalents due to fluctuations in settlements receivable, and customers payable, and hence working capital. These fluctuations are primarily due to:
•Timing of period end. For periods that end on a weekend or a bank holiday, our cash and cash equivalents, settlements receivable, and customers payable balances typically will be higher than for periods ending on a weekday, as we settle to our sellers for payment processing activity on business days; and
•Fluctuations in daily GPV. When daily GPV increases, our cash and cash equivalents, settlements receivable, and customers payable amounts increase. Typically our settlements receivable and customers payable balances at period end represent one to four days of receivables and disbursements to be made in the subsequent period. Customers payable, excluding amounts attributable to Cash App stored funds, and settlements receivable balances typically move in tandem, as pay-out and pay-in largely occur on the same business day. However, customers payable balances will be greater in amount than settlements receivable balances due to the fact that a subset of funds are held due to unlinked bank accounts, risk holds, and chargebacks. Also customer funds obligations, which are included in customers payable, may cause customers payable to trend differently than settlements receivable. Holidays and day-of-week may also cause significant volatility in daily GPV amounts.
Safeguarding Obligation Liability and Safeguarding Asset Related to Bitcoin Held for Other Parties
As detailed in Note 14, Bitcoin Held for Other Parties within Notes to the Consolidated Financial Statements, upon the adoption of SAB 121, we recorded a safeguarding obligation liability and a corresponding safeguarding asset related to the bitcoin held for other parties. As of December 31, 2022, the safeguarding obligation liability related to bitcoin held for other parties was $428.2 million. We have taken steps to mitigate the potential risk of loss for the bitcoin held for other parties, including holding insurance coverage specifically for certain bitcoin incidents and using secure cold storage to store materially all of the bitcoin held for other parties. SAB 121 also asks us to consider the legal ownership of the bitcoin held for other parties, including whether the bitcoin held for other parties would be available to satisfy general creditor claims in the event of Block’s bankruptcy. The legal rights of people with respect to crypto-assets held on their behalf by a custodian, such as us, upon the custodian’s bankruptcy have not yet been settled by courts and are highly fact dependent. Our contractual arrangements state that our customers and trading partners retain legal ownership of the bitcoin custodied by us on their behalf; they have the right to sell, pledge, or transfer the bitcoin; and they also benefit from the rewards and bear the risks associated with the ownership, including as a result of any bitcoin price fluctuations. We do not use any of the bitcoin held for other parties as collateral for our loans or any other financing arrangements, nor do we lend or pledge bitcoin held for others to any third parties. We have been monitoring and will continue to actively monitor legal and regulatory developments and may consider further steps, as appropriate, to support this contractual position so that in the event of Block’s bankruptcy, the bitcoin custodied by us should not be deemed to be part of Block's bankruptcy estate. We do not expect potential future cash flows associated with the bitcoin safeguarding obligation liability.
Cash Flow Activities
The following table summarizes our cash flow activities (in thousands):
| | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2019 | | 2018 | | |
Net cash provided by operating activities | $ | 465,699 | | | $ | 295,080 | | | |
Net cash provided by (used in) investing activities: | 95,193 | | | (905,848) | | | |
Net cash provided by (used in) financing activities | (98,874) | | | 515,755 | | | |
Effect of foreign exchange rate on cash and cash equivalents | 3,841 | | | (7,221) | | | |
Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 465,859 | | | $ | (102,234) | | | |
| | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2022 | | 2021 | | |
Net cash provided by operating activities | $ | 175,903 | | | $ | 847,830 | | | |
Net cash provided by (used in) investing activities | 1,225,696 | | | (1,310,879) | | | |
Net cash provided by financing activities | 97,580 | | | 2,652,034 | | | |
Effect of foreign exchange rate on cash and cash equivalents | (38,363) | | | (7,066) | | | |
Net increase in cash, cash equivalents, restricted cash, and customer funds | $ | 1,460,816 | | | $ | 2,181,919 | | | |
Cash Flows from Operating Activities
Cash provided by (used in) operating activities consisted of net loss adjusted for certain non-cash items including gain or loss on revaluation of equity investment, depreciation and amortization, non-cash interest and other expense, share-based compensation expense, transaction and loan losses, deferred income taxes, and gain (loss) on disposal of property and equipment, non-cash lease expense, gain on sale of asset group, as well as the effect of changes in operating assets and liabilities, including working capital.
For the year ended December 31, 2019,2022, cash provided by operating activities was $465.7$175.9 million, primarily due to a net income of $375.4$553.0 million, adjusted for the add back of non-cash expenses of $574.5$1.4 billion consisting primarily of share-based compensation; transaction, loan, and consumer receivable losses; depreciation and amortization; non-cash interest; and bitcoin impairment losses. This was offset by a net outflow from amortization of discounts and premiums and other non-cash adjustments of $592.5 million and changes in other assets and liabilities of $674.4 million due to timing of period end.
For the year ended December 31, 2021, cash provided by operating activities was $847.8 million, primarily due to net income of $158.8 million, adjusted for the add back of non-cash expenses of $1.1 billion consisting primarily of share-based compensation, transaction and loan losses, depreciation and amortization, and non-cash interest, bitcoin impairment losses and other expenses largely driven by growth and expansion of our business activities,expenses. This was offset in part by the gain on sale of Caviar of $373.4 million in the fourth quarter. The cash generated from operating activities was negatively affected by a net outflow from changes in other assets and liabilities of $110.8 million.
For the year ended December 31, 2018, cash provided by operating activities was $295.1$325.2 million primarily due to a net losstiming of $38.5 million, adjusted for the add backperiod end, as well as PPP loans facilitated, less loans sold, of non-cash expenses of $379.4 million consisting primarily of share-based compensation, transaction and loan losses, depreciation and amortization, and non-cash interest and other expenses, largely driven by growth and expansion of our business activities. The cash generated from operating activities was negatively affected by a net outflow from changes in other assets and liabilities of $45.9$56.0 million.
Cash Flows from Investing Activities
Cash flows used in investing activities primarily relate to business acquisitions, consumer receivables, capital expenditures to support our growth, and investments in marketable debt securities, investment in privately held entity, and business acquisitions.securities.
For the year ended December 31, 2019,2022, cash provided by investing activities was $95.2 million,$1.2 billion, primarily as a result ofdue to the net cash proceeds from sale of asset group of $309.3 million related to the sale of the Caviar business and proceeds from sale of equity investment in Eventbrite of $33.0 million, offset in part by the net investments of marketable securities, including investments from customer funds, of $149.0 million.$1.1 billion. Additional usesinflows of cash in investing activities were a result of purchases of property and equipment of $62.5 million, business combinations, net of cash acquired of $20.4 million, and other investments of $15.3 million.
For the year ended December 31, 2018, cash used in investing activities was $905.8 million, primarily as a result of the net investments of marketable debt securities of $630.9 million. We increased our investment portfolio using proceeds from the financing activities described below. During the year ended December 31, 2018, the Company started investing a portion of customer funds in short-term marketable debt securities. Such uses of cash include net investments of marketable debt securities from customer funds of $99.8 million. Additional uses of cash were a result of business acquisitions, net of cash acquired, of $112.4 million and$539.5 million. These were partially offset by the purchase of property and equipment of $61.2$170.8 million, to help us scale.net consumer receivable originations of $169.4 million, and purchases of other investments of $56.7 million.
For the year ended December 31, 2021, cash used in investing activities was $1.3 billion, primarily due to the net proceeds from investments of marketable securities, including investments from customer funds, of $1.2 billion. Additional uses of cash were as a result of business acquisitions, net of cash acquired of $164.0 million, the purchase of bitcoin investments of $170.0 million, the purchase of property and equipment of $134.3 million, and purchases of other investments of $48.5 million. These were partially offset by proceeds from sales of equity investments of $420.6 million.
Cash Flows from Financing Activities
For the year ended December 31, 2019,2022, cash used inprovided by financing activities was $98.9$97.6 million, primarily as a result of payments for employee tax withholding related to vestingnet proceeds from warehouse facilities borrowings of restricted stock units$1.2 billion, a change in customer funds of $212.3$349.3 million, offset in part byas well as proceeds from issuances of common stock from the exercise of options and purchases under theour employee stockshare purchase plan net of $118.5$81.8 million. These were offset by the payment to redeem convertible notes assumed upon the acquisition of Afterpay of $1.1 billion and repayments of the PPPLF advances of $480.7 million.
For the year ended December 31, 2018,2021, cash provided by financing activities was $515.8 million,$2.7 billion, primarily as a result of $795.2 million$2.0 billion in net proceeds from the 20232031 Senior Notes offering and as a result of2026 Senior Notes offerings, proceeds from issuances of common stock from the exercise of options and purchases under theour employee stockshare purchase plan net of $133.9$126.7 million, offset in part by the cash payment of $219.4 million for the principal amount of certain 2022 Notes upon conversion and payments for employee tax withholding related to vesting of restricted stock units of $189.1$323.0 million.
Contractual Obligations and Commitments
Our principal commitments consist of convertible senior notes, operating leases, capital leases, and purchase commitments. The following table summarizes our commitments to settle contractual obligations in cash as of December 31, 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments due by period | | | | | | | | | |
| Total | | | Less than 1 year | | | 1 - 3 years | | | 3 - 5 years | | | More than 5 years |
| (in thousands) | | | | | | | | | |
Convertible senior notes, including interest | $ | 1,090,506 | | | $ | 5,109 | | | $ | 221,280 | | | $ | 864,117 | | | $ | — | |
Operating leases | 534,778 | | | 42,173 | | | 133,609 | | | 105,905 | | | 253,091 | |
Finance leases | 2,446 | | | 2,446 | | | — | | | — | | | — | |
Purchase commitments | 53,311 | | | 53,311 | | | — | | | — | | | — | |
Total | $ | 1,681,041 | | | $ | 103,039 | | | $ | 354,889 | | | $ | 970,022 | | | $ | 253,091 | |
Convertible Senior Notes
On May 25, 2018, we issued $862.5 million in aggregate principal amount of 2023 Notes that mature on May 15, 2023, unless earlier converted or repurchased, and bear interest at a rate of 0.50% payable semi-annually on May 15 and November 15 of each year. See Note 13, Indebtedness, of the Notes to the Consolidated Financial Statements for more details on this transaction.
On March 6, 2017, we issued $440.0 million in aggregate principal amount of Notes that mature on March 1, 2022, unless earlier converted or repurchased, and bear interest at a rate of 0.375% payable semi-annually on March 1 and September 1 of each year. See Note 13, Indebtedness, of the Notes to the Consolidated Financial Statements for more details on this transaction.
Lease Commitments
We have entered into various non-cancelable operating leases for certain offices with contractual lease periods expiring between 2020 and 2031. We recognized total rental expenses under operating leases of $32.5 million, $23.3 million, and $12.9 million during the years ended December 31, 2019, 2018, and 2017, respectively.
Purchase commitments
We had non-cancelable purchase obligations to hardware suppliers for $53.3 million for the year ended December 31, 2019.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements during the periods presented.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. GAAP requires us to make certain estimates and judgments that affect the amounts reported in our financial statements. We base our estimates on historical experience, anticipated future trends, and other assumptions we believe to be reasonable under the circumstances. Because these accounting policies require significant judgment, our actual results may differ materially from our estimates.
We believe accounting policies and the assumptions and estimates associated with accrued transaction losses and revenue recognitionbusiness combinations could potentially have the greatest potentiala material effect on our consolidated financial statements. Therefore, we consider these to be ourstatements, and therefore are critical accounting policies and estimates.
Transaction Losses
We are exposed to transaction losses due to chargebacks as a result of fraud or uncollectibility of transaction payments. We estimate accrued transaction losses based on available data as of the reporting date, including expectations of future chargebacks, and historical trends related to loss rates. During the year ended December 31, 2019, we recorded Seller
transaction losses of $88.1 million, which as a percentage of GPV were less than 0.1%, and continues to show improvement relative to historical averages. We expect transaction losses to increase to a lesser extent than GPV growth due to ongoing investment in data science and improvements in our risk operations to mitigate exposure to transaction losses.Business Combinations
Contingencies
As disclosed in Note 18a result of the acquisitions of TIDAL, completed in the second quarter of 2021, and Afterpay, completed on January 31, 2022, we consider accounting for business combinations under ASC 805, Business Combinations, to also be a critical accounting policy and estimate as it requires management to make significant estimates and assumptions, including the valuation of intangible assets acquired, determination of fair values of liabilities assumed including pre-acquisition contingencies and valuation of contingent consideration, where applicable. Although we believe that the assumptions and estimates we have made have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results. The carrying value of our acquired intangible assets as of December 31, 2022 was $2.0 billion. Refer to Note 9, Acquisitions and Note 11, Acquired Intangible Assets within Notes to the Consolidated Financial Statements we have potential exposurefor further details.
Accrued Transaction Losses
We are exposed to credit losses related to transactions processed by sellers that are subsequently subject to chargebacks when we are unable to collect from the sellers primarily due to insolvency, disputes between a tax disputeseller and their customer, or due to fraudulent transactions. Generally, we estimate 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. We also consider other relevant market data in developing such estimates and assumptions. Accrued transaction losses also include estimated losses on Cash App activity related to peer-to-peer payments sent from a credit card, Cash for Business, and Cash App Card. As of December 31, 2022, we had accrued $64.5 million related to transaction losses. Additions to the reserve are reflected in current operating results, while realized losses are offset against the reserve. These amounts are classified within transaction, loan, and consumer receivable losses on the consolidated statements of operations, except for the amounts associated with the Tax Collector. Dependingpeer-to-peer service offered to Cash App customers for free that are classified within sales and marketing expenses. Refer to Note 1, Description of Business and Summary of Significant Accounting Policies and Note 12, Other Consolidated Balance Sheet Components (Current) within Notes to the Consolidated Financial Statements for further details.
Allowance for Credit Losses Related to Consumer Receivables
We are exposed to credit losses on our consumer receivables portfolio. We estimate the outcomeexpected credit losses in the outstanding portfolio of consumer receivables using both quantitative and qualitative methods that analyze portfolio performance, uses judgment regarding the quantitative components of the tax dispute,reserve, and considers all available information relevant to assessing collectibility. As of December 31, 2022, we estimate that we could incur losses associated with taxes, interest,had accrued $151.3 million related to allowance for credit losses. Refer to Note 1, Description of Business and penalties that range from approximately $0Summary of Significant Accounting Policies and Note 6, Consumer Receivables, net within Notes to $63 million in the aggregateConsolidated Financial Statements for the fiscal years 2016, 2017, 2018 and 2019. Additional taxes, interest and penalties for future periods could be material as well. Estimating the amount losses that we should record in our financial statements for the potential exposure requires us to make assumptions and apply considerable judgment. The eventual outcome could differ materially from the estimates we have made in the financial statements.further details.
Recent Accounting Pronouncements
See “Recent Accounting Pronouncements” described in Note 1, Description of theBusiness and Summary of Significant Accounting Policies within Notes to our consolidated financial statements.the Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have operations both within the United States and globally, and we are exposed to market risks in the ordinary course of our business, including the effects of interest rate changes and foreign currency fluctuations. Information relating to quantitative and qualitative disclosures about these market risks is described below.
Equity Price Risk
Marketable Equity Investments
Our marketable equity investments are investments held in publicly-traded companies and are measured using quoted prices in active markets which could result in volatility in our financial results in future periods. As of December 31, 2022, our marketable equity investments were immaterial. Adjustments are recorded in other (expense) income, net on the consolidated statements of operations and establish a new carrying value for the investment. A hypothetical 10% increase or decrease in the fair value of our marketable equity investments would not have a material effect on our financial results.
Non-Marketable Equity Investments
Our non-marketable equity investments are investments in privately-held companies that we hold for purposes other than trading. These investments are inherently risky because there is no established market for these securities and the markets for the technologies or products these companies are developing are typically in the early stages. As such, we could lose our entire investment in these companies. Adjustments are recorded in other expense (income), net on the consolidated statements of operations and establish a new carrying value for the investment. As of December 31, 2022, the aggregate carrying value of our non-marketable equity investments included in other non-current assets was $208.9 million. A hypothetical 10% increase or decrease in the carrying value of our non-marketable equity investments would not have a material effect on our financial results.
Bitcoin Market Price Risk
As of December 31, 2022, we had made cumulative investments in bitcoin of $220.0 million. Our investment in bitcoin is accounted for as an indefinite-lived intangible asset, and thus, is subject to impairment losses if the fair value of bitcoin decreases below the carrying value during the assessed reporting period. Impairment losses cannot be recovered for any subsequent increase in fair value until the sale of the asset. We recorded an impairment charge on our investment in bitcoin of $46.6 million in the year ended December 31, 2022 due to the observed market price of bitcoin decreasing below the carrying value during the period. As of December 31, 2022, the cumulative impairment charges to date were $117.7 million and the fair value of the investment in bitcoin was $132.7 million based on observable market prices, which is $30.4 million in excess of our carrying value of $102.3 million after impairment charges. Any decreases to the carrying value of bitcoin investments are recorded in operating expenses on the consolidated statements of operations. A hypothetical 10% increase or decrease in the market price of bitcoin would not have a material effect on our financial results.
Interest Rate Sensitivity
Our cash and cash equivalents, and marketable debt securities as of December 31, 2019,2022 were held primarily in cash deposits, money market funds, U.S. government and agency securities, commercial paper, and corporate bonds. The fair value of our cash, cash equivalents, and marketable debt securities would not be significantly affected by either an increase or decrease in interest rates due mainly to the short-term nature of a majority of these instruments. Additionally, we have the ability to hold these instruments until maturity if necessary to reduce our risk. AnyOur Warehouse Facilities borrowings and any future borrowings incurred under our credit facility wouldthe 2020 Credit Facility both accrue interest at a floating ratevariable rates based on a formulaformulas tied to certain market rates at the time of incurrence (as described above).incurrence. A hypothetical 100 basis point10% increase or decrease in interest rates would not have a material effect on our financial results.
Foreign Currency Risk
Our consolidated financial statements are presented in U.S. dollars. Most of our revenue is earned in U.S. dollars and, therefore our revenuesubsequent to the acquisition of Afterpay, a portion is not currently subject to significant foreign currency risk.earned in Australian Dollars. Our foreign operations are denominated in the currencies of the countries in which our operations are located, and may be subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Japanese Yen, Canadian Dollar, Australian Dollar, Euro,rates. Our results of operations and British Pound. Fluctuationscash flows are, therefore, subject to fluctuations in foreign currency exchange rates and may cause us to recognize transaction gains and losses on our financial statements.
From time to time, we use foreign exchange derivative contracts to hedge a portion of our exposure to changes in currency exchange rates, which result from our statementglobal operating and financing activities. We do not use derivative financial instruments for trading or speculative purposes. Gains and losses from foreign currency transactions, as well as foreign exchange forward contracts, were not significant for the any period presented in the consolidated financial statements included in this Form 10-K. We did not have any material foreign currency derivatives outstanding as of operations.December 31, 2022. A hypothetical 10% increase or decrease in current exchange rates on our financial instruments would not have a material impacteffect on our financial results.
ItemITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SQUARE,BLOCK, INC.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
The supplementary financial information required by this Item 8 is included in Part II, Item 7 under the caption "Quarterly Results of Operations," which is incorporated herein by reference.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Square,Block, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheetsheets of Square,Block, Inc. and subsidiaries (the “Company”)Company) as of December 31, 2019,2022 and 2021, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the yearthree years in the period ended December 31, 2019,2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company atas of December 31, 2019,2022 and 2021, and the results of its operations and its cash flows for each of the yearthree years in the period ended December 31, 2019,2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework(2013 framework) and our report dated February 26, 202023, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’sCompany's financial statements based on our audit.audits. We are a public accounting firm registered with the PCAOBPublic Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditaudits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our auditaudits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our auditaudits also included evaluating the accounting principles used and significant estimates made by management as well as evaluating the overall presentation of the financial statements.statement presentation. We believe that our audit providesaudits provide a reasonable basis for our opinion.
Critical Audit Matters
The following critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the following critical audit matters, below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| | | | | | | | |
| | Accrued transaction lossesBusiness Combinations - Valuation |
Description of the Matter | | As discussed in Notes 1 and 119 to the consolidated financial statements, the Company completed an acquisition of Afterpay Limited during 2022 for consideration of $13.8 billion. The Company accounted for this acquisition as a business combination. |
| | |
| | Auditing the Company’s accounting for the acquisition was complex due to the estimation uncertainty in the Company’s determination of the fair value of acquired identifiable intangible assets, which principally consisted of customer assets, trade names, and technology assets, of $1.4 billion, $386.0 million, and $239.0 million, respectively. The estimation uncertainty for the acquired intangible assets was primarily due to the underlying assumptions about the future performance of the acquired business, which were utilized in determining the fair value of the acquired intangible assets. The significant assumptions used by management included discount rates and certain assumptions that form the basis of the forecasted results, including revenue growth rates. These significant assumptions were forward-looking and could be affected by future economic and market conditions. |
| | |
How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s controls over its accounting for the acquisition. This included testing controls over the estimation process supporting the recognition and measurement of the intangible assets, and management’s review and evaluation of underlying assumptions and estimates with regards to the determination of the fair value of the intangible assets. |
| | |
| | To test the Company’s estimated fair value of the acquired intangible assets, our audit procedures included, among others, reading the underlying agreements, and involving a valuation specialist to assist us in evaluating the Company’s selected valuation methodologies and testing the significant assumptions, including discount rates and revenue growth rates, used in those methodologies. We compared revenue growth rates against historical trends and to those of guideline public companies and other industry participants. We also tested the completeness and accuracy of the underlying data supporting the assumptions and estimates. |
| | | | | | | | |
| | Accrued Transaction Losses |
Description of the Matter | | As discussed in Notes 1 and 12 to the consolidated financial statements, the Company is exposed to transaction losses from chargebacks, which represent fraudulent transactions, potential losses due to disputes between a seller and its customer or due to fraudulent transactions.disputes between peer-to-peer users. The Company established a reserve for these estimated potential losses of $34.8$64.5 million at December 31, 2019.2022. The Company’s reserve is estimated based on available data as of the reporting date, including expectations of future chargebacks and historical trends related to loss rates. |
| | |
| | Auditing management’s estimate of the reserve for transaction losses was challenging because management’s estimate required a high degree of judgementjudgment in evaluating historical trends related to loss rates and expectations of future chargebacks.chargebacks and the need for a qualitative adjustment. |
| | | | | | | | |
How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s controls over the process for determining the reserve for transaction losses. For example, we tested controls over management’s review of the methodology to determine estimated losses, the completeness and accuracy of underlying loss rate data used in the estimation of potential losses from chargebacks, and the assumptions made about future chargebacks. |
| | |
| | To test the Company’s reserve for transaction losses, our audit procedures included, among others, evaluating the Company’s methodology and testing the underlying data and assumptions used by management to estimate potential losses. We compared the Company’s historical estimated potential losses with actual results to assess the Company’s methodology to estimate potential losses. We evaluated the completeness and accuracy of the loss rate data used in the calculation of the Company’s reserve for transaction losses by agreeingcomparing such data to third-party data. In addition, we evaluated any adjustments made by management to the Company’s methodology to estimate potential losses, to reflect expectations of future chargebacks including the basis for concluding whether such adjustments were warranted. We also reviewed subsequent events, which included actual chargebacks, and considered whether they corroborated the Company’s conclusion. |
| | | | | | | | |
| | AccountingAllowance for loss contingenciesCredit Losses Related to Consumer Receivables |
Description of the Matter | | The Company’s consumer receivables and the associated allowance for credit losses were $2.0 billion and $151.3 million as of December 31, 2022, respectively. The provision for credit losses was $203.7 million for the year ended December 31, 2022. As discussed in Note 18Notes 1 and 6 to the consolidated financial statements, the Company has exposure to expected credit losses from consumer receivables, for which an allowance for credit losses is involved in various litigation matters, legal claims and other investigations.recorded under ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The Company accrues a liabilityestimates the allowance for an estimated loss if the potential loss from any litigation or claim is considered probable,credit losses related to consumer receivables using both quantitative methods, which consider historical losses and the amount can be reasonably estimated. The Company also performs an assessment of the materiality of loss contingencies where a loss is either reasonably possible or it is reasonably possible that an exposure to loss existsrecoveries, recent and historical trends in excess of the amount accrued. If it is reasonably possible that such a loss or an additional loss may have been incurreddelinquencies, past-due receivables and the effect on the consolidated financial statements is material, the Company discloses the nature of the loss contingencycharge-offs, and an estimate of the possible loss or range of loss or a statement that such an estimate cannot be made within the notes to the consolidated financial statements.qualitative methods, which consider consumer behavior, current and historical macroeconomic trends, along with other factors. |
| | |
| | Auditing management’s determinationestimate of whetherthe allowance for credit losses related to consumer receivables was challenging because management’s estimate required a high degree of judgment in evaluating historical trends related to loss rates and an assessment of a need for a contingency is probable and reasonably estimable, reasonably possible or remote, andqualitative adjustment in the related disclosures, was subjective and required significant judgment. In particular, these determinations were sensitive to the uncertainties related to the ultimate outcome of theCompany’s expected credit loss contingency, the status and uncertainty of the litigation and/or the appeals process, the jurisdiction where the lawsuit was filed, and the status of any settlement discussions associated with the loss contingency.methodology. |
| | |
How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design, and tested the operating effectiveness of the controls related to the Company’s process for identification, recognition, measurement and disclosure of loss contingencies. For example, we tested controls over management’s assessment of whether a loss is probable or reasonably possible. |
| | |
| | To test the Company’s loss contingenciesallowance for credit losses related to consumer receivables, we involved EY specialists in testing management’s methodology and related disclosures, ourkey assumptions. Our audit procedures included, among others, assessingevaluating the completeness of the litigation matters, legal claims and other investigations subject to evaluationCompany’s methodology as well as performing procedures over historical losses incurred by the Company by aging category and evaluatingtesting recoveries. In addition, we evaluated and tested management’s conclusion for the need for a qualitative adjustment in the Company’s assessmentexpected credit loss methodology including the examination of current macroeconomic conditions such as changes in unemployment and GDP. We also reviewed subsequent events, which included actual collections on current and aged receivables as of December 31, 2022, to consider whether they corroborated the probability of outcome for loss contingencies and measurement and disclosure of probable and reasonably possible losses. These procedures included inquiring of management and internal and external legal counsel to confirm our understanding of the claims against the Company, evaluating responses to inquiry letters sent to internal and external legal counsel, obtaining written representations from executives of the CompanyCompany’s conclusion related to loss contingencies, inspecting court rulings and correspondence from counterparties, and inspecting any settlement agreements.the overall allowance for credit losses related to consumer receivables. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2019.
San Francisco, California
February 26, 2020
23, 2023
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Square,Block, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Square,Block, Inc. and subsidiaries (the “Company”)'s internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway 2013 frameworkCommission (2013 framework) (the “COSO criteria”)COSO criteria). In our opinion, Square,Block, Inc. and subsidiaries (the “Company”)Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheetsheets of the Company as of December 31, 2019,2022 and 2021, the related consolidated statementstatements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the yearthree years ended December 31, 2019,2022, and the related notes and our report dated February 26, 202023, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Form 10-K.Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Francisco, California
February 26, 2020
23, 2023
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Square, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Square, Inc. and subsidiaries (the Company) as of December 31, 2018, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company adopted Accounting Standard Codification Topic 606, Revenue from Contracts with Customers, effective January 1, 2018.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We served as the Company’s auditor from 2011 to 2019.
San Francisco, California
February 27, 2019
SQUARE,BLOCK, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data) | | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 4,544,202 | | | $ | 4,443,669 | |
Investments in short-term debt securities | 1,081,851 | | | 869,283 | |
Settlements receivable | 2,416,324 | | | 1,171,612 | |
Customer funds | 3,180,324 | | | 2,830,995 | |
Consumer receivables, net | 1,871,160 | | | — | |
Loans held for sale | 474,036 | | | 517,940 | |
Safeguarding asset related to bitcoin held for other parties | 428,243 | | | 1,100,596 | |
Other current assets | 1,627,265 | | | 687,429 | |
Total current assets | 15,623,405 | | | 11,621,524 | |
Property and equipment, net | 329,302 | | | 282,140 | |
Goodwill | 11,966,761 | | | 519,276 | |
Acquired intangible assets, net | 2,014,034 | | | 257,049 | |
Investments in long-term debt securities | 573,429 | | | 1,526,430 | |
Operating lease right-of-use assets | 373,172 | | | 449,406 | |
Other non-current assets | 484,237 | | | 370,535 | |
Total assets | $ | 31,364,340 | | | $ | 15,026,360 | |
Liabilities and Stockholders’ Equity | | | |
Current liabilities: | | | |
| | | |
Customers payable | $ | 5,548,656 | | | $ | 3,979,624 | |
Settlements payable | 462,505 | | | 254,611 | |
Accrued expenses and other current liabilities | 1,056,676 | | | 702,881 | |
Current portion of long-term debt (Note 15) | 460,356 | | | 455 | |
Warehouse funding facilities, current | 461,240 | | | — | |
Safeguarding obligation liability related to bitcoin held for other parties | 428,243 | | | 1,100,596 | |
PPP Liquidity Facility advances | 16,840 | | | 497,533 | |
Total current liabilities | 8,434,516 | | | 6,535,700 | |
Deferred tax liabilities | 132,498 | | | 15,236 | |
Warehouse funding facilities, non-current | 877,066 | | | — | |
Long-term debt (Note 15) | 4,109,829 | | | 4,559,208 | |
Operating lease liabilities, non-current | 357,419 | | | 395,017 | |
Other non-current liabilities | 201,657 | | | 207,610 | |
Total liabilities | 14,112,985 | | | 11,712,771 | |
Commitments and contingencies (Note 20) | | | |
Stockholders’ equity: | | | |
Preferred stock, $0.0000001 par value: 100,000,000 shares authorized at December 31, 2022 and December 31, 2021. None issued and outstanding at December 31, 2022 and December 31, 2021. | — | | | — | |
Class A common stock, $0.0000001 par value: 1,000,000,000 shares authorized at December 31, 2022 and December 31, 2021; 539,408,009 and 403,237,209 issued and outstanding at December 31, 2022 and December 31, 2021, respectively. | — | | | — | |
Class B common stock, $0.0000001 par value: 500,000,000 shares authorized at December 31, 2022 and December 31, 2021; 60,651,533 and 61,706,578 issued and outstanding at December 31, 2022 and December 31, 2021, respectively. | — | | | — | |
Additional paid-in capital | 18,314,681 | | | 3,317,255 | |
Accumulated other comprehensive loss | (523,090) | | | (16,435) | |
Accumulated deficit | (568,712) | | | (27,965) | |
Total stockholders’ equity attributable to common stockholders | 17,222,879 | | | 3,272,855 | |
Noncontrolling interests | 28,476 | | | 40,734 | |
Total stockholders’ equity | 17,251,355 | | | 3,313,589 | |
Total liabilities and stockholders’ equity | $ | 31,364,340 | | | $ | 15,026,360 | |
| | | | | | | | | | | |
| December 31, | | |
| 2019 | | 2018 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 1,047,118 | | | $ | 583,173 | |
Investments in short-term debt securities | 492,456 | | | 540,991 | |
Settlements receivable | 588,692 | | | 364,946 | |
Customer funds | 676,292 | | | 334,017 | |
Loans held for sale | 164,834 | | | 89,974 | |
Other current assets | 250,409 | | | 198,804 | |
Total current assets | 3,219,801 | | | 2,111,905 | |
Property and equipment, net | 149,194 | | | 142,402 | |
Goodwill | 266,345 | | | 261,705 | |
Acquired intangible assets, net | 69,079 | | | 77,102 | |
Investments in long-term debt securities | 537,303 | | | 464,680 | |
Build-to-suit lease asset | — | | | 149,000 | |
Operating lease right-of-use assets | 113,148 | | | — | |
Other non-current assets | 196,388 | | | 74,229 | |
Total assets | $ | 4,551,258 | | | $ | 3,281,023 | |
Liabilities and Stockholders’ Equity | | | |
Current liabilities: | | | |
| | | |
Customers payable | $ | 1,273,135 | | | $ | 749,215 | |
Settlements payable | 95,834 | | | 54,137 | |
Accrued expenses and other current liabilities | 297,841 | | | 215,189 | |
| | | |
Operating lease liabilities, current | 27,275 | | | — | |
| | | |
Total current liabilities | 1,694,085 | | | 1,018,541 | |
Long-term debt | 938,832 | | | 899,695 | |
Build-to-suit lease liability | — | | | 149,000 | |
Operating lease liabilities, non-current | 108,830 | | | — | |
Other non-current liabilities | 94,461 | | | 93,286 | |
Total liabilities | 2,836,208 | | | 2,160,522 | |
Commitments and contingencies (Note 18) | | | |
Stockholders’ equity: | | | | |
Preferred stock, $0.0000001 par value: 100,000,000 shares authorized at December 31, 2019 and December 31, 2018. NaN issued and outstanding at December 31, 2019 and December 31, 2018. | — | | | — | |
Class A common stock, $0.0000001 par value: 1,000,000,000 shares authorized at December 31, 2019 and December 31, 2018; 352,386,562 and 323,546,864 issued and outstanding at December 31, 2019 and December 31, 2018, respectively. | — | | | — | |
Class B common stock,$0.0000001 par value: 500,000,000 shares authorized at December 31, 2019 and December 31, 2018; 80,410,158 and 93,501,142 issued and outstanding at December 31, 2019 and December 31, 2018, respectively. | — | | | — | |
Additional paid-in capital | 2,223,749 | | | 2,012,328 | |
Accumulated other comprehensive income (loss) | 1,629 | | | (6,053) | |
Accumulated deficit | (510,328) | | | (885,774) | |
Total stockholders’ equity | 1,715,050 | | | 1,120,501 | |
Total liabilities and stockholders’ equity | $ | 4,551,258 | | | $ | 3,281,023 | |
SeeThe accompanying notesNotes to consolidated financial statements.
the Consolidated Financial Statements are an integral part of this statement.
SQUARE,
BLOCK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2019 | | 2018 | | 2017 |
Revenue: | | | | | |
Transaction-based revenue | $ | 3,081,074 | | | $ | 2,471,451 | | | $ | 1,920,174 | |
Subscription and services-based revenue | 1,031,456 | | | 591,706 | | | 252,664 | |
Hardware revenue | 84,505 | | | 68,503 | | | 41,415 | |
Bitcoin revenue | 516,465 | | | 166,517 | | | — | |
Total net revenue | 4,713,500 | | | 3,298,177 | | | 2,214,253 | |
Cost of revenue: | | | | | |
Transaction-based costs | 1,937,971 | | | 1,558,562 | | | 1,230,290 | |
Subscription and services-based costs | 234,270 | | | 169,884 | | | 75,720 | |
Hardware costs | 136,385 | | | 94,114 | | | 62,393 | |
Bitcoin costs | 508,239 | | | 164,827 | | | — | |
Amortization of acquired technology | 6,950 | | | 7,090 | | | 6,544 | |
Total cost of revenue | 2,823,815 | | | 1,994,477 | | | 1,374,947 | |
Gross profit | 1,889,685 | | | 1,303,700 | | | 839,306 | |
Operating expenses: | | | | | |
Product development | 670,606 | | | 497,479 | | | 321,888 | |
Sales and marketing | 624,832 | | | 411,151 | | | 253,170 | |
General and administrative | 436,250 | | | 339,245 | | | 250,553 | |
Transaction and loan losses | 126,959 | | | 88,077 | | | 67,018 | |
Amortization of acquired customer assets | 4,481 | | | 4,362 | | | 883 | |
| | | | | |
Total operating expenses | 1,863,128 | | | 1,340,314 | | | 893,512 | |
Operating income (loss) | 26,557 | | | (36,614) | | | (54,206) | |
Gain on sale of asset group | (373,445) | | | — | | | — | |
Interest expense, net | 21,516 | | | 17,982 | | | 10,053 | |
Other expense (income), net | 273 | | | (18,469) | | | (1,595) | |
Income (loss) before income tax | 378,213 | | | (36,127) | | | (62,664) | |
Provision for income taxes | 2,767 | | | 2,326 | | | 149 | |
Net income (loss) | $ | 375,446 | | | $ | (38,453) | | | $ | (62,813) | |
Net income (loss) per share: | | | | | |
Basic | $ | 0.88 | | | $ | (0.09) | | | $ | (0.17) | |
Diluted | $ | 0.81 | | | $ | (0.09) | | | $ | (0.17) | |
Weighted-average shares used to compute net income (loss) per share: | | | | | |
Basic | 424,999 | | | 405,731 | | | 379,344 | |
Diluted | 466,076 | | | 405,731 | | | 379,344 | |
See accompanying notes to consolidated financial statements.
73 | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Revenue: | | | | | |
Transaction-based revenue | $ | 5,701,540 | | | $ | 4,793,146 | | | $ | 3,294,978 | |
Subscription and services-based revenue | 4,552,773 | | | 2,709,731 | | | 1,539,403 | |
Hardware revenue | 164,418 | | | 145,679 | | | 91,654 | |
Bitcoin revenue | 7,112,856 | | | 10,012,647 | | | 4,571,543 | |
Total net revenue | 17,531,587 | | | 17,661,203 | | | 9,497,578 | |
Cost of revenue: | | | | | |
Transaction-based costs | 3,364,028 | | | 2,719,502 | | | 1,911,848 | |
Subscription and services-based costs | 861,745 | | | 483,056 | | | 222,712 | |
Hardware costs | 286,995 | | | 221,185 | | | 143,901 | |
Bitcoin costs | 6,956,733 | | | 9,794,992 | | | 4,474,534 | |
Amortization of acquired technology assets | 70,194 | | | 22,645 | | | 11,174 | |
Total cost of revenue | 11,539,695 | | | 13,241,380 | | | 6,764,169 | |
Gross profit | 5,991,892 | | | 4,419,823 | | | 2,733,409 | |
Operating expenses: | | | | | |
Product development | 2,135,612 | | | 1,383,841 | | | 881,826 | |
Sales and marketing | 2,057,951 | | | 1,617,189 | | | 1,109,670 | |
General and administrative | 1,686,849 | | | 982,817 | | | 579,203 | |
Transaction, loan, and consumer receivable losses | 550,683 | | | 187,991 | | | 177,670 | |
Bitcoin impairment losses | 46,571 | | | 71,126 | | | — | |
Amortization of customer and other acquired intangible assets | 138,758 | | | 15,747 | | | 3,855 | |
Total operating expenses | 6,616,424 | | | 4,258,711 | | | 2,752,224 | |
Operating income (loss) | (624,532) | | | 161,112 | | | (18,815) | |
| | | | | |
Interest expense, net | 36,228 | | | 33,124 | | | 56,943 | |
Other income, net | (95,443) | | | (29,474) | | | (291,725) | |
Income (loss) before income tax | (565,317) | | | 157,462 | | | 215,967 | |
Provision (benefit) for income taxes | (12,312) | | | (1,364) | | | 2,862 | |
Net income (loss) | (553,005) | | | 158,826 | | | 213,105 | |
Less: Net loss attributable to noncontrolling interests | (12,258) | | | (7,458) | | | — | |
Net income (loss) attributable to common stockholders | $ | (540,747) | | | $ | 166,284 | | | $ | 213,105 | |
| | | | | |
Net income (loss) per share attributable to common stockholders: | | | | | |
Basic | $ | (0.93) | | | $ | 0.36 | | | $ | 0.48 | |
Diluted | $ | (0.93) | | | $ | 0.33 | | | $ | 0.44 | |
Weighted-average shares used to compute net income (loss) per share attributable to common stockholders: | | | | | |
Basic | 578,949 | | | 458,432 | | | 443,126 | |
Diluted | 578,949 | | | 501,779 | | | 482,167 | |
The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement.
SQUARE,BLOCK, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
| | | Year Ended December 31, | | | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 | | 2022 | | 2021 | | 2020 |
Net income (loss) | Net income (loss) | $ | 375,446 | | | $ | (38,453) | | | $ | (62,813) | | Net income (loss) | $ | (553,005) | | | $ | 158,826 | | | $ | 213,105 | |
Net foreign currency translation adjustments | Net foreign currency translation adjustments | 1,879 | | | (4,496) | | | 1,900 | | Net foreign currency translation adjustments | (471,166) | | | (24,667) | | | 20,439 | |
Net unrealized gain on revaluation of intercompany loans | 75 | | | 303 | | | 385 | | |
| Net unrealized gain (loss) on marketable debt securities | Net unrealized gain (loss) on marketable debt securities | 5,728 | | | (542) | | | (1,614) | | Net unrealized gain (loss) on marketable debt securities | (35,489) | | | (15,096) | | | 1,260 | |
Total comprehensive income (loss) | Total comprehensive income (loss) | $ | 383,128 | | | $ | (43,188) | | | $ | (62,142) | | Total comprehensive income (loss) | $ | (1,059,660) | | | $ | 119,063 | | | $ | 234,804 | |
SeeThe accompanying notesNotes to consolidated financial statements.
the Consolidated Financial Statements are an integral part of this statement.
SQUARE,BLOCK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except for number of shares)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Convertible preferred stock | | | | | Class A and B common stock | | | | Additional paid-in | | Accumulated other comprehensive | | Accumulated | | Total stockholders’ |
| | Shares | | | Amount | | Shares | | Amount | | capital | | income (loss) | | deficit | | equity |
Balance at December 31, 2016 | | — | | | $ | — | | | 364,547,376 | | | $ | — | | | $ | 1,357,381 | | | $ | (1,989) | | | $ | (779,239) | | | $ | 576,153 | |
| Net loss | — | | | — | | | — | | | — | | | — | | | — | | | (62,813) | | | (62,813) | |
Shares issued in connection with: | | | | | | | | | | | | | | | | |
| Exercise of stock options | — | | | — | | | 24,510,745 | | | — | | | 144,774 | | | — | | | — | | | 144,774 | |
| Purchases under employee stock purchase plan | — | | | — | | | 1,670,045 | | | — | | | 17,859 | | | — | | | — | | | 17,859 | |
| Vesting of restricted stock units | — | | | — | | | 5,964,153 | | | — | | | — | | | — | | | — | | | — | |
Vesting of early exercised stock options and other | | — | | | — | | | | | — | | | 661 | | | — | | | — | | | 661 | |
Repurchase of common stock | | — | | | — | | | (24,209) | | | — | | | — | | | — | | | — | | | — | |
Change in other comprehensive loss | | — | | | — | | | — | | | — | | | — | | | 671 | | | — | | | 671 | |
Share-based compensation | | — | | | — | | | — | | | — | | | 159,509 | | | — | | | — | | | 159,509 | |
Tax withholding related to vesting of restricted stock units | | — | | | — | | | (1,474,035) | | | — | | | (44,682) | | | — | | | — | | | (44,682) | |
Conversion feature of convertible senior notes, due 2022, net of allocated debt issuance costs | | — | | | — | | | — | | | — | | | 83,901 | | | — | | | — | | | 83,901 | |
Purchase of bond hedges in conjunction with issuance of convertible senior notes, due 2022 | | — | | | — | | | — | | | — | | | (92,136) | | | — | | | — | | | (92,136) | |
Sale of warrants in conjunction with issuance of convertible senior notes, due 2022 | | — | | | — | | | — | | | — | | | 57,244 | | | — | | | — | | | 57,244 | |
Payment for termination of Starbucks warrant | | — | | | — | | | — | | | — | | | (54,808) | | | — | | | — | | | (54,808) | |
Cumulative adjustment due to adoption of new standard | | — | | | — | | | — | | | — | | | 683 | | | — | | | (683) | | | — | |
Balance at December 31, 2017 | | — | | | $ | — | | | 395,194,075 | | | $ | — | | | $ | 1,630,386 | | | $ | (1,318) | | | $ | (842,735) | | | $ | 786,333 | |
| Net loss | — | | | — | | | — | | | — | | | — | | | — | | | (38,453) | | | (38,453) | |
Shares issued in connection with: | | | | | | | | | | | | | | | | |
| Exercise of stock options | — | | | — | | | 13,402,680 | | | — | | | 106,962 | | | — | | | — | | | 106,962 | |
| Vesting of early exercised stock options and other | — | | | — | | | — | | | — | | | 177 | | | — | | | — | | | 177 | |
| Purchases under employee stock purchase plan | — | | | — | | | 826,356 | | | — | | | 26,888 | | | — | | | — | | | 26,888 | |
| Vesting of restricted stock units | — | | | — | | | 8,046,640 | | | — | | | — | | | — | | | — | | | — | |
Issuance of common stock in connection with business combination | | — | | | — | | | 2,649,590 | | | — | | | 140,107 | | | — | | | — | | | 140,107 | |
Replacement stock awards issued in connection with acquisition | | — | | | — | | | 24,613 | | | — | | | 899 | | | — | | | — | | | 899 | |
Repurchase of common stock | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Change in other comprehensive loss | | — | | | — | | | — | | | — | | | — | | | (4,735) | | | — | | | (4,735) | |
Share-based compensation | | — | | | — | | | — | | | — | | | 226,182 | | | — | | | — | | | 226,182 | |
Tax withholding related to vesting of restricted stock units | | — | | | — | | | (3,013,394) | | | — | | | (189,124) | | | — | | | — | | | (189,124) | |
Conversion feature of convertible senior notes, due 2023, net of allocated costs | | — | | | — | | | — | | | — | | | 154,019 | | | — | | | — | | | 154,019 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Class A and B common stock | | Additional paid-in | | Accumulated other comprehensive | | Accumulated | | Noncontrolling | | Total stockholders’ |
| | | | | | Shares | | Amount | | capital | | income (loss) | | deficit | | interests | | equity |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Balance at December 31, 2019 | | | | | 432,796,720 | | | $ | — | | | $ | 2,223,749 | | | $ | 1,629 | | | $ | (510,328) | | | $ | — | | | $ | 1,715,050 | |
| Net income | | | | | — | | | — | | | — | | | — | | | 213,105 | | | — | | | 213,105 | |
Shares issued in connection with employee stock plans | | | | | 19,013,638 | | | — | | | 161,984 | | | — | | | — | | | — | | | 161,984 | |
Issuance of common stock in connection with business combination | | | | | 607,974 | | | — | | | 35,319 | | | — | | | — | | | — | | | 35,319 | |
Change in other comprehensive income | | | | | — | | | — | | | — | | | 21,699 | | | — | | | — | | | 21,699 | |
Share-based compensation | | | | | — | | | — | | | 411,673 | | | — | | | — | | | — | | | 411,673 | |
Tax withholding related to vesting of restricted stock units | | | | | (2,852,127) | | | — | | | (314,019) | | | — | | | — | | | — | | | (314,019) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Conversion feature of convertible notes, net of allocated costs | | | | | — | | | — | | | 347,059 | | | — | | | — | | | — | | | 347,059 | |
Purchase of bond hedges in conjunction with issuance of convertible notes | | | | | — | | | — | | | (338,145) | | | — | | | — | | | — | | | (338,145) | |
Sale of warrants in conjunction with issuance of convertible notes | | | | | — | | | — | | | 232,095 | | | — | | | — | | | — | | | 232,095 | |
Issuance of common stock in conjunction with the conversion of convertible notes | | | | | 8,853,484 | | | — | | | 195,749 | | | — | | | — | | | — | | | 195,749 | |
Exercise of bond hedges in conjunction with the conversion of convertible notes | | | | | (2,234,913) | | | — | | | — | | | — | | | — | | | — | | | — | |
Balance at December 31, 2020 | | | | | 456,184,776 | | | $ | — | | | $ | 2,955,464 | | | $ | 23,328 | | | $ | (297,223) | | | $ | — | | | $ | 2,681,569 | |
Cumulative adjustment due to adoption of ASU 2020-06 | | | | | — | | | — | | | (502,707) | | | — | | | 102,974 | | | — | | | (399,733) | |
| Net income (loss) | | | | | — | | | — | | | — | | | — | | | 166,284 | | | (7,458) | | | 158,826 | |
Shares issued in connection with employee stock plans | | | | | 11,975,907 | | | — | | | 126,829 | | | — | | | — | | | — | | | 126,829 | |
Issuance of common stock in connection with business combination | | | | | 118,443 | | | — | | | 28,735 | | | — | | | — | | | — | | | 28,735 | |
Change in other comprehensive loss | | | | | — | | | — | | | — | | | (39,763) | | | — | | | — | | | (39,763) | |
Share-based compensation | | | | | — | | | — | | | 623,067 | | | — | | | — | | | — | | | 623,067 | |
Tax withholding related to vesting of restricted stock units | | | | | (1,403,146) | | | — | | | (323,012) | | | — | | | — | | | — | | | (323,012) | |
Issuance of common stock in conjunction with the conversion of convertible notes | | | | | 5,514,727 | | | — | | | 408,879 | | | — | | | — | | | — | | | 408,879 | |
Exercise of bond hedges in conjunction with the conversion of convertible notes | | | | | (7,446,920) | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
Noncontrolling interests in connection with business combination | | | | | — | | | — | | | — | | | — | | | — | | | 48,192 | | | 48,192 | |
Balance at December 31, 2021 | | | | | 464,943,787 | | | $ | — | | | $ | 3,317,255 | | | $ | (16,435) | | | $ | (27,965) | | | $ | 40,734 | | | $ | 3,313,589 | |
| Net loss | | | | | — | | | — | | | — | | | — | | | (540,747) | | | (12,258) | | | (553,005) | |
Shares issued in connection with employee stock plans | | | | | 11,824,138 | | | — | | | 81,768 | | | — | | | — | | | — | | | 81,768 | |
Issuance of common stock in connection with business combination | | | | | 113,617,352 | | | — | | | 13,827,929 | | | — | | | — | | | — | | | 13,827,929 | |
Change in other comprehensive loss | | | | | — | | | — | | | — | | | (506,655) | | | — | | | — | | | (506,655) | |
Share-based compensation | | | | | — | | | — | | | 1,092,010 | | | — | | | — | | | — | | | 1,092,010 | |
Tax withholding related to vesting of restricted stock units | | | | | (37,629) | | | — | | | (4,735) | | | — | | | — | | | — | | | (4,735) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Convertible preferred stock | | | | | Class A and B common stock | | | | Additional paid-in | | Accumulated other comprehensive | | Accumulated | | Total stockholders’ |
| | Shares | | | Amount | | Shares | | Amount | | capital | | income (loss) | | deficit | | equity |
Purchase of bond hedges in conjunction with issuance of convertible senior notes, due 2023 | | — | | | — | | | — | | | — | | | (172,586) | | | — | | | — | | | (172,586) | |
Sale of warrants in conjunction with issuance of convertible senior notes, due 2023 | | — | | | — | | | — | | | — | | | 112,125 | | | — | | | — | | | 112,125 | |
Issuance of common stock in conjunction with the conversion of senior notes, due 2022 | | — | | | — | | | 7,288,907 | | | — | | | (20,962) | | | — | | | — | | | (20,962) | |
Exercise of bond hedges in conjunction with the conversion of senior notes, due 2022 | | — | | | — | | | (6,901,567) | | | — | | | — | | | — | | | — | | | — | |
Cumulative adjustment due to adoption of ASC 606 | | — | | | — | | | — | | | — | | | — | | | — | | | (4,586) | | | (4,586) | |
Recovery of common stock in connection with indemnification settlement agreement | | — | | | — | | | (469,894) | | | — | | | (2,745) | | | — | | | — | | | (2,745) | |
Balance at December 31, 2018 | | — | | | $ | — | | | 417,048,006 | | | $ | — | | | $ | 2,012,328 | | | $ | (6,053) | | | $ | (885,774) | | | $ | 1,120,501 | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | 375,446 | | | 375,446 | |
Shares issued in connection with: | | | | | | | | | | | | | | | | |
| Exercise of stock options | — | | | — | | | 10,176,170 | | | — | | | 82,340 | | | — | | | — | | | 82,340 | |
| Vesting of early exercised stock options and other | — | | | — | | | 426 | | | — | | | 36 | | | — | | | — | | | 36 | |
| Purchases under employee stock purchase plan | — | | | — | | | 673,661 | | | — | | | 36,174 | | | — | | | — | | | 36,174 | |
| Vesting of restricted stock units | — | | | — | | | 8,338,035 | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | |
Cancellation of restricted stock awards | | — | | | — | | | (90,342) | | | — | | | — | | | — | | | — | | | — | |
Change in other comprehensive loss | | — | | | — | | | — | | | — | | | — | | | 7,682 | | | — | | | 7,682 | |
Share-based compensation | | — | | | — | | | — | | | — | | | 306,201 | | | — | | | — | | | 306,201 | |
Tax withholding related to vesting of restricted stock units | | — | | | — | | | (3,077,807) | | | — | | | (212,264) | | | — | | | — | | | (212,264) | |
Issuance of common stock in conjunction with the conversion of senior notes, due 2022 | | — | | | — | | | 127 | | | — | | | 3 | | | — | | | — | | | 3 | |
Exercise of bond hedges in conjunction with the conversion of senior notes, due 2022 | | — | | | — | | | (250,763) | | | — | | | — | | | — | | | — | | | — | |
Recovery of common stock in connection with indemnification settlement agreement | | — | | | — | | | (20,793) | | | — | | | (1,069) | | | — | | | — | | | (1,069) | |
Balance at December 31, 2019 | | — | | | $ | — | | | 432,796,720 | | | $ | — | | | $ | 2,223,749 | | | $ | 1,629 | | | $ | (510,328) | | | $ | 1,715,050 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Class A and B common stock | | Additional paid-in | | Accumulated other comprehensive | | Accumulated | | Noncontrolling | | Total stockholders’ |
| | | | | | Shares | | Amount | | capital | | income (loss) | | deficit | | interests | | equity |
Issuance of common stock in conjunction with the conversion of convertible notes | | | | | 20,055 | | | — | | | 454 | | | — | | | — | | | — | | | 454 | |
Exercise of bond hedges in conjunction with the conversion of convertible notes | | | | | (1,188,734) | | | — | | | — | | | — | | | — | | | — | | | — | |
Issuance of common stock in connection with the exercise of common stock warrants | | | | | 10,880,573 | | | — | | | — | | | — | | | — | | | — | | | — | |
Balance at December 31, 2022 | | | | | 600,059,542 | | | $ | — | | | $ | 18,314,681 | | | $ | (523,090) | | | $ | (568,712) | | | $ | 28,476 | | | $ | 17,251,355 | |
SeeThe accompanying notesNotes to consolidated financial statements.
the Consolidated Financial Statements are an integral part of this statement.