UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, ~~2015.~~2016.



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to .

Commission file number ~~000-24821~~001-36859

PayPal Holdings, Inc.

(Exact Name of Registrant as Specified in Its Charter)



Delaware	47-2989869
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

2211 North First Street San Jose, California	95131
(Address of Principal Executive Offices)	(Zip Code)

(408) 967-1000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [x] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	ý	Accelerated filer	o

Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]

As of July ~~23, 2015,~~20, 2016, there were ~~1,218,735,605~~1,206,918,019 shares of the registrant's common stock, $0.0001 par value, outstanding, which is the only class of common or voting stock of the registrant issued.

PayPal Holdings, Inc.

Table of Contents

PART I: FINANCIAL INFORMATION


Item 1:	Financial Statements

PayPal Holdings, Inc.

CONDENSED ~~COMBINED AND~~ CONSOLIDATED BALANCE SHEET



	June 30, 2016			December 31, 2015
	(In millions, except par value)
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	2,018		$	1,393
Short-term investments	2,939			2,018
Accounts receivable, net	167			137
Loans and interest receivable, net of allowances of $279 in 2016 and $233 in 2015	4,507			4,184
Funds receivable and customer accounts	13,034			12,261
Prepaid expenses and other current assets	792			655
Total current assets	23,457			20,648
Long-term investments	1,315			2,348
Property and equipment, net	1,412			1,344
Goodwill	4,069			4,069
Intangible assets, net	281			358
Other assets	97			114
Total assets	$	30,631		$	28,881
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	169		$	145
Funds payable and amounts due to customers	13,834			12,261
Accrued expenses and other current liabilities	1,181			1,179
Income taxes payable	39			32
Total current liabilities	15,223			13,617
Deferred tax liability and other long-term liabilities	1,591			1,505
Total liabilities	16,814			15,122
Commitments and contingencies (Note 11)
Equity:
Common stock, $0.0001 par value; 4,000 shares authorized; 1,207 and 1,224 outstanding	—			—
Treasury stock at cost, 25 shares as of June 30, 2016	(896		)	—
Additional paid-in-capital	13,305			13,100
Retained earnings	1,356			668
Accumulated other comprehensive income (loss)	52			(9		)
Total equity	13,817			13,759
Total liabilities and equity	$	30,631		$	28,881

June 30,
2015 December 31,
2014
(In millions)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,562
$ 2,201
Short-term investments 1,846
29
Accounts receivable, net 81
65
Loans and interest receivable, net 3,152
3,586
Funds receivable and customer accounts 11,386
10,612
Notes and receivables from affiliates 103
694
Other current assets 583
378
Total current assets 19,713
17,565
Long-term investments 2,258
31
Property and equipment, net 1,291
922
Goodwill 3,409
3,189
Intangible assets, net 186
156
Other assets 54
54
Total assets $ 26,911
$ 21,917
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 188
$ 115
Funds payable and amounts due to customers 11,386
10,612
Notes and payables to affiliates 102
1,093
Accrued expenses and other current liabilities 877
1,434
Income taxes payable 31
29
Total current liabilities 12,584
13,283
Long-term liabilities 1,587
386
Total liabilities 14,171
13,669
Commitments and contingencies (Note 10)

Equity:
Accumulated other comprehensive income 24
110
Net parent investment 12,716
8,138
Total equity 12,740
8,248
Total liabilities and equity $ 26,911
$ 21,917

The accompanying notes are an integral part of these condensed combined and consolidated financial statements.

PayPal Holdings, Inc.

CONDENSED COMBINED AND CONSOLIDATED STATEMENT OF INCOME


	Three Months Ended June 30,					Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014			2015		2014			2016		2015		2016		2015
	(In millions)										(In millions, except per share data)
	(Unaudited)										(Unaudited)
Net revenues	$	2,297	$	1,983		$	4,434	$	3,857		$	2,650	$	2,297	$	5,194	$	4,434
Operating expenses:
Transaction expense	634		525			1,209		1,039			810		634		1,562		1,209
Transaction and loan losses	185		144			363		273			255		185		510		363
Customer support and operations	308		263			583		518			318		278		614		527
Sales and marketing	245		253			481		468			250		234		483		456
Product development	241		221			465		419			209		202		404		387
General and administrative	135		122			273		237			261		215		492		432
Depreciation and amortization	150		125			291		255			176		150		351		291
Restructuring	1		—			49		—			—		1		—		49
Total operating expenses	1,899		1,653			3,714		3,209			2,279		1,899		4,416		3,714
Operating income	398		330			720		648			371		398		778		720
Other income (expense), net	1		(4		)	—		(10		)	9		1		24		—
Income before income taxes	399		326			720		638			380		399		802		720
Income tax expense	94		45			160		739			57		94		114		160
Net income/(loss)	$	305	$	281		$	560	$	(101	)
Net income											$	323	$	305	$	688	$	560

Net income (loss) per share:
Net income per share:
Basic	$	0.25	$	0.23		$	0.46	$	(0.08	)	$	0.27	$	0.25	$	0.57	$	0.46
Diluted	$	0.25	$	0.23		$	0.46	$	(0.08	)	$	0.27	$	0.25	$	0.56	$	0.46

Weighted average shares:
Basic	1,218		1,218			1,218		1,218			1,210		1,218		1,213		1,218
Diluted	1,224		1,224			1,224		1,218			1,215		1,224		1,220		1,224

The accompanying notes are an integral part of these condensed combined and consolidated financial statements.

PayPal Holdings, Inc.

CONDENSED COMBINED AND CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014			2016			2015			2016			2015
	(In millions)												(In millions)
	(Unaudited)												(Unaudited)
Net income (loss)	$	305		$	281		$	560		$	(101	)
Net income													$	323		$	305		$	688		$	560
Other comprehensive income (loss), net of reclassification adjustments:
Foreign currency translation	9			(2		)	(24		)	(2		)	(5		)	9			3			(24		)
Unrealized losses on investments, net	(2		)	—			(2		)	—
Unrealized gains (losses) on investments, net													9			(2		)	21			(2		)
Tax expense on unrealized gains (losses) on investments, net													(3		)	—			(5		)	—
Unrealized gains (losses) on hedging activities, net	(124		)	11			(60		)	21			79			(124		)	43			(60		)
Tax expense on unrealized gains (losses) on hedging activities, net	(1		)	—			—			(3		)	(1		)	(1		)	(1		)	—
Other comprehensive income (loss), net of tax	(118		)	9			(86		)	16			79			(118		)	61			(86		)
Comprehensive income (loss)	$	187		$	290		$	474		$	(85	)
Comprehensive income													$	402		$	187		$	749		$	474

The accompanying notes are an integral part of these condensed combined and consolidated financial statements.

PayPal Holdings, Inc.

CONDENSED COMBINED AND CONSOLIDATED STATEMENT OF CASH FLOWS



	Six Months Ended June 30,
	2016			2015
	(In millions)
	(Unaudited)
Cash flows from operating activities:
Net income	$	688		$	560
Adjustments:
Transaction and loan losses	510			363
Depreciation and amortization	350			291
Stock-based compensation	206			162
Deferred income taxes	88			92
Excess tax benefits from stock-based compensation	(32		)	(16		)
Premium received on sale of principal loans receivable held for sale	(12		)	(30		)
Changes in assets and liabilities:
Accounts receivable	(30		)	(13		)
Receivable from eBay	—			42
Changes in principal loans receivable held for sale, net	12			4
Accounts payable	22			38
Payable to eBay	—			(121		)
Income taxes payable	37			35
Other assets and liabilities	(405		)	(241		)
Net cash provided by operating activities	1,434			1,166
Cash flows from investing activities:
Purchases of property and equipment	(334		)	(425		)
Proceeds from sales of property and equipment	—			11
Changes in principal loans receivable, net	(476		)	408
Purchases of investments	(10,209		)	(11,252		)
Maturities and sales of investments	9,335			5,641
Acquisitions, net of cash acquired	(19		)	(273		)
Funds receivable and customer accounts	222			789
Notes and receivables from eBay	—			575
Net cash provided by (used in) investing activities	(1,481		)	(4,526		)
Cash flows from financing activities:
Proceeds from issuance of common stock	57			—
Purchases of treasury stock	(896		)	—
Excess tax benefits from stock-based compensation	32			16
Contribution from eBay	—			3,829
Tax withholdings related to net share settlements of equity awards	(94		)	—
Repayments under financing arrangements, net	(21		)	(873		)
Funds payable and amounts due to customers	1,579			774
Net cash provided by financing activities	657			3,746
Effect of exchange rate changes on cash and cash equivalents	15			(25		)
Net increase in cash and cash equivalents	625			361
Cash and cash equivalents at beginning of period	1,393			2,201
Cash and cash equivalents at end of period	$	2,018		$	2,562
Supplemental cash flow disclosures:
Cash paid for interest	$	2		$	12
Cash paid for income taxes	$	36		$	31

Six Months Ended June 30,
2015 2014
(In millions)
(Unaudited)
Cash flows from operating activities:
Net income (loss) $ 560
$ (101 )
Adjustments:
Transaction and loan losses 363
273
Depreciation and amortization 291
255
Stock-based compensation 162
143
Deferred income taxes 92
695
Excess tax benefits from stock-based compensation (16 ) (33 )
Premium received on sale of principal loans receivable held for sale (30 ) —
Changes in assets and liabilities:
Accounts receivable (13 ) 1
Notes and receivable from affiliates, net 42
(87 )
Changes in principal loans receivable held for sale, net 4
—
Accounts payable 38
27
Notes payable to affiliates (121 ) (43 )
Income taxes payable and other tax liabilities 35
9
Other assets and liabilities (241 ) (154 )
Net cash provided by operating activities 1,166
985
Cash flows from investing activities:
Purchases of property and equipment (425 ) (196 )
Proceeds from sales of property and equipment 11
—
Changes in principal loans receivable, net 408
(233 )
Purchases of investments (4,465 ) (24 )
Maturities and sales of investments 417
381
Acquisitions, net of cash acquired (273 ) (1 )
Notes and receivables from affiliates 575
(377 )
Net cash used in investing activities (3,752 ) (450 )
Cash flows from financing activities:
Excess tax benefits from stock-based compensation 16
33
Contribution from parent 3,829
11
Repayments under financing arrangements, net (873 ) (87 )
Funds receivable and customer accounts (774 ) (774 )
Funds payable and amounts due to customers 774
774
Net cash provided by (used in) financing activities 2,972
(43 )
Effect of exchange rate changes on cash and cash equivalents (25 ) —
Net increase in cash and cash equivalents 361
492
Cash and cash equivalents at beginning of period 2,201
1,604
Cash and cash equivalents at end of period $ 2,562
$ 2,096
Supplemental cash flow disclosures:
Cash paid for interest $ 12
$ 9
Cash paid for income taxes $ 31
$ 25

The accompanying notes are an integral part of these condensed combined and consolidated financial statements.

Table of Contents

PayPal Holdings, Inc.

NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Overview and Summary of Significant Accounting Policies

Overview and Organization

PayPal Holdings, Inc. ("~~PayPal",~~PayPal," the ~~"Company", "we", "us",~~"Company," "we," "us," or "our") was incorporated in Delaware in January 2015 and is a leading technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide. We put our customers at the center of everything we do. We strive to ~~become the most convenient and trusted way~~increase our relevance for consumers, merchants, friends and family to access and move ~~and manage~~their money anywhere in the world, anytime, on any platform and through any device (e.g., mobile, tablets, personal computers or wearables). We provide safer and simpler ways for businesses of all sizes to accept payments from merchant websites, mobile devices and applications, and at offline retail locations through a wide range of payment ~~solutions across~~solutions. We also facilitate person to person payments through PayPal, Venmo and Xoom. Our combined payment solution capabilities, including our ~~Payments Platform, including~~ PayPal, PayPal Credit, Braintree, Venmo, and ~~Braintree products.~~Xoom products, comprise our proprietary Payments Platform.

We operate globally ~~and~~ in a rapidly evolving regulatory environment characterized by a heightened regulatory focus on all aspects of the payments industry. Government regulation impacts key aspects of our business, and we are subject to regulations that affect the payments industry in the many countries in which we operate. Changes in or non-compliance with laws and regulations, changes in the interpretation of laws and regulations, and the enactment of new laws and regulations applicable to us could have a material adverse impact on our business, results of operations and financial condition. ~~Therefore, we monitor these areas closely to maintain a compliant system for our customers who depend on us.~~

Significant Accounting Policies

Basis of Presentation and Principles of Combination and Consolidation

~~PayPal's Registration Statement on Form 10, as amended ("Form 10"), was declared effective by the U.S. Securities and Exchange Commission ("SEC") on June 29, 2015.~~

On July 17, 2015 (the "distribution date"), PayPal became an independent publicly-traded company through the pro rata distribution by eBay Inc. ("eBay") of ~~100 percent~~100% of the outstanding common stock of PayPal to eBay stockholders ~~(the~~(which we refer to as the "separation" or the "distribution"). Each eBay stockholder of record as of the close of business on July 8, 2015 received one share of PayPal common stock for every share of eBay common stock held on the record date. Approximately 1.2 billion shares of PayPal common stock were distributed on July 17, 2015 to eBay stockholders. PayPal's common stock began "regular way" trading under the ticker symbol "PYPL" on ~~the~~The NASDAQ Stock Market on July 20, 2015.

Prior to the separation, eBay transferred substantially all of the assets and liabilities and operations of eBay's payments business to PayPal, which was completed in June 2015 (the ~~"Capitalization"~~"capitalization"). ~~Combined~~The combined financial statements prior to the ~~Capitalization~~capitalization were prepared on a stand-alone basis and were derived from eBay's consolidated financial statements and accounting records. The combined financial statements reflect our financial position, results of operations, comprehensive income and cash flows as our business was operated as part of eBay prior to the ~~Capitalization of PayPal.~~capitalization. Following the ~~Capitalization,~~capitalization, the consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All periods presented have been accounted for in conformity with U.S. generally accepted accounting principles ("GAAP").

For periods prior to the ~~Capitalization,~~capitalization, the condensed combined financial statements include expenses associated with ~~workplace resources~~real estate and information technology that were previously allocated to the payments business of eBay, and additional expenses related to certain corporate functions, including senior management, legal, human resources and finance. These expenses also include allocations related to stock-based compensation. The expenses that were incurred by eBay were allocated to us based on direct usage or benefit where identifiable, with the remainder allocated on a pro rata basis of revenue, headcount, or other systematic measure. We consider the expense allocation methodology and results to be reasonable for all periods presented. The condensed combined financial statements also include certain assets and liabilities that were historically held at the eBay corporate level, but which are specifically identifiable and attributable to us. The condensed combined and consolidated financial position, results of operations and cash flows of PayPal may not be indicative of our results had we been a separate stand-alone entity ~~during~~throughout the periods presented, nor are the results stated herein indicative of what the Company’s financial position, results of operations and cash flows may be in the future. All intercompany transactions and accounts have been eliminated. Transactions between usthe Company and eBay are included in these condensed combined and consolidated financial ~~statements.~~statements for all periods presented.

Beginning with the first quarter of 2016, we reclassified certain operating expenses in our condensed combined and consolidated statements of income to better align our external and internal financial reporting. These classification changes relate primarily to real estate and information technology operating expenses that were previously allocated among customer support and operations expense, sales and marketing expense and product development expense. As of the first quarter of 2016, our management did not

Table of Contents

PayPal Holdings, Inc.

NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

allocate these operating expenses for internal financial reporting and general management of the business and has therefore discontinued this allocation for external financial reporting purposes. As a result, starting with the first quarter of 2016, these operating expenses were no longer reported as part of general and administrative expenses. These changes have no impact on the previously reported condensed combined and consolidated net income for prior periods, including total operating expenses, financial position or cash flows for any periods presented, and do not eliminate any of the costs allocated to us by eBay for any periods prior to the separation. Prior period amounts have been reclassified to conform to the current period presentation.

The following table presents the effects of the changes on the presentation of operating expenses to the previously reported condensed combined and consolidated statement of income:



	Three Months Ended June 30, 2015
In millions	As Reported		Adjustments		Revised
Transaction expense	$	634	—		$	634
Transaction and loan losses	185		—		185
Customer support and operations	308		(30	)	278
Sales and marketing	245		(11	)	234
Product development	241		(39	)	202
General and administrative	135		80		215
Depreciation and amortization	150		—		150
Restructuring	1		—		1
Total operating expenses	$	1,899	—		$	1,899



	Six Months Ended June 30, 2015
In millions	As Reported		Adjustments		Revised
Transaction expense	$	1,209	—		$	1,209
Transaction and loan losses	363		—		363
Customer support and operations	583		(56	)	527
Sales and marketing	481		(25	)	456
Product development	465		(78	)	387
General and administrative	273		159		432
Depreciation and amortization	291		—		291
Restructuring	49		—		49
Total operating expenses	$	3,714	—		$	3,714

The accompanying condensed combined and consolidated financial statements include the financial statements of PayPal and our wholly and majority-owned subsidiaries. Investments in entities where we hold at least a 20% ownership interest and have the ability to exercise significant influence, but not control, over the investee are accounted for using the equity method of accounting.

~~PayPal Holdings, Inc.~~

~~NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~For such investments, our share of the investees’ results of operations is included in other income (expense), net and our investment balance is included in long-term investments.~~ Investments in entities where we hold less than a 20% ownership interest are generally accounted for using the cost method of accounting, and our share of the investees’ results of operations is included inon other income (expense), net in our condensed combined and consolidated statement of income to the extent dividends are received. Our investment balance is included in long-term investments on our condensed consolidated balance sheet.

These condensed combined and consolidated financial statements and accompanying notes should be read in conjunction with the audited combined and consolidated financial statements and accompanying notes for the year ended December 31, ~~2014~~2015 included in our Annual Report on Form ~~10.~~10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission.

In the opinion of management, these condensed combined and consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for fair presentation of the condensed combined and consolidated

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PayPal Holdings, Inc.

NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

financial statements for interim periods. We have evaluated all subsequent events through the date the financial statements were issued.

Use of Estimates

The preparation of condensed combined and consolidated financial statements in conformity with ~~U.S.~~ GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed combined and consolidated financial statements and the reported amounts of revenues and expenses, including allocations from eBay for periods presented prior to the separation, during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to provisions for transaction and loan losses, loss contingencies, income taxes, revenue recognition and the valuation of goodwill and intangible assets. We base our estimates on historical experience and on various other assumptions which we believe to be reasonable under the circumstances. Actual results could differ from those estimates.

Cash and cash equivalents

Cash and cash equivalents are short-term, highly liquid investments with original maturities of three months or less when purchased and are comprised primarily of bank deposits, government and agency securities and commercial paper.

Customer accounts

We hold all customer balances (both in the U.S. and internationally) as direct claims against us which are reflected on our consolidated balance sheet as a liability classified as amounts due to customers. Various jurisdictions where PayPal operates require us to hold eligible liquid assets, as defined by the regulators in these jurisdictions, equal to at least 100% of the aggregate amount of all customer balances. Therefore, we use the assets underlying the customer balances to meet these regulatory requirements and separately classify the assets as customer accounts in our condensed consolidated balance sheet. We classify the assets underlying the customer balances as current based on their purpose and availability to fulfill our direct obligation under amounts due to customers.

In March 2016, as approved by management and our Luxembourg banking subsidiary Supervisory Board and as permitted within regulations set forth by the Luxembourg Commission de Surveillance du Secteur Financier (the “CSSF”), we designated $800 million of European customer balances held in our Luxembourg banking subsidiary to be used to extend credit to our European customers. This is consistent with our strategy of diversifying funding sources for our credit business and neither represents a change in our credit business development strategy nor risk appetite. These funds are classified as cash and cash equivalents in our condensed consolidated balance sheet and represent 20% of European customer balances potentially available for corporate use by the Company at June 30, 2016 as determined by applying financial regulations maintained by the CSSF. The remaining assets underlying the customer balances remain separately classified as customer accounts in our condensed consolidated balance sheet. We do not commingle these customer accounts with corporate funds and maintain these assets separately in interest and non-interest bearing bank deposits, time deposits, corporate debt securities and U.S. and foreign government and agency securities. See “Note 6—Funds Receivable and Customer Accounts” for additional information related to customer accounts. Due to the above approved plan, we have presented changes in funds receivable and customer accounts as cash flows from investing activities in our condensed combined and consolidated statements of cash flows based on the nature of the activity underlying our customer accounts. We have elected to conform the prior year statement of cash flows to the current period presentation to provide comparability.

The following table presents the effects of the changes on the presentation of the statement of cash flows to the previously reported cash flows from investing activities and cash flows from financing activities in the condensed combined statement of cash flows for the six months ended June 30, 2015. These changes have no impact on the previously reported total net cash flows:

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PayPal Holdings, Inc.

NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	Six Months Ended June 30, 2015
In millions	As Reported			Adjustments		Revised
Cash flows from investing activities:
Purchases of investments	(4,465		)	(6,787	)	(11,252		)
Maturities and sales of investments	417			5,224		5,641
Funds receivable and customer accounts	—			789		789

Cash flows from financing activities:
Funds receivable and customer accounts	(774		)	774		—

Net change	$	(4,822	)	—		$	(4,822	)

Recent Accounting Pronouncements

In 2014, the Financial Accounting Standards Board (FASB) issued new guidance related to pushdown accounting. The new guidance provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. These amendments became effective on November 18, 2014. Additionally, in 2015, the FASB issued new guidance related to pushdown accounting, which removes references to the SEC guidance on pushdown accounting from the FASB Accounting Standards Codification. These amendments therefore conform the FASB's guidance on pushdown accounting with the SEC's guidance. The adoption of both standards did not have a material impact on our combined and consolidated financial statements.

~~In 2014, the FASB~~ issued new accounting guidance related to revenue recognition. This new standard will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition guidance provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. In 2015, the FASB deferred the effective date to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. In 2016, the FASB updated the guidance for reporting revenue gross versus net to improve the implementation guidance on principal versus agent considerations and updated the guidance for identifying performance obligations and the accounting of intellectual property licenses. In addition, the FASB introduced practical expedients and made narrow scope improvements to the new accounting guidance. This guidance can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. ~~In July 2015, the FASB voted to defer the effective date to January 1, 2018 with early adoption beginning January 1, 2017.~~ We are evaluating ~~our~~the impact and approach to adopting this new accounting guidance ~~as well as its impact~~ on our financial statements.

In ~~2015,~~2016, the FASB issued new accounting guidance related to ~~extraordinary~~the classification and ~~unusual items. The~~measurement of financial instruments. This new standard ~~eliminates~~makes limited amendments to the ~~concept~~guidance in U.S. GAAP by requiring equity investments to be measured at fair value with changes in fair value recognized in net income. This new standard also amends the presentation of ~~extraordinary items from GAAP.~~certain fair value changes for financial liabilities measured at fair value and it also amends certain disclosure requirements associated with the fair value of financial instruments. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, ~~2015.~~2017. Early adoption is ~~permitted.~~permitted in limited situations. We ~~may~~are required to apply the ~~standard prospectively or retrospectively~~new guidance on a modified retrospective basis to all ~~periods presented. The adoption~~outstanding instruments, with a cumulative effect adjustment as of the date of adoption. We are evaluating the impact and approach to adopting this ~~standard is not expected to have a material impact~~new accounting guidance on our financial statements.

In ~~2015,~~2016, the FASB issued new accounting guidance related to ~~consolidations.~~accounting for leases, which will require lessees to recognize lease assets and lease liabilities on the balance sheet for the rights and obligations created by all leases with terms greater than twelve months. As we are not a lessor, other changes in the standard applicable to lessors do not apply. The ~~new guidance amends the guidelines for determining whether certain legal entities should be consolidated and reduces the number of consolidation models. The new guidance~~standard is effective for fiscal years and interim periods within those ~~fiscal~~ years beginning after December 15, ~~2015. Early~~2018, with early adoption is permitted. We are required to adopt the guidance using a modified retrospective basis and can elect to apply optional practical expedients. We are evaluating the impact ~~if any, of~~and approach to adopting this new accounting guidance on our financial statements.

In ~~2015,~~2016, the FASB issued new accounting guidance ~~related~~ to ~~accounting~~simplify the analysis for ~~fees paid in a cloud computing arrangement.~~embedded derivatives. The new ~~standard provides~~ guidance ~~to customers about~~clarifies that when assessing whether a ~~cloud computing arrangement includes~~contingent call or put option qualifies as a ~~software license. If a cloud computing arrangement includes a software license, then~~separate derivative from the ~~customer should account for~~host contract (e.g., the ~~software license element~~debt instrument), the nature of the ~~arrangement consistent with~~exercise contingency would be excluded from the ~~acquisition of other software licenses. If a cloud computing arrangement does not include a software license,~~

~~PayPal Holdings, Inc.~~

~~NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~the customer should account for the arrangement as a service contract.~~assessment. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, ~~2015. Early~~2016, with early adoption permitted. We are required to apply the new guidance on a modified retrospective basis to all existing debt instruments as of the beginning of the fiscal year for which the amendments are effective. The adoption of this standard is not expected to have a material impact on our financial statements.

In 2016, the FASB issued new accounting guidance on investments that qualify for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The new guidance eliminates the requirement for retrospective adjustment of the investment, results of operations and retained earnings as if the equity method had been in effect during all the

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NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

previous periods that the investment had been held. Instead, under the new guidance, the cost of acquiring the additional interest in the investee would be added to the current basis of the previously held interest and equity method accounting would be adopted as of the date the investment becomes qualified for equity method accounting. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 with early adoption permitted. The guidance should be applied prospectively after adoption. The adoption of this standard is not expected to have a material impact on our financial statements.

In 2016, the FASB issued new guidance on the accounting for share-based payment compensation. The new guidance makes amendments to the following areas: accounting for income taxes upon vesting or settlement of awards, presentation of excess tax benefits on the statement of cash flows, accounting for forfeitures, minimum statutory withholding requirements and presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet minimum statutory withholding requirements. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 with early adoption permitted. We are required to apply different transition methods depending on the amendments, including a modified retrospective transition method, a retrospective transition method and a prospective transition method. We are evaluating the impact ~~if any, of~~and approach to adopting this new accounting guidance on our financial statements.

In 2016, the FASB issued new guidance on the measurement of credit losses on financial instruments. Credit losses on loans, trade and other receivables, held-to-maturity debt securities and other instruments will reflect our current estimate of the expected credit losses that generally will result in the earlier recognition of allowances for losses. Credit losses on available-for-sale debt securities with unrealized losses will be recognized as allowances for credit losses limited to the amount by which fair value is below amortized cost. Additional disclosures will be required, including information used to track credit quality by year of origination for most financing receivables. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 with early adoption permitted. We are required to apply the standard’s provisions as a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted with impairment of available-for-sale debt securities applied prospectively after adoption. We are evaluating the impact and approach to adopting this new accounting guidance on our financial statements.

Note 2 —- Net Income ~~(loss)~~ Per Share

Basic net income ~~(loss)~~ per share is computed by dividing net income ~~(loss)~~ for the period by the weighted average number of common shares outstanding during the period. The weighted average number of common shares outstanding for basic and diluted earnings per share for the ~~period is~~three and six months ended June 30, 2016 was based on the weighted average number of common shares outstanding for the period. The weighted average number of common shares outstanding for basic and diluted earnings per share for the three and six months ended June 30, 2015 was based on the number of shares of PayPal common stock outstanding on July 17, 2015, the distribution date. On the distribution date, eBay stockholders of record as of the close of business on July 8, 2015 received one share of PayPal common stock for every share of eBay common stock held as of the record date. Approximately 1.2 billion shares of PayPal common stock were distributed on July 17, 2015 to eBay stockholders. Diluted net income per share is computed by dividing net income for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding for the period. The dilutive effect of outstanding options and equity incentive awards is reflected in diluted net income per share by application of the treasury stock method. The calculation of diluted net income per share excludes all anti-dilutive common shares.

The following table sets forth the computation of basic and diluted net income per share for the periods indicated:

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NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015⁽¹⁾		2016		2015⁽¹⁾
(In millions, except per share amounts)
Numerator:
Net income	$	323	$	305	$	688	$	560
Denominator:
Weighted average shares of common stock - basic	1,210		1,218		1,213		1,218
Dilutive effect of equity incentive awards	5		6		7		6
Weighted average shares of common stock - diluted	1,215		1,224		1,220		1,224
Net income per share:
Basic	$	0.27	$	0.25	$	0.57	$	0.46
Diluted	$	0.27	$	0.25	$	0.56	$	0.46
Common stock equivalents excluded from income per diluted share because their effect would have been anti-dilutive	11		2		8		2

¹ On July 17, 2015, the distribution date, eBay stockholders of record as of the close of business on July 8, 2015 received one share of PayPal common stock for every share of eBay common stock held as of the record date. ~~Diluted~~Basic and diluted net income ~~(loss)~~ per share ~~is computed by dividing net income (loss)~~ for the ~~period by~~three and six months ended June 30, 2015 is calculated using the number of shares of common stock and potentially dilutive common stock outstanding as of the distribution date. The dilutive effect of outstanding options and equity incentive awards is reflected in diluted net income (loss) per share by application of the treasury stock method. The calculation of diluted net income (loss) per share excludes all anti-dilutive common shares. The same number of shares was used to calculate diluted earnings per share for periods presented since no PayPal equity was outstanding prior to the distribution.

~~The following table sets forth the computation of basic and diluted net income (loss) per share for the periods indicated:~~

Three Months Ended June 30, Six Months Ended June 30,
2015 2014 2015 2014
(In millions, except per share amounts)
Numerator:
Net income (loss) $ 305
$ 281
$ 560
$ (101 )
Denominator:
Weighted average shares of common stock - basic
1,218
1,218
1,218
1,218
Dilutive effect of equity incentive awards
6
6
6
—
Weighted average shares of common stock - diluted 1,224
1,224
1,224
1,218
Net income (loss) per share:
Basic $ 0.25
$ 0.23
$ 0.46
$ (0.08 )
Diluted $ 0.25
$ 0.23
$ 0.46
$ (0.08 )
distributed on July 17, 2015.

Note 3 —- Business Combinations

~~2015 Acquisition and Divestiture Activity~~

~~During the three months ended June 30, 2015, we completed two acquisitions for aggregate gross purchase consideration of approximately $281 million, consisting primarily of cash.~~

We completed the acquisition of Paydiant in April 2015 for total cash consideration of approximately $230 million, net of cash acquired. We acquired Paydiant to expand our capabilities in mobile payments. The allocation of purchase consideration resulted in approximately $49 million of technology and customer-related intangible assets, net liabilities of approximately $6 million, and initial goodwill of $187 million. We do not expect goodwill to be deductible for income tax purposes. The allocation of the purchase price for this acquisition has been prepared on a preliminary basis and changes to the allocation may occur as additional information becomes available.

We completed the acquisition of CyActive Security, Ltd. in April 2015 for total consideration of approximately $43 million, net of cash acquired. We acquired CyActive to further enhance our risk assessment capabilities used to protect merchants and consumers

~~PayPal Holdings, Inc.~~

~~NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

on our Payments Platform. The allocation of purchase consideration resulted in approximately $8 million of technology-related intangible assets, net liabilities of approximately $2 million, and initial goodwill of $37 million. We do not expect goodwill to be deductible for income tax purposes. The allocation of the purchase price for this acquisition has been prepared on a preliminary basis and changes to the allocation may occur as additional information becomes available.

We have included the financial results of Paydiant and CyActive in our combined condensed financial statements from the dates of acquisition. Revenues and expenses related to Paydiant and CyActive for the period ending June 30, 2015 were not material. Pro forma results of operations have not been presented because the effect of these acquisitions were not material to our financial results.

~~2014 Acquisition and Divestiture Activity~~

There were no acquisitions or divestitures completed in ~~2014.~~the three and six months ended June 30, 2016. During 2015, we completed four acquisitions, reflecting 100% of the equity interests of the acquired companies, for an aggregate amount of $1.4 billion as described in "Part IV, Item 15, Note 3—Business Combinations" in our Annual Report on Form 10-K for the year ended December 31, 2015. In the three months ended March 31, 2016, we finalized the allocation of the purchase consideration for Paydiant and Cyactive which did not result in any material changes to the allocation.

Note 4 - Goodwill and Intangible Assets

Goodwill

The following table presents goodwill balances and adjustments to those balances during the six months ended June 30, ~~2015:~~2016 (in millions):



	December 31, 2015		Goodwill Acquired		Adjustments		June 30, 2016
Total Goodwill	$	4,069	$	—	$	—	$	4,069

December 31,
2014
Goodwill
Acquired
Adjustments June 30,
2015
Total Goodwill $ 3,189
$ 224
$ (4 ) $ 3,409

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~~The adjustments to goodwill during the six months ended June 30, 2015 relate to foreign exchange rate translations.~~NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Intangible Assets

The components of identifiable intangible assets are as follows:


	June 30, 2015								December 31, 2014								June 30, 2016								December 31, 2015
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Useful Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Useful Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Useful Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Useful Life (Years)
	(In millions, except years)																(In millions, except years)
Intangible assets:
Customer lists and user base	$	534	$	(486	)	$	48	5	$	520	$	(477	)	$	43	6	$	605	$	(524	)	$	81	4	$	605	$	(501	)	$	104	4
Marketing related	181		(133		)	48		3	181		(117		)	64		3	197		(170		)	27		3	197		(150		)	47		3
Developed technologies	210		(162		)	48		3	167		(153		)	14		3	245		(190		)	55		3	245		(176		)	69		3
All other	137		(95		)	42		5	105		(70		)	35		5	243		(125		)	118		5	243		(105		)	138		5
Intangible assets, net	$	1,062	$	(876	)	$	186		$	973	$	(817	)	$	156		$	1,290	$	(1,009	)	$	281		$	1,290	$	(932	)	$	358

During the period, eBay contributed intangible assets with a gross carrying amount of $31 million and a net book value of $13 million. All identifiable intangible assets are subject to amortization and no significant residual value is estimated for the intangible assets. Amortization expense for intangible assets was ~~$23~~$39 million and ~~$20~~$23 million for the three months ended June 30, ~~2015~~2016 and ~~2014,~~2015, respectively. Amortization expense for intangible assets was ~~$42~~$77 million and ~~$44~~$42 million for the six months ended June 30, 2016 and 2015, respectively.

Expected future intangible asset amortization as of June 30, 2016 was as follows (in millions):



Fiscal years:
Remaining 2016	$	72
2017	101
2018	68
2019	23
2020	17
	$	281

Note 5 - Geographical Information

The following tables summarize the allocation of net revenues and ~~2014, respectively.~~long-lived assets based on geography:



	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
	(In millions)
Net revenues:
U.S.	$	1,407	$	1,170	$	2,750	$	2,200
United Kingdom	318		286		625		563
Other Countries	925		841		1,819		1,671
Total net revenues	$	2,650	$	2,297	$	5,194	$	4,434

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NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~Expected future intangible asset amortization as of June 30, 2015 is as follows (in millions):~~

Fiscal years:
Remaining 2015 $ 46
2016 83
2017 37
2018 17
2019 3
Thereafter: —
$ 186

~~Note 5 - Segment and Geographical Information~~

We determine operating segments based on how our chief operating decision maker manages the business, including making operating decisions, deciding how to allocate resources and evaluating operating performance. Our chief operating decision-maker is our Chief Executive Officer who reviews our operating results on a consolidated basis. Accordingly, we operate in one segment and have one reportable segment.

~~The following tables summarize the allocation of net revenues based on geography:~~

Three Months Ended June 30, Six Months Ended June 30,
2015 2014 2015 2014
(In millions)
Net revenues:
U.S. $ 1,170
$ 982
$ 2,200
$ 1,885
United Kingdom 286
283
563
553
Rest of world 841
718
1,671
1,419
Total net revenues $ 2,297
$ 1,983
$ 4,434
$ 3,857


	June 30, 2015		December 31, 2014		June 30, 2016		December 31, 2015
	(In millions)				(In millions)
Long-lived assets:
U.S.	$	4,393	$	3,784	$	1,329	$	1,256
International	462		401
Other Countries					83		88
Total long-lived assets	$	4,855	$	4,185	$	1,412	$	1,344

Net revenues are attributed to U.S., U.K. and ~~international geographies~~other countries primarily based upon the country in which the merchant is located, or in the case of a cross border transaction, may be earned from ~~both~~the countries in which the consumer and the merchant respectively reside. Net revenues earned from ~~other~~ value added services are typically attributed to the country in which either the consumer or the merchant ~~resides, depending on~~reside. Tangible long-lived assets for the ~~type~~three and six months ended June 30, 2016 and 2015 consisted of ~~service provided.~~property and equipment. Long-lived assets attributed to the U.S. and ~~international geographies~~other countries are based upon the country in which the asset is located or owned.

~~Information regarding net revenues by major products~~

Note 6 - Funds Receivable and ~~services for three~~Customer Accounts

The following table summarizes the assets underlying our funds receivable and ~~six months ended~~customer accounts as of June 30, ~~2015~~2016 and ~~2014 is as follows:~~December 31, 2015.



	June 30, 2016		December 31, 2015
	(In millions)
Cash and cash equivalents	$	4,815	$	5,245
Government and agency securities	5,209		4,305
Time deposits	504		830
Corporate debt securities	599		180
Funds receivable	1,907		1,701
Total funds receivable and customer accounts	$	13,034	$	12,261

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NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Three Months Ended June 30, Six Months Ended June 30,
2015 2014 2015 2014
(In millions)
Transaction revenues $ 1,970
$ 1,712
$ 3,884
$ 3,386
Other value added services: 327
271
550
471
Total net revenues $ 2,297
$ 1,983
$ 4,434
$ 3,857

~~Note 6 - Investments~~

At June 30, ~~2015~~2016 and December 31, ~~2014,~~2015, the estimated fair value of our investments classified as available for sale included within funds receivable and customer accounts was as follows:



	June 30, 2016
	Gross Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(In millions)
Government and agency securities	$	4,736	$	1	$	—	$	4,737
Time deposits	504		—		—		504
Total	$	5,240	$	1	$	—	$	5,241



	December 31, 2015
	Gross Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(In millions)
Government and agency securities	$	3,299	$	—	$	(1	)	$	3,298
Time deposits	830		—		—			830
Total	$	4,129	$	—	$	(1	)	$	4,128

We elect to account for certain investments within customer accounts, including foreign-currency denominated available-for-sale investments, under the fair value option. As a result, any gains and losses from fair value changes on such investments are recognized in other income (expense), net on the condensed combined and consolidated statement of income. Election of the fair value option allows us to significantly reduce the accounting asymmetry that would otherwise arise when recognizing the changes in the fair value of available-for-sale investments and the corresponding foreign exchange gains and losses relating to customer liabilities. At June 30, 2016 and December 31, 2015, the estimated fair value of our investments included within funds receivable and customer accounts under the fair value option was $1.1 billion and $1.2 billion, respectively. In the three months ended June 30, 2016 and 2015, $18 million of net loss and $40 million of net gain from fair value changes were recognized in other income (expense), net on the condensed combined and consolidated statement of income. In the six months ended June 30, 2016 and 2015, $7 million and $21 million of net losses from fair value changes were recognized in other income (expense), net on the condensed combined and consolidated statement of income.

The aggregate fair value of investments in an unrealized loss position was $1.3 billion as of June 30, 2016. The aggregate gross unrealized loss on our short-term and long-term investments was not material as of June 30, 2016. We believe the decline in value is due to temporary market conditions and expect to recover the entire amortized cost basis of the securities. We neither intend nor anticipate the need to sell the securities before recovery. We continue to monitor the performance of the investment portfolio and assess market and interest rate risk when evaluating whether other-than-temporary impairment exists.

As of June 30, 2016, we had no material investments that have been in a continuous unrealized loss position for greater than 12 months. Amounts reclassified to earnings from unrealized gains and losses were not material for the six months ended June 30, 2016 and 2015.

The estimated fair values of our investments classified as available for sale included within funds receivable and customer accounts by date of contractual maturity at June 30, 2016 were as follows:



	June 30, 2016
	(In millions)
One year or less	$	5,014
One year through two years	227
Total	$	5,241

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NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 7 - Investments

At June 30, 2016 and December 31, 2015, the estimated fair value of our short-term and long-term investments classified as available for sale was as follows:



	June 30, 2016
	Gross Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(In millions)
Short-term investments⁽¹⁾:
Corporate debt securities	2,551		2		—			2,553
Government and agency securities	19		—		—			19
Time deposits	112		—		—			112
Long-term investments⁽¹⁾:
Corporate debt securities	1,246		4		(1		)	1,249
Government and agency securities	10		—		—			10
Total⁽¹⁾	$	3,938	$	6	$	(1	)	$	3,943

⁽¹⁾Excludes short-term restricted cash of $17 million and long-term restricted cash of $6 million.

June 30, 2015

Gross
Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair Value
(In millions)
Short-term investments:
Corporate debt securities $ 1,251
$ —
$ (1 ) $ 1,250
Government and agency securities $ 590
$ —
$ —
$ 590
Time deposits $ 6
   $ —
   $ —
$ 6
Long-term investments:

Corporate debt securities $ 2,232
$ 1
$ (2 ) $ 2,231
Total $ 4,079
$ 1
$ (3 ) $ 4,077



	December 31, 2015
	Gross Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(In millions)
Short-term investments⁽¹⁾:
Corporate debt securities	2,000		—		(2		)	1,998
Time deposits	2		—		—			2
Long-term investments⁽¹⁾:
Corporate debt securities	2,328		—		(14		)	2,314
Total⁽¹⁾	$	4,330	$	—	$	(16	)	$	4,314

⁽¹⁾Excludes short-term restricted cash of $18 million and long-term restricted cash of $8 million.

In the three months ended June 30, 2016, we elected to account for foreign denominated available-for-sale investments held in our Luxembourg banking subsidiary under the fair value option. Election of the fair value option allows us to recognize any gains and losses from fair value changes on such investments in other income (expense), net on the condensed combined and consolidated statement of income to offset certain foreign exchange gains and losses on our foreign denominated customer liabilities. At June 30, 2016 the estimated fair value of our investments included within short term investments under the fair value option was $238 million. In the three months ended June 30, 2016, $15 million of net losses from fair value changes were recognized in other income (expense), net on the condensed combined and consolidated statement of income.

December 31, 2014

Gross
Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair Value
(In millions)
Short-term investments:
Time deposits $ 29
   $ —
   $ —
$ 29

We have short-term restricted cash that we intend to use to support our global sabbatical program. In addition, in connection with the acquisition of Xoom, we have long-term restricted cash required as collateral by payment processors and for licensing rules in India.

As of June 30, ~~2015,~~2016, we had no material long-term or short-term investments that have been in a continuous unrealized loss position for greater than 12 months. Amounts reclassified to earnings from unrealized gains and losses were not material for the three ~~months ended~~ and six months ended June 30, ~~2015~~2016 and ~~2014.~~2015.

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NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The estimated fair values of our short-term and long-term investments classified as available for sale by date of contractual maturity at June 30, ~~2015 are~~2016 were as follows:


	June 30, 2015		June 30, 2016
	(In millions)		(In millions)
One year or less	$	1,846	$	2,684
One year through two years	1,358		753
Two years through three years	718		434
Three years through four years	122		42
Four years through five years	22		24
Greater than five years	11		6
Total(1)	$	4,077	$	3,943


Item 4:	Controls and Procedures

(a) Evaluation of disclosure controls and procedures. Based on the evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934) required by Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, our Chief Executive Officer and our Chief Financial Officer have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.

(b) Changes in internal controls. There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION


Item 1:	Legal Proceedings

The information set forth under “Note ~~10 —~~11- Commitments and Contingencies, — Litigation and ~~Other Legal~~Regulatory Matters” to the condensed combined and consolidated financial statements included in Part I, Item 1 of this report is incorporated herein by reference.


Item 1A:	Risk Factors

~~The following discussion is divided into three sections. The first section,~~We are subject to various risks and uncertainties, which ~~begins immediately following this paragraph, discusses some of the risks that may~~could materially affect our business, results of operations, financial condition, and ~~financial condition.~~future results and the trading price of our common stock. You should carefully read the following information together with the information appearing in Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2015. The ~~second section, captioned “Risks Related~~following information supplements and, to the ~~Separation and Our Operation as an Independent Publicly Traded Company,” discusses~~extent inconsistent, supersedes some of the ~~risks relating to~~information appearing in the Risk Factors section of our separation into an independent publicly traded company. The third section, captioned “Risks Related to Our Common Stock,” discusses some of the risks relating to an investment in our Common Stock. You should carefully review all of these sections,Annual Report on Form 10-K. These risk factors, as well as our condensed combined and consolidated financial statements and notes thereto and the other information appearing in this report, should be reviewed carefully for important information regarding risks that affect us.

~~Risk Factors That May Affect Our Business, Results of Operations and Financial Condition~~

Our operating and financial results come primarily from transactions involving payments made in a reporting period and are therefore subject to fluctuations that could adversely affect our business, financial condition, results of operations and cash flows, as well as the trading price of our common stock.

Our operating and financial results have varied on a quarterly basis during our operating history and may continue to fluctuate significantly as a result of a variety of factors, including as a result of the risks set forth in this “Risk Factors” section. It is difficult for us to forecast the level or source of our revenues or earnings (loss) accurately. In view of the rapidly evolving nature of our business, period-to-period comparisons of our operating results may not be meaningful, and you should not rely upon them as an indication of future performance. We do not have backlog, and substantially all of our net revenues each quarter come primarily from transactions involving payments during that quarter. Due to the inherent difficulty in forecasting revenues, it is also difficult to forecast expenses as a percentage of net revenues. Quarterly and annual expenses as a percentage of net revenues reflected in our combined financial statements may be significantly different from historical or projected rates. Our operating results in one or more future quarters may fall below the expectations of securities analysts and investors. The trading price of our common stock could decline, perhaps substantially, as a result of the factors described in this paragraph.

~~Global and regional economic conditions could harm our business.~~

Our operations and performance depend significantly on global and regional economic conditions. Adverse economic conditions and events (including volatility or distress in the equity and/or debt or credit markets and fluctuations in foreign currency exchange rates) have in the past negatively impacted regional and global financial markets and will likely continue to do so from time to time in the future. These events and conditions, such as recent uncertainties related to Greek sovereign debt obligations, could have a negative and adverse impact on the companies and customers with which we do business. In addition, financial turmoil affecting the banking system or financial markets could cause additional consolidation of the financial services industry, or significant financial service institution failures, new or incremental tightening in the credit markets, low liquidity, and extreme volatility in fixed income, credit, currency, and equity markets. Adverse impacts to the companies and customers with which we do business, the banking system, or financial markets could have a material adverse effect on our business, including a reduction in the volume and prices of transactions on our payments platforms.

~~Our success depends to a large degree on our ability to successfully address the rapidly evolving market for transactions on mobile devices.~~

Mobile devices are increasingly used for ecommerce transactions and payments. A significant and growing portion of our customers access our platforms through mobile devices. We may lose customers if we are not able to continue to meet our customers’ mobile and multi-screen experience expectations. The variety of technical and other configurations across different mobile devices and platforms increases the challenges associated with this environment. In addition, a number of other companies with significant resources and a number of innovative startups have introduced products and services focusing on mobile markets.

Our ability to successfully address the challenges posed by the rapidly evolving market for mobile transactions is crucial to our continued success, and any failure to continuously increase the volume of mobile transactions effected through our platforms could harm our business.

~~If we cannot keep pace with rapid technological developments to provide new and innovative programs, products and services, the use of our products and our revenues could decline.~~

Rapid, significant technological changes continue to confront the industries in which we operate, including developments in smart cards, tokenization, ecommerce, mobile, and radio frequency and proximity payment devices, such as contactless payments. We cannot predict the effect of technological changes on our business. In addition to our own initiatives and innovations, we rely in part on third parties, including some of our competitors, for the development of and access to new technologies. We expect that new services and technologies applicable to the industries in which we operate will continue to emerge. These new services and technologies may be superior to, or render obsolete, the technologies we currently use in our products and services. Incorporating new technologies into our products and services may require substantial expenditures and take considerable time, and ultimately may not be successful. In addition, our ability to adopt new services and develop new technologies may be inhibited by industry-wide standards, payments networks, new laws and regulations, resistance to change from consumers or merchants, or third parties’ intellectual property rights. Our success will depend on our ability to develop new technologies and adapt to technological changes and evolving industry standards.

Changes in how consumers fund their PayPal transactions could harm our business.

We pay significant transaction fees when consumers fund payment transactions using credit cards, lower fees when consumers fund payments with debit cards, nominal fees when consumers fund payment transactions by electronic transfer of funds from bank accounts, and nonominal fees when consumers fund payment transactions from an existing PayPal account balance or through ~~the~~our PayPal Credit products. Our financial success is ~~highly~~ sensitive to changes in the rate at which our consumers fund payments using credit and debit cards (collectively, “payment cards”), which can significantly increase our costs. ~~Some~~Despite our efforts to provide consumers with the opportunity to use their existing PayPal account balance to fund payment transactions, some of our consumers may prefer to use ~~credit and debit~~payment cards, especially if these payment cards offer functionality and benefits not associated with the use of their bank accounts. Some of our offerings, including the ability of consumers to make a limited number of “guest” payments without opening a PayPal account, have a higher rate of payment card funding than our basic product offering. An increase in the portion of our payment volume funded using ~~credit and debit~~payment cards ~~would~~or in fees associated with our funding mix, or other events or developments that make it more difficult or costly for us to fund transactions by electronic transfer of funds from bank accounts or existing PayPal account balances, could materially and adversely affect our financial ~~performance.~~performance and significantly harm our business. Some of our plans to lower our funding costs, including ~~both the~~our PayPal Credit products and ~~the ability for~~enabling consumers to defer payment for a short period of time on some transactions, may increase the risk to us of nonpayment by consumers. An

Negotiated arrangements with payment card networks and/or issuing banks, promoting greater choice and options for consumers to fund payment transactions could have an uncertain impact on our business. We recently announced that we have entered into a strategic partnership with Visa, Inc. ("Visa") to further expand our relationship with Visa in a way that will make it easier for merchants and consumers to choose to pay with Visa credit and debit cards. As part of the agreement, we will gain access to Visa’s tokenization services in the U.S. for in-store point-of-sale PayPal transactions. While we anticipate that this strategic partnership will result in an increase in ~~fees~~the number of transactions and transaction volume that we process, we also anticipate that a greater percentage of customer transactions will be executed using a credit or debit card, which could increase our funding costs. If our transaction volume does not increase as expected, our business and results of operations could be adversely affected due to increased costs associated with our funding ~~mix or in losses associated with nonpayment by consumers could harm our business.~~

~~Our business is subject to online security risks, including security breaches.~~mix.

Our business involves the storage and transmission of customers’ personal financial information. In addition, a significant number of our customers authorize us to bill their payment card accounts directly for all transaction and other fees charged by us. We have built our reputation on the premise that our payments platform offers customers a secure way to make payments. An increasing number of websites, including those owned by several other large Internet and offline companies, have disclosed breaches of their security, some of which have involved sophisticated and highly targeted attacks on portions of their websites or infrastructure. In May 2014, eBay Inc. publicly announced that criminals were able to penetrate and steal certain data, including user names, encrypted user passwords and other non-financial user data from certain of its Marketplaces business unit databases, which led to Marketplaces requiring a password reset and fewer transactions using our PayPal services. A breach of security at PayPal could have negative consequences to our reputation, which could result in our customers using our services less often, and have significant out-of-pocket financial impact.

The techniques used to obtain unauthorized access, disable, or degrade service, or sabotage systems, change frequently, may be difficult to detect for a long time, and often are not recognized until launched against a target. Certain efforts may be state sponsored and supported by significant financial and technological resources and therefore may be even more difficult to detect. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures. Unauthorized parties may also attempt to gain access to our systems or facilities through various means, including hacking into our systems or facilities, fraud, trickery or other means of deceiving our employees, contractors and temporary staff. A party that is able to circumvent our security measures could misappropriate our or our customers’ personal proprietary information, cause interruption in our operations and damage our computers or those of our customers. In addition, our customers have been and likely will continue to be targeted by parties using fraudulent “spoof” and “phishing” emails to misappropriate user names, passwords, payment card numbers, or other personal information or to introduce viruses or other malware through “trojan horse” programs to our customers’ computers.

Also, our information technology and infrastructure may be vulnerable to cyberattacks or security incidents and third parties may be able to access our customers’ proprietary information and payment card data that are stored on or accessible through our systems. Any security breach at a company providing services to us or our customers could have similar effects. Because we promote to our customers that our payments platform offers a secure way to make payments, a security breach would have a significant impact on our reputation.

In addition, under payment card rules and our contracts with our card processors, if there is a breach of payment card information that we store, or that is stored by our direct payment card processing customers, we could be liable to the payment card issuing banks for their cost of issuing new cards and related expenses. If we were unable to accept payment cards, our business would be harmed. Additionally, financial services regulators in various jurisdictions, including the United States and the European Union, have implemented or are considering proposals to impose new authentication requirements on banks and payment processors intended to reduce online fraud, which could impose significant costs, require us to change our business practices, make it more difficult for new customers to join PayPal, and reduce the ease of use of our products, which could harm our business.

We may also need to expend significant additional resources to protect against security breaches or to redress problems caused by breaches. These issues are likely to become more difficult and costly as we expand the number of markets where we operate. Additionally, our insurance policies carry low coverage limits, which may not be adequate to reimburse us for losses caused by security breaches and we may not be able to fully collect, if at all, under these insurance policies.

~~Systems failures and resulting interruptions in the availability of our websites, applications, products or services could harm our business.~~

Our systems may experience service interruptions or degradation because of hardware and software defects or malfunctions, computer denial-of-service and other cyberattacks, human error, earthquakes, hurricanes, floods, fires, natural disasters, power losses, disruptions in telecommunications services, fraud, military or political conflicts, terrorist attacks, computer viruses, or other events. Our systems are also subject to break-ins, sabotage and intentional 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, 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 system failures, denial of service attacks and other events or conditions from time to time that interrupt the availability or reduce the speed or functionality of our websites and mobile applications. These events have resulted and likely will result in loss of revenue. A prolonged interruption in the availability or reduction in the speed or other functionality of our websites and mobile applications could materially harm our business. Frequent or persistent interruptions in our services could cause current or potential customers to believe that our systems are unreliable, leading them to switch to our competitors or to avoid our sites, and could permanently harm our reputation and brands. Moreover, to the extent that any system failure or similar event results in damages to our customers or their businesses, these customers could seek significant compensation from us for their losses and those claims, even if unsuccessful, would likely be time-consuming and costly for us to address.

Our website has suffered significant intermittent unavailability, including for example, transaction failures which affected some customers in the United Kingdom for over 24 hours in August 2014 and mobile login failures which affected some customers for several hours in April 2014. Reliability is particularly critical for us because the full-time availability of our PayPal services is critical to our goal of gaining widespread acceptance among consumers and merchants for digital and mobile payments. We have undertaken certain system upgrades and re-platforming efforts designed to improve our reliability and speed. These efforts are costly and time consuming, involve significant technical risk and may divert our resources from new features and products, and there can be no guarantee that these efforts will succeed. Because we are a regulated financial institution, frequent or persistent site interruptions could lead to regulatory scrutiny, significant fines and penalties, or mandatory and costly changes to our business practices, and ultimately could cause us to lose existing licenses we need to operate or prevent us from obtaining additional licenses that we need to expand.

We also rely on facilities, components and services supplied by third parties, including eBay, and our business may be materially adversely affected to the extent these components or services do not meet our expectations or these third parties cease to provide the services or facilities. In particular, a decision by any of our third party hosting providers to close a facility that we use could cause system interruptions and delays, result in loss of critical data and cause lengthy interruptions in our services. We do not carry business interruption insurance sufficient to compensate us for losses that may result from interruptions in our service as a result of systems failures and similar events.

Changes to payment card networks or bank fees, rules, or practices could harm our business.

We do not directly access the payment card networks, such as Visa and MasterCard, that enable our acceptance of credit cards and debit cards, ~~(including~~including some types of prepaid ~~cards). As a result,~~cards. Accordingly, we must rely on banks or other payment processors to process transactions and must pay fees for the services. 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 which accesses their networks. Payment card networks have or may impose special assessments for transactions that are executed through a “digital wallet” such as PayPal’s, and such fees could particularly impact us and significantly increase our costs. Our payment card processors may have the right to pass any increases in interchange fees and assessments on to us as well as increase their own fees for processing. Any changes in interchange fees and assessments could increase our operating costs and reduce our operating income. We recently announced that we have entered into a strategic partnership with Visa, Inc. to further expand our relationship with Visa in a way that will make it easier for merchants and consumers to choose to pay with Visa credit and debit cards. During the term of the agreement,

Visa has agreed to not enact or impose any fees or rules solely targeted at PayPal. Upon termination of the agreement, PayPal could become subject to special digital wallet fees or other special assessments.

In addition, in some jurisdictions, governments have required Visa and MasterCard to reduce interchange fees, or have opened investigations as to whether Visa’s or MasterCard’s interchange fees and practices violate antitrust law. In the United States, the Federal Reserve Board issued a final rule capping debit card interchange fees at significantly lower rates than Visa or MasterCard previously charged. In the European Union, the Multilateral Interchange Fee ~~(“MIF”)~~ Regulation limits credit and debit interchange fees for payments ~~to 0.3%~~ and ~~0.2%, respectively. The MIF Regulation, which is expected to become effective in the second half of 2015, may significantly impact our pricing policy in the European Union.~~imposes business rules on card processing services. Any ~~such~~ material reduction in credit or debit card interchange rates in the United States or other markets could ~~jeopardize~~adversely affect our competitive position against traditional credit and debit card ~~processors,~~service providers, and may subject us to pricing pressure, although it would also lower our costs. Future changes to those regulations ~~or to our business~~ could potentially ~~cause us to be treated as a payment card network, which could subject us to additional regulation and require us to change our business practices, which could reduce our revenue and~~ adversely affect our business.

We are required by our processors to comply with payment card network operating rules, including special operating rules for payment service providers to merchants, and we have agreed to reimburse our processors for any fines they are assessed by payment card networks as a result of any rule violations by us or our merchants. The payment card networks set and interpret the card operating rules. ~~Payment card networks have from~~From time to time, the networks have alleged that various aspects of our business model violate these operating rules. If such allegations are not resolved favorably, they ~~could~~may result in material fines and penalties or require changes in our business practices that may be costly. The payment card networks could adopt new operating rules or interpret or re-interpret existing rules that we or our processors might find difficult or even impossible to follow, or costly to implement. As a result, we could lose our ability to give consumers the option of using payment cards to fund their payments or the choice of currency in which they would like their payment card to be charged. If we ~~were~~are unable to accept payment cards or ~~were~~are meaningfully limited in our ability to do so, our business would be ~~harmed.~~

adversely affected.

We and our payment card processors have implemented specific business processes for merchants ~~in order~~ to comply with payment card network operating rules for providing services to ~~merchants, but any~~merchants. Any failure to comply with these rules could result in fines. We are also ~~could be, and in the past have been,~~ subject to fines from payment card networks if we fail to detect that merchants are engaging in activities that are illegal or that are considered “high risk,” primarily the sale of certain types of digital content. For “high risk” merchants, we must either prevent such merchants from using our PayPal services or register such merchants with the payment card networks and conduct additional monitoring with respect to such merchants. Although the amount of these fines has not been material to date, ~~any~~ additional fines in the future could become material and could result in a termination of our ability to accept payment cards or require changes in our process for registering new ~~customers. This~~customers, which would ~~significantly damage~~materially harm our business. ~~Our retail point-of-sale solution and PayPal Here product are also subject to payment~~Payment card network ~~operating~~ rules ~~which~~ may also increase the ~~costs~~cost of, ~~those products~~impose restrictions on, or otherwise negatively impact the development of, our retail point-of-sale solutions, which may negatively impact their ~~deployment.~~

deployment and adoption.

Failure to deal effectively with fraud, fictitious transactions, bad transactions, and negative customer experiences would increase our loss rate and harm our business, and could severely diminish merchant and consumer confidence in and use of our services.

We incur substantial losses due to claims from consumers that merchants have not performed or that their goods or services do not match the merchant’s description. We seek to recover such losses from the merchant, but may not be able to recover in full if the merchant is unwilling or unable to pay. In addition, in the event of the bankruptcy or other business interruption of a merchant that sells goods or services in advance of the date of their delivery or use (e.g., airline, cruise or concert tickets, custom-made goods and subscriptions), we could be liable to the buyers of such goods or services, either through our buyer protection program or through chargebacks on payment cards used by customers to fund their payment. While we have established reserves based on assumptions and estimates that we believe are reasonable to cover such eventualities, these reserves may be insufficient.

We also incur losses from claims that the consumer did not authorize the purchase, from consumer fraud, from erroneous transmissions and from customers who have closed bank accounts or have insufficient funds in them to satisfy payments. In addition, if losses incurred by us related to payment card transactions become excessive, they could potentially result in our losing the right to accept payment cards for ~~payment. In the event that we were unable to accept~~ payment, ~~cards, the number of transactions processed through~~which would harm our PayPal services would decrease substantially and our business could be harmed. We are similarly subject to the risk of fraudulent activity associated with merchants, consumers of PayPal Credit products and third parties handling our user information.business. We have taken measures to detect and reduce the risk of fraud, but these measures need to be continually improved and may not be effective against new and continually evolving forms of fraud or in connection with new product offerings. If these measures do not succeed, our business could be harmed.

The United Kingdom’s departure from the European Union could adversely affect us.

47The United Kingdom (U.K.) held a referendum on June 23, 2016 in which a majority of voters approved an exit from the European Union (EU) (“Brexit”). Negotiations are expected to commence to determine the future terms of the U.K.’s relationship with the EU, including, among other things, the terms of trade between the U.K. and the EU. The effects of Brexit will depend on any agreements the U.K. reaches to retain access to EU markets either during a transitional period or more permanently. The outcome

of this referendum caused volatility in global stock markets and foreign currency exchange rate fluctuations and may continue to do so in the future. Brexit could adversely affect U.K., regional (including European) and worldwide economic and market conditions and could contribute to instability in global financial and foreign exchange markets, including volatility in the value of the British Pound and euro, which in turn could adversely affect the companies and customers with which we do business, particularly in the U.K. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which EU laws to replace or replicate. In particular, depending on the terms of Brexit, we may face new regulatory costs and challenges, including the following:

we could lose our ability for our EU operations to passport into the U.K. market through the banking license of PayPal (Europe) S.à r.l. et Cie, SCA (“PayPal (Europe)”), our wholly-owned subsidiary that is licensed and subject to regulation as a bank in Luxembourg;

we could be required to obtain additional regulatory licensing to operate in the U.K. market, adding costs and potential inconsistency to our business;

we could lose our ability to rely on Luxembourg as our lead regulatory authority for certain aspects of our U.K. operations; and

we could also be required to comply with regulatory requirements in the U.K. that are in addition to, or inconsistent with, the regulatory requirements of the EU.

Any ~~factors that reduce cross-border trade or make such trade more difficult~~of these effects of Brexit and others we cannot anticipate could ~~harm~~adversely affect our ~~business.~~

~~Cross-border trade is an important source~~business, results of ~~both revenue~~operations, financial condition and profits for us. For the year ended December 31, 2014, approximately 24% of total payment volume (“TPV”) involved cross-border trade (i.e., transactions where the merchant and consumer were in different countries). Cross-border transactions generally provide higher revenues and operating income than similar transactions that take place within a single country or market. Cross-border trade also represents our primary (or in some cases, only) presence in certain important markets, such as China.

Cross-border trade is subject to, and may be impacted by, foreign exchange rate fluctuations. In addition, the potential interpretation and application of laws of multiple jurisdictions (e.g., the jurisdiction of the merchant and the consumer) are often extremely complicated in the context of cross-border trade. The interpretation and/or application of such laws could impose restrictions on cross-border trade. Any factors that increase the costs of cross-border trade or restrict, delay, or make cross-border trade more difficult or impractical would lower our revenues and profits and could harm our business.

cash flows.

Our business is subject to extensive government regulation and oversight, ~~relating to the provision of financial services.~~as well as extensive, complex, overlapping and frequently changing rules, regulations and legal interpretations.

~~We are~~Our business is subject to ~~various~~extensive government regulation and oversight. For a discussion of how government regulation impacts key aspects of our business, please see Item I - “Business—Government Regulation” in our Annual Report on Form 10-K for the year ended December 31, 2015. Our business is also subject to laws, rules, regulations, policies and ~~regulations~~legal interpretations in the ~~United States and other countries where~~markets in which we ~~operate. Such laws and regulations include~~operate, including (but not limited to) those governing banking, credit, deposit taking, cross-border and domestic money transmission, foreign exchange, ~~and~~privacy, data protection, banking secrecy, payment services ~~such as~~(including payment processing and settlement ~~services.~~services), consumer protection, anti-money laundering, and counter-terrorist financing. The legal and regulatory requirements ~~that apply~~applicable to us ~~vary~~are extensive, complex, frequently changing, and increasing in ~~the markets where we operate~~number, and may impose overlapping and/or conflicting requirements or obligations.

Financial and political events have increased ~~over time as~~ the ~~geographical scope~~level of regulatory scrutiny on the payments industry, and ~~complexity of our business and products have expanded. While we have a compliance program focused on compliance with applicable~~regulatory agencies may view matters or interpret laws and regulations ~~and~~differently than they have ~~increased the resources allocated to that program~~ in the ~~last several years,~~past and in a manner adverse to our business. Our success and increased visibility may result in increased regulatory oversight and tighter enforcement of rules and regulations that may apply to our business.

As we expand and localize our international activities, we are increasingly becoming obligated to comply with the laws of the countries or markets in which we operate. In addition, because our services are accessible worldwide and we facilitate sales of goods and provide services to customers worldwide, one or more jurisdictions may ~~still~~claim that we or our customers are required to comply with their laws. Laws regulating the Internet, mobile and related technologies outside of the United States often impose different, more specific, or even conflicting obligations on us , as well as broader liability. For example, certain transactions that may be permissible in a local jurisdiction may be prohibited by regulations of U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”) or U.S. anti-money laundering or counter-terrorist financing regulations.

Any failure or perceived failure to comply with existing or new laws and regulations (including changes to or expansion of the interpretation of those laws and regulations), including those discussed in this risk factor, may subject us to significant fines, orpenalties, criminal and civil lawsuits, forfeiture of significant assets, and other enforcement actions in one or more ~~jurisdictions or be required~~jurisdictions; result in additional compliance and licensure requirements; increase regulatory scrutiny of our business; restrict our operations; force us to ~~make changes to~~change our business practices, make product or ~~compliance programs~~operational changes or delay planned product launches or improvements. The foregoing could, individually or in the ~~future. Non-compliance could also~~aggregate, expose us to significant liability, impose significant costs, require us to expend substantial resources, increase the cost and complexity of compliance, damage our brand and business, make our products and services less attractive, result in ~~significant criminal and civil lawsuits, penalties, forfeiture~~the loss of ~~significant assets, or other enforcement actions. Costs associated with fines, enforcement actions, as well as reputational harm, changes in compliance requirements or limits on~~customers, limit our ability to ~~expand~~grow the business, adversely affect our ~~product offerings could~~results of operations, and harm our ~~business.~~reputation. The complexity of U.S. federal and state regulatory and enforcement regimes, coupled with the global scope of our operations and the evolving global regulatory environment, could result in a single event giving rise to a large number of overlapping investigations and legal and regulatory proceedings by multiple government authorities in different jurisdictions. We have implemented policies and procedures designed to help ensure compliance with applicable laws, and regulations, but there can be no assurance that our employees, contractors, or agents will not violate such laws and regulations.

Payments Regulation

In the U.S., PayPal, Inc. has obtained licenses to operate as a money transmitter (or its equivalent) in the ~~United States, in the~~ states where it is required, ~~and~~as well as in the District of Columbia, the U.S. Virgin Islands and Puerto Rico. These licenses include not only the PayPal branded products and services in these states, but also our Venmo branded products and services. Our subsidiary, ~~Venmo,~~Xoom, is also licensed as a money transmitter in certain U.S. states. As licensed money transmitters, PayPal and ~~Venmo~~Xoom are subject to restrictions with respect to their investment of customer funds, reporting requirements, bonding requirements and inspection by state regulatory agencies. Accordingly, if we violate these laws or regulations, we could be subject to liability and/or additional restrictions, forced to cease doing business with residents of certain states, forced to change our business practices or be required to obtain additional licenses or regulatory approvals that could impose substantial ~~cost if we violate these laws or regulations.~~

costs.

While we currently allow our ~~consumers~~customers with credit cards to send payments from approximately 200 markets, we allow customers in only approximately half of those markets (including the ~~United States)~~U.S.) to also receive payments, in some cases with significant restrictions on the manner in which customers can withdraw funds. These limitations may affect our ability to grow our business in these markets. Of the markets whose residents can use our PayPal services, ~~approximately~~almost 30 ~~markets~~of them are in member states of the European Union. We provide ~~localized versions of~~ our ~~service~~services to customers in the European Union through PayPal (Europe) S.à r.l. et Cie, SCA (“PayPal (Europe)”), our wholly-owned subsidiary that is licensed and subject to regulation as a bank in Luxembourg. Accordingly, PayPal (Europe) is subject to significant fines or other enforcement action if it violates the disclosure, reporting, anti-money-laundering, capitalization, ~~funds~~fund management, corporate governance, privacy, data protection, information security, ~~bank~~banking secrecy, taxation, sanctions, or other requirements imposed on Luxembourg banks. ~~Any fines or other enforcement actions could adversely affect our business.~~ In addition, European Union laws and regulations are typically subject to different and potentially inconsistent interpretations by the countries that are members of the European Union, which can make compliance more costly and operationally difficult to manage.

In Australia, we serve our customers through PayPal Australia Pty. Ltd. (“PayPal Australia”), which is licensed by the Australian Securities and Investments Commission as a provider of a non-cash payment product and by the Australian Prudential Regulation Authority as a purchased payment facility provider, which is a type of authorized depository institution. Accordingly, PayPal Australia is subject to significant fines or other enforcement action if it violates the product disclosure, reporting, anti-money laundering, capital requirements, privacy, corporate governance or other requirements imposed on Australian depository institutions.

In many of the other markets ~~such as China, much of Southeast Asia and South America,~~in which we do business, we serve our customers through PayPal Pte. Ltd., our wholly-owned subsidiary that is based in Singapore. PayPal Pte. Ltd. is supervised by the Monetary Authority of Singapore and is designated as a holder of a stored value facility and does not hold a remittance license. As a result, PayPal Pte. Ltd. is not able to offer outbound remittance payments (including donations to charities) infrom Singapore, and can only offer payments for the purchase of goods and ~~services.~~services in Singapore. In many of the markets (other than Singapore) served by PayPal Pte. Ltd., it is ~~not clear~~unclear and uncertain whether our Singapore-based service is subject only to Singapore law or, if it is subject to the application of local laws, whether such local laws would require a payment processor like us to be licensed as a payments service, bank, or financial institution or otherwise.

In Australia, we serve our customers through PayPal Australia Pty. Ltd. ("PayPal Australia"), which is licensed by the Australian Securities and Investments Commission as a financial product and by the Australian Prudential Regulation Authority as a purchased payment facility provider, which is a type of authorized depository institution. Accordingly, PayPal Australia would be subject to significant fines or other enforcement action if it violates the disclosure, reporting, anti-money laundering, capitalization, privacy, corporate governance or other requirements imposed on Australian depository institutions.

We are also subject to regulation in other markets in which we do business and we have been and expect to continue to be required to apply for various licenses, certifications and regulatory approvals in a number of the countries where we ~~have operations, such as Canada, Turkey, China, Mexico, Brazil and Hong Kong.~~provide our services. There can be no assurance that we will be able to obtain any such licenses. Even if we were able to obtain such licenses, there are substantial costs and potential product changes involved in maintaining such licenses, and we ~~would~~could be subject to fines or other enforcement action if ~~it violates~~we are found to violate disclosure, reporting, anti-money laundering, capitalization, corporate governance or other requirements of such licenses. These factors could impose substantial additional costs and involve considerable delay to the development or provision of our products or services, or could require significant and costly operational changes or prevent us from providing any products or services in ~~certain countries.~~

a given market.

In many other countries it may not be clear whether we are required to be licensed as a payment services provider, bank, financial institution or otherwise. In such markets, we may rely on ~~partnerships with~~ local banks to process payments and conduct foreign exchange in local currency. Local regulators may use their power to slow or halt payments to local merchants conducted through ~~our~~the local ~~banking partner.~~bank or otherwise prohibit us from doing business in a country. Such regulatory actions or the need to obtain licenses, certifications or other regulatory approvals could impose substantial costs, ~~and~~ involve considerable delay to the provision or development of our services in, ~~a given market,~~ or could require significant and costly operational changes or prevent us from providing any products or services in a given market. For example, in June 2016, we suspended our operations in Turkey following cease and desist instructions from Turkey’s regulatory body, Bankacýlýk Düzenleme Ve Denetleme Kurumu (BDDK), following the BDDK’s rejection of our application for an e-money payments license.

~~We are subject to consumer protection laws and regulations.~~Consumer Protection

We are subject to consumer protection laws and regulations in the ~~United States and the other~~ countries in which we operate. ~~We are focused on compliance with these laws~~The financial services sector has been increasingly subject to regulatory scrutiny. In the U.S., we have been, and ~~regulations~~we expect that we will continue to be, required to make additional disclosures to our consumers and ~~have programs designed~~ to comply with new restrictions and existing consumer protection requirements. However, any errors, failures, or delays in complying with such consumer protection laws and regulations could result in significant criminal and civil lawsuits, penalties, forfeiture of significant assets, or other enforcement actions, as well as reputational harm. Any new consumer protection laws and regulations (or changes to, or expansion of, the interpretation or application of existing laws and regulations) applicable to us could subject us to additional restrictionsrequirements on our operations, additional compliance and licensure requirements, and increased regulatory scrutiny, which could force us to change our business practices or limit our ability to grow our business. Costs associated with fines or enforcement actions, changes in compliance requirements, or limitations on our ability to grow our business, could have an adverse effect on our financial results and harm our business.

~~Although there have been no definitive interpretations to date, we have taken actions as though~~activities. Among other things, our services are subject to the Electronic Fund Transfer Act and Regulation E issued by the Consumer Financial Protection Bureau (“CFPB”). Under such regulations, among other things, we are required to provide advance disclosure of changes to our services, to follow specified error resolution procedures and to reimburse consumers for losses from certain transactions not authorized by the consumer. Additionally, even technical violations of these laws can result in assessment of actual damages or statutory damages or penalties of up to $1,000 in individual cases or up to $500,000 per violation in any class action and treble damages in some instances, and we could also be liable for plaintiffs’ attorneys’ fees. ~~In the second quarter~~We are subject to, and have paid amounts in settlement of, ~~2010, two putative class-action~~ lawsuits ~~(Devinda Fernando and Vadim Tsigel v. PayPal, Inc. and Moises Zepeda v. PayPal, Inc.) were filed in the U.S. District Court for the Northern District of California. These lawsuits contain~~containing allegations ~~related to violations of aspects of~~that our business violated the Electronic Fund Transfer Act and Regulation E ~~and violations of a previous settlement agreement related~~or otherwise advance claims for relief relating to ~~Regulation E, and/or allege~~our business practices (e.g., that we improperly held consumer funds or otherwise improperly limited consumer accounts. These lawsuits seek damages as well as changes to our business practices, among other remedies. A determination that there have been violations of the Electronic Fund Transfer Act, Regulation E or violations of other laws relating to our business practices could expose us to significant liability. Any changes to our business practices resulting from these lawsuits could require us to incur significant costs and to expend substantial resources, which could delay other planned product launches or improvements and further harm our business.accounts).

~~The financial services sector has been increasingly subject to regulatory scrutiny.~~ In January 2012, the CFPB finalized rules under Regulation E, mandated by the Dodd-Frank Act, which required us, beginning in October 2013, to provide additional disclosures, error resolution rights, and cancellation rights to U.S. consumers who make international remittance payments. In November 2014, the CFPB proposed a new prepaid account rule that would apply to prepaid cards, ~~and~~ mobile wallets ~~including~~and potentially PayPal accounts. In December 2014, we became subject to CFPB supervision and examination pursuant to a new regulation that allows the CFPB to supervise all companies, including PayPal, that provide more than one million international ~~money~~remittance transfers per year. Under the regulation, CFPB examiners are now able to examine us for compliance with the remittance transfer rule and

other laws and regulations. ~~For~~These and other ~~matters relating to regulation~~rules promulgated by the CFPB ~~please see “Note 10: Commitments~~could increase our costs and ~~Contingencies - Litigation~~require us to expend substantial resources and ~~Regulatory Matters.”~~make changes to our business practices.

In May 2015, we entered into a Stipulated Final Judgment and Consent Order ("Consent Order") with the CFPB in which we settled regulatory claims arising from PayPal Credit practices between 2011 and 2015. The Consent Order included obligations on PayPal to pay $15 million in redress to consumers and a $10 million civil monetary penalty, and required PayPal to make various changes to the PayPal Credit disclosures and related business practices. We continue to cooperate and engage with the CFPB and work to ensure compliance with the Consent Order, which may result in us incurring additional costs associated with compliance or redress.

PayPal (Europe) ~~implements~~offers its ~~localized~~ services in European Union countries through a “passport” notification process through the Luxembourg regulator to regulators in other European Union member states pursuant to European Union Directives, and has completed the “passport” notification process in all European Union member ~~countries other than Croatia.~~countries. The regulators in these countries could notify PayPal (Europe) of local consumer protection laws that apply to its business, in addition to Luxembourg consumer protection law, and could also seek to persuade the Luxembourg regulator to order PayPal (Europe) to conduct its activities in the local country through a branch office. These or similar actions by these regulators could increase the cost of, or delay, our plans for expanding our business in European Union countries. In addition, the countries that are members of the European Union may each have different and potentially inconsistent interpretations of regulations implementing the European Union Payment Services Directive and the E-Money Directive, which could make compliance more costly and operationally difficult to manage. The ~~European Commission has proposed revisions~~Revised Payment Services Directive (“PSD2”) entered into force in January 2016 and will need to be implemented into national legislation by January 2018. The implementation of the ~~Payments Services and Anti-Money Laundering Directives, which could further make compliance more costly and operationally difficult to manage.~~PSD2 may negatively affect our business. Finally, if the assets of PayPal (Europe) exceed certain thresholds, or if the European Central Bank ("ECB") determines that PayPal (Europe) is a significant supervised entity or that some activity of PayPal (Europe) is subject to oversight by the ECB, PayPal (Europe) or certain of its activities could become directly regulated by the ~~European Central Bank rather than primarily by~~ECB in addition to the Luxembourg regulator, the Commission de Surveillance du Secteur Financier, as ~~a less significant supervised entity,~~its national supervisor, which could subject us to additional requirements and would likely increase ~~its~~compliance costs.

~~We are subject to anti-money laundering~~Anti-Money Laundering and ~~counter-terrorist financing laws and regulations.~~

Counter-Terrorist Financing

We are subject to various anti-money laundering and counter-terrorist financing laws and regulations around the world that prohibit, among other things, our involvement in transferring the proceeds of criminal activities. We routinely report to the U.S. Department of the Treasury’s Office of Foreign Assets Control ("OFAC") on payments we have ~~programs designed~~rejected or blocked pursuant to ~~comply~~OFAC sanctions regulations and on any possible violations of those regulations. In March 2015, we reached a settlement with OFAC regarding possible violations arising from our practices between 2009 and 2013. In addition, we continue to cooperate with OFAC regarding other transactions that could also possibly be in violation of OFAC sanctions regulations. In addition, we continue to cooperate with OFAC regarding other transactions that we have self-reported could also possibly be in violation of OFAC sanctions regulations. Subsequent to our March 2015 settlement, we have received new and existing legal and regulatory requirements. However, any errors, failures, or delays in complying with federal, state or foreign anti-money laundering or counter-terrorist financing laws and regulationssubpoenas from OFAC seeking additional information about certain of these transactions. Such self-reported transactions could result in claims or actions against us including litigation, injunctions, damage awards, fines or penalties, or require us to change our business practices that could result in a material loss, require significant ~~criminal and civil lawsuits, penalties, forfeiture~~management time, result in the diversion of significant ~~assets,~~operational resources or ~~other enforcement actions, as well as reputational harm.~~otherwise harm our business. Violation of OFAC sanctions regulations that OFAC determines to be egregious can result in statutory penalties of up to $250,000

per transaction. For a discussion of our dealings with ~~the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”),~~OFAC, please see “Note ~~10:~~11: Commitments and Contingencies - Litigation and Regulatory Matters.”

U.S. and other regulators ~~have increased~~globally continue to increase their scrutiny of compliance with these obligations, which may require us to further revise or expand our compliance program, including the procedures we use to verify the identity of our customers and to monitor international and domestic transactions. ~~Several~~Many countries in which we ~~are regulated~~operate also have ~~also implemented new~~ anti-money laundering and counter-terrorist financing laws and regulations, and we have ~~had~~been and continue to be required to make changes to our compliance program in various jurisdictions in response. Regulators regularly re-examine the transaction volume thresholds at which we must obtain and keep applicable records or verify identities of customers and any change in such thresholds could result in greater costs for compliance. ~~Costs associated with fines or enforcement actions, changes in~~The European Commission has proposed revisions to the Fourth Anti-Money Laundering Directive, which was recently approved by the European Parliament. The implementation of this directive and the recently-adopted regulation on information accompanying transfer of funds (commonly known as the Revised Wire Transfer Regulation) could make compliance ~~requirements, or limitations on our ability~~more costly and operationally difficult to ~~grow our business could harm our business~~manage.

Privacy and any new requirements or changes to existing requirements could impose significant costs, result in delays to planned product improvements, make it more difficult for new customers to join our network and reduce the attractivenessProtection of ~~our products and services.~~

~~Regulation in the areas of privacy and protection of user data could harm our business.~~User Data

We are subject to a number of laws, rules and directives (which we refer to as "privacy laws") relating to the collection, use, retention, security, processing and transfer (which we refer to as "process") of personally identifiable information about our customers ~~around~~and employees (which we refer to as "personal data") in the ~~world.~~countries where we operate. Much of the personal ~~information~~data that we ~~collect,~~process, especially financial information, is regulated by multiple ~~laws. User data protection~~privacy laws ~~may be interpreted~~ and, ~~applied inconsistently from country to country.~~in some cases, the privacy laws of multiple jurisdictions. In many cases, these laws apply not only to third-party transactions, but also to transfers of information between or among ~~ourselves,~~us, our subsidiaries, and other parties with which we have commercial ~~relations. These~~relationships.

Regulatory scrutiny of privacy, data protection, collection, use and sharing of data is increasing on a global basis. There is uncertainty associated with the legal and regulatory environment around privacy and data protection laws, which continue to develop in ways we cannot ~~predict~~predict. Privacy and ~~that may harm our business.~~

~~Regulatory scrutiny of privacy, user~~ data protection ~~use of data~~laws may be interpreted and ~~data collection is increasing on a global basis. We are subject~~applied inconsistently from country to ~~a number of privacy~~country and similar laws and regulations in the countries in which we operate and these laws and regulations will likely continue to evolve over time, both through regulatory and legislative action and judicial decisions. Some of these laws impose ~~requirements that are~~ inconsistent ~~with one another, yet regulators may claim that both apply.~~or conflicting requirements. Complying with ~~these~~ varying ~~national~~jurisdictional requirements could ~~cause us to incur substantial~~increase the costs and complexity of compliance or require us to change our business practices in a manner adverse to our business, and violations of ~~privacy-related~~privacy and data protection-related laws can result in significant ~~penalties.~~penalties and damage to our brand and business. In addition, compliance with ~~these~~inconsistent privacy laws may restrict our ability to provide products and services to our ~~customers that they may find to be valuable.~~customers. A determination that there have been violations of ~~laws relating to our practices under communications-based~~privacy or data protection laws could expose us to significant damage awards, fines and other penalties that could, individually or in the aggregate, materially harm our ~~business.~~ business and reputation.

In ~~particular,~~October 2015, the European Court of Justice ruled that the U.S.-EU Safe Harbor framework clauses, one compliance method by which companies could transfer personal data regarding citizens of the European Union to the United States, could no longer be relied upon. The U.S. and EU authorities have agreed in principle on a replacement for Safe Harbor known as “Privacy Shield”. The Privacy Shield approach has not been fully ratified by all parties and we anticipate that there may be challenges to this initiative. PayPal has chosen to adopt EU model clauses published by the European Commission as a basis for the export of data from the EU to the U.S. for those parts of our business that had previously relied on Safe Harbor. In addition, because PayPal (Europe) is headquartered in Luxembourg and subject to regulation as a bank in that jurisdiction, we have relied on the “one-stop-shop” concept under which Luxembourg has been our lead data protection regulator in the EU. However, a recent European Court of Justice ruling (Weltimmo) affecting companies that do business in the EU potentially could make us subject to the local data protection laws or regulatory enforcement activities of the various EU member states in which we have established legal entities and which apply privacy laws that are different than, and which may even conflict with, those in Luxembourg.

In addition, because of the ~~enormous~~large number of ~~texts,~~text messages, emails, phone calls and other communications we send or make to our customers ~~communications~~for various business purposes, communication-related privacy laws that

provide a specified monetary damage award or fine for each violation ~~(such as those described below)~~ could result in particularly ~~large~~significant damage awards or fines.

For example, ~~the Federal Communications Commission amended certain of its regulations~~ under the Telephone Consumer Protection Act ~~or TCPA,~~("TCPA"), in ~~2012 and 2013 in a manner that could increase our exposure to liability for certain types of telephonic communication with customers, including but not limited to text messages to mobile phones. Under~~ the ~~TCPA,~~U.S., plaintiffs may seek actual monetary loss or statutory damages of $500 per violation, whichever is greater, and courts may treble the damage award for willful or knowing violations. We have been, are, ~~regularly~~and may continue to be subject to lawsuits (including class-action ~~lawsuits, as well as individual lawsuits,~~lawsuits) containing allegations that our business violated the TCPA. We recently settled Murray v. Bill Me Later (filed in the U.S. District Court for the Northern District of Illinois in June 2012), which alleged that Bill Me Later made calls featuring artificial or prerecorded voices without prior consent. These lawsuits seek damages (including statutory damages) and injunctive relief, among other remedies. Given the ~~enormous~~large number of communications we send to our customers, a determination that there have been violations of the TCPA or other communications-based statutes could expose us to significant damage awards that could, individually or in the aggregate, materially harm our business.

The EU has recently adopted a comprehensive overhaul of its data protection regime from the current national legislative approach to a single European Economic Area Privacy Regulation, the General Data Protection Regulation ("GDPR"), which comes into effect in 2018. The proposed EU data protection regime extends the scope of the EU data protection law to all foreign companies

processing data of EU residents. It provides for a harmonization of the data protection regulations throughout the EU, thereby making it easier for non-European companies to comply with these regulations. It imposes strict data protection compliance regime with severe penalties of up to the greater of 4% of worldwide turnover and €20 million and includes new rights such as the “portability” of personal data. Although the GDPR will apply across the EU without a need for local implementing legislation, as has been the case under the current data protection regime, local data protection authorities (DPAs) will still have the ability to interpret the GDPR, which has the potential to create inconsistencies on a country-by-country basis.

We post on our websites our privacy policies and practices including concerning the collection, use and disclosure of user data. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any ~~rconegulatory~~applicable regulatory requirements or orders, or ~~other federal, state or international~~ privacy, data protection, information security or consumer protection-related privacy laws and regulations in one or more jurisdictions could result in proceedings or actions against us by governmental entities or others, ~~(e.g.,~~including class action privacy ~~litigation),~~litigation in certain jurisdictions, subject us to significant fines, penalties, judgments and negative publicity, require us to change our business practices, increase ~~our~~the costs and complexity of compliance, and adversely affect our business. Data ~~collection,~~protection, privacy and information security have become the subject of increasing public, media and legislative concern. If ~~Internet and mobile~~our customers were to reduce their use of our ~~websites, mobile platforms,~~ products and services as a result of these concerns, our business could be materially harmed. As noted above, we are also subject to the possibility of security and privacy breaches, which themselves may result in a violation of these privacy laws.

PayPal is not a bank or licensed lender in the United States and relies upon third parties to make loans and provide ~~the~~ other products critical to our business.

As PayPal is neither a chartered financial institution nor licensed to make loans in any state, we ~~must~~ rely on a ~~bank or licensed lender~~third party chartered financial institution to ~~offer~~issue the PayPal Credit ~~products~~consumer product in the ~~United States. Currently, when~~U.S., and a ~~U.S. consumer makes a purchase using a PayPal Credit product, a~~different chartered financial institution ~~extends credit~~ to issue the ~~consumer, funds~~PayPal Working Capital product in the ~~extension~~U.S. Both of ~~credit at the point of sale, and advances funds to the merchant. We subsequently purchase and retain most of the receivables related to the consumer loans made by the~~these chartered financial institution and, as a result, bear most of the risk of loss in the event of loan defaults. Although the chartered financial institution continues to own each of the consumer accounts, we own most of the related consumer loan receivables, and weinstitutions are ~~also responsible for servicing functions related to the consumer account.~~

~~Comenity Capital Bank and WebBank, which are both~~ industrial banks chartered by the State of ~~Utah,~~Utah. In the event of a termination or interruption in the ability of the chartered financial institution that currently ~~issue~~issues the PayPal Credit ~~products~~consumer product in the ~~United States, with Comenity~~U.S. to lend under the PayPal Credit consumer product, our chartered financial institution that issues the PayPal Working Capital ~~Bank originating~~product in the ~~majority of new loans. As part of this arrangement, WebBank~~U.S. has agreed to take ownership of (and originate loans with respect to) all consumer ~~accounts in the event of a termination or interruption in Comenity Capital Bank’s ability to lend.~~accounts. Nevertheless, any termination or interruption of ~~WebBank’s or Comenity Capital Bank’s~~either bank’s ability to lend could result in the inability to originate any new PayPal Credit ~~products, which~~or PayPal Working Capital loans. In the event of either bank’s inability to lend, we would ~~require us~~ either need to reach a similar ~~arrangement~~agreement with another chartered financial institution ~~which, if possible at all, may not be available on favorable terms,~~ or to obtain our own bank charter ~~which~~or licenses. We may be unable to reach a similar agreement with another partner on favorable terms or at all, and obtaining a bank charter or lending licenses would be a time-consuming and costly process and would subject us to ~~a number of~~ additional laws and ~~regulations, compliance~~regulatory requirements, which could be burdensome and increase our costs. In addition, our commercial relationships with third parties which ~~would be burdensome.~~are federally supervised U.S. financial institutions could subject us to examination by their federal banking regulators with respect to certain services that we provide.

~~The PayPal Credit products also~~A recent judicial decision by the U.S. Second Circuit Court of Appeals, Madden v. Midland Funding, LLC (786 F.3d 246 (2d Cir. 2015)), concluded that the debt buyer of a charged off credit card account could not rely on ~~third-party merchant processors and payment gateways~~the National Bank Act's preemption of state interest rate limits for interest at rates imposed by the debt buyer after charge-off. A petition to ~~process transactions. For~~ the ~~year ended December 31, 2014, approximately 16% of all transaction volume by dollar amount through~~United States Supreme Court to review the ~~PayPal Credit products~~decision was ~~settled through~~denied on June 27, 2016; the ~~facilities of a single vendor. Any disruption~~case will now be remanded to ~~these third-party payment processing and gateway services would adversely affect~~ the ~~PayPal Credit products.~~

~~Our credit products expose us~~lower court to ~~additional risks.~~

~~Our PayPal Credit products are offered to a wide range of consumers, and~~be determined in accordance with the ~~financial success of these products depends on our ability and the ability~~ruling of the ~~banks issuing the PayPal Credit products~~Second Circuit. The decision has resulted in some uncertainty as to ~~manage the credit risk related to these products. The lenders extend credit at the point~~whether non-bank entities purchasing loans originated by a bank may rely on federal preemption of ~~sale using our proprietary segmentation~~state usury laws, and ~~credit scoring algorithms and other analytical techniques designed to analyze the credit~~may create an increased risk of specific consumers based on their past purchasing and payment history as well as their credit scores. These algorithms and techniques may not accurately predict the creditworthiness of a consumer due to inaccurate assumptions about a particular consumer or the economic environment, among other factors. The accuracy of the

~~predictions and the ability of the lenders and~~litigation by plaintiffs challenging our ability to ~~manage credit risk related to~~collect interest in accordance with the PayPal Credit products may also be affected by legal or regulatory changes (e.g., bankruptcy laws and minimum payment regulations), competitors’ actions, changes in consumer behavior, and other factors. A lender may incorrectly interpret the data produced by these algorithms in setting its credit policies, which may impact the financial performanceterms of the PayPal Credit products. In addition, economic and financial conditions may affect consumer confidence levels and reduce consumers’ ability or willingness to use credit, including the credit extended by a lender to PayPal Credit account holders who use the PayPal Credit products, which could harm our business. As of December 31, 2014, approximately $20.2 billion of unused credit was available to PayPal Credit account holders. While this amount represents the total unused credit available, we have not experienced, and do not anticipate, that allcertain of our ~~PayPal Credit account holders will access their entire available credit at any given point~~loans. Although the Madden decision specifically addressed preemption under the National Bank Act, this decision could support future challenges to federal preemption for other institutions, including FDIC-insured, state chartered industrial banks like those that we rely on to issue our loan products in time. In addition, the individual lines of credit that make up this unused credit are subject to periodic review and termination by the chartered financial institutions that are the issuers of PayPal Credit products based on, among other things, account usage and consumer creditworthiness.

~~Over the past several years, the volume of credit extended by the financial institutions issuing the PayPal Credit products has increased. In~~ the United ~~States,~~States. Although we ~~purchase~~believe the ~~receivables relating to these consumer loans extended by~~Madden case can be distinguished from the ~~issuing banks, and therefore bear the risk of loss~~manner in the event of loan defaults. Like other businesses with significant exposure to losses from consumer credit, we face the risk that PayPal Credit account holders will default on their payment obligations, making the receivables uncollectible and creating the risk of potential charge-offs. The rate at which receivables were charged off as uncollectible, or the net charge-off rate, was approximately 5.67% for the year ended December 31, 2014. The non-payment rate among PayPal Credit account holders may increase due to, among other things, changes to underwriting standards by us and the financial institutions issuing the PayPal Credit products, worsening economic conditions, such as a recession or greater austerity in various countries, and high unemployment rates. Consumers who miss payments often fail to repay their loans, and consumers who file for protection under the bankruptcy laws generally do not repay their loans.

~~We have entered into an agreement with Synchrony (formerly GE Capital Retail Bank) pursuant to~~ which we ~~one of~~offer our ~~affiliates, or a third party partner of ours, will purchase, subject to certain conditions, a dual-branded retail~~ credit ~~card portfolio from Synchrony. This transaction is currently expected to close in the fourth quarter of 2016, although~~products, there can be no assurance that this transaction will close on terms currently contemplated, or at all. If this transaction is consummated, we will own the related consumer loan receivables, and our risks relating to our ownership of consumer loan receivables will increase.

In 2013, we began a program, working with WebBank, for WebBank to offer working capital financing to selected merchants in the United States, and for us to purchase the related receivables. Similar programs are also available in the United Kingdom and Australia. Loans to merchants present risks similar to those discussed above associated with the PayPal Credit products.

We purchase receivables related to PayPal Credit products and other credit accounts. If we are unable to fund our purchase of these receivables adequately or in a cost-effective manner, or if we are unable to efficiently manage the cash resources utilized to purchase these receivables, our business could be harmed.

~~New and proposed laws and regulations could harm our business.~~

We are subject to laws and regulations affecting our domestic and international operations in a number of other areas, including data privacy requirements, intellectual property ownership and infringement, tax, anti-competition, export requirements, anti-corruption, labor, advertising, billing, promotions, quality of services, environmental, and health and safety regulations. It is not always clear how these laws and regulations apply to our business. Many of these laws and regulations were adopted priorassurances as to the advent of the Internet, mobile, and related technologies and, as a result, do not contemplate or address the unique issues of the Internet, mobile and related technologies. Many of these laws, including some of those that do reference the Internet, mobile and related technologies are subject to interpretation by the courts on an ongoing basis and, as a result, their applicability and scope remain uncertain.

Compliance with these laws, regulations, and similar requirements may be onerous and expensive, and variances and inconsistencies from jurisdiction to jurisdiction may further increase the cost of compliance and doing business. For example, new or proposed laws in certain countries require us to maintain separate servers in those countries so that all personal data of citizens of that country are maintained locally. Any such costs, which may rise in the future as a result of changes in these laws and regulations or in their interpretation, could individually or in the aggregate make our products and services less attractive to our customers, delay the introduction of new products or services in one or more regions, or cause us to change or limit our business practices. We have implemented policies and procedures designed to ensure compliance with applicable laws and regulations, but there can be no assurance that our employees, contractors, or agents will not violate such laws and regulations or our policies and procedures.

Financial and political events have increased the level of regulatory scrutiny on large companies, and regulatory agencies may view matters or interpret laws and regulations differently than they have in the past and in a manner adverse to our business. Our success and increased visibility have driven existing businesses that perceive us to be a threat to their businesses to raise concerns about our business models to policymakers and regulators. These businesses and their trade association groups employ significant resources in their efforts to shape the legal and regulatory regimes in countries where we have significant operations. They may employ these resources in an effort to change the legal and regulatory regimes in ways intended to reduce the effectiveness of our business and the ability of customers to use our products and services.

As we expand and localize our international activities, we are increasingly becoming obligated to comply with the laws of the countries or markets in which we operate. In addition, because our services are accessible worldwide and we facilitate sales of goods and provide services to customers worldwide, one or more jurisdictions may claim that we or our customers are required to comply with their laws. Laws regulating Internet, mobile and related technologies outside of the United States are generally less favorable to us than those in the United States. Compliance may be more costly or may require us to change our business practices or restrict our services, and the impositionoutcome of any ~~regulations on us~~potential litigation, or ~~our customers could harm our business. In addition, we may be subject to multiple overlapping legal or regulatory regimes~~ that impose conflicting requirements on us (e.g., in cross-border trade). Our alleged failure to comply with foreign laws could subject us to penalties ranging from criminal prosecution to significant fines to bans on our services, in addition to the ~~significant costs we may incur in defending against~~possible impact of such ~~actions.~~

Following the global financial crisis of 2008, U.S. federal lawmakers enacted the Dodd-Frank Act overhauling the federal government’s oversight of consumer financial products and systemic risk in the U.S. financial system. The general effect of the financial reform law has been, and we expectlitigation will continue to be, to require us to make additional disclosures to our consumers and to impose new restrictions and requirements on certain of our activities, resulting in new compliance requirements and obligations that could increase our costs, may result in increased litigation and the need to make expensive product changes, and could otherwise harm our business.

~~Substantial and increasingly intense competition worldwide in the global payments industry may harm our business.~~

The global payments industry is highly competitive. We compete against businesses in varied industries, many of whom are larger than we are, have a dominant and secure position in other industries, and offer other goods and services to consumers and merchants which we do not offer. As online and offline commerce increasingly converge, the pace of change, innovation and disruption is increasing. The global payments industry is rapidly changing, highly innovative and increasingly subject to regulatory scrutiny, which may negatively affect the competitive landscape. We compete against all forms of payments, including:

~~paper-based transactions (principally cash and checks);~~

~~providers of traditional payment methods, particularly credit and debit cards, money orders, and Automated Clearing House transactions (these providers are primarily well-established banks);~~

providers of “digital wallets” which offer customers the ability to pay online and/or on mobile devices through a variety of payment methods, including with mobile applications, through contactless payments, and with a variety of payment methods;

providers of mobile payments solutions that use tokenized card data approaches and Near Field Communication (“NFC”) functionality (including Host Based Card Emulation (“HCE”) functionality to eliminate the need for a physical NFC chip in the device);

~~payment-card processors that offer their services to merchants;~~

~~providers of “person-to-person” payments that facilitate individuals sending money with an email address or mobile phone number;~~

~~providers of mobile payments; and~~

~~providers of card readers for mobile devices and of other new point of sale and multi-channel technologies.~~

~~We also face competition and potential competition from:~~

~~money remitters;~~

~~services that provide online merchants the ability to offer their customers the option of paying for purchases from their bank account or paying on credit in the United States and abroad;~~

~~issuers of stored value targeted at online payments;~~

~~other international online payment-services providers;~~

~~other providers of online account-based payments;~~

~~payment services targeting users of social networks and online gaming, often through billing to the consumer’s mobile phone account;~~

~~mobile payment services between bank accounts;~~

~~payment services enabling banks to offer their online banking customers the ability to send and receive payments through their bank account;~~

~~online shopping services that provide special offers linked to a specific payment provider; and~~

~~services that help merchants accept and manage virtual currencies.~~

Some of these payment providers have greater customer bases, volume, scale, and market share than we do, which may provide significant competitive advantages. Some of these competitors may also be subject to less burdensome licensing, anti-money laundering, counter-terrorist financing, and other regulatory requirements. They may devote greater resources to the development, promotion, and sale of products and services, and they may offer lower prices or more effectively introduce their own innovative programs and services that adversely impact our growth. We also expect new entrants to offer competitive products and services. In addition, some merchants provide such services to themselves. Competing services tied to established banks and other financial institutions may offer greater liquidity and engender greater consumer confidence in the safety and efficacy of their services. In addition, in certain countries, such as Germany, Netherlands and Australia, electronic funds transfer is a leading method of payment for both online and offline transactions. As in the United States, established banks and other financial institutions that do not currently offer online payments could quickly and easily develop such a service.

~~We compete primarily on the basis of the following:~~

~~ability to attract, retain and engage both merchants and consumers with relatively low marketing expense;~~

~~ability to show that merchants will achieve incremental sales by offering our PayPal services;~~

~~security of transactions and the ability for consumers to use our PayPal services without sharing their financial information with the merchant;~~

~~simplicity of our fee structure;~~

~~ability to develop services across multiple commerce channels, including mobile payments and payments at the retail point of sale;~~

~~trust in our dispute resolution and buyer and seller protection programs;~~

~~customer service;~~

~~brand recognition;~~

~~website, mobile platform and application onboarding, ease-of-use and accessibility;~~

~~system reliability and data security;~~

~~ease and quality of integration into third-party mobile applications; and~~

~~quality of developer tools such as our application programming interfaces and software development kits.~~

If we are not able to differentiate our business from those of our competitors, drive value for our customers, and/or effectively align our resources with our goals and objectives, we may not be able to compete effectively against our competitors. Our failure to compete effectively against any of the foregoing competitive threats could materially and adversely harm our business.

~~We are exposed to fluctuations in foreign currency exchange rates.~~

We have significant operations internationally that are denominated in foreign currencies, primarily the Euro, British Pound, and Australian Dollar, subjecting us to foreign currency risk. The strengthening or weakening of the U.S. dollar versus the Euro, British Pound, and Australian Dollar impacts the translation of our net revenues generated in these foreign currencies into the U.S. dollar. In 2014, foreign currency movements relative to the U.S. dollar negatively impacted net revenues by approximately $58 million (inclusive of a $36 million negative impact from hedging activities). In 2013, foreign currency

movements relative to the U.S. dollar negatively impacted net revenues by approximately $20 million (inclusive of a $4 million negative impact from hedging activities). Additionally, in connection with our services in multiple currencies, we set our foreign exchange rates twice per day, and may face financial exposure if we incorrectly set our foreign exchange rates or as a result of fluctuations in foreign exchange rates between the times that we set our foreign exchange rates. Given that we also hold some corporate and customer funds in non-U.S. currencies, our financial results are affected by the translation of these non-U.S. currencies into U.S. dollars. While we regularly enter into transactions to hedge portions of our foreign currency translation exposure, it is impossible to predict or eliminate the effects of this exposure. Fluctuations in foreign exchange rates could significantly impact our financial results.

~~We are exposed to fluctuations in interest rates.~~

We are exposed to interest rate risk from our investment portfolio and from interest-rate sensitive assets underlying the customer balances we hold on our combined balance sheet as customer accounts. As of December 31, 2014, approximately 97% of our total cash and investment portfolio was held in cash and cash equivalents. The assets underlying our customer balances we hold on our combined balance sheet as customer accounts are maintained in interest and non-interest bearing bank deposits, time deposits, and U.S. and foreign government and agency securities. We seek to preserve principal while holding eligible liquid assets, as defined by the regulatory requirements and commercial law in the jurisdictions in which we operate, equal to at least 100% of the aggregate amount of all customer balances. We do not pay interest on amounts due to customers. A 100 basis point adverse change in interest rates would not have a material adverse impact on our ~~financial assets or liabilities at December 31, 2014 and 2013.~~

~~Also, fluctuations~~business. Additionally, certain issues to be decided on remand in interest rates may adversely impact our customers’ spending levels and ability and willingness to pay outstanding amounts owed to us. Higher interest rates often lead to higher payment obligations by customers to us and other lenders under mortgage, credit card and other consumer loans, which may reduce our customers’ ability to remain current on their obligations to us and therefore lead to increased delinquencies, charge-offs and allowance for loan and interest receivable which could have an adverse effect on our net earnings.

~~In addition, we have entered into a new revolving credit facility. As a result, we will be exposed to fluctuations in interest rates~~the Madden case, including those related to the ~~extent~~choice of ~~our borrowings under~~law provision for the ~~facility, which bear interest at a floating rate.~~

~~Changes to our buyer and seller protection programs could increase our loss rate.~~

Our buyer and seller protection programs protect merchants and consumers from fraudulent transactions. We recently increased the scope of our buyer protection program to cover digital goods and intangible goods and services. In addition, consumers who pay through PayPal may have reimbursement rights from their payment card company or bank, which in turn will seek recovery from us. The risk of losses from our buyer and seller protection programs are specific to individual buyers, sellers and transactions, and may also be impacted by regional variations to these programs, modifications to these programs resulting from changes in regulatory requirements, or changes that we decide to implement, such as expanding the scope of transactions covered by one or more of these programs. Following the distribution, we have extended our protection programs to certain customers’ purchases on eBay, and our costs will therefore increase. For the periods presented in the combined financial statements, payments under these programs have ranged between 0.08% and 0.12% of TPV on an annual basis. Historical trends may not be an indication of future payments under these programs. Increases in our loss rate resulting from changes to our buyer and seller protection programs could harm our business.

~~Our international operations are subject to increased risks, which could harm our business.~~

~~Our international operations, especially in the United Kingdom, Germany (and the other countries~~loans, might alleviate some of the ~~European Union) and China, have generated a majority of our net revenues in recent years. In addition to~~ uncertainty ~~about our ability to generate revenues from our foreign operations and expand into international markets, there are risks inherent in doing business internationally, including:~~

expenses associated with localizing our products and services and customer data, including offering customers the ability to transact business in the local currency and adapting our products and services to local preferences (e.g., payment methods) with which we may have limited or no experience;

~~trade barriers and changes in trade regulations;~~

~~difficulties in developing, staffing, and simultaneously managing a large number of varying foreign operations as a result of distance, language, and cultural differences;~~

~~stringent local labor laws and regulations;~~

~~credit risk and higher levels of payment fraud;~~

~~profit repatriation restrictions, foreign currency exchange restrictions or extreme fluctuations in foreign currency exchange rates for a particular currency;~~

~~political or social unrest, economic instability, repression, or human rights issues;~~

~~geopolitical events, including natural disasters, public health issues, acts of war, and terrorism;~~

~~import or export regulations;~~

compliance with U.S. laws such as the Foreign Corrupt Practices Act, and foreign laws prohibiting corrupt payments to government officials, as well as U.S. and foreign laws designed to combat money laundering and the financing of terrorist activities;

~~antitrust and competition regulations;~~

~~potentially adverse tax developments and consequences;~~

~~economic uncertainties relating to sovereign and other debt;~~

~~different, uncertain, or more stringent user protection, data protection, privacy, and other laws;~~

~~risks~~ related to ~~other government regulation or required compliance with local laws;~~

~~national or regional differences in macroeconomic growth rates;~~

~~local licensing and reporting obligations; and~~

~~increased difficulties in collecting accounts receivable.~~the ruling.

Violations of the complex foreign and U.S. laws and regulations that apply to our international operations may result in fines, criminal actions, or sanctions against us, our officers, or our employees; prohibitions on the conduct of our business; and damage to our reputation. Although we have implemented policies and procedures designed to promote compliance with these laws, there can be no assurance that our employees, contractors, or agents will not violate our policies. These risks are inherent in our international operations and expansion and may increase our costs of doing business internationally and could harm our business.

~~Use of our payments services for illegal purposes could harm our business.~~

Our payment system is susceptible to potentially illegal or improper uses, including terrorist financing, illegal online gambling, fraudulent sales of goods or services, illicit sales of prescription medications or controlled substances, piracy of software, movies, music, and other copyrighted or trademarked goods, money laundering, bank fraud, child pornography trafficking, prohibited sales of alcoholic beverages or tobacco products, online securities fraud, or to facilitate other illegal activity. There has been an increased focus by intellectual property rights owners and government officials on the role that payments systems play in the sale of, and payment for, pirated digital goods on the Internet, primarily through file sharing services. Changes in law have increased the penalties for intermediaries providing payment services for certain illegal activities and additional payments-related proposals are under active consideration by government authorities. Intellectual property rights owners may seek to bring legal action against providers of payments solutions, such as PayPal, and other entities that are peripherally involved in the sale of infringing items. Rights owners have also increasingly gone into U.S. courts and obtained injunctions requiring us to cease handling transactions for named websites and third parties (in most cases located outside the United States) and to hold the funds of such parties pending judicial resolution of the rights owners’ claims, which disrupts the relationship between such parties and us. Any resulting claims could damage our reputation and any resulting liabilities, loss of transaction volume or increased costs could harm our business.

~~We are subject to risks associated with information disseminated through our services.~~

Online services companies may be subject to claims relating to information disseminated through their services, including claims alleging defamation, libel, breach of contract, invasion of privacy, negligence, copyright or trademark infringement, among other things. The laws relating to the liability of online services companies for information disseminated through their services

are subject to frequent challenges both in the United States and foreign jurisdictions. Any liabilities incurred as a result of these matters could require us to incur additional costs and harm our reputation and our business.

Our potential liability to third parties for the customer-provided content on our sites, particularly in jurisdictions outside the United States where laws governing Internet transactions are unsettled, may increase. If we become liable for information provided by our customers and carried on our service in any jurisdiction in which we operate, we could be directly harmed and we may be forced to implement new measures to reduce our exposure to this liability, including expending substantial resources or discontinuing certain service offerings, which could harm our business.

Our failure to manage our customer funds and the assets underlying our customer funds properly could harm our business.

Our ability to manage and account accurately for the assets underlying our customer funds requires a high level of internal controls. As our business continues to grow and we expand our product offerings, we must continue to strengthen our associated internal ~~controls accordingly.~~controls. In March 2016, as approved by the Supervisory Board of our Luxembourg banking subsidiary and as permitted within regulations set forth by the CSSF, we have designated certain European customer balances held in our Luxembourg banking subsidiary to be used to extend credit to our European customers. Our success requires significant public confidence in our ability to properly manage our customers’ balances and handle large and growing transaction volumes and amounts of customer funds.

Any failure to maintain the necessary controls or to manage our customer funds and the assets underlying our customer funds accurately could ~~severely diminish customer~~result in reputational harm, lead customers to discontinue or reduce their use of our products ~~and/or~~and result in significant penalties and fines, which ~~could harm our business.~~

~~We are subject to regulatory activity and antitrust litigation under competition laws.~~

We are subject to scrutiny by various government agencies under U.S. and foreign laws and regulations, including competition laws. Some jurisdictions also provide private rights of action for competitors or consumers to assert claims of anti-competitive conduct. Other companies and government agencies have in the past and may in the future allege that our actions violate the antitrust or competition laws of the United States, individual states, the European Commission or other countries, or otherwise constitute unfair competition. An increasing number of governments are regulating competition law activities, including increased scrutiny in large markets such as China. Our business partnerships or agreements or arrangements with customers or other companies could give rise to regulatory action or antitrust litigation. Some regulators, particularly those outside of the United States, may perceive our business to be used so broadly that otherwise uncontroversial business practices could be deemed anticompetitive. Any claims or investigations, even if without foundation, may be very expensive to defend or respond to, involve negative publicity and substantial diversion of management time and effort and could result in significant judgments against us or require us to change our business practices.

~~We are subject to patent litigation.~~

We have repeatedly been sued for allegedly infringing other parties’ patents. We are a defendant in a number of patent lawsuits and have been notified of several other potential patent disputes. We expect that we will increasingly be subject to patent infringement claims because, among other reasons:

~~our products and services continue to expand in scope and complexity;~~

~~we continue to expand into new business areas, including through acquisitions; and~~

the universe of patent owners who may claim that we, any of the companies that we have acquired, or our customers infringe their patents, and the aggregate number of patents controlled by such patent owners, continues to increase.

Such claims may be brought directly against us and/or against our customers whom we may indemnify either because we are contractually obligated to do so or we choose to do so as a business matter. We believe that an increasing number of these claims against us and other technology companies have been, and continue to be, initiated by third parties whose sole or primary business is to assert such claims. In addition, we have seen significant patent disputes between operating companies in some technology industries. Patent claims, whether meritorious or not, are time-consuming and costly to defend and resolve, and could require us to make expensive changes in our methods of doing business, enter into costly royalty or licensing agreements, make substantial payments to satisfy adverse judgments or settle claims or proceedings, or cease conducting certain operations, which would harm our business.

~~We may be unable to adequately protect or enforce our intellectual property rights, or third parties may allege that we are infringing their intellectual property rights.~~

We believe the protection of our intellectual property, including our trademarks, patents, copyrights, domain names, trade dress, and trade secrets, is critical to our success. We seek to protect our intellectual property rights by relying on applicable laws and regulations in the United States and internationally, as well as a variety of administrative procedures. We also rely on contractual restrictions to protect our proprietary rights when offering or procuring products and services, including confidentiality and invention assignment agreements entered into with our employees and contractors and confidentiality agreements with parties with whom we conduct business.

However, effective intellectual property protection may not be available in every country in which our products and services are made available, and contractual arrangements and other steps we have taken to protect our intellectual property may not prevent third parties from infringing or misappropriating our intellectual property or deter independent development of equivalent or superior intellectual property rights by others. Trademark, copyright, patent, domain name, trade dress and trade secret protection is very expensive to maintain and may require litigation. We must protect our intellectual property rights and other proprietary rights in an increasing number of jurisdictions, a process that is expensive and time consuming and may not be successful in every jurisdiction. Also, we may not be able to discover or determine the extent of any unauthorized use of our proprietary rights. We have licensed in the past, and expect to license in the future, certain of our proprietary rights, such as trademarks or copyrighted material, to others. These licensees may take actions that diminish the value of our proprietary rights or harm our reputation. Any failure to adequately protect or enforce our intellectual property rights, or significant costs incurred in doing so, could materially harm our business.

As the number of products in the software industry increases and the functionality of these products further overlap, and as we acquire technology through acquisitions or licenses, we may become increasingly subject to infringement claims, including patent, copyright, and trademark infringement claims. Litigation may be necessary to determine the validity and scope of the patent and other intellectual property rights of others. The ultimate outcome of any allegation is uncertain and, regardless of the outcome, any such claim, with or without merit, may be time-consuming, result in costly litigation, divert management’s time and attention from our business, require us to stop selling, delay shipping, or redesign our products, or require us to pay substantial amounts to satisfy judgments or settle claims or lawsuits or to pay substantial royalty or licensing fees, or to satisfy indemnification obligations that we have with some of our customers. Our failure to obtain necessary license or other rights, or litigation or claims arising out of intellectual property matters, may harm our business.

~~We are regularly subject to general litigation, regulatory disputes, and government inquiries.~~

We are regularly subject to claims, lawsuits (including class actions and individual lawsuits), government investigations, and other proceedings involving competition and antitrust, intellectual property, privacy, consumer protection, accessibility claims, securities, tax, labor and employment, commercial disputes, services and other matters. In particular, our business faces ongoing consumer protection and intellectual property litigation, as discussed above. The number and significance of these disputes and inquiries have increased as our company has grown larger, our business has expanded in scope and geographic reach, and our products and services have increased in complexity. In addition, some of the laws and regulations affecting Internet and mobile commerce and consumer credit are subject to ongoing interpretation by the courts and governmental authorities, and the resulting uncertainty in the scope and application of these laws and regulations increases the risk that we will be subject to private claims and governmental actions alleging violations of those laws and regulations.

The outcome and impact of such claims, lawsuits, government investigations, and proceedings cannot be predicted with certainty. Regardless of the outcome, such investigations and proceedings can have an adverse impact on us because of legal costs, diversion of management resources, and other factors. Determining reserves for our pending litigation is a complex, fact-intensive process that is subject to judgment calls. It is possible that a resolution of one or more such proceedings could require us to make substantial payments to satisfy judgments, fines or penalties or to settle claims or proceedings, any of which could materially adversely affect our business. These proceedings could also result in reputational harm, criminal sanctions, consent decrees, or orders preventing us from offering certain products, or services, or requiring a change in our business practices in costly ways, or requiring development of non-infringing or otherwise altered products or technologies. Any of these consequences could materially adversely affect our business.

~~We may have exposure to greater than anticipated tax liabilities.~~

The determination of our worldwide provision for income taxes and other tax liabilities requires estimation and significant judgment, and there are many transactions and calculations where the ultimate tax determination is uncertain. Like many other

multinational corporations, we are subject to tax in multiple U.S. and foreign tax jurisdictions and have structured our operations to reduce our effective tax rate. Our determination of our tax liability is always subject to audit and review by applicable domestic and foreign tax authorities, and we are currently undergoing a number of investigations, audits and reviews by taxing authorities throughout the world, including with respect to our tax structure. Any adverse outcome of any such audit or review could have a negative effect on our business and the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made. While we have established reserves based on assumptions and estimates that we believe are reasonable to cover such eventualities, these reserves may prove to be insufficient.

In addition, our future income taxes could be adversely affected by earnings being lower than anticipated (or by the incurrence of losses) in jurisdictions that have lower statutory tax rates and higher than anticipated in jurisdictions that have higher statutory tax rates, by changes in the valuation of our deferred tax assets and liabilities, as a result of gains on our foreign exchange risk management program, or changes in tax laws, regulations, or accounting principles, as well as certain discrete items.

In light of continuing fiscal challenges in certain U.S. states and in many countries in Europe, various levels of government are increasingly focused on tax reform and other legislative action to increase tax revenue, including corporate income taxes. For example, the economic downturn reduced tax revenues for United States federal and state governments, and a number of proposals to increase taxes from corporate entities have been implemented or are being considered at various levels of government. These include a number of proposals to modify the U.S. federal income tax laws applicable to companies, like ours, operating in multiple U.S. and foreign jurisdictions which, if enacted, could materially increase our effective tax rate. A number of U.S. states have attempted to increase corporate tax revenues by taking an expansive view of corporate presence to attempt to impose corporate income taxes and other direct business taxes on companies that have no physical presence in their state, and taxing authorities in foreign jurisdictions may take similar actions. Many U.S. states are also altering their apportionment formulas to increase the amount of taxable income or loss attributable to their state from certain out-of-state businesses. Similarly, in Europe, and elsewhere in the world, there are various tax reform efforts underway designed to ensure that corporate entities are taxed on a larger percentage of their earnings. If more taxing authorities are successful in applying direct taxes to Internet companies that do not have a physical presence in their respective jurisdictions, this could increase our effective tax rate.

~~We and our merchants may be subject to sales reporting and record-keeping obligations.~~

One or more states or the federal government or foreign countries may seek to impose reporting or record-keeping obligations on companies that engage in or facilitate ecommerce. Such an obligation could be imposed by legislation intended to improve tax compliance (and legislation to such effect has been contemplated by several states and a number of foreign jurisdictions) or if one of our companies was ever deemed to be the legal agent of our merchants by a jurisdiction in which it operates. We are required to report to the Internal Revenue Service, (“IRS”), on customers subject to U.S. income tax who receive more than $20,000 in payments and more than 200 payments in a calendar year. As a result, we are required to request tax identification numbers from certain payees, track payments by tax identification number and, under certain conditions, withhold a portion of payments and forward such withholding to the IRS. We have modified our software to meet these requirements and expect increased operational costs and changes to our customer experience in connection with complying with these reporting obligations. The IRS regulations also require us to collect a certification of non-U.S. taxpayer status from certain international merchants. The Foreign Account Tax Compliance Act, which took effect at the start of 2013, is likely to require an increase in the number of non-U.S. customers from whom we must obtain a similar certification, and to increase the compliance burdens on us. Any failure by us to meet these new requirements could result in substantial monetary penalties and other sanctions and could harm our business.

~~Acquisitions, joint ventures, and strategic investments could result in operating difficulties and could harm our business.~~

We have acquired a significant number of businesses of varying size and scope, technologies, services, and products. In July 2015, we announced that we have agreed to acquire Xoom Corporation, which provides international money transfer and remittances across a number of cross-border corridors. This acquisition is subject to customary closing conditions, including regulatory approvals, and is expected to close in the fourth quarter of 2015; however, if these conditions are not satisfied or waived, the transaction could be delayed or not take place. We also expect to continue to evaluate and consider a wide array of potential strategic transactions as part of our overall business strategy, including business combinations, acquisitions, and dispositions of businesses, technologies, services, products, and other assets, as well as strategic investments and joint ventures.

~~These transactions may involve significant challenges and risks, including:~~

~~the potential loss of key customers, vendors and other key business partners of the companies we acquire, or dispose of, following and continuing after announcement of our transaction plans;~~

declining employee morale and retention issues affecting employees of companies that we acquire or dispose of, which may result from changes in compensation, or changes in management, reporting relationships, future prospects or the direction of the acquired or disposed business;

~~difficulty making new and strategic hires of new employees;~~

~~diversion of management time and a shift of focus from operating the business to the transaction, and in the case of an acquisition, integration and administration;~~

the need to integrate the operations, systems (including accounting, management, information, human resource and other administrative systems), technologies, products and personnel of each acquired company, which is an inherently risky and potentially lengthy and costly process;

~~the inefficiencies and lack of control that may result if such integration is delayed or not implemented, and unforeseen difficulties and expenditures that may arise as a result;~~

the need to implement or improve controls, procedures and policies appropriate for a larger public company at companies that prior to acquisition may have lacked such controls, procedures and policies or whose controls, procedures and policies did not meet applicable legal and other standards;

~~risks associated with our expansion into new international markets;~~

~~derivative lawsuits resulting from the acquisition;~~

liability for activities of the acquired company before the acquisition, including intellectual property and other litigation claims or disputes, violations of laws, rules and regulations, commercial disputes, tax liabilities and other known and unknown liabilities;

~~the potential loss of key employees following the transaction;~~

the acquisition of new customer and employee personal information, which in and of itself may require regulatory approval and or additional controls, policies and procedures and subject us to additional exposure; and

our dependence on the acquired business’ accounting, financial reporting, operating metrics and similar systems, controls and processes and the risk that errors or irregularities in those systems, controls and processes will lead to errors in our combined financial statements or make it more difficult to manage the acquired business.

At any given time we may be engaged in discussions or negotiations with respect to one or more of these types of transactions and any of these transactions could be material to our financial condition and results of operations. In addition, it may take us longer than expected to fully realize the anticipated benefits of these transactions, and those benefits may ultimately be smaller than anticipated or may not be realized at all, which could adversely affect our business and operating results. Any acquisitions or dispositions may also require us to issue additional equity securities, spend our cash, or incur debt (and increased interest expense), liabilities, and amortization expenses related to intangible assets or write-offs of goodwill, which could adversely affect our results of operations and dilute the economic and voting rights of our stockholders.

In addition, we may make certain investments, including through joint ventures, in which we have a minority equity interest and/or lack management and operational control. Under such circumstances, the controlling joint venture partner in a joint venture investment may have business interests, strategies or goals that are inconsistent with ours, and business decisions or other actions or omissions of the controlling investor, joint venture partner or joint venture company may result in harm to our reputation or adversely affect the value of our investment in the investment or joint venture.

~~Problems with or price increases by third parties who provide services to us or to our customers could harm our business.~~

A number of third parties provide services to us or to our customers. We are dependent on caching services that make our sites load faster, the processing companies and banks that link us to the payment card, and bank clearing networks to process transactions, among others. We are subject to, among other things, increases in interchange fees and assessments that payment card networks such as Visa and MasterCard charge for each transaction using one of their cards (which our payment card processors have the right to pass on to us), as well as changes in payment card network operating rules, including special operating rules for Internet payment services providers, such as PayPal. Similarly, we rely on unaffiliated lenders to make the consumer and other loans originated through the PayPal Credit products and also rely heavily on third parties to operate our services, including merchant processors and payment gateways to process transactions and third parties that provide loan receivable tracking and customer statements processing. Financial or regulatory issues, labor issues (e.g., strikes, lockouts, or work stoppages), or other problems that prevent these companies from providing services to us or our customers could harm our business.

Price increases by, or service terminations, disruptions or interruptions at, companies that provide services to us and our customers and clients could also make it more difficult for our merchants to complete transactions, thereby harming our business. Some third parties who provide services to us may have or gain market power and be able to increase their prices to us without competitive constraint.

We have outsourced certain functions to third-party providers, including some customer support and product development functions, which are critical to our operations. If our service providers do not perform satisfactorily, our operations could be disrupted, which could result in customer dissatisfaction and could harm our business.

There can be no assurance that third parties who provide services directly to us or our customers will continue to do so on acceptable terms, or at all. If any third parties were to stop providing services to us or our merchants on acceptable terms, including as a result of bankruptcy, we may be unable to procure alternatives from other third parties in a timely and efficient manner and on acceptable terms, or at all.

~~Our developer platforms, which are open to merchants and third-party developers, subject us to additional risks.~~

We provide third-party developers with access to application programming interfaces, software development kits and other tools designed to allow them to produce applications for use, with a particular focus on mobile applications. There can be no assurance that merchants or third-party developers will develop and maintain applications and services on our open platforms on a timely basis or at all, and a number of factors could cause such third-party developers to curtail or stop development for our platforms. In addition, our business is subject to many regulatory restrictions. It is possible that merchants and third-party developers who utilize our development platforms or tools could violate these regulatory restrictions and we may be held responsible for such violations, which could harm our business.

Our retail point of sale solutions expose us to additional risks.

We have announced several retail point of sale solutions, which enable merchants to accept payments using a payments card reader attached to, or otherwise communicating with, a mobile device or to scan payment cards and codes using the mobile device’s embedded camera, and which ~~will~~ enable consumers to use their mobile devices to pay ~~hands-free. To~~at the ~~extent~~point of sale. We recently announced that we have entered into a strategic partnership with Visa, Inc. to further expand our relationship with Visa in a way that will make it easier for merchants and consumers to choose to pay with Visa credit and debit cards. As part of the agreement, we will gain access to Visa’s tokenization services in the US for in-store point-of-sale PayPal transactions, which we expect will increase the number of point of sale transactions that we process. As we continue to expand our product and service offerings at the retail point of sale, we will face additional risks, including:

increased expectations from offline retailers regarding the reliability and availability of our systems and services and correspondingly lower amounts of downtime, which we may not be able to meet;

significant competition at the retail point of sale, particularly from established payment card providers such as Visa, MasterCard and American Express, many of which have substantially greater resources than we do;

increased targeting by ~~fraudsters, and~~fraudsters; given that our fraud models are less developed in this area, we may experience increases in fraud and associated transaction losses as we adjust to fraudulent activity at the point of sale;

exposure to product liability claims to the extent that hardware devices that we produce for use at the retail point of sale malfunction or are not in compliance with laws, which could result in substantial liability and require product recalls or other actions;

exposure to ~~new or~~ additional laws, rules and regulations;

increased reliance on third parties involved with processing in-store payments, including independent software providers, electronic point of sale providers, hardware providers (such as cash register and pin-pad providers), payment processors and banks that enable in-store transactions; and

lower operating income than our other payment solutions.

Unless we are able to successfully manage these risks, including driving adoption of, and significant volume through, our retail point of sale solutions over time, our business may be harmed.

Our success largely depends on key personnel. Because competition for our key employees is intense, we may not be able to attract, retain, and develop the highly skilled employees we need to support our business. The loss of senior management or other key personnel could harm our business.

Our future performance depends substantially on the continued services of our senior management and other key personnel, including key engineering and product development personnel, and our ability to attract, retain, and motivate key personnel. Competition for key personnel is intense, especially in the Silicon Valley where our corporate headquarters are located, and we may be unable to successfully attract, integrate, or retain sufficiently qualified key personnel. In making employment decisions, particularly in the Internet and high-technology industries, job candidates often consider the value of the equity awards they would receive in connection with their employment and fluctuations in our stock price may make it more difficult to attract, retain, and motivate employees. In addition, we do not have long-term employment agreements with any of our key personnel and do not maintain any “key person” life insurance policies. The loss of the services of any of our senior management or other key personnel, or our inability to attract highly qualified senior management and other key personnel, could harm our business.

~~Risks Related to the Separation and Our Operation as an Independent Publicly Traded Company~~

~~We may not achieve some or all of the expected benefits of the separation, and the separation could harm our business.~~

We may not be able to achieve the full strategic and financial benefits expected to result from the separation, or such benefits may be delayed or not occur at all. The separation and distribution is expected to provide the following benefits, among others: enhanced strategic and management focus; better ability to form strategic partnerships and relationships; faster decision-making; more efficient allocation of capital; alignment of incentives with performance objectives; direct access to the capital markets; and a distinct investment identity. We may not achieve these and other anticipated benefits for a variety of reasons, including, among others:

~~following the separation, we may be more susceptible to market fluctuations and other adverse events than if we were still a part of eBay;~~

~~following the separation, our business will be less diversified than eBay’s business prior to the separation; and~~

~~following the separation, regulatory requirements may inhibit or prevent certain of the activities the parties intend to continue to preserve operating synergies.~~

~~If we fail to achieve some or all of the benefits expected to result from the separation, or if such benefits are delayed, our business could be harmed.~~

If the distribution, together with certain related transactions, does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 368(a)(1)(D) and 355 of the Internal Revenue Code (the “Code”), eBay, PayPal and eBay stockholders could be subject to significant tax liabilities and, in certain circumstances, we could be required to indemnify eBay for material taxes pursuant to indemnification obligations under the tax matters agreement.

eBay has received an opinion from its outside legal counsel regarding the qualification of the distribution, together with certain related transactions, as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 368(a)(1)(D) and 355 of the Code. The opinion was based on and relied on, among other things, certain facts and assumptions, as well as certain representations, statements and undertakings of eBay and PayPal, including those relating to the past and future conduct of eBay and PayPal. If any of these representations, statements or undertakings are, or become, inaccurate or incomplete, or if eBay or PayPal breach any of their respective covenants in the separation documents, the opinion of counsel may be invalid and the conclusions reached therein could be jeopardized.

Notwithstanding the opinion of counsel, the IRS could determine that the distribution, together with certain related transactions, should be treated as a taxable transaction if the IRS determines that any of these representations, assumptions, or undertakings upon which such opinion was based are incorrect or have been violated or if the IRS disagrees with the conclusions in the opinion of counsel. An opinion of counsel is not binding on the IRS or any court and there can be no assurance that the IRS will not challenge the conclusions reached in the opinion. The IRS did not provide any opinion in advance of the separation that our proposed transaction will be tax-free.

If the distribution, together with certain related transactions, failed to qualify as a transaction that is generally tax-free under Sections 368(a)(1)(D) and 355 of the Code, in general, eBay would recognize taxable gain as if it had sold the PayPal common stock in a taxable sale for its fair market value, eBay stockholders who receive PayPal common stock in the distribution would be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares and we could incur significant liabilities.

We may not be able to engage in desirable strategic or capital-raising transactions following the separation. In addition, we could be liable for adverse tax consequences resulting from engaging in significant strategic or capital-raising transactions.

To preserve the tax-free treatment to eBay of the separation and the distribution, under the tax matters agreement that we entered into with eBay, for a period of time following the distribution, we are generally prohibited from taking certain actions that prevent the distribution and related transactions from qualifying as a transaction that is generally tax-free, for U.S. federal income tax purposes under Sections 368(a)(1)(D) and 355 of the Code. These restrictions may limit our ability to pursue certain strategic transactions or other transactions that may maximize the value of our business. ”

We have no history of operating as an independent company in our current form, and our historical financial information is not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of our future results.

The condensed combined and consolidated financial statements included in Part I of this Quarterly Report on Form 10-Q refers to our business as operated by and integrated with eBay, and were derived from the consolidated financial statements and accounting records of eBay. Accordingly, this financial information does not necessarily reflect the financial condition, results of operations, or cash flows that we would have achieved as a separate, publicly traded company during the periods presented or those that we will achieve in the future primarily as a result of the factors described below:

Prior to the separation, our business has been operated by eBay as part of its broader corporate organization, rather than as an independent company. eBay or one of its affiliates performed various corporate functions for us, such as legal, finance, treasury, accounting, tax, auditing, human resources, and public affairs. Our historical financial results reflect allocations of corporate expenses from eBay for such functions, which are likely to be less than the expenses we would have incurred had we operated as a separate publicly traded company.

Prior to the separation, our business was integrated with the other businesses of eBay. Historically, we shared economies of scope and scale in costs, employees, vendor relationships and customer relationships. Although we have entered into transition agreements and an operating agreement with eBay, these arrangements may not retain or fully capture the benefits that we have enjoyed as a result of being integrated with eBay and may result in our paying higher charges than in the past for these services. This could have an adverse effect on our results of operations and financial condition.

We may lose certain synergies and benefits we enjoyed as a result of being a part of eBay. As a part of eBay, we benefited from, among other things, the acquisition of new customers from eBay, capital to fund acquisitions, investments, and credit, and data from eBay that helps us to manage risks and maintain a low loss rate. In addition, being a part of eBay enabled us to leverage eBay’s technology capabilities, data, commerce platforms and relationships with retailers, brands and large merchants worldwide. The loss of these synergies and benefits could have an adverse impact on our results of operations and financial condition.

Generally, our working capital requirements and capital for our general corporate purposes, including acquisitions and capital expenditures, were historically satisfied as part of the corporate-wide cash management policies of eBay. Following the separation, we may need to obtain additional financing from banks, through public offerings or private placements of debt or equity securities, or through strategic relationships or other arrangements, which may or may not be available and may be more costly.

~~Following the separation, the cost of capital for our business may be higher than eBay’s cost of capital prior to the separation.~~

Other significant changes may occur in our cost structure, management, financing, and business operations as a result of operating as a company separate from eBay. For additional information, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the condensed combined and consolidated financial statements and accompanying notes included in Part I of this Quarterly Report on Form 10-Q.

~~eBay remains a significant source of our revenues after the distribution.~~

After the distribution, we continue to derive a significant amount of revenues from eBay. If the operating agreement expires or if eBay terminates the operating agreement prior to its expiration or there is a significant change in our relationship with eBay, including if eBay becomes a merchant of record, eliminates or modifies any of its risk management or customer protection programs, directs transactions to a different provider of payment services or offers eBay customers more payment options, our business could be harmed.

eBay may fail to perform under various transaction agreements that will be executed as part of the separation or it may fail to have necessary systems and services in place when certain of the transaction agreements expire.

In connection with the separation, we entered into a separation and distribution agreement with eBay as well as various other agreements, including an operating agreement, colocation services agreements, a transition services agreement, a tax matters agreement, an employee matters agreement, an intellectual property matters agreement, a data sharing addendum, and a product development agreement. The separation agreement, the tax matters agreement, the employee matters agreement, and intellectual property matters agreement determine the allocation of assets and liabilities (including by means of licensing) between the companies following the separation for those respective areas and include any necessary indemnifications related to liabilities and obligations. The operating agreement, colocation services agreements and data sharing addendum establish certain commercial relationships between eBay and us related to payment processing, credit, information technology infrastructure and data sharing. The transition services agreement provides for the performance of certain services by each company for the benefit of the other for a limited period of time after the separation. We will rely on eBay to satisfy its performance and payment obligations under these agreements. If eBay is unable to satisfy its obligations under these agreements, including its indemnification obligations, we could incur operational difficulties or losses. If we do not have in place our own systems and services, or if we do not have agreements with other providers of these services once these transaction agreements expire or terminate, we may not be able to operate our business effectively and our profitability may decline.

~~Our accounting and other management systems and resources may not be adequately prepared to meet the financial reporting and other requirements to which we will be subject following the distribution.~~

Our financial results previously were included within the consolidated results of eBay, and its reporting and control systems were appropriate for subsidiaries of a public company. Prior to the distribution, we were not directly subject to reporting and other requirements of the Securities Exchange Act of 1934, as amended, and Section 404 of the Sarbanes-Oxley Act of 2002. After the distribution, we will be subject to such reporting and other requirements, which will require, among other things, annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered public accounting firm addressing these assessments. These and other obligations will place significant demands on our management, administrative, and operational resources, including accounting and information technology resources. To comply with these requirements, we anticipate that we will need to upgrade our systems, including duplicating computer hardware infrastructure, implement additional financial and management controls, reporting systems and procedures, and hire additional accounting, finance and information technology staff. If we are unable to do this in a timely and effective fashion, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies could be impaired and our business could be harmed.

~~After the separation, certain of our directors may have actual or potential conflicts of interest because of their previous or continuing positions at eBay.~~

Because of their current or former positions with eBay, certain of our directors own eBay common stock and equity awards. Following the separation, even though our board of directors consists of a majority of directors who are independent, some of our directors continue to have a financial interest in eBay common stock and equity awards. In addition, one of our directors continues to serve on the eBay board of directors. Continuing ownership of eBay common stock and equity awards, or service as a director at both companies could create, or appear to create, potential conflicts of interest if PayPal and eBay have disagreements about the contracts between them that continue or face decisions that could have different implications for PayPal and eBay.

~~Risks Related to Our Common Stock~~

~~The price of our common stock may fluctuate significantly.~~

~~The price of our common stock may fluctuate significantly due to a number of factors, some of which may be beyond our control, including:~~

~~actual or anticipated fluctuations in our operating results;~~

~~changes in earnings estimated by securities analysts or our ability to meet those estimates;~~

~~the change in our stockholder base due to the spin-off;~~

~~the operating and stock price performance of comparable companies;~~

~~changes to the regulatory and legal environment under which we operate; and~~

~~market conditions in the payments industry, the industries of merchants and the domestic and worldwide economy as a whole.~~

PayPal’s amended and restated certificate of incorporation designates the state courts of the State of Delaware, or, if no state court located in the State of Delaware has jurisdiction, the federal court for the District of Delaware, as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by PayPal’s stockholders, which could discourage lawsuits against PayPal and PayPal’s directors and officers.

PayPal’s amended and restated certificate of incorporation provides that unless the corporation otherwise determines, the state courts of the State of Delaware, or, if no state court located in the state of Delaware has jurisdiction, the federal court for the District of Delaware, will be the sole and exclusive forum for any derivative action or proceeding brought on behalf of PayPal, any action asserting a claim of breach of a fiduciary duty owed by any director or officer of PayPal to PayPal or PayPal’s stockholders, creditors or other constituents, any action asserting a claim against PayPal or any director or officer of PayPal arising pursuant to any provision of the Delaware General Corporation Law or PayPal’s amended and restated certificate of incorporation or bylaws, or any action asserting a claim against PayPal or any director or officer of PayPal governed by the internal affairs doctrine. This exclusive forum provision may limit the ability of PayPal’s stockholders to bring a claim in a judicial forum that such stockholders find favorable for disputes with PayPal or PayPal’s directors or officers, which may discourage such lawsuits against PayPal and PayPal’s directors and officers. Alternatively, if a court outside of Delaware were to find this exclusive forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings described above, PayPal may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect PayPal’s business, financial condition or results of operations.

Certain provisions in PayPal’s amended and restated certificate of incorporation and bylaws may prevent or delay an acquisition of PayPal, which could decrease the trading price of PayPal common stock.

PayPal’s amended and restated certificate of incorporation and amended and restated bylaws contain certain provisions that may have the effect of deterring coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the bidder and by encouraging prospective acquirers to negotiate with PayPal’s board of directors rather than to attempt a hostile takeover. These provisions include, among others:

~~rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings;~~

the fact that directors may not be elected, removed or replaced at stockholder-requested special meetings unless a person, entity or group owns at least a majority of PayPal’s outstanding common stock;

~~the right of PayPal’s board to issue preferred stock without stockholder approval; and~~

~~the ability of PayPal’s directors, and not stockholders, to fill vacancies on PayPal’s board of directors in most circumstances.~~

PayPal has also elected not to be governed by Section 203 of the DGCL, which provides that, subject to limited exceptions, persons that acquire, or are affiliated with a person that acquires, more than 15% of the outstanding voting stock of a Delaware corporation shall not engage in any business combination with that corporation, including by merger, consolidation or acquisitions of additional shares, for a three-year period following the date on which that person or its affiliates becomes the holder of more than 15% of the corporation’s outstanding voting stock. PayPal’s amended and restated certificate of incorporation, however, contains a provision that generally mirrors Section 203 of the DGCL, except that there will be a 20% threshold instead of the 15% provided for by the DGCL. These provisions could delay or prevent a change of control that PayPal’s stockholders may favor.

Certain of the above provisions were added pursuant to the agreement between eBay Inc. and certain entities under the control of Carl C. lcahn. These provisions are not intended to make PayPal immune from takeovers. However, these provisions will apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that PayPal’s board of directors determines is not in the best interests of PayPal and PayPal’s stockholders. These provisions may also prevent or discourage attempts to remove and replace incumbent directors.

In addition, an acquisition or further issuance of PayPal’s stock could trigger the application of Section 355(e) of the Code. For a discussion of Section 355(e), see “Material U.S. Federal Income Tax Consequences” in our registration statement on Form 10, as amended, filed with the Securities and Exchange Commission. Under the tax matters agreement, PayPal would be required to indemnify eBay for any resulting taxes, and this indemnity obligation might discourage, delay or prevent a change of

control that PayPal’s stockholders may consider favorable. Please refer to “Certain Relationships and Related Person Transactions” and “Description of PayPal’s Capital Stock” in our registration statement on Form 10, as amended, filed with the Securities and Exchange Commission for a more detailed description of these agreements and provisions.


Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds

~~Not applicable.~~In January 2016, our Board of Directors authorized a stock repurchase program that provides for the repurchase of up to $2 billion of our common stock, with no expiration from the date of authorization. This stock repurchase program is intended to offset the impact of dilution from our equity compensation programs and, subject to market conditions and other factors, to be used to make opportunistic repurchases of our common stock to reduce outstanding share count. Any share repurchases under our stock repurchase program may be made through open market transactions, block trades, privately negotiated transactions or other means at times and in such amounts as management deems appropriate and will be funded from our working capital or other financing alternatives. However, any stock repurchases are subject to market conditions and other uncertainties and we cannot predict if or when any stock repurchases will be made. Moreover, we may terminate our stock repurchase program at any time without notice.

The stock repurchase activity under our stock repurchase program during the six months ended June 30, 2016 is summarized as follows:



	Shares Repurchased	Average Price Paid per Share⁽¹⁾		Value of Shares Repurchased		Remaining Amount Authorized
	(In millions, except per share amounts)
Authorization of plan in January 2016						$	2,000
Period ended January 31, 2016	—	—		—		—
Period ended February 29, 2016	17	$	35.27	$	596	(596		)
Period ended March 31, 2016	—	—		—		—
Period ended April 30, 2016	—	—		—		—
Period ended May 31, 2016	8	38.67		300		(300		)
Period ended June 30, 2016	—	—		—		—
Balance as of June 30, 2016	25			$	896	$	1,104

⁽¹⁾Average price paid per share includes broker commissions.

These repurchased shares of common stock were recorded as treasury stock and were accounted for under the cost method. No repurchased shares of common stock have been retired.


Item 3:	Defaults Upon Senior Securities

Not applicable.



			Page Number
Part I.	Financial Information		3
	Item 1.	Condensed Consolidated Balance Sheet	3
		Condensed Combined and Consolidated Statement of Income	4
		Condensed Combined and Consolidated Statement of Comprehensive Income	5
		Condensed Combined and Consolidated Statement of Cash Flows	6
		Notes to Condensed Consolidated Financial Statements	7
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	34
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49
	Item 4.	Controls and Procedures	50
Part II.	Other Information		51
	Item 1.	Legal Proceedings	51
	Item 1A.	Risk Factors	51
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59
Signatures			60
Exhibit Index			61



	December 31, 2013			Amount of (loss) recognized in other comprehensive income (effective portion)		Amount of (loss) reclassified from accumulated other comprehensive income to net revenue (effective portion)		June 30, 2014
	(In millions)
Foreign exchange contracts designated as cash flow hedges	$	(91	)	(19	)	(40	)	$	(70	)


	June 30, 2015		December 31, 2014		June 30, 2016		December 31, 2015
	(In millions)				(In millions)
> 760	$	446	$	553	$	567	$	569
680 - 759	1,226		1,439		1,637		1,529
600 - 679	1,118		1,344		1,502		1,449
< 599	296		341		433		369
Total	$	3,086	$	3,677	$	4,139	$	3,916


June 30, 2015
June 30, 2016							June 30, 2016
(In millions)
Current	Current	30 - 59 Days Past Due	60 - 89 Days Past Due	90 - 180 Days Past Due	Total Past Due	Total Financing Receivables	Current	30 - 59 Days Past Due		60 - 89 Days Past Due		90 - 180 Days Past Due		Total Past Due		Total Consumer Receivables
2,777		143	54	112	309	3,086
$							3,815	$	181	$	71	$	156	$	408	$	4,223


December 31, 2014
December 31, 2015							December 31, 2015
(In millions)
Current	Current	30 - 59 Days Past Due	60 - 89 Days Past Due	90 - 180 Days Past Due	Total Past Due	Total Financing Receivables	Current	30 - 59 Days Past Due		60 - 89 Days Past Due		90 - 180 Days Past Due		Total Past Due		Total Consumer Receivables
3,303		163	62	149	374	3,677
$							3,593	$	172	$	66	$	155	$	393	$	3,986



	June 30, 2015		December 31, 2014
	(In millions)
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	2,562	$	2,201
Short-term investments	1,846		29
Accounts receivable, net	81		65
Loans and interest receivable, net	3,152		3,586
Funds receivable and customer accounts	11,386		10,612
Notes and receivables from affiliates	103		694
Other current assets	583		378
Total current assets	19,713		17,565
Long-term investments	2,258		31
Property and equipment, net	1,291		922
Goodwill	3,409		3,189
Intangible assets, net	186		156
Other assets	54		54
Total assets	$	26,911	$	21,917
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	188	$	115
Funds payable and amounts due to customers	11,386		10,612
Notes and payables to affiliates	102		1,093
Accrued expenses and other current liabilities	877		1,434
Income taxes payable	31		29
Total current liabilities	12,584		13,283
Long-term liabilities	1,587		386
Total liabilities	14,171		13,669
Commitments and contingencies (Note 10)
Equity:
Accumulated other comprehensive income	24		110
Net parent investment	12,716		8,138
Total equity	12,740		8,248
Total liabilities and equity	$	26,911	$	21,917



Fiscal years:
Remaining 2015	$	46
2016	83
2017	37
2018	17
2019	3
Thereafter:	—
	$	186



Description	Balances at June 30, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
	(In millions)
Assets:
Cash and cash equivalents	$	529	$	—	$	529
Short-term investments:
Restricted Cash	17		17		—
Corporate debt securities	2,553		—		2,553
Government and agency securities	257		—		257
Time deposits	112		—		112
Total short-term investments	$	2,939	$	17	$	2,922
Funds receivable and customer accounts	6,912		—		6,912
Derivatives	204		—		204
Long-term investments:
Restricted Cash	6		6		—
Corporate debt securities	1,249		—		1,249
Government and agency securities	10		—		10
Total long-term investments	1,265		6		1,259
Total financial assets	$	11,849	$	23	$	11,826
Liabilities:
Derivatives	$	85	$	—	$	85



Description	Balances at June 30, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
	(In millions)
Assets:
Cash and cash equivalents	$	2,562	$	1,842	$	720
Short-term investments:
Corporate debt securities	1,250		—		1,250
Government and agency securities	590		—		590
Time deposits	6		—		6
Total short-term investments	1,846		—		1,846
Funds receivable and customer accounts	5,839		—		5,839
Derivatives	87		—		87
Long-term investments:
Corporate debt securities	$	2,231	$	—	$	2,231
Total financial assets	$	12,565	$	1,842	$	10,723
Liabilities:
Derivatives	$	23	$	—	$	23



Description	Balances at December 31, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
	(In millions)
Assets:
Cash and cash equivalents	$	2,201	$	2,201	$	—
Short-term investments:
Time deposits	29		—		29
Total short-term investments	29		—		29
Funds receivable and customer accounts	4,161		—		4,161
Derivatives	135		—		135
Total financial assets	$	6,526	$	2,201	$	4,325
Liabilities:
Derivatives	$	7	$	—	$	7



Description	Balances at December 31, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
	(In millions)
Assets:
Cash and cash equivalents	$	406	$	—	$	406
Short-term investments:
Restricted Cash	18		18		—
Corporate debt securities	1,998		—		1,998
Time deposits	2		—		2
Total short-term investments	2,018		18		2,000
Funds receivable and customer accounts	6,978		—		6,978
Derivatives	97		—		97
Long-term investments:
Restricted Cash	8		8		—
Corporate debt securities	2,314		—		2,314
Total long-term investments	2,322		8		2,314
Total financial assets	$	11,821	$	26	$	11,795
Liabilities:
Derivatives	$	25	$	—	$	25


	Balance Sheet Location	June 30, 2015		December 31, 2014		Balance Sheet Location	June 30, 2016		December 31, 2015
		(In millions)					(In millions)
Derivative Assets:
Foreign exchange contracts designated as cash flow hedges	Other Current Assets	$	81	$	128	Other Current Assets	$	107	$	59
Foreign exchange contracts not designated as hedging instruments	Other Current Assets	6		7		Other Current Assets	97		38
Total derivative assets		$	87	$	135		$	204	$	97

Derivative Liabilities:
Foreign exchange contracts designated as cash flow hedges	Other Current Liabilities	$	15	$	2	Other Current Liabilities	$	7	$	2
Foreign exchange contracts not designated as hedging instruments	Other Current Liabilities	8		5		Other Current Liabilities	78		23
Total derivative liabilities		$	23	$	7		$	85	$	25

Total fair value of derivative instruments		$	64	$	128
Net fair value of derivative instruments							$	119	$	72



	December 31, 2015		Amount of gain recognized in other comprehensive income (effective portion)	Amount of gain reclassified from accumulated other comprehensive income to net revenue (effective portion)	June 30, 2016
	(In millions)
Foreign exchange contracts designated as cash flow hedges	$	57	84	41	$	100



June 30, 2016
(In millions)
Within Original Expected Repayment Period		30 - 59 Days Greater		60 - 89 Days Greater		90 - 180 Days Greater		180+ Days		Total Past Original Expected Repayment Period		Total Merchant Receivables
$	474	$	29	$	16	$	26	$	10	$	81	$	555



	June 30, 2016									June 30, 2015
	PayPal Working Capital Advances			Fees Receivable			Total Allowance			PayPal Working Capital Advances			Fees Receivable			Total Allowance
	(In millions)
Balance as of January 1	$	19		$	3		$	22		$	6		$	1		$	7
Provisions	17			1			18			10			1			11
Charge-offs	(14		)	(2		)	(16		)	(6		)	(1		)	(7		)
Recoveries	2			—			2			1			—			1
Balance as of June 30	$	24		$	2		$	26		$	11		$	1		$	12



	Options		Weighted Average Grant-Date Fair Value (per share)
	(In thousands, except per share amounts)
Outstanding at January 1, 2015	2,409
Granted and assumed	1,002		$	13.60
Exercised	(575	)
Forfeited/expired/canceled	(84	)
Outstanding at June 30, 2015	2,752



	Options
	(In thousands)
Outstanding at January 1, 2016	6,008
Granted	124
Exercised	(731	)
Forfeited/expired/canceled	(165	)
Outstanding at June 30, 2016	5,236



	Units		Weighted Average Grant-Date Fair Value (per share)
	(In thousands, except per share amounts)
Outstanding at January 1, 2015	14,715
Awarded and assumed	7,148		$	57.25
Vested	(4,150	)
Forfeited	(1,102	)
Outstanding at June 30, 2015	16,611
Expected to vest at June 30, 2015	13,797



	Three Months Ended		Six Months Ended
	(In millions)
Employee severance and benefits	$	1	$	49
Total	$	1	$	49



	Employee Severance and Benefits			Other Associated Costs		Total
	(In millions)
Accrued liability as of January 1, 2015	$	—		$	—	$	—
Charges	49			—		$	49
Payments	(43		)	—		$	(43	)
Accrued liability as of June 30, 2015	$	6		$	—	$	6



	Unrealized Gains (Losses) on Cash Flow Hedges		Unrealized Gains (Losses) on Investments			Foreign Currency Translation			Estimated tax (expense) benefit			Total
	(In millions)
Beginning balance as of March 31, 2016	$	21	$	(4	)	$	(45	)	$	1		$	(27	)
Other comprehensive income (loss) before reclassifications	88		9			(5		)	(4		)	88
Amount of gain reclassified from accumulated other comprehensive income	9		—			—			—			9
Net current period other comprehensive income	79		9			(5		)	(4		)	79
Ending balance as of June 30, 2016	$	100	$	5		$	(50	)	$	(3	)	$	52


Details about Accumulated Other Comprehensive Income Components	Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income					Affected Line Item in the Statement of Income	Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income				Affected Line Item in the Statement of Income
	Three Months Ended June 30,						Three Months Ended June 30,
	2015		2014				2016		2015
	(In millions)						(In millions)
Gains (losses) on cash flow hedges-foreign exchange contracts	$	62	$	(23	)	Net revenues
Gains on cash flow hedges-foreign exchange contracts							$	9	$	62	Net revenues
Unrealized losses on investments							$	—	$	—	Other income (expense), net
	$	62	$	(23	)	Income before income taxes	$	9	$	62	Income before income taxes
	—		—			Income tax expense	—		—		Income tax expense
Total reclassifications for the period	$	62	$	(23	)	Net income/(loss)	$	9	$	62	Net income



	Three Months Ended June 30,						Percent Increase/(Decrease)		Six Months Ended June 30,						Percent Increase/(Decrease)
	2016			2015			Percent Increase/(Decrease)		2016			2015			Percent Increase/(Decrease)
	(In millions, except percentages)
Net revenues	$	2,650		$	2,297		15	%	$	5,194		$	4,434		17	%
Operating expenses	2,279			1,899			20	%	4,416			3,714			19	%
Operating income	371			398			(7	)%	778			720			8	%
Operating margin	14		%	17		%	**		15		%	16		%	**
Income tax expense	57			94			(39	)%	114			160			(29	)%
Effective tax rate	15		%	24		%	**		14		%	22		%	**
Net income	$	323		$	305		6	%	$	688		$	560		23	%
Net income per diluted share⁽¹⁾⁽²⁾	$	0.27		$	0.25		7	%	$	0.56		$	0.46		23	%



	Three Months Ended June 30, 2016			Six Months Ended June 30, 2016
	(in millions)
Unfavorable impact to net revenues (exclusive of hedging impact)	$	(25	)	$	(72	)
Hedging impact	9			41
Unfavorable impact to net revenues	(16		)	(31		)
Favorable impact to operating expense	11			41
Unfavorable impact to operating income	$	(5	)	$	10



	June 30, 2015		December 31, 2014
Percentage of Loans Receivable with FICO scores > 680	54	%	54	%
Percentage of Loans Receivable with FICO scores < 599	10	%	9	%

Percent of Loans Receivable current	90	%	90	%
Percent of Loans Receivable > 90 days outstanding	4	%	4	%



	June 30,		June 30,
	2016		2015
Percentage of Loans Receivable with FICO scores > 680⁽¹⁾	53.2	%	54.2	%
Percentage of Loans Receivable with FICO scores < 599⁽¹⁾	10.5	%	9.6	%
Percent of Loans Receivable current	90.3	%	90.0	%
Percent of Loans Receivable > 90 days outstanding	3.7	%	3.6	%
Net charge off rate⁽²⁾	6.3	%	5.8	%



		PayPal Holdings, Inc.
		Principal Executive Officer:

		By:	/s/ Daniel H. Schulman
			Daniel H. Schulman
			President and Chief Executive Officer
Date:	July ~~29, 2015~~26, 2016
		Principal Financial Officer:

		By:	/s/ ~~Patrick L. A. Dupuis~~John D. Rainey
			~~Patrick L. A. Dupuis~~John D. Rainey
			Senior Vice President, ~~Interim~~ Chief Financial Officer
Date:	July ~~29, 2015~~26, 2016
		Principal Accounting Officer:

		By:	/s/ Aaron A. Anderson
			Aaron A. Anderson
			Vice President, Chief Accounting Officer
Date:	July ~~29, 2015~~26, 2016




Exhibit ~~2.1(2)~~10.01+*		~~Separation and Distribution Agreement by and between eBay Inc. and~~ PayPal Holdings, Inc.~~, dated as of June 26, 2015.~~ Amended and Restated 2015 Equity Incentive Award Plan
Exhibit ~~3.1(3)~~10.02+*		Amended and Restated ~~Certificate of Incorporation of~~ PayPal ~~Holdings, Inc., dated July 17, 2015.~~Employee Incentive Plan
Exhibit ~~3.2(3)~~10.03		~~Amended and Restated Bylaws of PayPal Holdings, Inc.,~~Amendment dated ~~July 17, 2015.~~
~~Exhibit 10.1(3)~~		June 30, 2016, to the Operating Agreement by and ~~among eBay Inc., eBay International AG, PayPal Holdings, Inc., PayPal,~~ ~~Inc., PayPal Pte. Ltd. and PayPal Payments Pte. Holdings S.C.S., dated July 17, 2015.~~
~~Exhibit 10.2(3)~~		~~Transition Services Agreement by and~~ between ~~eBay Inc. and PayPal Holdings, Inc., dated July 17, 2015.~~
~~Exhibit 10.3(3)~~		~~Tax Matters Agreement by and between eBay Inc. and PayPal Holdings, Inc., dated July 17, 2015.~~
~~Exhibit 10.4(3)~~		~~Employee Matters Agreement by and between eBay Inc. and PayPal Holdings, Inc., dated July 17, 2015.~~
~~Exhibit 10.5(3)~~		~~Intellectual Property Matters Agreement by and among eBay Inc.,~~Registrant, eBay International AG, PayPal Holdings, Inc., PayPal, Inc., PayPal Pte. Ltd. and PayPal Payments Pte. Holdings S.C.S.~~, dated July 17, 2015.~~
~~Exhibit 10.6(3)~~		~~Credit and Guarantee Agreement, dated as of July 17, 2015, by and among PayPal Holdings, Inc., PayPal, Inc., JPMorgan Chase Bank, N.A., as Administrative Agent, and the other parties thereto.~~
~~Exhibit 10.7(3)+~~		~~PayPal Employee Incentive Plan.~~
~~Exhibit 10.8(3)+~~		~~PayPal Holdings, Inc. 2015 Equity Incentive Award Plan.~~
~~Exhibit 10.9(3)+~~		~~PayPal Holdings, Inc. Deferred Compensation Plan.~~
~~Exhibit 10.10(1)+~~		~~PayPal Holdings, Inc. Change in Control Severance Plan for Key Employees, dated June 16, 2015.~~
~~Exhibit 10.11(1)+~~		~~PayPal Holdings, Inc. SVP and Above Standard Severance Plan, dated June 16, 2015.~~
Exhibit 31.01		Certification of Registrant's Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.02		Certification of Registrant's Chief Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.01		Certification of Registrant's Chief Executive Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.02		Certification of Registrant's Chief Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document


~~(1)~~	~~Filed as an exhibit to Registrant’s Amendment No. 4 to Registration Statement on Form 10 filed with the Securities and Exchange Commission on June 18, 2015 and incorporated herein by reference.~~


~~(2)~~	~~Filed as an exhibit to Registrant’s Amendment No. 5 to Registration Statement on Form 10 filed with the Securities and Exchange Commission on June 26, 2015 and incorporated herein by reference.~~


~~(3)~~	~~Filed as an exhibit to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 20, 2015 and incorporated herein by reference.~~