10-Q 1 q1fy19squareinc10-q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
______________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
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: 001-37622
______________________
Square, Inc.
(Exact name of registrant as specified in its charter)
______________________
Delaware
 
80-0429876
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)

1455 Market Street, Suite 600
San Francisco, CA 94103
(Address of principal executive offices, including zip code)
(415) 375-3176
(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  ý    No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  ý    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ý   Accelerated filer  o   Non-accelerated filer  o Smaller reporting company  o Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  ý
As of April 26, 2019, the number of shares of the registrant’s Class A common stock outstanding was 336,267,871 and the number of shares of the registrant’s Class B common stock outstanding was 86,698,955.




TABLE OF CONTENTS
 


Page No.
PART I—Financial Information
 
 
PART II—Other Information
 




SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “appears,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about our future financial performance, our anticipated growth and growth strategies and our ability to effectively manage that growth, our ability to invest in and develop our products and services to operate with changing technology, the expected benefits of our products to our customers and the impact of our products on our business; our anticipated expansion and growth in Gross Payment Volume (GPV) and revenue, including our expectations regarding larger sellers, our plans for international expansion, the expected impact of our recent acquisitions, our plans with respect to patents and other intellectual property, our expectations regarding litigation and positions we have taken with respect to our tax classification, our expectations regarding share-based compensation, our expectations regarding the impacts of accounting guidance, our expectations regarding restricted cash, and the sufficiency of our cash and cash equivalents and cash generated from operations to meet our working capital and capital expenditure requirements.

We have based the forward-looking statements on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, prospects, business strategy, and financial needs. The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. We operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.

All forward-looking statements are based on information and estimates available to the Company at the time of this Quarterly Report on Form 10-Q and are not guarantees of future performance. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law.




Part I—Financial Information
Item 1. Financial Statements
SQUARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (In thousands, except share and per share data)
 
March 31,
2019
 
December 31,
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
521,676

 
$
583,173

Short-term investments
566,539

 
540,991

Restricted cash
33,220

 
33,838

Settlements receivable
1,391,078

 
364,946

Customer funds
445,417

 
334,017

Loans held for sale
123,471

 
89,974

Other current assets
185,121

 
164,966

Total current assets
3,266,522

 
2,111,905

Property and equipment, net
133,706

 
142,402

Goodwill
267,012

 
261,705

Acquired intangible assets, net
79,697

 
77,102

Long-term investments
481,063

 
464,680

Restricted cash
14,433

 
15,836

Built-to-suit lease asset

 
149,000

Operating lease right-of-use assets
111,956

 

Other non-current assets
48,202

 
58,393

Total assets
$
4,402,591

 
$
3,281,023

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Customers payable
$
1,661,894

 
$
749,215

Settlements payable
266,121

 
54,137

Accrued transaction losses
36,047

 
33,682

Accrued expenses
87,812

 
82,354

Operating lease liabilities, current
23,041

 

Other current liabilities
108,644

 
99,153

Total current liabilities
2,183,559

 
1,018,541

Long-term debt, net of current portion (Note 12)
909,302

 
899,695

Built-to-suit lease liability

 
149,000

Operating lease liabilities, non-current
112,556

 

Other non-current liabilities
75,585

 
93,286

Total liabilities
3,281,002

 
2,160,522

Commitments and contingencies (Note 17)

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.0000001 par value: 100,000,000 shares authorized at March 31, 2019 and December 31, 2018. None issued and outstanding at March 31, 2019 and December 31, 2018.

 

Class A common stock, $0.0000001 par value: 1,000,000,000 shares authorized at March 31, 2019 and December 31, 2018; 334,650,231 and 323,546,864 issued and outstanding at March 31, 2019 and December 31, 2018, respectively.

 

Class B common stock, $0.0000001 par value: 500,000,000 shares authorized at March 31, 2019 and December 31, 2018; 86,973,715 and 93,501,142 issued and outstanding at March 31, 2019 and December 31, 2018, respectively.

 

Additional paid-in capital
2,048,938

 
2,012,328

Accumulated other comprehensive loss
(3,424
)
 
(6,053
)
Accumulated deficit
(923,925
)
 
(885,774
)
Total stockholders’ equity
1,121,589

 
1,120,501

Total liabilities and stockholders’ equity
$
4,402,591

 
$
3,281,023

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

4


SQUARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)

 
Three Months Ended March 31,
 
2019
 
2018
Revenue:
 
 
 
Transaction-based revenue
$
656,762

 
$
523,037

Subscription and services-based revenue
218,857

 
97,054

Hardware revenue
18,212

 
14,417

Bitcoin revenue
65,528

 
34,095

Total net revenue
959,359

 
668,603

Cost of revenue:
 
 
 
Transaction-based costs
409,069

 
327,911

Subscription and services-based costs
60,523

 
30,368

Hardware costs
26,941

 
19,702

Bitcoin costs
64,696

 
33,872

Amortization of acquired technology
1,376

 
1,580

Total cost of revenue
562,605

 
413,433

Gross profit
396,754

 
255,170

Operating expenses:
 
 
 
Product development
153,559

 
105,095

Sales and marketing
133,713

 
77,266

General and administrative
101,598

 
75,501

Transaction, loan and advance losses
27,841

 
18,031

Amortization of acquired customer assets
2,085

 
269

Total operating expenses
418,796

 
276,162

Operating loss
(22,042
)
 
(20,992
)
Interest expense, net
4,681

 
2,112

Other expense, net
11,299

 
707

Loss before income tax
(38,022
)
 
(23,811
)
Provision for income taxes
129

 
175

Net loss
$
(38,151
)
 
$
(23,986
)
Net loss per share:
 
 
 
Basic
$
(0.09
)
 
$
(0.06
)
Diluted
$
(0.09
)
 
$
(0.06
)
Weighted-average shares used to compute net loss per share
 
 
 
Basic
419,289

 
395,948

Diluted
419,289

 
395,948

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

5


SQUARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(In thousands)

 
Three Months Ended March 31,
 
2019
 
2018
Net loss
$
(38,151
)
 
$
(23,986
)
Net foreign currency translation adjustments
266

 
549

Net unrealized gain on revaluation of intercompany loans
75

 
665

Net unrealized gain (loss) on marketable debt securities, net of tax
2,288

 
(1,190
)
Total comprehensive loss
$
(35,522
)
 
$
(23,962
)

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

6


SQUARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
Three Months Ended March 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net loss
$
(38,151
)
 
$
(23,986
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
18,971

 
10,160

Non-cash interest and other expense
8,224

 
4,847

Share-based compensation
61,088

 
46,824

Loss on revaluation of equity investment
14,087

 

Amortization of operating lease right-of-use assets and accretion of operating lease liabilities
6,690

 

Recovery of common stock in connection with indemnification settlement agreement
(789
)
 

Transaction, loan and advance losses
27,841

 
18,031

Change in deferred income taxes
(754
)
 
(654
)
Changes in operating assets and liabilities:
 
 
 
Settlements receivable
(1,027,472
)
 
(81,452
)
Customer funds
(109,439
)
 
(49,619
)
Purchase of loans held for sale
(507,755
)
 
(344,976
)
Sales and principal payments of loans held for sale
467,518

 
337,092

Other current assets
(19,327
)
 
(13,444
)
Other non-current assets
(2,527
)
 
(1,256
)
Customers payable
912,749

 
147,977

Settlements payable
211,984

 
2,114

Charge-offs to accrued transaction losses
(17,443
)
 
(12,842
)
Accrued expenses
15,721

 
2,703

Other current liabilities
16,991

 
5,155

Payments for operating lease liabilities
(9,293
)
 

Other non-current liabilities
3,530

 
5,379

Net cash provided by operating activities
32,444

 
52,053

Cash flows from investing activities:
 
 
 
Purchase of marketable debt securities
(193,673
)
 
(50,221
)
Proceeds from maturities of marketable debt securities
111,505

 
45,450

Proceeds from sale of marketable debt securities
44,810

 

Purchase of marketable debt securities from customer funds
(34,613
)
 

Proceeds from maturities of marketable debt securities from customer funds
33,000

 

Purchase of property and equipment
(18,168
)
 
(8,083
)
Payments for other investments
(2,000
)
 

Purchase of intangible assets

 
(1,584
)
Business combinations, net of cash acquired
(11,248
)
 
(1,055
)
Net cash used in investing activities
(70,387
)
 
(15,493
)
Cash flows from financing activities:
 
 
 
Payment of deferred purchase consideration
(95
)
 

Principal payments on finance lease obligation
(1,284
)
 
(665
)
Proceeds from the exercise of stock options, net
25,328

 
31,354

Payments for tax withholding related to vesting of restricted stock units
(50,801
)
 
(27,651
)
Net cash provided by (used in) financing activities
(26,852
)
 
3,038

Effect of foreign exchange rate on cash and cash equivalents
1,277

 
1,397

Net increase (decrease) in cash, cash equivalents and restricted cash
(63,518
)
 
40,995

Cash, cash equivalents and restricted cash, beginning of period
632,847

 
735,081

Cash, cash equivalents and restricted cash, end of period
$
569,329

 
$
776,076

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

7


SQUARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands, except for number of shares)

 
 
Class A and B common stock
 
Additional paid-in
 
Accumulated other comprehensive
 
Accumulated
 
Total stockholders’
 
 
Shares
 
Amount
 
capital
 
loss
 
deficit
 
equity
Balance at December 31, 2018
417,048,006

 
$

 
$
2,012,328

 
$
(6,053
)
 
$
(885,774
)
 
$
1,120,501

 
Net loss

 

 

 

 
(38,151
)
 
(38,151
)
Shares issued in connection with:
 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options
3,588,052

 

 
25,328

 

 

 
25,328

 
Vesting of early exercised stock options and other
425

 

 
36

 

 

 
36

 
Vesting of restricted stock units
1,994,156

 

 

 

 

 

Change in other comprehensive loss

 

 

 
2,629

 

 
2,629

Share-based compensation

 

 
62,835

 

 

 
62,835

Tax withholding related to vesting of restricted stock units
(741,324
)
 

 
(50,801
)
 

 

 
(50,801
)
Issuance of common stock in conjunction with the conversion of senior notes, due 2022
43

 

 
1

 

 

 
1

Exercise of bond hedges in conjunction with the conversion of senior notes, due 2022
(250,614
)
 

 

 

 

 

Recovery of common stock in
connection with indemnification  settlement agreement
(14,798
)
 
 
 
(789
)
 

 

 
(789
)
Balance at March 31, 2019
421,623,946

 

 
2,048,938

 
(3,424
)
 
(923,925
)
 
1,121,589



 
 
Class A and B common stock
 
Additional paid-in
 
Accumulated other comprehensive
 
Accumulated
 
Total stockholders’
 
 
Shares
 
Amount
 
capital
 
loss
 
deficit
 
equity
Balance at December 31, 2017
395,194,075

 
$

 
$
1,630,386

 
$
(1,318
)
 
$
(842,735
)
 
$
786,333

Cumulative Adjustment ASC 606, Revenue from contracts with customers

 

 

 

 
(4,586
)
 
(4,586
)
 
Net loss

 

 

 

 
(23,986
)
 
(23,986
)
Shares issued in connection with:
 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options
4,213,775

 

 
31,354

 

 

 
31,354

 
Vesting of early exercised stock options and other

 

 
136

 

 

 
136

 
Vesting of restricted stock units
1,625,534

 

 

 

 

 

Change in other comprehensive loss

 

 

 
24

 

 
24

Share-based compensation

 

 
48,356

 

 

 
48,356

Tax withholding related to vesting of restricted stock units
(649,305
)
 

 
(27,651
)
 

 

 
(27,651
)
Balance at March 31, 2018
400,384,079

 

 
1,682,581

 
(1,294
)
 
(871,307
)
 
809,980


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


8

SQUARE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
    
Square, Inc. (together with its subsidiaries, Square or the Company) creates tools that help sellers start, run, and grow their businesses. Square enables sellers to accept card payments and also provides reporting and analytics, and next-day settlement. Square’s point-of-sale software and other business services help sellers manage inventory, locations, and employees; access financing; engage buyers; build a website or online store; and grow sales. The Cash App is an easy way to send, spend, and store money, and Caviar is a food-ordering service. Square was founded in 2009 and is headquartered in San Francisco, with offices in the United States, Canada, Japan, Australia, Ireland, and the UK.

Basis of Presentation
    
The accompanying interim condensed consolidated financial statements of the Company are unaudited. These interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP) and the applicable rules and regulations of the Securities and Exchange Commission (SEC) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The December 31, 2018 condensed consolidated balance sheet was derived from the audited financial statements as of that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

The accompanying unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature considered necessary to state fairly the Company's consolidated financial position, results of operations, comprehensive income (loss), and cash flows for the interim periods. All intercompany transactions and balances have been eliminated in consolidation. The interim results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019, or for any other future annual or interim period.

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk,” and the Consolidated Financial Statements and notes thereto included in Items 7, 7A, and 8, respectively, in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, as well as related disclosure of contingent assets and liabilities. Actual results could differ from the Company’s estimates. To the extent that there are material differences between these estimates and actual results, the Company’s financial condition or operating results will be materially affected. The Company bases its estimates on past experience and other assumptions that the Company believes are reasonable under the circumstances, and the Company evaluates these estimates on an ongoing basis.

Estimates, judgments, and assumptions in these consolidated financial statements include, but are not limited to, those related to revenue recognition, accrued transaction losses, valuation of the debt component of convertible senior notes, valuation of loans held for sale, goodwill, acquired intangible assets and deferred revenue, income and other taxes, operating and financing lease right-of-use assets and related liabilities, and share-based compensation.

Concentration of Credit Risk
    
For the three months ended March 31, 2019 and 2018, the Company had no customer that accounted for greater than 10% of total net revenue.

The Company had three third-party payment processors that represented approximately 55%, 35%, and 6% of settlements receivable as of March 31, 2019. The same three parties represented approximately 45%, 33%, and 9% of settlements receivable as of December 31, 2018. All other third-party processors were insignificant.


9


Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, marketable debt securities, settlements receivables, customer funds, and loans held for sale. The associated risk of concentration for cash and cash equivalents and restricted cash is mitigated by banking with creditworthy institutions. At certain times, amounts on deposit exceed federal deposit insurance limits. The associated risk of concentration for marketable debt securities is mitigated by holding a diversified portfolio of highly rated investments. Settlements receivable are amounts due from well-established payment processing companies and normally take one or two business days to settle which mitigates the associated risk of concentration. The associated risk of concentration for loans held for sale is partially mitigated by credit evaluations that are performed prior to facilitating the offering of loans and ongoing performance monitoring of the Company’s loan customers.

New Accounting Policies
The Company adopted Accounting Standards Codification (ASC) 842, Leases on January 1, 2019, and elected the optional transition method to apply the transition provisions from the effective date of adoption, which requires the Company to report the cumulative effect of the adoption of the standard on the date of adoption with no changes to the prior period balances. Pursuant to the practical expedients, the Company has elected not to reassess: (i) whether expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases, or, (iii) initial direct costs for any existing leases. Additionally, the Company has lease agreements with lease and non-lease components, which are accounted for separately. The Company recognized $112.0 million of operating right-of-use lease assets and $135.6 million of operating lease liabilities on its consolidated balance sheet as of March 31, 2019. Additionally, the Company derecognized $149 million related to the build-to-suit asset and liability upon adoption of this standard because the Company is no longer deemed to be the owner of the related asset under construction under the new standard. Refer to Note 17 for further detail.

Except for the adoption of ASC 842, there have been no material changes to the Company’s accounting policies during the three months ended March 31, 2019, as compared to the accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Recent Accounting Pronouncements

Recently issued accounting pronouncements not yet adopted

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses, which requires measurement and recognition of expected credit losses for financial assets held. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company intends to adopt this guidance effective January 1, 2020. The Company is currently evaluating the impact this guidance may have on the consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. The new guidance eliminates the requirement to calculate the implied fair value of goodwill assuming a hypothetical purchase price allocation (i.e., Step 2 of the goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value, not to exceed the carrying amount of goodwill. This standard should be adopted when the Company performs its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. The amendments should be applied on a prospective basis. The Company intends to adopt this guidance effective with its 2019 annual goodwill impairment test which it performs as of December 31. The Company does not expect the adoption of this guidance to have a material impact on the consolidated financial statements and related disclosures.

In July 2018, the FASB issued ASU 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement, which will remove, modify, and add disclosure requirements for fair value measurements to improve the overall usefulness of such disclosures. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for any removed or modified disclosure requirements. Transition is on a prospective basis for the new and modified disclosures, and on a retrospective basis for disclosures that have been eliminated. The Company currently does not intend to early adopt any portion of this disclosure guidance. The Company is currently evaluating the impact this guidance may have on the consolidated financial statements and related disclosures.


10


In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which is intended to align the requirements for capitalization of implementation costs incurred in a cloud computing arrangement that is a service contract with the existing guidance for internal-use software. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The guidance provides flexibility in adoption, allowing for either retrospective adjustment or prospective adjustment for all implementation costs incurred after the date of adoption. The Company is currently evaluating whether to early adopt this guidance as well as the impact it may have on the consolidated financial statements and related disclosures.


NOTE 2 - REVENUE

The following table presents the Company's revenue disaggregated by revenue source (in thousands):

 
Three Months Ended March 31,
 
2019
 
2018
Revenue from Contracts with Customers:
 
 
 
Transaction-based revenue
$
656,762

 
$
523,037

Subscription and services-based revenue
190,307

 
77,215

Hardware revenue
18,212

 
14,417

Bitcoin revenue
$
65,528

 
$
34,095

Revenue from other sources:
 
 
 
Subscription and services-based revenue
$
28,550

 
$
19,839


The deferred revenue balances were as follows (in thousands):

 
Three Months Ended March 31,
 
2019
 
2018
Deferred revenue, beginning of the period
$
36,451

 
$
5,893

Less: cumulative impact of the adoption of ASC 606

 
(4,303
)
Deferred revenue, beginning of the period, as adjusted
36,451

 
1,590

Deferred revenue, end of the period
42,160

 
3,353

Revenue recognized in the period from amounts included in deferred revenue at the beginning of the period
$
12,306

 
$
298

    

NOTE 3 - INVESTMENTS


11


The Company's short-term and long-term investments as of March 31, 2019 are as follows (in thousands):

 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Short-term debt securities:
 
 
 
 
 
 
 
U.S. agency securities
$
113,508

 
$
142

 
$
(15
)
 
$
113,635

Corporate bonds
84,832

 
289

 
(25
)
 
85,096

Municipal securities
20,237

 
54

 
(18
)
 
20,273

U.S. government securities
317,787

 
394

 
(71
)
 
318,110

Non-U.S. government securities
29,355

 
70

 

 
29,425

Total
$
565,719

 
$
949

 
$
(129
)
 
$
566,539

 
 
 
 
 
 
 
 
Long-term debt securities:
 
 
 
 
 
 
 
U.S. agency securities
$
85,993

 
$
299

 
$
(28
)
 
$
86,264

Corporate bonds
186,674

 
1,233

 
(11
)
 
187,896

Municipal securities
23,267

 
128

 
(2
)
 
23,393

U.S. government securities
174,515

 
541

 
(8
)
 
175,048

Non-U.S. government securities
8,417

 
45

 

 
8,462

Total
$
478,866

 
$
2,246

 
$
(49
)
 
$
481,063


The Company's short-term and long-term investments as of December 31, 2018 are as follows (in thousands):

 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Short-term debt securities:
 
 
 
 
 
 
 
U.S. agency securities
$
80,160

 
$
32

 
$
(70
)
 
$
80,122

Corporate bonds
109,807

 
80

 
(368
)
 
109,519

Municipal securities
27,839

 
52

 
(59
)
 
27,832

U.S. government securities
292,615

 
161

 
(509
)
 
292,267

Non-U.S. government securities
31,263

 
4

 
(16
)
 
31,251

Total
$
541,684

 
$
329

 
$
(1,022
)
 
$
540,991

 
 
 
 
 
 
 
 
Long-term debt securities:
 
 
 
 
 
 
 
U.S. agency securities
$
114,444

 
$
194

 
$
(78
)
 
$
114,560

Corporate bonds
159,783

 
419

 
(950
)
 
159,252

Municipal securities
28,453

 
167

 
(26
)
 
28,594

U.S. government securities
153,743

 
553

 
(172
)
 
154,124

Non-U.S. government securities
8,122

 
28

 

 
8,150

Total
$
464,545

 
$
1,361

 
$
(1,226
)
 
$
464,680


For the periods presented, gains or losses realized on the sale of investments were not material. Investments are reviewed periodically to identify possible other-than-temporary impairments. As the Company has the ability and intent to hold these investments with unrealized losses for a reasonable period of time sufficient for the recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired for any of the periods presented.


12


The amortized cost of investments classified as cash equivalents approximated the fair value due to the short term nature of the investments.

The contractual maturities of the Company's short-term and long-term investments as of March 31, 2019 are as follows (in thousands):

 
Amortized Cost
 
Fair Value
Due in one year or less
$
565,719

 
$
566,539

Due in one to five years
478,866

 
481,063

Total
$
1,044,585

 
$
1,047,602



NOTE 4 - CUSTOMER FUNDS

The following table presents the assets underlying customer funds (in thousands):

 
March 31,
2019
 
December 31,
2018
Cash
$
278,967

 
$
158,697

Cash Equivalents:
 
 
 
Money market funds
862

 
18

U.S. agency securities
14,539

 
39,991

U.S. government securities
49,125

 
35,349

Short-term debt securities:
 
 
 
U.S. agency securities
22,286

 
27,291

U.S. government securities
79,638

 
72,671

Total
$
445,417

 
$
334,017


The Company's investments within customer funds as of March 31, 2019 are as follows (in thousands):

 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Short-term debt securities:
 
 
 
 
 
 
 
U.S. agency securities
$
22,281

 
$
7

 
$
(2
)
 
$
22,286

U.S. government securities
79,607

 
33

 
(2
)
 
79,638

Total
$
101,888

 
$
40

 
$
(4
)
 
$
101,924




13


The Company's investments within customer funds as of December 31, 2018 are as follows (in thousands):

 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Short-term debt securities:
 
 
 
 
 
 
 
U.S. agency securities
27,293

 
2

 
(4
)
 
27,291

U.S. government securities
72,662

 
12

 
(3
)
 
72,671

Total
$
99,955

 
$
14

 
$
(7
)
 
$
99,962


For the periods presented, gains or losses realized on the sale of investments were not material. Investments are reviewed periodically to identify possible other-than-temporary impairments. As the Company has the ability and intent to hold these investments with unrealized losses for a reasonable period of time sufficient for the recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired for any of the periods presented.

The amortized cost of investments classified as cash equivalents approximated the fair value due to the short term nature of the investments.

The contractual maturities of the Company's investments within customer funds as of March 31, 2019 are as follows (in thousands):

 
Amortized Cost
 
Fair Value
Due in one year or less
$
101,888

 
$
101,924

Due in one to five years

 

Total
$
101,888

 
$
101,924



NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company measures its cash equivalents, customer funds, short-term and long-term marketable debt securities, and marketable equity investments at fair value. The Company classifies these investments within Level 1 or Level 2 of the fair value hierarchy because the Company values these investments using quoted market prices or alternative pricing sources and models utilizing market observable inputs.

14


The Company’s financial assets and liabilities that are measured at fair value on a recurring basis are classified as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Cash Equivalents:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
164,457

 
$

 
$

 
$
218,109

 
$

 
$

U.S. agency securities

 
19,712

 

 

 
46,423

 

Commercial paper

 
2,997

 

 

 

 

U.S. government securities
102,199

 

 

 

 

 

Municipal securities

 

 

 
86,239

 

 

Non-U.S. government securities

 

 

 

 
23,981

 

Customer funds:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
862

 

 

 
18

 

 

U.S. agency securities

 
36,825

 

 

 
67,282

 

U.S. government securities
128,763

 

 

 
108,020

 

 

Short-term debt securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities

 
113,635

 

 

 
80,122

 

Corporate bonds

 
85,096

 

 

 
109,519

 

Municipal securities

 
20,273

 

 

 
27,832

 

U.S. government securities
318,110

 

 

 
292,267

 

 

Non-U.S. government securities

 
29,425

 

 

 
31,251

 

Long-term debt securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities

 
86,264

 

 

 
114,560

 

Corporate bonds

 
187,896

 

 

 
159,252

 

Municipal securities

 
23,393

 

 

 
28,594

 

U.S. government securities
175,048

 

 

 
154,124

 

 

Non-U.S. government securities

 
8,462

 

 

 
8,150

 

Other:
 
 
 
 
 
 
 
 
 
 
 
Equity investment
31,255

 

 

 
45,342

 

 

Total
$
920,694

 
$
613,978

 
$

 
$
904,119

 
$
696,966

 
$


The carrying amounts of certain financial instruments, including settlements receivable, accounts payable, customers payable, accrued expenses and settlements payable, approximate their fair values due to their short-term nature.

The Company estimates the fair value of its convertible senior notes based on their last actively traded prices (Level 1) or market observable inputs (Level 2). The estimated fair value and carrying value of the convertible senior notes were as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
 
Carrying Value
 
Fair Value (Level 2)
 
Carrying Value
 
Fair Value (Level 2)
2023 Notes
$
725,900

 
$
1,042,987

 
$
718,522

 
$
901,468

2022 Notes
183,402

 
690,691

 
181,173

 
515,693

Total
$
909,302

 
$
1,733,678

 
$
899,695

 
$
1,417,161


15



The estimated fair value and carrying value of loans held for sale is as follows (in thousands):

 
March 31, 2019
 
December 31, 2018
 
Carrying Value
 
Fair Value (Level 3)
 
Carrying Value
 
Fair Value (Level 3)
Loans held for sale
$
123,471

 
$
128,358

 
$
89,974

 
$
93,064

Total
$
123,471

 
$
128,358

 
$
89,974

 
$
93,064


For the three months ended March 31, 2019, the Company recorded a charge for the excess of amortized cost over fair value of the loans of $6.7 million. For the three months ended March 31, 2018, the Company recorded a charge for the excess of amortized cost over fair value of the loans of $2.5 million.
If applicable, the Company will recognize transfers into and out of levels within the fair value hierarchy at the end of the reporting period in which the actual event or change in circumstance occurs. During the three months ended March 31, 2019 and 2018, the Company did not have any transfers in or out of Level 1, Level 2, or Level 3 assets or liabilities.

NOTE 6 - PROPERTY AND EQUIPMENT, NET
The following is a summary of property and equipment, less accumulated depreciation and amortization (in thousands):    

March 31,
2019

December 31,
2018
Leasehold improvements
$
105,244

 
$
107,611

Computer equipment
82,056


80,093

Capitalized software
64,233

 
58,908

Office furniture and equipment
20,713


20,699

 
272,246

 
267,311

Less: Accumulated depreciation and amortization
(138,540
)

(124,909
)
Property and equipment, net
$
133,706

 
$
142,402

Depreciation and amortization expense on property and equipment was $15.5 million for the three months ended March 31, 2019. Depreciation and amortization expense on property and equipment was $8.3 million for the three months ended March 31, 2018.

NOTE 7 - ACQUISITIONS

Weebly, Inc.
On May 31, 2018, the Company acquired 100% of the outstanding shares of Weebly, a technology company that offers customers website hosting and domain name registration solutions. The acquisition of Weebly enables the Company to combine Weebly’s web presence tools with the Company's in-person and online offerings to create a cohesive solution for sellers to start or grow an omnichannel business. The acquisition expanded the Company’s customer base globally and added a new recurring revenue stream.

The purchase consideration was comprised of $132.4 million in cash and 2,418,271 shares of the Company’s Class A common stock with an aggregate fair value of $140.1 million based on the closing price of the Company’s Class A common stock on the acquisition date. As part of the acquisition, the Company paid an aggregate of $17.7 million in cash and shares to settle outstanding vested and unvested employee options, of which $2.6 million was accounted for as post-combination compensation expense and is excluded from the purchase consideration. Third-party acquisition-related costs were insignificant. The results of Weebly's operations have been included in the consolidated financial statements since the closing date.

16


The acquisition was accounted for as a business combination. This method requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date and that the difference between the fair value of the consideration paid for the acquired entity and the fair value of the net assets acquired be recorded as goodwill, which is not amortized but is tested at least annually for impairment.
The table below summarizes the consideration paid for Weebly and the preliminary assessment of the fair value of the assets acquired and liabilities assumed at the closing date (in thousands, except share data).
Consideration:
 
Cash
$
132,432

Stock (2,418,271 shares of Class A common stock)
140,107

 
$
272,539

Recognized amounts of identifiable assets acquired and liabilities assumed:
 
Current assets (inclusive of cash acquired of $25,758)
$
46,814

Intangible customer assets
42,700

Intangible technology assets
14,900

Intangible trade name
11,300

Intangible other assets
961

Total liabilities assumed (including deferred revenue of $22,800)
(37,592
)
Total identifiable net assets acquired
79,083

Goodwill
193,456

Total
$
272,539

The Company prepared an initial determination of the fair value of the assets acquired and liabilities assumed as of the acquisition date using preliminary information. Subsequently, the Company recognized measurement period adjustments to the purchase consideration and the fair value of certain liabilities assumed as a result of further refinements in the Company’s estimates. These adjustments were prospectively applied. The effect of these adjustments on the preliminary purchase price allocation was an increase in goodwill and tax liabilities assumed of $3.9 million and $4.8 million, respectively. There was no impact to the consolidated statements of operations as result of these adjustments. The Company continues the process of completing the evaluation of contingencies and potential tax exposures related to the acquisition. Accordingly, the preliminary values reflected in the table above are subject to change.
As of March 31, 2019, $19.1 million of cash and 357,780 shares of the total consideration were withheld as security for indemnification obligations related to general representations and warranties, in addition to certain potential tax exposures.
Goodwill from the Weebly acquisition is primarily attributable to the value of expected synergies created by incorporating Weebly solutions into the Company's technology platform and the value of the assembled workforce. None of the goodwill generated from the Weebly acquisition or the acquired intangible assets are expected to be deductible for tax purposes. Additionally the acquisition would have resulted in recognition of deferred tax assets arising mainly from the net of deferred tax assets from acquired net operating losses (NOLs) and research and development credits, and deferred tax liabilities associated with intangible assets and deferred revenue. However, the realization of such deferred tax assets depends primarily on the Company's post-acquisition ability to generate taxable income in future periods. Accordingly, a valuation allowance was recorded against the net acquired deferred tax asset in accounting for the acquisition.

The acquisition of Weebly did not have a material impact on the Company's reported revenue or net loss amounts for any period presented. Accordingly, pro forma financial information has not been presented.

NOTE 8 - GOODWILL

Goodwill is recorded when the consideration paid for an acquisition of a business exceeds the fair value of identifiable net tangible and intangible assets acquired.


17


The change in carrying value of goodwill in the period was as follows (in thousands):
Balance at December 31, 2018
$
261,705

Acquisitions
7,437

Other adjustments
(2,130
)
Balance at March 31, 2019
$
267,012


The Company performs a goodwill impairment test annually on December 31 and more frequently if events and circumstances indicate that the asset might be impaired. For the periods presented, the Company had recorded no impairment charges.

NOTE 9 - ACQUIRED INTANGIBLE ASSETS    

During the three months ended March 31, 2019, the Company did not make any material acquisitions.
    
The following table presents the detail of acquired intangible assets as of the periods presented (in thousands):
 
Balance at March 31, 2019
Cost
 
Accumulated Amortization
 
Net
Technology assets
49,007

 
(29,796
)
 
19,211

Customer assets
57,109

 
(9,361
)
 
47,748

Trade name
11,300

 
(2,354
)
 
8,946

Other
5,299

 
(1,507
)
 
3,792

Total
$
122,715

 
$
(43,018
)
 
$
79,697


 
Balance at December 31, 2018
Cost
 
Accumulated Amortization
 
Net
Technology assets
45,978

 
(28,420
)
 
17,558

Customer assets
57,109

 
(8,068
)
 
49,041

Trade name
11,300

 
(1,648
)
 
9,652

Other
2,246

 
(1,395
)
 
851

Total
$
116,633

 
$
(39,531
)
 
$
77,102


All intangible assets are amortized over their estimated useful lives. The weighted average amortization periods for acquired technology, customer intangible assets, and acquired trade name are approximately 5 years, 11 years and 4 years, respectively.


18


The changes to the carrying value of intangible assets were as follows (in thousands):

 
Three Months Ended March 31,
 
2019
 
2018
Acquired intangible assets, net, beginning of the period
$
77,102

 
$
14,334

Acquisitions
6,082

 
1,679

Amortization expense
3,487

 
1,875

Acquired intangible assets, net, end of the period
$
79,697

 
$
14,138


The total estimated future amortization expense of these intangible assets as of March 31, 2019 is as follows (in thousands):
2019 (remaining 9 months)
$
11,185

2020
12,611

2021
11,413

2022
9,484

2023
7,953

Thereafter
27,051

Total
$
79,697


NOTE 10 - OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (CURRENT)
Other Current Assets
The following table presents the detail of other current assets (in thousands):
    
 
March 31,
2019
 
December 31,
2018
Inventory, net
$
26,679

 
$
28,627

Processing costs receivable
59,470

 
46,102

Prepaid expenses
23,526

 
21,782

Accounts receivable, net
28,665

 
22,393

Other
46,781

 
46,062

Total
$
185,121

 
$
164,966





19


Accrued Expenses
The following table presents the detail of accrued expenses (in thousands):    
 
March 31,
2019
 
December 31,
2018
Accrued facilities expenses
$
5,853

 
$
13,040

Accrued payroll
18,282

 
9,612

Accrued professional fees
6,173

 
5,232

Accrued advertising and other marketing
15,940

 
12,201

Processing costs payable
13,190

 
12,683

Accrued non income tax liabilities
6,568

 
9,503

Accrued hardware costs
5,413

 
5,125

Other accrued liabilities
16,393

 
14,958

Total
$
87,812

 
$
82,354


Other Current Liabilities
The following table presents the detail of other current liabilities (in thousands):    
    
 
March 31,
2019
 
December 31,
2018
Accounts payable
$
24,635

 
$
36,416

Deferred revenue, current
36,343

 
31,474

Square Capital payable (i)
18,459

 
6,092

Square Payroll payable (ii)
12,338

 
7,534

Other
16,869

 
17,637

Total
$
108,644

 
$
99,153


(i) Square Capital payable represents unpaid amounts arising from the purchase of loans or loan repayments collected on behalf of third parties.

(ii) Square Payroll payable represents amounts received from Square Payroll product customers that will be utilized to settle the customers' employee payroll and related obligations.

NOTE 11 - OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (NON-CURRENT)

Other Non-Current Assets

The following table presents the detail of other non-current assets (in thousands):

 
March 31,
2019
 
December 31,
2018
Equity investment (i)
$
31,255

 
$
45,342

Other
16,947

 
13,051

Total
$
48,202

 
$
58,393


(i) This balance represents the Company's investment in Class B common shares of Eventbrite, Inc. (Eventbrite). The investment is carried at fair value with changes in fair value being recorded on the consolidated statement of operations. During

20


the three months ended March 31, 2019, the Company recorded a loss of $14.1 million to other expense (income), net on the consolidated statements of operations arising from revaluation of this investment.
    

Other Non-Current Liabilities
The following table presents the detail of other non-current liabilities (in thousands):
 
March 31,
2019
 
December 31,
2018
Statutory liabilities (ii)
$
57,839

 
$
54,748

Deferred rent, non-current (iii)

 
23,003

Deferred revenue, non-current
5,817

 
4,977

Other
11,929

 
10,558

Total
$
75,585

 
$
93,286


(ii) Statutory liabilities represent loss contingencies that may arise from the Company's interpretation and application of certain guidelines and rules issued by various federal, state, local, and foreign regulatory authorities.

(iii) The adoption of ASC 842 on January 1, 2019, resulted in the reclassification of deferred rent as an offset to right-of-use lease assets.

NOTE 12 - INDEBTEDNESS

Revolving Credit Facility

In November 2015, the Company entered into a revolving credit agreement with certain lenders, which extinguished the prior revolving credit agreement and provided for a $375.0 million revolving secured credit facility maturing in November 2020. This revolving credit agreement is secured by certain tangible and intangible assets.

Loans under the credit facility bear interest at the Company’s option of (i) a base rate based on the highest of the prime rate, the federal funds rate plus 0.50%, and an adjusted LIBOR rate for a one-month interest period, in each case plus a margin ranging from 0.00% to 1.00%, or (ii) an adjusted LIBOR rate plus a margin ranging from 1.00% to 2.00%. This margin is determined based on the Company’s total leverage ratio for the preceding four fiscal quarters. The Company is obligated to pay other customary fees for a credit facility of this size and type including an annual administrative agent fee of $0.1 million and an unused commitment fee of 0.15%. To date no funds have been drawn under the credit facility, with $375.0 million remaining available. The Company paid $0.1 million and $0.1 million in unused commitment fees during both the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, the Company was in compliance with all financial covenants associated with this credit facility.


21


Convertible Senior Notes due in 2023

On May 25, 2018, the Company issued an aggregate principal amount of $862.5 million of convertible senior notes (2023 Notes). The 2023 Notes mature on May 15, 2023, unless earlier converted or repurchased, and bear interest at a rate of 0.50% payable semi-annually on May 15 and November 15 of each year. The 2023 Notes are convertible at an initial conversion rate of 12.8456 shares of the Company's Class A common stock per $1,000 principal amount of 2023 Notes, which is equivalent to an initial conversion price of approximately $77.85 per share of Class A common stock. Holders may convert their 2023 Notes at any time prior to the close of business on the business day immediately preceding February 15, 2023 only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2018 (and only during such calendar quarter), if the last reported sale price of the Company’s Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the measurement period) in which the trading price (as defined in the indenture governing the 2023 Notes) per $1,000 principal amount of 2023 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s Class A common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events, including certain distributions, the occurrence of a fundamental change (as defined in the indenture governing the 2023 Notes) or a transaction resulting in the Company’s Class A common stock converting into other securities or property or assets. On or after February 15, 2023, up until the close of business on the second scheduled trading day immediately preceding the maturity date, a holder may convert all or any portion of its 2023 Notes regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of its Class A common stock, or a combination of cash and shares of its Class A common stock, at the Company’s election. The Company's current policy is to settle conversions entirely in shares of the Company's Class A common stock. The Company will reevaluate this policy from time to time as conversion notices are received from holders of the 2023 Notes. The circumstances required to allow the holders to convert their 2023 Notes were not met during the three months ended March 31, 2019.

In accounting for the issuance of the 2023 Notes, the Company separated the 2023 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was $155.3 million and was determined by deducting the fair value of the liability component from the par value of the 2023 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount ("debt discount") is amortized to interest expense over the term of the 2023 Notes at an effective interest rate of 4.69% over the contractual terms of the 2023 Notes.

Debt issuance costs related to the 2023 Notes comprised of discounts and commissions payable to the initial purchasers of $6.0 million and third party offering costs of $0.8 million. The Company allocated the total amount incurred to the liability and equity components of the 2023 Notes based on their relative values. Issuance costs attributable to the liability component were $5.6 million and will be amortized to interest expense using the effective interest method over the contractual term. Issuance costs attributable to the equity component were netted with the equity component in stockholders’ equity.

22



Convertible Senior Notes due in 2022

On March 6, 2017, the Company issued an aggregate principal amount of $440.0 million of convertible senior notes (2022 Notes). The 2022 Notes mature on March 1, 2022, unless earlier converted or repurchased, and bear interest at a rate of 0.375% payable semi-annually on March 1 and September 1 of each year. The 2022 Notes are convertible at an initial conversion rate of 43.5749 shares of the Company's Class A common stock per $1,000 principal amount of 2022 Notes, which is equivalent to an initial conversion price of approximately $22.95 per share of Class A common stock. Holders may convert their 2022 Notes at any time prior to the close of business on the business day immediately preceding December 1, 2021 only under the following circumstances: (1) during any calendar quarter (and only during such calendar quarter), if the last reported sale price of the Company’s Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the measurement period) in which the trading price (as defined in the indenture governing the 2022 Notes) per $1,000 principal amount of 2022 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s Class A common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events, including certain distributions, the occurrence of a fundamental change (as defined in the indenture governing the 2022 Notes) or a transaction resulting in the Company’s Class A common stock converting into other securities or property or assets. On or after December 1, 2021, up until the close of business on the second scheduled trading day immediately preceding the maturity date, a holder may convert all or any portion of its 2022 Notes regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of its Class A common stock, or a combination of cash and shares of its Class A common stock, at the Company’s election. The circumstances required to allow the holders to convert their 2022 Notes were met starting January 1, 2018 and continued to be met through March 31, 2019. In 2018, certain holders of the 2022 Notes converted an aggregate principal amount of $228.3 million of their Notes. The Company settled the conversions through a combination of $219.4 million in cash and issuance of 7.3 million shares of the Company's Class A common stock. Conversions in the three months ended March 31, 2019 were not material. The Company currently expects to settle future conversions entirely in shares of the Company's Class A common stock. The Company will reevaluate this policy from time to time as conversion notices are received from holders of the 2022 Notes.

In accounting for the issuance of the 2022 Notes, the Company separated the 2022 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was $86.2 million and was determined by deducting the fair value of the liability component from the par value of the 2022 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The debt discount is amortized to interest expense over the term of the 2022 Notes at an effective interest rate of 5.34% over the contractual terms of the 2022 Notes.

Debt issuance costs related to the 2022 Notes comprised of discounts and commissions payable to the initial purchasers of $11.0 million and third party offering costs of $0.8 million. The Company allocated the total amount incurred to the liability and equity components of the 2022 Notes based on their relative values. Issuance costs attributable to the liability component were $9.4 million and will be amortized to interest expense using the effective interest method over the contractual term.  Issuance costs attributable to the equity component were netted with the equity component in stockholders’ equity.

The debt component associated with the 2022 Notes that were converted as of December 31, 2018, was accounted for as an extinguishment of debt, with the Company recording loss on extinguishment of $5.0 million, as the difference between the estimated fair value and the carrying value of such 2022 Notes. The equity component associated with the 2022 Notes that were converted was accounted for as a reacquisition of equity upon the conversion of such 2022 Notes. Accordingly, the excess of the fair value of the consideration issued to settle the conversion over the fair value of the debt component of $21.0 million was accounted for as a reduction to the additional paid in capital.


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The net carrying amount of the Notes were as follows (in thousands):

 
Principal outstanding
 
Unamortized debt discount
 
Unamortized debt issuance costs
 
Net carrying value
March 31, 2019
 
 
 
 
 
 
 
2023 Notes
$
862,500

 
$
(131,767
)
 
$
(4,833
)
 
$
725,900

2022 Notes
211,728

 
(25,563
)
 
(2,763
)
 
183,402

Total
$
1,074,228

 
$
(157,330
)
 
$
(7,596
)
 
$
909,302

 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
2023 Notes
$
862,500

 
$
(138,924
)
 
$
(5,054
)
 
$
718,522

2022 Notes
211,728

 
(27,569
)
 
(2,986
)
 
181,173

 
$
1,074,228

 
$
(166,493
)
 
$
(8,040
)
 
$
899,695



The net carrying amount of the equity component of the 2023 Notes and 2022 Notes were as follows (in thousands):

 
Amount allocated to conversion option
 
Less: allocated issuance costs
 
Equity component, net
March 31, 2019 and December 31, 2018
 
 
 
 
 
2023 Notes
$
155,250

 
$
(1,231
)
 
$
154,019

2022 Notes
41,481

 
(1,108
)
 
40,373

Total
196,731

 
(2,339
)
 
194,392



The Company recognized interest expense on the Notes as follows (in thousands, except for percentages):

 
Three Months Ended March 31,
 
2019
 
2018
Contractual interest expense
$
1,277

 
$
413

Amortization of debt discount and issuance costs
9,608

 
4,393

Total
$
10,885

 
$
4,806


The effective interest rate of the liability component is 4.69% and 5.34% for the 2023 Notes and 2022 Notes, respectively.

Convertible Note Hedge and Warrant Transactions

In connection with the offering of the 2023 Notes, the Company entered into convertible note hedge transactions (2023 convertible note hedges) with certain financial institution counterparties (2018 Counterparties) whereby the Company has the option to purchase a total of approximately 11.1 million shares of its Class A common stock at a price of approximately $77.85 per share. The total cost of the 2023 convertible note hedge transactions was $172.6 million. In addition, the Company sold warrants (2023 warrants) to the 2018 Counterparties whereby the 2018 Counterparties have the option to purchase a total of 11.1 million shares of the Company’s Class A common stock at a price of approximately $109.26 per share. The Company received $112.1 million in cash proceeds from the sale of the 2023 warrants. Taken together, the purchase of the 2023 convertible note hedges and sale of the 2023 warrants are intended to reduce dilution from the conversion of the 2023 Notes and/or offset

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any cash payments the Company is required to make in excess of the principal amount of the converted 2023 Notes, as the case may be, and to effectively increase the overall conversion price from approximately $77.85 per share to approximately $109.26 per share. As these instruments are considered indexed to the Company's own stock and are considered equity classified, the 2023 convertible note hedges and 2023 warrants are recorded in stockholders’ equity, are not accounted for as derivatives and are not remeasured each reporting period. The net costs incurred in connection with the 2023 convertible note hedge and 2023 warrant transactions were recorded as a reduction to additional paid-in capital on the condensed consolidated balance sheets.

In connection with the offering of the 2022 Notes, the Company entered into convertible note hedge transactions (2022 convertible note hedges) with certain financial institution counterparties (2017 Counterparties) whereby the Company has the option to purchase a total of approximately 19.2 million shares of its Class A common stock at a price of approximately $22.95 per share. The total cost of the 2022 convertible note hedge transactions was $92.1 million. In addition, the Company sold warrants (2022 warrants) to the 2017 Counterparties whereby the 2017 Counterparties have the option to purchase a total of 19.2 million shares of the Company’s Class A common stock at a price of approximately $31.18 per share. The Company received $57.2 million in cash proceeds from the sale of the 2022 warrants. Taken together, the purchase of the 2022 convertible note hedges and sale of the 2022 warrants are intended to reduce dilution from the conversion of the 2022 Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of the converted 2022 Notes, as the case may be, and to effectively increase the overall conversion price from approximately $22.95 per share to approximately $31.18 per share. As these instruments are considered indexed to the Company's own stock and are considered equity classified, the 2022 convertible note hedges and 2022 warrants are recorded in stockholders’ equity, are not accounted for as derivatives and are not remeasured each reporting period. The net costs incurred in connection with the 2022 convertible note hedge and 2022 warrant transactions were recorded as a reduction to additional paid-in capital on the condensed consolidated balance sheets. In 2018, the Company exercised a pro-rata portion of the 2022 convertible note hedges to offset the shares of the Company's Class A common stock issued to settle the conversion of the 2022 Notes discussed above. The 2022 convertible note hedges were net share settled, and the Company received 6.9 million shares of the Company's Class A common stock from the 2017 Counterparties in 2018. During the three months ended March 31, 2019, the Company received an additional 0.3 million shares of the Company's Class A common stock.

NOTE 13 - ACCRUED TRANSACTION LOSSES
The Company is exposed to transaction losses due to chargebacks as a result of fraud or uncollectibility.
The following table summarizes the activities of the Company’s reserve for transaction losses (in thousands):
    
 
Three Months Ended March 31,
 
2019
 
2018
Accrued transaction losses, beginning of the period
$
33,682

 
$
26,893

Provision for transaction losses
19,808

 
14,258

Charge-offs to accrued transaction losses
(17,443
)
 
(12,842
)
Accrued transaction losses, end of the period
$
36,047

 
$
28,309


NOTE 14 - INCOME TAXES
The Company recorded an income tax expense of $0.1 million for the three months ended March 31, 2019, compared to income tax expense of $0.2 million for the three months ended March 31, 2018. The income tax expense recorded for the three months ended March 31, 2019 was primarily due to state and foreign income tax expense as well as a change in the valuation allowance on the Company's deferred tax assets.

The Company’s effective tax rate was (0.3)% for the three months ended March 31, 2019, compared to an effective tax rate of (0.7)% for the three months ended March 31, 2018. The difference between the effective tax rate and the federal statutory tax rate for the three months ended March 31, 2019 and March 31, 2018 primarily relates to fluctuations in the Company's pre-tax book income.


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The Company’s effective tax rate may be subject to fluctuation during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of forecasted pre-tax earnings in the various jurisdictions in which the Company operates, valuation allowances against deferred tax assets, the recognition and de-recognition of tax benefits related to uncertain tax positions, and changes in or the interpretation of tax laws in jurisdictions where the Company conducts business.

As of March 31, 2019, the Company retains a full valuation allowance on its deferred tax assets in the U.S. and certain foreign jurisdictions. The realization of the Company’s deferred tax assets depends primarily on its ability to generate taxable income in future periods. The amount of deferred tax assets considered realizable in future periods may change as management continues to reassess the underlying factors it uses in estimating future taxable income.
The tax provision for the three months ended March 31, 2019 and March 31, 2018, was calculated on a jurisdictional basis. The Company estimated the foreign income tax provision using the effective income tax rate expected to be applicable for the full year.


NOTE 15 - STOCKHOLDERS’ EQUITY
Common Stock

The Company has authorized the issuance of Class A common stock and Class B common stock. Class A common stock and Class B common stock are referred to as "common stock" throughout these Notes to the Condensed Consolidated Financial Statements, unless otherwise noted. As of March 31, 2019, the Company was authorized to issue 1,000,000,000 shares of Class A common stock and 500,000,000 shares of Class B common stock, each with a par value of $0.0000001 per share. As of March 31, 2019, there were 334,650,231 shares of Class A common stock and 86,973,715 shares of Class B common stock outstanding. Options and awards granted following the Company's initial public offering are related to underlying Class A common stock. Additionally, holders of Class B common stock are able to convert such shares into Class A common stock.

Warrants

In conjunction with the 2023 Notes offering, the Company sold the 2023 warrants whereby the 2018 Counterparties have the option to purchase a total of approximately 11.1 million shares of the Company’s Class A common stock at a price of $109.26 per share. The Company received $112.1 million in cash proceeds from the sale of the 2023 warrants. See Note 12, Indebtedness, for more details on this transaction.

In conjunction with the 2022 Notes offering, the Company sold warrants whereby the 2017 Counterparties have the option to purchase a total of approximately 19.2 million shares of the Company’s Class A common stock at a price of $31.18 per share. None of the warrants associated with the 2022 and 2023 Notes offering were exercised as of March 31, 2019.


Stock Plans

The Company maintains two share-based employee compensation plans: the 2009 Stock Plan (2009 Plan) and the 2015 Equity Incentive Plan (2015 Plan). The 2015 Plan serves as the successor to the 2009 Plan. The 2015 Plan became effective as of November 17, 2015. Outstanding awards under the 2009 Plan continue to be subject to the terms and conditions of the 2009 Plan. Since November 17, 2015, no additional awards have been nor will be in the future granted under the 2009 Plan.


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Under the 2015 Plan, shares of the Company's Class A common stock are reserved for the issuance of incentive and nonstatutory stock options, restricted stock awards (RSAs), restricted stock units (RSUs), performance shares, and stock bonuses to qualified employees, directors, and consultants. The awards must be granted at a price per share not less than the fair market value at the date of grant. Initially, 30,000,000 shares were reserved under the 2015 Plan, and any shares subject to options or other similar awards granted under the 2009 Plan that expire, are forfeited, are repurchased by the Company, or otherwise terminate unexercised, will become available under the 2015 Plan. The number of shares available for issuance under the 2015 Plan will be increased on the first day of each fiscal year, in an amount equal to the least of (i) 40,000,000 shares, (ii) 5% of the outstanding shares on the last day of the immediately preceding fiscal year, or (iii) such number of shares determined by the Company’s board of directors or a committee thereof. As of March 31, 2019, the total number of shares subject to stock options, RSAs and RSUs outstanding under the 2015 Plan was 20,822,979, and 86,449,187 shares were available for future issuance. As of March 31, 2019, the total number of shares subject to stock options, RSAs and RSUs outstanding under the 2009 Plan was 24,792,142.

A summary of stock option activity for the three months ended March 31, 2019 is as follows (in thousands, except share and per share data):
 
Number of Stock Options Outstanding
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
(in years)
 
Aggregate
Intrinsic
Value
Balance at December 31, 2018
33,152,881

 
$
9.52

 
5.45
 
$
1,543,793

Granted
97,701

 
73.94

 
 
 
 
Exercised
(3,588,052
)
 
7.06

 
 
 
 
Forfeited
(95,141
)
 
11.78

 
 
 
 
Balance at March 31, 2019
29,567,389

 
$
10.03

 
5.41
 
$
1,918,661

Options exercisable as of
 
 
 
 
 
 
 
March 31, 2019
27,693,334

 
$
8.88

 
5.23
 
$
1,828,856


Restricted Stock Activity
Activity related to RSAs and RSUs during the three months ended March 31, 2019 is set forth below:
 
Number of
shares
 
Weighted
Average Grant
Date Fair Value
Unvested as of December 31, 2018
17,934,728

 
$
31.34

Granted
552,596

 
69.20

Vested
(1,880,545
)
 
24.12

Forfeited
(559,047
)
 
29.35

Unvested as of March 31, 2019
16,047,732

 
$
33.56


Share-Based Compensation
The fair value of stock options and employee stock purchase plan rights are estimated on the date of grant using the Black-Scholes-Merton option valuation model. The fair value of RSAs and RSUs is determined by the closing price of the Company’s common stock on each grant date. 

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The fair value of stock options granted was estimated using the following weighted-average assumptions:
    
 
Three Months Ended March 31,
 
2019
Dividend yield
%
Risk-free interest rate
2.59
%
Expected volatility
38.55
%
Expected term (years)
6.08


There were no stock options granted during the three months ended March 31, 2018.

The following table summarizes the effects of share-based compensation on the Company's condensed consolidated statements of operations (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Cost of revenue
$
21

 
$
31

Product development
42,649

 
30,482

Sales and marketing
6,202

 
4,961

General and administrative
12,216

 
11,350

Total
$
61,088

 
$
46,824

    
The Company recorded $4.3 million of share-based compensation expense related to the Company's 2015 Employee Stock Purchase Plan during the three months ended March 31, 2019, compared to $2.3 million for the three months ended March 31, 2018, which are included in the table above.

The Company capitalized $1.7 million of share-based compensation expense related to capitalized software costs during the three months ended March 31, 2019, compared to $1.5 million for the three months ended March 31, 2018.
As of March 31, 2019, there was $527.0 million of total unrecognized compensation cost related to outstanding awards that are expected to be recognized over a weighted-average period of 2.7 years.

NOTE 16 - NET LOSS PER SHARE
Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is the same as basic net loss per share because the effects of potentially dilutive items were anti-dilutive given the Company’s net loss.

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The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):
 
Three Months Ended March 31,
2019
 
2018
Net loss
$
(38,151
)
 
$
(23,986
)
Basic shares:
 
 
 
Weighted-average common shares outstanding
419,860

 
397,246
Weighted-average unvested shares
(571
)
 
(1,298
)
Weighted-average shares used to compute basic net loss per share
419,289

 
395,948

Diluted shares:
 
 
 
Weighted-average shares used to compute diluted net loss per share
419,289

 
395,948

Net loss per share:
 
 
 
Basic
$
(0.09
)
 
$
(0.06
)
Diluted
$
(0.09
)
 
$
(0.06
)

Additionally, since the Company intends to settle future conversions of its outstanding 2022 Notes and 2023 Notes entirely in shares of its Class A common stock, the Company will consider the number of shares expected to be issued in calculating any potential dilutive effect of the conversions, if applicable. In the periods that the Company has reported a net loss the diluted loss per share is the same as basic loss per share for those periods.

The following potential common shares were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented (in thousands):

 
Three Months Ended March 31,
 
2019
 
2018
Stock options and restricted stock units
47,833

 
66,382

Common stock warrants
30,252

 
19,173

Convertible senior notes
20,305

 

Unvested shares
571

 
1,298

Employee stock purchase plan
212

 
264

Total anti-dilutive securities
99,173

 
87,117



NOTE 17 - COMMITMENTS AND CONTINGENCIES
Operating and Finance Leases

The Company’s operating leases are primarily comprised of office facilities, with the most significant leases relating to corporate headquarters in San Francisco and an office in New York. The Company's leases have remaining lease terms of 1 year to 12 years, some of which include options to extend for 5 year terms, or include options to terminate the leases within 1 year. None of the options to extend the leases have been included in the measurement of the right of use asset or the associated lease liability. The Company elects to apply the short-term lease measurement and recognition exemption to its leases where applicable. In December 2018, the Company entered into a lease arrangement for 355,762 square feet of office space in Oakland, California for a term of 12 years with options to extend the lease term for two five year terms. The lease commencement date is expected to be in November 2019 with total lease payments over the term of approximately $276 million. Under the terms of this lease, the Company is required to make certain payments during the construction stage of the office space, which the Company will record as a prepaid lease asset. Additionally, the Company has finance leases for data center equipment, with remaining lease terms of approximately 2 years.
    

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The components of lease expense were as follows (in thousands):

 
Three Months Ended March 31,
 
2019
Operating lease costs
$
6,690

 
 
Finance lease costs
 
Amortization of right-of-use assets
1,293

Interest on lease liabilities

Total finance lease costs
$
1,293


For the periods presented, costs associated with short-term leases were not material.

Other information related to leases was as follows:
 
Three Months Ended March 31,
 
2019
Weighted Average Remaining Lease Term:
 
Operating leases
4.80 years

Finance leases
1.75 years

Weighted Average Discount Rate:
 
Operating leases
4
%
Finance leases
%

Future minimum lease payments under non-cancelable operating leases (with initial lease terms in excess of one year) and future minimum finance lease payments as of March 31, 2019 are as follows (in thousands):

 
Finance
 
Operating
Year:
 
 
 
2019 (remaining 9 months)
$
3,745

 
$
20,112

2020
2,446

 
39,182

2021

 
53,426

2022

 
54,229

2023

 
47,952

Thereafter

 
211,056

Total
$
6,191

 
$
425,957

Less amount representing interest

 
14,323

Less leases executed but not yet commenced

 
276,037

Total
$
6,191

 
$
135,597



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The current portion of the finance lease liability is included within other current liabilities while the non-current portion is included within other non-current liabilities on the condensed consolidated balance sheets. The associated finance lease assets are included in property and equipment, net on the condensed consolidated balance sheets.
 
Litigation
The Company is currently a party to, and may in the future be involved in, various litigation matters (including intellectual property litigation), legal claims, and government investigations.

The Treasurer & Tax Collector of the City and County of San Francisco (Tax Collector) has issued a decision for fiscal years 2014 and 2015, that the Tax Collector believes the Company’s primary business activity is financial services rather than information services, and accordingly, the Company would be liable for the Gross Receipts Tax and Payroll Expense Tax under the rules for financial services business activities. The Company paid the liability for fiscal years 2014 and 2015 in the first quarter of 2018, as assessed by the Tax Collector. The Company believes its position has merit and intends to vigorously defend its position, including possibly through litigation. Should the Company not prevail, the Company could be obligated to pay additional taxes together with any associated penalties and interest for subsequent years that together, in aggregate, could be material. The Company is currently unable to estimate the range of possible loss given the uncertainties associated with this matter, including uncertainties about the Tax Collector’s rationale for its position and about the amounts that may ultimately be subject to such taxes.