SQUARE, INC., 10-Q filed on 5/2/2018
Quarterly Report
v3.8.0.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2018
Apr. 30, 2018
Document and Entity Information [Abstract]    
Entity Registrant Name Square, Inc.  
Entity Central Index Key 0001512673  
Current Fiscal Year End Date --12-31  
Entity Filer Category Large Accelerated Filer  
Document Type 10-Q  
Document Period End Date Mar. 31, 2018  
Document Fiscal Year Focus 2018  
Document Fiscal Period Focus Q1  
Amendment Flag false  
Class A    
Class of Stock [Line Items]    
Entity Common Stock, Shares Outstanding   289,951,143
Class B    
Class of Stock [Line Items]    
Entity Common Stock, Shares Outstanding   110,743,787
v3.8.0.1
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) - USD ($)
$ in Thousands
Mar. 31, 2018
Dec. 31, 2017
Current assets:    
Cash and cash equivalents $ 738,586 $ 696,474
Short-term investments 200,048 169,576
Restricted cash 27,688 28,805
Settlements receivable 700,646 620,523
Customer funds 152,661 103,042
Loans held for sale 78,821 73,420
Other current assets 91,933 86,454
Total current assets 1,990,383 1,778,294
Property and equipment, net 98,170 91,496
Goodwill 58,327 58,327
Acquired intangible assets, net 14,138 14,334
Long-term investments 176,672 203,667
Restricted cash 9,802 9,802
Other non-current assets 32,120 31,350
Total assets 2,379,612 2,187,270
Current liabilities:    
Accounts payable 19,556 16,763
Customers payable 881,754 733,736
Settlements payable 116,902 114,788
Accrued transaction losses 28,309 26,893
Accrued expenses 57,997 52,280
Other current liabilities 27,214 28,367
Total current liabilities 1,131,732 972,827
Long-term debt (Note 11) 362,965 358,572
Other non-current liabilities 74,935 69,538
Total liabilities 1,569,632 1,400,937
Commitments and contingencies (Note 16)
Stockholders’ equity:    
Preferred stock, $0.0000001 par value: 100,000,000 shares authorized at March 31, 2018 and December 31, 2017. None issued and outstanding at March 31, 2018 and December 31, 2017. 0 0
Additional paid-in capital 1,682,581 1,630,386
Accumulated other comprehensive loss (1,294) (1,318)
Accumulated deficit (871,307) (842,735)
Total stockholders’ equity 809,980 786,333
Total liabilities and stockholders’ equity 2,379,612 2,187,270
Class A    
Stockholders’ equity:    
Common stock 0 0
Class B    
Stockholders’ equity:    
Common stock $ 0 $ 0
v3.8.0.1
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) - $ / shares
Mar. 31, 2018
Dec. 31, 2017
Class of Stock [Line Items]    
Preferred stock, par value (in USD per share) $ 0.0000001 $ 0.0000001
Preferred stock, shares authorized (in shares) 100,000,000 100,000,000
Preferred stock, shares issued (in shares) 0 0
Preferred stock, shares outstanding (in shares) 0 0
Class A    
Class of Stock [Line Items]    
Common stock, par value (in USD per share) $ 0.0000001 $ 0.0000001
Common stock, shares authorized (in shares) 1,000,000,000 1,000,000,000
Common stock, shares issued (in shares) 287,921,742 280,400,813
Common stock, shares outstanding (in shares) 287,921,742 280,400,813
Class B    
Class of Stock [Line Items]    
Common stock, par value (in USD per share) $ 0.0000001 $ 0.0000001
Common stock, shares authorized (in shares) 500,000,000 500,000,000
Common stock, shares issued (in shares) 112,462,337 114,793,262
Common stock, shares outstanding (in shares) 112,462,337 114,793,262
v3.8.0.1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Revenue:    
Hardware revenue $ 14,417 $ 9,016
Bitcoin revenue 34,095 0
Total net revenue 668,603 461,554
Cost of revenue:    
Hardware costs 19,702 12,662
Bitcoin costs 33,872 0
Amortization of acquired technology 1,580 1,807
Total cost of revenue 413,433 288,123
Gross profit 255,170 173,431
Operating expenses:    
Product development 105,095 68,582
Sales and marketing 77,266 49,900
General and administrative 75,501 56,935
Transaction, loan and advance losses 18,031 11,891
Amortization of acquired customer assets 269 205
Total operating expenses 276,162 187,513
Operating loss (20,992) (14,082)
Interest and other expense, net 2,819 499
Loss before income tax (23,811) (14,581)
Provision for income taxes 175 509
Net loss $ (23,986) $ (15,090)
Net loss per share:    
Basic (in USD per share) $ (0.06) $ (0.04)
Diluted (in USD per share) $ (0.06) $ (0.04)
Weighted-average shares used to compute net loss per share    
Basic (in shares) 395,948 366,737
Diluted (in shares) 395,948 366,737
Transaction-based revenue    
Revenue:    
Transaction and services-based revenue $ 523,037 $ 403,478
Cost of revenue:    
Transaction and services-based costs 327,911 257,778
Subscription and services-based revenue    
Revenue:    
Transaction and services-based revenue 97,054 49,060
Cost of revenue:    
Transaction and services-based costs $ 30,368 $ 15,876
v3.8.0.1
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Statement of Comprehensive Income [Abstract]    
Net loss $ (23,986) $ (15,090)
Net foreign currency translation adjustments 549 757
Net unrealized gain (loss) on revaluation of intercompany loans 665 (29)
Net unrealized gain (loss) on marketable securities (1,190) 19
Total comprehensive loss $ (23,962) $ (14,343)
v3.8.0.1
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Cash flows from operating activities:    
Net loss $ (23,986) $ (15,090)
Adjustments to reconcile net loss to net cash provided by operating activities:    
Depreciation and amortization 10,160 9,437
Non-cash interest and other expense 4,847 1,534
Share-based compensation 46,824 31,670
Transaction, loan and advance losses 18,031 11,891
Deferred provision (benefit) for income taxes (654) 99
Changes in operating assets and liabilities:    
Settlements receivable (81,452) 54,586
Customer funds (49,619) (13,953)
Purchase of loans held for sale (344,976) (252,170)
Sales and principal payments of loans held for sale 337,092 242,431
Other current assets (13,444) 6,105
Other non-current assets (1,256) 141
Accounts payable 1,990 (1,459)
Customers payable 147,977 (11,132)
Settlements payable 2,114 (15,378)
Charge-offs to accrued transaction losses (12,842) (11,178)
Accrued expenses 2,703 3,930
Other current liabilities 3,165 (368)
Other non-current liabilities 5,379 2,902
Net cash provided by operating activities 52,053 43,998
Cash flows from investing activities:    
Purchase of marketable securities (50,221) (181,851)
Proceeds from maturities of marketable securities 45,450 15,569
Proceeds from sale of marketable securities 0 3,996
Purchase of property and equipment (8,083) (6,508)
Purchase of intangible assets (1,584) 0
Business acquisitions (1,055) (1,600)
Net cash used in investing activities (15,493) (170,394)
Cash flows from financing activities:    
Proceeds from issuance of convertible senior notes, net 0 428,250
Purchase of convertible senior note hedges 0 (92,136)
Proceeds from issuance of warrants 0 57,244
Payment for termination of Starbucks warrant 0 (54,808)
Principal payments on capital lease obligation (665) (247)
Proceeds from the exercise of stock options, net 31,354 39,280
Payments for tax withholding related to vesting of restricted stock units (27,651) 0
Net cash provided by financing activities 3,038 377,583
Effect of foreign exchange rate on cash and cash equivalents 1,397 1,058
Net increase in cash, cash equivalents and restricted cash 40,995 252,245
Cash, cash equivalents and restricted cash, beginning of period 735,081 488,745
Cash, cash equivalents and restricted cash, end of period $ 776,076 $ 740,990
v3.8.0.1
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
3 Months Ended
Mar. 31, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, next-day settlement, and chargeback protection. Square’s point-of-sale software and other business services help sellers manage inventory, locations, and employees; access financing; engage customers; and grow sales. Cash App is an easy way for businesses and individuals to send and receive money, store their funds as well as use their funds via a Visa debit card, and recently started offering customers the ability to purchase bitcoin (a 'cryptocurrency' or 'digital currency'). Caviar is a food ordering service for pickup and delivery that helps restaurants reach new customers. Square was founded in 2009 and is headquartered in San Francisco, with offices in the United States, Canada, Japan, Australia, Ireland, and the United Kingdom.

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, 2017 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 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, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018, 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, 2017.

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 and intangible assets, income and other taxes, and share-based compensation.

Concentration of Credit Risk
    
For the three months ended March 31, 2018 and 2017, 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 46%, 42%, and 7% of settlements receivable as of March 31, 2018. The same three parties represented approximately 46%, 42%, and 8% of settlements receivable as of December 31, 2017. All other third-party processors were insignificant.

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, marketable 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 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.

Accounting Policies
Except for the adoption of ASC 606, Revenue from Contracts with Customers (ASC 606), described in Note 2, and the accounting policy on cryptocurrency transactions, described below, there have been no material changes to the Company’s accounting policies during the three months ended March 31, 2018, as compared to the accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Cryptocurrency transactions

During the fourth quarter of 2017, the Company started offering its Cash App customers the ability to purchase bitcoin, a cryptocurrency denominated asset, from the Company. The Company purchases bitcoin from public cryptocurrency exchanges or from customers. Upon purchase, the Company records the cost of bitcoin within other current assets in its consolidated balance sheets. Upon sale, the Company records the total sale amount received from customers as bitcoin revenue and the associated cost as cost of revenue. The carrying value of bitcoin was $0.2 million and $0.3 million as of March 31, 2018 and December 31, 2017, respectively. The Company assesses the carrying value of bitcoin at each reporting date and records an impairment charge if the cost exceeds the fair value. Losses on bitcoin for the three months ended March 31, 2018 were insignificant.

Recent Accounting Pronouncements

Recently issued accounting pronouncements not yet adopted

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases, which will require, among other items, lessees to recognize a right of use asset and a related lease liability for most leases on the balance sheet. Qualitative and quantitative disclosures will be enhanced to better understand the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The new standard should be applied on a modified retrospective basis. The Company does not plan to early adopt this guidance. The Company’s operating leases primarily comprise of office spaces, with the most significant leases relating to corporate headquarters in San Francisco and an office in New York. While the Company continues to evaluate the impact of adopting this guidance on its consolidated financial statements, it does expect to record right to use assets and related lease liabilities on its consolidated balance sheets upon adoption, which will increase total assets and liabilities.
    
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, 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, with early adoption permitted. The Company is currently evaluating the impact this new 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 does not expect the adoption of this guidance to have a material the impact on the consolidated financial statements and related disclosures.

In March 2017, the FASB issued ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities, which amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. This standard is effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The amendments in this guidance should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact this new guidance may have on the consolidated financial statements and related disclosures.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. When the Tax Cuts and Jobs Act of 2017 was enacted in December 2017, there was a valuation allowance on the deferred tax assets included within the Company's accumulated other comprehensive income; therefore no tax expense resulted from the change in the federal income tax rate. This guidance allows companies to reclassify such tax effects from accumulated other comprehensive income to retained earnings. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The Company does not expect the adoption of this guidance to have a material impact on the consolidated financial statements and related disclosures.

In February 2018, the FASB issued ASU 2018-03, Recognition and Measurement of Financial Assets and Financial Liabilities. This guidance clarifies that an entity that uses the measurement alternative for equity securities without readily determinable fair values can change its measurement approach to fair value. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. The Company does not expect the adoption of this guidance to have a material impact on the consolidated financial statements and related disclosures.
.
v3.8.0.1
REVENUE
3 Months Ended
Mar. 31, 2018
Revenue from Contract with Customer [Abstract]  
REVENUE
REVENUE

Adoption of ASC 606, Revenue from Contracts with Customers

On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company's historic revenue recognition methodology under ASC 605, Revenue Recognition.

The Company recorded a net reduction to retained earnings of $4.6 million as of January 1, 2018, due to the cumulative impact of adopting ASC 606, primarily related to impact on revenue and associated cost of revenue from hardware sold through the retail distribution channels and hardware installment sales. The impact to revenue for the three months ended March 31, 2018, was an increase of $1.3 million as a result of applying ASC 606.

For the three months ended March 31, 2018, the revenue recognized from contracts with customers was $648.8 million, including $34.1 million from bitcoin sales. Revenue from other sources was $19.8 million. Impairment losses arising from contracts with customers were not significant in the current reporting period.

The impact of adoption of ASC 606 on the Company's consolidated statement of operations and balance sheet was as follows (in thousands):

 
Three Months Ended March 31, 2018
 
As reported
 
Balances without adoption
of ASC 606
 
Effect of change
Impact on the Condensed Consolidated Statement of Operations:
 
 
 
 
 
Subscription and services-based revenue
$
97,054

 
$
96,995

 
$
59

Hardware revenue
14,417

 
13,154

 
1,263

Subscription and services-based costs
30,368

 
30,368

 

Hardware costs
19,702

 
18,757

 
945

Impact on the Condensed Consolidated Balance Sheets:
 
 
 
 
 
Other current assets
91,933

 
100,573

 
(8,640
)
Other current liabilities
27,214

 
31,976

 
(4,762
)
Other non-current assets
32,120

 
33,355

 
(1,235
)
Other non-current liabilities
$
74,935

 
$
75,993

 
$
(1,058
)


Revenue Recognition

Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company's contracts with customers generally do not include multiple performance obligations.

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

 
Three Months Ended March 31,
 
2018
 
2017
Revenue from Contracts with Customers:
 
 
 
Transaction-based revenue
$
523,037

 
$
403,478

Subscription and services-based revenue
77,215

 
31,321

Hardware revenue
$
14,417

 
$
9,016

Bitcoin revenue
$
34,095

 
$


         
Transaction-based revenue

The Company charges its sellers a transaction fee for managed payments solutions that is generally calculated as a percentage of the total transaction amount processed. The Company selectively offers custom pricing for certain sellers. The Company collects the transaction amount from the seller's customer's bank, net of acquiring interchange and assessment fees, processing fees and bank settlement fees paid to third-party payment processors and financial institutions. The Company retains its fees and remits the net amount to the sellers.

The Company acts as the merchant of record for its sellers and works directly with payment card networks and banks so that its sellers do not need to manage the complex systems, rules, and requirements of the payments industry. The Company satisfies its performance obligations and therefore recognizes the transaction fees as revenue upon authorization of a transaction by the seller's customer's bank.

Revenue is recognized net of refunds, which arise from reversals of transactions initiated by sellers.

The transaction fees collected from sellers are recognized as revenue on a gross basis as the Company is the principal in the delivery of the managed payments solutions to the sellers. The Company has concluded it is the principal because it controls the services before delivery to the seller, it is primarily responsible for the delivery of the services and it has discretion in setting prices charged to sellers. As the merchant of record, Square is liable for settlement of the transactions the Company processes for its sellers, which is recorded as cost of revenues.

Subscription and services-based revenue

Subscription and services-based revenue is primarily comprised of revenue the Company generates from Instant Deposit, Caviar and various software as a service (SaaS) products.

Instant Deposit is a functionality within the Cash App and the Company's managed payment solutions that enables customers, including individuals and sellers, to instantly deposit funds into their bank accounts. The Company charges a per transaction fee which is recognized as revenue when customers instantly deposit funds to their bank account.

Caviar is a food ordering platform that facilitates food delivery services for restaurants. The Company's performance obligation is the delivery of food orders from restaurants to customers. The Company charges fees to restaurants, as sellers, and also charges delivery and service fees to customers. All fees are billed upon delivery of food orders, when the Company considers that it has satisfied its performance obligations. Revenue is also recognized upon delivery of the food orders, net of refunds. Refunds are estimated based on historical experience.

SaaS represents software products and solutions that provide customers with access to various technologies for a fee which is recognized ratably as the service is provided. The Company's contracts with customers are generally for a term of one month and renew automatically each month. The Company invoices its customers monthly. The Company considers that it satisfies its performance obligations over time each month as it provides the SaaS services to customers and hence recognizes revenue ratably over the month.

Hardware revenue

The Company generates revenue through the sale of hardware through e-commerce and through its retail distribution channels. The Company satisfies its performance obligation upon delivery of hardware to its customers who include end user customers, distributors, or retailers. The Company may at times offer concessions to customers and also allows for customer returns, which are accounted for as variable consideration. The Company estimates these amounts based on historical experience, and reduces revenue recognized. The Company invoices end user customers upon delivery of the products to customers and payments from such customers are due upon invoicing. Distributors and retailers have payment terms that range from 30 to 90 days after delivery.

The Company offers hardware installment sales to customers with terms ranging from three to twenty four months. The Company allocates a portion of the consideration received from these arrangements to a financing component when it determines that a significant financing component exists. The financing component is subsequently recognized as financing revenue over the terms of the arrangement with the customer.

Bitcoin revenue

During the fourth quarter of 2017, the Company started offering its Cash App customers the ability to purchase bitcoin, a cryptocurrency denominated asset, from the Company. The Company satisfies its performance obligation and records revenue when bitcoin is transferred to the customer's account.

Arrangements with Multiple Performance Obligations

Infrequently the Company has offered its hardware customers free managed payment solutions with the purchase of its hardware as part of a marketing promotion. For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers since the Company's products and services are normally sold on a stand alone basis.

Deferred revenues

Deferred revenue is comprised of unearned revenue related to managed payments services offered in conjunction with hardware sales for which the cash payments from customers are received and due upon the sale of the hardware.

The deferred revenue balances were as follows (in thousands):
 
Three Months Ended March 31,
 
2018
 
2017
Deferred revenue, beginning of the period
$
5,893

 
$
5,407

Deferred revenue, end of the period
3,353

 
2,965

Revenue recognized in the period from amounts included in deferred revenue at the beginning of the period
298

 
4,062




Practical Expedients

The Company does not recognize a financing component for hardware installment sales that have a term of one year or less.
v3.8.0.1
RESTRICTED CASH
3 Months Ended
Mar. 31, 2018
Cash and Cash Equivalents [Abstract]  
RESTRICTED CASH
RESTRICTED CASH
    
As of March 31, 2018 and December 31, 2017, restricted cash of $27.7 million and $28.8 million, respectively, is related to pledged cash deposited into savings accounts at the financial institutions that process the Company's sellers' payment transactions and as collateral pursuant to an agreement with the originating bank for the Company's loan product. The Company uses the restricted cash to secure letters of credit with the financial institution to provide collateral for cash flow timing differences in the processing of these payments. The Company has recorded this amount as a current asset on the consolidated balance sheets due to the short-term nature of these cash flow timing differences and that there is no minimum time frame during which the cash must remain restricted. Additionally, this balance includes certain amounts held as collateral pursuant to multi-year lease agreements, discussed in the paragraph below, which we expect to become unrestricted within the next year.
    
As of both March 31, 2018 and December 31, 2017, the remaining restricted cash of $9.8 million, is primarily related to cash deposited into money market funds that is used as collateral pursuant to multi-year lease agreements entered into in 2012 and 2014 (Note 16). The Company has recorded this amount as a non-current asset on the consolidated balance sheets as the terms of the related leases extend beyond one year.
v3.8.0.1
FAIR VALUE OF FINANCIAL INSTRUMENTS
3 Months Ended
Mar. 31, 2018
Fair Value Disclosures [Abstract]  
FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company measures its cash equivalents and short-term and long-term investments at fair value. The Company classifies its cash equivalents and short-term and long-term investments within Level 1 or Level 2 of the fair value hierarchy because the Company values these investments using quoted market prices or alternative pricing sources and models utilizing market observable inputs.
The Company’s financial assets and liabilities that are measured at fair value on a recurring basis are classified as follows (in thousands):
 
March 31, 2018
 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Cash and Cash Equivalents:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
405,813

 
$

 
$

 
$
387,698

 
$

 
$

Commercial paper

 
20,576

 

 

 
24,695

 

Short-term securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities

 
13,583

 

 

 
15,083

 

Corporate bonds

 
91,672

 

 

 
57,798

 

Commercial paper

 
14,286

 

 

 
17,428

 

Municipal securities

 
26,889

 

 

 
23,700

 

U.S. government securities
53,618

 

 

 
55,567

 

 

Long-term securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities

 
20,095

 

 

 
20,169

 

Corporate bonds

 
71,383

 

 

 
91,413

 

Municipal securities

 
14,519

 

 

 
26,224

 

U.S. government securities
70,675

 

 

 
65,861

 

 

Total
$
530,106

 
$
273,003

 
$

 
$
509,126

 
$
276,510

 
$



The carrying amounts of certain financial instruments, including cash equivalents, settlements receivable, customer funds, accounts payable, customers payable, 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, 2018
 
December 31, 2017
 
Carrying Value
 
Fair Value (Level 2)
 
Carrying Value
 
Fair Value (Level 2)
Convertible senior notes
$
362,965

 
$
963,965

 
$
358,572

 
$
719,356

Total
$
362,965

 
$
963,965

 
$
358,572

 
$
719,356



Loans held for sale are recorded at the lower of amortized cost or fair value determined on an individual loan basis. To determine the fair value the Company utilizes industry-standard valuation modeling, such as discounted cash flow models, taking into account the estimated timing and amounts of periodic repayments.
  
A summary of loans disclosed at fair value on a recurring basis is as follows (in thousands):

 
March 31, 2018
 
December 31, 2017
 
Carrying Value
 
Fair Value (Level 3)
 
Carrying Value
 
Fair Value (Level 3)
Loans held for sale
$
78,821

 
$
81,459

 
$
73,420

 
$
76,070

Total
$
78,821

 
$
81,459

 
$
73,420

 
$
76,070



The Company recognizes a charge within transaction, loan and advance losses on the consolidated statement of operations whenever the amortized cost of a loan exceeds its fair value, with such charges being reversed for subsequent increases in fair value, but only to the extent that such reversals do not result in the amortized cost of a loan exceeding its fair value. 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. No charges were recorded for the three months ended March 31, 2017.
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, 2018 and 2017, the Company did not have any transfers in or out of Level 1, Level 2, or Level 3 assets or liabilities.
v3.8.0.1
INVESTMENTS
3 Months Ended
Mar. 31, 2018
Investments, Debt and Equity Securities [Abstract]  
INVESTMENTS
INVESTMENTS

The Company determines the appropriate classification of its investments in marketable securities at the time of purchase and reevaluates such designation at each balance sheet date. The Company has classified and accounted for its marketable securities as available-for-sale.

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

 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Short-term securities:
 
 
 
 
 
 
 
U.S. agency securities
$
13,581

 
$
5

 
$
(3
)
 
$
13,583

Corporate bonds
92,023

 
11

 
(362
)
 
91,672

Commercial paper
14,286

 

 

 
14,286

Municipal securities
26,950

 
20

 
(81
)
 
26,889

U.S. government securities
53,615

 
11

 
(8
)
 
53,618

Total
$
200,455

 
$
47

 
$
(454
)
 
$
200,048

 
 
 
 
 
 
 
 
Long-term securities:
 
 
 
 
 
 
 
U.S. agency securities
$
20,169

 
$
8

 
$
(82
)
 
$
20,095

Corporate bonds
71,741

 
170

 
(528
)
 
71,383

Municipal securities
14,467

 
70

 
(18
)
 
14,519

U.S. government securities
71,078

 

 
(403
)
 
70,675

Total
$
177,455

 
$
248

 
$
(1,031
)
 
$
176,672


The Company's short-term and long-term investments as of December 31, 2017 are as follows (in thousands):

 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Short-term securities:
 
 
 
 
 
 
 
U.S. agency securities
$
15,122

 
$

 
$
(39
)
 
$
15,083

Corporate bonds
57,855

 
22

 
(79
)
 
57,798

Commercial paper
17,428

 

 

 
17,428

Municipal securities
23,743

 
8

 
(51
)
 
23,700

U.S. government securities
55,729

 
1

 
(163
)
 
55,567

Total
$
169,877

 
$
31

 
$
(332
)
 
$
169,576

 
 
 
 
 
 
 
 
Long-term securities:
 
 
 
 
 
 
 
U.S. agency securities
$
20,288

 
$
2

 
$
(121
)
 
$
20,169

Corporate bonds
91,959

 
25

 
(571
)
 
91,413

Municipal securities
26,371

 
13

 
(160
)
 
26,224

U.S. government securities
66,362

 
19

 
(520
)
 
65,861

Total
$
204,980

 
$
59

 
$
(1,372
)
 
$
203,667



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 until a recovery of fair value, or 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 contractual maturities of the Company's short-term and long-term investments as of March 31, 2018 are as follows (in thousands):

 
Amortized Cost
 
Fair Value
Due in one year or less
$
200,455

 
$
200,048

Due in one to five years
177,455

 
176,672

Total
$
377,910

 
$
376,720

v3.8.0.1
PROPERTY AND EQUIPMENT, NET
3 Months Ended
Mar. 31, 2018
Property, Plant and Equipment [Abstract]  
PROPERTY AND EQUIPMENT, NET
PROPERTY AND EQUIPMENT, NET
The following is a summary of property and equipment, less accumulated depreciation and amortization (in thousands):    

March 31,
2018

December 31,
2017
Leasehold improvements
$
82,425

 
$
77,073

Computer equipment
70,818


66,186

Capitalized software
39,268

 
35,063

Office furniture and equipment
15,152


14,490

 
207,663

 
192,812

Less: Accumulated depreciation and amortization
(109,493
)

(101,316
)
Property and equipment, net
$
98,170

 
$
91,496


Depreciation and amortization expense on property and equipment was $8.3 million for the three months ended March 31, 2018. Depreciation and amortization expense on property and equipment was $7.3 million for the three months ended March 31, 2017.
v3.8.0.1
GOODWILL
3 Months Ended
Mar. 31, 2018
Goodwill and Intangible Assets Disclosure [Abstract]  
GOODWILL
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. As of both March 31, 2018 and December 31, 2017, goodwill was $58.3 million.

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.
v3.8.0.1
ACQUIRED INTANGIBLE ASSETS
3 Months Ended
Mar. 31, 2018
Goodwill and Intangible Assets Disclosure [Abstract]  
ACQUIRED INTANGIBLE ASSETS
ACQUIRED INTANGIBLE ASSETS

For the three months ended March 31, 2018, 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, 2018
Cost
 
Accumulated Amortization
 
Net
Patents
$
1,285

 
$
(585
)
 
$
700

Technology Assets
30,837

 
(22,909
)
 
7,928

Customer Assets
10,319

 
(4,809
)
 
5,510

Total
$
42,441

 
$
(28,303
)
 
$
14,138


 
Balance at December 31, 2017
Cost
 
Accumulated Amortization
 
Net
Patents
$
1,285

 
$
(559
)

$
726

Technology Assets
29,158

 
(21,329
)
 
7,829

Customer Assets
10,319

 
(4,540
)
 
5,779

Total
$
40,762

 
$
(26,428
)
 
$
14,334



The weighted average amortization periods for acquired patents, acquired technology, and customer intangible assets are approximately 13 years, 4 years, and 9 years, respectively.
    
Amortization expense associated with other intangible assets was $1.9 million for the three months ended March 31, 2018. Amortization expense associated with other intangible assets was $2.1 million for the three months ended March 31, 2017.

The total estimated future amortization expense of these intangible assets as of March 31, 2018 is as follows (in thousands):
2018 (remaining 9 months)
$
4,864

2019
4,002

2020
2,039

2021
892

2022
611

Thereafter
1,730

Total
$
14,138

v3.8.0.1
OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (CURRENT)
3 Months Ended
Mar. 31, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (CURRENT)
OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (CURRENT)
Other Current Assets
The following table presents the detail of other current assets (in thousands):
    
 
March 31,
2018
 
December 31,
2017
Inventory, net
$
20,899

 
$
16,777

Processing costs receivable
27,099

 
21,083

Prepaid expenses
14,743

 
14,473

Accounts receivable, net
9,876

 
8,606

Deferred hardware costs (i)

 
7,931

Deferred magstripe reader costs (ii)
2,677

 
2,469

Other
16,639

 
15,115

Total
$
91,933

 
$
86,454



(i) The deferred hardware costs represented costs associated with hardware sold through the retail distribution channels. The adoption of ASC 606 on January 1, 2018, has resulted in the recognition of such costs upon delivery of the hardware to the distribution channel.

(ii) The Company capitalizes the cost of its magstripe readers, including packaging and shipping costs, held on-hand by the Company as of each consolidated balance sheet date. Once the readers are shipped to a third-party distributor or an end-customer, they are recorded as marketing expense on the consolidated statements of operations.

Accrued Expenses
The following table presents the detail of accrued expenses (in thousands):    
 
March 31,
2018
 
December 31,
2017
Accrued payroll
$
13,833

 
$
9,103

Accrued professional fees
5,888

 
5,638

Accrued advertising and other marketing
7,279

 
6,723

Processing costs payable
10,166

 
10,145

Accrued non income tax liabilities
4,677

 
6,155

Accrued hardware costs
1,305

 
2,496

Other accrued liabilities
14,849

 
12,020

Total
$
57,997

 
$
52,280



Other Current Liabilities
The following table presents the detail of other current liabilities (in thousands):    
    
 
March 31,
2018
 
December 31,
2017
Square Capital payable (iii)
$
6,450

 
$
7,671

Square Payroll payable (iv)
2,865

 
2,850

Deferred revenue
3,353

 
5,893

Current portion of deferred rent
3,252

 
3,311

Accrued redemptions
1,110

 
1,036

Other
10,184

 
7,606

Total
$
27,214

 
$
28,367



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

(iv) Square Payroll payable represents amounts received from Square Payroll product customers that will be utilized to settle the customers employee payroll and related obligations.
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,
2018
 
December 31,
2017
Investment in privately held entity
$
25,000

 
$
25,000

Deposits
2,379

 
2,738

Debt issuance costs
719

 
788

Deferred tax assets
666

 
519

Other
3,356

 
2,305

Total
$
32,120

 
$
31,350


Other Non-Current Liabilities
The following table presents the detail of other non-current liabilities (in thousands):
 
March 31,
2018
 
December 31,
2017
Statutory liabilities (i)
$
44,468

 
$
40,768

Deferred rent
22,241

 
20,349

Deferred tax liabilities
139

 
644

Other
8,087

 
7,777

Total
$
74,935

 
$
69,538



(i) Statutory liabilities represent loss contingencies that may arise from the Company's interpretation and application of certain guidelines and rules issued by various federal, state, local, and foreign regulatory authorities.
v3.8.0.1
OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (NON-CURRENT)
3 Months Ended
Mar. 31, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (NON-CURRENT)
OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (CURRENT)
Other Current Assets
The following table presents the detail of other current assets (in thousands):
    
 
March 31,
2018
 
December 31,
2017
Inventory, net
$
20,899

 
$
16,777

Processing costs receivable
27,099

 
21,083

Prepaid expenses
14,743

 
14,473

Accounts receivable, net
9,876

 
8,606

Deferred hardware costs (i)

 
7,931

Deferred magstripe reader costs (ii)
2,677

 
2,469

Other
16,639

 
15,115

Total
$
91,933

 
$
86,454



(i) The deferred hardware costs represented costs associated with hardware sold through the retail distribution channels. The adoption of ASC 606 on January 1, 2018, has resulted in the recognition of such costs upon delivery of the hardware to the distribution channel.

(ii) The Company capitalizes the cost of its magstripe readers, including packaging and shipping costs, held on-hand by the Company as of each consolidated balance sheet date. Once the readers are shipped to a third-party distributor or an end-customer, they are recorded as marketing expense on the consolidated statements of operations.

Accrued Expenses
The following table presents the detail of accrued expenses (in thousands):    
 
March 31,
2018
 
December 31,
2017
Accrued payroll
$
13,833

 
$
9,103

Accrued professional fees
5,888

 
5,638

Accrued advertising and other marketing
7,279

 
6,723

Processing costs payable
10,166

 
10,145

Accrued non income tax liabilities
4,677

 
6,155

Accrued hardware costs
1,305

 
2,496

Other accrued liabilities
14,849

 
12,020

Total
$
57,997

 
$
52,280



Other Current Liabilities
The following table presents the detail of other current liabilities (in thousands):    
    
 
March 31,
2018
 
December 31,
2017
Square Capital payable (iii)
$
6,450

 
$
7,671

Square Payroll payable (iv)
2,865

 
2,850

Deferred revenue
3,353

 
5,893

Current portion of deferred rent
3,252

 
3,311

Accrued redemptions
1,110

 
1,036

Other
10,184

 
7,606

Total
$
27,214

 
$
28,367



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

(iv) Square Payroll payable represents amounts received from Square Payroll product customers that will be utilized to settle the customers employee payroll and related obligations.
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,
2018
 
December 31,
2017
Investment in privately held entity
$
25,000

 
$
25,000

Deposits
2,379

 
2,738

Debt issuance costs
719

 
788

Deferred tax assets
666

 
519

Other
3,356

 
2,305

Total
$
32,120

 
$
31,350


Other Non-Current Liabilities
The following table presents the detail of other non-current liabilities (in thousands):
 
March 31,
2018
 
December 31,
2017
Statutory liabilities (i)
$
44,468

 
$
40,768

Deferred rent
22,241

 
20,349

Deferred tax liabilities
139

 
644

Other
8,087

 
7,777

Total
$
74,935

 
$
69,538



(i) Statutory liabilities represent loss contingencies that may arise from the Company's interpretation and application of certain guidelines and rules issued by various federal, state, local, and foreign regulatory authorities.
v3.8.0.1
INDEBTEDNESS
3 Months Ended
Mar. 31, 2018
Debt Disclosure [Abstract]  
INDEBTEDNESS
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 in unused commitment fees during both the three months ended March 31, 2018 and 2017. As of March 31, 2018, the Company was in compliance with all financial covenants associated with this credit facility.

Convertible Senior Notes

On March 6, 2017, the Company issued an aggregate principal amount of $400.0 million of convertible senior notes (Notes) and an additional 10% or $40.0 million pursuant to the exercise in full of the option to the initial purchasers to cover over-allotments. The 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 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 Notes, which is equivalent to an initial conversion price of approximately $22.95 per share of Class A common stock. Holders may convert their 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 Notes) per $1,000 principal amount of 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 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 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. It is the Company’s current intent and policy to settle conversions through combination settlement with a specified dollar amount of $1,000 per $1,000 principal amount of Notes. The circumstances required to allow the holders to convert their Notes were met for the quarters commencing January 1, 2018 and April 1, 2018, respectively. As of May 1, 2018, no holders have converted or indicated their intention to convert their Notes.

In accounting for the issuance of the Notes, the Company separated the 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 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 Notes at an effective interest rate of 5.34% over the contractual terms of the Notes.

Debt issuance costs related to the 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 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 Notes consisted of the following (in thousands):
 
March 31, 2018
 
December 31, 2017
Principal
$
440,000

 
$
440,000

Less: unamortized debt discount
(69,425
)
 
(73,384
)
Less: unamortized debt issuance costs
(7,610
)
 
(8,044
)
Net carrying amount
$
362,965

 
$
358,572

 
The net carrying amount of the equity component of the Notes was as follows (in thousands):

 
March 31, 2018
 
December 31, 2017
Debt discount related to value of conversion option
$
86,203

 
$
86,203

Less: allocated debt issuance costs
(2,302
)
 
(2,302
)
Equity component, net
$
83,901

 
$
83,901




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

 
Three Months Ended March 31,
 
2018
 
2017
Contractual interest expense based on 0.375% per annum
$
413

 
$
113

Amortization of debt discount and issuance costs
4,393

 
1,390

Total
$
4,806

 
$
1,503

Effective interest rate of the liability component
5.34
%
 
5.34
%


Convertible Note Hedge and Warrant Transactions

In connection with the offering of the Notes, the Company entered into convertible note hedge transactions with certain financial institutions (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 convertible note hedge transactions was $92.1 million. In addition, the Company sold warrants to the Counterparties whereby the 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 these warrants. Taken together, the purchase of the convertible note hedges and sale of the warrants are intended to reduce dilution from the conversion of the Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of the converted 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 convertible note hedges and 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 convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the condensed consolidated balance sheets.
v3.8.0.1
ACCRUED TRANSACTION LOSSES
3 Months Ended
Mar. 31, 2018
Product Warranties Disclosures [Abstract]  
ACCRUED TRANSACTION LOSSES
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,
 
2018
 
2017
Accrued transaction losses, beginning of the period
$
26,893

 
$
20,064

Provision for transaction losses
14,258

 
11,558

Charge-offs to accrued transaction losses
(12,842
)
 
(11,178
)
Accrued transaction losses, end of the period
$
28,309

 
$
20,444

v3.8.0.1
INCOME TAXES
3 Months Ended
Mar. 31, 2018
Income Tax Disclosure [Abstract]  
INCOME TAXES
INCOME TAXES
The Company recorded an income tax expense of $0.2 million for the three months ended March 31, 2018, compared to income tax expense of $0.5 million for the three months ended March 31, 2017. The income tax expense recorded for the three months ended March 31, 2018 was primarily due to state and foreign income tax expense.

The Company’s effective tax rate was (0.7)% for the three months ended March 31, 2018, compared to an effective tax rate of (3.5)% for the three months ended March 31, 2017. The difference between the effective tax rate and the federal statutory tax rate for the three months ended March 31, 2018 and March 31, 2017 primarily relates to the valuation allowance on the Company’s deferred tax assets.

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, 2018, 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, 2018 and March 31, 2017, was calculated on a jurisdiction basis. The Company estimated the foreign income tax provision using the effective income tax rate expected to be applicable for the full year.

On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act of 2017. The accounting for all items is expected to be complete when the 2017 U.S. corporate income tax return is filed in 2018. Any differences between what was previously recorded and the final tax return amounts or estimates done for subsequent quarters are not expected to be material.
v3.8.0.1
STOCKHOLDERS' EQUITY
3 Months Ended
Mar. 31, 2018
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
STOCKHOLDERS' EQUITY
STOCKHOLDERS’ EQUITY
The changes in total stockholders’ equity were as follows (in thousands):

 
Total stockholders’ equity
Balance at December 31, 2017
$
786,333

Net loss
(23,986
)
Exercise of stock options
31,354

Vesting of early exercised stock options and other
136

Share-based compensation
48,356

Tax withholding related to vesting of restricted stock units
(27,651
)
Cumulative adjustment for adoption of ASC 606
(4,586
)
Change in other comprehensive loss
24

Balance at March 31, 2018
$
809,980



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, 2018, 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, 2018, there were 287,921,742 shares of Class A common stock and 112,462,337 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.

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.

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, 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, 2018, the total number of shares subject to stock options and RSUs outstanding under the 2015 Plan was 24,960,627, and 65,895,253 shares were available for future issuance. As of March 31, 2018, the total number of shares subject to stock options and RSUs outstanding under the 2009 Plan was 38,069,996.

A summary of stock option activity for the three months ended March 31, 2018 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, 2017
47,270,091

 
$
8.67

 
6.52
 
$
1,229,103

Exercised
(4,213,775
)
 
7.44

 
 
 
 
Forfeited
(328,651
)
 
12.04

 
 
 
 
Balance at March 31, 2018
42,727,665

 
$
8.76

 
6.33
 
$
1,727,761

Options exercisable as of
 
 
 
 
 
 
 
March 31, 2018
40,039,760

 
$
8.47

 
6.20
 
$
1,630,725



Restricted Stock Activity
Activity related to RSUs during the three months ended March 31, 2018 is set forth below:
 
Number of
RSUs
 
Weighted
Average Grant
Date Fair Value
Unvested as of December 31, 2017
21,317,525

 
$
17.84

Granted
1,226,422

 
44.78

Vested
(1,625,534
)
 
14.54

Forfeited
(615,455
)
 
15.67

Unvested as of March 31, 2018
20,302,958

 
$
19.80



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 RSUs is determined by the closing price of the Company’s common stock on each grant date. 
There were no stock options granted during the three months ended March 31, 2018 and 2017.

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,
 
2018
 
2017
Cost of revenue
$
31

 
$

Product development
30,482

 
19,356

Sales and marketing
4,961

 
3,935

General and administrative
11,350

 
8,379

Total
$
46,824

 
$
31,670


    
The Company recorded $2.3 million of share-based compensation expense related to the Company's 2015 Employee Stock Purchase Plan during the three months ended March 31, 2018, compared to $1.9 million for the three months ended March 31, 2017, which are included in the table above.

The Company capitalized $1.5 million of share-based compensation expense related to capitalized software costs during the three months ended March 31, 2018, compared to $0.5 million for the three months ended March 31, 2017.
As of March 31, 2018, there was $418.7 million of total unrecognized compensation cost related to outstanding stock options that is expected to be recognized over a weighted-average period of 2.74 years.
v3.8.0.1
LOSS PER SHARE
3 Months Ended
Mar. 31, 2018
Earnings Per Share [Abstract]  
LOSS PER SHARE
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 loss per share is the same as basic loss per share for all periods presented because the effects of potentially dilutive items were anti-dilutive given the Company’s net loss.
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,
2018
 
2017
Net loss
$
(23,986
)
 
$
(15,090
)
Basic shares:
 
 
 
Weighted-average common shares outstanding
397,246

 
368,571
Weighted-average unvested shares
(1,298
)
 
(1,834
)
Weighted-average shares used to compute basic net loss per share
395,948

 
366,737

Diluted shares:
 
 
 
Weighted-average shares used to compute diluted loss per share
395,948

 
366,737

Net loss per share:
 
 
 
Basic
$
(0.06
)
 
$
(0.04
)
Diluted
$
(0.06
)
 
$
(0.04
)


Additionally, since the Company expects to settle the principal amount of its outstanding Notes in cash, the Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread will have a dilutive impact on diluted net income per share of common stock when the average market price of the Company’s common stock for a given period exceeds the conversion price of $22.95 per share for the Notes. Because the Company has reported a net loss for all periods presented, 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,
 
2018
 
2017
Stock options and restricted stock units
66,382

 
84,909

Common stock warrants
19,173

 
11,129

Unvested shares
1,298