SQUARE, INC., 10-K filed on 2/26/2020
Annual Report
v3.19.3.a.u2
Cover Page - USD ($)
$ in Billions
12 Months Ended
Dec. 31, 2019
Feb. 21, 2020
Jun. 30, 2019
Cover page.      
Document Type 10-K    
Document Annual Report true    
Document Period End Date Dec. 31, 2019    
Document Transition Report false    
Entity File Number 001-37622    
Entity Registrant Name SQUARE, INC.    
Entity Incorporation, State or Country Code DE    
Entity Tax Identification Number 80-0429876    
Entity Address, Address Line One 1455 Market Street    
Entity Address, Address Line Two Suite 600    
Entity Address, City or Town San Francisco    
Entity Address, State or Province CA    
Entity Address, Postal Zip Code 94103    
City Area Code 415    
Local Phone Number 375-3176    
Title of 12(b) Security Class A Common Stock, $0.0000001 par value per share    
Trading Symbol SQ    
Security Exchange Name NYSE    
Entity Well-known Seasoned Issuer Yes    
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Interactive Data Current Yes    
Entity Filer Category Large Accelerated Filer    
Entity Small Business false    
Entity Emerging Growth Company false    
Entity Shell Company false    
Entity Public Float     $ 24.6
Class of Stock [Line Items]      
Documents Incorporated by Reference Portions of the registrant’s Definitive Proxy Statement relating to the Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the registrant’s fiscal year ended December 31, 2019.    
Entity Central Index Key 0001512673    
Current Fiscal Year End Date --12-31    
Document Fiscal Year Focus 2019    
Document Fiscal Period Focus FY    
Amendment Flag false    
Class A      
Class of Stock [Line Items]      
Entity Common Stock, Shares Outstanding (in shares)   354,826,967  
Class B      
Class of Stock [Line Items]      
Entity Common Stock, Shares Outstanding (in shares)   80,407,753  
v3.19.3.a.u2
CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Thousands
Dec. 31, 2019
Dec. 31, 2018
Current assets:    
Cash and cash equivalents $ 1,047,118 $ 583,173
Investments in short-term debt securities 492,456 540,991
Settlements receivable 588,692 364,946
Customer funds 676,292 334,017
Loans held for sale 164,834 89,974
Other current assets 250,409 198,804
Total current assets 3,219,801 2,111,905
Property and equipment, net 149,194 142,402
Goodwill 266,345 261,705
Acquired intangible assets, net 69,079 77,102
Investments in long-term debt securities 537,303 464,680
Build-to-suit lease asset 0 149,000
Operating lease right-of-use assets 113,148  
Other non-current assets 196,388 74,229
Total assets 4,551,258 3,281,023
Current liabilities:    
Customers payable 1,273,135 749,215
Settlements payable 95,834 54,137
Accrued expenses and other current liabilities 128,387 82,354
Operating lease liabilities, current 27,275  
Total current liabilities 1,694,085 1,018,541
Long-term debt 938,832 899,695
Build-to-suit lease liability 0 149,000
Operating lease liabilities, non-current 108,830  
Other non-current liabilities 94,461 93,286
Total liabilities 2,836,208 2,160,522
Commitments and contingencies (Note 18)
Stockholders’ equity:    
Preferred stock, $0.0000001 par value: 100,000,000 shares authorized at December 31, 2019 and December 31, 2018. None issued and outstanding at December 31, 2019 and December 31, 2018. 0 0
Additional paid-in capital 2,223,749 2,012,328
Accumulated other comprehensive income (loss) 1,629 (6,053)
Accumulated deficit (510,328) (885,774)
Total stockholders’ equity 1,715,050 1,120,501
Total liabilities and stockholders’ equity 4,551,258 3,281,023
Accrued Liabilities and Other Liabilities 297,841 215,189
Class A    
Stockholders’ equity:    
Common stock 0 0
Class B    
Stockholders’ equity:    
Common stock $ 0 $ 0
v3.19.3.a.u2
CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares
Dec. 31, 2019
Dec. 31, 2018
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    
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)   323,546,864
Common stock, shares outstanding (in shares) 352,386,562 323,546,864
Class B    
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)   93,501,142
Common stock, shares outstanding (in shares) 80,410,158 93,501,142
v3.19.3.a.u2
CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)
shares in Thousands, $ in Thousands
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Revenue:      
Revenue $ 4,713,500 $ 3,298,177 $ 2,214,253
Cost of Revenue [Abstract]      
Cost of revenue 136,385 94,114 62,393
Total cost of revenue 2,823,815 1,994,477 1,374,947
Gross profit 1,889,685 1,303,700 839,306
Operating expenses:      
Product development 670,606 497,479 321,888
Sales and marketing 624,832 411,151 253,170
General and administrative 436,250 339,245 250,553
Transaction and loan losses 126,959 88,077 67,018
Total operating expenses 1,863,128 1,340,314 893,512
Operating income (loss) 26,557 (36,614) (54,206)
Gain on sale of asset group (373,445) 0 0
Interest expense, net 21,516 17,982 10,053
Other expense (income), net 273 (18,469) (1,595)
Income (loss) before income tax 378,213 (36,127) (62,664)
Provision for income taxes 2,767 2,326 149
Net income (loss) $ 375,446 $ (38,453) $ (62,813)
Net income (loss) per share:      
Basic (in USD per share) $ 0.88 $ (0.09) $ (0.17)
Diluted (in USD per share) $ 0.81 $ (0.09) $ (0.17)
Weighted-average shares used to compute net income (loss) per share:      
Basic (in shares) 424,999 405,731 379,344
Diluted (in shares) 466,076 405,731 379,344
Transaction-based revenue      
Revenue:      
Revenue $ 3,081,074 $ 2,471,451 $ 1,920,174
Cost of Revenue [Abstract]      
Cost of revenue 1,937,971 1,558,562 1,230,290
Subscription and services-based revenue      
Revenue:      
Revenue 883,922 499,010 185,485
Revenue 1,031,456 591,706 252,664
Cost of Revenue [Abstract]      
Cost of revenue 234,270 169,884 75,720
Hardware revenue      
Revenue:      
Revenue 84,505 68,503 41,415
Bitcoin revenue      
Revenue:      
Revenue 516,465 166,517 0
Cost of Revenue [Abstract]      
Cost of revenue 508,239 164,827 0
Acquired technology      
Cost of Revenue [Abstract]      
Amortization of acquired technology 6,950 7,090 6,544
Acquired customers      
Operating expenses:      
Amortization of acquired customer assets $ 4,481 $ 4,362 $ 883
v3.19.3.a.u2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Statement of Comprehensive Income [Abstract]      
Net income (loss) $ 375,446 $ (38,453) $ (62,813)
Net foreign currency translation adjustments 1,879 (4,496) 1,900
Net unrealized gain on revaluation of intercompany loans 75 303 385
Net unrealized gain (loss) on marketable debt securities 5,728 (542) (1,614)
Total comprehensive income (loss) $ 383,128 $ (43,188) $ (62,142)
v3.19.3.a.u2
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - USD ($)
$ in Thousands
Total
Convertible preferred stock
Class A and B common stock
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Beginning balance (in shares) at Dec. 31, 2016   0 364,547,376      
Beginning balance at Dec. 31, 2016 $ 576,153 $ 0 $ 0 $ 1,357,381 $ (1,989) $ (779,239)
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Net income (loss) (62,813)         (62,813)
Shares issued in connection with:            
Exercise of stock options (in shares)     24,510,745      
Exercise of stock options 144,774     144,774    
Vesting of early exercised stock options and other 661     661    
Purchases under employee stock purchase plan (in shares)     1,670,045      
Purchases under employee stock purchase plan 17,859     17,859    
Vesting of restricted stock units (in shares)     5,964,153      
Repurchase of common stock (in shares)     (24,209)      
Change in other comprehensive loss 671       671  
Share-based compensation 159,509     159,509    
Tax withholding related to vesting of restricted stock units (in shares)     (1,474,035)      
Tax withholding related to vesting of restricted stock units (44,682)     (44,682)    
Conversion feature of convertible senior notes, due 2022, net of allocated debt issuance costs 83,901     83,901    
Purchase of bond hedges in conjunction with issuance of convertible senior notes, due 2022 (92,136)     (92,136)    
Sale of warrants in conjunction with issuance of convertible senior notes, due 2022 57,244     57,244    
Payment for termination of Starbucks warrant (54,808)     (54,808)    
Ending balance at Dec. 31, 2017 786,333 $ 0 $ 0 1,630,386 (1,318) (842,735)
Ending balance (in shares) at Dec. 31, 2017   0 395,194,075      
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Net income (loss) (38,453)         (38,453)
Shares issued in connection with:            
Exercise of stock options (in shares)     13,402,680      
Exercise of stock options 106,962     106,962    
Vesting of early exercised stock options and other 177     177    
Purchases under employee stock purchase plan (in shares)     826,356      
Purchases under employee stock purchase plan 26,888     26,888    
Vesting of restricted stock units (in shares)     8,046,640      
Issuance of common stock in connection with business combination (shares)     2,649,590      
Issuance of common stock in connection with business combination 140,107     140,107    
Replacement stock awards issued in connection with acquisition (in shares)     24,613      
Replacement stock awards issued in connection with acquisition 899     899    
Change in other comprehensive loss (4,735)       (4,735)  
Share-based compensation 226,182     226,182    
Tax withholding related to vesting of restricted stock units (in shares)     (3,013,394)      
Tax withholding related to vesting of restricted stock units (189,124)     (189,124)    
Conversion feature of convertible senior notes, due 2022, net of allocated debt issuance costs 154,019     154,019    
Purchase of bond hedges in conjunction with issuance of convertible senior notes, due 2022 (172,586)     (172,586)    
Sale of warrants in conjunction with issuance of convertible senior notes, due 2022 112,125     112,125    
Issuance of common stock in conjunction with the conversion of senior notes, due 2022 (in shares)     7,288,907      
Issuance of common stock in conjunction with the conversion of senior notes, due 2022 $ (20,962)     (20,962)    
Exercise of bond hedges in conjunction with the conversion of senior notes, due 2022 (in shares)     (6,901,567)      
Recovery of common stock in connection with indemnification settlement agreement (in shares) (469,894)   (469,894)      
Recovery of common stock in connection with indemnification settlement agreement $ (2,745)     (2,745)    
Ending balance at Dec. 31, 2018 1,120,501 $ 0 $ 0 2,012,328 (6,053) (885,774)
Ending balance (in shares) at Dec. 31, 2018   0 417,048,006      
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Net income (loss) $ 375,446         375,446
Shares issued in connection with:            
Exercise of stock options (in shares) 10,176,170   10,176,170      
Exercise of stock options $ 82,340     82,340    
Vesting of early exercised stock options and other (in shares) 426          
Vesting of early exercised stock options and other $ 36     36    
Purchases under employee stock purchase plan (in shares)     673,661      
Purchases under employee stock purchase plan 36,174     36,174    
Vesting of restricted stock units (in shares)     8,338,035      
Cancellation of restricted stock awards (in shares)     (90,342)      
Change in other comprehensive loss 7,682       7,682  
Share-based compensation 306,201     306,201    
Tax withholding related to vesting of restricted stock units (in shares)     (3,077,807)      
Tax withholding related to vesting of restricted stock units (212,264)     (212,264)    
Issuance of common stock in conjunction with the conversion of senior notes, due 2022 (in shares)     127      
Issuance of common stock in conjunction with the conversion of senior notes, due 2022 $ 3     3    
Exercise of bond hedges in conjunction with the conversion of senior notes, due 2022 (in shares)     (250,763)      
Recovery of common stock in connection with indemnification settlement agreement (in shares) (20,793)   (20,793)      
Recovery of common stock in connection with indemnification settlement agreement $ (1,069)     (1,069)    
Ending balance at Dec. 31, 2019 $ 1,715,050 $ 0 $ 0 $ 2,223,749 $ 1,629 $ (510,328)
Ending balance (in shares) at Dec. 31, 2019   0 432,796,720      
v3.19.3.a.u2
CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Cash flows from operating activities:      
Net income (loss) $ 375,446 $ (38,453) $ (62,813)
Adjustments to reconcile net loss to net cash provided by operating activities:      
Depreciation and amortization 75,598 60,961 37,279
Non-cash interest and other expense 34,547 31,257 14,421
Loss on extinguishment of long-term debt 0 5,047 0
Non-cash lease expense 29,696 0 0
Share-based compensation 297,863 216,881 155,836
Replacement stock awards issued in connection with acquisition 0 899 0
Gain on sale of asset group (373,445) 0 0
Loss (gain) on revaluation of equity investment 12,326 (20,342) 0
Recovery of common stock in connection with indemnification settlement agreement (1,069) (2,745) 0
Transaction and loan losses 126,959 88,077 67,018
Change in deferred income taxes (1,376) (646) (1,385)
Changes in operating assets and liabilities:      
Settlements receivable (248,271) 245,795 (305,831)
Customer funds (204,208) (131,004) (59,468)
Purchase of loans held for sale (2,266,738) (1,609,611) (1,184,630)
Sales and principal payments of loans held for sale 2,168,682 1,579,834 1,145,314
Customers payable 523,795 15,597 301,778
Settlements payable 41,697 (60,651) 63,637
Charge-offs to accrued transaction losses (78,325) (58,192) (46,148)
Other assets and liabilities (47,478) (27,624) 2,703
Net cash provided by operating activities 465,699 295,080 127,711
Cash flows from investing activities:      
Purchase of marketable debt securities (992,583) (1,000,346) (544,910)
Proceeds from maturities of marketable debt securities 430,888 197,454 168,224
Proceeds from sale of marketable debt securities 548,619 171,992 89,087
Purchase of marketable debt securities from customer funds (311,499) (148,096) 0
Proceeds from maturities of marketable debt securities from customer funds 158,055 0 0
Proceeds from sale of marketable debt securities from customer funds 17,493 48,334 0
Purchase of property and equipment (62,498) (61,203) (26,097)
Purchase of other investments (15,250) 0 (25,000)
Proceeds from sale of equity investment 33,016 0 0
Purchase of intangible assets 0 (1,584) 0
Proceeds from sale of asset group 309,324 0 0
Business combinations, net of cash acquired (20,372) (112,399) (1,915)
Net cash provided by (used in) investing activities: 95,193 (905,848) (340,611)
Cash flows from financing activities:      
Proceeds from issuance of convertible senior notes, net 0 855,663 428,250
Purchase of convertible senior note hedges 0 (172,586) (92,136)
Proceeds from issuance of warrants 0 112,125 57,244
Principal payment on conversion of senior notes 0 (219,384) 0
Payment for termination of Starbucks warrant 0 0 (54,808)
Proceeds from the exercise of stock options and purchases under the employee stock purchase plan, net 118,514 133,850 162,504
Payments for tax withholding related to vesting of restricted stock units (212,264) (189,124) (44,682)
Other financing activities (5,124) (4,789) (1,439)
Net cash provided by (used in) financing activities (98,874) 515,755 454,933
Effect of foreign exchange rate on cash and cash equivalents 3,841 (7,221) 4,303
Net increase (decrease) in cash, cash equivalents and restricted cash 465,859 (102,234) 246,336
Cash, cash equivalents and restricted cash, beginning of the year 632,847 735,081 488,745
Cash, cash equivalents and restricted cash, end of the year $ 1,098,706 $ 632,847 $ 735,081
v3.19.3.a.u2
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
12 Months Ended
Dec. 31, 2019
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 empower businesses, sellers and individuals to participate in the economy. Square enables sellers to accept card payments and also provides reporting and analytics, and next-day settlement. Square’s point-of-sale software and other business services help sellers manage inventory, locations, and employees; access financing; engage buyers; build a website or online store; and grow sales. Cash App is an easy way to send, spend, and store money. On October 31, 2019, the Company completed the sale of the Caviar business, 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 consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP) and include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

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, contingencies, 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, assessing the likelihood of adverse outcomes from claims and disputes, and share-based compensation.

Revenue Recognition

On January 1, 2018, the Company adopted Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, 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. Refer to Note 2 for the impact of this adoption.

Revenue is recognized when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.

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. The Company applies the optional exemption allowed under ASC 606 not to disclose consideration attributable to performance obligations for future transaction processing since the term of the contract with a seller is not defined and any future consideration on the contract would be dependent on the value and volume of transactions processed in the future, which are not determinable.

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 as the merchant of record, it controls the services before delivery to the seller, it is primarily responsible for the delivery of the services to its sellers, and it has discretion in setting prices charged to sellers. The Company also has the unilateral ability to accept or reject a transaction based on criteria established by the Company. As the merchant of record, Square is liable for the costs of processing the transactions for its sellers, and records such costs within cost of revenue.

Subscription and services-based revenue

Subscription and services-based revenue is primarily comprised of revenue the Company generates from Instant Deposit and Cash Card, Square Capital, website hosting and domain name registration services, and various other software as a service (SaaS) products.

Instant Deposit is a functionality within the Cash App and the Company's managed payments solution 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. The Company also offers Cash App customers the ability to use funds stored in the Cash App via a Visa prepaid card (Cash Card), for which the Company charges a per transaction fee that is recorded as revenue.

Square Capital facilitates a loan that is offered through a partnership with an industrial bank that is either repaid through withholding a percentage of the collections of the seller's receivables processed by the Company or a specified monthly amount. The Company generally facilitates loans to its sellers through a pre-qualification process that includes an analysis of the aggregated data of the seller’s business which includes, but is not limited to, the seller’s historical processing volumes, transaction count, chargebacks, growth, and length of time as a Square customer. The Company also facilitates loans to the customers of certain sellers as well as to the sellers of its partners who do not process payments through the Company. The loans are generally originated by a bank partner, from whom the Company purchases the loans obtaining all rights, title, and interest. The loans have no stated coupon rate but the seller is charged a one-time origination fee by the bank partner based upon their risk rating, which is derived primarily from processing activity. It is the Company’s intent to sell all of its rights, title, and interest of these loans to third-party investors for an upfront fee when the loans are sold. The Company records the net amounts paid to the bank as the cost of the loans purchased and subsequently records a gain on sale of the loans to the third-party investors as revenue upon transfer of title. The Company is retained by the third-party investors to service the loans and earns a servicing fee for facilitating the repayment of these receivables through its managed payments solutions. The Company records servicing revenue as servicing is delivered. For the loans which are not immediately sold to third-party investors, the Company recognizes a portion of the expected seller repayments over the cost of the loans as revenue in proportion to the loan principal reduction.

Following the acquisition of Weebly in May 2018, the Company offers customers website hosting services for a fee that is generally billed at inception. The Company also acts as a reseller of domain names registration services for a registrar for a fee, which is also generally billed at inception. The Company considers that it satisfies its performance obligations over time and as such recognizes revenue ratably over the term of the relevant arrangements, which vary from one month to twenty four months for website hosting, and one year to ten years for domain name registration.

SaaS represents software products and solutions that provide customers with access to various technologies for a fee which is recognized as revenue 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.
Subscription and services revenue also included revenue generated from Caviar, a food ordering platform that facilitated food delivery services that was sold by the Company on October 31, 2019. The performance obligations were the delivery of food orders from restaurants to customers and the provision of catered meals to corporate customers. For delivery of food orders, the Company charged fees to restaurants, as sellers, and also charged delivery and service fees to individuals. For provision of catered meals the Company charged corporate customers a fee. All fees were billed upon delivery of food orders or catered meals, when the Company considers that it has satisfied its performance obligations. Revenue was recognized upon delivery of the food orders or catered meals, net of refunds. Refunds were estimated based on historical experience.

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, and retailers. The Company 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 separate from hardware revenue, within subscription and services-based revenue, over the terms of the arrangement with the customer. Pursuant to practical expedients afforded under ASC 606, the Company does not recognize a financing component for hardware installment sales that have a term of one year or less.

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

The Company's contracts with customers generally do not include multiple performance obligations with differing patterns of revenue recognition, except for domain name registration offered with website hosting services sold after May 31, 2018 following the acquisition of Weebly (Note 7). The Company offers its customers the option to buy website hosting bundled with domain name registration, and infrequently the Company has offered its hardware customers free managed payments 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. The Company determines 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.

Cost of Revenue

Transaction-based costs

Transaction-based costs consist primarily of interchange and assessment fees, processing fees and bank settlement fees paid to third-party payment processors and financial institutions.

Subscription and services-based costs

Subscription and services-based costs consist primarily of Caviar-related costs, which included processing fees, payments to third-party couriers for deliveries and the cost of equipment provided to sellers. Caviar-related costs for catered meals also included food costs and personnel costs. Subscriptions and services-based costs also include costs associated with Cash Card and Instant Deposit.
Hardware costs

Hardware costs consist of all product costs associated with contactless and chip readers, chip card readers, Square Stand, Square Register, Square Terminal and third-party peripherals. Product costs consist of third-party manufacturing costs.

Bitcoin costs

Bitcoin cost of revenue comprises of the amounts the Company pays to purchase bitcoin, which will fluctuate in line with the price of bitcoin in the market.

Other Costs

Other costs such as employee costs including share based compensation, rent, and occupancy charges are generally not allocated to cost of revenues and are reflected in operating expenses.

Sales and Marketing Expenses

Advertising costs are expensed as incurred and included in sales and marketing expense in the consolidated statements of operations. Total advertising costs for the years ended December 31, 2019, 2018, and 2017 were $142.7 million, $101.9 million, and $81.9 million, respectively. Costs associated with the Cash Card and certain peer-to-peer service offered to the Cash App customers for free are included in sales and marketing expenses as the Company consider these to be marketing tools to encourage the usage of Cash App.

Share-based Compensation

Share-based compensation expense relates to stock options, restricted stock awards (RSAs), restricted stock units (RSUs), and purchases under the Company’s 2015 Employee Stock Purchase Plan (ESPP) which is measured based on the grant-date fair value. The fair value of RSAs and RSUs is determined by the closing price of the Company’s common stock on each grant date. The fair value of stock options and ESPP shares granted to employees is estimated on the date of grant using the Black-Scholes-Merton option valuation model. This share-based compensation expense valuation model requires the Company to make assumptions and judgments regarding the variables used in the calculation. These variables include the expected term (weighted average period of time that the options granted are expected to be outstanding), the expected volatility of the Company’s stock, expected risk-free interest rate and expected dividends. The Company uses the simplified calculation of expected term, as the Company does not have sufficient historical data to use any other method to estimate expected term. Expected volatility is based on a weighted average of the historical volatilities of the Company's common stock along with several entities with characteristics similar to those of the Company. The Company will continue to weight its own volatility more heavily as more of its own historical stock price information becomes available. Once its own historical data is equal to that of the expected term of option grants a peer group is no longer considered necessary. The expected risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. Share-based compensation expense is recorded on a straight-line basis over the requisite service period. The Company accounts for forfeitures as they occur.

Income and Other Taxes
The Company reports income taxes under the asset and liability approach. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating loss and tax credit carryforwards. Deferred tax amounts are determined by using the enacted tax rates expected to be in effect when the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

A valuation allowance reduces the deferred tax assets to the amount that is more likely than not to be realized. The Company considers historical information, tax planning strategies, the expected timing of the reversal of existing temporary differences, and may rely on financial projections to support its position on the recoverability of deferred tax assets. The Company’s judgment regarding future profitability contains significant assumptions and estimates of future operations. If such assumptions were to differ significantly from actual future results of operations, it may have a material impact on the Company’s ability to realize its deferred tax assets. At the end of each period, the Company assesses the ability to realize the
deferred tax assets. If it is more likely than not that the Company would not realize the deferred tax assets, then the Company would establish a valuation allowance for all or a portion of the deferred tax assets.

The Company recognizes the effect of uncertain income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that has a greater than 50% likelihood of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to uncertain tax positions in the provision for income tax expense on the consolidated statements of operations.

Cash and Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments, including money market funds, with an original maturity of three months or less when purchased to be cash equivalents.

As of December 31, 2019 and 2018, restricted cash of $38.9 million and $33.8 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 that we expect to become unrestricted within the next year.

As of December 31, 2019 and 2018, the remaining restricted cash of $12.7 million and $15.8 million, respectively, is primarily related to cash held as collateral pursuant to multi-year lease agreements (Note 18). 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.

Concentration of Credit Risk

For the years ended December 31, 2019, 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 48%, 29%, and 9% of settlements receivable as of December 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.

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.
Investments in marketable debt securities

The Company's short-term and long-term investments include marketable debt securities such as government and agency securities, corporate bonds, commercial paper and municipal securities. The Company determines the appropriate classification of its investments in marketable debt securities at the time of purchase and reevaluates such designation at each balance sheet date. The Company has classified and accounted for its marketable debt securities as available-for-sale. Investments are reviewed periodically to identify possible other-than-temporary impairments. If any impairment is considered other-than-temporary, the Company writes down the investment to its fair value and records the corresponding charge through other income (expense), net on its consolidated statements of operations. The Company carries these investments at fair value, and report the unrealized gains and losses, net of taxes, as a component of stockholders’ equity, except for unrealized losses determined to be other-than-temporary, which we record within other expense (income), net. We determine any realized gains or losses on the sale of marketable debt securities on a specific identification method, and we record such gains and losses as a component of other expense (income), net.

Investments in equity securities

The Company holds marketable and non-marketable equity investments, over which the Company does not have a controlling interest or significant influence. Marketable equity investments are measured using quoted prices in active markets with changes recorded in Other income (expense), net on the consolidated statements of operations. Non-marketable equity investments have no readily determinable fair values and are measured using the measurement alternative, which is defined as cost, less impairment, adjusted for observable price changes from orderly transactions for identical or similar investments of the same issuer. Adjustments are recorded in Other income (expense), net on the consolidated statements of operations.

Non-marketable equity investments are valued using significant unobservable inputs or data in an inactive market and the valuation requires our judgment due to the absence of market prices and inherent lack of liquidity. The carrying value for these investments is not adjusted if there are no observable transactions for identical or similar investments of the same issuer or if there are no identified events or changes in circumstances that may indicate impairment. Valuations of non-marketable equity investments are inherently complex due to the lack of readily available market data. In addition, the determination of whether an orderly transaction is for an identical or similar investment requires significant management judgment, including understanding the differences in the rights and obligations of the investments and the extent to which those differences would affect the fair values of those investments.

The Company assesses the impairment of its non-marketable equity investments on a quarterly basis. The impairment analysis encompasses an assessment of the severity and duration of the impairment and a qualitative and quantitative analysis of other key factors including the investee’s financial metrics, market acceptance of the investee’s product or technology, other competitive products or technology in the market, general market conditions, and the rate at which the investee is using its cash. If the investment is considered to be impaired, the Company will record an impairment in Other income (expense), net on the consolidated statements of operations and establish a new carrying value for the investment.
Customer funds

Customer funds held in deposit represent Cash App customers' stored balances that customers would later use to send money or make payments, or customers cash in transit. During the year ended December 31, 2018, the Company started investing a portion of these stored balances in short-term marketable debt securities (Note 4). The Company determines the appropriate classification of the investments in marketable debt securities within customer funds at the time of purchase and reevaluates such designation at each balance sheet date. The Company has classified and accounted for its marketable debt securities within customer funds as available-for-sale.

Fair Value of Financial Instruments

The Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. Fair value accounting establishes a three-level hierarchy priority for disclosure of assets and liabilities recorded at fair value. The ordering of priority reflects the degree to which objective prices in external active markets are available to measure fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable.

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

Level 2 Inputs: Other than quoted prices included in Level 1 Inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

Loans Held for Sale

The Company classifies customer loans as held for sale upon purchase from an industrial bank partner, as there is an available market for such loans and it is the Company’s intent to sell all of its rights, title, and interest in these loans to third-party investors. 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. The Company recognizes a charge within transaction and loan 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. A loan that is initially designated as held for sale may be reclassified to held for investment if and when the Company's intent for that loan changes. There have been no reclassifications made to date.

Settlements Receivable
        
Settlements receivable represents amounts due from third-party payment processors for customer transactions. Settlements receivable are typically received within one or two business days of the transaction date. No valuation allowances have been established, as funds are due from large, well-established financial institutions with no historical collections issue.
Inventory

Inventory is comprised of contactless and chip readers, chip card readers, Square Stand, Square Register, Square Terminal and third-party peripherals, as well as component parts that are used to manufacture these products. Inventory is stated at the lower of cost (generally on a first-in, first-out basis) or net realizable value. Inventory that is obsolete or in excess of forecasted usage is written down to its net realizable value based on the estimated selling prices in the ordinary course of business. The Company's inventory is held at third party warehouses and contract manufacturer premises.

Deferred Revenue

Deferred revenue is primarily comprised of payments for website hosting and domain name registration received from customers at inception of the arrangements prior to the services being rendered. Deferred revenue also includes 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.


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 private broker dealers or from Cash App 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 Company does not hold bitcoin for speculation purposes. The carrying value of bitcoin held by the Company was $1.0 million and $0.2 million as of December 31, 2019 and 2018, respectively. The Company assesses the carrying value of bitcoin held by the Company at each reporting date and records an impairment charge if the carrying value exceeds the fair value. Losses on bitcoin for the years ended December 31, 2019, 2018, and 2017 were insignificant.

Property and Equipment

Property and equipment are recorded at historical cost less accumulated depreciation, which is computed on a straight-line basis over the asset’s estimated useful life. The estimated useful lives of property and equipment are described below:
Property and EquipmentUseful Life
Capitalized software18 months
Computer and data center equipment
Two to three years
Furniture and fixturesSeven years
Leasehold improvements
Lesser of ten years or remaining lease term

When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from their respective accounts, and any gain or loss on such sale or disposal is reflected in operating expenses.

Capitalized Software

The Company capitalizes certain costs incurred in developing internal-use software when capitalization requirements have been met. Costs prior to meeting the capitalization requirements are expensed as incurred. Capitalized costs are included in property and equipment, net, and amortized on a straight-lined basis over the estimated useful life of the software and included in product development costs on the consolidated statements of operations. The Company capitalized $22.5 million, $24.0 million and $9.8 million of internally developed software during the years ended December 31, 2019, 2018 and 2017, respectively, and recognized $18.9 million, $10.6 million and $6.6 million of amortization expense during the years ended December 31, 2019, 2018 and 2017, respectively.
Leases

The Company leases office space and equipment under non-cancellable finance and operating leases with various expiration dates.

The Company adopted Accounting Standards Codification (ASC) 842, Leases (ASC 842) 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 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. The Company elected to apply the short-term lease measurement and recognition exemption to its leases where applicable. Operating lease right-of-use assets and operating lease liabilities are recognized at the present value of the future lease payments, generally for the base noncancellable lease term, at the lease commencement date for each lease. The interest rate used to determine the present value of the future lease payments is the Company's incremental borrowing rate because the interest rate implicit in most of the Company's leases is not readily determinable. The Company's incremental borrowing rate is estimated to approximate the interest rate that the Company would pay to borrow on a collateralized basis with similar terms and payments as the lease, and in economic environments where the leased asset is located. Operating lease right-of-use assets also include any prepaid lease payments and lease incentives. The Company's lease agreements generally contain lease and non-lease components. Non-lease components, which primarily include payments for maintenance and utilities, are combined with lease payments and accounted for as a single lease component. The Company includes the fixed non-lease components in the determination of the right-of-use assets and operating lease liabilities. The Company records the amortization of the right of use asset and the accretion of lease liability as a component of rent expense in the consolidated statement of operations. The accounting for finance leases remained substantially unchanged.

Upon adoption of ASC 842, 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. Additionally, the Company derecognized $149.0 million related to the build-to-suit asset and liability upon adoption of this standard because the Company was no longer deemed to be the owner of the related asset under construction under the new standard.


When lease agreements provide allowances for leasehold improvements, the Company assesses whether it is the owner of the leasehold improvements for accounting purposes. When the Company concludes that it is the owner, it capitalizes the leasehold improvement assets and recognizes the related depreciation expense on a straight-line basis over the lesser of the lease term or the estimated useful life of the asset. Additionally, the Company recognizes the amounts of allowances to be received from the lessor as a reduction of the lease liability and the associated right of use asset. When the Company concludes that it is not the owner, the payments that the Company makes towards the leasehold improvements are accounted as a component of the lease payments.

The Company records a liability for the estimated fair value for any asset retirement obligation (ARO) associated with its leases, with an offsetting asset. In the determination of the fair value of AROs, the Company uses various assumptions and judgments, including such factors as the existence of a legal obligation, estimated amounts and timing of settlements, and discount and inflation rates. The liability is subsequently accreted while the asset is depreciated. As of December 31, 2019, the Company had a liability for AROs, gross of accretion, of $3.6 million and an associated asset, net of depreciation, of $1.6 million.

Business Combinations

The purchase price of an acquisition is allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition dates. The excess of total consideration over the fair values of the assets acquired and the liabilities assumed is recorded as goodwill. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of
assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments would be recorded on the consolidated statements of operations.

Long-Lived Assets, including Goodwill and Acquired Intangibles

The Company evaluates the recoverability of property and equipment and finite lived intangible assets for impairment whenever events or circumstances indicate that the carrying amounts of such assets may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset or an asset group to estimated undiscounted future net cash flows expected to be generated. If the carrying amount of the long–lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third–party independent appraisals, as considered necessary. For the periods presented, the Company had recorded no impairment charges.

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. An impairment loss is recognized to the extent that the carrying amount exceeds the reporting unit’s fair value. The Company has concluded that its business operations as a whole comprise one reporting unit. The Company has the option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount and determine whether further action is needed. If, after assessing the totality of events or circumstances, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. For the periods presented, the Company had recorded no impairment charges.

Acquired intangibles consist of acquired technology and customer relationships associated with various acquisitions. Acquired technology is amortized over its estimated useful life on a straight-line basis within cost of revenue. Customer relationships acquired are amortized on a straight-line basis over their estimated useful lives within operating expenses. The Company evaluates the remaining estimated useful life of its intangible assets being amortized on an ongoing basis to determine whether events and circumstances warrant a revision to the remaining period of amortization.

Assets Held for Sale

The Company classifies an asset group (‘asset’) as held for sale in the period that (i) it has approved and committed to a plan to sell the asset, (ii) the asset is available for immediate sale in its present condition, (iii) an active program to locate a buyer and other actions required to sell the asset have been initiated, (iv) the sale of the asset is probable and transfer of the asset is expected to qualify for recognition as a completed sale within one year (subject to certain events or circumstances), (v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and (vi) it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. The Company initially and subsequently measures a long-lived asset that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in other income (expenses), net, in the consolidated statement of operations. Conversely, gains are generally not recognized on the sale of a long-lived asset until the date of sale. Upon designation as an asset held for sale, the Company stops recording depreciation or amortization expense on the asset. The Company assesses the fair value of assets held for sale less any costs to sell at each reporting period until the asset is sold or is no longer classified as held for sale. Upon sale of the asset any excess of the sale proceeds over the carrying value of the asset is recorded as a gain on sale of asset group in the consolidated statement of operations.

Customers Payable

Customers payable represents the transaction amounts, less revenue earned by the Company, owed to sellers or Cash App customers. The payable amount comprises amounts owed to customers due to timing differences as the Company typically settles within one business day, amounts held by the Company in accordance with its risk management policies, and amounts held for customers who have not yet linked a bank account. This balance also includes the Company's liability for customer funds held on deposit in the Cash App.
Accrued Transaction Losses

The Company establishes a reserve for estimated transaction losses due to chargebacks, which represent a potential loss due to disputes between a seller and their customer or due to a fraudulent transaction. This also includes estimated transaction losses on Cash App activity related to peer-to-peer payments sent from a credit card, Cash for Business and Cash Card. The reserve is estimated based on available data as of the reporting date, including expectations of future chargebacks, and historical trends related to loss rates. Additions to the reserve are reflected in current operating results, while realized losses are offset against the reserve. These amounts are classified within transaction and loan losses on the consolidated statements of operations, except for the amounts associated with the peer-to-peer service offered to Cash App customers for free that is classified within sales and marketing expenses.

Recent Accounting Pronouncements
Recently adopted accounting pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses, which requires the measurement and recognition of expected credit losses for financial assets held. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available for sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company adopted this guidance effective January 1, 2020 and has applied the guidance prospectively. The Company has determined that the new guidance does not have a material impact on the balances reported in its consolidated financial statements and will include additional disclosures in the first reporting period subsequent to adoption. Beginning with the first quarter of 2020, the Company will expand disclosures in the financial statements to discuss how it develops its expected credit loss estimates, the methodology applied to estimate the allowance for credit losses, and the factors that influence the Company's estimates. For available for sale debt securities with unrealized losses where the Company concludes that an allowance for credit losses is not necessary, the Company will disclose the associated fair value of such securities as well as the basis for conclusions that an allowance for credit losses was not necessary, aggregated by major investment category and length of time that individual securities have been in a continuous unrealized loss position. For available for sale debt securities subject to credit losses, the Company will disclose the methodology and significant inputs used to measure the allowance for credit losses, the Company’s policy of recognizing uncollectible available for sale debt securities, and provide a tabular roll forward of the credit losses by major security type.

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 for interim or annual goodwill impairment performed on testing dates after January 1, 2017. The amendments should be applied on a prospective basis. The Company adopted this guidance effective January 1, 2020 and will apply the guidance for the 2020 annual goodwill impairment test which will be performed as of December 31. The adoption of this guidance did not 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 adopted this guidance effective January 1, 2020 and has applied the guidance prospectively, and will include additional disclosures required by the new guidance relating to significant unobservable inputs used to develop Level 3 fair value measurements in the first quarter of 2020.
Recently issued accounting pronouncements not yet adopted

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 does not expect the adoption of this guidance to have a material impact on the consolidated financial statements and related disclosures.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments — Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The amendments clarify the scope of the credit losses standard and among other things. With respect to hedge accounting, the amendments address partial-term fair value hedges and fair value hedge basis adjustments, among other things. On recognizing and measuring financial instruments, they address the scope of the guidance, the requirement for remeasurement to fair value when using the measurement alternative, and certain disclosure requirements among other things. 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 as long an entity has also adopted the amendments in ASU 2016-13. The Company does not expect the adoption of this guidance to have a material impact on the consolidated financial statements and related disclosures.

In December 2019, the FASB issued ASU 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes, as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. Among other things, the new guidance simplifies intraperiod tax allocation and reduces the complexity in accounting for income taxes with year-to-date losses in interim periods. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2020, 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.
v3.19.3.a.u2
REVENUE
12 Months Ended
Dec. 31, 2019
Revenue from Contract with Customer [Abstract]  
REVENUE REVENUE
Adoption of ASC 606, Revenue from Contracts with Customers

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 the effect 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 year ended December 31, 2018 was an increase of $6.4 million as a result of applying ASC 606.

Practical Expedients

The Company does not recognize a financing component for hardware installment sales that have a term of one year or less.


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

Year Ended December 31,
201920182017
Revenue from Contracts with Customers:
Transaction-based revenue$3,081,074  $2,471,451  $1,920,174  
Subscription and services-based revenue883,922  499,010  185,485  
Hardware revenue84,505  68,503  41,415  
Bitcoin revenue516,465  166,517  —  
Revenue from other sources:
Subscription and services-based revenue$147,534  $92,696  $67,179  

The deferred revenue balances were as follows (in thousands):
Year Ended December 31,
20192018
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 adjusted36,451  1,590  
Deferred revenue, end of the period44,331  36,451  
Deferred revenue arising from business combination—  22,800  
Revenue recognized in the period from amounts included in deferred revenue at the beginning of the period$31,510  $1,590  
v3.19.3.a.u2
INVESTMENTS IN DEBT SECURITIES
12 Months Ended
Dec. 31, 2019
Investments, Debt and Equity Securities [Abstract]  
INVESTMENTS IN DEBT SECURITIES INVESTMENTS IN DEBT SECURITIES
The Company's short-term and long-term investments as of December 31, 2019 are as follows (in thousands):

Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
Short-term debt securities:
U.S. agency securities$131,124  $409  $(11) $131,522  
Corporate bonds67,169  580  (28) 67,721  
Municipal securities6,667  109  —  6,776  
U.S. government securities264,069  1,083  (17) 265,135  
Foreign securities21,270  48  (16) 21,302  
Total$490,299  $2,229  $(72) $492,456  
Long-term debt securities:
U.S. agency securities$63,645  $612  $(189) $64,068  
Corporate bonds141,307  1,832  (61) 143,078  
Municipal securities9,594  151  (39) 9,706  
U.S. government securities294,682  1,287  (190) 295,779  
Foreign securities24,625  86  (39) 24,672  
Total$533,853  $3,968  $(518) $537,303  
        
The Company's short-term and long-term investments as of December 31, 2018 are as follows (in thousands):

Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
Short-term debt securities:
U.S. agency securities$80,160  $32  $(70) $80,122  
Corporate bonds109,807  80  (368) 109,519  
Municipal securities27,839  52  (59) 27,832  
U.S. government securities292,615  161  (509) 292,267  
Foreign securities31,263   (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 bonds159,783  419  (950) 159,252  
Municipal securities28,453  167  (26) 28,594  
U.S. government securities153,743  553  (172) 154,124  
Foreign securities8,122  28  —  8,150  
Total$464,545  $1,361  $(1,226) $464,680  

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

For the years ended December 31, 2019, 2018 and 2017, 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 Company's gross unrealized losses and fair values for those investments that were in an unrealized loss position as of December 31, 2019 and 2018, aggregated by investment category and the length of time that individual securities have been in a continuous loss position are as follows (in thousands):


December 31, 2019
Less than 12 monthsGreater than 12 monthsTotal
Fair ValueGross Unrealized LossesFair ValueGross Unrealized LossesFair ValueGross Unrealized Losses
Short-term debt securities:
U.S. agency securities$23,896  $(9) $4,996  $(2) $28,892  $(11) 
Corporate bonds5,507  (27) 2,502  (1) 8,009  (28) 
Municipal securities1,004  —  —  —  1,004  —  
U.S. government securities21,481  (8) 14,984  (9) 36,465  (17) 
Foreign securities13,499  (16) —  —  13,499  (16) 
Total$65,387  $(60) $22,482  $(12) $87,869  $(72) 
Long-term debt securities:
U.S. agency securities$16,740  $(189) $—  $—  $16,740  $(189) 
Corporate bonds16,708  (61) —  —  16,708  (61) 
Municipal securities1,005  (39) —  —  1,005  (39) 
U.S. government securities42,210  (162) —  (28) 42,210  (190) 
Foreign securities16,383  (39) —  —  16,383  (39) 
Total$93,046  $(490) $(28) $93,046  $(518) 


December 31, 2018
Less than 12 monthsGreater than 12 monthsTotal
Fair ValueGross Unrealized LossesFair ValueGross Unrealized LossesFair ValueGross Unrealized Losses
Short-term debt securities:
U.S. agency securities$78,134  $(70) $—  $—  $78,134  $(70) 
Corporate bonds38,052  (61) 62,479  (307) 100,531  (368) 
Municipal securities2,251  (1) 22,915  (58) 25,166  (59) 
U.S. government securities240,979  (148) 41,131  (361) 282,110  (509) 
Foreign securities27,280  (16) —  —  27,280  (16) 
Total$386,696  $(296) $126,525  $(726) $513,221  $(1,022) 
Long-term debt securities:
U.S. agency securities$20,504  $(29) $10,133  $(49) $30,637  $(78) 
Corporate bonds119,333  (824) 20,306  (126) 139,639  (950) 
Municipal securities9,701  (14) 3,260  (12) 12,961  (26) 
U.S. government securities25,850  (32) 24,576  (140) 50,426  (172) 
Foreign securities1,000  —  —  —  1,000  —  
Total$176,388  $(899) $58,275  $(327) $234,663  $(1,226) 
The contractual maturities of the Company's short-term and long-term investments as of December 31, 2019 are as follows (in thousands):

Amortized CostFair Value
Due in one year or less$490,299  $492,456  
Due in one to five years533,853  537,303  
Total$1,024,152  $1,029,759  
CUSTOMER FUNDS
The following table presents the assets underlying customer funds (in thousands):

December 31,
2019
December 31,
2018
Cash$422,459  $158,697  
Cash Equivalents:
Money market funds233  18  
U.S. agency securities8,585  39,991  
U.S. government securities6,984  35,349  
Short-term debt securities:
U.S. agency securities—  27,291  
U.S. government securities238,031  72,671  
Total$676,292  $334,017  

        

The Company's investments within customer funds as of December 31, 2019 are as follows (in thousands):
Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
Short-term debt securities:
U.S. government securities$237,909  $144  $(22) $238,031  
Total$237,909  $144  $(22) $238,031  


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

Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
Short-term debt securities:
U.S. agency securities$27,293  $ $(4) $27,291  
U.S. government securities72,662  12  (3) 72,671  
Total$99,955  $14  $(7) $99,962  
        
The amortized cost of investments classified as cash equivalents approximated the fair value due to the short-term nature of the investments.

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 gross unrealized losses and fair values for those investments that were in an unrealized loss position as of December 31, 2019 and 2018, aggregated by investment category and the length of time that individual securities have been in a continuous loss position are as follows (in thousands):

December 31, 2019
Less than 12 monthsGreater than 12 monthsTotal
Fair ValueGross Unrealized LossesFair ValueGross Unrealized LossesFair ValueGross Unrealized Losses
Short-term debt securities:
U.S. government securities$56,984  $(22) $—  $—  $56,984  $(22) 
Total$56,984  $(22) $—  $—  $56,984  $(22) 


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