SQUARE, INC., 10-K filed on 2/27/2018
Annual Report
Document and Entity Information (USD $)
In Billions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Jun. 30, 2017
Feb. 22, 2018
Class A
Feb. 22, 2018
Class B
Class of Stock [Line Items]
 
 
 
 
Entity Registrant Name
Square, Inc. 
 
 
 
Entity Central Index Key
0001512673 
 
 
 
Entity Current Reporting Status
Yes 
 
 
 
Entity Voluntary Filers
No 
 
 
 
Current Fiscal Year End Date
--12-31 
 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
 
Document Type
10-K 
 
 
 
Document Period End Date
Dec. 31, 2017 
 
 
 
Document Fiscal Year Focus
2017 
 
 
 
Document Fiscal Period Focus
FY 
 
 
 
Amendment Flag
false 
 
 
 
Entity Common Stock, Shares Outstanding
 
 
283,432,014 
112,924,272 
Entity Public Float
 
$ 6.4 
 
 
CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and cash equivalents
$ 696,474 
$ 452,030 
Short-term investments
169,576 
59,901 
Restricted cash
28,805 
22,131 
Settlements receivable
620,523 
321,102 
Customer funds
103,042 
43,574 
Loans held for sale
73,420 
42,144 
Other current assets
86,454 
60,543 
Total current assets
1,778,294 
1,001,425 
Property and equipment, net
91,496 
88,328 
Goodwill
58,327 
57,200 
Acquired intangible assets, net
14,334 
19,292 
Long-term investments
203,667 
27,366 
Restricted cash
9,802 
14,584 
Other non-current assets
31,350 
3,194 
Total assets
2,187,270 
1,211,362 
Current liabilities:
 
 
Accounts payable
16,763 
12,602 
Customers payable
733,736 
431,632 
Settlements payable
114,788 
51,151 
Accrued transaction losses
26,893 
20,064 
Accrued expenses
52,280 
39,543 
Other current liabilities
28,367 
22,472 
Total current liabilities
972,827 
577,464 
Long-term debt (Note 9)
358,572 
Other non-current liabilities
69,538 
57,745 
Total liabilities
1,400,937 
635,209 
Commitments and contingencies (Note 14)
   
   
Stockholders’ equity:
 
 
Preferred stock, $0.0000001 par value: 100,000,000 shares authorized at December 31, 2017 and December 31, 2016. None issued and outstanding at December 31, 2017 and December 31, 2016.
Additional paid-in capital
1,630,386 
1,357,381 
Accumulated other comprehensive loss
(1,318)
(1,989)
Accumulated deficit
(842,735)
(779,239)
Total stockholders’ equity
786,333 
576,153 
Total liabilities and stockholders’ equity
2,187,270 
1,211,362 
Class A
 
 
Stockholders’ equity:
 
 
Common stock
Class B
 
 
Stockholders’ equity:
 
 
Common stock
$ 0 
$ 0 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Dec. 31, 2017
Dec. 31, 2016
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)
Preferred stock, shares outstanding (in shares)
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)
280,400,813 
198,746,620 
Common stock, shares outstanding (in shares)
280,400,813 
198,746,620 
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)
114,793,262 
165,800,756 
Common stock, shares outstanding (in shares)
114,793,262 
165,800,756 
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Revenue:
 
 
 
Hardware revenue
$ 41,415 
$ 44,307 
$ 16,377 
Total net revenue
2,214,253 
1,708,721 
1,267,118 
Cost of Revenue [Abstract]
 
 
 
Hardware costs
62,393 
68,562 
30,874 
Amortization of acquired technology
6,544 
8,028 
5,639 
Total cost of revenue
1,374,947 
1,132,683 
897,088 
Gross profit
839,306 
576,038 
370,030 
Operating expenses:
 
 
 
Product development
321,888 
268,537 
199,638 
Sales and marketing
253,170 
173,876 
145,618 
General and administrative
250,553 
251,993 
143,466 
Transaction, loan and advance losses
67,018 
51,235 
54,009 
Amortization of acquired customer assets
883 
850 
1,757 
Total operating expenses
893,512 
746,491 
544,488 
Operating loss
(54,206)
(170,453)
(174,458)
Interest and other (income) expense, net
8,458 
(780)
1,613 
Loss before income tax
(62,664)
(169,673)
(176,071)
Provision for income taxes
149 
1,917 
3,746 
Net loss
(62,813)
(171,590)
(179,817)
Deemed dividend on Series E preferred stock
(32,200)
Net loss attributable to common stockholders
(62,813)
(171,590)
(212,017)
Net loss per share attributable to common stockholders:
 
 
 
Basic (in USD per share)
$ (0.17)
$ (0.50)
$ (1.24)
Diluted (in USD per share)
$ (0.17)
$ (0.50)
$ (1.24)
Weighted-average shares used to compute net loss per share attributable to common stockholders:
 
 
 
Basic (in shares)
379,344 
341,555 
170,498 
Diluted (in shares)
379,344 
341,555 
170,498 
Subscription and services-based
 
 
 
Revenue:
 
 
 
Revenue
252,664 
129,351 
58,013 
Cost of Revenue [Abstract]
 
 
 
Transaction and services-based costs
75,720 
43,132 
22,470 
Customers Other than Starbucks |
Transaction-based
 
 
 
Revenue:
 
 
 
Revenue
1,920,174 
1,456,160 
1,050,445 
Cost of Revenue [Abstract]
 
 
 
Transaction and services-based costs
1,230,290 
943,200 
672,667 
Starbucks |
Transaction-based
 
 
 
Revenue:
 
 
 
Revenue
78,903 
142,283 
Cost of Revenue [Abstract]
 
 
 
Transaction and services-based costs
$ 0 
$ 69,761 
$ 165,438 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Statement of Comprehensive Income [Abstract]
 
 
 
Net loss
$ (62,813)
$ (171,590)
$ (179,817)
Net foreign currency translation adjustments
1,900 
(716)
(356)
Net unrealized gain (loss) on revaluation of intercompany loans
385 
(11)
(22)
Net unrealized loss on marketable securities
(1,614)
(77)
Total comprehensive loss
$ (62,142)
$ (172,394)
$ (180,195)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (USD $)
In Thousands, except Share data, unless otherwise specified
Total
USD ($)
IPO
USD ($)
Series E
USD ($)
Convertible preferred stock
USD ($)
Convertible preferred stock
Series E
USD ($)
Class A and B common stock
USD ($)
Class A and B common stock
IPO
Additional paid-in capital
USD ($)
Additional paid-in capital
IPO
USD ($)
Accumulated other comprehensive loss
USD ($)
Accumulated deficit
USD ($)
Beginning balance at Dec. 31, 2015
$ 508,048 
 
 
 
 
$ 0 
 
$ 1,116,882 
 
$ (1,185)
$ (607,649)
Beginning balance (in shares) at Dec. 31, 2015
 
 
 
 
 
334,949,445 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
 
 
 
Net loss
(171,590)
 
 
 
 
 
 
 
 
 
(171,590)
Shares issued in connection with:
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options and warrants
82,438 
 
 
 
 
 
 
82,438 
 
 
 
Exercise of stock options and warrants (in shares)
 
 
 
 
 
24,413,821 
 
 
 
 
 
Purchases under employee stock purchase plan
14,201 
 
 
 
 
 
 
14,201 
 
 
 
Purchases under employee stock purchase plan (in shares)
 
 
 
 
 
1,852,900 
 
 
 
 
 
Vesting of restricted stock units
 
 
 
 
 
 
 
 
 
 
Vesting of restricted stock units (in shares)
 
 
 
 
 
3,392,726 
 
 
 
 
 
Vesting of early exercised stock options
2,313 
 
 
 
 
 
 
2,313 
 
 
 
Cancellation of shares related to business combinations
 
 
 
 
 
 
 
 
 
 
Cancellation of shares related to business combinations (in shares)
 
 
 
 
 
(228)
 
 
 
 
 
Repurchase of common stock
 
 
 
 
 
 
 
 
 
 
Repurchase of common stock (in shares)
 
 
 
 
 
(61,288)
 
 
 
 
 
Change in other comprehensive loss
(804)
 
 
 
 
 
 
 
 
(804)
 
Share-based compensation
141,547 
 
 
 
 
 
 
141,547 
 
 
 
Ending balance at Dec. 31, 2016
576,153 
 
 
 
 
1,357,381 
 
(1,989)
(779,239)
Ending balance (in shares) at Dec. 31, 2016
 
 
 
 
364,547,376 
 
 
 
 
 
Beginning balance at Dec. 31, 2014
 
 
 
 
 
 
 
 
 
 
Beginning balance (in shares) at Dec. 31, 2014
 
 
 
 
 
154,603,683 
 
 
 
 
 
Shares issued in connection with:
 
 
 
 
 
 
 
 
 
 
 
Contribution of common stock (in shares)
 
 
 
 
 
(5,068,238)
 
 
 
 
 
Ending balance at Jan. 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Beginning balance at Dec. 31, 2014
273,672 
 
 
514,945 
 
 
155,166 
 
(807)
(395,632)
Beginning balance (in shares) at Dec. 31, 2014
 
 
 
135,252,809 
 
154,603,683 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
 
 
 
Net loss
(179,817)
 
 
 
 
 
 
 
 
 
(179,817)
Shares issued in connection with:
 
 
 
 
 
 
 
 
 
 
 
Issuance of stock
 
245,726 
29,952 
 
29,952 
 
 
 
245,726 
 
 
Issuance of stock (in shares)
 
 
 
 
1,940,058 
 
29,700,000 
 
 
 
 
Conversion of Series A, B, C, D & E preferred stock upon initial public offering to common stock
 
 
(544,897)
 
 
 
544,897 
 
 
 
Conversion of Series A, B, C, D & E preferred stock upon initial public offering to common stock (in shares)
 
 
 
(137,192,867)
 
137,192,867 
 
 
 
 
 
Deemed dividend on Series E preferred stock
 
 
 
 
 
 
32,200 
 
 
(32,200)
Deemed dividend on Series E preferred stock (in shares)
10,299,696 
 
 
 
 
10,299,696 
 
 
 
 
 
Exercise of stock options
14,766 
 
 
 
 
 
 
14,766 
 
 
 
Exercise of stock options (in shares)
 
 
 
 
 
5,544,785 
 
 
 
 
 
Issuance of common stock related to acquisitions
35,776 
 
 
 
 
 
 
35,776 
 
 
 
Issuance of common stock related to acquisitions (in shares)
 
 
 
 
 
3,591,014 
 
 
 
 
 
Issuance of common stock
 
 
 
 
 
 
 
 
 
Issuance of common stock (in shares)
 
 
 
 
 
3,777 
 
 
 
 
 
Vesting of early exercised stock options
4,958 
 
 
 
 
 
 
4,958 
 
 
 
Contribution of common stock
 
 
 
 
 
 
 
 
 
 
Contribution of common stock (in shares)
 
 
 
 
 
(5,068,238)
 
 
 
 
 
Repurchase of common stock
 
 
 
 
 
 
 
 
 
 
Repurchase of common stock (in shares)
 
 
 
 
 
(918,139)
 
 
 
 
 
Change in other comprehensive loss
(378)
 
 
 
 
 
 
 
 
(378)
 
Share-based compensation
82,292 
 
 
 
 
 
 
82,292 
 
 
 
Tax benefit from share-based award activity
1,101 
 
 
 
 
 
 
1,101 
 
 
 
Ending balance at Dec. 31, 2015
508,048 
 
 
 
 
1,116,882 
 
(1,185)
(607,649)
Ending balance (in shares) at Dec. 31, 2015
 
 
 
 
334,949,445 
 
 
 
 
 
Beginning balance at Dec. 31, 2016
576,153 
 
 
 
 
1,357,381 
 
(1,989)
(779,239)
Beginning balance (in shares) at Dec. 31, 2016
 
 
 
 
364,547,376 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
 
 
 
Net loss
(62,813)
 
 
 
 
 
 
 
 
 
(62,813)
Shares issued in connection with:
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options
144,774 
 
 
 
 
 
 
144,774 
 
 
 
Exercise of stock options (in shares)
24,510,745 
 
 
 
 
24,510,745 
 
 
 
 
 
Purchases under employee stock purchase plan
17,859 
 
 
 
 
 
 
17,859 
 
 
 
Purchases under employee stock purchase plan (in shares)
 
 
 
 
 
1,670,045 
 
 
 
 
 
Vesting of restricted stock units
 
 
 
 
 
 
 
 
 
 
Vesting of restricted stock units (in shares)
 
 
 
 
 
5,964,153 
 
 
 
 
 
Vesting of early exercised stock options
661 
 
 
 
 
 
 
661 
 
 
 
Repurchase of common stock
 
 
 
 
 
 
 
 
 
 
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
(44,682)
 
 
 
 
 
 
(44,682)
 
 
 
Tax withholding related to vesting of restricted stock units (in shares)
 
 
 
 
 
(1,474,035)
 
 
 
 
 
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
 
 
 
 
395,194,075 
 
 
 
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Cash flows from operating activities:
 
 
 
Net loss
$ (62,813)
$ (171,590)
$ (179,817)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
37,279 
37,745 
27,626 
Non-cash interest and other expense
14,421 
(49)
270 
Share-based compensation
155,836 
138,786 
82,292 
Excess tax benefit from share-based payment activity
(1,101)
Transaction, loan and advance losses
67,018 
51,235 
54,009 
Deferred provision (benefit) for income taxes
(1,385)
58 
26 
Changes in operating assets and liabilities:
 
 
 
Settlements receivable
(305,831)
(177,662)
(31,810)
Customer funds
(59,468)
(34,128)
(6,462)
Purchase of loans held for sale
(1,184,630)
(668,976)
(816)
Sales and principal payments of loans held for sale
1,145,314 
627,627 
21 
Other current assets
(26,119)
16,116 
(25,841)
Other non-current assets
(3,274)
631 
1,220 
Accounts payable
4,515 
(2,147)
7,831 
Customers payable
301,778 
206,574 
76,009 
Settlements payable
63,637 
38,046 
13,105 
Charge-offs to accrued transaction losses
(46,148)
(47,931)
(34,655)
Accrued expenses
12,207 
(409)
21,450 
Other current liabilities
3,683 
6,056 
6,655 
Other non-current liabilities
11,691 
3,149 
11,111 
Net cash provided by operating activities
127,711 
23,131 
21,123 
Cash flows from investing activities:
 
 
 
Purchase of marketable securities
(544,910)
(164,766)
Proceeds from maturities of marketable securities
168,224 
43,200 
Proceeds from sale of marketable securities
89,087 
34,222 
Purchase of property and equipment
(26,097)
(25,433)
(37,432)
Proceeds from sale of property and equipment
296 
Payments for investment in privately held entity
(25,000)
Payment for acquisition of intangible assets
(400)
(1,286)
Business acquisitions, net of cash acquired
(1,915)
(1,360)
(4,500)
Net cash used in investing activities:
(340,611)
(114,241)
(43,218)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of convertible senior notes, net
428,250 
Purchase of convertible senior note hedges
(92,136)
Proceeds from issuance of warrants
57,244 
Payment for termination of Starbucks warrant
(54,808)
Proceeds from issuance of preferred stock, net
29,952 
Proceeds from issuance of common stock upon initial public offering, net of offering costs
   
251,257 
Payments of offering costs related to initial public offering
(5,530)
Principal payments on debt
(30,000)
Payments of debt issuance costs
(1,387)
Principal payments on capital lease obligation
(1,439)
(168)
Proceeds from the exercise of stock options and purchases under the employee stock purchase plan, net
162,504 
96,439 
13,840 
Payments for tax withholding related to vesting of restricted stock units
(44,682)
Excess tax benefit from share-based payment award
1,101 
Net cash provided by financing activities
454,933 
90,741 
264,763 
Effect of foreign exchange rate on cash and cash equivalents
4,303 
(438)
(1,775)
Net increase (decrease) in cash, cash equivalents and restricted cash
246,336 
(807)
240,893 
Cash, cash equivalents and restricted cash, beginning of the year
488,745 
489,552 
248,659 
Cash, cash equivalents and restricted cash, end of the year
$ 735,081 
$ 488,745 
$ 489,552 
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 and 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.

Reclassifications and Other Adjustments

As a result of the Company’s adoption of Accounting Standards Update (ASU) No. 2016-18, Restricted Cash, on January 1, 2017, the Company reclassified changes in restricted cash balances from investing activities in the statement of cash flows to changes in cash, cash equivalents and restricted cash. For the years ended December 31, 2016 and 2015, $8.5 million and $1.9 million, respectively, was reclassified from cash outflows from investing activities to changes in cash, cash equivalents and restricted cash.

During the year ended December 31, 2017, the Company has reclassified certain prior period balances to conform to the current period presentation. In particular the Company has combined the Customer funds obligation and Customers payable into a single caption called Customers payable on the consolidated balance sheet. This classification change was made because both accounts reflect customer amounts that are held by Square that are obligations to the customer.

Litigation Settlement

On June 8, 2016, a final, definitive settlement agreement (Settlement Agreement) was entered into by Robert E. Morley, REM Holdings 3, LLC, Jack Dorsey, Jim McKelvey, and the Company. The Settlement Agreement required an aggregate total payment of $50.0 million to plaintiffs, including meaningful contributions by Mr. Dorsey and Mr. McKelvey. The Company made a payment of $48.0 million to plaintiffs and met its obligations under the Settlement Agreement. This amount was classified within general and administrative expenses on the consolidated statements of operations for the year ended December 31, 2016. On June 17, 2016, the Court entered an Order dismissing the complaints in their entirety, with prejudice.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted 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, 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.

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery of obligations to its customers has occurred, the related fees are fixed or determinable, and collectibility is reasonably assured. Revenue is generated from the following:

Transaction-based revenue and Starbucks 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 had a processing agreement with Starbucks, for certain Starbucks-owned stores in the United States. During the fourth quarter of 2016, Starbucks completed its previously announced transition to another payments solution provider.

The Company recognizes the transaction fees a seller pays to the Company 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 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. As the merchant of record, Square is liable for settlement of the transactions the Company processes for its sellers.

The gross transaction fees collected from sellers are recognized as revenue on a gross basis as the Company is the primary obligor to the seller and is responsible for processing the payment, has latitude in establishing pricing with respect to the sellers and other terms of service, has sole discretion in selecting the third party to perform the settlement, and assumes the credit risk for the transaction processed.

Subscription and services-based revenue
    
Subscription and services-based revenue is primarily generated by Instant Deposit, Caviar, Square Capital and various software as a service products.

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

Caviar is a food ordering platform that facilitates food delivery services for restaurants. Caviar revenue consists of fees charged to restaurants, as sellers, and delivery and service fees charged to customers. All fees are recognized upon delivery of the food, net of refunds.
    
Square Capital facilitates a loan that is offered through a partnership with an industrial bank that is generally repaid through withholding a percentage of the collections of the seller's receivables processed by the Company. During the first quarter of 2016, the Company fully transitioned from offering merchant cash advances (MCAs) to loans. The Company facilitates loans to sellers pre-qualified through 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 loans are 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. 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 payments solutions. The Company recognizes the gain on sale of the loans to the investors as revenue upon transfer of title to investors. The Company records servicing revenue as servicing is delivered. For the loans which are not 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.


    

Software as a service provides customers with access to various technologies for a fee which is recognized ratably as the service is provided.
Hardware revenue

Hardware revenue is generated from sales of contactless and chip readers, chip card readers, Square Stand, Square Register and third-party peripherals. Hardware revenue is recorded net of returns and is recognized upon delivery of hardware to the end customer and satisfaction of the other basic revenue recognition criteria. The Company considers delivery to have occurred once title and risk of loss has been transferred to the end customer. The Company records deferred revenue when it receives payments in advance of the delivery of products.

Cost of Revenue

Transaction-based costs and Starbucks transaction-based costs

Transaction-based costs and Starbucks 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. Contracts with third-party payment processors are typically for a term of two to four years.

Subscription and services-based costs

Subscription and services-based costs consist primarily of Caviar-related costs, which include payments to third-party couriers for deliveries and the cost of equipment provided to sellers. These costs also include costs associated with Cash App transactions when customers instantly deposit funds to their bank account and for transactions conducted with a Cash Card, credit card or Cash for Business. Cost of revenue for other subscription and services-based costs consists primarily of the amortization related to the development of certain subscription and services-based products.

Hardware costs

Hardware costs consist of all product costs associated with contactless and chip readers, chip card readers, Square Stand, Square Register and third-party peripherals. Product costs include manufacturing-related overhead and personnel costs, certain royalties, packaging, and fulfillment costs.

Advertising Costs

Advertising costs are expensed as incurred and included in sales and marketing expense on the consolidated statements of operations. Total advertising costs for the years ended December 31, 2017, 2016, and 2015 were $81.9 million, $58.3 million, and $58.3 million, respectively.

Share-based Compensation

Share-based compensation expense relates to stock options, 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 RSUs is determined by the closing price of the Company’s common stock on each grant date.The fair value of stock options and employee stock purchase plan 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. For the year ended December 31, 2016 and prior, the Company recorded share-based compensation expense net of estimated forfeitures. On January 1, 2017, as a result of the Company's adoption of ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, the Company elected to account for forfeitures as they occur.
The fair value of stock options granted to non-employees, including consultants, is initially measured upon the date of grant and remeasured over the vesting period using the same methodology described above. These non-employees provide service to the Company on an ongoing basis, therefore, the performance commitment for each non-employee grant is not considered probable until the award is earned over time. The expected term for non-employee grants is the contractual term and share-based compensation expense is recognized on a straight-line basis over this term. Share-based compensation expense related to non-employees has not been material for any of the periods presented.
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 uses financial projections to support its net deferred tax assets, which contain 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, 2017 and 2016, restricted cash of $28.8 million and $22.1 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 December 31, 2017 and 2016, the remaining restricted cash of $9.8 million and $14.6 million, respectively, 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 14). 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, 2017 and 2016, the Company had no customer who accounted for greater than 10% of total net revenue. For the year ended December 31, 2015, the Company had no customer other than Starbucks who accounted for greater than 10% of total net revenue. The Company terminated its relationship with Starbucks during the year ended December 31, 2016.

The Company had three third-party payment processors that represented approximately 46%, 42%, and 8% of settlements receivable as of December 31, 2017. The same three parties represented approximately 52%, 35%, and 10% of settlements receivable as of December 31, 2016. 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.

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 a 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, 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. 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.

Customer Funds

Customer funds held represent Cash App customers' stored balances that customers would later use to send money or make payments, or customers cash in transit. As of December 31, 2017 and 2016, the Company held these stored balances as short term bank deposits.

Inventory

Inventory is comprised of contactless and chip readers, chip card readers, Square Stand, Square Register 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 the Company's warehouses as well as at third party contract manufacturer premises.

Deferred Magstripe Reader Costs

The Company capitalizes the cost of its magstripe readers, which are included in other current assets on the consolidated balance sheets. The amount capitalized represents the cost of the 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.

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 Equipment
 
Useful Life
Capitalized software
 
18 months
Computer and data center equipment
 
Three years
Furniture and fixtures
 
Seven years
Leasehold improvements
 
Lesser of estimated useful life 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 cost 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 or allocated to subscription and service-based costs on the consolidated statements of operations. The Company capitalized $9.8 million, $7.9 million and $4.5 million of internally developed software during the years ended December 31, 2017, 2016 and 2015, respectively, and recognized $6.6 million, $7.1 million and $3.2 million of amortization expense during the years ended December 31, 2017, 2016 and 2015, respectively.

Leases

The Company leases office space and equipment under non-cancellable capital and operating leases with various expiration dates. The Company records the total rent expense on a straight-line basis over the lease term.

When lease agreements provide allowances for leasehold improvements, the Company 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, and reduces rent expense on a straight-line basis over the term of the lease by the amount of the allowances provided. The Company classifies the cash payments for the leasehold improvements within investing activities while reimbursements from the landlords are classified within operating activities.

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, 2017, the Company had a liability for ARO, gross of accretion, of $3.6 million and an associated asset, net of depreciation, of $2.3 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 estimate 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–part independent appraisals, as considered necessary. For the periods presented, the Company had recorded no impairment charges.

Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in a business combination. 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 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.

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 we typically settle 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 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. 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 charges to the reserve are made when losses are recognized. These amounts are classified within transaction and advance losses on the consolidated statements of operations.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, and issued subsequent amendments to the initial guidance within ASU 2015-04, ASU 2016-08, ASU 2016-10, ASU 2016-12, and ASU 2016-20. The new guidance will replace all current U.S. GAAP guidance about revenue recognition, including industry specific guidance. The core principal of this new guidance is that revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration for which the Company expects to be entitled in exchange for those goods or services. The new guidance will also change how companies account for certain incremental costs to obtain a customer contract, such as sales commissions, by requiring that such costs be capitalized and charged to expense over the period of expected benefit. This guidance is effective for the Company’s interim and annual financial statements beginning January 1, 2018. The guidance can be adopted either through the full retrospective approach, which requires restatement of all periods presented with a cumulative effect adjustment as of the beginning of the earliest period presented, or through a modified retrospective approach, which requires a cumulative effect adjustment as of the date of adoption. The modified retrospective approach also requires additional disclosures, for the year of adoption, of the impact of the new guidance to each of the financial statements line items and qualitative explanation of the significant changes between the reported results under the new revenue guidance and the previous revenue guidance. The Company adopted this new guidance on January 1, 2018 using the modified retrospective approach. Apart from the incremental disclosure requirements it is the Company’s conclusion that the new guidance will not have a material impact on its consolidated financial statements, financial reporting systems, processes or controls.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, as part of its simplification initiative. The previous guidance required an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less a normal profit margin. Under the new guidance, inventory is measured at the lower of cost and net realizable value, which would eliminate the other two options that currently exist for market replacement cost and net realizable value less a normal profit margin. The amendment is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. The Company adopted this new guidance on January 1, 2017, and it did not have any effect on the consolidated financial statements and related disclosures.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. This guidance is intended to improve the recognition, measurement, presentation, and disclosure of financial instruments. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted with certain restrictions. The new guidance could result to volatility of other income (expense), net, in future periods as a result of the remeasurement of the equity securities through earnings upon the occurrence of future observable price changes. The Company adopted this new guidance on January 1, 2018, and it did not have any effect on the consolidated financial statements.

In February 2016, the FASB issued 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 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 March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting,
which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. The Company adopted this new guidance on January 1, 2017. As part of the adoption, the Company elected to account for forfeitures as they occur. As this guidance requires a modified retrospective approach when eliminating the forfeiture rate, the Company recorded an adjustment of $0.7 million to increase accumulated deficit and additional paid-in capital as of January 1, 2017. With respect to classification of excess tax benefits on the Statement of Cash Flows, the Company has elected to apply this guidance on a prospective basis. Thus, the prior periods have not been adjusted. The remaining areas of simplification in this guidance did not have an impact on the consolidated financial statements.

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 August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. This guidance addresses several cash flow issues with the objective of reducing the existing diversity in practice. Specific issues addressed in this guidance include, but are not limited to, debt prepayment or extinguishment costs, contingent consideration payments made after a business combination and application of the predominance principle. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The amendments should be applied retrospectively. The Company adopted this new guidance on January 1, 2018, and it did not have any effect on the consolidated financial statements and related disclosures.

In October 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, which amends existing guidance on the recognition of current and deferred income tax impacts for intra-entity asset transfers other than inventory. The current guidance requires companies to defer the income tax effects of intercompany transfers of all assets, until the asset has been sold to an outside party whereas the new guidance will not allow the deferral of income tax effects of intercompany transfers of assets except for inventory. This standard is effective for annual periods beginning after December 15, 2017, 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 adopted this new guidance on January 1, 2018, and it did not have any effect on the consolidated financial statements and related disclosures.

In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash, which provides guidance on the classification of restricted cash to be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts on the statement of cash flows. This standard is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The Company early adopted this guidance on January 1, 2017, and adjusted its consolidated statements of cash flow for each of the periods presented.

In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business. The amendment seeks to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, intangible assets and consolidation. This standard is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The amendments should be applied prospectively on or after the effective dates. The Company adopted this new guidance on January 1, 2018, and it did not have any effect 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 May 2017, the FASB issued ASU No. 2017-09, Scope of Modification Accounting, which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. This standard is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The amendments should be applied on a prospective basis. The Company adopted this new guidance on January 1, 2018, and it did not have any effect on the consolidated financial statements and related disclosures.
FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial assets and liabilities that are measured at fair value on a recurring basis are classified as follows (in thousands):
 
December 31, 2017
 
December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Cash and cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
387,698

 
$

 
$

 
$
207,168

 
$

 
$

Commercial paper

 
24,695

 

 

 
7,496

 

Municipal securities

 

 

 

 
1,000

 

Short-term securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities

 
15,083

 

 

 
9,055

 

Corporate bonds

 
57,798

 

 

 
6,980

 

Commercial paper

 
17,428

 

 

 
17,298

 

Municipal securities

 
23,700

 

 

 
8,028

 

U.S. government securities
55,567

 

 

 
18,540

 

 

Long-term securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities

 
20,169

 

 

 
3,502

 

Corporate bonds

 
91,413

 

 

 
12,914

 

Municipal securities

 
26,224

 

 

 
2,492

 

U.S. government securities
65,861

 

 

 
8,458

 

 

Total
$
509,126

 
$
276,510

 
$

 
$
234,166

 
$
68,765

 
$



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):
 
December 31, 2017
 
Carrying Value
 
Fair Value (Level 2)
Convertible senior notes
$
358,572

 
$
719,356

Total
$
358,572

 
$
719,356


    

A summary of loans disclosed at fair value on a recurring basis is as follows (in thousands):

 
December 31, 2017
 
December 31, 2016
 
Carrying Value
 
Fair Value (Level 3)
 
Carrying Value
 
Fair Value (Level 3)
Loans held for sale
$
73,420

 
$
76,070

 
$
42,144

 
$
42,633

Total
$
73,420

 
$
76,070

 
$
42,144

 
$
42,633


    
For the year ended December 31, 2017, the Company recorded a charge for the excess of amortized cost over fair value of the loans of $8.0 million. No charges were recorded for the years ended December 31, 2016 and 2015.
    
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 years ended December 31, 2017, 2016 and 2015, the Company did not have any transfers in or out of Level 1, Level 2, or Level 3 assets or liabilities.
INVESTMENTS
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 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


The Company's short-term and long-term investments as of December 31, 2016 are as follows (in thousands):

 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Short-term securities:
 
 
 
 
 
 
 
U.S. agency securities
$
9,048

 
$
7

 
$

 
$
9,055

Corporate bonds
17,318

 

 
(20
)
 
17,298

Commercial paper
6,980

 

 

 
6,980

Municipal securities
8,037

 

 
(9
)
 
8,028

U.S. government securities
18,537

 
3

 

 
18,540

Total
$
59,920

 
$
10

 
$
(29
)
 
$
59,901

 
 
 
 
 
 
 
 
Long-term securities:
 
 
 
 
 
 
 
U.S. agency securities
$
3,502

 
$

 
$

 
$
3,502

Corporate bonds
12,939

 

 
(25
)
 
12,914

Municipal securities
2,505

 

 
(13
)
 
2,492

U.S. government securities
8,478

 

 
(20
)
 
8,458

Total
$
27,424

 
$

 
$
(58
)
 
$
27,366



For the years ended December 31, 2017, 2016 and 2015, 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 December 31, 2017 are as follows (in thousands):

 
Amortized Cost
 
Fair Value
Due in one year or less
$
169,877

 
$
169,576

Due in one to five years
204,980

 
203,667

Total
$
374,857

 
$
373,243

PROPERTY AND EQUIPMENT, NET
PROPERTY AND EQUIPMENT, NET
PROPERTY AND EQUIPMENT, NET
The following is a summary of property and equipment, less accumulated depreciation and amortization (in thousands):    
 
December 31,
2017
 
December 31,
2016
Computer equipment
$
66,186

 
$
52,915

Office furniture and equipment
14,490

 
10,737

Leasehold improvements
77,073

 
73,366

Capitalized software
35,063

 
24,642

Total
192,812

 
161,660

Less: Accumulated depreciation and amortization
(101,316
)
 
(73,332
)
Property and equipment, net
$
91,496

 
$
88,328


Depreciation and amortization expense on property and equipment was $29.7 million, $28.7 million, and $20.1 million, for the years ended December 31, 2017, 2016, and 2015, respectively.
GOODWILL
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 December 31, 2017 and December 31, 2016, goodwill was $58.3 million and $57.2 million, respectively.

The Company performed its annual goodwill impairment test as of December 31, 2017. The Company determined that the consolidated business is represented by a single reporting unit and through qualitative analysis concluded that it was more likely than not that the fair value of the reporting unit was greater than its carrying amount. As a result, the two-step goodwill impairment test was not required, and no impairments of goodwill were recognized during the year ended December 31, 2017.
ACQUIRED INTANGIBLE ASSETS
ACQUIRED INTANGIBLE ASSETS
ACQUIRED INTANGIBLE ASSETS

During the years ended December 31, 2017 and 2016, 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 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


 
Balance at December 31, 2016
Cost
 
Accumulated Amortization
 
Net
Patents
$
1,285

 
$
(454
)
 
$
831

Technology Assets
29,075

 
(14,702
)
 
14,373

Customer Assets
7,745

 
(3,657
)
 
4,088

Total
$
38,105

 
$
(18,813
)
 
$
19,292



The weighted average amortization periods for acquired patents, technology, and customer intangible assets are approximately 13 years, 4 years, and 9 years, respectively.
Amortization expense associated with acquired intangible assets was $7.6 million, $9.0 million, and $7.5 million for the years ended December 31, 2017, 2016, and 2015, respectively.
The total estimated annual future amortization expense of these intangible assets as of December 31, 2017, is as follows (in thousands):
2018
 
$
6,226

2019
 
3,442

2020
 
1,479

2021
 
846

2022
 
611

Thereafter
1,730

Total
$
14,334

OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (CURRENT)
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):
    
 
December 31,
2017
 
December 31,
2016
Inventory, net
$
16,777

 
$
13,724

Processing costs receivable
21,083

 
10,049

Prepaid expenses
14,473

 
7,365

Accounts receivable, net
8,606

 
6,191

Deferred hardware costs
7,931

 
4,546

Deferred magstripe reader costs
2,469

 
3,911

Merchant cash advance receivable, net
125

 
4,212

Other
14,990

 
10,545

Total
$
86,454

 
$
60,543


Accrued Expenses
The following table presents the detail of accrued expenses (in thousands):
 
December 31,
2017
 
December 31,
2016
Accrued payroll
$
9,103

 
$
5,799

Accrued professional fees
5,638

 
5,788

Accrued advertising and other marketing
6,723

 
5,008

Processing costs payable
10,145

 
10,871

Accrued non income tax liabilities
6,155

 
3,562

Accrued hardware costs
2,496

 
3,148

Other accrued liabilities
$
12,020

 
$
5,367

Total
$
52,280

 
$
39,543


Other Current Liabilities
The following table presents the detail of other current liabilities (in thousands):    
    
 
December 31,
2017
 
December 31,
2016
Square Capital payable (i)
$
7,671

 
$
4,907

Square Payroll payable (ii)
2,850

 
4,769

Deferred revenue
5,893

 
5,407

Current portion of deferred rent
3,311

 
2,862

Accrued redemptions
1,036

 
1,628

Other
7,606

 
2,899

Total
$
28,367

 
$
22,472



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

(ii) Square Payroll payable represents amounts received from Square Payroll product customers that will be utilized to settle the customers employee payroll and related obligations.
OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (NON-CURRENT)

Other Non-Current Assets

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

 
December 31,
2017
 
December 31,
2016
Investment in privately held entity (i)
$
25,000

 
$

Deposits
2,738

 
1,775

Debt issuance costs
788

 
1,063

Deferred tax assets
519

 
306

Other
2,305

 
50

Total
$
31,350

 
$
3,194



(i) In August, 2017, the Company invested $25.0 million in Eventbrite, a leader in event technology providing a platform that facilitates ticket sales, as well as promotion and management of events. In conjunction with the investment, the Company entered into an agreement with Eventbrite specifying terms under which the Company would provide payment processing services to Eventbrite and its customers for a five year term in the countries in which the Company operates. This agreement is subject to automatic one year renewals thereafter unless terminated by either party. Eventbrite and the Company have a common member on their respective boards of directors. The Company has not estimated the fair value of the investment as it has determined that it is not practicable to determine such fair value, and there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value.

Other Non-Current Liabilities
The following table presents the detail of other non-current liabilities (in thousands):
 
December 31,
2017
 
December 31,
2016
Statutory liabilities (ii)
$
40,768

 
$
29,497

Deferred rent
20,349

 
23,119

Deferred tax liabilities
644

 
476

Other
7,777

 
4,653

Total
$
69,538

 
$
57,745



(ii) Statutory liabilities represent loss contingencies that may arise from the Company's interpretation and application of certain guidelines and rules issued by various federal, state, local, and foreign regulatory authorities.
OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (NON-CURRENT)
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):
    
 
December 31,
2017
 
December 31,
2016
Inventory, net
$
16,777

 
$
13,724

Processing costs receivable
21,083

 
10,049

Prepaid expenses
14,473

 
7,365

Accounts receivable, net
8,606

 
6,191

Deferred hardware costs
7,931

 
4,546

Deferred magstripe reader costs
2,469

 
3,911

Merchant cash advance receivable, net
125

 
4,212

Other
14,990

 
10,545

Total
$
86,454

 
$
60,543


Accrued Expenses
The following table presents the detail of accrued expenses (in thousands):
 
December 31,
2017
 
December 31,
2016
Accrued payroll
$
9,103

 
$
5,799

Accrued professional fees
5,638

 
5,788

Accrued advertising and other marketing
6,723

 
5,008

Processing costs payable
10,145

 
10,871

Accrued non income tax liabilities
6,155

 
3,562

Accrued hardware costs
2,496

 
3,148

Other accrued liabilities
$
12,020

 
$
5,367

Total
$
52,280

 
$
39,543


Other Current Liabilities
The following table presents the detail of other current liabilities (in thousands):    
    
 
December 31,
2017
 
December 31,
2016
Square Capital payable (i)
$
7,671

 
$
4,907

Square Payroll payable (ii)
2,850

 
4,769

Deferred revenue
5,893

 
5,407

Current portion of deferred rent
3,311

 
2,862

Accrued redemptions
1,036

 
1,628

Other
7,606

 
2,899

Total
$
28,367

 
$
22,472



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

(ii) Square Payroll payable represents amounts received from Square Payroll product customers that will be utilized to settle the customers employee payroll and related obligations.
OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (NON-CURRENT)

Other Non-Current Assets

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

 
December 31,
2017
 
December 31,
2016
Investment in privately held entity (i)
$
25,000

 
$

Deposits
2,738

 
1,775

Debt issuance costs
788

 
1,063

Deferred tax assets
519

 
306

Other
2,305

 
50

Total
$
31,350

 
$
3,194



(i) In August, 2017, the Company invested $25.0 million in Eventbrite, a leader in event technology providing a platform that facilitates ticket sales, as well as promotion and management of events. In conjunction with the investment, the Company entered into an agreement with Eventbrite specifying terms under which the Company would provide payment processing services to Eventbrite and its customers for a five year term in the countries in which the Company operates. This agreement is subject to automatic one year renewals thereafter unless terminated by either party. Eventbrite and the Company have a common member on their respective boards of directors. The Company has not estimated the fair value of the investment as it has determined that it is not practicable to determine such fair value, and there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value.

Other Non-Current Liabilities
The following table presents the detail of other non-current liabilities (in thousands):
 
December 31,
2017
 
December 31,
2016
Statutory liabilities (ii)
$
40,768

 
$
29,497

Deferred rent
20,349

 
23,119

Deferred tax liabilities
644

 
476

Other
7,777

 
4,653

Total
$
69,538

 
$
57,745



(ii) Statutory liabilities represent loss contingencies that may arise from the Company's interpretation and application of certain guidelines and rules issued by various federal, state, local, and foreign regulatory authorities.
INDEBTEDNESS
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 $0.6 million in unused commitment fees for both the years ended December 31, 2017 and 2016. As of December 31, 2017, 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 as of January 1, 2018. As of February 27, 2018, no holders have converted 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):
 
December 31, 2017
Principal
$
440,000

Less: unamortized debt discount
(73,384
)
Less: unamortized debt issuance costs
(8,044
)
Net carrying amount
$
358,572

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

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

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




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

 
Year Ended December 31,
 
2017
Contractual interest expense based on 0.375% per annum
1,351

Amortization of debt discount and issuance costs
14,223

Total
15,574

Effective interest rate of the liability component
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 approximately $92.1 million. In addition, the Company sold warrants to the Counterparties whereby the Counterparties have the option to purchase a total of approximately 19.2 million shares of the Company’s Class A common stock at a price of approximately $31.18 per share. The Company received approximately $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 consolidated balance sheets.
ACCRUED TRANSACTION LOSSES
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):
    
 
Year Ended December 31,
 
2017
 
2016
 
2015
Accrued transaction losses, beginning of the year
$
20,064

 
$
17,176

 
$
8,452

Provision for transaction losses
52,977

 
50,819

 
43,379

Charge-offs to accrued transaction losses
(46,148
)
 
(47,931
)
 
(34,655
)
Accrued transaction losses, end of the year
$
26,893