SQUARE, INC., 10-Q filed on 11/2/2016
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2016
Oct. 25, 2016
Class A
Oct. 25, 2016
Class B
Document and Entity Information [Abstract]
 
 
 
Entity Registrant Name
Square, Inc. 
 
 
Entity Central Index Key
0001512673 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Non-accelerated Filer 
 
 
Document Type
10-Q 
 
 
Document Period End Date
Sep. 30, 2016 
 
 
Document Fiscal Year Focus
2016 
 
 
Document Fiscal Period Focus
Q3 
 
 
Amendment Flag
false 
 
 
Class of Stock [Line Items]
 
 
 
Entity Common Stock, Shares Outstanding
 
166,302,906 
185,836,069 
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2016
Dec. 31, 2015
Current assets:
 
 
Cash and cash equivalents
$ 437,900 
$ 470,775 
Short-term investments
76,427 
Restricted cash
13,559 
13,537 
Settlements receivable
233,812 
142,727 
Loans held for sale
28,817 
604 
Merchant cash advance receivable, net
8,268 
36,473 
Other current assets
44,244 
41,447 
Total current assets
843,027 
705,563 
Property and equipment, net
89,957 
87,222 
Goodwill
56,699 
56,699 
Acquired intangible assets, net
20,252 
26,776 
Long-term investments
15,478 
Restricted cash
23,137 
14,686 
Other assets
3,658 
3,826 
Total assets
1,052,208 
894,772 
Current liabilities:
 
 
Accounts payable
13,719 
18,869 
Customers payable
364,434 
224,811 
Accrued transaction losses
21,428 
17,176 
Accrued expenses
41,943 
44,401 
Other current liabilities
44,500 
28,945 
Total current liabilities
486,024 
334,202 
Other liabilities
55,795 
52,522 
Total liabilities
541,819 
386,724 
Commitments and contingencies
   
   
Stockholders’ equity:
 
 
Preferred stock, $0.0000001 par value: 100,000,000 shares authorized at September 30, 2016 and December 31, 2015. None issued and outstanding at September 30, 2016 and December 31, 2015.
Common stock, $0.0000001 par value: 1,000,000,000 Class A shares authorized at September 30, 2016 and December 31, 2015; 162,988,864 and 31,717,133 issued and outstanding at September 30, 2016 and December 31, 2015, respectively. 500,000,000 Class B shares authorized at both September 30, 2016 and December 31, 2015; 188,328,922 and 303,232,312 issued and outstanding at September 30, 2016 and December 31, 2015, respectively.
Additional paid-in capital
1,274,248 
1,116,882 
Accumulated deficit
(764,072)
(607,649)
Accumulated other comprehensive income (loss)
213 
(1,185)
Total stockholders’ equity
510,389 
508,048 
Total liabilities and stockholders’ equity
$ 1,052,208 
$ 894,772 
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) (USD $)
Sep. 30, 2016
Dec. 31, 2015
Class of Stock [Line Items]
 
 
Preferred stock, par value (in USD per share)
$ 0.0000001 
$ 0.0000001 
Preferred stock, shares authorized (in shares)
100,000,000 
100,000,000 
Preferred stock, shares issued (in shares)
Preferred stock, shares outstanding (in shares)
Class A
 
 
Class of Stock [Line Items]
 
 
Common stock, par value (in USD per share)
$ 0.0000001 
$ 0.0000001 
Common stock, shares authorized (in shares)
1,000,000,000 
1,000,000,000 
Common stock, shares issued (in shares)
162,988,864 
31,717,133 
Common stock, shares outstanding (in shares)
162,988,864 
31,717,133 
Class B
 
 
Class of Stock [Line Items]
 
 
Common stock, par value (in USD per share)
$ 0.0000001 
$ 0.0000001 
Common stock, shares authorized (in shares)
500,000,000 
500,000,000 
Common stock, shares issued (in shares)
188,328,922 
303,232,312 
Common stock, shares outstanding (in shares)
188,328,922 
303,232,312 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Revenue:
 
 
 
 
Hardware revenue
$ 8,171 
$ 4,207 
$ 35,438 
$ 10,002 
Total net revenue
439,002 
332,188 
1,256,804 
892,758 
Cost of revenue:
 
 
 
 
Hardware costs
15,689 
5,726 
56,444 
16,636 
Amortization of acquired technology
1,886 
1,142 
6,142 
2,886 
Total cost of revenue
288,688 
235,878 
847,291 
631,821 
Gross profit
150,314 
96,310 
409,513 
260,937 
Operating expenses:
 
 
 
 
Product development
70,418 
55,020 
203,648 
140,452 
Sales and marketing
46,754 
39,259 
124,470 
107,170 
General and administrative
52,075 
37,820 
198,966 
97,743 
Transaction, loan and advance losses
12,885 
16,005 
38,201 
40,840 
Amortization of acquired customer assets
164 
423 
703 
1,373 
Total operating expenses
182,296 
148,527 
565,988 
387,578 
Operating loss
(31,982)
(52,217)
(156,475)
(126,641)
Interest (income) and expense, net
(183)
137 
(243)
995 
Other (income) and expense, net
294 
644 
(690)
1,390 
Loss before income tax
(32,093)
(52,998)
(155,542)
(129,026)
Provision for income taxes
230 
932 
881 
2,502 
Net loss
(32,323)
(53,930)
(156,423)
(131,528)
Net loss per share:
 
 
 
 
Basic (in USD per share)
$ (0.09)
$ (0.35)
$ (0.46)
$ (0.88)
Diluted (in USD per share)
$ (0.09)
$ (0.35)
$ (0.46)
$ (0.88)
Weighted-average shares used to compute net loss per share
 
 
 
 
Basic (in shares)
343,893 
152,334 
336,593 
149,058 
Diluted (in shares)
343,893 
152,334 
336,593 
149,058 
Transaction |
Customers Other than Starbucks
 
 
 
 
Revenue:
 
 
 
 
Revenue
388,347 
280,955 
1,053,664 
751,929 
Cost of revenue:
 
 
 
 
Transaction, software, and data product costs
254,061 
182,007 
683,194 
479,937 
Transaction |
Starbucks
 
 
 
 
Revenue:
 
 
 
 
Revenue
7,164 
32,332 
78,869 
95,199 
Cost of revenue:
 
 
 
 
Transaction, software, and data product costs
4,528 
41,410 
69,810 
118,542 
Software and data product
 
 
 
 
Revenue:
 
 
 
 
Revenue
35,320 
14,694 
88,833 
35,628 
Cost of revenue:
 
 
 
 
Transaction, software, and data product costs
$ 12,524 
$ 5,593 
$ 31,701 
$ 13,820 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Statement of Comprehensive Income [Abstract]
 
 
 
 
Net loss
$ (32,323)
$ (53,930)
$ (156,423)
$ (131,528)
Net foreign currency translation adjustments
127 
(198)
722 
(455)
Net unrealized gain (loss) on revaluation of intercompany loans
74 
80 
656 
(15)
Net unrealized gain (loss) on marketable securities
(60)
20 
Total comprehensive loss
$ (32,182)
$ (54,048)
$ (155,025)
$ (131,998)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Cash flows from operating activities:
 
 
Net loss
$ (156,423)
$ (131,528)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
Depreciation and amortization
27,817 
18,526 
Provision for transaction losses
36,875 
32,967 
Provision for (reduction in) uncollectible merchant cash advances
509 
4,616 
Deferred provision for income taxes
(104)
(207)
Loss on disposal of property and equipment
(88)
240 
Changes in operating assets and liabilities:
 
 
Settlements receivable
(91,390)
(40,729)
Purchase of loans held for sale
(421,243)
Proceeds from sales and principal payments of loans held for sale
393,221 
Merchant cash advance receivable
27,696 
(18,725)
Other current assets
(3,011)
(4,457)
Other assets
145 
1,102 
Accounts payable
(867)
2,048 
Customers payable
139,105 
89,446 
Charge-offs and recoveries to accrued transaction losses
(32,623)
(25,415)
Accrued expenses
86 
13,950 
Other current liabilities
15,255 
1,524 
Other noncurrent liabilities
2,376 
8,801 
Net cash provided by operating activities
42,235 
3,130 
Cash flows from investing activities:
 
 
Purchase of marketable securities
(139,103)
Proceeds from maturities of marketable securities
26,268 
Proceeds from sale of marketable securities
20,962 
Purchase of property and equipment
(19,674)
(30,724)
Payment for acquisition of intangible assets
(400)
(110)
Change in restricted cash
(8,473)
(252)
Business acquisitions (net of cash acquired)
(4,500)
Net cash used in investing activities
(120,420)
(35,586)
Cash flows from financing activities:
 
 
Principal payments on debt
(30,000)
Payments of offering costs related to initial public offering
(5,530)
Proceeds from issuances of common stock from the exercise of options and employee stock purchase plan
48,304 
12,209 
Net cash provided by (used in) financing activities
42,774 
(17,791)
Effect of foreign exchange rate changes on cash and cash equivalents
2,536 
(970)
Net decrease in cash and cash equivalents
(32,875)
(51,217)
Cash and cash equivalents, beginning of period
470,775 
225,300 
Cash and cash equivalents, end of period
437,900 
174,083 
Customers Other than Starbucks
 
 
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
Share-based compensation
104,899 
49,486 
Starbucks
 
 
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
Share-based compensation
$ 0 
$ 1,485 
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 of all sizes start, run, and grow their businesses – from payment processing to point of sale, hardware to software, business loans to payroll and more. Businesses and individuals can also use Square Cash, an easy way to send and receive money, as well as Caviar, a food delivery service for popular restaurants. Square was founded in 2009 and is headquartered in San Francisco, with offices in the United States, Canada, Japan, and Australia.

Initial Public Offering

In November 2015, the Company completed its Initial Public Offering (IPO) in which it issued and sold 29,700,000 shares of Class A common stock at a public offering price of $9.00 per share and a selling stockholder sold 1,350,000 shares of Class A common stock. The Company did not receive any proceeds from the sale of shares by the selling stockholder. The total net proceeds received by the Company from the IPO were $245.7 million after deducting underwriting discounts and commissions of $14.7 million and other offering expenses of approximately $6.9 million.

Out of Period Adjustments 

During the three months ended June 30, 2016, the Company recorded an out of period adjustment of $6.0 million to transaction, loan and advance losses as a result of a correction to the calculation of its reserve for transaction losses. The adjustment was recorded to correct an understatement of transaction losses in prior periods. Of the total amount of this adjustment, $0.5 million is related to the three months ended March 31, 2016, and $2.6 million, $1.6 million and $1.0 million is related to the years ended December 31, 2015, 2014, and 2013, respectively. The remaining $0.3 million is related to historical periods. The Company does not believe that such amounts are material with respect to the estimated operating loss or estimated net loss for the current fiscal year or any previously reported consolidated financial statements.

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 million to plaintiffs, including meaningful contributions by Mr. Dorsey and Mr. McKelvey. The Company made a payment of $48 million to plaintiffs and met its obligations under the Settlement Agreement. This amount was classified within general and administrative expenses on the condensed consolidated statements of operations for the nine months ended September 30, 2016. On June 17, 2016, the Court entered an Order dismissing the complaints in their entirety, with prejudice.

Basis of Presentation
    
The accompanying interim condensed consolidated financial statements of the Company are unaudited. These interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP) and the applicable rules and regulations of the Securities and Exchange Commission (SEC) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The December 31, 2015 condensed consolidated balance sheet was derived from the audited financial statements as of that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

The accompanying unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature considered necessary to state fairly the Company's consolidated financial position, results of operations, comprehensive loss, and cash flows for the interim periods. All intercompany transactions and balances have been eliminated in consolidation. The interim results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016, or for any other future annual or interim period.

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk,” and the Consolidated Financial Statements and notes thereto included in Items 7, 7A, and 8, respectively, in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.

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.

Significant estimates, judgments, and assumptions in these consolidated financial statements include, but are not limited to, those related to revenue recognition, accrued transaction losses, provision for uncollectible receivables related to merchant cash advances (MCAs), valuation of loans held for sale, business combinations, goodwill and intangible assets, income taxes, and share-based compensation.

Concentration of Credit Risk
For the three and nine months ended September 30, 2016, the Company had no customer that accounted for greater than 10% of total net revenue. For the three and nine months ended September 30, 2015, the Company had no customer other than Starbucks that accounted for greater than 10% of total net revenue. The Company had three third-party processors that represented approximately 47%, 39%, and 11% of settlements receivable as of September 30, 2016. The same three parties represented approximately 56%, 23%, and 16% of settlements receivable as of December 31, 2015.
The Company places its cash and cash equivalents and investments in marketable securities with large creditworthy U.S. financial institutions. Balances in these accounts may exceed federally insured limits at times.

Significant Accounting Policies
Except as described below, there have been no material changes to the Company’s significant accounting policies during the nine months ended September 30, 2016, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

Loans Held for Sale

The Company provides loans to sellers prequalified 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, from whom the Company purchases the loans obtaining all rights, title, and interest.

The loans are classified as held for sale upon purchase, as it is the Company’s intent to sell all of its rights, title, and interest in these loans to third-party investors for an up-front origination fee when the loans are sold. The Company also earns a servicing fee by continuing to service the loans by remitting monies to the third-party investors. Revenue from origination fees are recognized upon transfer of title to investors and servicing revenue is recognized as servicing is delivered.

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. Loans are recorded at the lower of cost or fair value. To determine the fair value of loans, the Company utilizes industry standard modeling, such as discounted cash flow models, to arrive at an estimate of fair value.

Recently Issued Accounting Standards

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, and ASU 2016-12. The new guidance will replace all current U.S. GAAP guidance on this topic and eliminate all 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. 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 guidance can be applied either retrospectively to each period presented or as a cumulative effect adjustment as of the date of adoption. The Company has not yet selected a transition method and is evaluating the impact of adopting this new accounting standard update on the consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-04, Recognition of Breakage for Certain Prepaid Stored-Value Products. This guidance specifies how prepaid stored-value product liabilities should be derecognized, thereby eliminating the current and potential future diversity in practice. 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 Company is currently evaluating the impact this new guidance may have on the consolidated financial statements.

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 is currently evaluating the impact this new guidance may have 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.

In August 2016, the FASB issues ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. This guidance addresses several specific cash flow issues with the objective of reducing the existing diversity in practice. 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 Company is currently evaluating the impact this new guidance may have on the consolidated financial statements.
RESTRICTED CASH
RESTRICTED CASH
RESTRICTED CASH
    
As of September 30, 2016 and December 31, 2015, restricted cash of $13.6 million and $13.5 million, respectively, is related to pledged cash deposited into savings accounts at the financial institutions that process the Company's sellers' payment transactions. The Company uses the restricted cash to secure letters of credit with the financial institutions 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 condensed 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.
    
As of September 30, 2016 and December 31, 2015, the remaining restricted cash of $23.1 million and $14.7 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 (see Note 17) and as collateral pursuant to an agreement with the originating bank for the Company's loan product. The Company has recorded this amount as a non-current asset on the condensed consolidated balance sheets as the terms extend beyond one year.
FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company measures its cash equivalents and short-term and long-term investments at fair value. The Company classifies its cash equivalents and short-term and long-term investments within Level 1 or Level 2 of the fair value hierarchy because the Company values these investments using quoted market prices or alternative pricing sources and models utilizing market observable inputs.
The Company’s financial assets and liabilities that are measured at fair value on a recurring basis are classified as follows (in thousands):
 
September 30, 2016
 
December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Cash and Cash Equivalents:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
209,364

 
$

 
$

 
$
337,234

 
$

 
$

Commercial paper

 
1,500

 

 

 

 

Short-term securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities

 
13,088

 

 

 

 

Corporate bonds

 
19,787

 

 

 

 

Commercial paper

 
17,455

 

 

 

 

Municipal securities

 
6,529

 

 
 
 
 
 
 
U.S. government securities
19,568

 

 

 

 

 

Long-term securities:
 
 
 
 
 
 

 

 

U.S. agency securities

 
6,519

 

 

 

 

Corporate bonds

 
4,423

 

 

 

 

Municipal securities

 
3,033

 

 

 

 

U.S. government securities
1,503

 

 

 

 

 

Total
$
230,435

 
$
72,334

 
$

 
$
337,234

 
$

 
$




Loans are recorded at the lower of cost or fair value. To determine the fair value of loans, the Company utilizes industry-standard valuation modeling, such as discounted cash flow models, to arrive at an estimate of fair value.

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

 
September 30, 2016
 
Carrying Value
 
Fair Value (Level 3)
Loans held for sale
28,817

 
29,778

Total
28,817

 
29,778



As of December 31, 2015, the difference between the fair value of loans and the carrying value was insignificant.
The carrying amounts of certain financial instruments, including cash equivalents, settlements receivable, merchant cash advance receivable, accounts payable, customers payable, and settlements payable, approximate their fair values due to their short-term nature.
If applicable, the Company will recognize transfers into and out of levels within the fair value hierarchy at the end of the reporting period in which the actual event or change in circumstance occurs. During the three and nine months ended September 30, 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 September 30, 2016 are as follows (in thousands):

 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Short-term securities:
 
 
 
 
 
 
 
U.S. agency securities
$
13,076

 
$
12

 
$

 
$
13,088

Corporate bonds
19,795

 

 
(8
)
 
19,787

Commercial paper
17,455

 

 

 
17,455

Municipal securities
6,530

 

 
(1
)
 
6,529

U.S. government securities
19,552

 
16

 

 
19,568

Total
$
76,408

 
$
28

 
$
(9
)
 
$
76,427

 
 
 
 
 
 
 
 
Long-term securities:
 
 
 
 
 
 
 
U.S. agency securities
$
6,508

 
$
11

 
$

 
$
6,519

Corporate bonds
4,419

 
4

 

 
4,423

Municipal securities
3,038

 

 
(5
)
 
3,033

U.S. government securities
1,500

 
3

 

 
1,503

Total
$
15,465

 
$
18

 
$
(5
)
 
$
15,478



For the three and nine months ended September 30, 2016, gains or losses realized on the sale of investments were insignificant. 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 as of September 30, 2016.

The contractual maturities of the Company's short-term and long-term investments as of September 30, 2016 are as follows (in thousands):

 
Amortized Cost
 
Fair Value
Due in one year or less
$
76,408

 
$
76,427

Due in one to five years
15,465

 
15,478

Total
$
91,873

 
$
91,905

ALLOWANCE FOR MERCHANT CASH ADVANCE LOSSES
ALLOWANCE FOR MERCHANT CASH ADVANCE LOSSES
ALLOWANCE FOR MERCHANT CASH ADVANCE LOSSES
The following table summarizes the activities of the Company’s allowance for uncollectible merchant cash advance receivables (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Allowance for uncollectible MCA receivables, beginning of the period
$
5,091

 
$
5,277

 
$
7,443

 
$
2,431

Provision for uncollectible MCA receivables
602

 
1,468

 
509

 
4,616

MCA receivables charged off
(855
)
 
(809
)
 
(3,114
)
 
(1,111
)
Allowance for uncollectible MCA receivables, end of the period
$
4,838

 
$
5,936

 
$
4,838

 
$
5,936


    
As of March 31, 2016, the Company had fully transitioned from offering MCAs to loans. Activity in the table above includes updates to the Company's provision estimates for historical balances and charge offs of certain MCA receivables based on payment inactivity.
PROPERTY AND EQUIPMENT, NET
Property, Plant and Equipment, Net
PROPERTY AND EQUIPMENT, NET
The following is a summary of property, equipment, and internally-developed software at cost, less accumulated depreciation and amortization (in thousands):    

September 30,
2016

December 31,
2015
Computer equipment
$
50,520


$
43,531

Office furniture and equipment
10,110


9,339

Leasehold improvements
72,308


65,298

Capitalized software
22,761


14,533

Construction in process
670

 
490

Total
156,369


133,191

Less: Accumulated depreciation and amortization
(66,412
)

(45,969
)
Property and equipment, net
$
89,957


$
87,222


Depreciation and amortization expense on property and equipment was $7.6 million and $20.9 million for the three and nine months ended September 30, 2016, respectively. Depreciation and amortization expense on property and equipment was $5.0 million and $14.2 million for the three and nine months ended September 30, 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 both September 30, 2016 and December 31, 2015, goodwill was $56.7 million.

The Company performs a goodwill impairment test annually on December 31 and more frequently if events and circumstances indicate that the asset might be impaired. For the periods presented, the Company had recorded no impairment charges.
ACQUIRED INTANGIBLE ASSETS
ACQUIRED INTANGIBLE ASSETS
ACQUIRED INTANGIBLE ASSETS
The following table presents the detail of acquired intangible assets as of the periods presented (in thousands):
 
Balance as of September 30, 2016
Cost
 
Accumulated Amortization
 
Net
Patent
$
1,285

 
$
(427
)
 
$
858

Technology Assets
29,045

 
(12,786
)
 
16,259

Customer Assets
6,645

 
(3,510
)
 
3,135

Total
$
36,975

 
$
(16,723
)
 
$
20,252


 
Balance as of December 31, 2015
Cost
 
Accumulated Amortization
 
Net
Patent
$
1,285

 
$
(348
)

$
937

Technology Assets
28,645

 
(6,644
)
 
22,001

Customer Assets
6,645

 
(2,807
)
 
3,838

Total
$
36,575

 
$
(9,799
)
 
$
26,776



The weighted average amortization periods for acquired patents, acquired technology, and customer intangible assets are approximately 13 years, three years, and six years, respectively.
    
Amortization expense associated with other intangible assets was $2.1 million and $6.9 million for the three and nine months ended September 30, 2016, respectively. Amortization expense associated with other intangible assets was $1.6 million and $4.3 million for the three and nine months ended September 30, 2015, respectively.

The total estimated annual future amortization expense of these intangible assets as of September 30, 2016 is as follows (in thousands):
2016 (remaining 3 months)
$
2,048

2017
7,187

2018
5,687

2019
2,983

2020
1,087

Thereafter
1,260

Total
$
20,252

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):
    
 
September 30,
2016
 
December 31,
2015
Accounts receivable
$
7,407

 
$
4,808

Prepaid expenses
3,734

 
7,101

Deferred reader costs
3,869

 
4,018

Inventory
14,695

 
11,864

Tenant improvement reimbursement receivable
1,189

 
1,788

Deferred hardware costs
2,839

 
1,709

Processing costs receivable
4,470

 
7,847

Other
6,041

 
2,312

Total
$
44,244

 
$
41,447



Accrued Expenses
The following table presents the detail of accrued expenses (in thousands):    
 
September 30,
2016
 
December 31,
2015
Accrued hardware costs
$
6,345

 
$
11,622

Processing costs payable
7,182

 
11,417

Accrued professional fees
4,247

 
7,642

Accrued payroll
6,712

 
2,660

Accrued marketing
7,147

 
2,443

Other accrued liabilities
10,310

 
8,617

Total
$
41,943

 
$
44,401



Other Current Liabilities
The following table presents the detail of other current liabilities (in thousands):    
    
 
September 30,
2016
 
December 31,
2015
Settlements payable
27,515

 
$
13,105

Employee early exercised stock options
924

 
2,141

Accrued redemptions
1,369

 
1,066

Current portion of deferred rent
2,750

 
2,393

Deferred revenue
5,303

 
6,623

Other
6,639

 
3,617

Total
$
44,500

 
$
28,945

OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (NON-CURRENT)

Other Non-Current Assets

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

 
September 30,
2016
 
December 31,
2015
Deposits
$
2,104

 
$
1,993

Deferred tax assets
301

 
188

Other
1,253

 
1,645

Total
$
3,658

 
$
3,826



Other Non-Current Liabilities
The following table presents the detail of other non-current liabilities (in thousands):
 
September 30,
2016
 
December 31,
2015
Deferred rent
$
23,790

 
$
25,543

Employee early exercised stock options
201

 
1,128

Deferred tax liabilities
285

 
299

Statutory liabilities
27,554

 
25,492

Other
3,965

 
60

Total
$
55,795

 
$
52,522

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):
    
 
September 30,
2016
 
December 31,
2015
Accounts receivable
$
7,407

 
$
4,808

Prepaid expenses
3,734

 
7,101

Deferred reader costs
3,869

 
4,018

Inventory
14,695

 
11,864

Tenant improvement reimbursement receivable
1,189

 
1,788

Deferred hardware costs
2,839

 
1,709

Processing costs receivable
4,470

 
7,847

Other
6,041

 
2,312

Total
$
44,244

 
$
41,447



Accrued Expenses
The following table presents the detail of accrued expenses (in thousands):    
 
September 30,
2016
 
December 31,
2015
Accrued hardware costs
$
6,345

 
$
11,622

Processing costs payable
7,182

 
11,417

Accrued professional fees
4,247

 
7,642

Accrued payroll
6,712

 
2,660

Accrued marketing
7,147

 
2,443

Other accrued liabilities
10,310

 
8,617

Total
$
41,943

 
$
44,401



Other Current Liabilities
The following table presents the detail of other current liabilities (in thousands):    
    
 
September 30,
2016
 
December 31,
2015
Settlements payable
27,515

 
$
13,105

Employee early exercised stock options
924

 
2,141

Accrued redemptions
1,369

 
1,066

Current portion of deferred rent
2,750

 
2,393

Deferred revenue
5,303

 
6,623

Other
6,639

 
3,617

Total
$
44,500

 
$
28,945

OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (NON-CURRENT)

Other Non-Current Assets

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

 
September 30,
2016
 
December 31,
2015
Deposits
$
2,104

 
$
1,993

Deferred tax assets
301

 
188

Other
1,253

 
1,645

Total
$
3,658

 
$
3,826



Other Non-Current Liabilities
The following table presents the detail of other non-current liabilities (in thousands):
 
September 30,
2016
 
December 31,
2015
Deferred rent
$
23,790

 
$
25,543

Employee early exercised stock options
201

 
1,128

Deferred tax liabilities
285

 
299

Statutory liabilities
27,554

 
25,492

Other
3,965

 
60

Total
$
55,795

 
$
52,522

DEBT
DEBT
DEBT
In November 2015, the Company entered into a revolving credit agreement with certain lenders, which extinguished the prior revolving credit agreement and provided for a $375.0 million revolving secured credit facility maturing in November 2020. This revolving credit agreement is secured by certain tangible and intangible assets.
Loans under the credit facility bear interest at the Company’s option of (i) a base rate based on the highest of the prime rate, the federal funds rate plus 0.50%, and an adjusted LIBOR rate for a one-month interest period, in each case plus a margin ranging from 0.00% to 1.00%, or (ii) an adjusted LIBOR rate plus a margin ranging from 1.00% to 2.00%. This margin is determined based on the Company’s total leverage ratio for the preceding four fiscal quarters. The Company is obligated to pay other customary fees for a credit facility of this size and type including an annual administrative agent fee of $0.1 million and an unused commitment fee of 0.15%. To date no funds have been drawn under the credit facility, with $375.0 million remaining available. The Company paid $0.1 million and $0.4 million in unused commitment fees during the three and nine months ended September 30, 2016, respectively.
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. Recoveries are reflected as a reduction in the reserve for transaction losses when the recovery occurs.
The following table summarizes the activities of the Company’s reserve for transaction losses (in thousands):
    
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Accrued transaction losses, beginning of the period
$
16,093

 
$
15,844

 
$
17,176

 
$
8,452

Provision for transaction losses
13,483

 
11,401

 
36,875

 
32,967

Charge-offs and recoveries to accrued transaction losses
(8,148
)
 
(11,241
)
 
(32,623
)
 
(25,415
)
Accrued transaction losses, end of the period
$
21,428

 
$
16,004

 
$
21,428

 
$
16,004

INCOME TAXES
INCOME TAXES
INCOME TAXES
The Company recorded an income tax expense of $0.2 million and $0.9 million for the three and nine months ended September 30, 2016, respectively, compared to income tax expense of $0.9 million and $2.5 million for the three and nine months ended September 30, 2015, respectively. The income tax expense recorded for the three and nine months ended September 30, 2016 was primarily due to state and foreign income tax expense.
The Company’s effective tax rate was approximately (0.7)% and (0.6)% for the three and nine months ended September 30, 2016, respectively, compared to an effective tax rate of (1.8)% and (1.9)% for the three and nine months ended September 30, 2015, respectively. The difference between the effective tax rate and the federal statutory tax rate for the three and nine months ended September 30, 2016 primarily relates to the valuation allowance on the Company’s deferred tax assets.
The Company’s effective tax rate may be subject to fluctuation during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of forecasted pre-tax earnings in the various jurisdictions in which the Company operates, valuation allowances against deferred tax assets, the recognition and de-recognition of tax benefits related to uncertain tax positions, and changes in or the interpretation of tax laws in jurisdictions where the Company conducts business.

As of September 30, 2016, the Company retains a full valuation allowance on its deferred tax assets in the U.S. and certain foreign jurisdictions. The realization of the Company’s deferred tax assets depends primarily on its ability to generate taxable income in future periods. The amount of deferred tax assets considered realizable in future periods may change as management continues to reassess the underlying factors it uses in estimating future taxable income.
The tax provision for the three and nine months ended September 30, 2016 was calculated on a jurisdiction basis. The Company estimated the foreign income tax provision using the effective income tax rate expected to be applicable for the full year.
STOCKHOLDERS' EQUITY
STOCKHOLDERS' EQUITY
STOCKHOLDERS’ EQUITY
Common Stock

The Company has authorized the issuance of Class A common stock and Class B common stock. Class A common stock and Class B common stock are referred to as "common stock" throughout these Notes to the Condensed Consolidated Financial Statements, unless otherwise noted. As of September 30, 2016, the Company was authorized to issue 1,000,000,000 shares of Class A common stock and 500,000,000 shares of Class B common stock, each with a par value of $0.0000001 per share. As of September 30, 2016, there were 162,988,864 shares of Class A common stock and 188,328,922 shares of Class B common stock outstanding. Options and awards granted following the Company's Initial Public Offering are related to underlying Class A common stock. Additionally, Class B shareholders are able to convert their shares into Class A common stock.

Stock Plans
The Company maintains two share-based employee compensation plans: the 2009 Stock Plan (2009 Plan) and the 2015 Equity Incentive Plan (2015 Plan). The 2015 Plan serves as the successor to the 2009 Plan. The 2015 Plan became effective as of November 17, 2015. Outstanding awards under the 2009 Plan continue to be subject to the terms and conditions of the 2009 Plan. Beginning November 17, 2015, no additional securities will be issued under the 2009 Plan.

Under the 2015 Plan, shares of common stock are reserved for the issuance of incentive and nonstatutory stock options, restricted stock awards, restricted stock units (RSUs), performance shares, and stock bonuses to qualified employees, directors, and consultants. The shares may be granted at a price per share not less than the fair market value at the date of grant. Initially, 30,000,000 shares were reserved under the 2015 Plan, and any shares subject to options or other similar awards granted under the 2009 Plan that expire, are forfeited, are repurchased by the Company, or otherwise terminate unexercised will become available under the 2015 Plan. The number of shares available for issuance under the 2015 Plan will be increased on the first day of each fiscal year, in an amount equal to the least of (i) 40,000,000 shares, (ii) 5% of the outstanding shares on the last day of the immediately preceding fiscal year, or (iii) such number of shares determined by the Company’s board of directors. As of September 30, 2016, the total number of shares subject to stock options and RSUs outstanding under the 2015 Plan was 19,037,766, and 35,373,551 shares were available for future issuance. As of September 30, 2016, the total number of shares subject to stock options and RSUs outstanding under the 2009 Plan was 82,934,307.
A summary of stock option activity for the nine months ended September 30, 2016 is as follows (in thousands, except share and per share data):
 
Number of Stock Options Outstanding
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
(in years)
 
Aggregate
Intrinsic
Value
Balance as of December 31, 2015
107,515,554

 
$
6.99

 
7.87
 
$
656,194

Granted
1,767,320

 
13.49

 
 
 
 
Exercised
(13,559,723
)
 
3.02

 
 
 
 
Forfeited
(9,020,899
)
 
$
10.99

 
 
 
 
Balance as of September 30, 2016
86,702,252

 
7.32

 
7.40
 
418,923

Options vested and expected to vest as of
 
 
 
 
 
 
 
September 30, 2016
81,679,340

 
7.10

 
6.81
 
410,515

Options exercisable as of
 
 
 
 
 
 
 
September 30, 2016
82,443,845

 
7.15

 
7.31
 
411,791



Restricted Stock Activity
Activity related to RSUs during the nine months ended September 30, 2016 is set forth below:
 
Number of
RSUs
 
Weighted
Average Grant
Date Fair Value
Unvested as of December 31, 2015
3,632,765

 
$
13.14

Granted
14,546,288

 
12.12

Vested
(1,780,873
)
 
12.48

Forfeited
(1,128,359
)
 
13.09

Unvested as of September 30, 2016
15,269,821

 
$
12.25



Share-Based Compensation
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.
Effective August 31, 2015, the Company modified all of its nonstatutory stock option grants to extend the exercise term for terminated employees who have completed two years of service. In the event of a termination, the modified expiration date will be the earlier of (i) three years from termination or (ii) one year following an initial public offering, if in each case, the date of termination occurs between August 31, 2015 and the nine-month anniversary of the initial public offering. In all cases, the grants remain subject to earlier expiration in accordance with their original terms. During the three and nine months ended September 30, 2016, share-based compensation expense included $0.6 million and $2.0 million, respectively, related to the vested portion of the impacted options, as a result of the modification. The Company will incur an additional $5.2 million of share-based compensation expense over the remaining vesting periods of the impacted options.
The fair value of stock options granted was estimated using the following weighted-average assumptions:
    
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Dividend yield
%
 
%
 
%
 
%
Risk-free interest rate
1.31
%
 
1.69
%
 
1.54
%
 
1.73
%
Expected volatility
43.51
%
 
44.56
%
 
42.74
%
 
47.91
%
Expected term (years)
6.08

 
5.86

 
6.08

 
6.06



The following table summarizes the effects of share-based compensation on the Company's condensed consolidated statements of operations (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Product development
$
23,949

 
$
13,938

 
$
70,064

 
$
33,287

Sales and marketing
3,697

 
1,750

 
9,963

 
4,524

General and administrative
9,133

 
5,105

 
24,872

 
11,675

Total
$
36,779

 
$
20,793

 
$
104,899

 
$
49,486


    
On November 17, 2015, the Company’s 2015 Employee Stock Purchase Plan (ESPP) became effective. During the three and nine months ended September 30, 2016, the Company recorded $0.8 million and $3.8 million, respectively, of share-based compensation expense related to the ESPP, which is included in the table above. There was no similar activity during the three and nine months ended September 30, 2015.

The Company capitalized $1.2 million and $2.0 million of share-based compensation expense related to capitalized software during the three and nine months ended September 30, 2016, respectively. There was no similar activity during the three and nine months ended September 30, 2015.
As of September 30, 2016, there was $272.4 million of total unrecognized compensation cost related to outstanding stock options that is expected to be recognized over a weighted-average period of 2.95 years.
LOSS PER SHARE
LOSS PER SHARE
LOSS PER SHARE
Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted loss per share is the same as basic loss per share for all years presented because the effects of potentially dilutive items were anti-dilutive given the Company’s net loss.
The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
2016
 
2015
 
2016
 
2015
Net loss
$
(32,323
)
 
$
(53,930
)
 
$
(156,423
)
 
$
(131,528
)
Basic shares:
 
 
 
 
 
 
 
Weighted-average common shares outstanding
346,299
 
156,206
 
339,728
 
153,965
Weighted-average unvested shares
(2,406
)
 
(3,872
)
 
(3,135
)
 
(4,907
)
Weighted-average shares used to compute basic net loss per share
343,893
 
152,334
 
336,593
 
149,058
Diluted shares:
 
 
 
 
 
 
 
Weighted-average shares used to compute diluted loss per share
343,893
 
152,334
 
336,593
 
149,058
Net loss per share:
 
 
 
 
 
 
 
Basic
$
(0.09
)
 
$
(0.35
)
 
$
(0.46
)
 
$
(0.88
)
Diluted
$
(0.09
)
 
$
(0.35
)
 
$
(0.46
)
 
$
(0.88
)


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

 
Three and Nine Months Ended September 30,
 
2016
 
2015
Stock options and restricted stock units
101,972

 
106,234

Common stock warrants
9,458

 
9,457

Preferred stock warrants

 
87

Convertible preferred stock

 
135,253

Unvested shares
1,997

 
3,872

Employee stock purchase plan
637

 

Total anti-dilutive securities
114,064

 
254,903

OTHER INCOME AND EXPENSE, NET
OTHER INCOME AND EXPENSE, NET
OTHER INCOME AND EXPENSE, NET
Other income and expense, net, is comprised of the following (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net (gain) loss on foreign exchange
$
217

 
$
610

 
$
(789
)
 
$
1,324

Other
77

 
34

 
99

 
66

Total other (income) and expense, net
$
294

 
$
644

 
$
(690
)
 
$
1,390

COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES
Operating and Capital Leases
The Company has entered into various non-cancelable operating leases for certain offices with contractual lease periods expiring between 2016 and 2025. The Company recognized total rental expenses under operating leases of $2.9 million and $8.4 million for the three and nine months ended September 30, 2016, respectively, compared to $3.1 million and $9.8 million for the three and nine months ended September 30, 2015, respectively.
Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) and future minimum capital lease payments as of September 30, 2016 are as follows (in thousands):
 
Capital
 
Operating
Year:
 
 
 
2016 (remaining 3 months)
$
116

 
$
4,017

2017
449

 
16,610

2018
406

 
16,386

2019
299

 
15,510

2020

 
15,590

Thereafter

 
51,631

Total
$
1,270

 
$
119,744

Less amount representing interest
(3
)
 
 
Present value of capital lease obligations
1,267

 
 
Less current portion of capital lease obligation
(458
)
 
 
Non-current portion of capital lease obligation
$
809

 
 


Litigation
The Company is currently a party to, and may in the future be involved in, various litigation matters (including intellectual property litigation), legal claims, and government investigations.

The Company is involved in a class action lawsuit concerning independent contractors in connection with the Company’s Caviar business. On March 19, 2015, Jeffry Levin, on behalf of a putative nationwide class, filed a lawsuit in the United States District Court for the Northern District of California against the Company’s wholly owned subsidiary, Caviar, Inc., which, as amended, alleges that Caviar misclassified Mr. Levin and other similarly situated couriers as independent contractors and, in doing so, violated various provisions of the California Labor Code and California Business and Professions Code by requiring them to pay various business expenses that should have been borne by Caviar. The Court compelled arbitration of Mr. Levin’s individual claims on November 16, 2015 and dismissed the lawsuit in its entirety with prejudice on May 2, 2016. On June 1, 2016, Mr. Levin filed a Notice of Appeal of the Court’s order compelling arbitration with the United States Court of Appeals for the Ninth Circuit. Mr. Levin filed his opening appellate brief regarding the order compelling arbitration of his individual claims on October 7, 2016. The Company’s answering brief is due November 7, 2016. Mr. Levin also sought an award of penalties pursuant to the Labor Code Private Attorneys General Act of 2004 (PAGA). The parties stipulated that Mr. Levin would no longer pursue this PAGA claim, but this claim may instead be pursued by a different courier.

In addition, from time to time, the Company is involved in various other litigation matters and disputes arising in the ordinary course of business. While it is not feasible to predict or determine the ultimate outcome of these matters, the Company believes that none of the Company's current legal proceedings will have a material adverse effect on the Company's business.
SEGMENT AND GEOGRAPHICAL INFORMATION
SEGMENT AND GEOGRAPHIC INFORMATION
SEGMENT AND GEOGRAPHICAL INFORMATION
Operating segments are defined as components of an enterprise for which discrete financial information is available that is evaluated regularly by the chief operating decision maker (CODM) for purposes of allocating resources and evaluating financial performance. The Company’s CODM reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. As such, the Company’s operations constitute a single operating segment and one reportable segment.
Revenue
Revenue by geography is based on the billing addresses of the merchants. The following table sets forth revenue by geographic area (in thousands):

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenue
 
 
 
 
 
 
 
United States
$
421,317

 
$
320,858

 
$
1,210,704

 
$
863,148

International
17,685

 
11,330

 
46,100

 
29,610

Total net revenue
$
439,002

 
$
332,188

 
$
1,256,804

 
$
892,758



No individual country from the international markets contributed in excess of 10% of total revenue for three and nine months ended September 30, 2016 and 2015.

Long-Lived Assets
The following table sets forth long-lived assets by geographic area (in thousands):
 
September 30,
2016
 
December 31,
2015
Long-lived assets
 
 
 
United States
$
164,152

 
$
168,583

International
2,756

 
2,114

Total long-lived assets
$
166,908

 
$
170,697

SUPPLEMENTAL CASH FLOW INFORMATION
SUPPLEMENTAL CASH FLOW INFORMATION
SUPPLEMENTAL CASH FLOW INFORMATION

The supplemental disclosures of cash flow information consist of the following (in thousands):

 
Nine Months Ended September 30,
 
2016
 
2015
Supplemental Cash Flow Data:
 
 
 
Cash paid for interest
$
428

 
$
888

Cash paid for income taxes
321

 
1,798

Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Change in purchases of property and equipment in accounts payable and accrued expenses
1,310

 
4,366

Fair value of shares issued related to acquisitions

 
27,456

DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)
The accompanying interim condensed consolidated financial statements of the Company are unaudited. These interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP) and the applicable rules and regulations of the Securities and Exchange Commission (SEC) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The December 31, 2015 condensed consolidated balance sheet was derived from the audited financial statements as of that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

The accompanying unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature considered necessary to state fairly the Company's consolidated financial position, results of operations, comprehensive loss, and cash flows for the interim periods. All intercompany transactions and balances have been eliminated in consolidation. The interim results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016, or for any other future annual or interim period.

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk,” and the Consolidated Financial Statements and notes thereto included in Items 7, 7A, and 8, respectively, in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.
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.

Significant estimates, judgments, and assumptions in these consolidated financial statements include, but are not limited to, those related to revenue recognition, accrued transaction losses, provision for uncollectible receivables related to merchant cash advances (MCAs), valuation of loans held for sale, business combinations, goodwill and intangible assets, income taxes, and share-based compensation.

The Company places its cash and cash equivalents and investments in marketable securities with large creditworthy U.S. financial institutions. Balances in these accounts may exceed federally insured limits at times.
The loans are classified as held for sale upon purchase, as it is the Company’s intent to sell all of its rights, title, and interest in these loans to third-party investors for an up-front origination fee when the loans are sold. The Company also earns a servicing fee by continuing to service the loans by remitting monies to the third-party investors. Revenue from origination fees are recognized upon transfer of title to investors and servicing revenue is recognized as servicing is delivered.

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. Loans are recorded at the lower of cost or fair value. To determine the fair value of loans, the Company utilizes industry standard modeling, such as discounted cash flow models, to arrive at an estimate of fair value.
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, and ASU 2016-12. The new guidance will replace all current U.S. GAAP guidance on this topic and eliminate all 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. 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 guidance can be applied either retrospectively to each period presented or as a cumulative effect adjustment as of the date of adoption. The Company has not yet selected a transition method and is evaluating the impact of adopting this new accounting standard update on the consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-04, Recognition of Breakage for Certain Prepaid Stored-Value Products. This guidance specifies how prepaid stored-value product liabilities should be derecognized, thereby eliminating the current and potential future diversity in practice. 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 Company is currently evaluating the impact this new guidance may have on the consolidated financial statements.

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 is currently evaluating the impact this new guidance may have 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.

In August 2016, the FASB issues ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. This guidance addresses several specific cash flow issues with the objective of reducing the existing diversity in practice. 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 Company is currently evaluating the impact this new guidance may have on the consolidated financial statements.

FAIR VALUE OF FINANCIAL INSTRUMENTS (Tables)
Schedule of Fair Value, Assets and Liabilities Measured on Recurring Basis
The Company’s financial assets and liabilities that are measured at fair value on a recurring basis are classified as follows (in thousands):
 
September 30, 2016
 
December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Cash and Cash Equivalents:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
209,364

 
$

 
$

 
$
337,234

 
$

 
$

Commercial paper

 
1,500

 

 

 

 

Short-term securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities

 
13,088

 

 

 

 

Corporate bonds

 
19,787

 

 

 

 

Commercial paper

 
17,455

 

 

 

 

Municipal securities

 
6,529

 

 
 
 
 
 
 
U.S. government securities
19,568

 

 

 

 

 

Long-term securities:
 
 
 
 
 
 

 

 

U.S. agency securities

 
6,519

 

 

 

 

Corporate bonds

 
4,423

 

 

 

 

Municipal securities

 
3,033

 

 

 

 

U.S. government securities
1,503

 

 

 

 

 

Total
$
230,435

 
$
72,334

 
$

 
$
337,234

 
$

 
$

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

 
September 30, 2016
 
Carrying Value
 
Fair Value (Level 3)
Loans held for sale
28,817

 
29,778

Total
28,817

 
29,778

INVESTMENTS (Tables)
The Company's short-term and long-term investments as of September 30, 2016 are as follows (in thousands):

 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Short-term securities:
 
 
 
 
 
 
 
U.S. agency securities
$
13,076

 
$
12

 
$

 
$
13,088

Corporate bonds
19,795

 

 
(8
)
 
19,787

Commercial paper
17,455

 

 

 
17,455

Municipal securities
6,530

 

 
(1
)
 
6,529

U.S. government securities
19,552

 
16

 

 
19,568

Total
$
76,408

 
$
28

 
$
(9
)
 
$
76,427

 
 
 
 
 
 
 
 
Long-term securities:
 
 
 
 
 
 
 
U.S. agency securities
$
6,508

 
$
11

 
$

 
$
6,519

Corporate bonds
4,419

 
4

 

 
4,423

Municipal securities
3,038

 

 
(5
)
 
3,033

U.S. government securities
1,500

 
3

 

 
1,503

Total
$
15,465

 
$
18

 
$
(5
)
 
$
15,478

The contractual maturities of the Company's short-term and long-term investments as of September 30, 2016 are as follows (in thousands):

 
Amortized Cost
 
Fair Value
Due in one year or less
$
76,408

 
$
76,427

Due in one to five years
15,465

 
15,478

Total
$
91,873

 
$
91,905

ALLOWANCE FOR MERCHANT CASH ADVANCE LOSSES (Tables)
Schedule of Allowance for Uncollectible Merchant Cash Advance Receivables
The following table summarizes the activities of the Company’s allowance for uncollectible merchant cash advance receivables (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Allowance for uncollectible MCA receivables, beginning of the period
$
5,091

 
$
5,277

 
$
7,443

 
$
2,431

Provision for uncollectible MCA receivables
602

 
1,468

 
509

 
4,616

MCA receivables charged off
(855
)
 
(809
)
 
(3,114
)
 
(1,111
)
Allowance for uncollectible MCA receivables, end of the period
$
4,838

 
$
5,936

 
$
4,838

 
$
5,936

PROPERTY AND EQUIPMENT, NET (Tables)
Schedule of Property, Equipment, and Internally Developed Software
The following is a summary of property, equipment, and internally-developed software at cost, less accumulated depreciation and amortization (in thousands):    

September 30,
2016

December 31,
2015
Computer equipment
$
50,520


$
43,531

Office furniture and equipment
10,110


9,339

Leasehold improvements
72,308


65,298

Capitalized software
22,761


14,533

Construction in process
670

 
490

Total
156,369


133,191

Less: Accumulated depreciation and amortization
(66,412
)

(45,969
)
Property and equipment, net
$
89,957


$
87,222

ACQUIRED INTANGIBLE ASSETS (Tables)
The following table presents the detail of acquired intangible assets as of the periods presented (in thousands):
 
Balance as of September 30, 2016
Cost
 
Accumulated Amortization
 
Net
Patent
$
1,285

 
$
(427
)
 
$
858

Technology Assets
29,045

 
(12,786
)
 
16,259

Customer Assets
6,645

 
(3,510
)
 
3,135

Total
$
36,975

 
$
(16,723
)
 
$
20,252


 
Balance as of December 31, 2015