SQUARE, INC., 10-Q filed on 11/8/2017
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2017
Nov. 3, 2017
Class A
Nov. 3, 2017
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
Large Accelerated Filer 
 
 
Document Type
10-Q 
 
 
Document Period End Date
Sep. 30, 2017 
 
 
Document Fiscal Year Focus
2017 
 
 
Document Fiscal Period Focus
Q3 
 
 
Amendment Flag
false 
 
 
Class of Stock [Line Items]
 
 
 
Entity Common Stock, Shares Outstanding
 
268,850,952 
119,716,690 
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and cash equivalents
$ 658,412 
$ 452,030 
Short-term investments
209,959 
59,901 
Restricted cash
20,533 
22,131 
Settlements receivable
587,630 
321,102 
Customer funds
85,473 
43,574 
Loans held for sale
58,331 
42,144 
Other current assets
66,539 
60,543 
Total current assets
1,686,877 
1,001,425 
Property and equipment, net
88,666 
88,328 
Goodwill
57,961 
57,200 
Acquired intangible assets, net
14,648 
19,292 
Long-term investments
191,335 
27,366 
Restricted cash
14,565 
14,600 
Other non-current assets
29,800 
3,194 
Total assets
2,083,852 
1,211,362 
Current liabilities:
 
 
Accounts payable
13,529 
12,602 
Customers payable
727,341 
431,632 
Settlements payable
81,414 
51,151 
Accrued transaction losses
26,720 
20,064 
Accrued expenses
60,626 
39,543 
Other current liabilities
21,049 
22,472 
Total current liabilities
930,679 
577,464 
Long-term debt (Note 10)
354,237 
Other non-current liabilities
66,027 
57,745 
Total liabilities
1,350,943 
635,209 
Commitments and contingencies (Note 15)
   
   
Stockholders’ equity:
 
 
Preferred stock, $0.0000001 par value: 100,000,000 shares authorized at September 30, 2017 and December 31, 2016. None issued and outstanding at September 30, 2017 and December 31, 2016.
Additional paid-in capital
1,560,374 
1,357,381 
Accumulated deficit
(827,072)
(779,239)
Accumulated other comprehensive loss
(393)
(1,989)
Total stockholders’ equity
732,909 
576,153 
Total liabilities and stockholders’ equity
2,083,852 
1,211,362 
Class A
 
 
Stockholders’ equity:
 
 
Common stock
Class B
 
 
Stockholders’ equity:
 
 
Common stock
$ 0 
$ 0 
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) (USD $)
Sep. 30, 2017
Dec. 31, 2016
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)
263,379,421 
198,746,620 
Common stock, shares outstanding (in shares)
263,379,421 
198,746,620 
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)
124,422,721 
165,800,756 
Common stock, shares outstanding (in shares)
124,422,721 
165,800,756 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Revenue:
 
 
 
 
Hardware revenue
$ 10,089 
$ 8,171 
$ 29,394 
$ 35,438 
Total net revenue
585,159 
439,002 
1,598,218 
1,256,804 
Cost of revenue:
 
 
 
 
Hardware costs
18,775 
15,689 
45,610 
56,444 
Amortization of acquired technology
1,556 
1,886 
5,058 
6,142 
Total cost of revenue
366,543 
288,688 
998,742 
847,291 
Gross profit
218,616 
150,314 
599,476 
409,513 
Operating expenses:
 
 
 
 
Product development
82,547 
70,418 
229,255 
203,648 
Sales and marketing
66,533 
46,754 
176,349 
124,470 
General and administrative
64,312 
52,075 
184,235 
198,966 
Transaction, loan and advance losses
19,893 
12,885 
50,185 
38,201 
Amortization of acquired customer assets
222 
164 
649 
703 
Total operating expenses
233,507 
182,296 
640,673 
565,988 
Operating loss
(14,891)
(31,982)
(41,197)
(156,475)
Interest and other (income) expense, net
1,854 
111 
5,619 
(933)
Loss before income tax
(16,745)
(32,093)
(46,816)
(155,542)
Provision (benefit) for income taxes
(647)
230 
300 
881 
Net loss
(16,098)
(32,323)
(47,150)
(156,423)
Net loss per share:
 
 
 
 
Basic (in USD per share)
$ (0.04)
$ (0.09)
$ (0.13)
$ (0.46)
Diluted (in USD per share)
$ (0.04)
$ (0.09)
$ (0.13)
$ (0.46)
Weighted-average shares used to compute net loss per share
 
 
 
 
Basic (in shares)
383,951 
343,893 
375,743 
336,593 
Diluted (in shares)
383,951 
343,893 
375,743 
336,593 
Transaction |
Customers Other than Starbucks
 
 
 
 
Revenue:
 
 
 
 
Revenue
510,019 
388,347 
1,395,562 
1,053,664 
Cost of revenue:
 
 
 
 
Transaction and services-based costs
328,043 
254,061 
896,913 
683,194 
Transaction |
Starbucks
 
 
 
 
Revenue:
 
 
 
 
Revenue
7,164 
78,869 
Cost of revenue:
 
 
 
 
Transaction and services-based costs
4,528 
69,810 
Software and data product
 
 
 
 
Revenue:
 
 
 
 
Revenue
65,051 
35,320 
173,262 
88,833 
Cost of revenue:
 
 
 
 
Transaction and services-based costs
$ 18,169 
$ 12,524 
$ 51,161 
$ 31,701 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Statement of Comprehensive Income [Abstract]
 
 
 
 
Net loss
$ (16,098)
$ (32,323)
$ (47,150)
$ (156,423)
Net foreign currency translation adjustments
367 
127 
1,554 
722 
Net unrealized gain (loss) on revaluation of intercompany loans
(41)
74 
362 
656 
Net unrealized gain (loss) on marketable securities
(200)
(60)
(320)
20 
Total comprehensive loss
$ (15,972)
$ (32,182)
$ (45,554)
$ (155,025)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Cash flows from operating activities:
 
 
Net loss
$ (47,150)
$ (156,423)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
Depreciation and amortization
27,647 
27,817 
Non-cash interest and other expense
9,969 
(88)
Share-based compensation
111,311 
104,899 
Transaction, loan and advance losses
50,185 
38,201 
Deferred provision for income taxes
133 
(104)
Changes in operating assets and liabilities:
 
 
Settlements receivable
(271,235)
(92,207)
Customer funds
(41,899)
(19,000)
Purchase of loans held for sale
(874,498)
(421,243)
Sales and principal payments of loans held for sale
852,187 
393,221 
Other current assets
(6,262)
24,685 
Other non-current assets
(1,699)
145 
Accounts payable
1,223 
(867)
Customers payable
295,406 
139,105 
Settlements payable
30,263 
14,410 
Charge-offs to accrued transaction losses
(33,081)
(32,623)
Accrued expenses
20,328 
86 
Other current liabilities
(1,125)
845 
Other non-current liabilities
8,614 
2,376 
Net cash provided by operating activities
130,317 
23,235 
Cash flows from investing activities:
 
 
Purchase of marketable securities
(485,484)
(139,103)
Proceeds from maturities of marketable securities
106,079 
26,268 
Proceeds from sale of marketable securities
65,121 
20,962 
Purchase of property and equipment
(19,625)
(19,674)
Payment for investment in privately held entity
(25,000)
Payment for acquisition of intangible assets
(400)
Business acquisitions, net of cash acquired
(1,600)
Net cash used in investing activities
(360,509)
(111,947)
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)
Principal payments on capital lease obligation
(1,020)
Payments of offering costs related to initial public offering
(5,530)
Proceeds from the exercise of stock options and purchases under the employee stock purchase plan, net
111,889 
48,304 
Payments for tax withholding related to vesting of restricted stock units
(18,298)
Net cash provided by financing activities
431,121 
42,774 
Effect of foreign exchange rate changes on cash and cash equivalents
3,836 
2,536 
Net increase (decrease) in cash, cash equivalents and restricted cash
204,765 
(43,402)
Cash, cash equivalents and restricted cash, beginning of period
488,745 
489,552 
Cash, cash equivalents and restricted cash, end of period
$ 693,510 
$ 446,150 
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. Square Cash is an easy way for businesses and individuals to send and receive money, and Caviar is a food ordering service for restaurants. Square was founded in 2009 and is headquartered in San Francisco, with offices in the United States, Canada, Japan, Australia, Ireland, and the United Kingdom.

Basis of Presentation
    
The accompanying interim condensed consolidated financial statements of the Company are unaudited. These interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP) and the applicable rules and regulations of the Securities and Exchange Commission (SEC) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The December 31, 2016 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, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017, 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, 2016.

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 nine months ended September 30, 2016, $8.5 million was reclassified from cash outflows from investing activities to changes in cash, cash equivalents and restricted cash.

The presentation of changes in customer funds in the statement of cash flows for the nine months ended September 30, 2016 has also been revised for the correction of an immaterial error that was identified during the fourth quarter of 2016 whereby the Company had previously misclassified and reported certain customer funds as cash and cash equivalents rather than classifying these customer funds as a component of current assets impacting operating activities. The effect of the revision was to decrease the amount of net cash provided by operating activities for the nine months ended September 30, 2016 by $19.0 million and decrease cash and cash equivalents as of September 30, 2016 by that same amount. Net cash provided by operating activities for the year ended December 31, 2016 and cash and cash equivalents as of December 31, 2016 were not misstated.

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 Customer 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.

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, valuation of the debt component of convertible senior notes, valuation of loans held for sale, goodwill and intangible assets, income and other taxes, and share-based compensation.

Concentration of Credit Risk
    
For the three and nine months ended September 30, 2017 and 2016, the Company had no customer that accounted for greater than 10% of total net revenue.

The Company had three third-party processors that represented approximately 52%, 37%, and 8% of settlements receivable as of September 30, 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.

Significant Accounting Policies
Except for the adoption of ASU 2016-18, Restricted Cash, described above, there have been no material changes to the Company’s significant accounting policies during the nine months ended September 30, 2017, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

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 will be 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 plans to adopt the new guidance using the modified retrospective approach. The Company is still evaluating the impact the new guidance will have on its financial statements and disclosures. The Company has reached preliminary conclusions about certain key accounting assessments. The Company is also assessing financial reporting system and process changes that may be necessary to implement the new guidance. Although its evaluation is ongoing and its preliminary conclusions could change, apart from the incremental disclosure requirements and the potential impact the new standard may have on systems and processes, it is the Company’s preliminary conclusion that the new guidance will not have a material impact on its consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, as part of its simplification initiative. The current guidance requires 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. We anticipate that the adoption of ASU 2016-01 may increase the volatility of our other income (expense), net, as a result of the remeasurement of our equity securities upon the possible occurrence of future observable price changes; however, the Company does not expect such changes to be material.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which will require, among other items, lessees to recognize most leases as assets and liabilities 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. Based on the Company's initial assessment of its current leases and potential, the Company does not anticipate the adoption of this guidance to have a material impact on its operating results. The Company will continue to evaluate the impact of recording right to use assets and related liabilities on its consolidated balance sheets.

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 does not expect the adoption of this new guidance to have a material impact 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 does not expect the adoption of this guidance to have a material impact 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 condensed 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 does not expect the adoption of this guidance to have a material the impact 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 currently anticipates that the adoption of this new guidance will not have a material impact on the consolidated financial statements and related disclosures.
RESTRICTED CASH
RESTRICTED CASH
RESTRICTED CASH
    
As of September 30, 2017 and December 31, 2016, restricted cash of $20.5 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 and loans. 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 both September 30, 2017 and December 31, 2016, the remaining restricted cash of $14.6 million, is primarily related to cash deposited into money market funds that is used as collateral pursuant to multi-year lease agreements entered into in 2012 and 2014 (see Note 15). The Company has recorded this amount as a non-current asset on the condensed consolidated balance sheets as the terms of the related leases 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, 2017
 
December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Cash and Cash Equivalents:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
384,546

 
$

 
$

 
$
207,168

 
$

 
$

U.S. agency securities

 

 

 

 

 

Commercial paper

 

 

 

 
7,496

 

U.S. government securities

 

 

 

 

 

Corporate bonds

 

 

 

 

 

Municipal securities

 

 

 

 
1,000

 

Short-term securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities

 
13,091

 

 

 
9,055

 

Corporate bonds

 
52,420

 

 

 
6,980

 

Commercial paper

 
58,298

 

 

 
17,298

 

Municipal securities

 
22,493

 

 

 
8,028

 

U.S. government securities
63,657

 

 

 
18,540

 

 

Long-term securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities

 
25,269

 

 

 
3,502

 

Corporate bonds

 
88,673

 

 

 
12,914

 

Municipal securities

 
20,080

 

 

 
2,492

 

U.S. government securities
57,313

 

 

 
8,458

 

 

Total
$
505,516

 
$
280,324

 
$

 
$
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):
 
September 30, 2017
 
Carrying Value
 
Fair Value (Level 2)
Convertible senior notes
$
354,237

 
$
616,000

Total
$
354,237

 
$
616,000



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

 
September 30, 2017
 
December 31, 2016
 
Carrying Value
 
Fair Value (Level 3)
 
Carrying Value
 
Fair Value (Level 3)
Loans held for sale
$
58,331

 
$
60,375

 
$
42,144

 
$
42,633

Total
$
58,331

 
$
60,375

 
$
42,144

 
$
42,633



The Company recognizes a charge within transaction, loan and advance losses on the condensed consolidated statements of operations whenever the amortized cost of a loan exceeds its fair value, with such charges being reversed for subsequent increases in fair value to the extent of the amortized cost amount. For the three and nine months ended September 30, 2017, the Company recorded a charge for the excess of amortized cost over fair value of the loans of $3.4 million and $6.1 million, respectively. No charges were recorded for the respective periods in 2016.
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, 2017 and 2016, 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, 2017 are as follows (in thousands):

 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Short-term securities:
 
 
 
 
 
 
 
U.S. agency securities
$
13,084

 
$
7

 
$

 
$
13,091

Corporate bonds
52,405

 
25

 
(10
)
 
52,420

Commercial paper
58,298

 

 

 
58,298

Municipal securities
22,513

 
5

 
(25
)
 
22,493

U.S. government securities
63,674

 
15

 
(32
)
 
63,657

Total
$
209,974

 
$
52

 
$
(67
)
 
$
209,959

 
 
 
 
 
 
 
 
Long-term securities:
 
 
 
 
 
 
 
U.S. agency securities
$
25,306

 
$

 
$
(37
)
 
$
25,269

Corporate bonds
88,722

 
39

 
(88
)
 
88,673

Municipal securities
20,104

 
9

 
(33
)
 
20,080

U.S. government securities
57,388

 
22

 
(97
)
 
57,313

Total
$
191,520

 
$
70

 
$
(255
)
 
$
191,335


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

The contractual maturities of the Company's short-term and long-term investments as of September 30, 2017 are as follows (in thousands):

 
Amortized Cost
 
Fair Value
Due in one year or less
$
209,974

 
$
209,959

Due in one to five years
191,520

 
191,335

Total
$
401,494

 
$
401,294

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):    

September 30,
2017

December 31,
2016
Leasehold improvements
$
75,533

 
$
73,366

Computer equipment
61,694


52,915

Capitalized software
31,723

 
24,642

Office furniture and equipment
14,313


10,737

 
183,263

 
161,660

Less: Accumulated depreciation and amortization
(94,597
)

(73,332
)
Property and equipment, net
$
88,666

 
$
88,328


Depreciation and amortization expense on property and equipment was $7.3 million and $21.8 million for the three and nine months ended September 30, 2017, respectively. 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.
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 September 30, 2017 and December 31, 2016, goodwill was $58.0 million and $57.2 million, respectively.

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 at September 30, 2017
Cost
 
Accumulated Amortization
 
Net
Patents
$
1,285

 
$
(533
)
 
$
752

Technology Assets
29,158

 
(19,843
)
 
9,315

Customer Assets
8,886

 
(4,305
)
 
4,581

Total
$
39,329

 
$
(24,681
)
 
$
14,648


 
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, acquired technology, and customer intangible assets are approximately 13 years, four years, and nine years, respectively.
    
Amortization expense associated with other intangible assets was $1.8 million and $5.9 million for the three and nine months ended September 30, 2017, 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.

The total estimated annual future amortization expense of these intangible assets as of September 30, 2017 is as follows (in thousands):
2017 (remaining 3 months)
$
1,734

2018
6,037

2019
3,253

2020
1,296

2021
759

Thereafter
1,569

Total
$
14,648

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,
2017
 
December 31,
2016
Inventory, net
$
21,204

 
$
13,724

Processing costs receivable
16,777

 
10,049

Prepaid expenses
7,901

 
7,365

Accounts receivable, net
4,209

 
6,191

Deferred hardware costs
2,648

 
4,546

Deferred magstripe reader costs
2,428

 
3,911

Merchant cash advance receivable, net
356

 
4,212

Other
11,016

 
10,545

Total
$
66,539

 
$
60,543


Accrued Expenses
The following table presents the detail of accrued expenses (in thousands):    
 
September 30,
2017
 
December 31,
2016
Accrued payroll
$
11,878

 
$
5,799

Accrued professional fees
9,161

 
5,788

Accrued advertising and other marketing
10,482

 
5,008

Processing costs payable
5,766

 
9,655

Accrued non income tax liabilities
4,862

 
3,562

Accrued hardware costs
6,157

 
3,148

Other accrued liabilities
12,320

 
6,583

Total
$
60,626

 
$
39,543



Other Current Liabilities
The following table presents the detail of other current liabilities (in thousands):    
    
 
September 30,
2017
 
December 31,
2016
Square Capital payable
$
7,472

 
$
4,907

Square Payroll payable
2,350

 
4,769

Deferred revenue
3,424

 
5,407

Current portion of deferred rent
3,207

 
2,862

Accrued redemptions
1,084

 
1,628

Other
3,512

 
2,899

Total
$
21,049

 
$
22,472

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

 
$

Deposits
2,911

 
1,775

Debt Issuance Costs
858

 
1,063

Deferred tax assets
191

 
306

Other
840

 
50

Total
$
29,800

 
$
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. 

Other Non-Current Liabilities
The following table presents the detail of other non-current liabilities (in thousands):
 
September 30,
2017
 
December 31,
2016
Statutory liabilities
$
38,049

 
$
29,497

Deferred rent
21,029

 
23,119

Deferred tax liabilities
476

 
476

Other
6,473

 
4,653

Total
$
66,027

 
$
57,745

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,
2017
 
December 31,
2016
Inventory, net
$
21,204

 
$
13,724

Processing costs receivable
16,777

 
10,049

Prepaid expenses
7,901

 
7,365

Accounts receivable, net
4,209

 
6,191

Deferred hardware costs
2,648

 
4,546

Deferred magstripe reader costs
2,428

 
3,911

Merchant cash advance receivable, net
356

 
4,212

Other
11,016

 
10,545

Total
$
66,539

 
$
60,543


Accrued Expenses
The following table presents the detail of accrued expenses (in thousands):    
 
September 30,
2017
 
December 31,
2016
Accrued payroll
$
11,878

 
$
5,799

Accrued professional fees
9,161

 
5,788

Accrued advertising and other marketing
10,482

 
5,008

Processing costs payable
5,766

 
9,655

Accrued non income tax liabilities
4,862

 
3,562

Accrued hardware costs
6,157

 
3,148

Other accrued liabilities
12,320

 
6,583

Total
$
60,626

 
$
39,543



Other Current Liabilities
The following table presents the detail of other current liabilities (in thousands):    
    
 
September 30,
2017
 
December 31,
2016
Square Capital payable
$
7,472

 
$
4,907

Square Payroll payable
2,350

 
4,769

Deferred revenue
3,424

 
5,407

Current portion of deferred rent
3,207

 
2,862

Accrued redemptions
1,084

 
1,628

Other
3,512

 
2,899

Total
$
21,049

 
$
22,472

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

 
$

Deposits
2,911

 
1,775

Debt Issuance Costs
858

 
1,063

Deferred tax assets
191

 
306

Other
840

 
50

Total
$
29,800

 
$
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. 

Other Non-Current Liabilities
The following table presents the detail of other non-current liabilities (in thousands):
 
September 30,
2017
 
December 31,
2016
Statutory liabilities
$
38,049

 
$
29,497

Deferred rent
21,029

 
23,119

Deferred tax liabilities
476

 
476

Other
6,473

 
4,653

Total
$
66,027

 
$
57,745

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 $0.1 million and $0.4 million in unused commitment fees during the three and nine months ended September 30, 2017 and 2016, respectively. As of September 30, 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 commencing after the calendar quarter ending on June 30, 2017 (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.

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):
 
September 30, 2017
Principal
$
440,000

Less: unamortized debt discount
(77,291
)
Less: unamortized debt issuance costs
(8,472
)
Net carrying amount
$
354,237

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

 
September 30, 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):

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2017
Contractual interest expense based on 0.375% per annum
$
413

 
$
938

Amortization of debt discount and issuance costs
4,277

 
9,889

Total
$
4,690

 
$
10,827

Effective interest rate of the liability component
5.34
%
 
5.34
%


Convertible Note Hedge and Warrant Transactions

In connection with the offering of the Notes, the Company entered into convertible note hedge transactions with certain financial institutions (Counterparties) whereby the Company has the option to purchase a total of approximately 19.2 million shares of its Class A common stock at a price of approximately $22.95 per share. The total cost of the convertible note hedge transactions was $92.1 million. In addition, the Company sold warrants to the Counterparties whereby the Counterparties have the option to purchase a total of 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 $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 offset any actual dilution from the conversion of the Notes and to effectively increase the overall conversion price from approximately $22.95 per share to approximately $31.18 per share. As these instruments are considered indexed to the Company's own stock and are considered equity classified, the convertible note hedges and warrants are recorded in stockholders’ equity, are not accounted for as derivatives and are not remeasured each reporting period. The net costs incurred in connection with the convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the condensed consolidated balance sheets.
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):
    
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Accrued transaction losses, beginning of the period
$
22,455

 
$
16,093

 
$
20,064

 
$
17,176

Provision for transaction losses
15,102

 
13,483

 
39,737

 
36,875

Charge-offs to accrued transaction losses
(10,837
)
 
(8,148
)
 
(33,081
)
 
(32,623
)
Accrued transaction losses, end of the period
$
26,720

 
$
21,428

 
$
26,720

 
$
21,428

INCOME TAXES
INCOME TAXES
INCOME TAXES
The Company recorded an income tax benefit of $0.6 million and an income tax expense of $0.3 million for the three and nine months ended September 30, 2017, respectively, compared to income tax expense of $0.2 million and $0.9 million for the three and nine months ended September 30, 2016, respectively. The income tax benefit recorded for the three months ended September 30, 2017 and the income tax expense recorded for the nine months ended September 30, 2017 were primarily due to state and foreign income tax expense, offset by the income tax benefit of the monetization of the Company’s alternative minimum tax (AMT) credit carryforward on its 2016 Federal tax return.

The Company’s effective tax rate was 3.9% and (0.7)% for the three and nine months ended September 30, 2017, respectively, compared to an effective tax rate of (0.7)% and (0.6)% for the three and nine months ended September 30, 2016, respectively. The difference between the effective tax rate and the federal statutory tax rate for the three and nine months ended September 30, 2017 and 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, 2017, 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, 2017 and 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
The changes in total stockholders’ equity were as follows (in thousands):

 
Total stockholders’ equity
Balance at December 31, 2016
$
576,153

Net loss
(47,150
)
Exercise of stock options
104,251

Purchases under the employee stock purchase plan
7,767

Vesting of early exercised stock options and other
563

Share-based compensation
113,826

Tax withholding related to vesting of restricted stock units
(18,298
)
Conversion feature of convertible senior notes, due 2022, net of allocated debt issuance costs
83,901

Purchase of bond hedges in conjunction with issuance of convertible senior notes, due 2022
(92,136
)
Sale of warrants in conjunction with issuance of convertible senior notes, due 2022
57,244

Payment for termination of Starbucks warrant
(54,808
)
Change in other comprehensive loss
1,596

Balance at September 30, 2017
$
732,909



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, 2017, 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, 2017, there were 263,379,421 shares of Class A common stock and 124,422,721 shares of Class B common stock outstanding. Options and awards granted following the Company's Initial Public Offering are related to underlying Class A common stock. Additionally, holders of Class B common stock are able to convert such shares into Class A common stock.

Warrants

On February 24, 2017, the Company and Starbucks entered into a Warrant Cancellation and Payment Agreement pursuant to which the Company paid Starbucks cash consideration of approximately $54.8 million in return for the termination of the Warrant to Purchase Stock dated August 7, 2012, as amended, that provided Starbucks with the right to purchase an aggregate of approximately 9.5 million shares of the Company’s common stock.

In conjunction with the Notes offering, the Company sold warrants 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 $31.18 per share. The Company received $57.2 million in cash proceeds from the sale of these warrants. See Note 10, Indebtedness, for more details on this transaction.

Stock Plans

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

Under the 2015 Plan, shares of the Company's Class A common stock are reserved for the issuance of incentive and nonstatutory stock options, restricted stock awards, restricted stock units (RSUs), performance shares, and stock bonuses to qualified employees, directors, and consultants. The 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 or a committee thereof. As of September 30, 2017, the total number of shares subject to stock options and RSUs outstanding under the 2015 Plan was 26,290,690, and 46,341,496 shares were available for future issuance. As of September 30, 2017, the total number of shares subject to stock options and RSUs outstanding under the 2009 Plan was 48,262,824.
A summary of stock option activity for the nine months ended September 30, 2017 is as follows (in thousands, except share and per share data):
 
Number of Stock Options Outstanding
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
(in years)
 
Aggregate
Intrinsic
Value
Balance at December 31, 2016
73,261,562

 
$
7.70

 
7.28
 
$
443,711

Granted
1,216,959

 
17.20

 
 
 
 
Exercised
(19,050,042
)
 
5.47

 
 
 
 
Forfeited
(2,423,888
)
 
11.42

 
 
 
 
Balance at September 30, 2017
53,004,591

 
$
8.55

 
6.76
 
$
1,073,815

Options exercisable as of
 
 
 
 
 
 
 
September 30, 2017
49,642,480

 
$
8.26

 
6.63
 
$
1,020,272



Restricted Stock Activity
Activity related to RSUs during the nine months ended September 30, 2017 is set forth below:
 
Number of
RSUs
 
Weighted
Average Grant
Date Fair Value
Unvested as of December 31, 2016
15,443,391

 
$
12.09

Granted
12,241,086

 
18.81

Vested
(4,145,734
)
 
12.37

Forfeited
(1,989,820
)
 
12.90

Unvested as of September 30, 2017
21,548,923

 
$
15.78



Share-Based Compensation
The fair value of stock options and employee stock purchase plan rights are estimated on the date of grant using the Black-Scholes-Merton option valuation model. Whereas, 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 granted was estimated using the following weighted-average assumptions:
    
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2017
 
2016
Dividend yield
%
 
%
 
%
Risk-free interest rate
1.31
%
 
1.88
%
 
1.54
%
Expected volatility
43.51
%
 
32.22
%
 
42.74
%
Expected term (years)
6.08

 
6.02

 
6.08


There were no stock options granted during the three months ended September 30, 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. 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.
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,
 
2017
 
2016
 
2017
 
2016
Cost of revenue
$
29

 
$

 
$
47

 
$

Product development
25,254

 
23,949

 
69,746

 
70,064

Sales and marketing
4,579

 
3,697

 
12,869

 
9,963

General and administrative
10,186

 
9,133

 
28,649

 
24,872

Total
$
40,048

 
$
36,779

 
$
111,311

 
$
104,899


    
The Company recorded $1.3 million and $4.4 million of share-based compensation expense related to the Company's 2015 Employee Stock Purchase Plan during the three and nine months ended September 30, 2017, respectively, compared to $0.8 million and $3.8 million for the three and nine months ended September 30, 2016, respectively, which are included in the table above.

The Company capitalized $1.3 million and $2.5 million of share-based compensation expense related to capitalized software costs during the three and nine months ended September 30, 2017, respectively, compared to $1.2 million and $2.0 million for the three and nine months ended September 30, 2016, respectively.
As of September 30, 2017, there was $399.7 million of total unrecognized compensation cost related to outstanding stock options that is expected to be recognized over a weighted-average period of 2.87 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 periods presented because the effects of potentially dilutive items were anti-dilutive given the Company’s net loss.
The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
2017
 
2016
 
2017
 
2016
Net loss
$
(16,098
)
 
$
(32,323
)
 
$
(47,150
)
 
$
(156,423
)
Basic shares:
 
 
 
 
 
 
 
Weighted-average common shares outstanding
385,409

 
346,299
 
377,374

 
339,728
Weighted-average unvested shares
(1,458
)
 
(2,406
)
 
(1,631
)
 
(3,135
)
Weighted-average shares used to compute basic net loss per share
383,951

 
343,893

 
375,743

 
336,593
Diluted shares:
 
 
 
 
 
 
 
Weighted-average shares used to compute diluted loss per share
383,951

 
343,893

 
375,743

 
336,593
Net loss per share:
 
 
 
 
 
 
 
Basic
$
(0.04
)
 
$
(0.09
)
 
$
(0.13
)
 
$
(0.46
)
Diluted
$
(0.04
)
 
$
(0.09
)
 
$
(0.13
)
 
$
(0.46
)


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

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

 
Three and Nine Months Ended September 30,
 
2017
 
2016
Stock options and restricted stock units
74,554

 
101,972

Common stock warrants
19,173

 
9,458

Unvested shares
1,446

 
1,997

Employee stock purchase plan
642

 
637

Total anti-dilutive securities
95,815

 
114,064

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 2017 and 2025. The Company recognized total rental expenses under operating leases of $3.7 million and $9.6 million for the three and nine months ended September 30, 2017, respectively, compared to $2.9 million and $8.4 million for the three and nine months ended September 30, 2016, 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, 2017 are as follows (in thousands):
 
Capital
 
Operating
Year:
 
 
 
2017 (remaining 3 months)
$
376

 
$
4,381

2018
1,495

 
18,001

2019
1,380

 
16,911

2020
142

 
16,905

2021

 
16,626

Thereafter

 
36,088

Total
$
3,393

 
$
108,912

Less amount representing interest
(1
)
 
 
Present value of capital lease obligations
3,392

 
 
Less current portion of capital lease obligation
(1,500
)
 
 
Non-current portion of capital lease obligation
$
1,892

 
 


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 filed its answering brief on December 7, 2016, and Mr. Levin filed his reply on December 21, 2016. No hearing date has been set. 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 that it may instead be pursued by a different courier. Subsequently, couriers Nadezhda Rosen and La’Dell Brewster filed a new PAGA-only claim in the Superior Court of the State of California for the County of San Francisco (Superior Court) on November 7, 2016. Plaintiffs claim that Caviar misclassified its couriers as independent contractors resulting in numerous violations of the California Labor Code, pursuant to which plaintiffs seek statutory penalties for those violations. In February 2017, the Company participated in a mediation with the parties in these Caviar misclassification suits to explore resolution of the matters at hand. After continued negotiation, the parties reached a global settlement of these suits, which is subject to final confirmation by the Superior Court. The Company has made appropriate accruals in the financial statements for the immaterial amounts expected to be paid as settlement.

In addition, from time to time, the Company is involved in various other litigation matters and disputes arising in the ordinary course of business. The Company cannot at this time fairly estimate a reasonable range of exposure, if any, of the potential liability with respect to these other matters. While the Company does not believe, at this time, that any ultimate liability resulting from any of these other matters will have a material adverse effect on the Company's results of operations, financial position, or liquidity, the Company cannot give any assurance regarding the ultimate outcome of these other matters, and their resolution could be material to the Company's operating results for any particular period.
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 is the chief executive officer who 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,
 
2017
 
2016
 
2017
 
2016
Revenue
 
 
 
 
 
 
 
United States
$
559,053

 
$
421,317

 
$
1,533,960

 
$
1,210,704

International
26,106

 
17,685

 
64,258

 
46,100

Total net revenue
$
585,159

 
$
439,002

 
$
1,598,218

 
$
1,256,804



No individual country from the international markets contributed in excess of 10% of total revenue for the three and nine months ended September 30, 2017 and 2016.

Long-Lived Assets
The following table sets forth long-lived assets by geographic area (in thousands):
 
September 30,
2017
 
December 31,
2016
Long-lived assets
 
 
 
United States
$
156,850

 
$
162,118

International
4,425

 
2,675

Total long-lived assets
$
161,275

 
$
164,793

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,
 
2017
 
2016
Supplemental Cash Flow Data:
 
 
 
Cash paid for interest
$
1,230

 
$
428

Cash paid for income taxes
1,117

 
321

Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Change in purchases of property and equipment in accounts payable and accrued expenses
(123
)
 
1,310

Unpaid business acquisition purchase price
644

 

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, 2016 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, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017, 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, 2016.
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 nine months ended September 30, 2016, $8.5 million was reclassified from cash outflows from investing activities to changes in cash, cash equivalents and restricted cash.

The presentation of changes in customer funds in the statement of cash flows for the nine months ended September 30, 2016 has also been revised for the correction of an immaterial error that was identified during the fourth quarter of 2016 whereby the Company had previously misclassified and reported certain customer funds as cash and cash equivalents rather than classifying these customer funds as a component of current assets impacting operating activities. The effect of the revision was to decrease the amount of net cash provided by operating activities for the nine months ended September 30, 2016 by $19.0 million and decrease cash and cash equivalents as of September 30, 2016 by that same amount. Net cash provided by operating activities for the year ended December 31, 2016 and cash and cash equivalents as of December 31, 2016 were not misstated.

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 Customer 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.
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, 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.

For the three and nine months ended September 30, 2017 and 2016, the Company had no customer that accounted for greater than 10% of total net revenue.

The Company had three third-party processors that represented approximately 52%, 37%, and 8% of settlements receivable as of September 30, 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.


In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, as part of its simplification initiative. The current guidance requires 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. We anticipate that the adoption of ASU 2016-01 may increase the volatility of our other income (expense), net, as a result of the remeasurement of our equity securities upon the possible occurrence of future observable price changes; however, the Company does not expect such changes to be material.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which will require, among other items, lessees to recognize most leases as assets and liabilities 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. Based on the Company's initial assessment of its current leases and potential, the Company does not anticipate the adoption of this guidance to have a material impact on its operating results. The Company will continue to evaluate the impact of recording right to use assets and related liabilities on its consolidated balance sheets.

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 does not expect the adoption of this new guidance to have a material impact 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 does not expect the adoption of this guidance to have a material impact 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 condensed 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 does not expect the adoption of this guidance to have a material the impact 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 currently anticipates that the adoption of this new guidance will not have a material impact on the consolidated financial statements and related disclosures.

FAIR VALUE OF FINANCIAL INSTRUMENTS (Tables)
Schedule of Fair Value, Assets and Liabilities Measured on Recurring Basis
A summary of loans disclosed at fair value on a recurring basis is as follows (in thousands):

 
September 30, 2017
 
December 31, 2016
 
Carrying Value
 
Fair Value (Level 3)
 
Carrying Value
 
Fair Value (Level 3)
Loans held for sale
$
58,331

 
$
60,375

 
$
42,144

 
$
42,633

Total
$
58,331

 
$
60,375

 
$
42,144

 
$
42,633

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, 2017
 
December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Cash and Cash Equivalents:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
384,546

 
$

 
$

 
$
207,168

 
$

 
$

U.S. agency securities

 

 

 

 

 

Commercial paper

 

 

 

 
7,496

 

U.S. government securities

 

 

 

 

 

Corporate bonds

 

 

 

 

 

Municipal securities

 

 

 

 
1,000

 

Short-term securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities

 
13,091

 

 

 
9,055

 

Corporate bonds

 
52,420

 

 

 
6,980

 

Commercial paper

 
58,298