SQUARE, INC., 10-Q filed on 8/1/2018
Quarterly Report
v3.10.0.1
Document and Entity Information - shares
6 Months Ended
Jun. 30, 2018
Jul. 27, 2018
Document and Entity Information [Abstract]    
Entity Registrant Name Square, Inc.  
Entity Central Index Key 0001512673  
Current Fiscal Year End Date --12-31  
Entity Filer Category Large Accelerated Filer  
Document Type 10-Q  
Document Period End Date Jun. 30, 2018  
Document Fiscal Year Focus 2018  
Document Fiscal Period Focus Q2  
Amendment Flag false  
Class A    
Class of Stock [Line Items]    
Entity Common Stock, Shares Outstanding   301,612,405
Class B    
Class of Stock [Line Items]    
Entity Common Stock, Shares Outstanding   108,815,689
v3.10.0.1
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) - USD ($)
$ in Thousands
Jun. 30, 2018
Dec. 31, 2017
Current assets:    
Cash and cash equivalents $ 1,387,977 $ 696,474
Short-term investments 233,599 169,576
Restricted cash 27,487 28,805
Settlements receivable 806,688 620,523
Customer funds 208,855 103,042
Loans held for sale 85,040 73,420
Other current assets 120,250 86,454
Total current assets 2,869,896 1,778,294
Property and equipment, net 121,708 91,496
Goodwill 255,656 58,327
Acquired intangible assets, net 85,514 14,334
Long-term investments 168,150 203,667
Restricted cash 12,908 9,802
Other non-current assets 40,995 31,350
Total assets 3,554,827 2,187,270
Current liabilities:    
Accounts payable 9,214 16,763
Customers payable 1,001,422 733,736
Settlements payable 140,616 114,788
Accrued transaction losses 29,207 26,893
Accrued expenses 74,816 52,280
Other current liabilities 60,635 28,367
Total current liabilities 1,315,910 972,827
Long-term debt (Note 12) 1,071,437 358,572
Other non-current liabilities 85,851 69,538
Total liabilities 2,473,198 1,400,937
Commitments and contingencies (Note 17)
Stockholders’ equity:    
Preferred stock, $0.0000001 par value: 100,000,000 shares authorized at June 30, 2018 and December 31, 2017. None issued and outstanding at June 30, 2018 and December 31, 2017. 0 0
Additional paid-in capital 1,963,298 1,630,386
Accumulated other comprehensive loss (4,456) (1,318)
Accumulated deficit (877,213) (842,735)
Total stockholders’ equity 1,081,629 786,333
Total liabilities and stockholders’ equity 3,554,827 2,187,270
Class A    
Stockholders’ equity:    
Common stock 0 0
Class B    
Stockholders’ equity:    
Common stock $ 0 $ 0
v3.10.0.1
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) - $ / shares
Jun. 30, 2018
Dec. 31, 2017
Class of Stock [Line Items]    
Preferred stock, par value (in USD per share) $ 0.0000001 $ 0.0000001
Preferred stock, shares authorized (in shares) 100,000,000 100,000,000
Preferred stock, shares issued (in shares) 0 0
Preferred stock, shares outstanding (in shares) 0 0
Class A    
Class of Stock [Line Items]    
Common stock, par value (in USD per share) $ 0.0000001 $ 0.0000001
Common stock, shares authorized (in shares) 1,000,000,000 1,000,000,000
Common stock, shares issued (in shares) 297,371,047 280,400,813
Common stock, shares outstanding (in shares) 297,371,047 280,400,813
Class B    
Class of Stock [Line Items]    
Common stock, par value (in USD per share) $ 0.0000001 $ 0.0000001
Common stock, shares authorized (in shares) 500,000,000 500,000,000
Common stock, shares issued (in shares) 109,580,981 114,793,262
Common stock, shares outstanding (in shares) 109,580,981 114,793,262
v3.10.0.1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2018
Jun. 30, 2017
Jun. 30, 2018
Jun. 30, 2017
Revenue:        
Revenue $ 814,938 $ 551,505 $ 1,483,541 $ 1,013,059
Cost of revenue:        
Total cost of revenue 499,122 344,076 912,555 632,199
Gross profit 315,816 207,429 570,986 380,860
Operating expenses:        
Product development 114,800 78,126 219,895 146,708
Sales and marketing 98,243 59,916 175,509 109,816
General and administrative 82,772 62,988 158,273 119,923
Transaction, loan and advance losses 21,976 18,401 40,007 30,292
Amortization of acquired customer assets 2,816 1,943 4,691 4,064
Total operating expenses 318,463 219,653 594,625 407,166
Operating loss (2,647) (12,224) (23,639) (26,306)
Interest and other expense, net 2,655 3,266 5,474 3,765
Loss before income tax (5,302) (15,490) (29,113) (30,071)
Provision for income taxes 604 472 779 981
Net loss $ (5,906) $ (15,962) $ (29,892) $ (31,052)
Net loss per share:        
Basic (in USD per share) $ (0.01) $ (0.04) $ (0.07) $ (0.08)
Diluted (in USD per share) $ (0.01) $ (0.04) $ (0.07) $ (0.08)
Weighted-average shares used to compute net loss per share        
Basic (in shares) 403,301 376,357 399,624 371,573
Diluted (in shares) 403,301 376,357 399,624 371,573
Transaction-based revenue        
Revenue:        
Revenue $ 625,228 $ 482,065 $ 1,148,265 $ 885,543
Cost of revenue:        
Cost of revenue 395,349 311,092 723,260 568,870
Subscription and services-based revenue        
Revenue:        
Revenue 134,332 59,151 231,386 108,211
Cost of revenue:        
Cost of revenue 39,784 17,116 70,152 32,992
Hardware revenue        
Revenue:        
Revenue 18,362 10,289 32,779 19,305
Cost of revenue:        
Cost of revenue 25,536 14,173 45,238 26,835
Bitcoin revenue        
Revenue:        
Revenue 37,016 0 71,111 0
Cost of revenue:        
Cost of revenue 36,596 0 70,468 0
Technology assets        
Cost of revenue:        
Amortization of acquired technology 1,857 1,695 3,437 3,502
Customer assets        
Operating expenses:        
Amortization of acquired customer assets $ 672 $ 222 $ 941 $ 427
v3.10.0.1
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2018
Jun. 30, 2017
Jun. 30, 2018
Jun. 30, 2017
Statement of Comprehensive Income [Abstract]        
Net loss $ (5,906) $ (15,962) $ (29,892) $ (31,052)
Net foreign currency translation adjustments (2,944) 430 (2,395) 1,187
Net unrealized gain (loss) on revaluation of intercompany loans (458) 432 207 403
Net unrealized gain (loss) on marketable securities 240 (139) (950) (120)
Total comprehensive loss $ (9,068) $ (15,239) $ (33,030) $ (29,582)
v3.10.0.1
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($)
$ in Thousands
6 Months Ended
Jun. 30, 2018
Jun. 30, 2017
Cash flows from operating activities:    
Net loss $ (29,892) $ (31,052)
Adjustments to reconcile net loss to net cash provided by operating activities:    
Depreciation and amortization 22,488 18,562
Non-cash interest and other expense 11,855 5,680
Share-based compensation 98,943 71,263
Replacement stock awards issued in connection with acquisition 757 0
Recovery of common stock in connection with indemnification settlement agreement (2,745) 0
Transaction, loan and advance losses 40,007 30,292
Deferred provision (benefit) for income taxes (688) 99
Changes in operating assets and liabilities:    
Settlements receivable (191,987) 8,934
Customer funds (105,813) (30,022)
Purchase of loans held for sale (734,251) (570,819)
Sales and principal payments of loans held for sale 716,950 560,209
Other current assets (33,495) (2,201)
Other non-current assets (9,696) (110)
Accounts payable (9,716) 143
Customers payable 267,746 34,149
Settlements payable 25,828 (9,317)
Charge-offs to accrued transaction losses (26,030) (22,243)
Accrued expenses 6,083 17,000
Other current liabilities 18,008 4,327
Other non-current liabilities 6,680 5,696
Net cash provided by operating activities 71,032 90,590
Cash flows from investing activities:    
Purchase of marketable securities (165,024) (314,055)
Proceeds from maturities of marketable securities 79,273 52,064
Proceeds from sale of marketable securities 56,259 21,730
Purchase of property and equipment (23,143) (13,883)
Purchase of intangible assets (1,584) 0
Business combinations, net of cash acquired (111,828) (1,600)
Net cash used in investing activities (166,047) (255,744)
Cash flows from financing activities:    
Proceeds from issuance of convertible senior notes, net 855,663 428,250
Purchase of convertible senior note hedges (172,586) (92,136)
Proceeds from issuance of warrants 112,125 57,244
Settlement of deferred purchase consideration (640) 0
Payment for termination of Starbucks warrant 0 (54,808)
Principal payments on capital lease obligation (1,375) (634)
Proceeds from the exercise of stock options and purchases under the employee stock purchase plan, net 67,199 89,863
Payments for tax withholding related to vesting of restricted stock units (68,575) 0
Net cash provided by financing activities 791,811 427,779
Effect of foreign exchange rate on cash and cash equivalents (3,505) 2,331
Net increase in cash, cash equivalents and restricted cash 693,291 264,956
Cash, cash equivalents and restricted cash, beginning of period 735,081 488,745
Cash, cash equivalents and restricted cash, end of period $ 1,428,372 $ 753,701
v3.10.0.1
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
6 Months Ended
Jun. 30, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
    
Square, Inc. (together with its subsidiaries, Square or the Company) creates tools that help sellers start, run, and grow their businesses. Square enables sellers to accept card payments and also provides reporting and analytics, next-day settlement, and chargeback protection. Square’s point-of-sale software and other business services help sellers manage inventory, locations, and employees; access financing; engage buyers; build a website or online store; and grow sales. The Cash App is an easy way to send, spend, and receive money, and Caviar is a food-ordering platform. Square was founded in 2009 and is headquartered in San Francisco, with offices in the United States, Canada, Japan, Australia, Ireland, and the UK.

Basis of Presentation
    
The accompanying interim condensed consolidated financial statements of the Company are unaudited. These interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP) and the applicable rules and regulations of the Securities and Exchange Commission (SEC) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The December 31, 2017 condensed consolidated balance sheet was derived from the audited financial statements as of that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

The accompanying unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature considered necessary to state fairly the Company's consolidated financial position, results of operations, comprehensive loss, and cash flows for the interim periods. All intercompany transactions and balances have been eliminated in consolidation. The interim results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018, or for any other future annual or interim period.

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk,” and the Consolidated Financial Statements and notes thereto included in Items 7, 7A, and 8, respectively, in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, as well as related disclosure of contingent assets and liabilities. Actual results could differ from the Company’s estimates. To the extent that there are material differences between these estimates and actual results, the Company’s financial condition or operating results will be materially affected. The Company bases its estimates on past experience and other assumptions that the Company believes are reasonable under the circumstances, and the Company evaluates these estimates on an ongoing basis.

Estimates, judgments, and assumptions in these consolidated financial statements include, but are not limited to, those related to revenue recognition, accrued transaction losses, valuation of the debt component of convertible senior notes, valuation of loans held for sale, goodwill, acquired intangible assets and deferred revenue, income and other taxes, and share-based compensation.

Concentration of Credit Risk
    
For the three and six months ended June 30, 2018 and 2017, the Company had no customer that accounted for greater than 10% of total net revenue.

The Company had three third-party payment processors that represented approximately 46%, 43%, and 7% of settlements receivable as of June 30, 2018. The same three parties represented approximately 46%, 42%, and 8% of settlements receivable as of December 31, 2017. All other third-party processors were insignificant.

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, marketable securities, settlements receivables, customer funds, and loans held for sale. The associated risk of concentration for cash and cash equivalents and restricted cash is mitigated by banking with creditworthy institutions. At certain times, amounts on deposit exceed federal deposit insurance limits. The associated risk of concentration for marketable securities is mitigated by holding a diversified portfolio of highly rated investments. Settlements receivable are amounts due from well-established payment processing companies and normally take one or two business days to settle which mitigates the associated risk of concentration. The associated risk of concentration for loans held for sale is partially mitigated by credit evaluations that are performed prior to facilitating the offering of loans and ongoing performance monitoring of the Company’s loan customers.

Accounting Policies
Except for the adoption of ASC 606, Revenue from Contracts with Customers (ASC 606), described in Note 2, and the accounting policy on cryptocurrency transactions, described below, there have been no material changes to the Company’s accounting policies during the six months ended June 30, 2018, as compared to the accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Cryptocurrency transactions

During the fourth quarter of 2017, the Company started offering its Cash App customers the ability to purchase bitcoin, a cryptocurrency denominated asset, from the Company. The Company purchases bitcoin from private broker dealers or from customers. Upon purchase, the Company records the cost of bitcoin within other current assets in its consolidated balance sheets. Upon sale, the Company records the total sale amount received from customers as bitcoin revenue and the associated cost as cost of revenue. The carrying value of bitcoin held by the Company was $0.4 million and $0.3 million as of June 30, 2018 and December 31, 2017, respectively. The Company assesses the carrying value of bitcoin held by the Company at each reporting date and records an impairment charge if the cost exceeds the fair value. Losses on bitcoin for the three and six months ended June 30, 2018, were insignificant.

Recent Accounting Pronouncements

Recently issued accounting pronouncements not yet adopted

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases, which will require, among other items, lessees to recognize a right of use asset and a related lease liability for most leases on the balance sheet. Qualitative and quantitative disclosures will be enhanced to better understand the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The new standard should be applied on a modified retrospective basis. The Company does not plan to early adopt this guidance. The Company’s operating leases primarily comprise of office spaces, with the most significant leases relating to corporate headquarters in San Francisco and an office in New York. While the Company continues to evaluate the impact of adopting this guidance on its consolidated financial statements, it does expect to record material right to use assets and related lease liabilities on its consolidated balance sheets upon adoption, which will increase total assets and liabilities.
    
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected credit losses for financial assets held. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact this new guidance may have on the consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. The new guidance eliminates the requirement to calculate the implied fair value of goodwill assuming a hypothetical purchase price allocation (i.e., Step 2 of the goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value, not to exceed the carrying amount of goodwill. This standard should be adopted when the Company performs its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. The amendments should be applied on a prospective basis. The Company does not expect the adoption of this guidance to have a material the impact on the consolidated financial statements and related disclosures.

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

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

In February 2018, the FASB issued ASU 2018-03, Recognition and Measurement of Financial Assets and Financial Liabilities. This guidance clarifies that an entity that uses the measurement alternative for equity securities without readily determinable fair values can change its measurement approach to fair value. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. The Company does not expect the adoption of this guidance to have a material impact on the consolidated financial statements and related disclosures.
v3.10.0.1
REVENUE
6 Months Ended
Jun. 30, 2018
Revenue from Contract with Customer [Abstract]  
REVENUE
REVENUE

Adoption of ASC 606, Revenue from Contracts with Customers

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

The Company recorded a net reduction to retained earnings of $4.6 million as of January 1, 2018, due to the cumulative impact of adopting ASC 606, primarily related to the effect on revenue and associated cost of revenue from hardware sold through the retail distribution channels and hardware installment sales. The impact to revenue for the three and six months ended June 30, 2018 was an increase of $2.4 million and $3.7 million, respectively, as a result of applying ASC 606.

For the three months ended June 30, 2018, the revenue recognized from contracts with customers was $792.3 million and revenue from other sources was $22.7 million. For the six months ended June 30, 2018, the revenue recognized from contracts with customers was $1,441.0 million and revenue from other sources was $42.5 million. Impairment losses arising from contracts with customers were $0.9 million and $1.8 million for the three and six months ended June 30, 2018, respectively.

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

 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
As reported
 
Balances without adoption
of ASC 606
 
Effect of change
 
As reported
 
Balances without adoption
of ASC 606
 
Effect of change
Impact on the Condensed Consolidated Statement of Operations:
 
 
 
 
 
 
 
 
 
 
 
Subscription and services-based revenue
$
134,332

 
$
134,240

 
$
92

 
$
231,386

 
$
231,235

 
$
151

Hardware revenue
18,362

 
16,079

 
2,283

 
32,779

 
29,233

 
3,546

Subscription and services-based costs
39,784

 
39,784

 

 
70,152

 
70,152

 

Hardware costs
$
25,536

 
$
22,939

 
$
2,597

 
$
45,238

 
$
41,696

 
$
3,542


The impact of adoption of ASC 606 on the Company's condensed consolidated balance sheets was as follows (in thousands):

 
June 30, 2018
 
As reported
 
Balances without adoption
of ASC 606
 
Effect of change
Impact on the Condensed Consolidated Balance Sheets:
 
 
 
 
 
Other current assets
$
120,250

 
$
131,464

 
$
(11,214
)
Other current liabilities
60,635

 
67,486

 
(6,851
)
Other non-current assets
40,995

 
42,570

 
(1,575
)
Other non-current liabilities
$
85,851

 
$
87,282

 
$
(1,431
)


Revenue Recognition

Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company's contracts with customers generally do not include multiple performance obligations, except for domain name registration offered with website hosting services sold after May 31, 2018 following the acquisition of Weebly (see Note 7 , Acquisitions).

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenue from Contracts with Customers:
 
 
 
 
 
 
 
Transaction-based revenue
$
625,228

 
$
482,065

 
$
1,148,265

 
$
885,543

Subscription and services-based revenue
111,670

 
59,151

 
188,885

 
108,211

Hardware revenue
$
18,362

 
$
10,289

 
$
32,779

 
$
19,305

Bitcoin revenue
$
37,016

 
$

 
$
71,111

 
$


         
Transaction-based revenue

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

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

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

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

Subscription and services-based revenue

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

Instant Deposit is a functionality within the Cash App and the Company's managed payments solution that enables customers, including individuals and sellers, to instantly deposit funds into their bank accounts. The Company charges a per transaction fee which is recognized as revenue when customers instantly deposit funds to their bank account. The Company also offers Cash App customers the ability to use funds stored in the Cash App via a Visa prepaid card, for which the Company charges a per transaction fee that is recorded as revenue.

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

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

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

Hardware revenue

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

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

Bitcoin revenue

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

Arrangements with Multiple Performance Obligations

The Company also offers its customers the option to buy website hosting bundled with domain name registration, and infrequently the Company has offered its hardware customers free managed payments solutions with the purchase of its hardware as part of a marketing promotion. For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers since the Company's products and services are normally sold on a stand alone basis.

Deferred Revenue

Deferred revenue is comprised of unearned revenue related to managed payments services offered in conjunction with hardware sales for which the cash payments from customers are received and due upon the sale of the hardware. Deferred revenue also includes payments for website hosting and domain name registration received from customers at inception of the arrangements prior to the services being rendered.

The deferred revenue balances were as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Deferred revenue, beginning of the period
$
3,353

 
$
2,965

 
$
5,893

 
$
5,407

Less: accumulative adjustment for adoption of ASC 606

 

 
(4,303
)
 

Deferred revenue, beginning of the period, as adjusted
3,353

 
2,965

 
1,590

 
5,407

Deferred revenue, end of the period
27,155

 
4,523

 
27,155

 
4,523

Deferred revenue arising from business combination
22,800

 

 
22,800

 

Revenue recognized in the period from amounts included in deferred revenue at the beginning of the period
1,975

 
925

 
1,095

 
5,257



Practical Expedients

The Company does not recognize a financing component for hardware installment sales that have a term of one year or less.
v3.10.0.1
RESTRICTED CASH
6 Months Ended
Jun. 30, 2018
Cash and Cash Equivalents [Abstract]  
RESTRICTED CASH
RESTRICTED CASH
    
As of June 30, 2018 and December 31, 2017, restricted cash of $27.5 million and $28.8 million, respectively, is related to pledged cash deposited into savings accounts at the financial institutions that process the Company's sellers' payment transactions and as collateral pursuant to an agreement with the originating bank for the Company's loan product. The Company uses the restricted cash to secure letters of credit with the financial institution to provide collateral for cash flow timing differences in the processing of these payments. The Company has recorded this amount as a current asset on the consolidated balance sheets due to the short-term nature of these cash flow timing differences and that there is no minimum time frame during which the cash must remain restricted. Additionally, this balance includes certain amounts held as collateral pursuant to multi-year lease agreements, discussed in the paragraph below, which we expect to become unrestricted within the next year.
    
As of June 30, 2018 and December 31, 2017, the remaining restricted cash of $12.9 million and $9.8 million, respectively, is primarily related to cash deposited into money market funds that is used as collateral pursuant to multi-year lease agreements (Note 17). This includes $3.1 million arising from the acquisition of Weebly (Note 7). The Company has recorded this amount as a non-current asset on the consolidated balance sheets as the terms of the related leases extend beyond one year.
v3.10.0.1
FAIR VALUE OF FINANCIAL INSTRUMENTS
6 Months Ended
Jun. 30, 2018
Fair Value Disclosures [Abstract]  
FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company measures its cash equivalents and short-term and long-term investments at fair value. The Company classifies its cash equivalents and short-term and long-term investments within Level 1 or Level 2 of the fair value hierarchy because the Company values these investments using quoted market prices or alternative pricing sources and models utilizing market observable inputs.
The Company’s financial assets and liabilities that are measured at fair value on a recurring basis are classified as follows (in thousands):
 
June 30, 2018
 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Cash and Cash Equivalents:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
1,031,129

 
$

 
$

 
$
387,698

 
$

 
$

U.S. agency securities

 
35,086

 

 

 

 

Commercial paper

 

 

 

 
24,695

 

U.S. government securities
34,978

 

 

 

 

 

Short-term securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities

 
14,997

 

 

 
15,083

 

Corporate bonds

 
57,371

 

 

 
57,798

 

Commercial paper

 

 

 

 
17,428

 

Municipal securities

 
23,740

 

 

 
23,700

 

U.S. government securities
137,491

 

 

 
55,567

 

 

Long-term securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities

 
10,076

 

 

 
20,169

 

Corporate bonds

 
52,567

 

 

 
91,413

 

Municipal securities

 
19,444

 

 

 
26,224

 

U.S. government securities
86,063

 

 

 
65,861

 

 

Total
$
1,289,661

 
$
213,281

 
$

 
$
509,126

 
$
276,510

 
$



The carrying amounts of certain financial instruments, including cash equivalents, settlements receivable, customer funds, accounts payable, customers payable, and settlements payable, approximate their fair values due to their short-term nature.

The Company estimates the fair value of its convertible senior notes based on their last actively traded prices (Level 1) or market observable inputs (Level 2). The estimated fair value and carrying value of the convertible senior notes were as follows (in thousands):
 
June 30, 2018
 
December 31, 2017
 
Carrying Value
 
Fair Value (Level 2)
 
Carrying Value
 
Fair Value (Level 2)
2023 Notes
$
704,021

 
$
924,936

 
$

 
$

2022 Notes
367,416

 
1,188,686

 
358,572

 
719,356

Total
$
1,071,437

 
$
2,113,622

 
$
358,572

 
$
719,356



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

 
June 30, 2018
 
December 31, 2017
 
Carrying Value
 
Fair Value (Level 3)
 
Carrying Value
 
Fair Value (Level 3)
Loans held for sale
$
85,040

 
$
88,645

 
$
73,420

 
$
76,070

Total
$
85,040

 
$
88,645

 
$
73,420

 
$
76,070



The Company recognizes a charge within transaction, loan and advance losses on the consolidated statement of operations whenever the amortized cost of a loan exceeds its fair value, with such charges being reversed for subsequent increases in fair value, but only to the extent that such reversals do not result in the amortized cost of a loan exceeding its fair value. For the three and six months ended June 30, 2018, the Company recorded a charge for the excess of amortized cost over fair value of the loans of $3.2 million and $5.7 million, respectively. For both the three and six months ended June 30, 2017, the Company recorded a charge for the excess of amortized cost over fair value of the loans of $2.7 million.
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 six months ended June 30, 2018 and 2017, the Company did not have any transfers in or out of Level 1, Level 2, or Level 3 assets or liabilities.
v3.10.0.1
INVESTMENTS
6 Months Ended
Jun. 30, 2018
Investments, Debt and Equity Securities [Abstract]  
INVESTMENTS
INVESTMENTS

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

The Company's short-term and long-term investments as of June 30, 2018 are as follows (in thousands):

 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Short-term securities:
 
 
 
 
 
 
 
U.S. agency securities
$
14,978

 
$
19

 
$

 
$
14,997

Corporate bonds
57,293

 
201

 
(123
)
 
57,371

Commercial paper

 

 

 

Municipal securities
23,720

 
30

 
(10
)
 
23,740

U.S. government securities
137,499

 
78

 
(86
)
 
137,491

Total
$
233,490

 
$
328

 
$
(219
)
 
$
233,599

 
 
 
 
 
 
 
 
Long-term securities:
 
 
 
 
 
 
 
U.S. agency securities
$
10,096

 
$

 
$
(20
)
 
$
10,076

Corporate bonds
52,354

 
245

 
(32
)
 
52,567

Municipal securities
19,483

 
10

 
(49
)
 
19,444

U.S. government securities
86,086

 
88

 
(111
)
 
86,063

Total
$
168,019

 
$
343

 
$
(212
)
 
$
168,150


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

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

 
$

 
$
(39
)
 
$
15,083

Corporate bonds
57,855

 
22

 
(79
)
 
57,798

Commercial paper
17,428

 

 

 
17,428

Municipal securities
23,743

 
8

 
(51
)
 
23,700

U.S. government securities
55,729

 
1

 
(163
)
 
55,567

Total
$
169,877

 
$
31

 
$
(332
)
 
$
169,576

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

 
$
2

 
$
(121
)
 
$
20,169

Corporate bonds
91,959

 
25

 
(571
)
 
91,413

Municipal securities
26,371

 
13

 
(160
)
 
26,224

U.S. government securities
66,362

 
19

 
(520
)
 
65,861

Total
$
204,980

 
$
59

 
$
(1,372
)
 
$
203,667



For the periods presented, gains or losses realized on the sale of investments were not material. Investments are reviewed periodically to identify possible other-than-temporary impairments. As the Company has the ability and intent to hold these investments with unrealized losses 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 June 30, 2018 are as follows (in thousands):

 
Amortized Cost
 
Fair Value
Due in one year or less
$
233,490

 
$
233,599

Due in one to five years
168,019

 
168,150

Total
$
401,509

 
$
401,749

v3.10.0.1
PROPERTY AND EQUIPMENT, NET
6 Months Ended
Jun. 30, 2018
Property, Plant and Equipment [Abstract]  
PROPERTY AND EQUIPMENT, NET
PROPERTY AND EQUIPMENT, NET
The following is a summary of property and equipment, less accumulated depreciation and amortization (in thousands):    

June 30,
2018

December 31,
2017
Leasehold improvements
$
94,241

 
$
77,073

Computer equipment
81,763


66,186

Capitalized software
45,927

 
35,063

Office furniture and equipment
18,231


14,490

 
240,162

 
192,812

Less: Accumulated depreciation and amortization
(118,454
)

(101,316
)
Property and equipment, net
$
121,708

 
$
91,496


Depreciation and amortization expense on property and equipment was $9.3 million and $17.5 million for the three and six months ended June 30, 2018, respectively. Depreciation and amortization expense on property and equipment was $7.2 million and $14.5 million for the three and six months ended June 30, 2017, respectively.
v3.10.0.1
ACQUISITIONS
6 Months Ended
Jun. 30, 2018
Business Combinations [Abstract]  
ACQUISITIONS
ACQUISITIONS
Weebly, Inc.
On May 31, 2018, the Company acquired 100% of the outstanding shares of Weebly, a technology company that offers customers website hosting and domain name registration solutions. The acquisition of Weebly will enable the Company to combine Weebly’s web presence tools with the Company's in-person and online offerings to create a cohesive solution for sellers to start or grow an omnichannel business. The acquisition will also expand the Company’s customer base globally and add a new recurring revenue stream.

The purchase consideration was comprised of $131.9 million in cash and 2,406,071 shares of the Company’s Class A common stock with an aggregate fair value of $139.4 million based on the closing price of the Company’s Class A common stock on the acquisition date. As part of the acquisition, the Company paid an aggregate of $17.7 million in cash and shares to settle outstanding vested and unvested employee options, of which $2.6 million was accounted for as post-combination compensation expense and is excluded from the purchase consideration. Third-party acquisition-related costs of $1.2 million were recognized in general and administrative expense for both the three and six months ended June 30, 2018. The results of Weebly's operations have been included in the consolidated financial statements since the closing date.
The acquisition was accounted for as a business combination. This method requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date and that the difference between the fair value of the consideration paid for the acquired entity and the fair value of the net assets acquired be recorded as goodwill, which is not amortized but is tested at least annually for impairment.
The table below summarizes the consideration paid for Weebly and the preliminary assessment of the fair value of the assets acquired and liabilities assumed at the closing date (in thousands, except share data). The Company is in the process of completing the valuation of the acquired intangible assets and deferred revenue and is evaluating contingencies and tax effects related to the acquisition. Accordingly, the preliminary values reflected in the table are subject to change.
Consideration:
 
Cash
$
131,860

Stock (2,406,071 shares of common stock)
139,396

 
$
271,256

Recognized amounts of identifiable assets acquired and liabilities assumed:
 
Current assets (inclusive of cash acquired of $25,758)
$
44,685

Intangible customer assets
42,700

Intangible technology assets
14,900

Intangible trade name
11,300

Intangible other assets
961

Total liabilities assumed (including deferred revenue of $22,800)
(32,824
)
Total identifiable net assets acquired
81,722

Goodwill
189,534

Total
$
271,256


As of June 30, 2018, $19.9 million of cash and 372,578 shares of the total consideration were withheld as security for indemnification obligations related to general representations and warranties, in addition to certain potential tax exposures.
.
Goodwill from the Weebly acquisition is primarily attributable to the value of expected synergies created by incorporating Weebly solutions into the Company's technology platform and the value of the assembled workforce. None of the goodwill generated from the Weebly acquisition or the acquired intangible assets are expected to be deductible for tax purposes. Additionally the acquisition would have resulted in recognition of deferred tax assets arising mainly from the net of deferred tax assets from acquired net operating losses (NOLs) and research and development credits, and deferred tax liabilities associated with intangible assets and deferred revenue. However, the realization of such deferred tax assets depends primarily on the Company's post-acquisition ability to generate taxable income in future periods. Accordingly, a valuation allowance was recorded against the net acquired deferred tax asset in accounting for the acquisition.


The results of operations from the Weebly acquisition have been consolidated with those of the Company beginning as of the acquisition date. The acquisition of Weebly did not have a material impact on the Company's reported revenue or net loss amounts for any period presented. Accordingly, pro forma financial information has not been presented.
Other acquisitions

The Company also spent an aggregate of $9.9 million, net of cash acquired, in connection with other immaterial acquisitions during the six months ended June 30, 2018, which resulted in the recognition of additional intangible assets and goodwill. Pro forma financial information has not been presented for any of our acquisitions as the impact to our consolidated financial statements was not material.
v3.10.0.1
GOODWILL
6 Months Ended
Jun. 30, 2018
Goodwill and Intangible Assets Disclosure [Abstract]  
GOODWILL
GOODWILL

Goodwill is recorded when the consideration paid for an acquisition of a business exceeds the fair value of identifiable net tangible and intangible assets acquired.

The change in carrying value of goodwill in the period was as follows (in thousands):
Balance at December 31, 2017
$
58,327

Acquisitions completed during the six months ended June 30, 2018
197,329

Balance at June 30, 2018
$
255,656



The Company performs a goodwill impairment test annually on December 31 and more frequently if events and circumstances indicate that the asset might be impaired. For the periods presented, the Company had recorded no impairment charges.
v3.10.0.1
ACQUIRED INTANGIBLE ASSETS
6 Months Ended
Jun. 30, 2018
Goodwill and Intangible Assets Disclosure [Abstract]  
ACQUIRED INTANGIBLE ASSETS
ACQUIRED INTANGIBLE ASSETS    

The Company entered into two transactions accounted for as business combinations during the quarter ended June 30, 2018, that involved the acquisition of intangible assets. Refer to Note 7 for further details.

The following table presents the detail of acquired intangible assets as of the periods presented (in thousands):
 
Balance at June 30, 2018
Cost
 
Accumulated Amortization
 
Net
Patents
$
1,285

 
$
(611
)
 
$
674

Technology assets
45,978

 
(24,766
)
 
21,212

Customer assets
57,109

 
(5,481
)
 
51,628

Trade name
11,300

 
(235
)
 
11,065

Other
961

 
(26
)
 
935

Total
$
116,633

 
$
(31,119
)
 
$
85,514


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

 
$
(559
)

$
726

Technology assets
29,158

 
(21,329
)
 
7,829

Customer assets
10,319

 
(4,540
)
 
5,779

Total
$
40,762

 
$
(26,428
)
 
$
14,334



The weighted average amortization periods for acquired patents, acquired technology, customer intangible assets, and acquired trade name are approximately 13 years, 5 years, 11 years and 4 years, respectively.

All intangible assets are amortized over their estimated useful lives. The changes to the carrying value of intangible assets were as follows (in thousands):

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Acquired intangible assets, net, beginning of the period
$
14,138

 
$
18,395

 
$
14,334

 
$
19,292

Acquisitions
74,192

 

 
75,871

 
1,224

Amortization expense
2,816

 
1,943

 
4,691

 
4,064

Acquired intangible assets, net, end of the period
$
85,514

 
$
16,452

 
$
85,514

 
$
16,452



The total estimated future amortization expense of these intangible assets as of June 30, 2018 is as follows (in thousands):
2018 (remaining 6 months)
$
7,863

2019
13,843

2020
11,638

2021
10,440

2022
8,511

Thereafter
33,219

Total
$
85,514

v3.10.0.1
OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (CURRENT)
6 Months Ended
Jun. 30, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (CURRENT)
OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (CURRENT)
Other Current Assets
The following table presents the detail of other current assets (in thousands):
    
 
June 30,
2018
 
December 31,
2017
Inventory, net
$
22,041

 
$
16,777

Processing costs receivable
33,861

 
21,083

Prepaid expenses
16,663

 
14,473

Accounts receivable, net
17,895

 
8,606

Deferred hardware costs (i)

 
7,931

Deferred magstripe reader costs (ii)
3,034

 
2,469

Prepaid compensation, current (iii)
5,940

 

Other
20,816

 
15,115

Total
$
120,250

 
$
86,454



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

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

(iii) Prepaid compensation relates to cash transferred by the Company to an escrow agent in connection with a business combination that will be paid to officers of the acquiree over time as they provide services to the Company.

Accrued Expenses
The following table presents the detail of accrued expenses (in thousands):    
 
June 30,
2018
 
December 31,
2017
Accrued payroll
$
10,229

 
$
9,103

Accrued professional fees
9,168

 
5,638

Accrued advertising and other marketing
11,961

 
6,723

Processing costs payable
11,205

 
10,145

Accrued non income tax liabilities
7,504

 
6,155

Accrued hardware costs
1,806

 
2,496

Other accrued liabilities
22,943

 
12,020

Total
$
74,816

 
$
52,280



Other Current Liabilities
The following table presents the detail of other current liabilities (in thousands):    
    
 
June 30,
2018
 
December 31,
2017
Square Capital payable (iv)
$
10,301

 
$
7,671

Square Payroll payable (v)
6,494

 
2,850

Deferred revenue, current
24,062

 
5,893

Deferred rent, current
3,691

 
3,311

Accrued redemptions
1,110

 
1,036

Other
14,977

 
7,606

Total
$
60,635

 
$
28,367



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

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

Other Non-Current Assets

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

 
June 30,
2018
 
December 31,
2017
Investment in privately held entity
$
25,000

 
$
25,000

Prepaid compensation, non-current (i)
7,927

 

Deposits
2,646

 
2,738

Debt issuance costs
650

 
788

Deferred tax assets
680

 
519

Other
4,092

 
2,305

Total
$
40,995

 
$
31,350


(i) Prepaid compensation relates to cash transferred by the Company to an escrow agent in connection with a business combination that will be paid to officers of the acquiree over time as they provide services to the Company.
Other Non-Current Liabilities
The following table presents the detail of other non-current liabilities (in thousands):
 
June 30,
2018
 
December 31,
2017
Statutory liabilities (ii)
$
47,423

 
$
40,768

Deferred rent, non-current
21,479

 
20,349

Deferred purchase consideration
3,900

 

Deferred revenue, non-current
3,093

 
432

Deferred tax liabilities
148

 
644

Other
9,808

 
7,345

Total
$
85,851

 
$
69,538



(ii) Statutory liabilities represent loss contingencies that may arise from the Company's interpretation and application of certain guidelines and rules issued by various federal, state, local, and foreign regulatory authorities.
v3.10.0.1
OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (NON-CURRENT)
6 Months Ended
Jun. 30, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (NON-CURRENT)
OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (CURRENT)
Other Current Assets
The following table presents the detail of other current assets (in thousands):
    
 
June 30,
2018
 
December 31,
2017
Inventory, net
$
22,041

 
$
16,777

Processing costs receivable
33,861

 
21,083

Prepaid expenses
16,663

 
14,473

Accounts receivable, net
17,895

 
8,606

Deferred hardware costs (i)

 
7,931

Deferred magstripe reader costs (ii)
3,034

 
2,469

Prepaid compensation, current (iii)
5,940

 

Other
20,816

 
15,115

Total
$
120,250

 
$
86,454



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

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

(iii) Prepaid compensation relates to cash transferred by the Company to an escrow agent in connection with a business combination that will be paid to officers of the acquiree over time as they provide services to the Company.

Accrued Expenses
The following table presents the detail of accrued expenses (in thousands):    
 
June 30,
2018
 
December 31,
2017
Accrued payroll
$
10,229

 
$
9,103

Accrued professional fees
9,168

 
5,638

Accrued advertising and other marketing
11,961

 
6,723

Processing costs payable
11,205

 
10,145

Accrued non income tax liabilities
7,504

 
6,155

Accrued hardware costs
1,806

 
2,496

Other accrued liabilities
22,943

 
12,020

Total
$
74,816

 
$
52,280



Other Current Liabilities
The following table presents the detail of other current liabilities (in thousands):    
    
 
June 30,
2018
 
December 31,
2017
Square Capital payable (iv)
$
10,301

 
$
7,671

Square Payroll payable (v)
6,494

 
2,850

Deferred revenue, current
24,062

 
5,893

Deferred rent, current
3,691

 
3,311

Accrued redemptions
1,110

 
1,036

Other
14,977

 
7,606

Total
$
60,635

 
$
28,367



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

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

Other Non-Current Assets

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

 
June 30,
2018
 
December 31,
2017
Investment in privately held entity
$
25,000

 
$
25,000

Prepaid compensation, non-current (i)
7,927

 

Deposits
2,646

 
2,738

Debt issuance costs
650

 
788

Deferred tax assets
680

 
519

Other
4,092

 
2,305

Total
$
40,995

 
$
31,350


(i) Prepaid compensation relates to cash transferred by the Company to an escrow agent in connection with a business combination that will be paid to officers of the acquiree over time as they provide services to the Company.
Other Non-Current Liabilities
The following table presents the detail of other non-current liabilities (in thousands):
 
June 30,
2018
 
December 31,
2017
Statutory liabilities (ii)
$
47,423

 
$
40,768

Deferred rent, non-current
21,479

 
20,349

Deferred purchase consideration
3,900

 

Deferred revenue, non-current
3,093

 
432

Deferred tax liabilities
148

 
644

Other
9,808

 
7,345

Total
$
85,851

 
$
69,538



(ii) Statutory liabilities represent loss contingencies that may arise from the Company's interpretation and application of certain guidelines and rules issued by various federal, state, local, and foreign regulatory authorities.
v3.10.0.1
INDEBTEDNESS
6 Months Ended
Jun. 30, 2018
Debt Disclosure [Abstract]  
INDEBTEDNESS
INDEBTEDNESS

Revolving Credit Facility

In November 2015, the Company entered into a revolving credit agreement with certain lenders, which extinguished the prior revolving credit agreement and provided for a $375.0 million revolving secured credit facility maturing in November 2020. This revolving credit agreement is secured by certain tangible and intangible assets.

Loans under the credit facility bear interest at the Company’s option of (i) a base rate based on the highest of the prime rate, the federal funds rate plus 0.50%, and an adjusted LIBOR rate for a one-month interest period, in each case plus a margin ranging from 0.00% to 1.00%, or (ii) an adjusted LIBOR rate plus a margin ranging from 1.00% to 2.00%. This margin is determined based on the Company’s total leverage ratio for the preceding four fiscal quarters. The Company is obligated to pay other customary fees for a credit facility of this size and type including an annual administrative agent fee of $0.1 million and an unused commitment fee of 0.15%. To date no funds have been drawn under the credit facility, with $375.0 million remaining available. The Company paid $0.1 million and $0.3 million in unused commitment fees during both the three and six months ended June 30, 2018 and 2017, respectively. As of June 30, 2018, the Company was in compliance with all financial covenants associated with this credit facility.

Convertible Senior Notes due in 2023

On May 25, 2018, the Company issued an aggregate principal amount of $750.0 million of convertible senior notes and an additional 15% or $112.5 million pursuant to the exercise in full of the option to the initial purchaser to cover over-allotments (2023 Notes). The 2023 Notes mature on May 15, 2023, unless earlier converted or repurchased, and bear interest at a rate of 0.50% payable semi-annually on May 15 and November 15 of each year. The 2023 Notes are convertible at an initial conversion rate of 12.8456 shares of the Company's Class A common stock per $1,000 principal amount of 2023 Notes, which is equivalent to an initial conversion price of approximately $77.85 per share of Class A common stock. Holders may convert their 2023 Notes at any time prior to the close of business on the business day immediately preceding February 15, 2023 only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2018
(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 2023 Notes) per $1,000 principal amount of 2023 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 2023 Notes) or a transaction resulting in the Company’s Class A common stock converting into other securities or property or assets. On or after February 15, 2023, 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 2023 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 2023 Notes.

In accounting for the issuance of the 2023 Notes, the Company separated the 2023 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 $155.3 million and was determined by deducting the fair value of the liability component from the par value of the 2023 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 2023 Notes at an effective interest rate of 4.69% over the contractual terms of the Notes.

Debt issuance costs related to the 2023 Notes comprising of discounts and commissions payable to the initial purchasers of $6.0 million and third party offering costs amounted to $0.8 million. The Company allocated the total amount incurred to the liability and equity components of the 2023 Notes based on their relative values. Issuance costs attributable to the liability component were $5.6 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.
Convertible Senior Notes due in 2022

On March 6, 2017, the Company issued an aggregate principal amount of $400.0 million of convertible senior 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 (2022 Notes). The 2022 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 2022 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 2022 Notes, which is equivalent to an initial conversion price of approximately $22.95 per share of Class A common stock. Holders may convert their 2022 Notes at any time prior to the close of business on the business day immediately preceding December 1, 2021 only under the following circumstances: (1) during any calendar quarter (and only during such calendar quarter), if the last reported sale price of the Company’s Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the measurement period) in which the trading price (as defined in the indenture governing the 2022 Notes) per $1,000 principal amount of 2022 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 2022 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 2022 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 2022 Notes. The circumstances required to allow the holders to convert their 2022 Notes were met for the quarters commencing January 1, 2018, April 1, 2018 and July 1, 2018 respectively. In late July 2018, certain holders of the 2022 Notes informed the Company of their intention to convert $45 million in principal amount.

In accounting for the issuance of the 2022 Notes, the Company separated the 2022 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 2022 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The debt discount is amortized to interest expense over the term of the 2022 Notes at an effective interest rate of 5.34% over the contractual terms of the Notes.

Debt issuance costs related to the 2022 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 2022 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 net carrying amount of the Notes were as follows (in thousands):

 
Principal outstanding
 
Unamortized debt discount
 
Unamortized debt issuance costs
 
Net carrying value
June 30, 2018
 
 
 
 
 
 
 
2023 Notes
862,500

 
(152,955
)
 
(5,524
)
 
704,021

2022 Notes
440,000

 
(65,414
)
 
(7,170
)