SQUARE, INC., 10-K filed on 2/27/2017
Annual Report
Document and Entity Information Document and Entity Information (USD $)
In Billions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Jun. 30, 2016
Feb. 17, 2017
Class A
Feb. 17, 2017
Class B
Class of Stock [Line Items]
 
 
 
 
Entity Registrant Name
Square, Inc. 
 
 
 
Entity Central Index Key
0001512673 
 
 
 
Entity Current Reporting Status
Yes 
 
 
 
Entity Voluntary Filers
No 
 
 
 
Current Fiscal Year End Date
--12-31 
 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
 
Document Type
10-K 
 
 
 
Document Period End Date
Dec. 31, 2016 
 
 
 
Document Fiscal Year Focus
2016 
 
 
 
Document Fiscal Period Focus
FY 
 
 
 
Amendment Flag
false 
 
 
 
Entity Common Stock, Shares Outstanding
 
 
208,288,497 
158,902,579 
Entity Public Float
 
$ 1.4 
 
 
CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
Current assets:
 
 
Cash and cash equivalents
$ 452,030 
$ 461,329 
Short-term investments
59,901 
Restricted cash
22,131 
13,537 
Settlements receivable
321,102 
142,727 
Customer funds held
43,574 
9,446 
Loans held for sale
42,144 
604 
Merchant cash advance receivable, net
4,212 
36,473 
Other current assets
56,331 
41,447 
Total current assets
1,001,425 
705,563 
Property and equipment, net
88,328 
87,222 
Goodwill
57,173 
56,699 
Acquired intangible assets, net
19,292 
26,776 
Long-term investments
27,366 
Restricted cash
14,584 
14,686 
Other assets
3,194 
3,826 
Total assets
1,211,362 
894,772 
Current liabilities:
 
 
Accounts payable
12,602 
18,869 
Customers payable
388,058 
215,365 
Customer funds obligation
43,574 
9,446 
Accrued transaction losses
20,064 
17,176 
Accrued expenses
39,543 
44,401 
Other current liabilities
73,623 
28,945 
Total current liabilities
577,464 
334,202 
Debt (Note 11)
Other liabilities
57,745 
52,522 
Total liabilities
635,209 
386,724 
Commitments and contingencies (Note 16)
   
   
Stockholders’ equity:
 
 
Preferred stock, $0.0000001 par value: 100,000,000 shares authorized at December 31, 2016 and December 31, 2015. None issued and outstanding at December 31, 2016 and December 31, 2015.
Additional paid-in capital
1,357,381 
1,116,882 
Accumulated other comprehensive loss
(1,989)
(1,185)
Accumulated deficit
(779,239)
(607,649)
Total stockholders’ equity
576,153 
508,048 
Total liabilities and stockholders’ equity
1,211,362 
894,772 
Class A Common Stock
 
 
Stockholders’ equity:
 
 
Common stock
Class B Common Stock
 
 
Stockholders’ equity:
 
 
Common stock
$ 0 
$ 0 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Dec. 31, 2016
Dec. 31, 2015
Preferred stock, par value (in USD per share)
$ 0.0000001 
$ 0.0000001 
Preferred stock, shares authorized (in shares)
100,000,000 
100,000,000 
Preferred stock, shares issued (in shares)
Preferred stock, shares outstanding (in shares)
Class A
 
 
Common stock, par value (in USD per share)
$ 0.0000001 
$ 0.0000001 
Common stock, shares authorized (in shares)
1,000,000,000 
1,000,000,000 
Common stock, shares issued (in shares)
198,746,620 
31,717,133 
Common stock, shares outstanding (in shares)
198,746,620 
31,717,133 
Class B
 
 
Common stock, par value (in USD per share)
$ 0.0000001 
$ 0.0000001 
Common stock, shares authorized (in shares)
500,000,000 
500,000,000 
Common stock, shares issued (in shares)
165,800,756 
303,232,312 
Common stock, shares outstanding (in shares)
165,800,756 
303,232,312 
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Revenue:
 
 
 
Hardware revenue
$ 44,307 
$ 16,377 
$ 7,323 
Total net revenue
1,708,721 
1,267,118 
850,192 
Cost of Revenue [Abstract]
 
 
 
Hardware costs
68,562 
30,874 
18,330 
Amortization of acquired technology
8,028 
5,639 
1,002 
Total cost of revenue
1,132,683 
897,088 
624,118 
Gross profit
576,038 
370,030 
226,074 
Operating expenses:
 
 
 
Product development
268,537 
199,638 
144,637 
Sales and marketing
173,876 
145,618 
112,577 
General and administrative
251,993 
143,466 
94,220 
Transaction, loan and advance losses
51,235 
54,009 
24,081 
Amortization of acquired customer assets
850 
1,757 
1,050 
Total operating expenses
746,491 
544,488 
376,565 
Operating loss
(170,453)
(174,458)
(150,491)
Interest and other (income) expense, net
(780)
1,613 
2,162 
Loss before income tax
(169,673)
(176,071)
(152,653)
Provision for income taxes
1,917 
3,746 
1,440 
Net loss
(171,590)
(179,817)
(154,093)
Deemed dividend on Series E preferred stock
(32,200)
Net loss attributable to common stockholders
(171,590)
(212,017)
(154,093)
Net loss per share attributable to common stockholders:
 
 
 
Basic (in USD per share)
$ (0.50)
$ (1.24)
$ (1.08)
Diluted (in USD per share)
$ (0.50)
$ (1.24)
$ (1.08)
Weighted-average shares used to compute net loss per share attributable to common stockholders:
 
 
 
Basic (in shares)
341,555 
170,498 
142,042 
Diluted (in shares)
341,555 
170,498 
142,042 
Subscription and services-based
 
 
 
Revenue:
 
 
 
Revenue
129,351 
58,013 
12,046 
Cost of Revenue [Abstract]
 
 
 
Transaction, software, and data product costs
43,132 
22,470 
2,973 
Customers Other than Starbucks |
Transaction-based
 
 
 
Revenue:
 
 
 
Revenue
1,456,160 
1,050,445 
707,799 
Cost of Revenue [Abstract]
 
 
 
Transaction, software, and data product costs
943,200 
672,667 
450,858 
Starbucks |
Transaction-based
 
 
 
Revenue:
 
 
 
Revenue
78,903 
142,283 
123,024 
Cost of Revenue [Abstract]
 
 
 
Transaction, software, and data product costs
$ 69,761 
$ 165,438 
$ 150,955 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Statement of Comprehensive Income [Abstract]
 
 
 
Net loss
$ (171,590)
$ (179,817)
$ (154,093)
Net foreign currency translation adjustments
(716)
(356)
(114)
Net unrealized loss on revaluation of intercompany loans
(11)
(22)
Net unrealized loss on marketable securities
(77)
Total comprehensive loss
$ (172,394)
$ (180,195)
$ (154,207)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (USD $)
In Thousands, except Share data, unless otherwise specified
Total
USD ($)
IPO
USD ($)
Series E
USD ($)
Convertible preferred stock
USD ($)
Convertible preferred stock
Series E
USD ($)
Class A and B common stock
USD ($)
Class A and B common stock
IPO
Additional paid-in capital
USD ($)
Additional paid-in capital
IPO
USD ($)
Accumulated other comprehensive loss
USD ($)
Accumulated deficit
USD ($)
Beginning balance at Dec. 31, 2013
$ 162,294 
 
 
$ 366,197 
 
$ 0 
 
$ 38,329 
 
$ (693)
$ (241,539)
Beginning balance (in shares) at Dec. 31, 2013
 
 
 
134,528,520 
 
138,017,900 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
 
 
 
Net loss
(154,093)
 
 
 
 
 
 
 
 
 
(154,093)
Shares issued in connection with:
 
 
 
 
 
 
 
 
 
 
 
Issuance of stock
 
 
148,748 
 
148,748 
 
 
 
 
 
 
Issuance of stock (in shares)
 
 
 
 
9,700,289 
 
 
 
 
 
 
Exercise of stock options
8,685 
 
 
 
 
 
 
8,685 
 
 
 
Exercise of stock options (in shares)
 
 
 
 
 
9,403,147 
 
 
 
 
 
Issuance of common stock in connection with business combinations
59,576 
 
 
 
 
 
 
59,576 
 
 
 
Issuance of common stock in connection with business combinations (in shares)
 
 
 
 
 
8,384,156 
 
 
 
 
 
Issuance of common stock
 
 
 
 
 
 
 
 
 
Issuance of common stock (in shares)
 
 
 
 
 
24,220 
 
 
 
 
 
Vesting of early exercised stock options
11,128 
 
 
 
 
 
 
11,128 
 
 
 
Contribution of stock
 
 
 
 
 
 
 
 
 
 
Contribution of stock (in shares)
 
 
 
(8,976,000)
 
 
 
 
 
 
 
Repurchase of common stock
 
 
 
 
 
 
 
 
 
 
Repurchase of common stock (in shares)
 
 
 
 
 
(1,225,740)
 
 
 
 
 
Change in other comprehensive loss
(114)
 
 
 
 
 
 
 
 
(114)
 
Share-based compensation
36,100 
 
 
 
 
 
 
36,100 
 
 
 
Tax benefit from share-based award activity
1,348 
 
 
 
 
 
 
1,348 
 
 
 
Ending balance at Dec. 31, 2014
273,672 
 
 
514,945 
 
 
155,166 
 
(807)
(395,632)
Ending balance (in shares) at Dec. 31, 2014
 
 
 
135,252,809 
 
154,603,683 
 
 
 
 
 
Shares issued in connection with:
 
 
 
 
 
 
 
 
 
 
 
Contribution of stock (in shares)
 
 
 
 
 
(5,068,238)
 
 
 
 
 
Ending balance at Jan. 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Beginning balance at Dec. 31, 2014
273,672 
 
 
514,945 
 
 
155,166 
 
(807)
(395,632)
Beginning balance (in shares) at Dec. 31, 2014
 
 
 
135,252,809 
 
154,603,683 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
 
 
 
Net loss
(179,817)
 
 
 
 
 
 
 
 
 
(179,817)
Shares issued in connection with:
 
 
 
 
 
 
 
 
 
 
 
Issuance of stock
 
245,726 
29,952 
 
29,952 
 
 
 
245,726 
 
 
Issuance of stock (in shares)
 
 
 
 
1,940,058 
 
29,700,000 
 
 
 
 
Conversion of Series A, B, C, D & E preferred stock upon initial public offering to common stock
 
 
(544,897)
 
 
 
544,897 
 
 
 
Conversion of Series A, B, C, D & E preferred stock upon initial public offering to common stock (in shares)
 
 
 
(137,192,867)
 
137,192,867 
 
 
 
 
 
Deemed dividend on Series E preferred stock
 
 
 
 
 
 
32,200 
 
 
(32,200)
Deemed dividend on Series E preferred stock (in shares)
10,299,696 
 
 
 
 
10,299,696 
 
 
 
 
 
Exercise of stock options
14,766 
 
 
 
 
 
 
14,766 
 
 
 
Exercise of stock options (in shares)
 
 
 
 
 
5,544,785 
 
 
 
 
 
Issuance of common stock in connection with business combinations
35,776 
 
 
 
 
 
 
35,776 
 
 
 
Issuance of common stock in connection with business combinations (in shares)
 
 
 
 
 
3,591,014 
 
 
 
 
 
Issuance of common stock
 
 
 
 
 
 
 
 
 
Issuance of common stock (in shares)
 
 
 
 
 
3,777 
 
 
 
 
 
Vesting of early exercised stock options
4,958 
 
 
 
 
 
 
4,958 
 
 
 
Contribution of stock
 
 
 
 
 
 
 
 
 
 
Contribution of stock (in shares)
 
 
 
 
 
(5,068,238)
 
 
 
 
 
Repurchase of common stock
 
 
 
 
 
 
 
 
 
 
Repurchase of common stock (in shares)
 
 
 
 
 
(918,139)
 
 
 
 
 
Change in other comprehensive loss
(378)
 
 
 
 
 
 
 
 
(378)
 
Share-based compensation
82,292 
 
 
 
 
 
 
82,292 
 
 
 
Tax benefit from share-based award activity
1,101 
 
 
 
 
 
 
1,101 
 
 
 
Ending balance at Dec. 31, 2015
508,048 
 
 
 
 
1,116,882 
 
(1,185)
(607,649)
Ending balance (in shares) at Dec. 31, 2015
 
 
 
 
334,949,445 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
 
 
 
Net loss
(171,590)
 
 
 
 
 
 
 
 
 
(171,590)
Shares issued in connection with:
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options (in shares)
24,328,414 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options and warrants
82,438 
 
 
 
 
 
 
82,438 
 
 
 
Purchases under employee stock purchase plan
14,201 
 
 
 
 
 
 
14,201 
 
 
 
Purchases under employee stock purchase plan (in shares)
 
 
 
 
 
1,852,900 
 
 
 
 
 
Exercise of stock options and warrants (in shares)
 
 
 
 
 
24,413,821 
 
 
 
 
 
Vesting of RSUs
 
 
 
 
 
 
 
 
 
 
Vesting of RSUs (in shares)
 
 
 
 
 
3,392,726 
 
 
 
 
 
Vesting of early exercised stock options
2,313 
 
 
 
 
 
 
2,313 
 
 
 
Cancellation of shares related to business combinations
 
 
 
 
 
 
 
 
 
 
Cancellation of shares related to business combinations (in shares)
 
 
 
 
 
(228)
 
 
 
 
 
Repurchase of common stock
 
 
 
 
 
 
 
 
 
 
Repurchase of common stock (in shares)
 
 
 
 
 
(61,288)
 
 
 
 
 
Change in other comprehensive loss
(804)
 
 
 
 
 
 
 
 
(804)
 
Share-based compensation
141,547 
 
 
 
 
 
 
141,547 
 
 
 
Ending balance at Dec. 31, 2016
$ 576,153 
 
 
$ 0 
 
$ 0 
 
$ 1,357,381 
 
$ (1,989)
$ (779,239)
Ending balance (in shares) at Dec. 31, 2016
 
 
 
 
364,547,376 
 
 
 
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Cash flows from operating activities:
 
 
 
Net loss
$ (171,590)
$ (179,817)
$ (154,093)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
37,745 
27,626 
18,586 
Share-based compensation
138,786 
82,292 
36,100 
Excess tax benefit from share-based payment activity
(1,101)
(1,348)
Provision for transaction losses
50,819 
43,379 
18,478 
Provision for uncollectible receivables related to merchant cash advances
1,159 
6,240 
2,431 
Deferred provision for income taxes
58 
26 
(2,664)
(Gain) loss on disposal of property and equipment
(49)
270 
133 
Changes in operating assets and liabilities:
 
 
 
Settlements receivable
(178,405)
(27,420)
(50,361)
Customer funds held
(34,128)
(6,462)
(2,985)
Purchase of loans held for sale
(668,976)
(816)
Proceeds from sales and principal payments of loans held for sale
627,627 
21 
Merchant cash advance receivable
31,102 
(13,411)
(31,733)
Other current assets
(14,986)
(12,430)
(14,323)
Other assets
631 
1,220 
(636)
Accounts payable
(2,147)
7,831 
179 
Customers payable
172,446 
69,547 
49,971 
Customer funds obligation
34,128 
6,462 
2,985 
Charge-offs and recoveries to accrued transaction losses
(47,931)
(34,655)
(17,514)
Accrued expenses
(409)
21,450 
8,113 
Other current liabilities
44,102 
19,760 
3,007 
Other liabilities
3,149 
11,111 
23,295 
Net cash (used in) provided by operating activities
23,131 
21,123 
(112,379)
Cash flows from investing activities:
 
 
 
Purchase of marketable securities
(164,766)
Maturities of marketable securities
43,200 
Sales of marketable securities
34,222 
Purchase of property and equipment
(25,433)
(37,432)
(28,794)
Proceeds from sale of property and equipment
296 
Payment for acquisition of intangible assets
(400)
(1,286)
(400)
Increases in restricted cash
(8,492)
(1,878)
(7,075)
Business acquisitions (net of cash acquired)
(1,360)
(4,500)
11,715 
Net cash used in investing activities:
(122,733)
(45,096)
(24,554)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of preferred stock, net
29,952 
148,748 
Proceeds from issuance of common stock upon initial public offering, net of offering costs
251,257 
Payments of offering costs related to initial public offering
(5,530)
Proceeds from debt
30,000 
Principal payments on debt
(30,000)
Payments of debt issuance costs
(1,387)
Principal payments on capital lease obligation
(168)
Proceeds from issuances of common stock from the exercise of options and employee stock purchase plan
96,439 
13,840 
14,056 
Excess tax benefit from share-based payment award
1,101 
1,348 
Net cash provided by financing activities
90,741 
264,763 
194,152 
Effect of foreign exchange rate on cash and cash equivalents
(438)
(1,776)
(1,080)
Net increase (decrease) in cash and cash equivalents
(9,299)
239,014 
56,139 
Cash and cash equivalents, beginning of the year
461,329 
222,315 
166,176 
Cash and cash equivalents, end of the year
$ 452,030 
$ 461,329 
$ 222,315 
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) is a cohesive commerce ecosystem that helps its sellers start, run, and grow their businesses – from managed payments solutions to point of sale, hardware to software, loans to payroll and more. Businesses and individuals can also use Square Cash, an easy way to send and receive money, as well as Caviar, a food ordering service for restaurants. Square was founded in 2009 and is headquartered in San Francisco, with offices in the United States, Canada, Japan, and Australia.

Out of Period Adjustments to Reserve for Transaction Losses

During the second quarter of the year ended December 31, 2016, the Company recorded an out of period adjustment of $6.0 million to transaction, loan and advance losses as a result of a correction to the calculation of its reserve for transaction losses. The adjustment was recorded to correct an understatement of transaction losses in prior periods. Of the total amount of this adjustment, $0.5 million is related to the three months ended March 31, 2016, and $2.6 million and $1.6 million is related to the years ended December 31, 2015 and 2014, respectively. The remaining $1.3 million is related to historical periods. The Company evaluated the error from a qualitative and quantitative perspective in accordance with the requirements of the Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 99, Materiality, (SAB 99) and concluded that such amounts were not material with respect to the operating loss or net loss for the current fiscal year or any previously reported consolidated financial statements. The correction of this error had no impact on the net cash flows from operations in any of the periods.

Immaterial Correction to Cash and Cash Equivalents

During the fourth quarter of 2016, the Company identified an error that impacted the consolidated balance sheet as of December 31, 2015, the consolidated statement of cash flows for the years ended December 31, 2015 and 2014, and in the unaudited condensed consolidated balance sheets and statements of cash flows as of and for the three months ended March 31, 2016, the six months ended June 30, 2016, and the nine months ended September 30, 2016, all related to the reported amounts of cash and cash equivalents. During these periods, the Company erroneously classified and reported certain customer funds as cash and cash equivalents instead of classifying these customer funds as a component of current assets. These customer funds represent cash balances stored by customers utilizing the Square Cash app that the customers can withdraw at a subsequent time or use to make transfers or payments, or customer cash that was in transit. The Company held these stored balances as short term deposits with a third-party bank.
 
The effect of correcting these errors was to decrease cash and cash equivalents at December 31, 2015 by $9.5 million and increase customer funds as a component of current assets of the same amount. These adjustments did not change current assets, total assets, or net loss.
 
The effect of the revisions within the consolidated statement of cash flows was to decrease the cash flows from operations and the change in cash and cash equivalents for the year ended December 31, 2015 by $6.5 million.

Management evaluated the materiality of the errors described above from a qualitative and quantitative perspective in accordance with the requirements of the SAB 99. Based on such evaluation, the Company has concluded that their correction would not be material to any individual prior period.

Changes to the Description of Revenue and Cost of Revenue Line Items

The Company has renamed some of the revenue and cost of revenues financial statement line items in its consolidated statements of operations to better describe how the Company monetizes its product offerings. Accordingly, the previously presented transaction revenue and Starbucks transaction revenue have been renamed transaction-based revenue and Starbucks transaction-based revenue, respectively, while software and data product revenue has been renamed subscription and services-based revenue. The products and services revenues included in the previously presented line items remains the same. The cost of revenues line items have similarly been renamed while the components of costs of revenues in the line items have remained the same.


Litigation Settlement

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

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

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

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 loans held for sale, business combinations, goodwill and intangible assets, income taxes, and share-based compensation.

Revenue Recognition

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

Transaction-based revenue and Starbucks transaction-based revenue

The Company charges its sellers a transaction fee for managed payments solutions that is generally calculated as a percentage of the total transaction amount processed. The Company selectively offers custom pricing for larger sellers. The Company had a processing agreement with Starbucks, for certain Starbucks-owned stores in the United States. As of December 31, 2016, Starbucks has completed its previously announced transition to another payments solution provider.

The Company recognizes the transaction fees a seller pays to the Company as revenue upon authorization of a transaction by the seller's customer's bank. Revenue is recognized net of refunds, which arise from reversals of transactions initiated by sellers. The Company acts as the merchant of record for its sellers and works directly with payment card networks and banks so that its sellers do not need to manage the complex systems, rules, and requirements of the payments industry. As the merchant of record, Square is liable for settlement of the transactions the Company processes for its sellers.

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

Subscription and services-based revenue
    
Subscription and services-based revenue primarily consists of revenue related to services provided through software offerings or deriving from the use of underlying data. Subscription and services-based revenue is primarily generated by Square Capital, Caviar, and other software as a service.

Square Capital facilitates a loan that is offered through a partnership with a Utah-chartered, member FDIC industrial bank that is generally repaid through withholding a percentage of the collections of the seller's receivables processed by the Company. During the first quarter of 2016, the Company fully transitioned from offering merchant cash advances (MCAs) to loans. The Company facilitates loans to sellers pre-qualified through an analysis of the aggregated data of the seller’s business which includes, but is not limited to, the seller’s historical processing volumes, transaction count, chargebacks, growth, and length of time as a Square customer. The loans are originated by a bank partner, from whom the Company purchases the loans obtaining all rights, title, and interest. The loans have no stated coupon rate but the seller is charged a one-time origination fee by the bank partner based upon their risk rating, which is derived primarily from processing activity. It is the Company’s intent to sell all of its rights, title, and interest in certain of these loans to third-party investors for an upfront fee when the loans are sold. The Company records the net amounts paid to the bank as the cost of the loans purchased and subsequently records a gain on sale of the loans to the third-party investors. The Company is retained by the third-party investors to service the loans and earns a servicing fee for facilitating the repayment of these receivables through its payments solutions. The Company recognizes the gain on sale of the loans to the investors as revenue upon transfer of title to investors. The Company records servicing revenue as servicing is delivered. For the loans which are not sold to third-party investors, the Company recognizes a portion of the expected seller repayments over the cost of the loans as revenue in proportion to the loan principal reduction.
 
Caviar is a courier order management app that facilitates food delivery services for restaurants. Caviar revenue consists of seller fees charged to restaurants, delivery fees, and service fees from consumers. All fees are recognized upon delivery of the food, net of refunds.

Software as a service provides the use of software on a stand-alone basis for a fee which is recognized ratably as service is provided.
Hardware revenue

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

Cost of Revenue

Transaction-based costs and Starbucks transaction-based costs

Transaction-based costs and Starbucks transaction-based costs consist primarily of interchange fees set by payment card networks that are paid to the card-issuing financial institution, assessment fees paid to payment networks, fees paid to third-party payment card processors, and bank settlement fees. Contracts with third-party payment processors are typically for a term of two to four years.

Subscription and services-based costs

Subscription and services-based costs consist primarily of Caviar-related costs, which include payments to third-party couriers for deliveries and seller-facing equipment. Cost of revenue for other subscription and services-based costs consists primarily of the amortization related to the development of certain subscription and services-based products.

Hardware costs

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

Advertising Costs

Advertising costs are expensed as incurred and included in sales and marketing expense on the consolidated statements of operations. Total advertising costs for the years ended December 31, 2016, 2015, and 2014 were $58.3 million, $58.3 million, and $45.1 million, respectively.

Share-based Compensation

Share-based compensation expense relates to stock options, restricted stock units (RSUs), and purchases under the Company’s 2015 Employee Stock Purchase Plan (ESPP) which is measured based on the grant-date fair value. The Company estimates the fair value of stock options and employee stock purchase plan shares granted to employees on the date of grant using the Black-Scholes-Merton option valuation model. The fair value of RSUs is based on the market value of the Company's common stock on grant date. The Company recognizes compensation expense net of estimated forfeitures over the vesting period of the applicable award using the straight-line method. Forfeiture rates are estimated based on historical forfeitures of share-based awards and are adjusted to reflect changes in facts and circumstances, if any.

There are unvested restricted shares issued to employees of certain acquired companies. A portion of these awards is generally subject to continued post-acquisition employment, which is accounted for as post-acquisition share-based compensation expense. The shares are measured based on the grant-date fair value and recognized as compensation expense on a straight-line basis over the required service period.

Income Taxes

The Company reports income taxes under the asset and liability approach. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating loss and tax credit carryforwards. Deferred tax amounts are determined by using the enacted tax rates expected to be in effect when the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance reduces the deferred tax assets to the amount that is more likely than not to be realized.

The Company uses financial projections to support its net deferred tax assets, which contain significant assumptions and estimates of future operations. If such assumptions were to differ significantly from actual future results of operations, it may have a material impact on the Company’s ability to realize its deferred tax assets. At the end of each period, the Company assesses the ability to realize the deferred tax assets. If it is more likely than not that the Company would not realize the deferred tax assets, then the Company would establish a valuation allowance for all or a portion of the deferred tax assets.

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

Cash and Cash Equivalents and Restricted Cash

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

As of December 31, 2016 and 2015, restricted cash of $22.1 million and $13.5 million, respectively, is related to pledged cash deposited into savings accounts at the financial institutions that process the Company's sellers' payment transactions 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.

As of December 31, 2016 and 2015, the remaining restricted cash of $14.6 million and $14.7 million, respectively, is primarily related to cash deposited into money market funds that is used as collateral pursuant to multi-year lease agreements entered into in 2012 and 2014 (Note 16). The Company has recorded this amount as a non-current asset on the consolidated balance sheets as the terms of the related leases extend beyond one year.

Concentration of Credit Risk

For the year ended December 31, 2016, the Company had no customer who accounted for greater than 10% of total net revenue. For the years ended December 31, 2015 and 2014, the Company had no customer other than Starbucks who accounted for greater than 10% of total net revenue. The Company terminated its relationship with Starbucks during the year ended December 31, 2016.

The Company had three third-party processors that represented approximately 52%, 35%, and 10% of settlements receivable as of December 31, 2016. The Company had three third-party processors that represented approximately 56%, 23%, and 16% of settlements receivable as of December 31, 2015.

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, settlements receivables, customer funds held, merchant cash advance receivables, and loans held for sale. The associated risk of concentration for cash and cash equivalents 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 merchant cash advance receivables and loans held for sale is mitigated by ongoing credit evaluations of the Company’s customers.

Fair Value of Financial Instruments

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

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

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

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

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

Loans Held for Sale

The Company facilitates the offering of loans by its bank partner to sellers pre-qualified through an analysis of the aggregated data of the seller’s business which includes, but is not limited to, the seller’s historical processing volumes, transaction count, chargebacks, growth, and length of time as a Square customer. The loans are originated by a bank partner, from whom the Company purchases the loans obtaining all rights, title, and interest. Loans are classified as held for sale upon purchase, as it is the Company’s intent to sell all of its rights, title, and interest in certain of these loans to third-party investors for an agreed-upon purchase price when the loans are sold. A loan that is initially designated as held for sale may be reclassified to held for investment if and when the Company's intent for that loan changes. There have been no reclassifications made to date. Loans are recorded at the lower of cost or fair value. To determine the fair value of loans, the Company utilizes industry standard modeling, such as discounted cash flow models, to arrive at an estimate of fair value.

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

Provision for Uncollectible Receivables Related to MCAs
    
Merchant cash advance receivable, net, represents the aggregate amount of advances to merchants outstanding as of the balance sheet date, net of an allowance for potential uncollectible amounts. The Company estimates the allowance based on an assessment of various factors, including historical experience, merchants’ current processing volume, and other factors that may affect the merchants’ ability to generate future receivables. Additions to the allowance are reflected in current operating results, while charges against the allowance are made when charge-offs are recognized. The additions are classified within transaction and advance losses on the consolidated statements of operations. During the first quarter of 2016, the Company had fully transitioned from offering MCAs to loans. Activity subsequent to this transition relates primarily to updates to the Company's provision estimates for historical balances, write-offs or recoveries. The Company is not exposed to losses for the merchant cash advance receivables that are sold to third-party investors in accordance with the Company’s arrangements with them.

Customer Funds

Customer funds held represent cash stored by customers within the Square Cash App that the customers would later use to send money or make payments, or customer cash in transit. As of December 31, 2016 and 2015, the Company held these stored balances as short term deposits within a bank account. Customer funds obligation represents the Company's liability to the customers for the customer funds held.

Inventory

Inventory is comprised of contactless and chip readers, chip card readers, Square Stand, and third-party peripherals. Inventory is stated at the lower of cost (generally on a first-in, first-out basis) or market. Inventory that is obsolete or in excess of forecasted usage is written down to its estimated net realizable value based on assumptions about future demand and market conditions.

Deferred Magstripe Reader Costs

The Company capitalizes the cost of its magstripe readers, which are included in other current assets on the consolidated balance sheets. The amount capitalized represents the cost of the readers, including packaging and shipping costs, held on-hand by the Company as of each consolidated balance sheet date. Once the readers are shipped to a third-party distributor or an end-customer, they are recorded as marketing expense on the consolidated statements of operations.

Property and Equipment

Property and equipment are recorded at historical cost less accumulated depreciation, which is computed on a straight-line basis over the asset’s estimated useful life.
The estimated useful lives of property and equipment are described below:
Property and Equipment
 
Useful Life
Capitalized software
 
18 months
Computer and data center equipment
 
Three years
Furniture and fixtures
 
Seven years
Leasehold improvements
 
Lesser of estimated useful life or remaining lease term


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

Capitalized Software

The Company capitalizes certain cost incurred in developing internal-use software when capitalization requirements have been met. Costs prior to meeting the capitalization requirements are expensed as incurred. Capitalized costs are included in property and equipment, net, and amortized on a straight-lined basis over the estimated useful life of the software and included in product development costs or allocated to subscription and service-based costs on the consolidated statements of operations. The Company capitalized $7.9 million, $4.5 million and $6.4 million of internally developed software during the years ended December 31, 2016, 2015 and 2014, respectively, and recognized $7.1 million, $3.2 million and $2.7 million of amortization expense during the years ended December 31, 2016, 2015 and 2014, respectively.

Leases

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

When lease agreements provide allowances for leasehold improvements, the Company capitalizes the leasehold improvement assets and recognizes the related depreciation expense on a straight-line basis over the lesser of the lease term or the estimated useful life of the asset, and reduces rent expense on a straight-line basis over the term of the lease by the amount of the allowances provided. The Company classifies the cash payments for the leasehold improvements within investing activities while reimbursements from the landlords are classified within operating activities.

The Company records a liability for the estimated fair value for any asset retirement obligation (ARO) associated with its leases, with an offsetting asset. In the determination of the fair value of AROs, the Company uses various assumptions and judgments, including such factors as the existence of a legal obligation, estimated amounts and timing of settlements, and discount and inflation rates. The liability is subsequently accreted while the asset is depreciated. As of December 31, 2016, the Company had a liability for ARO, gross of accretion, of $3.2 million and an associated asset, net of depreciation, of $2.6 million.


Business Combinations

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

Long-Lived Assets, including Goodwill and Acquired Intangibles

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

Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in a business combination. The Company performs a goodwill impairment test annually on December 31 and more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the reporting unit’s fair value. The Company has the option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount and determine whether further action is needed. If, after assessing the totality of events or circumstances, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. For the periods presented, the Company had recorded no impairment charges.

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

Customers Payable

Customers payable represents the transaction amounts, less revenue earned by the Company, owed to sellers. The payable amount comprises amounts owed to customers due to timing differences as we typically settle within one business day, amounts held by the Company in accordance with its risk management policies, and amounts held for customers who have not yet linked a bank account.

Accrued Transaction Losses

The Company establishes a reserve for estimated transaction losses due to chargebacks, which represent a potential loss due to disputes between a seller and their customer or due to a fraudulent transaction. The reserve is estimated based on available data as of the reporting date, including expectations of future chargebacks, and historical trends related to loss rates. Additions to the reserve are reflected in current operating results, while charges to the reserve are made when losses are recognized. These amounts are classified within transaction and advance losses on the consolidated statements of operations.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, and issued subsequent amendments to the initial guidance within ASU 2015-04, ASU 2016-08, ASU 2016-10, ASU 2016-12, and ASU 2016-20. The new guidance will replace all current U.S. GAAP guidance on this topic and eliminate all industry specific guidance. The core principal of this new guidance is that revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration for which the Company expects to be entitled in exchange for those goods or services. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The Company does not plan to early adopt the guidance. The guidance can be adopted either through the full retrospective approach which requires restatement of all periods 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 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 apply the modified retrospective approach in the year of adoption of this guidance and is currently assessing the impact that the adoption of the guidance would have on the consolidated financial statements and related disclosures. The Company is also assessing any financial reporting system changes that would be necessary to implement the new guidance.

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 an approximately 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 an approximately 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 is currently evaluating the impact this new guidance may have on the consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. The new guidance eliminates the current requirement to present deferred tax assets and liabilities as current and noncurrent on the consolidated balance sheets. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. 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 early adopted this new guidance on a prospective basis as a change in accounting policy and therefore prior periods were not retrospectively adjusted.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. This guidance is intended to improve the recognition, measurement, presentation, and disclosure of financial instruments. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted with certain restrictions. The Company is currently evaluating the impact this new guidance may have on the consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which will require, among other items, lessees to recognize 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. 2016-04, Recognition of Breakage for Certain Prepaid Stored-Value Products. This guidance specifies how prepaid stored-value product liabilities should be derecognized, thereby eliminating the current and potential future diversity in practice. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact this new guidance may have on the consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting,
which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact this new guidance may have on the consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected credit losses for financial assets held. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact this new guidance may have on the consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. This guidance addresses several specific cash flow issues with the objective of reducing the existing diversity in practice. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact this new guidance may have on the consolidated financial statements.

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. 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 is currently evaluating the impact this new guidance may have on the consolidated financial statements.

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. For the years ended December 31, 2016, 2015 and 2014, $36.7 million, $28.2 million and $26.3 million, respectively, of restricted cash would have been included in cash and cash equivalents in the consolidated statements of cash flows if this new guidance had been adopted as of the respective dates.

In December 2016, the FASB issued ASU No. 2016-19, Technical Corrections and Improvements. The amendments cover a wide range of topics in the Accounting Standards Codification, covering differences between original guidance and the Accounting Standards Codification, guidance clarification and reference corrections, simplification and minor improvements. Most of the amendments in this update do not require transition guidance and are effective upon issuance of this update. Early adoption is permitted for the amendments that require transition guidance. The Company is currently evaluating the impact this new update may have on the consolidated financial statements.

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 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 is currently evaluating the impact this new guidance may have on the consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-03, Amendments to SEC Paragraphs Pursuant to Staff Announcements. The amendment provides guidance to the Company in relation to the disclosure of the impact that ASU 2014-09, ASU 2016-02 and ASU 2016-13 will have on the Company’s financial statements when adopted. Specifically, registrants should consider additional qualitative disclosures if the impact of an issued but not yet adopted ASU is unknown or cannot be reasonably estimated and to include a description of the effect of the accounting policies that the registrant expects. The Company has implemented this guidance within its current disclosures.

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. This amendment modified the concept of impairment assessment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. 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 is currently evaluating the impact this new guidance may have on the consolidated financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial assets and liabilities that are measured at fair value on a recurring basis are classified as follows (in thousands):
 
December 31, 2016
 
December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Cash and cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
207,168

 
$

 
$

 
$
337,234

 
$

 
$

Commercial paper

 
7,496

 

 

 

 

Municipal securities

 
1,000

 

 

 

 

Short-term securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities

 
9,055

 

 

 

 

Corporate bonds

 
6,980

 

 

 

 

Commercial paper

 
17,298

 

 

 

 

Municipal securities

 
8,028

 

 

 

 

U.S. government securities
18,540

 

 

 

 

 

Long-term securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities

 
3,502

 

 

 

 

Corporate bonds

 
12,914

 

 

 

 

Municipal securities

 
2,492

 

 

 

 

U.S. government securities
8,458

 

 

 

 

 

Total
$
234,166

 
$
68,765

 
$

 
$
337,234

 
$

 
$



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

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

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

 
December 31, 2016
 
Carrying Value
 
Fair Value (Level 3)
Loans held for sale
$
42,144

 
$
42,633

Total
$
42,144

 
$
42,633



As of December 31, 2015, the difference between the fair value of loans and the carrying value was insignificant.
    
If applicable, the Company will recognize transfers into and out of levels within the fair value hierarchy at the end of the reporting period in which the actual event or change in circumstance occurs. During the years ended December 31, 2016, 2015 and 2014, the Company did not have any transfers between Level 2 or Level 3 assets.
INVESTMENTS
INVESTMENTS
INVESTMENTS

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

The Company's short-term and long-term investments as of December 31, 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 year ended December 31, 2016, 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 as of December 31, 2016.

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

 
Amortized Cost
 
Fair Value
Due in one year or less
$
59,920

 
$
59,901

Due in one to five years
27,424

 
27,366

Total
$
87,344

 
$
87,267

MERCHANT CASH ADVANCE RECEIVABLE, NET
MERCHANT CASH ADVANCE RECEIVABLE, NET
MERCHANT CASH ADVANCE RECEIVABLE, NET
The following table summarizes the activities of the Company’s allowance for uncollectible receivables (in thousands):
 
Year Ended December 31,
 
Year Ended December 31,
 
2016
 
2015
Allowance for uncollectible MCA receivables, beginning of the period
$
7,443

 
$
2,431

Provision for uncollectible MCA receivables
1,159

 
6,240

MCA receivables charged off
(4,039
)
 
(1,228
)
Allowance for uncollectible MCA receivables, end of the period
$
4,563

 
$
7,443


    
During the first quarter of 2016, the Company had fully transitioned from offering MCAs to loans.
PROPERTY AND EQUIPMENT, NET
PROPERTY AND EQUIPMENT, NET
PROPERTY AND EQUIPMENT, NET
The following is a summary of property, equipment, and internally-developed software at cost, less accumulated depreciation and amortization (in thousands):    
 
December 31,
2016
 
December 31,
2015
Computer equipment
$
52,915

 
$
43,531

Office furniture and equipment
10,737

 
9,339

Leasehold improvements
73,366

 
65,298

Capitalized software
24,642

 
14,533

Construction in process

 
490

Total
161,660

 
133,191

Less: Accumulated depreciation and amortization
(73,332
)
 
(45,969
)
Property and equipment, net
$
88,328

 
$
87,222


Depreciation and amortization expense on property and equipment was $28.7 million, $20.1 million, and $16.5 million, for the years ended December 31, 2016, 2015, and 2014, respectively.
ACQUISITIONS
ACQUISITIONS
ACQUISITIONS
Fiscal 2016

During the year ended December 31, 2016, the Company completed an acquisition for a total consideration of $1.6 million in cash. This 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. Of the total purchase consideration, $1.1 million was allocated to acquired intangible assets and $0.5 million was allocated to goodwill. Intangible assets and goodwill generated from this acquisition is deductible for tax purposes. Goodwill is primarily attributable to expected synergies from future growth opportunities.

The results of operations from this acquisition have been consolidated with those of the Company as of the acquisition date. The acquisition's impact on revenue and net earnings for the year ended December 31, 2016 was not material. There was also no material impact on the Company’s revenue and net earnings on a pro forma basis for all periods presented.
Fiscal 2015

During the year ended December 31, 2015, the Company completed acquisitions for a total consideration of $32.0 million, consisting of 2,923,881 shares of common stock, options to purchase 26,173 shares of common stock, and $4.5 million in cash. These acquisitions were accounted for as business combinations. This method requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. Of the total purchase consideration of $32.0 million, $16.4 million has been allocated to goodwill, $14.9 million to acquired intangible assets, $0.8 million to property and equipment, and $0.2 million to deferred tax liabilities. Goodwill from these acquisitions is primarily attributable to expected synergies and cost reductions. $29.8 million of the intangible assets and goodwill generated from these acquisitions is deductible for tax purposes. Acquisition-related costs of $0.6 million were recognized in general and administrative expenses. Of the total purchase price, 355,284 shares of common stock and 22,818 options have been accounted for as post-combination compensation expense. As of December 31, 2016, 292,813 shares of the total share consideration remain withheld for indemnification purposes.

Additionally, the Company completed an acquisition of certain assets for a total purchase consideration of $9.5 million, consisting of 667,133 shares of common stock, and $1.0 million in cash. This transaction was accounted for as a purchase of assets, which consists of $9.0 million in intangible assets and $0.5 million of other assets.
Fiscal 2014

During the year ended December 31, 2014, the Company completed acquisitions for a total consideration of $59.6 million, consisting of 8,552,990 shares of common stock and options to purchase 168,834 shares of common stock. These acquisitions were accounted for as business combinations. This method requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. Of the total purchase consideration $39.7 million was allocated to goodwill, $11.4 million to acquired intangible assets, and $8.5 million to net tangible assets. Goodwill from these acquisitions was primarily attributable to expected synergies and cost reductions. None of the goodwill was deductible for tax. Acquisition-related costs of $0.5 million were recognized in general and administrative expenses. As of December 31, 2016, 1,291,979 shares of the total share consideration remain withheld for indemnification purposes.
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.
The following table summarizes activities related to the carrying value of goodwill (in thousands):
Balance at December 31, 2014
40,267

Acquisitions completed during the year ended December 31, 2015
$
16,432

Balance at December 31, 2015
$
56,699

Acquisitions completed during the year ended December 31, 2016
$
474

Balance at December 31, 2016
$
57,173


The Company performed its annual goodwill impairment test as of December 31, 2016. The Company determined that the consolidated business is represented by a single reporting unit and concluded that it was more likely than not that the fair value of the reporting unit was greater than its carrying amount. As a result, the two-step goodwill impairment test was not required, and no impairments of goodwill were recognized during the year ended December 31, 2016.
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 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


 
Balance at December 31, 2015
Cost
 
Accumulated Amortization
 
Net
Patents
$
1,285

 
$
(348
)
 
$
937

Technology Assets
28,645

 
(6,644
)
 
22,001

Customer Assets
6,645

 
(2,807
)
 
3,838

Total
$
36,575

 
$
(9,799
)
 
$
26,776



The weighted average amortization periods for acquired patents, acquired technology, and customer intangible assets are approximately 13 years, 3 years, and 7 years, respectively.
Amortization expense associated with other intangible assets was $9.0 million, $7.5 million, and $2.1 million for the years ended December 31, 2016, 2015, and 2014, respectively.
The total estimated annual future amortization expense of these intangible assets as of December 31, 2016, are as follows (in thousands):
2017
 
$
7,380

2018
 
5,881

2019
 
3,097

2020
 
1,140

2021
 
696

Thereafter
1,098

Total
$
19,292

OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (CURRENT)
OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (CURRENT)
OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (CURRENT)

Other Current Assets

The following table presents the detail of other current assets (in thousands):
    
 
December 31,
2016
 
December 31,
2015
Inventory
$
13,724

 
$
11,864

Accounts receivable
6,191

 
4,808

Prepaid expenses
7,365

 
7,101

Deferred magstripe reader costs
3,911

 
4,018

Tenant improvement reimbursement receivable
1,189

 
1,788

Deferred hardware costs
4,546

 
1,709

Processing costs receivable
8,593

 
7,847

Other
10,812

 
2,312

Total
$
56,331

 
$
41,447




Accrued Expenses
The following table presents the detail of accrued expenses (in thousands):
 
December 31,
2016
 
December 31,
2015
Accrued hardware costs
$
3,148

 
$
11,622

Processing costs payable
9,655

 
11,417

Accrued professional fees
5,788

 
7,642

Accrued payroll
5,799

 
2,660

Accrued marketing
3,972

 
2,443

Other accrued liabilities
11,181

 
8,617

Total
$
39,543

 
$
44,401


Other Current Liabilities
The following table presents the detail of other current liabilities (in thousands):    
    
 
December 31,
2016
 
December 31,
2015
Settlements payable
$
51,151

 
$
13,105

Employee early exercised stock options
674

 
2,141

Accrued redemptions
1,628

 
1,066

Current portion of deferred rent
2,862

 
2,393

Deferred revenue
5,407

 
6,623

Other
11,901

 
3,617

Total
$
73,623

 
$
28,945

OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (NON-CURRENT)

Other Non-Current Assets

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

 
December 31,
2016
 
December 31,
2015
Deposits
$
1,775

 
$
1,993

Deferred tax assets
306

 
188

Other
1,113

 
1,645

Total
$
3,194

 
$
3,826



Other Non-Current Liabilities
The following table presents the detail of other non-current liabilities (in thousands):
 
December 31,
2016
 
December 31,
2015
Deferred rent
$
23,119

 
$
25,543

Employee early exercised stock options
66

 
1,128

Deferred tax liabilities
476

 
299

Statutory liabilities
29,497

 
25,492

Other
4,587

 
60

Total
$
57,745

 
$
52,522

OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (NON-CURRENT)
OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (NON-CURRENT)
OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (CURRENT)

Other Current Assets

The following table presents the detail of other current assets (in thousands):
    
 
December 31,
2016
 
December 31,
2015
Inventory
$
13,724

 
$
11,864

Accounts receivable
6,191

 
4,808

Prepaid expenses
7,365

 
7,101

Deferred magstripe reader costs
3,911

 
4,018

Tenant improvement reimbursement receivable
1,189

 
1,788

Deferred hardware costs
4,546

 
1,709

Processing costs receivable
8,593

 
7,847

Other
10,812

 
2,312

Total
$
56,331

 
$
41,447




Accrued Expenses
The following table presents the detail of accrued expenses (in thousands):
 
December 31,
2016
 
December 31,
2015
Accrued hardware costs
$
3,148

 
$
11,622

Processing costs payable
9,655

 
11,417

Accrued professional fees
5,788

 
7,642

Accrued payroll
5,799

 
2,660

Accrued marketing
3,972

 
2,443

Other accrued liabilities
11,181

 
8,617

Total
$
39,543

 
$
44,401


Other Current Liabilities
The following table presents the detail of other current liabilities (in thousands):    
    
 
December 31,
2016
 
December 31,
2015
Settlements payable
$
51,151

 
$
13,105

Employee early exercised stock options
674

 
2,141

Accrued redemptions
1,628

 
1,066

Current portion of deferred rent
2,862

 
2,393

Deferred revenue
5,407

 
6,623

Other
11,901

 
3,617

Total
$
73,623

 
$
28,945

OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (NON-CURRENT)

Other Non-Current Assets

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

 
December 31,
2016
 
December 31,
2015
Deposits
$
1,775

 
$
1,993

Deferred tax assets
306

 
188

Other
1,113

 
1,645

Total
$
3,194

 
$
3,826



Other Non-Current Liabilities
The following table presents the detail of other non-current liabilities (in thousands):
 
December 31,
2016
 
December 31,
2015
Deferred rent
$
23,119

 
$
25,543

Employee early exercised stock options
66

 
1,128

Deferred tax liabilities
476

 
299

Statutory liabilities
29,497

 
25,492

Other
4,587

 
60

Total
$
57,745

 
$
52,522

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

Loans under the credit facility bear interest, at the Company’s option of (i) a base rate based on the highest of the prime rate, the federal funds rate plus 0.50% and an adjusted LIBOR rate for a one-month interest period in each case plus a margin ranging from 0.00% to 1.00%, or (ii) an adjusted LIBOR rate plus a margin ranging from 1.00% to 2.00%. This margin is determined based on the Company’s total leverage ratio for the preceding four fiscal quarters. The Company is obligated to pay other customary fees for a credit facility of this size and type including an annual administrative agent fee of $0.1 million and an unused commitment fee of 0.15%. To date no funds were drawn under the credit facility, with $375.0 million remaining available. The Company paid $0.6 million and $0.5 million in unused commitment fees during the years ended December 31, 2016 and 2015, respectively.
ACCRUED TRANSACTION LOSSES
ACCRUED TRANSACTION LOSSES
ACCRUED TRANSACTION LOSSES
The Company is exposed to transaction losses due to chargebacks as a result of fraud or uncollectibility.
The following table summarizes the activities of the Company’s reserve for transaction losses (in thousands):
    
 
Year Ended December 31,
 
2016
 
2015
 
2014
Accrued transaction losses, beginning of the year
$
17,176

 
$
8,452

 
$
7,488

Provision for transaction losses
50,819

 
43,379

 
18,478

Charge-offs and recoveries to accrued transaction losses
(47,931
)
 
(34,655
)
 
(17,514
)
Accrued transaction losses, end of the year
$
20,064

 
$
17,176

 
$
8,452

INCOME TAXES
INCOME TAXES
INCOME TAXES
The domestic and foreign components of loss before income taxes are as follows (in thousands):
 
Year Ended December 31,
2016
 
2015
 
2014
Domestic
$
(145,499
)
 
$
(157,229
)
 
$
(139,675
)
Foreign
(24,174
)
 
(18,842
)
 
(12,978
)
Loss before income taxes
$
(169,673
)
 
$
(176,071
)
 
$
(152,653
)

The components of the provision for income taxes are as follows (in thousands):
 
Year Ended December 31,
2016
 
2015
 
2014
Current:
 
 
 
 
 
Federal
$
63

 
$
1,662

 
$
2,746

State
527

 
836

 
531

Foreign
1,269

 
1,222

 
827

Total current provision for income taxes
1,859

 
3,720

 
4,104

Deferred:
 
 
 
 
 
Federal
173

 
67

 
(2,503
)
State
18

 
11

 
(161
)
Foreign
(133
)
 
(52
)
 

Total deferred provision for income taxes
58

 
26

 
(2,664
)
Total provision for income taxes
$
1,917

 
$
3,746

 
$
1,440


The following is a reconciliation of the statutory federal income tax rate to the Company's effective tax rate:
 
Balance at December 31,
2016
 
2015
 
2014
Tax at federal statutory rate
34.0
 %
 
34.0
 %
 
34.0
 %
State taxes, net of federal benefit
(0.1
)
 
(0.2
)
 
(0.1
)
Foreign rate differential
(2.4
)
 
(1.8
)
 
(1.5
)
Nondeductible expenses
(3.3
)
 
(3.3
)
 
(1.8
)
Credits
8.5

 
8.2

 
2.7

Other items
(0.4
)
 
(0.4
)
 
0.7

Change in valuation allowance
(37.4
)
 
(38.6
)
 
(35.0
)
Total
(1.1
)%
 
(2.1
)%
 
(1.0
)%

The tax effects of temporary differences and related deferred tax assets and liabilities are as follows (in thousands):
 
Balance at December 31,
2016
 
2015
 
2014
Deferred tax assets:
 
 
 
 
 
Capitalized costs
$
61,897

 
$
67,051

 
$
28,102

Accrued expenses
29,421

 
27,964

 
19,714

Net operating loss carryforwards
65,507

 
36,633

 
54,528

Tax credit carryforwards
38,927

 
25,349

 
11,662

Property, equipment and intangible assets
5,721

 

 

Share-based compensation
52,091

 
36,689

 
13,153

Other
1,640

 
1,469

 
542

Total deferred tax assets
255,204