SQUARE, INC., 10-Q filed on 5/6/2016
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2016
Apr. 28, 2016
Class A
Apr. 28, 2016
Class B
Document and Entity Information [Abstract]
 
 
 
Entity Registrant Name
Square, Inc. 
 
 
Entity Central Index Key
0001512673 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Non-accelerated Filer 
 
 
Document Type
10-Q 
 
 
Document Period End Date
Mar. 31, 2016 
 
 
Document Fiscal Year Focus
2016 
 
 
Document Fiscal Period Focus
Q1 
 
 
Amendment Flag
false 
 
 
Class of Stock [Line Items]
 
 
 
Entity Common Stock, Shares Outstanding
 
51,465,931 
283,834,631 
CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2016
Dec. 31, 2015
Current assets:
 
 
Cash and cash equivalents
$ 370,646 
$ 470,775 
Short-term investments
43,447 
Restricted cash
13,542 
13,537 
Settlements receivable
189,049 
142,727 
Merchant cash advance receivable, net
48,157 
36,473 
Other current assets
55,211 
42,051 
Total current assets
720,052 
705,563 
Property and equipment, net
89,039 
87,222 
Goodwill
56,699 
56,699 
Acquired intangible assets, net
24,463 
26,776 
Long-term investments
29,715 
Restricted cash
14,994 
14,686 
Other assets
10,107 
3,826 
Total assets
945,069 
894,772 
Current liabilities:
 
 
Accounts payable
19,580 
18,869 
Customers payable
283,860 
224,811 
Accrued transaction losses
15,419 
17,176 
Accrued expenses
97,335 
44,401 
Other current liabilities
33,738 
28,945 
Total current liabilities
449,932 
334,202 
Other liabilities
50,253 
52,522 
Total liabilities
500,185 
386,724 
Commitments and contingencies
   
   
Stockholders’ equity:
 
 
Preferred stock, $0.0000001 par value: 100,000,000 shares authorized at March 31, 2016, and December 31, 2015. None issued and outstanding at March 31, 2016, and December 31, 2015.
Common stock, $0.0000001 par value: 1,000,000,000 Class A shares authorized at both March 31, 2016, and December 31, 2015; 31,717,133 issued and outstanding at both March 31, 2016, and December 31, 2015. 500,000,000 Class B shares authorized at both March 31, 2016, and December 31, 2015; 303,553,308 and 303,232,312 issued and outstanding at March 31, 2016, and December 31, 2015, respectively.
Additional paid-in capital
1,149,634 
1,116,882 
Accumulated deficit
(704,404)
(607,649)
Accumulated other comprehensive loss
(346)
(1,185)
Total stockholders’ equity
444,884 
508,048 
Total liabilities and stockholders’ equity
$ 945,069 
$ 894,772 
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Mar. 31, 2016
Dec. 31, 2015
Class of Stock [Line Items]
 
 
Preferred stock, par value (in USD per share)
$ 0.0000001 
$ 0.0000001 
Preferred stock, shares authorized
100,000,000 
100,000,000 
Preferred stock, shares authorized
Preferred stock, shares outstanding
Class A
 
 
Class of Stock [Line Items]
 
 
Common stock, par value (in USD per share)
$ 0.0000001 
$ 0.0000001 
Common stock, shares authorized
1,000,000,000 
1,000,000,000 
Common stock, shares issued
31,717,133 
31,717,133 
Common stock, shares outstanding
31,717,133 
31,717,133 
Class B
 
 
Class of Stock [Line Items]
 
 
Common stock, par value (in USD per share)
$ 0.0000001 
$ 0.0000001 
Common stock, shares authorized
500,000,000 
500,000,000 
Common stock, shares issued
303,553,308 
303,232,312 
Common stock, shares outstanding
303,553,308 
303,232,312 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Revenue:
 
 
Hardware revenue
$ 16,182 
$ 2,204 
Total net revenue
379,269 
250,557 
Cost of revenue, hardware costs
26,740 
4,197 
Amortization of acquired technology
2,370 
602 
Total cost of revenue
269,029 
176,272 
Gross profit
110,240 
74,285 
Operating expenses:
 
 
Product development
64,592 
39,545 
Sales and marketing
38,496 
36,181 
General and administrative
96,107 
28,119 
Transaction and advance losses
7,861 
16,322 
Amortization of acquired intangible assets
317 
468 
Total operating expenses
207,373 
120,635 
Operating loss
(97,133)
(46,350)
Interest (income) and expense, net
69 
414 
Other (income) and expense, net
(786)
796 
Loss before income tax
(96,416)
(47,560)
Provision for income taxes
339 
418 
Net loss
(96,755)
(47,978)
Net loss per share:
 
 
Basic (in USD per share)
$ (0.29)
$ (0.33)
Diluted (in USD per share)
$ (0.29)
$ (0.33)
Weighted-average shares used to compute net loss per share
 
 
Basic
331,324 
145,069 
Diluted
331,324 
145,069 
Transaction |
Customers Other than Starbucks
 
 
Revenue:
 
 
Revenue
300,453 
211,110 
Cost of services
194,276 
132,107 
Transaction |
Starbucks
 
 
Revenue:
 
 
Revenue
38,838 
29,237 
Cost of services
36,610 
36,211 
Software and data product
 
 
Revenue:
 
 
Revenue
23,796 
8,006 
Cost of services
$ 9,033 
$ 3,155 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Statement of Comprehensive Income [Abstract]
 
 
Net loss
$ (96,755)
$ (47,978)
Net foreign currency translation adjustments
510 
(227)
Net unrealized gain (loss) on revaluation of intercompany loans
253 
Net unrealized gain (loss) on marketable securities
76 
Total comprehensive loss
$ (95,916)
$ (48,205)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Cash flows from operating activities:
 
 
Net loss
$ (96,755)
$ (47,978)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation and amortization
9,118 
5,546 
Share-based compensation
31,198 
13,461 
Provision for transaction losses
7,182 
13,757 
Provision for uncollectible merchant cash advances
73 
2,504 
Deferred provision for income taxes
78 
(207)
Loss (gain) on disposal of property and equipment
(38)
240 
Changes in operating assets and liabilities:
 
 
Settlements receivable
(46,503)
(34,030)
Merchant cash advance receivable
(11,756)
(3,895)
Other current assets
(13,327)
3,210 
Other assets
(6,301)
821 
Accounts payable
2,576 
4,683 
Customers payable
58,866 
38,631 
Charge-offs and recoveries to accrued transaction losses
(8,939)
(5,398)
Accrued expenses
55,810 
(5,443)
Other current liabilities
4,567 
(1,723)
Other noncurrent liabilities
(1,360)
4,871 
Net cash used in operating activities
(15,511)
(10,950)
Cash flows from investing activities:
 
 
Purchase of marketable securities
(73,086)
Purchase of property and equipment
(7,527)
(10,419)
Payment for acquisition of intangible assets
(400)
(100)
Change in restricted cash
(313)
Business acquisitions (net of cash acquired)
(3,750)
Net cash used in investing activities
(81,326)
(14,269)
Cash flows from financing activities:
 
 
Payments of offering costs related to initial public offering
(5,406)
Proceeds from the exercise of stock options
556 
1,749 
Net cash (used in) provided by financing activities
(4,850)
1,749 
Effect of foreign exchange rate changes on cash and cash equivalents
1,558 
(860)
Net decrease in cash and cash equivalents
(100,129)
(24,330)
Cash and cash equivalents, beginning of period
470,775 
225,300 
Cash and cash equivalents, end of period
$ 370,646 
$ 200,970 
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business

    
Square, Inc. (together with its subsidiaries, Square or the Company) creates tools that help sellers of all sizes start, run, and grow their businesses. Square's point-of-sale service offers tools for every part of running a business, from accepting credit cards and tracking inventory, to real-time analytics and invoicing. Square also offers sellers financial and marketing services, including small business financing and customer engagement tools. Businesses and individuals can also use Square Cash, an easy way to send and receive money, as well as Caviar, a food delivery service for popular restaurants. Square was founded in 2009 and is headquartered in San Francisco, with offices in the United States, Canada, Japan, and Australia.


Initial Public Offering

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

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

The accompanying unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature considered necessary to state fairly the Company's 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 months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016, or for any other future annual or interim period.

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

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

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

Concentration of Credit Risk
For the three months ended March 31, 2016 and 2015, the Company had no customer other than Starbucks that accounted for greater than 10% of total net revenue. The Company had three third-party processors that represented approximately 48%, 34%, and 15% of settlements receivable as of March 31, 2016. The same three parties represented approximately 56%, 23%, and 16% of settlements receivable as of December 31, 2015.
The Company places its cash and cash equivalents and investments in marketable securities with large, creditworthy financial institutions. Balances in these accounts may exceed federally insured limits at times.

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

Recently Issued Accounting Standards

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. 2016-08, Principal versus Agent Considerations, which provides implementation guidance on principal versus agent considerations in the new revenue recognition standard. This guidance clarifies how an entity should identify the unit of accounting (i.e., the specified good or service) for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. 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.
RESTRICTED CASH
RESTRICTED CASH
RESTRICTED CASH
    
As of both March 31, 2016 and December 31, 2015, restricted cash of $13.5 million is related to pledged cash deposited into savings accounts at the financial institutions that process the Company's sellers' payment transactions. The Company uses the restricted cash to secure letters of credit with the financial institutions to provide collateral for cash flow timing differences in the processing of these payments. The Company has recorded this amount as a current asset on the condensed consolidated balance sheets due to the short-term nature of these cash flow timing differences and that there is no minimum time frame during which the cash must remain restricted.
    
As of March 31, 2016 and December 31, 2015, the remaining restricted cash of $15.0 million and $14.7 million, respectively, is primarily related to cash deposited into money market funds that is used as collateral pursuant to multi-year lease agreements entered into in 2012 and 2014 (see note 17). 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company measures its cash equivalents and short-term and long-term investments at fair value. The Company classifies its cash equivalents and short-term and long-term investments within Level 1 or Level 2 of the fair value hierarchy because the Company values these investments using quoted market prices or alternative pricing sources and models utilizing market observable inputs.
The Company’s financial assets and liabilities that are measured at fair value on a recurring basis are classified as follows (in thousands):
 
March 31, 2016
 
December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Cash and Cash Equivalents:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
224,602

 
$

 
$

 
$
337,234

 
$

 
$

U.S. agency securities

 
2,500

 

 

 

 

Commercial paper

 
5,346

 

 

 

 

Municipal securities

 
1,672

 

 

 

 

Short-term securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities

 
8,484

 

 

 

 

Corporate bonds

 
4,543

 

 

 

 

Commercial paper

 
20,430

 

 

 

 

U.S. government securities
9,990

 

 

 

 

 

Long-term securities:
 
 
 
 
 
 

 

 

U.S. agency securities

 
7,662

 

 

 

 

Corporate bonds

 
5,908

 

 

 

 

U.S. government securities
16,145

 

 

 

 

 

Total
$
250,737

 
$
56,545

 
$

 
$
337,234

 
$

 
$



The carrying amounts of certain financial instruments, including cash equivalents, settlements receivable, merchant cash advance receivable, accounts payable, customers payable, settlements payable, and debt, approximate their fair values due to their short-term nature.
If applicable, the Company will recognize transfers into and out of levels within the fair value hierarchy at the end of the reporting period in which the actual event or change in circumstance occurs. During the three months ended March 31, 2016 and 2015, the Company did not have any transfers in or out of Level 1, Level 2, or Level 3 assets or liabilities.
INVESTMENTS
INVESTMENTS
INVESTMENTS

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

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

 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Short-term securities:
 
 
 
 
 
 
 
U.S. agency securities
$
8,479

 
$
5

 
$

 
$
8,484

Corporate bonds
4,543

 
5

 
(5
)
 
4,543

Commercial paper
20,430

 

 

 
20,430

U.S. government securities
9,985

 
5

 

 
9,990

Total
$
43,437

 
$
15

 
$
(5
)
 
$
43,447

 
 
 
 
 
 
 
 
Long-term securities:
 
 
 
 
 
 
 
U.S. agency securities
$
7,641

 
$
21

 
$

 
$
7,662

Corporate bonds
5,901

 
7

 

 
5,908

U.S. government securities
16,107

 
38

 

 
16,145

Total
$
29,649

 
$
66

 
$

 
$
29,715



For the three months ended March 31, 2016, gains or losses realized on the sale of investments were insignificant. Investments are reviewed periodically to identify possible other-than-temporary impairments. As the Company has the ability and intent to hold these investments with unrealized losses until a recovery of fair value, or for a reasonable period of time sufficient for the recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2016.

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

 
Amortized Cost
 
Fair Value
Due in one year or less
$
43,437

 
$
43,447

Due in one to five years
29,649

 
29,715

Total
$
73,086

 
$
73,162

MERCHANT CASH ADVANCE RECEIVABLE, NET
MERCHANT CASH ADVANCE RECEIVABLE, NET
MERCHANT CASH ADVANCE RECEIVABLE, NET
The Company enters into purchase and sale transactions with pre-qualified sellers in which the Company purchases a designated amount of future receivables for an upfront cash purchase price. The delivery of the future receivables purchased in exchange for the advance cash purchase price is facilitated through the merchant’s payment processing activities with the Company. There is no economic recourse to the seller in the event that the future receivables are not generated. There is also no fixed period of time in which the seller must deliver the purchased future receivables to the Company, as delivery of the purchased future receivables is contingent on the sellers’ generation of such receivables. The Company has limited contractual remedies in the event that a seller breaches its agreement with the Company (e.g., where a seller does not use the Company as its exclusive processor while future receivables purchased by the Company remain outstanding). Although there is no economic recourse to the seller in the event that the future receivables are not generated, the degree of uncertainty related to this economic benefit is mitigated by the extensive due diligence performed by the Company prior to purchasing the seller’s future receivables and is further mitigated by limited contractual remedies. The Company’s due diligence includes, but is not limited to, detailed analyses of the seller’s historical processing volumes, transaction count, chargebacks, growth, and account longevity.
The Company is exposed to losses related to uncollectible receivables purchased by the Company other than receivables that are sold to third parties in accordance with the Company’s arrangements with these third parties.

The Company establishes reserves for uncollectible receivables based on historical trends, adverse economic conditions, and specific merchant activity. Subsequent delivery to the Company of a previously designated uncollectible receivable is reflected as a reduction in the allowance for uncollectible receivables when the delivery of the receivable occurs.
The following table summarizes the activities of the Company’s allowance for uncollectible receivables (in thousands):
 
Three Months Ended March 31,
 
2016
 
2015
Allowance for uncollectible receivables, beginning of the period
$
7,443

 
$
2,431

Provision for uncollectible receivables
73

 
2,504

Receivables charged off
(58
)
 

Allowance for uncollectible receivables, end of the period
$
7,458

 
$
4,935


    The table above includes a reduction in uncollectible receivables for the three months ended March 31, 2016, primarily as a result of an update to the Company's provision estimates for Square Capital, which the Company continues to refine as more historical data becomes available.
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):    

March 31,
2016

December 31,
2015
Computer equipment
$
46,751


$
43,531

Office furniture and equipment
9,400


9,339

Leasehold improvements
67,714


65,298

Capitalized software
17,209


14,533

Construction in process
61

 
490

Total
141,135


133,191

Less: Accumulated depreciation and amortization
(52,096
)

(45,969
)
Property and equipment, net
$
89,039


$
87,222


Depreciation and amortization expense on property and equipment was $6.4 million for the three months ended March 31, 2016. Depreciation and amortization expense on property and equipment was $4.5 million for the three months ended March 31, 2015.

Construction in Process
Construction in process consists of leasehold improvements and furniture at the Company’s offices under construction as of March 31, 2016 and December 31, 2015. Upon completion of construction, the assets will be depreciated over their useful lives.
GOODWILL
GOODWILL
GOODWILL

Goodwill is recorded when the consideration paid for an acquisition of a business exceeds the fair value of identifiable net tangible and intangible assets acquired. As of March 31, 2016 and December 31, 2015, goodwill was $56.7 million.

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

 
$
(374
)
 
$
911

Technology Assets
29,045

 
(9,014
)
 
20,031

Customer Assets
6,645

 
(3,124
)
 
3,521

Total
$
36,975

 
$
(12,512
)
 
$
24,463


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

 
$
(348
)

$
937

Technology Assets
28,645

 
(6,644
)
 
22,001

Customer Assets
6,645

 
(2,807
)
 
3,838

Total
$
36,575

 
$
(9,799
)
 
$
26,776



The weighted average amortization periods for acquired patents, acquired technology, and customer intangible assets are approximately thirteen years, three years, and six years, respectively.
    
Amortization expense associated with other intangible assets was $2.7 million for the three months ended March 31, 2016. Amortization expense associated with other intangible assets was $1.1 million for the three months ended March 31, 2015.

The total estimated annual future amortization expense of these intangible assets as of March 31, 2016, are as follows (in thousands):
2016 (remaining 9 months)
$
6,259

2017
7,187

2018
5,687

2019
2,983

2020
1,087

Thereafter
1,260

Total
$
24,463

OTHER BALANCE SHEET COMPONENTS (CURRENT)
OTHER BALANCE SHEET COMPONENTS
OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (CURRENT)
Other Current Assets
The following table presents the detail of other current assets (in thousands):
    
 
March 31,
2016
 
December 31,
2015
Accounts receivable
$
3,268

 
$
4,808

Prepaid expenses
12,789

 
7,101

Deferred reader costs
3,218

 
4,018

Inventory
14,878

 
11,864

Tenant improvement reimbursement receivable
2,054

 
1,788

Deferred hardware costs
2,559

 
1,709

Processing costs receivable
10,037

 
7,847

Other
6,408

 
2,916

Total
$
55,211

 
$
42,051



Accrued Expenses
The following table presents the detail of accrued expenses (in thousands):    
 
March 31,
2016
 
December 31,
2015
Accrued hardware costs
$
2,656

 
$
11,622

Processing costs payable
14,651

 
11,417

Accrued professional fees
7,637

 
7,642

Accrued payroll
6,493

 
2,660

Litigation accrual
50,000

 

Other accrued liabilities
15,898

 
11,060

Total
$
97,335

 
$
44,401



Other Current Liabilities
The following table presents the detail of other current liabilities (in thousands):    
    
 
March 31,
2016
 
December 31,
2015
Settlements payable
16,308

 
$
13,105

Employee early exercised stock options
1,663

 
2,141

Accrued redemptions
1,134

 
1,066

Current portion of deferred rent
2,569

 
2,393

Deferred revenue
6,213

 
6,623

Other
5,851

 
3,617

Total
$
33,738

 
$
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):

 
March 31,
2016
 
December 31,
2015
Deposits
$
2,054

 
$
1,993

Deferred tax assets
122

 
188

Other
7,931

 
1,645

Total
$
10,107

 
$
3,826



Other Non-Current Liabilities
The following table presents the detail of other non-current liabilities (in thousands):
 
March 31,
2016
 
December 31,
2015
Deferred rent
$
25,083

 
$
25,543

Employee early exercised stock options
609

 
1,128

Deferred tax liabilities
299

 
299

Statutory liabilities
24,214

 
25,492

Other
48

 
60

Total
$
50,253

 
$
52,522

OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (NON-CURRENT)
OTHER BALANCE SHEET COMPONENTS
OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (CURRENT)
Other Current Assets
The following table presents the detail of other current assets (in thousands):
    
 
March 31,
2016
 
December 31,
2015
Accounts receivable
$
3,268

 
$
4,808

Prepaid expenses
12,789

 
7,101

Deferred reader costs
3,218

 
4,018

Inventory
14,878

 
11,864

Tenant improvement reimbursement receivable
2,054

 
1,788

Deferred hardware costs
2,559

 
1,709

Processing costs receivable
10,037

 
7,847

Other
6,408

 
2,916

Total
$
55,211

 
$
42,051



Accrued Expenses
The following table presents the detail of accrued expenses (in thousands):    
 
March 31,
2016
 
December 31,
2015
Accrued hardware costs
$
2,656

 
$
11,622

Processing costs payable
14,651

 
11,417

Accrued professional fees
7,637

 
7,642

Accrued payroll
6,493

 
2,660

Litigation accrual
50,000

 

Other accrued liabilities
15,898

 
11,060

Total
$
97,335

 
$
44,401



Other Current Liabilities
The following table presents the detail of other current liabilities (in thousands):    
    
 
March 31,
2016
 
December 31,
2015
Settlements payable
16,308

 
$
13,105

Employee early exercised stock options
1,663

 
2,141

Accrued redemptions
1,134

 
1,066

Current portion of deferred rent
2,569

 
2,393

Deferred revenue
6,213

 
6,623

Other
5,851

 
3,617

Total
$
33,738

 
$
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):

 
March 31,
2016
 
December 31,
2015
Deposits
$
2,054

 
$
1,993

Deferred tax assets
122

 
188

Other
7,931

 
1,645

Total
$
10,107

 
$
3,826



Other Non-Current Liabilities
The following table presents the detail of other non-current liabilities (in thousands):
 
March 31,
2016
 
December 31,
2015
Deferred rent
$
25,083

 
$
25,543

Employee early exercised stock options
609

 
1,128

Deferred tax liabilities
299

 
299

Statutory liabilities
24,214

 
25,492

Other
48

 
60

Total
$
50,253

 
$
52,522

DEBT
DEBT
DEBT
In November 2015, the Company entered into a new 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 in unused commitment fees during the three months ended March 31, 2016.
ACCRUED TRANSACTION LOSSES
ACCRUED TRANSACTION LOSSES
ACCRUED TRANSACTION LOSSES
The Company is exposed to transaction losses due to chargebacks as a result of fraud or uncollectibility. Recoveries are reflected as a reduction in the reserve for transaction losses when the recovery occurs.
The following table summarizes the activities of the Company’s reserve for transaction losses (in thousands):
    
 
Three Months Ended March 31,
 
2016
 
2015
Accrued transaction losses, beginning of the period
$
17,176

 
$
8,452

Provision for transaction losses
7,182

 
13,757

Charge-offs and recoveries to accrued transaction losses
(8,939
)
 
(5,398
)
Accrued transaction losses, end of the period
$
15,419

 
$
16,811

INCOME TAXES
INCOME TAXES
INCOME TAXES
The Company recorded an income tax expense of $0.3 million for the three months ended March 31, 2016, compared to income tax expense of $0.4 million for the three months ended March 31, 2015. The Company’s effective tax rate was approximately (0.4)% for the three months ended March 31, 2016, compared to an effective tax rate of (0.9)% for the three months ended March 31, 2015.
The Company’s effective tax rate may be subject to fluctuation during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of forecasted pre-tax earnings in the various jurisdictions in which we operate, valuation allowances against deferred tax assets, the recognition and de-recognition of tax benefits related to uncertain tax positions, and changes in or the interpretation of tax laws in jurisdictions where we conduct business.

As of March 31, 2016, the Company retains a full valuation allowance on its deferred tax assets in the U.S. and certain foreign jurisdictions. The realization of the Company’s deferred tax assets depends primarily on its ability to generate taxable income in future periods. The amount of deferred tax assets considered realizable in future periods may change as management continues to reassess the underlying factors it uses in estimating future taxable income.

The income tax expense recorded for the three months ended March 31, 2016, was primarily due to state and foreign income tax expense. The difference between the effective tax rate and the federal statutory tax rate for the three months ended March 31, 2016, primarily relates to the valuation allowance on the Company’s deferred tax assets.

The tax provision for the three months ended March 31, 2016, was calculated on a jurisdiction basis. We estimated the foreign income tax provision using the effective income tax rate expected to be applicable for the full year.
STOCKHOLDERS' EQUITY
STOCKHOLDERS' EQUITY
STOCKHOLDERS’ EQUITY
Common Stock

The Company has authorized the issuance of Class A common stock and Class B common stock. Class A common stock and Class B common stock are referred to as common stock throughout these Notes to the Condensed Consolidated Financial Statements, unless otherwise noted. As of March 31, 2016, the Company was authorized to issue 1,000,000,000 shares of Class A common stock and 500,000,000 shares of Class B common stock, each with a par value of $0.0000001 per share. As of March 31, 2016, there were 31,717,133 shares of Class A common stock and 303,553,308 shares of Class B common stock outstanding, each with a par value of $0.0000001 per share.

Stock Plans
The Company maintains two share-based employee compensation plans: the 2009 Stock Plan (2009 Plan) and the 2015 Equity Incentive Plan (2015 Plan). The 2015 Plan serves as the successor to the 2009 Plan. The 2015 Plan became effective as of November 17, 2015. Outstanding awards under the 2009 Plan continue to be subject to the terms and conditions of the 2009 Plan. 

Under the 2015 Plan, shares of common stock are reserved for the issuance of incentive and nonstatutory stock options, restricted stock awards, restricted stock units (RSUs), performance shares and stock bonuses to qualified employees, directors and consultants. The shares may be granted at a price per share not less than the fair market value at the date of grant. Initially, 30,000,000 shares were reserved under the 2015 Plan and any shares subject to options or other similar awards granted under the 2009 Plan that expire, are forfeited, are repurchased by the Company or otherwise terminate unexercised will become available under the 2015 Plan. The number of shares available for issuance under the 2015 Plan will be increased on the first day of each fiscal year, in an amount equal to the least of (i) 40,000,000 shares, (ii) 5% of the outstanding shares on the last day of the immediately preceding fiscal year or (iii) such number of shares determined by the Company’s board of directors. As of March 31, 2016, the total number of shares subject to stock options and RSUs outstanding under the 2015 Plan was 8,395,459, and 42,414,446 shares were available for future issuance. As of March 31, 2016, the total number of shares subject to stock options and RSUs outstanding under the 2009 Plan was 101,516,657. As of November 17, 2015, no additional securities will be issued under 2009 Plan.    
A summary of stock option activity for the three months ended March 31, 2016 is as follows (in thousands, except share and per share data):
 
Number of Stock Options Outstanding
 
Weighted
average
exercise
price
 
Weighted
average
remaining
contractual
term
(in years)
 
Aggregate
intrinsic
value
Balance at December 31, 2015
107,515,554

 
$
6.99

 
7.87
 
$
656,194

Granted
20,700

 
9.77

 
 
 
 
Exercised
(327,976
)
 
1.73

 
 
 
 
Forfeited
(3,801,721
)
 
$
12.03

 
 
 
 
Balance at March 31, 2016
103,406,557

 
6.82

 
7.72
 
874,966

Options vested and expected to vest at
 
 
 
 
 
 
 
March 31, 2016
95,493,312

 
6.51

 
7.29
 
837,620

Options exercisable at
 
 
 
 
 
 
 
March 31, 2016
100,569,757

 
6.76

 
7.67
 
857,167



Restricted Stock Activity

The Company issued RSUs to certain employees in fiscal year 2015. These RSUs typically vest over a term of four years.
Activity related to RSUs during the three months ended March 31, 2016 is set forth below:
 
Number of
RSUs
 
Weighted
average grant
date fair value
Unvested at December 31, 2015
3,632,765

 
$
13.14

Granted
3,040,950

 
11.29

Forfeited
(168,156
)
 
$
13.61

Unvested at March 31, 2016
6,505,559

 
$
12.26



Share-Based Compensation
The fair value of stock options and employee stock purchase plan shares granted to employees is estimated on the date of grant using the Black-Scholes-Merton option valuation model.
Effective August 31, 2015, the Company modified all of its nonstatutory stock option grants to extend the exercise term for terminated employees who have completed two years of service. In the event of a termination, the modified expiration date will be the earlier of (i) three years from termination or (ii) one year following an initial public offering, if in each case, the date of termination occurs between August 31, 2015 and the nine-month anniversary of the initial public offering. In all cases, the grants remain subject to earlier expiration in accordance with their original terms. During the three months ended March 31, 2016, share-based compensation expense included $0.7 million related to the vested portion of the impacted options, as a result of the modification. The Company will incur an additional $7.4 million of share-based compensation expense over the remaining vesting periods of the impacted options.
The fair value of stock options granted was estimated using the following weighted-average assumptions:
    
 
Three Months Ended March 31,
 
2016
 
2015
Dividend yield
%
 
%
Risk-free interest rate
1.39
%
 
1.63
%
Expected volatility
43
%
 
54
%
Expected term (years)
6.08

 
6.15



The following table summarizes the effects of share-based compensation on the Company's condensed consolidated statements of operations (in thousands):
 
Three Months Ended March 31,
 
2016
 
2015
Product development
$
21,947

 
$
8,958

Sales and marketing
2,903

 
1,429

General and administrative
6,348

 
3,074

Total
$
31,198

 
$
13,461


    
On November 17, 2015, the Company’s 2015 Employee Stock Purchase Plan (ESPP) became effective. During the three months ended March 31, 2016, the Company recorded $1.5 million of share-based compensation expense related to the ESPP, which is included in the table above. There was no similar activity during the three months ended March 31, 2015.
As of March 31, 2016, there was $241.6 million of total unrecognized compensation cost related to outstanding stock options that is expected to be recognized over a weighted-average period of 2.86 years.
LOSS PER SHARE
LOSS PER SHARE
LOSS PER SHARE
Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted loss per share is the same as basic loss per share for all years presented because the effects of potentially dilutive items were anti-dilutive given the Company’s net loss.
The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):
 
Three Months Ended March 31,
2016
 
2015
Net loss
$
(96,755
)
 
$
(47,978
)
Basic shares:
 
 
 
Weighted-average common shares outstanding
335,177
 
151,171
Weighted-average unvested shares
(3,853
)
 
(6,102
)
Weighted-average shares used to compute basic net loss per share
331,324
 
145,069
Diluted shares:
 
 
 
Weighted-average shares used to compute diluted loss per share
331,324
 
145,069
Net loss per share:
 
 
 
Basic
$
(0.29
)
 
$
(0.33
)
Diluted
$
(0.29
)
 
$
(0.33
)


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

 
Three Months Ended March 31,
 
2016
 
2015
Stock options and restricted stock units
109,912

 
90,583

Common stock warrants
9,544

 
15,762

Preferred stock warrants

 
87

Convertible preferred stock

 
135,253

Unvested shares
3,428

 
6,450

Employee stock purchase plan
635

 

Total anti-dilutive securities
123,519

 
248,135

OTHER INCOME AND EXPENSE, NET
OTHER INCOME AND EXPENSE, NET
OTHER INCOME AND EXPENSE, NET
Other income and expense, net, is comprised of the following (in thousands):
 
Three Months Ended March 31,
 
2016
 
2015
Net (gain) loss on foreign exchange
$
(897
)
 
$
771

Other
111

 
25

Total other (income) and expense, net
$
(786
)
 
$
796

COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES
Operating and Capital Leases
The Company has entered into various non-cancelable operating leases for certain offices with contractual lease periods expiring between 2014 and 2025. The Company recognized total rental expenses under operating leases of $2.8 million for the three months ended March 31, 2016, compared to $3.4 million for the three months ended March 31, 2015.
Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) and future minimum capital lease payments as of March 31, 2016 are as follows (in thousands):
 
Capital
 
Operating
Year:
 
 
 
2016 (remaining 9 months)
$
49

 
$
11,598

2017
50

 
15,607

2018
7

 
15,379

2019

 
15,414

2020

 
15,590

Thereafter

 
51,629

Total
$
106

 
$
125,217

Less amount representing interest
(5
)
 
 
Present value of capital lease obligations
101

 
 
Less current portion of capital lease obligation
(61
)
 
 
Non-current portion of capital lease obligation
$
40

 
 


Litigation
The Company is currently a party to, and may in the future be involved in, various litigation matters (including intellectual property litigation), legal claims, and government investigations. Notably, the Company is currently involved in ongoing legal proceedings with Robert E. Morley and REM Holdings 3, LLC (REM). In two related proceedings, the Company is litigating disputes over certain patents and over Mr. Morley’s early involvement in the business enterprise that became Square.

On December 1, 2010, the Company, along with its co-founder Jim McKelvey, filed a complaint (2010 Complaint) in the United States District Court for the Eastern District of Missouri (District Court), which, as amended, concerns the inventorship, ownership, implied license, non-infringement, invalidity, and unenforceability of three patents: U.S. Patent Nos. 7,918,394 (‘394 Patent), 7,810,729 (‘729 Patent), and 7,896,248 (‘248 Patent). All three patents are in a single patent family directed to card reader technology. The patents, which the U.S. Patent and Trademark Office (PTO) granted in 2010 and 2011, name Mr. Morley as the sole inventor and REM as their assignee of rights. The 2010 Complaint sought to add Mr. McKelvey as a named inventor of those patents given his significant contributions to the claimed inventions. REM counterclaimed, alleging infringement by Square of the three patents, and the Company subsequently requested that the PTO reexamine those patents.

On January 17, 2012, the PTO issued a reexamination certificate invalidating the entirety of the ‘394 Patent. With the ‘394 Patent invalidated, two patents remained for consideration by the PTO: the ‘729 Patent and the ‘248 Patent. In April 2012, the PTO reexamination examiner closed prosecution on those two patents, rejecting all of the claims of the ‘729 Patent and 13 of the 20 claims of the ‘248 Patent as invalid in view of prior art. REM appealed the reexamination examiner’s rejections on these two remaining patents to the Patent Office Trial and Appeals Board (PTAB), and the Company appealed to have the PTAB reject the remaining seven claims of the ‘248 Patent and to recognize additional grounds for rejection of the previously rejected ‘248 Patent and ‘729 Patent claims. In March 2014, the PTAB issued a decision in the Company's favor, affirming the rejection of all claims of the ‘729 Patent, affirming the rejection of the 13 claims of the ‘248 Patent, and ruling that the reexamination examiner should also reject the remaining seven claims of the ‘248 Patent (having so ruled, the PTAB did not need to consider additional grounds for rejecting the ‘248 and ‘729 Patent claims). Following the PTAB’s ruling, REM filed a response on the ‘248 Patent, substantially amending (i.e., adding new limitations to) five of the seven claims the PTAB had found to be unpatentable. On June 5, 2015, the PTO reexamination examiner, having considered the newly amended claims on remand, issued a preliminary determination that the new limitations allowed those five dependent claims to overcome the grounds for the PTAB’s rejection ruling. The PTO reexamination examiner noted, however, that at least four of the five new claims were still unpatentable because they were indefinite, impermissibly broad, or lacked support in the specification. Additionally, on September 8, 2015, REM filed a notice of appeal at the Court of Appeals for the Federal Circuit challenging the PTAB’s decision regarding the ‘729 Patent. The Company's arguments with respect to the remaining claims of the ‘248 Patent at the PTAB and the appeal by REM with respect to the ‘729 Patent are still pending, and the Company intends to pursue them vigorously. With the exception of these five more recently amended claims, which have not yet progressed beyond preliminary reexamination examiner review, all of the claims from all three patents asserted in the 2010 Complaint have either been canceled or otherwise found unpatentable by the PTAB.

On January 30, 2014, three weeks after the PTAB hearing that resulted in the rejection of all of Mr. Morley’s and REM’s remaining claims of the patents in the 2010 Complaint, Mr. Morley and REM filed a complaint against the Company and against Jack Dorsey and Mr. McKelvey, in the District Court, alleging that the formation of Square and the development of the Company's card reader and decoding technologies constituted, among other things, breach of an alleged joint venture, fraud, negligent misrepresentation, civil conspiracy, unjust enrichment, and misappropriation of trade secrets, as well as other related claims (2014 Complaint). Mr. Morley contends as part of his alleged joint venture claim, among others, that he was an equal partner with Mr. Dorsey and Mr. McKelvey in the business enterprise that ultimately evolved into Square, and that Mr. Dorsey and Mr. McKelvey breached their alleged joint venture agreement with Mr. Morley by excluding him from ownership in Square. Mr. Morley claims that to the extent the defendants contend that no joint venture was formed, Mr. McKelvey and Mr. Dorsey committed fraud, negligent misrepresentation, and/or fraudulent nondisclosure. The 2014 Complaint also alleges infringement of another patent related to the ‘248, ‘394, and ‘729 Patents, U.S. Patent No. 8,584,946 (‘946 Patent). Mr. Morley is seeking a judgment and order that Square, Mr. Dorsey, and Mr. McKelvey hold ownership of Square in constructive trust for Mr. Morley, as well as a variety of additional damages, injunctive relief, royalties, and correction of inventorship of certain of the Company's patents.

Even prior to the filing of the 2014 Complaint, on December 31, 2013, the Company had filed a petition at the PTAB requesting inter partes review (IPR) proceedings to invalidate the ‘946 Patent. On July 7, 2015, the PTAB issued a decision on the IPR, rejecting 12 of the 17 claims of the ‘946 patent, including all independent claims, to be invalid based on prior art. On November 20, 2015, the PTAB rejected two additional claims of the ‘946 patent in response to the Company's request for rehearing. Consequently, 14 of the 17 claims of the ‘946 patent stand rejected. On February 9, 2016, the Company filed an ex parte reexamination request at the patent office to invalidate the three remaining claims of the ‘946 patent. On March 30, 2016, the patent office granted the Company's request and instituted reexamination on all three claims.

The Company moved to consolidate the 2014 Complaint with the 2010 Complaint (the Complaints), and the District Court granted the Company's motion on July 16, 2014. The Company moved to dismiss certain claims as time barred under California and Delaware law, and the District Court denied the motion on October 16, 2014, applying Missouri law. The Company moved to stay counts of the 2014 Complaint related to alleged infringement of the ‘946 Patent and inventorship of certain of its patents, pending the ongoing PTO proceedings, and on April 2, 2015, the District Court granted the Company's motion to stay. The District Court has issued a scheduling order that sets forth the current expected schedule of important events in the proceedings, but no assurances can be given that the schedule will not change. A two-week trial is currently scheduled for June 13, 2016. The Company is vigorously defending against the Complaints. Notably, the Company filed a Motion for Summary Judgment on January 20, 2016. On April 22, 2016, the District Court denied the Company's Motion for Summary Judgment. The Company recently signed a binding term sheet with Mr. Morley and REM stipulating the material terms of a settlement. While the final definitive agreement has not yet been finalized, the Company recorded a charge of $50.0 million in general and administrative expenses for three months ended March 31, 2016. Until the Company enters into a final definitive agreement, the Company can make no assurances about the specific settlement terms, including monetary and nonmonetary terms.

Additionally, the Company is involved in a class action lawsuit concerning independent contractors in connection with the Company's Caviar business. On March 19, 2015, Jeffry Levin, on behalf of a putative nationwide class, filed a lawsuit in the Northern District of California against the Company's wholly owned subsidiary, Caviar, Inc., which, as amended, alleges that Caviar misclassified Mr. Levin and other similarly situated couriers as independent contractors and, in doing so, violated various provisions of the California Labor Code and California Business and Professions Code by requiring them to pay various business expenses that should have been borne by Caviar. Mr. Levin also sought an award of penalties pursuant to the Labor Code Private Attorneys General Act of 2004 on behalf of the putative class. On March 29, 2016, the Court entered a Notice of Intent to Dismiss the lawsuit, and on May 2, 2016, the Court dismissed the lawsuit in its entirety. The parties stipulated that certain dismissed claims may be pursued by a different courier, if plaintiff's counsel so chooses.

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

 
Three Months Ended March 31,
 
2016
 
2015
Revenue
 
 
 
United States
$
367,164

 
$
242,955

International
12,105

 
7,602

Total net revenue
$
379,269

 
$
250,557



No individual country from the international markets contributed in excess of 10% of total revenue for three months ended March 31, 2016, and 2015.

Long-Lived Assets
The following table sets forth long-lived assets by geographic area (in thousands):
 
March 31,
2016
 
December 31,
2015
Long-lived assets
 
 
 
United States
$
166,670

 
$
168,583

International
3,531

 
2,114

Total long-lived assets
$
170,201

 
$
170,697

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

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

 
Three Months Ended March 31,
 
2016
 
2015
Supplemental Cash Flow Data:
 
 
 
Cash paid for interest
$
142

 
$
418

Cash paid for income taxes
220

 
420

Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Change in purchases of property and equipment in accounts payable and accrued expenses
(657
)
 
3,662

Unpaid offering costs related to initial public offering
124

 

Fair value of shares issued related to acquisitions

 
22,887

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

The accompanying unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature considered necessary to state fairly the Company's 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 months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016, or for any other future annual or interim period.

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk,” and the Consolidated Financial Statements and notes thereto included in Items 7, 7A, and 8, respectively, in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.
The preparation of the Company’s consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, as well as related disclosure of contingent assets and liabilities. Actual results could differ from the Company’s estimates. To the extent that there are material differences between these estimates and actual results, the Company’s financial condition or operating results will be materially affected. The Company bases its estimates on past experience and other assumptions that the Company believes are reasonable under the circumstances, and the Company evaluates these estimates on an ongoing basis.

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

The Company places its cash and cash equivalents and investments in marketable securities with large, creditworthy financial institutions. Balances in these accounts may exceed federally insured limits at times.
Recently Issued Accounting Standards

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. 2016-08, Principal versus Agent Considerations, which provides implementation guidance on principal versus agent considerations in the new revenue recognition standard. This guidance clarifies how an entity should identify the unit of accounting (i.e., the specified good or service) for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS (Tables)
Schedule of Fair Value, Assets Measured on Recurring Basis
The Company’s financial assets and liabilities that are measured at fair value on a recurring basis are classified as follows (in thousands):
 
March 31, 2016
 
December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Cash and Cash Equivalents:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
224,602

 
$

 
$

 
$
337,234

 
$

 
$

U.S. agency securities

 
2,500

 

 

 

 

Commercial paper

 
5,346

 

 

 

 

Municipal securities

 
1,672

 

 

 

 

Short-term securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities

 
8,484

 

 

 

 

Corporate bonds

 
4,543

 

 

 

 

Commercial paper

 
20,430

 

 

 

 

U.S. government securities
9,990

 

 

 

 

 

Long-term securities:
 
 
 
 
 
 

 

 

U.S. agency securities

 
7,662

 

 

 

 

Corporate bonds

 
5,908

 

 

 

 

U.S. government securities
16,145

 

 

 

 

 

Total
$
250,737

 
$
56,545

 
$

 
$
337,234

 
$

 
$

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

 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Short-term securities:
 
 
 
 
 
 
 
U.S. agency securities
$
8,479

 
$
5

 
$

 
$
8,484

Corporate bonds
4,543

 
5

 
(5
)
 
4,543

Commercial paper
20,430

 

 

 
20,430

U.S. government securities
9,985

 
5

 

 
9,990

Total
$
43,437

 
$
15

 
$
(5
)
 
$
43,447

 
 
 
 
 
 
 
 
Long-term securities:
 
 
 
 
 
 
 
U.S. agency securities
$
7,641

 
$
21

 
$

 
$
7,662

Corporate bonds
5,901

 
7

 

 
5,908

U.S. government securities
16,107

 
38

 

 
16,145

Total
$
29,649

 
$
66

 
$

 
$
29,715

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

 
Amortized Cost
 
Fair Value
Due in one year or less
$
43,437

 
$
43,447

Due in one to five years
29,649

 
29,715

Total
$
73,086

 
$
73,162

MERCHANT CASH ADVANCE RECEIVABLE, NET (Tables)
Schedule of Allowance for Uncollectible Merchant Cash Advance Receivables
The following table summarizes the activities of the Company’s allowance for uncollectible receivables (in thousands):
 
Three Months Ended March 31,
 
2016
 
2015
Allowance for uncollectible receivables, beginning of the period
$
7,443

 
$
2,431

Provision for uncollectible receivables
73

 
2,504

Receivables charged off
(58
)
 

Allowance for uncollectible receivables, end of the period
$
7,458

 
$
4,935

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

March 31,
2016

December 31,
2015
Computer equipment
$
46,751


$
43,531

Office furniture and equipment
9,400


9,339

Leasehold improvements
67,714


65,298

Capitalized software
17,209


14,533

Construction in process
61

 
490

Total
141,135


133,191

Less: Accumulated depreciation and amortization
(52,096
)

(45,969
)
Property and equipment, net
$
89,039


$
87,222

ACQUIRED INTANGIBLE ASSETS (Tables)
The following table presents the detail of acquired intangible assets as of the periods presented (in thousands):
 
Balance at March 31, 2016
Cost
 
Accumulated Amortization
 
Net
Patent
$
1,285

 
$
(374
)
 
$
911

Technology Assets
29,045

 
(9,014
)
 
20,031

Customer Assets
6,645

 
(3,124
)
 
3,521

Total
$
36,975

 
$
(12,512
)
 
$
24,463


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

 
$
(348
)

$
937

Technology Assets
28,645

 
(6,644
)
 
22,001

Customer Assets
6,645

 
(2,807
)
 
3,838

Total
$
36,575

 
$
(9,799
)
 
$
26,776

The total estimated annual future amortization expense of these intangible assets as of March 31, 2016, are as follows (in thousands):
2016 (remaining 9 months)
$
6,259

2017
7,187

2018
5,687

2019
2,983

2020
1,087

Thereafter
1,260

Total
$
24,463

OTHER BALANCE SHEET COMPONENTS (CURRENT) (Tables)
The following table presents the detail of other current assets (in thousands):
    
 
March 31,
2016
 
December 31,
2015
Accounts receivable
$
3,268

 
$
4,808

Prepaid expenses
12,789

 
7,101

Deferred reader costs
3,218

 
4,018

Inventory
14,878

 
11,864

Tenant improvement reimbursement receivable
2,054

 
1,788

Deferred hardware costs
2,559

 
1,709

Processing costs receivable
10,037

 
7,847

Other
6,408

 
2,916

Total
$
55,211

 
$
42,051

The following table presents the detail of accrued expenses (in thousands):    
 
March 31,
2016
 
December 31,
2015
Accrued hardware costs
$
2,656

 
$
11,622

Processing costs payable
14,651

 
11,417

Accrued professional fees
7,637

 
7,642

Accrued payroll
6,493

 
2,660

Litigation accrual
50,000

 

Other accrued liabilities
15,898

 
11,060

Total
$
97,335

 
$
44,401

The following table presents the detail of other current liabilities (in thousands):    
    
 
March 31,
2016
 
December 31,
2015
Settlements payable
16,308

 
$
13,105

Employee early exercised stock options
1,663

 
2,141

Accrued redemptions
1,134

 
1,066

Current portion of deferred rent
2,569

 
2,393

Deferred revenue
6,213

 
6,623

Other
5,851

 
3,617

Total
$
33,738

 
$
28,945

OTHER CONSOLIDATED BALANCE SHEET COMPONENTS (NON-CURRENT) (Tables)
The following table presents the detail of other non-current assets (in thousands):

 
March 31,
2016
 
December 31,
2015
Deposits
$
2,054

 
$
1,993

Deferred tax assets
122

 
188

Other
7,931

 
1,645

Total
$
10,107

 
$
3,826

The following table presents the detail of other non-current liabilities (in thousands):
 
March 31,
2016
 
December 31,
2015
Deferred rent
$
25,083

 
$
25,543

Employee early exercised stock options
609

 
1,128

Deferred tax liabilities
299

 
299

Statutory liabilities
24,214

 
25,492

Other
48

 
60

Total
$
50,253

 
$
52,522

ACCRUED TRANSACTION LOSSES (Tables)
Schedule of Reserve for Transaction Losses
The following table summarizes the activities of the Company’s reserve for transaction losses (in thousands):
    
 
Three Months Ended March 31,
 
2016
 
2015
Accrued transaction losses, beginning of the period
$
17,176

 
$
8,452

Provision for transaction losses
7,182

 
13,757

Charge-offs and recoveries to accrued transaction losses
(8,939
)
 
(5,398
)
Accrued transaction losses, end of the period
$
15,419

 
$
16,811

STOCKHOLDERS' EQUITY (Tables)
A summary of stock option activity for the three months ended March 31, 2016 is as follows (in thousands, except share and per share data):
 
Number of Stock Options Outstanding
 
Weighted
average
exercise
price
 
Weighted
average
remaining
contractual
term
(in years)
 
Aggregate
intrinsic
value
Balance at December 31, 2015
107,515,554

 
$
6.99

 
7.87
 
$
656,194

Granted
20,700

 
9.77

 
 
 
 
Exercised
(327,976
)
 
1.73

 
 
 
 
Forfeited
(3,801,721
)
 
$
12.03

 
 
 
 
Balance at March 31, 2016
103,406,557

 
6.82

 
7.72
 
874,966

Options vested and expected to vest at
 
 
 
 
 
 
 
March 31, 2016
95,493,312

 
6.51

 
7.29
 
837,620

Options exercisable at
 
 
 
 
 
 
 
March 31, 2016
100,569,757

 
6.76

 
7.67
 
857,167

Activity related to RSUs during the three months ended March 31, 2016 is set forth below:
 
Number of
RSUs
 
Weighted
average grant
date fair value
Unvested at December 31, 2015
3,632,765

 
$
13.14

Granted
3,040,950

 
11.29

Forfeited
(168,156
)
 
$
13.61