Q2FY20 Square Inc 10 Q PDF

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UNITEDSTATES SECURITIESANDEXCHANGECOMMISSION Washington,D.C.20549 ______________________

FORM10-Q ______________________ (MarkOne)

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QUARTERLYREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934

ForthequarterlyperiodendedJune30,2020 OR

☐

TRANSITIONREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934

Forthetransitionperiodfrom________to________ CommissionFileNumber:001-37622

______________________

Square,Inc. (Exactnameofregistrantasspecifiedinitscharter)

______________________ Delaware

80-0429876

(Stateorotherjurisdictionof incorporationororganization)

(IRSEmployer IdentificationNo.)

1455MarketStreet,Suite600 SanFrancisco,CA94103 (Addressofprincipalexecutiveoffices,includingzipcode)

(415)375-3176 (Registrant’stelephonenumber,includingareacode)

SecuritiesregisteredpursuanttoSection12(b)oftheAct: Titleofeachclass ClassAcommonstock,$0.0000001parvaluepershare

TradingSymbol(s) SQ

Nameofeachexchangeonwhichregistered NewYorkStockExchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulat S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerg growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 the Exchange Act. Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐

No ☒

As of July 31, 2020, the number of shares of the registrant’s Class A common stock outstanding was 371,293,974 and the number of shares of the registrant’s Cl B common stock outstanding was 72,237,774.

TABLEOFCONTENTS

PageNo. PARTI—FinancialInformation Item 1. Financial Statements Condensed Consolidated Balance Sheets (unaudited) Condensed Consolidated Statements of Operations (unaudited) Condensed Consolidated Statements of Comprehensive Loss (unaudited) Condensed Consolidated Statements of Cash Flows (unaudited) Condensed Consolidated Statements of Stockholders' Equity (unaudited) Notes to the Condensed Consolidated Financial Statements (unaudited) Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures PARTII—OtherInformation Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information Item 6. Exhibits Signatures

5 6 7 8 9 1 4 55 56 57 58 84 84 84 84 84 85

SPECIALNOTEREGARDINGFORWARD-LOOKINGSTATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amende and Section 21E of the Securities Exchange Act of 1934, as amended, that involve substantial risks and uncertainties. Forward-looking statements generally rel to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such “may,” “will,” “appears,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predic “potential,” or “continue,” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentio Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about our future financial performance, t impact of the COVID-19 pandemic and related public health measures on our business, customers, and employees, our expectations regarding transaction and lo losses, the potential exposure as a non-bank participant in the Paycheck Protection Program ("PPP") and its effect on our liquidity and financial results and ability of our customers to comply with requirements and otherwise perform with respect to loans obtained under such program, our anticipated growth and grow strategies and our ability to effectively manage that growth, our ability to invest in and develop our products and services to operate with changing technology, expected benefits of our products to our customers and the impact of our products on our business, and our expectations regarding Gross Payment Volume (GP and revenue, including our expectations regarding the Cash App and Seller ecosystems, our expectations regarding product launches, the expected impact of recent acquisitions, our plans with respect to patents and other intellectual property, our expectations regarding litigation and positions we have taken with resp to our tax classification, our expectations regarding share-based compensation, our expectations regarding the impacts of accounting guidance, our expectati regarding restricted cash, and the sufficiency of our cash and cash equivalents and cash generated from operations to meet our working capital and cap expenditure requirements. We have based the forward-looking statements on our current expectations and projections about future events and trends that we believe may affect business, financial condition, results of operations, prospects, business strategy, and financial needs. The outcome of the events described in these forward-look statements is subject to known and unknown risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this Quarte Report on Form 10-Q. We operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is n possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10 We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events circumstances could differ materially from those described in the forward-looking statements. All forward-looking statements are based on information and estimates available to the Company at the time of this Quarterly Report on Form 10-Q a are not guarantees of future performance. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, exc as required by law.

PartI—FinancialInformation Item1.FinancialStatements SQUARE,INC. CONDENSEDCONSOLIDATEDBALANCESHEETS (Unaudited) (In thousands, except share and per share data) June30,2020

December31,2019

Assets Current assets: Cash and cash equivalents

$

Investments in short-term debt securities Settlements receivable Customer funds Loans held for sale Other current assets

1,972,762

$

1,047,118

714,348 879,464

492,456 588,692

1,733,107 567,499

676,292 164,834

319,890

250,409

6,187,070

3,219,801

167,062 295,759

149,194 266,345

Acquired intangible assets, net Investments in long-term debt securities

99,802 446,685

69,079 537,303

Operating lease right-of-use assets Other non-current assets

449,445 166,449

113,148 196,388

Total current assets Property and equipment, net Goodwill

Total assets

$

7,812,272

$

4,551,258

$

2,568,418

$

1,273,135

LiabilitiesandStockholders’Equity Current liabilities: Customers payable Settlements payable Accrued expenses and other current liabilities

179,131 393,576

95,834 297,841

Operating lease liabilities, current PPP Liquidity Facility advances

43,627 447,764

27,275 —

Total current liabilities

3,632,516

1,694,085

Long-term debt Operating lease liabilities, non-current

1,778,428 384,801

938,832 108,830

Other non-current liabilities Total liabilities Commitments and contingencies (Note 17) Stockholders’ equity: Preferred stock, $0.0000001 par value: 100,000,000 shares authorized at June 30, 2020 and December 31, 2019. None issued and outstanding at June 30, 2020 and December 31, 2019. Class A common stock, $0.0000001 par value: 1,000,000,000 shares authorized at June 30, 2020 and December 31, 2019; 370,102,185 and 352,386,562 issued and outstanding at June 30, 2020 and December 31, 2019, respectively. Class B common stock, $0.0000001 par value: 500,000,000 shares authorized at June 30, 2020 and December 31, 2019; 72,287,165 and 80,410,158 issued and outstanding at June 30, 2020 and December 31, 2019, respectively.

94,461 2,836,208

—

—

—

—

—

Additional paid-in capital Accumulated other comprehensive income Accumulated deficit Total stockholders’ equity $

Total liabilities and stockholders’ equity

90,220 5,885,965

2,223,749 1,629 (510,328)

1,926,307

1,715,050

7,812,272

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4

—

2,549,638 4,366 (627,697) $

4,551,258

SQUARE,INC. CONDENSEDCONSOLIDATEDSTATEMENTSOFOPERATIONS (Unaudited) (In thousands, except per share data) ThreeMonthsEnded June30, 2020 Revenue: Transaction-based revenue

$

SixMonthsEnded June30,

2019

682,572

$

2020

775,510

$

2019

1,440,673

$

1,432,272

Subscription and services-based revenue Hardware revenue

346,275 19,322

251,383 22,260

642,510 39,997

470,240 40,472

Bitcoin revenue

875,456

125,085

1,181,554

190,613

1,923,625

1,174,238

3,304,734

2,133,597

Transaction-based costs Subscription and services-based costs

388,106 50,169

490,349 60,119

853,885 90,880

899,418 120,642

Hardware costs Bitcoin costs

28,315 858,041

33,268 122,938

62,687 1,157,467

60,209 187,634

Total net revenue Cost of revenue:

Amortization of acquired technology

2,231

1,719

4,551

3,095

1,326,862

708,393

2,169,470

1,270,998

596,763

465,845

1,135,264

862,599

206,825

174,201

401,811

328,551

238,096 136,386

156,421 100,508

432,631 265,881

290,134 202,106

37,603 905

34,264 1,294

146,486 1,795

62,105 2,588

Total operating expenses

619,815

466,688

1,248,604

885,484

Operating loss

(23,052)

(843)

(113,340)

(22,885)

14,769 (25,591)

5,143 1,230

23,975 (19,729)

9,824 12,529

(12,230)

(7,216)

(117,586)

(45,238)

(752)

(476)

(217)

Total cost of revenue Gross profit Operating expenses: Product development Sales and marketing General and administrative Transaction and loan losses Amortization of acquired customer assets

Interest expense, net Other expense (income), net Loss before income tax Income tax benefit

(347)

$

(11,478)

$

(6,740)

$

(117,369)

$

(44,891)

Basic

$

(0.03)

$

(0.02)

$

(0.27)

$

(0.11)

Diluted

$

(0.03)

$

(0.02)

$

(0.27)

$

(0.11)

Net loss Net loss per share:

Weighted-average shares used to compute net loss per share Basic

440,117

423,305

437,529

421,297

Diluted

440,117

423,305

437,529

421,297

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5

SQUARE,INC. CONDENSEDCONSOLIDATEDSTATEMENTSOFCOMPREHENSIVELOSS (Unaudited) (In thousands) ThreeMonthsEnded June30, 2020 Net loss Net foreign currency translation adjustments

$

Total comprehensive loss

2019

(11,478) 6,367

Net unrealized gain on revaluation of intercompany loans Net unrealized gain on marketable debt securities

$

— 1,431 $

SixMonthsEnded June30,

(3,680)

2020

(6,740) 261

$

— 2,237 $

(4,242)

2019

(117,369) (2,021) — 4,758

$

(114,632)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6

$

(44,891) 527 75 4,525

$

(39,764)

SQUARE,INC. CONDENSEDCONSOLIDATEDSTATEMENTSOFCASHFLOWS (Unaudited) (In thousands) SixMonthsEnded June30, 2020

2019

Cashflowsfromoperatingactivities: Net loss

$

(117,369)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization

$

(44,891)

41,117

37,754

32,769 990

16,013 —

Share-based compensation Loss (gain) on revaluation of equity investment

173,713 (20,999)

140,554 18,929

Non-cash lease expense Transaction and loan losses

32,343 146,486

14,354 62,105

(1,024)

(2,229)

(302,103) (953,387)

(1,148,376) (125,042)

Purchase of loans held for sale Sales and principal payments of loans held for sale

(1,466,391) 1,041,208

(1,035,500) 975,823

Customers payable Settlements payable

1,291,968 83,297

1,052,867 236,515

Non-cash interest and other Loss on extinguishment of long-term debt

Change in deferred income taxes Changes in operating assets and liabilities: Settlements receivable Customer funds

Charge-offs to accrued transaction losses Other assets and liabilities

(37,783) (96,668)

(36,050) 3,010

(151,833)

165,836

(724,862)

(354,908)

267,686 330,626

220,229 116,522

(265,287) 142,000

(88,064) 63,000

Proceeds from sale of marketable debt securities from customer funds Purchase of property and equipment

22,457 (56,561)

— (30,162)

Payments for other investments Business combinations, net of cash acquired

— (18,354)

(2,000) (20,372)

(302,295)

(95,755)

Net cash provided by (used in) operating activities Cashflowsfrominvestingactivities: Purchase of marketable debt securities Proceeds from maturities of marketable debt securities Proceeds from sale of marketable debt securities Purchase of marketable debt securities from customer funds Proceeds from maturities of marketable debt securities from customer funds

Net cash used in investing activities Cashflowsfromfinancingactivities: Proceeds from issuance of convertible senior notes, net

986,241

—

Purchase of convertible senior note hedges Proceeds from issuance of warrants

(149,200) 99,500

— —

Proceeds from PPP Liquidity Facility advances Payments for tax withholding related to vesting of restricted stock units

447,764 (93,654)

— (106,663)

78,085 (1,924)

66,921 (2,663)

Proceeds from the exercise of stock options and purchases under the employee stock purchase plan, net Other financing activities Net cash provided by (used in) financing activities

1,366,812

Effect of foreign exchange rate on cash and cash equivalents Net increase in cash, cash equivalents, and restricted cash Cash, cash equivalents, and restricted cash, beginning of period Cash, cash equivalents, and restricted cash, end of period

$

(42,405)

(5,182)

2,340

907,502 1,098,706

30,016 632,847

2,006,208

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

$

662,863

7

SQUARE,INC. CONDENSEDCONSOLIDATEDSTATEMENTSOFSTOCKHOLDERS'EQUITY (Unaudited) (In thousands, except for number of shares)

Additionalpaidin capital

ClassAandBcommonstock Shares Amount BalanceatDecember31,2019 Net loss Shares issued in connection with employee stock plans Issuance of common stock in connection with business combination Change in other comprehensive loss Share-based compensation Tax withholding related to vesting of restricted stock units Conversion feature of convertible senior notes, due 2025, net of allocated costs Purchase of bond hedges in conjunction with issuance of convertible senior notes, due 2025 Sale of warrants in conjunction with issuance of convertible senior notes, due 2025 Issuance of common stock in conjunction with the conversion of senior notes, due 2022 BalanceatMarch31,2020 Net ...