BLOCK, INC. You should read the following discussion and analysis in conjunction with the information set forth within the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K. The statements in this discussion regarding our expectations of our future performance, liquidity and capital resources, our plans, estimates, beliefs and expectations that involve risks and uncertainties, and other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q. Our actual results may differ materially from those contained in or implied by any forward-looking statements.
Overview
OnDecember 1, 2021 , we changed our name from Square to Block. Block is the name for the company as a corporate entity. We started Block with the Square ecosystem inFebruary 2009 to enable businesses (sellers) to accept card payments, an important capability that was previously inaccessible to many businesses. However, sellers need many solutions to thrive, and we have expanded to provide them additional products and services and to give them access to a cohesive ecosystem of tools to help them manage and grow their businesses. Similarly, with Cash App, we have built an ecosystem of financial services to help individuals manage their money. We also added TIDAL and TBD as businesses to contribute to our purpose of economic empowerment. TIDAL, a global music and entertainment platform, focuses on putting both the artist experience and fan experience at the center of decisions, providing artists direct access to their audience, and allowing fans deeper connections to their favorite artists through original, exclusive, and curated content and events. TBD, a bitcoin-focused business, was established to build an open developer platform with the goal of making it easy to create non-custodial, permissionless, and decentralized financial services. InJanuary 2022 , we completed the acquisition of Afterpay Limited, a buy now pay later ("BNPL") platform that facilitates commerce between retail merchants and consumers by allowing its retail merchant clients to offer their customers the ability to buy goods and services on a BNPL basis. Square is a cohesive commerce ecosystem that helps sellers start, run, and grow their businesses, and consists of over 30 distinct software, hardware, and financial services products. We monetize the majority of these products through a combination of transaction, subscription, and service fees. Our suite of cloud-based software solutions are integrated to create a seamless experience and enable a holistic view of sales, customers, employees, and locations. With our offerings, a seller can accept payments in person via swipe, dip, or tap of a card, or online via Square Invoices,Square Virtual Terminal , or the seller's website. We also provide hardware to facilitate commerce for sellers, which includes magstripe readers, contactless and chip readers, Square Stand,Square Register ,Square Terminal , and third-party peripherals. InJuly 2021 , we launched Square Banking for ourU.S. sellers, which consists of a suite of products including Square Savings, Square Checking, and Square Loans (formerly known asSquare Capital ). Square Checking is offered through a partner bank, and Square Savings and Square Loans are offered through our wholly-owned subsidiarySquare Financial Services, Inc. ("Square Financial Services"). Square Financial Services offers banking services including certain loan and deposit products. In addition tothe United States , we also offer Square Loans inAustralia andCanada . Square Savings allows sellers to automatically set aside funds from daily sales into savings accounts that earn interest. Square Checking provides sellers with anFDIC -insured account allowing them instant access to their sales and the ability to use those funds for business expenses using their Square Debit Card, withdraw from an ATM, transfer via ACH, or pay employees via Square Payroll. Square Loans offers sellers access to business loans based on the seller's payment processing history. We recognize revenue upon the sale of the loans to third-party investors or over time as the sellers pay down the outstanding amounts for the loans that we hold as available for sale or for investment. We have grown rapidly to serve millions of sellers that represent a diverse set of industries including services, food-related business, and retail businesses; and sizes, ranging from a single vendor at a farmers' market to multi-location businesses. Square sellers also span geographies, includingthe United States ,Canada ,Japan ,Australia , theUnited Kingdom ,Ireland ,France , andSpain . Our Cash App ecosystem provides financial tools for individuals to store, send, receive, spend, and invest money. With Cash App, customers can fund their account with a bank account or debit card, send and receive peer-to-peer payments, add physical cash at participating retailers, deposit mobile checks, and receive direct deposit payments. Customers can make purchases with their Cash Card, aVisa prepaid card that is linked to the balance stored in Cash App. Additionally, customers can use CashApp Pay , a checkout option which allows customers to pay using their Cash App account. With Cash Boost, customers receive instant discounts when they make Cash Card purchases at designated merchants. Customers can also use their stored funds to buy and sell bitcoin and equity investments within Cash App. The Cash App ecosystem also includes a tax filing product for individuals, providing a seamless, mobile-first solution for individuals to file their taxes for free. 51 -------------------------------------------------------------------------------- As mentioned above, with the acquisition of Afterpay, we added a BNPL platform to our offerings. Through the use of this BNPL platform, consumers can split their purchases across four installments, generally due in two-week increments, without paying fees (if payments are made on time). Afterpay provides consumers with the ability to get desired items now but pay for them later and can simultaneously help merchants increase sales and order values. The Company pays BNPL sellers the full order value upfront, less a merchant fee, and assumes the risk of non-payment from the end-customer. Apart from capped late payment fees, consumers do not incur additional fees. Afterpay also provides an online shop directory, which allows consumers to search by product category for stores that offer Afterpay as a payment option, and offers an Afterpay in-store card for in-person transactions at a merchant's point of sale. The BNPL platform is being integrated into the Cash App and Square ecosystems, strengthening the connection between these ecosystems, expanding access to more sellers and customers, increasing Square's omnichannel platform, and helping drive more commerce between our sellers and customers. Customers will be able to manage their installments and repayments directly within Cash App, potentially driving increased engagement, while the commerce discovery functionality will be integrated with Cash App to help drive lead generation for merchants and customer engagement.
Update on the Impact of COVID-19 on Current Trends and Outlook
In 2022, our Square business experienced improvements which have been mainly as a result of continued economic recovery and re-openings in the majority ofU.S. markets. We experienced growth in our Square Gross Payment Volume ("GPV," as defined below within Key Operating Metrics and Non-GAAP Financial Measures) performance, as in-person activity at sellers continued to increase on a year-over-year basis. Overall, we continued to experience improvements in our business in our international markets, although regional lockdowns in select markets periodically affected in-person activity. Our Cash App business performed well due to increased consumer spending, as we continued to benefit from the strength of a broader macroeconomic recovery and regional re-openings. Although our business results remain positive, the continued effects of the COVID-19 pandemic on our financial results and the broader economic recovery are unknown. The emergence of new and more transmissible variants of COVID-19 has at times led to a resurgence of the virus, particularly in populations with low vaccination rates. Further, the impacts of inflation on our business and the broader economy, which may be exacerbated by the economic recovery from the COVID-19 pandemic, has impacted consumer spending, and may also impact our financial condition and results of operations. Results of Operations
Revenue (in thousands, except for percentages)
Three Months Ended
March 31,
2022 2021 $ Change % Change
Transaction-based revenue $ 1,232,969 $ 959,733 $ 273,236 28 %
Subscription and services-based revenue 959,557 557,681 401,876 72 %
Hardware revenue 37,326 28,788 8,538 30 %
Bitcoin revenue 1,730,793 3,511,068 (1,780,275) (51) %
Total net revenue $ 3,960,645 $ 5,057,270 $ (1,096,625) (22) %
Total net revenue for the three months ended March 31, 2022 decreased by $1.1
billion , or 22%, compared to the three months ended March 31, 2021 . Bitcoin
revenue decreased by $1.8 billion for the three months ended March 31, 2022
compared to the three months ended March 31, 2021 . Excluding bitcoin revenue,
total net revenue increased by $683.7 million , or 44%, in the three months ended
March 31, 2022 compared to the three months ended March 31, 2021 .
Transaction-based revenue for the three months ended March 31, 2022 increased by
$273.2 million , or 28%, compared to the three months ended March 31, 2021 . This
increase was in-line with the increase in GPV of 31% for the three months ended
March 31, 2022 compared to the three months ended March 31, 2021 . The increase
in transaction-based revenue was driven by:
52
--------------------------------------------------------------------------------
•continued improvements in both card-present and card-not-present volumes as a
result of growth from online channels, including Square Online, Invoices,
•growth in Cash App Business GPV which includes Cash for Business and peer-to-peer payments sent from a credit card. Cash for Business includes peer-to-peer transactions received by business accounts using Cash App.
These factors had varying impacts on GPV growth and may continue to impact our revenues in the future.
Subscription and services-based revenue for the three months endedMarch 31, 2022 increased by$401.9 million , or 72%, compared to the three months endedMarch 31, 2021 . This increase was primarily driven by the revenue generated from the BNPL platform following the acquisition of Afterpay in the first quarter of 2022, which contributed$129.8 million of subscription and services-based revenue in February andMarch 2022 . The increase was also driven by the results of Cash App and Square. The increase in Cash App subscription and services-based revenue is primarily due to increased Cash Card usage and Cash App Instant Deposit volumes. Square subscription and services-based revenue increased primarily due to the increased origination volumes of Square Loans, other software subscriptions, and Instant Transfer for sellers. Subscription and services-based revenue also includes revenue generated from music streaming services following the acquisition of TIDAL in the second quarter of 2021. Hardware revenue for the three months endedMarch 31, 2022 increased by$8.5 million , or 30%, compared to the three months endedMarch 31, 2021 . This increase was primarily a result of an overall increase in sales of hardware across many of our product offerings includingSquare Register ,Square Terminal , and Square Reader. Bitcoin revenue for the three months endedMarch 31, 2022 decreased by$1.8 billion , or 51%, compared to the three months endedMarch 31, 2021 . The amount of bitcoin revenue recognized will fluctuate depending on customer demand as well as changes in the market price of bitcoin. This decrease in the three months endedMarch 31, 2022 was driven primarily by relative stability in the price of bitcoin during the quarter endedMarch 31, 2022 , which reduced customer demand and trading activity compared to the quarter endedMarch 31, 2021 . While bitcoin revenue contributed 44% of the total net revenue in the three months endedMarch 31, 2022 , gross profit generated from bitcoin transactions was only 3% of the total gross profit in the three months endedMarch 31, 2022 , compared to 8% of total gross profit in the three months endedMarch 31, 2021 .
Cost of Revenue (in thousands, except for percentages)
Three Months Ended
March 31,
2022 2021 $ Change % Change
Transaction-based costs $ 718,700 $ 526,779 $ 191,921 36 %
Subscription and services-based costs 195,862 90,373 105,489 117 %
Hardware costs 63,664 40,482 23,182 57 %
Bitcoin costs 1,687,459 3,436,135 (1,748,676) (51) %
Total cost of revenue $ 2,665,685 $ 4,093,769 $ (1,428,084) (35) %
Total cost of revenue for the three months ended March 31, 2022 decreased by
$1.4 billion , or 35%, compared to the three months ended March 31, 2021 . Bitcoin
costs of revenue decreased by $1.7 billion in the three months ended March 31,
2022 , compared to the three months ended March 31, 2021 . Excluding bitcoin costs
of revenue, total cost of revenue increased by approximately $320.6 million , or
49%, in the three months ended March 31, 2022 , compared to the three months
ended March 31, 2021 . Cost of revenue also includes $15.5 million and $4.3
million for the three months ended March 31, 2022 and 2021, respectively,
related to the amortization of acquired developed technology assets, which
includes $8.9 million related to the acquisition of Afterpay in the first
quarter of 2022.
Transaction-based costs increased by $191.9 million , or 36%, compared to the
three months ended March 31, 2021 , while GPV grew by 31% in the same periods.
Transaction-based costs during the three months ended March 31, 2022 were
affected by a decrease in the percentage of debit card transactions which have a
lower cost per transaction.
Subscription and services-based costs for the three months ended March 31, 2022
increased by $105.5 million , or 117%, compared to the three months ended March
31, 2021 . The increase in the three months ended March 31, 2022 was
53
--------------------------------------------------------------------------------
driven primarily by Afterpay costs of revenue of $37.5 million for February and
March of 2022, as well as growth in Cash Card and Instant Deposit activity.
Additionally, these costs for the three months ended March 31, 2022 include
costs related to music streaming services following the acquisition of TIDAL in
the second quarter of 2021, as well as costs associated with Afterpay revenues
following the acquisition of Afterpay in the first quarter of 2022.
Hardware costs for the three months ended March 31, 2022 increased by $23.2
million , or 57%, compared to the three months ended March 31, 2021 . The increase
was due to the increased sales of hardware, as further discussed in hardware
revenue above, as well as increased purchase price variances and inbound
shipping rates due to supply chain disruptions.
Bitcoin costs for the three months ended March 31, 2022 decreased by $1.7
billion , or 51%, compared to the three months ended March 31, 2021 . Bitcoin cost
of revenue comprises of the total amounts we pay to purchase bitcoin, which will
fluctuate in line with bitcoin revenue.
Operating Expenses (in thousands, except for percentages)
Three Months Ended
March 31,
2022 2021 $ Change % Change
Product development $ 484,761 $ 310,141 $ 174,620 56 %
% of total net revenue 12 % 6 %
Sales and marketing $ 501,562 $ 349,460 $ 152,102 44 %
% of total net revenue 13 % 7 %
General and administrative $ 444,276 $ 195,909 $ 248,367 127 %
% of total net revenue 11 % 4 %
Transaction, loan, and consumer receivable losses $ 91,150 $ 20,395 $ 70,755 347 %
% of total net revenue 2 % - %
Bitcoin impairment losses $ - $ 19,860 $ (19,860) (100) %
% of total net revenue - % - %
Total operating expenses $ 1,521,749 $ 895,765 $ 625,984 70 %
Product development expenses for the three months ended March 31, 2022 increased
by $174.6 million , or 56%, compared to the three months ended March 31, 2021 ,
due primarily to the following:
•an increase of $126.2 million in personnel costs for the three months ended
March 31, 2022 , related to an increase in headcount among our engineering, data
science, and design teams, as we continue to improve and diversify our products.
The increase in personnel related costs includes an increase in share-based
compensation expense of $58.2 million for the three months ended March 31, 2022 ;
•an increase of $25.8 million in depreciation and amortization for the three
months ended March 31, 2022 , primarily as a result of the acquired intangible
assets from Afterpay which increased the amortization of intangibles by $22.1
million . Refer to Note 11, Acquired Intangible Assets within Notes to the
Condensed Consolidated Financial Statements for more details; and
•an increase of $24.8 million in software and data center costs, consulting, and
certain Cash App crypto networks operating costs for the three months ended
March 31, 2022 , as a result of increased capacity needs and expansion of our
cloud-based services. Beginning in the third quarter of 2021, certain operating
costs related to Cash App crypto network products that are offered for free were
reclassified to sales and marketing, while the portion of operating costs
attributable to revenue-generating products have been reclassified to cost of
revenues.
Sales and marketing expenses for the three months ended March 31, 2022 increased
by $152.1 million or 44%, compared to the three months ended March 31, 2021 ,
primarily due to the following:
•an increase of $36.9 million in sales and marketing personnel costs for the
three months ended March 31, 2022 , to enable growth initiatives. The increase in
personnel related costs includes an increase in share-based compensation
54
--------------------------------------------------------------------------------
expense of $10.4 million for the three months ended March 31, 2022 ;
•an increase of $29.3 million in advertising costs for our Square services for
the three months ended March 31, 2022 , primarily from increased online and
television marketing campaigns;
•an increase in Cash App marketing costs for the three months ended March 31,
2022 of $18.7 million . For the three months ended March 31, 2022 compared to the
three months ended March 31, 2021 , Cash App customer acquisition costs increased
by $32.8 million and peer-to-peer risk loss increased by $16.1 million . Cash App
customer acquisition costs include advertising costs and costs associated with
various incentives to customers. We consider the free services such as stock
investing, Cash App Taxes, and certain Cash Card and peer-to-peer services to
Cash App customers to be marketing initiatives aimed at attracting new customers
and encouraging the usage of Cash App; and
•an increase in sales and marketing expenses due to the recent acquisitions of
Afterpay and TIDAL, completed in the first quarter of 2022 and second quarter of
2021, respectively.
General and administrative expenses for the three months ended March 31, 2022
increased by $248.4 million or 127%, compared to the three months ended March
31, 2021 , primarily due to the following:
•an increase of $164.7 million in general and administrative personnel costs for
the three months ended March 31, 2022 , mainly as a result of additions to our
customer support, finance, and legal personnel as we continued to add resources
and skills to support our long-term growth as our business continues to scale.
The increase in personnel related costs includes an increase in share-based
compensation expense of $21.9 million for the three months ended March 31, 2022 ;
•acquisition-related integration and other expenses for Afterpay of $42.4
million , as well as a $66.3 million one-time charge related to the acceleration
of various stock compensation arrangements in connection with the Afterpay
acquisition, which was additional to ongoing share-based compensation expense
for Afterpay employees; and
•an increase in software and third-party legal, subscription costs and other professional fees, and other administrative expenses.
Transaction, loan, and consumer receivable losses for the three months endedMarch 31, 2022 increased by$70.8 million , or 347%, compared to the three months endedMarch 31, 2021 , primarily due to the following:
•an increase in the allowance for credit losses related to consumer receivables
from the time of acquisition of Afterpay to
•an increase in transaction losses for the three months endedMarch 31, 2022 of$25.5 million compared to the three months endedMarch 31, 2021 . The increase in the three months endedMarch 31, 2022 was primarily due to lower transaction losses in the three months endedMarch 31, 2021 following the release of previously established Square risk loss provisions related to the fourth quarter of 2020 as a result of better than expected realized transaction losses. This increase was partially offset by a decrease in transaction losses related Cash App's Cash Card in the three months endedMarch 31, 2022 ; and •an increase in loan losses for the three months endedMarch 31, 2022 of$8.8 million compared to the three months endedMarch 31, 2021 . The increase in loan losses in the three months endedMarch 31, 2022 as compared toMarch 31, 2021 was due to increased loan volumes. Additionally, loan losses in the three months endedMarch 31, 2022 also includes loan losses attributable to early stage products for Cash App. We did not record bitcoin impairment losses in the three months endedMarch 31, 2022 , while bitcoin impairment losses were$19.9 million in the three months endedMarch 31, 2021 . As ofMarch 31, 2022 , the fair value of our investment in bitcoin was$365.5 million based on observable market prices, which is$216.5 million in excess of the carrying value of our investment of$149.0 million . Any unrealized gains on our bitcoin investment will only be recognized upon the sale of such bitcoin investment. 55 -------------------------------------------------------------------------------- Interest Expense, Net, and Other Expense (Income), Net (in thousands, except for percentages) Three Months Ended March 31, 2022 2021 $ Change % Change Interest expense, net$ 15,748 $ 253 $ 15,495 NM Other expense (income), net$ (33,472) $ 27,528 $ (61,000) (222) % Interest expense, net for the three months endedMarch 31, 2022 increased by$15.5 million , compared to the three months endedMarch 31, 2021 . The increase was primarily due to interest expense related to our 2026 Senior Notes and 2031 Senior Notes. Refer to Note 14, Indebtedness within Notes to the Condensed Consolidated Financial Statements for further details. We recognized other income, net for the three months endedMarch 31, 2022 of$33.5 million , compared to other expense, net of$27.5 million for the three months endedMarch 31, 2021 . The change of$61.0 million in the three months endedMarch 31, 2022 was primarily due to recording an unrealized gain of$59.8 million during the three months endedMarch 31, 2022 , arising from the revaluation of a non-marketable investment. Other expense (income), net also includes foreign exchange losses and amortization of investments in marketable debt securities. Segment Results The Company has two reportable segments, Square and Cash App. The results of Afterpay have been equally allocated to the Square and Cash App segments as management has concluded that Afterpay's BNPL platform will contribute equally to both the Square and Cash App platforms. Refer to Note 20, Segment and Geographical Information within Notes to the Condensed Consolidated Financial Statements for more details.
Square Results
The following tables provide a summary of the revenue and gross profit for our Square segment for the three months endedMarch 31, 2022 and 2021 (in thousands): Three Months Ended March 31, 2022 2021 $ Change % Change Net revenue$ 1,443,704 $ 1,017,654 $ 426,050 42 % Cost of revenue 782,483 549,638 232,845 42 % Gross profit$ 661,221 $ 468,016 $ 193,205 41 % Revenue Revenue for the Square segment for the three months endedMarch 31, 2022 increased by$426.1 million , or 42%, compared to the three months endedMarch 31, 2021 . The increase was primarily due to growth in GPV attributable to continued improvements experienced in both card-present volumes, growth in higher-priced card-not-present transactions, as well as an increase in subscription and services-based revenue, which was primarily due to the increased origination volumes of Square Loans, other software subscriptions, Instant Transfer for sellers, and Square Debit Card. The increase in revenue for the Square segment was also due to the revenue generated from the BNPL platform following the acquisition of Afterpay.
Cost of Revenue
Cost of revenue for the Square segment for the three months endedMarch 31, 2022 increased by$232.8 million , or 42%, compared to the three months endedMarch 31, 2021 , which was in line with the increase in Square revenue of$426.1 million or 42%, for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 . Transaction-based costs during the three months endedMarch 31, 2022 were affected by a decrease in the percentage of debit card transactions which have a lower cost per transaction. 56 --------------------------------------------------------------------------------
Cash App Results
The following tables provide a summary of the revenue and gross profit for our Cash App segment for the three months endedMarch 31, 2022 and 2021 (in thousands): Three Months Ended March 31, 2022 2021 $ Change % Change Net revenue$ 2,462,343 $ 4,039,616 $ (1,577,273) (39) % Cost of revenue 1,838,684 3,544,131 (1,705,447) (48) % Gross profit$ 623,659 $ 495,485 $ 128,174 26 % Revenue Revenue for the Cash App segment for the three months endedMarch 31, 2022 decreased by$1.6 billion , or 39%, compared to the three months endedMarch 31, 2021 . The primary driver was a decrease in bitcoin revenue, slightly offset by growth in Cash App Instant Deposit, Cash Card, and Cash for Business. Bitcoin revenue will fluctuate depending on customer demand as well as changes in the market price of bitcoin. The decrease in bitcoin revenue in the three months endedMarch 31, 2022 was driven primarily by relative stability in the price of bitcoin during the quarter endedMarch 31, 2022 , which reduced customer demand and trading activity compared to the quarter endedMarch 31, 2021 . While bitcoin contributed 44% of the total net revenue, gross profit generated from bitcoin was only 3% of the total gross profit. Excluding$1.7 billion in bitcoin revenue, Cash App revenue increased by$203.0 million , or 38%, in the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 due to growth in the number of active Cash App accounts, an increase in the number of business accounts, and revenue generated from the BNPL platform following the acquisition of Afterpay.
Cost of Revenue
Cost of revenue for the Cash App segment for the three months endedMarch 31, 2022 decreased by$1.7 billion , or 48%, compared to the three months endedMarch 31, 2021 . The primary driver was a decrease in bitcoin revenue and the associated costs of such revenue, as discussed further above. Excluding$1.7 billion in bitcoin cost of revenue, Cash App cost of revenue increased by approximately$43.2 million , or 40%, in the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , due to growth in Cash Card, Cash App Instant Deposit, and Cash for Business.
Key Operating Metrics and Non-GAAP Financial Measures
We collect and analyze operating and financial data to evaluate the health of
our business, allocate our resources, and assess our performance. In addition to
total net revenue, net income (loss), and other results under generally accepted
accounting principles ("GAAP"), the following table sets forth key operating
metrics and non-GAAP financial measures we use to evaluate our business. We
believe these metrics and measures are useful to facilitate period-to-period
comparisons of our business, and to facilitate comparisons of our performance to
that of other payment solution providers.
Three Months Ended
March 31,
2022 2021
Gross Payment Volume ("GPV") (in millions) $ 43,504 $ 33,138
Adjusted EBITDA (in thousands) $ 195,361 $ 236,249
Adjusted Net Income Per Share:
Basic $ 0.19 $ 0.47
Diluted $ 0.18 $ 0.41
57--------------------------------------------------------------------------------
Gross Payment Volume ("GPV")
We define GPV as the total dollar amount of all card payments processed by sellers using Square, net of refunds, and ACH transfers. Additionally, GPV includes Cash App Business GPV, which is comprised of Cash App activity related to peer-to-peer transactions received by business accounts, and peer-to-peer payments sent from a credit card.
Adjusted EBITDA and Adjusted Net Income Per Share ("Adjusted EPS")
Adjusted EBITDA and Adjusted EPS are non-GAAP financial measures that represent our net income (loss) and net income (loss) per share, adjusted to eliminate the effect of items as described below. We have included these non-GAAP financial measures in this Quarterly Report on Form 10-Q because they are key measures used by our management to evaluate our operating performance, generate future operating plans, and make strategic decisions, including those relating to operating expenses and the allocation of internal resources. Accordingly, we believe these measures provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. In addition, they provide useful measures for period-to-period comparisons of our business, as they remove the effect of certain non-cash items and certain variable charges. •We believe it is useful to exclude certain non-cash charges, such as amortization of intangible assets, and share-based compensation expenses, from our non-GAAP financial measures because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations. •In connection with the issuance of our convertible senior notes (as described in Note 14, Indebtedness within Notes to the Condensed Consolidated Financial Statements), prior to the adoption of ASU 2020-06 onJanuary 1, 2021 , we were required to recognize non-cash interest expense related to amortization of debt discount and issuance costs. Subsequent to adoption, we only recognize non-cash interest expense related to amortization of debt issuance costs on convertible notes and unsecured notes. We believe that excluding these expenses from our non-GAAP measures is useful to investors because such incremental non-cash interest expense does not represent a current or future cash outflow for the Company and is therefore not indicative of our continuing operations or meaningful when comparing current results to past results. Additionally, for purposes of calculating diluted Adjusted EPS we add back cash interest expense on convertible senior notes, as if converted at the beginning of the period, if the impact is dilutive. •We exclude gain or loss on the disposal of property and equipment, gain or loss on revaluation of equity investments, bitcoin impairment losses, and prior to the adoption of ASU 2020-06 onJanuary 1, 2021 , gain or loss on debt extinguishment related to the conversion of convertible notes, as applicable, from non-GAAP financial measures because we do not believe that these items are reflective of our ongoing business operations. •We also exclude certain transaction and integration costs associated with business combinations, and various other costs that are not normal operating expenses. Transaction costs include amounts paid to redeem acquirees' unvested share-based compensation awards, and legal, accounting, valuation, and due diligence costs. Integration costs include advisory and other professional services or consulting fees necessary to integrate acquired businesses. Other costs that are not reflective of our core business operating expenses may include contingent losses, litigation and regulatory charges. We also add back the impact of the acquired deferred revenue and deferred cost adjustment, which was written down to fair value in purchase accounting.
In addition to the items above, Adjusted EBITDA as a non-GAAP financial measure also excludes depreciation and amortization, other cash interest income and expense, and other income and expense.
Beginning in the first quarter of 2022, we have included the tax impact of the non-GAAP adjustments in determining the Adjusted EPS. We determined the adjusted provision (benefit) for income taxes by calculating the estimated annual effective tax rate based on adjusted pre-tax income and applying it to Adjusted Net Income before income taxes. The prior period Adjusted EPS presentation has also been revised to conform with our new calculation and presentation.
Non-GAAP financial measures have limitations, should be considered as supplemental in nature, and are not meant as a substitute for the related financial information prepared in accordance with GAAP. These limitations include the following:
58
--------------------------------------------------------------------------------•share-based compensation expense has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and an important part of our compensation strategy;
•the intangible assets being amortized may have to be replaced in the future, and the non-GAAP financial measures do not reflect cash capital expenditure requirements for such replacements or for new capital expenditures or other capital commitments; and
•non-GAAP measures do not reflect changes in, or cash requirements for, our working capital needs.
In addition to the limitations above, Adjusted EBITDA as a non-GAAP financial measure does not reflect the effect of depreciation and amortization expense and related cash capital requirements, income taxes that may represent a reduction in cash available to us, and the effect of foreign currency exchange gains or losses, which is included in other income and expense. Other companies, including companies in our industry, may calculate the non-GAAP financial measures differently or not at all, which reduces their usefulness as comparative measures.
Because of these limitations, you should consider the non-GAAP financial measures alongside other financial performance measures, including net income (loss) and our other financial results presented in accordance with GAAP.
The following table presents a reconciliation of net income (loss) to Adjusted EBITDA for each of the periods indicated (in thousands):
Three Months Ended
March 31,
2022 2021
Net income (loss) attributable to common stockholders
Net loss attributable to noncontrolling interests (3,164)
-
Net income (loss) (207,363)
39,008
Share-based compensation expense 275,423
118,623
Depreciation and amortization 70,056
29,201
Acquisition-related, integration and other costs 76,065
26
Interest expense, net 15,748
253
Other expense (income), net (33,472)
27,528
Bitcoin impairment losses -
19,860
Provision (benefit) for income taxes (1,702)
947
Loss on disposal of property and equipment 534
615
Acquired deferred revenue adjustment 118
252
Acquired deferred cost adjustment (46) (64) Adjusted EBITDA$ 195,361 $ 236,249 59
--------------------------------------------------------------------------------
The following table presents a reconciliation of net income (loss) to Adjusted
Net Income and Adjusted EPS for each of the periods indicated, with revisions to
the prior period to include the tax effect of non-GAAP net income adjustments as
described above (in thousands, except per share data):
Three Months Ended
March 31,
2022 2021
Net income (loss) attributable to common stockholders $ (204,199) $ 39,008
Net loss attributable to noncontrolling interests (3,164) -
Net income (loss) (207,363) 39,008
Share-based compensation expense 275,423 118,623
Acquisition-related, integration and other costs 76,065 26
Amortization of intangible assets 42,160 6,884
Amortization of debt discount and issuance costs 3,630 1,832
Loss (gain) on revaluation of equity investments (49,741) 28,900
Bitcoin impairment losses - 19,860
Loss on disposal of property and equipment 534 615
Acquired deferred revenue adjustment 118 252
Acquired deferred cost adjustment (46) (64)
Tax effect of non-GAAP net income adjustments (38,326) (47,537)
Adjusted Net Income - basic $ 102,454 $ 168,399
Cash interest expense on convertible senior notes $ 1,241 $ 1,728
Adjusted Net Income - diluted Weighted-average shares used to compute Adjusted Net Income Per Share: Basic 541,435 454,973 Diluted 583,452 524,540 Adjusted Net Income Per Share: Basic$ 0.19 $ 0.47 Diluted$ 0.18 $ 0.41 Diluted Adjusted Net Income Per Share is computed by dividing Adjusted Net Income by the weighted-average number of shares of common stock outstanding adjusted for the dilutive effect of all potential shares of common stock. In periods when we reported an Adjusted Net Loss, diluted Adjusted Net Income Per Share is the same as basic Adjusted Net Income Per Share because the effects of potentially dilutive items were anti-dilutive. The following table presents a reconciliation of the tax effect of non-GAAP net income adjustments to our provision (benefit) for income taxes (in thousands, except effective tax rate): Three Months Ended March 31, 2022 2021
Provision (benefit) for income taxes, as reported
$ 947 Tax effect of non-GAAP net income adjustments 38,326
47,537
Adjusted provision for income taxes, non-GAAP 36,624 48,484 Non-GAAP Effective Tax Rate 26% 22%
We determined the adjusted provision for income taxes by calculating the estimated annual effective tax rate based on adjusted pre-tax income and applying it to Adjusted Net Income before income taxes.
60
--------------------------------------------------------------------------------Liquidity and Capital Resources
We continued to experience improvements in our business as the majority ofU.S. markets transitioned to varying states of economic recovery and reopenings. Although our outlook and business results continue to be positive, the extent to which the COVID-19 pandemic will further impact our results of operations, financial condition, and cash flows in the future is unknown. We continue to evaluate our investment plans and discretionary expenditures and will make adjustments accordingly.
Liquidity Sources
As ofMarch 31, 2022 , we had approximately$6.9 billion in available funds, including an undrawn amount of$600.0 million available under our revolving credit facility. Additionally, we had$1.6 billion available under our warehouse funding facilities. Refer to Note 14, Indebtedness within Notes to the Condensed Consolidated Financial Statements for more details. We intend to continue focusing on our long-term business initiatives and believe that our available funds are sufficient to meet our liquidity needs for the foreseeable future. We are carefully monitoring and managing our cash position in light of ongoing conditions and levels of operations. As ofMarch 31, 2022 , we were in compliance with all financial covenants associated with the 2020 Credit Facility and Senior Notes. None of our warehouse funding facilities contain financial covenants.
The following table summarizes our cash, cash equivalents, restricted cash, and investments in marketable debt securities (in thousands):
December 31,
March 31, 2022 2021
Cash and cash equivalents $ 3,993,565 $ 4,443,669
Short-term restricted cash 109,450 18,778
Long-term restricted cash 71,702 71,702
Customer funds cash and cash equivalents 3,190,905 2,440,941
Cash, cash equivalents, restricted cash, and customer funds 7,365,622
6,975,090
Investments in short-term debt securities 796,749 869,283
Investments in long-term debt securities 1,333,139 1,526,430
Cash, cash equivalents, restricted cash, customer funds, and investments in marketable debt securities
$
9,495,510
Our principal sources of liquidity are our cash and cash equivalents and investments in marketable debt securities. As ofMarch 31, 2022 , we had$9.5 billion of cash and cash equivalents, restricted cash, customer funds cash and cash equivalents, and investments in marketable debt securities. Customer funds cash and cash equivalents are separate from our corporate funds and are not used for any corporate purposes. These funds are not used for our liquidity, but rather to meet the obligations set aside for customers. Investments in marketable debt securities were held primarily in cash deposits, money market funds, reverse repurchase agreements,U.S. government and agency securities, commercial paper, and corporate bonds. We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Our investments in marketable debt securities are classified as available-for-sale. Excluding customer funds, the balance of cash and cash equivalents, restricted cash, and investments in marketable debt securities as ofMarch 31, 2022 was$6.3 billion . From time to time, we have raised capital by issuing equity, equity-linked, or debt securities such as our convertible senior notes. We do not have any off-balance sheet arrangements during the periods presented. We purchased an aggregate$220.0 million in bitcoin in 2020 and 2021, with no purchases in the three months endedMarch 31, 2022 . We believe cryptocurrency is an instrument of economic empowerment that aligns with our corporate purpose. We expect to hold these investments for the long term but will continue to reassess our investment in bitcoin relative to our balance sheet. As bitcoin is considered an indefinite lived intangible asset, under the accounting policy for such assets we will be required to recognize any decreases in market prices below carrying value as an impairment charge, with any mark up in value prohibited if the market price of bitcoin subsequently increases. We did not record impairment losses in the three months endedMarch 31, 2022 . As ofMarch 31, 2022 , the fair value of our investment in bitcoin was$365.5 million based on observable market prices which is$216.5 million in excess of the Company's carrying value of$149.0 million . Impairment losses cannot be recovered for any subsequent increase in fair value until the sale of the asset. 61 -------------------------------------------------------------------------------- InSeptember 2020 , we announced our intent to invest$100.0 million in supporting underserved communities, particularly, racial and ethnic minority groups who have been disproportionately affected by COVID-19. This initiative further deepens our commitment toward economic empowerment to help broaden such communities' access to financial services. As ofMarch 31, 2022 , we have invested$24.1 million in aggregate towards this initiative, of which$2.2 million was invested in the three months endedMarch 31, 2022 . Our principal commitments consist of convertible notes, senior notes, liquidity facility, revolving credit facility, warehouse funding facilities, operating leases, capital leases, and purchase commitments.
Senior Notes and Convertible Notes
As ofMarch 31, 2022 , we held over$4.6 billion in aggregate principal amount of long-term debt, comprised of$460.6 million in aggregate principal amount of convertible senior notes that mature onMay 15, 2023 ("2023 Convertible Notes"),$1.0 billion in aggregate amount of convertible senior notes that mature onMarch 1, 2025 ("2025 Convertible Notes"),$575.0 million in aggregate amount of convertible senior notes that mature onMay 1, 2026 ("2026 Convertible Notes"), and$575.0 million in aggregate amount of convertible senior notes that mature onNovember 1, 2027 ("2027 Convertible Notes," and together with the 2023 Convertible Notes, 2025 Convertible Notes, and 2026 Convertible Notes, the "Convertible Notes"). Additionally, onMay 20, 2021 , we issued$1.0 billion in aggregate principal amount of outstanding senior unsecured notes that mature onJune 1, 2026 ("2026 Senior Notes") and$1.0 billion in aggregate principal amount of outstanding senior unsecured notes that mature onJune 1, 2031 ("2031 Senior Notes" and, together with the 2026 Senior Notes, the "Senior Notes" and, together with the Convertible Notes, the "Notes"). The 2023 Convertible Notes bear interest at a rate of 0.50% payable semi-annually onMay 15 andNovember 15 of each year, the 2025 Convertible Notes bear interest at a rate of 0.125% payable semi-annually onMarch 1 andSeptember 1 of each year, the 2026 Convertible Notes bear no interest, and the 2027 Convertible Notes bear interest at a rate of 0.25% payable semi-annually onMay 1 andNovember 1 of each year. These Convertible Notes can be converted or repurchased prior to maturity if certain conditions are met. The 2026 Senior Notes bear interest a rate of 2.75% payable semi-annually onJune 1 andDecember 1 , while the 2031 Senior Notes bear interest at a rate of 3.50% payable semi-annually onJune 1 andDecember 1 of each year. These Senior Notes can be redeemed or repurchased prior to maturity if certain conditions are met. OnJanuary 31, 2022 , we closed the acquisition of Afterpay and assumed Afterpay's outstanding convertible notes of$1.1 billion , which we redeemed onMarch 4, 2022 at face value. Refer to Note 9, Acquisitions within Notes to the Condensed Consolidated Financial Statements for further details.
Paycheck Protection Program Liquidity Facility
InJune 2020 , we entered into the Paycheck Protection Program Liquidity Facility ("PPPLF") agreement with theFederal Reserve Bank of San Francisco ("First PPPLF Agreement") to secure additional credit collateralized by PPP loans. The advances under this facility are repayable if the associated PPP loans are forgiven, repaid by a customer or settled by the government guarantee. OnJanuary 29, 2021 , we entered into a second PPPLF agreement with theFederal Reserve Bank of San Francisco ("Second PPPLF Agreement") to secure additional credit, collateralized by loans from the second round of the PPP program, in an aggregate principal amount of up to$1.0 billion under both PPPLF Agreements. The maturity date of any PPPLF advances is the maturity date of the PPP loan pledged to secure the advance, and will be accelerated upon the occurrence of certain events of default. Although loans originated under the PPP have a stated maturity of between two and five years from origination, some of the loans may be forgiven 24 weeks after disbursement if they meet certain specified criteria. The PPPLF advances are repayable if the associated PPP loan is forgiven, repaid by the customer, or settled by the government guarantee. As ofMarch 31, 2022 ,$124.6 million of PPPLF advances were outstanding and are, generally, collateralized by the same value of PPP loans. Any differences between the amounts are generally due to the timing of PPP loan repayment or forgiveness, and repayment of PPPLF advances.
Revolving Credit Facility
We have entered into a revolving credit agreement with certain lenders, as subsequently amended, which provides a$500.0 million senior unsecured revolving credit facility (the "2020 Credit Facility") maturing inMay 2024 . OnFebruary 23, 2022 , the Company entered into a sixth amendment to the Credit Agreement to, among other things, provide for a new tranche of unsecured revolving loan commitments in an aggregate principal amount of up to$100.0 million (the "Tranche B Loans"). Loans under the 2020 Credit Facility, excluding the Tranche B Loans, bear interest at our option of (i) a base rate based on the highest of the prime rate, the federal funds rate plus 0.50%, and the adjusted LIBOR rate plus 1.00%, in each 62 -------------------------------------------------------------------------------- case, plus a margin ranging from 0.25% to 0.75% or (ii) an adjusted LIBOR rate plus a margin ranging from 1.25% to 1.75%. The margin is determined based on our total net leverage ratio, as defined in the agreement. The Tranche B Loans bear interest at the Company's option of (i) an annual rate based on the forward-looking term rate based on the Secured Overnight Financing Rate ("Term SOFR") or (ii) a base rate. Tranche B Loans based on Term SOFR shall bear interest at a rate equal to Term SOFR plus a margin of between 1.25% and 1.75%, depending on the Company's total net leverage ratio. Tranche B Loans based on the base rate shall bear interest at a rate based on the highest of the prime rate, the federal funds rate plus 0.50%, and Term SOFR with a tenor of one-month plus 1.00%, in each case, plus a margin ranging from 0.25% to 0.75%, depending on the Company's total net leverage ratio. We are obligated to pay other customary fees for a credit facility of this size and type including an unused commitment fee of 0.15%. To date, no funds have been drawn and no letters of credit have been issued under the 2020 Credit Facility.
Refer to Note 14, Indebtedness within Notes to the Condensed Consolidated Financial Statements for more details on these transactions.
Warehouse Funding Facilities
Following the acquisition of Afterpay, we assumed Afterpay's existing warehouse
funding facilities ("Warehouse Facilities") with an aggregate commitment amount
of $1.8 billion on a revolving basis, of which $0.2 billion was drawn and $1.6
billion remained available as of March 31, 2022 . The Warehouse Facilities have
been arranged utilizing wholly-owned and consolidated entities formed for the
sole purpose of financing the origination of consumer receivables to partly fund
our BNPL platform. Borrowings under the Warehouse Facilities are secured against
the respective consumer receivables.
Refer to Note 14, Indebtedness within Notes to the Condensed Consolidated Financial Statements for more details.
Cash, Restricted Cash, and Working Capital
We believe that our existing cash and cash equivalents, investment in marketable debt securities, and availability under our line of credit will be sufficient to meet our working capital needs, including any expenditures related to strategic transactions and investment commitments that we may from time to time enter into, and planned capital expenditures for at least the next 12 months. From time to time, we may seek to raise additional capital through equity, equity-linked, and debt financing arrangements. We cannot provide assurance that any additional financing will be available to us on acceptable terms or at all. When we were last rated in 2021, we received a non-investment grade rating byS&P Global Ratings (BB),Fitch Ratings, Inc. (BB) and Moody's Corporation (Ba2). We expect that these credit rating agencies will continue to monitor our performance, including our capital structure and results of operations. Our liquidity, access to capital, and borrowing costs could be adversely impacted by declines in our credit rating. Short-term restricted cash of$109.5 million as ofMarch 31, 2022 reflects pledged cash deposited into savings accounts at the financial institutions that process our sellers' payments transactions and as collateral pursuant to agreements with third-party originating banks for certain loan products. We use the restricted cash to secure letters of credit with these financial institutions to provide collateral for liabilities arising from cash flow timing differences in the processing of these payments. We have recorded this amount as a current asset on our consolidated balance sheets given the short-term nature of these cash flow timing differences and that there is no minimum time frame during which the cash must remain restricted. Additionally, this balance includes certain amounts held as collateral pursuant to multi-year lease agreements, which we expect to become unrestricted within the next year. Long-term restricted cash of$71.7 million as ofMarch 31, 2022 is primarily related to a reserve deposit to satisfy the capital and liquidity requirements associated with the banking operations of SFS mandated by theFDIC , as well as cash deposited into money market funds that is used as collateral pursuant to multi-year lease agreements. We have recorded these amounts as non-current assets on the condensed consolidated balance sheets as we are required to establish and maintain the reserve deposit at all times to support the ongoing liquidity obligations of SFS, and due to certain lease terms extending beyond one year.
We experience significant day-to-day fluctuations in our cash and cash equivalents due to fluctuations in settlements receivable, and customers payable, and hence working capital. These fluctuations are primarily due to:
63
--------------------------------------------------------------------------------
•Timing of period end. For periods that end on a weekend or a bank holiday, our
cash and cash equivalents, settlements receivable, and customers payable
balances typically will be higher than for periods ending on a weekday, as we
settle to our sellers for payment processing activity on business days; and
•Fluctuations in daily GPV. When daily GPV increases, our cash and cash
equivalents, settlements receivable, and customers payable amounts increase.
Typically our settlements receivable and customers payable balances at period
end represent one to four days of receivables and disbursements to be made in
the subsequent period. Customers payable, excluding amounts attributable to Cash
App stored funds, and settlements receivable balances typically move in tandem,
as pay-out and pay-in largely occur on the same business day. However, customers
payable balances will be greater in amount than settlements receivable balances
due to the fact that a subset of funds are held due to unlinked bank accounts,
risk holds, and chargebacks. Also customer funds obligations, which are included
in customers payable, may cause customers payable to trend differently than
settlements receivable. Holidays and day-of-week may also cause significant
volatility in daily GPV amounts.
Cash Flow Activities
The condensed consolidated statements of cash flows for the three months endedMarch 31, 2022 has been revised to reflect changes in the cash flow presentation adopted in 2021. Previously, the total changes in customer funds and customers payable were presented within operating activities within the Company's condensed consolidated statements of cash flows. The adjustment resulted in reclassifying changes in customer funds, and cash and cash equivalents that were associated with customers payable as financing activities. The adjustment also resulted in the portion of customer funds that is held in cash and cash equivalents, restricted cash, and customer funds to be included in the beginning and ending period totals of cash, cash equivalents, restricted cash, and customer funds. Prior period amounts have been adjusted to this presentation. Refer to Note 1, Description of the Business and Summary of Significant Accounting Policies within Notes to the Condensed Consolidated Financial Statements for further details.
The following table summarizes our cash flow activities (in thousands):
Three Months Ended
March 31,
2022 2021
Net cash provided by (used in) operating activities $ 229,423 $ (29,193)
Net cash provided by (used in) investing activities 1,130,613 (158,023)
Net cash provided by (used in) financing activities (968,556) 1,119,588
Effect of foreign exchange rate on cash and cash equivalents (948)
(8,206)
Net increase in cash, cash equivalents, restricted cash, and
customer funds $ 390,532 $ 924,166
64--------------------------------------------------------------------------------
Cash Flows from Operating Activities
Cash provided by, or used in, operating activities consisted of our net income (loss) adjusted for certain non-cash items, including gain or loss on revaluation of equity investments, depreciation and amortization, non-cash interest and other expense, share-based compensation expense, transaction and loan losses, bitcoin impairment losses, deferred income taxes, non-cash lease expense, gain on sale of asset group, as well as the effect of changes in operating assets and liabilities, including working capital. For the three months endedMarch 31, 2022 , cash provided by operating activities was$229.4 million . Net loss was$207.4 million , adjusted for the add back of non-cash expenses of$337.6 million , consisting primarily of share-based compensation; transaction, loan, and consumer receivable losses; depreciation and amortization; and gains on revaluation of equity investments, as well as non-cash lease expenses, which all contributed positively to operating activities. Additionally, there was a net inflow from the repayment and forgiveness of PPP loans, and a net outflow related to changes in other assets and liabilities of$61.4 million due to timing of period end. For the three months endedMarch 31, 2021 , cash used in operating activities was$29.2 million . Net income was$39.0 million , adjusted for the add back of non-cash expenses of$242.6 million , consisting primarily of share-based compensation, transaction and loan losses, depreciation and amortization, loss on revaluation of equity investment, and bitcoin impairment losses, which contributed positively to operating activities. This was offset by net outflow of PPP loans of$271.6 million , as well as a net outflow from changes in other assets and liabilities of$39.2 million due to timing.
Cash Flows from Investing Activities
Cash flows provided by, or used in, investing activities primarily relate to capital expenditures to support our growth, investments in marketable debt securities, bitcoin, and business acquisitions.
For the three months endedMarch 31, 2022 , cash provided by investing activities was$1.1 billion , primarily due to the net proceeds from the sales and maturities of marketable securities including investments from customer funds of$620.5 million , and the net cash acquired through the acquisition of Afterpay of$570.7 million . These were partially offset by the purchase of marketable debt securities, property and equipment and other investments of$210.0 million ,$41.2 million , and$16.5 million , respectively. For the three months endedMarch 31, 2021 , cash used in investing activities was$158.0 million , primarily due to purchases of bitcoin and other investments of$170.0 million , as well as the purchase of property and equipment of$34.1 million , partially offset by the net proceeds from investments of marketable securities including investments from customer funds of$55.6 million and the proceeds from sale of equity investments of$19.0 million .
Cash Flows from Financing Activities
For the three months endedMarch 31, 2022 , cash used in financing activities was$1.0 billion primarily as a result of the payment to redeem convertible notes assumed upon the acquisition of Afterpay of$1.1 billion , repayments of the PPPLF advances of$372.9 million , partially offset by the change in customer funds of$359.9 million and net proceeds from Warehouse Facilities borrowings of$92.9 million . For the three months endedMarch 31, 2021 , cash provided by financing activities was$1.1 billion primarily as a result of the change in customer funds of$938.6 million as well as proceeds, net of repayments of the PPPLF advances of$300.1 million , proceeds from issuances of common stock from the exercise of options, and purchases under our employee share purchase plan of$32.9 million , partially offset by payments for employee tax withholding related to vesting of restricted stock units of$152.0 million . 65 --------------------------------------------------------------------------------
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. GAAP requires us to make certain estimates and judgments that affect the amounts reported in our financial statements. We base our estimates on historical experience, anticipated future trends, and other assumptions we believe to be reasonable under the circumstances. Because these accounting policies require significant judgment, our actual results may differ materially from our estimates.
As disclosed in our Annual Report on Form 10-K for the year ended
Additionally, we consider accounting for business combinations under ASC 805, Business Combinations, to also be a critical accounting policy and estimate as it requires management to make significant estimates and assumptions, including the valuation of intangible assets acquired, determination of fair values of liabilities assumed including pre-acquisition contingencies, and valuation of contingent consideration, where applicable. Although we believe that the assumptions and estimates we have made have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
Recent Accounting Pronouncements
See "Recent Accounting Pronouncements" described in Note 1, Description of Business and Summary of Significant Accounting Policies within Notes to the Condensed Consolidated Financial Statements.
© Edgar Online, source
