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
We started Square inFebruary 2009 to enable businesses (sellers) to accept card payments, an important capability that was previously inaccessible to many businesses. However, sellers need many innovative 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 a parallel ecosystem of financial services to help individuals manage their money. Our Seller ecosystem 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 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 offering, 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. Square Card is a business prepaid card that enables sellers to spend the balance they have stored with Square. Sellers can also deposit funds into their Square stored balance so they can manage all of their business expenses in one place. In addition, sellers gain access to business loans throughSquare Capital 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. 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 , and theUnited Kingdom . 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, 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. 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. In the fourth quarter of 2020, we acquired CreditKarma Tax , which will add a tax filing product for individuals to Cash App's ecosystem, providing a seamless, mobile-first solution for individuals to file their taxes for free. OnApril 30, 2021 , we completed the acquisition of a majority ownership interest in TIDAL for an aggregate consideration of$302 million . TIDAL is a global music and entertainment platform that brings fans and artists together through unique music, content, and experiences. The acquisition extends our purpose of economic empowerment to musicians. OnMarch 1, 2021 , the industrial loan company charter forSquare Financial Services ("SFS") was approved by theFederal Deposit Insurance Corporation ("FDIC") and theState of Utah and began banking operations. SFS will offer banking services including certain loan and deposit products. To date, the operations of SFS have not been material, but are expected to grow in the second half of 2021. InApril 2020 , we were licensed to participate in the Paycheck Protection Program ("First Round PPP") administered by theSmall Business Administration ("SBA") that was enacted inMarch 2020 under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") in response to the COVID-19 pandemic. InFebruary 2021 , we began 42 -------------------------------------------------------------------------------- participating in the second round of the PPP program ("Second Round PPP"). The PPP was intended to provide relief to eligible businesses impacted by COVID-19, and to incentivize businesses to keep their workers on the payroll. These loans are guaranteed by theU.S. government and are eligible for forgiveness if the borrowers meet certain criteria. As ofMarch 31, 2021 , we had facilitated the issuance of$1.4 billion loans in the aggregate under the program. Of the loans facilitated under the First Round PPP, we sold$399.0 million to an investor. We do not plan to sell loans originated under the Second Round PPP. As ofMarch 31, 2021 , approximately$201.7 million in the aggregate of PPP loans we facilitated had been forgiven by the SBA, of which,$155.3 million was forgiven in the first quarter of 2021. OnJune 2, 2020 , we entered into the Paycheck Protection Program Liquidity Facility agreement with theFederal Reserve Bank of San Francisco ("First PPPLF Agreement") to secure additional credit in an aggregate principal amount of up to$500.0 million . The program was established by theFederal Reserve to supplement the SBA's PPP to support the economy in response to the COVID-19 crisis. The facility is intended to bolster the effectiveness of the PPP and provide liquidity to credit markets, helping to stabilize financial institutions supporting COVID-19 relief efforts. 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. As ofMarch 31, 2021 ,$764.2 million of PPPLF advances were outstanding and collateralized by the same value of the PPP loans. Borrowings under these facilities accrue interest at a rate of 0.35% and advances must be collateralized with loans originated under the PPP. The maturity date of any PPPLF advance will be the maturity date of the PPP loan pledged to secure the advance, and will be accelerated upon the occurrence of certain events of default. The advances under these facilities are also repayable if the associated PPP loans are forgiven, repaid by the customer, or settled by the government guarantee.
Update on the Impact of COVID-19 on Current Trends and Outlook
In the first quarter of 2021, our results of operations benefited from the government stimulus and relief programs included in the Economic Aid Act passed into law in lateDecember 2020 , and the American Rescue Plan Act of 2021 passed into law inMarch 2021 leading to increased consumer spending and inflows into our Cash App ecosystem. Additionally, we saw improvements in Seller GPV inMarch 2021 , compared to January andFebruary 2021 , due in part to the relaxation of COVID-19 related restrictions and broader regional re-openings. We expect the availability of stimulus funds disbursed to businesses and consumers through the American Rescue Plan Act of 2021 will positively impact our results of operations. Despite the various impacts of COVID-19 on consumer behavior affecting sellers and Cash App customers, we continue to innovate our product and service offerings to help customers adapt to the economic environment. While the COVID-19 pandemic continues to cause uncertainty in the global economy and restrictive measures by governments and businesses remain in place, the long-term impact to our business and results of operations remains unknown. The extent to which the pandemic will further impact our financial results will depend on future developments, including, but not limited to, the duration and ultimate scope of the pandemic, the impact of variants of the disease, the availability and efficacy of vaccines, the speed at which such vaccines are administered, the likelihood of a resurgence of positive cases, the pace and scope of reductions in the restrictions on individuals and businesses taken by local, state, federal, and national governmental authorities intended to minimize the spread of the virus, and stimulus programs to provide economic and financial relief. Accordingly, business disruption related to the COVID-19 pandemic may continue to cause significant fluctuations in our business and materially affect our results of operations. 43 -------------------------------------------------------------------------------- Results of Operations Revenue (in thousands, except for percentages) Three Months Ended March 31, 2021 2020 $ Change % Change Transaction-based revenue$ 959,733 $ 758,101 $ 201,632 27 % Subscription and services-based revenue 557,681 296,235 261,446 88 % Hardware revenue 28,788 20,675 8,113 39 % Bitcoin revenue 3,511,068 306,098 3,204,970 1,047 % Total net revenue$ 5,057,270 $ 1,381,109 $ 3,676,161 266 % Total net revenue for the three months endedMarch 31, 2021 increased by$3.7 billion , or 266%, compared to the three months endedMarch 31, 2020 . Bitcoin revenue increased by$3.2 billion , and represented 87% of the increase in total net revenue. Excluding bitcoin revenue, total net revenue increased by$471.2 million , or 44%, in the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . Transaction-based revenue for the three months endedMarch 31, 2021 increased by$201.6 million or 27%, compared to the three months endedMarch 31, 2020 , which was in-line with an increase in GPV of 29% for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . The increase in transaction-based revenue was driven by the: •growth in higher-priced card-not-present transactions as sellers shifted their businesses to adapt to the COVID-19 pandemic; •impact of government disbursements related to stimulus programs that improved consumer consumption; •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 to business accounts using Cash App; and •recovery of card-present volumes following regional re-openings in the latter part of the first quarter of 2021. Card-present growth varied by region and was dependent upon the timing and phased re-openings specific to each location. 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, 2021 increased by$261.4 million , or 88%, compared to the three months endedMarch 31, 2020 , driven by Cash App, and to a lesser extent, Seller. Cash App subscription and services-based revenue is primarily comprised of transaction fees from both Cash App Instant Deposit and Cash Card. Seller subscription and services-based revenue increased primarily due to Instant Transfer for sellers, Square Card and other software subscriptions. Hardware revenue for the three months endedMarch 31, 2021 increased by$8.1 million , or 39%, compared to the three months endedMarch 31, 2020 . The increase was primarily a result of an increase in sales of hardware across our product offerings, strengthened by the launch ofSquare Register andSquare Terminal in certain international markets. Bitcoin revenue for the three months endedMarch 31, 2021 increased by$3.2 billion , or 1,047%, compared to the three months endedMarch 31, 2020 . The increase was due to the market price of bitcoin, growth in the number of active bitcoin customers, and growth in customer demand. The amount of bitcoin revenue recognized will fluctuate depending on customer demand as well as changes in the market price of bitcoin. While bitcoin contributed 69% of the total revenue and 87% of the increase in revenues in the three months endedMarch 31, 2021 , gross profit generated from bitcoin transactions was only 8% of the total gross profit. 44 --------------------------------------------------------------------------------
Cost of Revenue (in thousands, except for percentages)
Three Months Ended
March 31,
2021 2020 $ Change % Change
Transaction-based costs $ 524,280 $ 465,779 $ 58,501 13 %Subscription and services-based costs 88,572 40,711
47,861 118 %
Hardware costs 40,482 34,372 6,110 18 %
Bitcoin costs 3,436,135 299,426 3,136,709 1,048 %
Amortization of acquired technology 4,300 2,320 1,980 85 %
Total cost of revenue $ 4,093,769 $ 842,608 $ 3,251,161 386 %
Total cost of revenue for the three months ended March 31, 2021 increased by
$3.3 billion , or 386%, compared to the three months ended March 31, 2020 .
Bitcoin costs of revenue increased by $3.1 billion , and represented 96% of the
increase in the total cost of revenue. Excluding bitcoin costs of revenue, total
cost of revenue increased by approximately $114.5 million , or 21%, in the three
months ended March 31, 2021 , compared to the three months ended March 31, 2020 .
Despite an increase in GPV of 29% for the three months ended March 31, 2021 ,
compared to the three months ended March 31, 2020 , transaction-based costs for
the three months ended March 31, 2021 increased by only $58.5 million , or 13%,
compared to the three months ended March 31, 2020 . The smaller growth in
transaction-based costs as compared to transaction-based revenue in the three
months ended March 31, 2021 was primarily attributable to a higher percentage of
debit card transactions and an increase in average transaction sizes, which each
lowered the average cost per transaction. We recognize that the recent shifts in
the percentage of debit card transactions and average value per transaction size
relative to historical periods are, in part, a result of changes to consumer
behaviors related to COVID-19, which may not continue in future quarters.
Subscription and services-based costs for the three months ended March 31, 2021
increased by $47.9 million , or 118%, compared to the three months ended March
31, 2020 . The increase in the three months ended March 31, 2021 was driven
primarily by growth in Cash Card and Instant Deposit activity.
Hardware costs for the three months ended March 31, 2021 increased by $6.1
million , or 18%, compared to the three months ended March 31, 2020 . The increase
was primarily due to the increased sales of hardware, as further discussed in
hardware revenue above.
Bitcoin costs for the three months ended March 31, 2021 increased by $3.1
billion , or 1,048%, compared to the three months ended March 31, 2020 . Bitcoin
cost of revenue comprises of the total amounts we pay to purchase bitcoin, which
will fluctuate in line with bitcoin revenue.
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--------------------------------------------------------------------------------Operating Expenses (in thousands, except for percentages)
Three Months Ended
March 31,
2021 2020 $ Change % Change
Product development $ 308,678 $ 194,986 $ 113,692 58 %
% of total net revenue 6 % 14 %
Sales and marketing $ 349,460 $ 194,535 $ 154,925 80 %
% of total net revenue 7 % 14 %
General and administrative $ 195,909 $ 129,495 $ 66,414 51 %
% of total net revenue 4 % 9 %
Transaction and loan losses $ 20,395 $ 108,883 $ (88,488) (81) %
% of total net revenue - % 8 %
Bitcoin impairment losses $ 19,860 $ - $ 19,860 NM
% of total net revenue - % - %
Amortization of acquired customer assets
$ 573 64 % % of total net revenue - % - % Total operating expenses$ 895,765 $ 628,789 $ 266,976 42 % Product development expenses for the three months endedMarch 31, 2021 increased by$113.7 million , or 58%, compared to the three months endedMarch 31, 2020 , due primarily to the following: •an increase of$75.0 million in personnel costs for the three months endedMarch 31, 2021 , 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$29.5 million for the three months endedMarch 31, 2021 ; and
•an increase of
Sales and marketing expenses for the three months endedMarch 31, 2021 increased by$154.9 million or 80%, compared to the three months endedMarch 31, 2020 , primarily due to the following: •an increase in Cash App marketing costs for the three months endedMarch 31, 2021 of$107.2 million . The increase in Cash App marketing costs includes a$68.4 million increase in processing costs and related transaction losses primarily associated with the increased volume of activity with our Cash App peer-to-peer service and increased card issuance costs. We offer services such as stock investing, and certain Cash Card and peer-to-peer services to our Cash App customers for free. Additionally, Cash App customer acquisition costs increased by$34.6 million in the three months endedMarch 31, 2021 which includes advertising costs and costs associated with various incentives to customers that we consider to be marketing initiatives to attract new customers and encourage the usage of Cash App; •an increase of$23.7 million in advertising costs for our Seller services for the three months endedMarch 31, 2021 , primarily from increased online and television marketing campaigns; and •an increase of$16.8 million in Seller and Cash App sales and marketing personnel costs for the three months endedMarch 31, 2021 , to enable growth initiatives. The increase in personnel related costs includes an increase in share-based compensation expense of$4.5 million . General and administrative expenses for the three months endedMarch 31, 2021 increased by$66.4 million or 51%, compared to the three months endedMarch 31, 2020 , primarily due to the following: 46 -------------------------------------------------------------------------------- •an increase of$38.3 million in general and administrative personnel costs for the three months endedMarch 31, 2021 , 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$7.3 million for the three months endedMarch 31, 2021 ; and
•the remaining increase was primarily due to increase in software and subscription costs, local business-related taxes, third-party legal and other professional fees and other administrative expenses.
Transaction and loan losses for the three months ended
•transaction losses for the three months endedMarch 31, 2021 decreased by$64.0 million compared to the three months endedMarch 31, 2020 . During the first quarter of 2020, we had recorded incremental provisions for our Seller business due to the expected impact of the COVID-19 pandemic and the subsequent shelter-in-place orders that resulted in a significant slowdown in business. Subsequently, we revised and lowered our estimate of transaction loss rates due to better than expected realized transaction losses. In the first quarter of 2021, we established our reserves based on the lower loss rates and released certain previously established risk loss provisions related to the fourth quarter of 2020. •loan losses for the three months endedMarch 31, 2021 decreased by$24.4 million compared to the three months endedMarch 31, 2020 . The primary driver for the decrease in loan losses was the higher incremental provisions that were recorded during the three months endedMarch 31, 2020 associated with the COVID-19 pandemic. Additionally, the decrease in loan losses was due to lower loan volumes facilitated in the three months endedMarch 31, 2021 as a result of the tightening of lending criteria beginning inAugust 2020 . Bitcoin impairment losses were$19.9 million in the three months endedMarch 31, 2021 due to the market price of bitcoin decreasing below the carrying value of our bitcoin investment observed during the period. As ofMarch 31, 2021 , the fair value of our investment in bitcoin was$472.0 million based on observable market prices, which is$271.9 million in excess of the carrying value of our investment of$200.1 million . Any unrealized gains on our bitcoin investment will only be recognized upon the sale of such bitcoin investment. Interest Expense, Net, and Other Expense, Net (in thousands, except for percentages) Three Months Ended March 31, 2021 2020 $ Change % Change Interest expense, net$ 253 $ 9,206 $ (8,953) (97) % Other expense, net$ 27,528 $ 5,862 $ 21,666 370 % Interest expense, net, for the three months endedMarch 31, 2021 decreased by$9.0 million , compared to the three months endedMarch 31, 2020 . The decrease was primarily due to lower non-cash interest expense related to our convertible notes as a result of the adoption of ASU No. 2020-06 onJanuary 1, 2021 . Under the accounting for ASU No. 2020-06, convertible notes will no longer be separated into a debt and equity component, thereby eliminating the discount associated with the equity component and the interest expense associated with such discount. Other expense, net for the three months endedMarch 31, 2021 increased by$21.7 million compared to the three months endedMarch 31, 2020 , primarily due to the mark to market loss of our equity investment in DoorDash of$28.9 million . These activities are offset in part by the foreign exchange gains and losses. 47 --------------------------------------------------------------------------------
Segment Results
Seller Results
The following tables provide a summary of the revenue and gross profit for our Seller segment for the three months endedMarch 31, 2021 and 2020 (in thousands): Three Months Ended March 31, 2021 2020 $ Change % Change Net revenue$ 1,017,654 $ 853,467 $ 164,187 19 % Cost of revenue 549,638 497,698 51,940 10 % Gross profit$ 468,016 $ 355,769 $ 112,247 32 % Revenue Revenue for the Seller segment for the three months endedMarch 31, 2021 increased by$164.2 million , or 19%, compared to the three months endedMarch 31, 2020 . The increase was primarily due to growth in GPV attributable to higher-priced card-not-present transactions as sellers adapted to the COVID-19 pandemic, and to a lesser extent, the recovery in card present volumes due to increased regional reopenings, and government disbursements related to stimulus programs. We also benefited from a higher percentage of debit card transactions and an increase in average transaction size. We saw an increase in Seller subscription and services-based revenue in the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 primarily as a result of lower revenues recorded inMarch 2020 due to the refund of software subscription fees to our customers, and, to a lesser extent, growth in Instant Transfer for sellers, Square Card and other software subscriptions.
Cost of revenue
Cost of revenue for the Seller segment for the three months endedMarch 31, 2021 increased by$51.9 million , or 10%, compared to the three months endedMarch 31, 2020 . Despite an increase in Seller revenue of$164.2 million , or 19%, for the three months endedMarch 31, 2021 , compared to the three months endedMarch 31, 2020 , the smaller increase in Seller costs of revenues was due to benefits from a higher percentage of debit card transactions and increase in average value per transaction, which each have lower costs.
Cash App
The following tables provide a summary of the revenue and gross profit for our Cash App segment for the three months endedMarch 31, 2021 and 2020 (in thousands): Three Months Ended March 31, 2021 2020 $ Change % Change Net revenue$ 4,039,616 $ 527,642 $ 3,511,974 666 % Cost of revenue 3,544,131 344,910 3,199,221 928 % Gross profit$ 495,485 $ 182,732 $ 312,753 171 % 48
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Revenue
Revenue for the Cash App segment for the three months endedMarch 31, 2021 increased by$3.5 billion , or 666%, compared to the three months endedMarch 31, 2020 . The primary drivers were growth in bitcoin revenue, and, to a lesser extent, Cash App Instant Deposit, Cash Card, and Cash for Business. Bitcoin revenue increased due to the market price of bitcoin, growth in the number of active bitcoin customers, and growth in customer demand. While bitcoin contributed 69% of the total revenue and 87% of the increase in revenues in the three months endedMarch 31, 2021 , gross profit generated from bitcoin was only 8% of the total gross profit. Additionally, Cash App revenue benefited from growth in numbers of active Cash App customers and from government relief programs most recently passed into law in lateDecember 2020 and inMarch 2021 , as well as cumulative benefit from earlier stimulus programs passed in 2020. These programs provided additional stimulus relief and unemployment benefits which resulted in an increase in consumer spending and inflows into our Cash App ecosystem. Cash App revenue growth may not be sustained at the same levels in future quarters and may be impacted by the enactment of further stimulus relief and benefit programs, as well as the demand and market prices for bitcoin, amongst other factors. Cost of revenue Cost of revenue for the Cash App segment for the three months endedMarch 31, 2021 increased by$3.2 billion , or 928%, compared to the three months endedMarch 31, 2020 . The primary driver for the increase was growth in bitcoin revenue, as further discussed above. Excluding bitcoin cost of revenue, Cash App cost of revenue increased by approximately$62.5 million , or 137%, in the three months endedMarch 31, 2021 , compared to the three months endedMarch 31, 2020 , due to Cash App Instant Deposit, Cash Card, and Cash for Business. Key Operating Metrics and Non-GAAP Financial Measures We collect and analyze operating and financial data to evaluate the health of our business, allocate our resources, and assess our performance. In addition to total net revenue, net income (loss), and other results under generally accepted accounting principles (GAAP), the following table sets forth key operating metrics and non-GAAP financial measures we use to evaluate our business. We believe these metrics and measures are useful to facilitate period-to-period comparisons of our business and to facilitate comparisons of our performance to that of other payment solution providers. Three Months Ended March 31, 2021 2020 Gross Payment Volume (GPV) (in millions)$ 33,138 $ 25,743 Adjusted EBITDA (in thousands)$ 236,249 $ 9,331 Adjusted Net Income (Loss) Per Share: Basic$ 0.47 $ (0.02) Diluted$ 0.41 $ (0.02)
Gross Payment Volume (GPV) We define GPV as the total dollar amount of all card payments processed by sellers using Square, net of refunds. Additionally, GPV includes Cash App activity related to Cash for Business and peer-to-peer payments sent from a credit card.
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Adjusted EBITDA and Adjusted Net Income (Loss) 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 11, Indebtedness, of the Notes to the Condensed Consolidated Financial
Statements), prior to the adoption of ASU No. 2020-06 on January 1, 2021 , we
were required to recognize non-cash interest expense related to amortization of
debt discount and issuance costs. Subsequent to the adoption, we recognize
non-cash interest expense related to amortization of debt issuance costs only.
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, impairment of
intangible assets, and prior to the adoption of ASU No. 2020-06 on January 1,
2021 , gain or loss on debt extinguishment related to the conversion of senior
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 costs associated with acquisitions that are not normal
operating expenses, including amounts paid to redeem acquirees' unvested
share-based compensation awards, and legal, accounting and due diligence costs,
and we 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, other cash interest income and expense, other income
and expense and provision or benefit from income taxes, as these items are not
components of our core business operations.
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:
•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 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, net.
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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,
2021 2020
Net income (loss) $ 39,008 $ (105,891)
Share-based compensation expense 118,623 77,303
Depreciation and amortization 29,201 20,061
Interest expense, net 253 9,206
Other expense, net 27,528 5,862
Bitcoin impairment losses 19,860 -
Loss on disposal of property and equipment 615 218
Acquisition related and other costs 26 1,524
Acquired deferred revenue adjustment 252 657
Acquired deferred costs adjustment (64) (144)
Provision for income taxes 947 535
Adjusted EBITDA $ 236,249 $ 9,331
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The following table presents a reconciliation of net income (loss) to Adjusted net income (loss) and Adjusted EPS for each of the periods indicated (in thousands, except per share data):
Three Months Ended
March 31,
2021 2020
Net income (loss) $ 39,008 $ (105,891)
Share-based compensation expense 118,623 77,303
Amortization of intangible assets 6,884 4,152
Amortization of debt issuance costs 1,832 12,528
Loss on revaluation of equity investment 28,900 -
Bitcoin impairment losses 19,860 -
Loss on extinguishment of long-term debt - 990
Loss on disposal of property and equipment 615 218
Acquisition related and other costs 26 1,524
Acquired deferred revenue adjustment 252 657
Acquired deferred costs adjustment (64) (144)
Adjusted Net Income (Loss) - basic $ 215,936 $ (8,663)
Cash interest expense on convertible senior notes $ 1,728 $ 1,373
Adjusted Net Income (Loss) - diluted $
217,664
Weighted-average shares used to compute Adjusted Net Income (Loss) Per Share: Basic 454,973 434,940 Diluted 524,540 434,940 Adjusted Net Income (Loss) Per Share: Basic$ 0.47 $ (0.02) Diluted$ 0.41 $ (0.02)
To calculate the diluted Adjusted EPS we adjust the weighted-average number of shares of common stock outstanding for the dilutive effect of all potential shares of common stock.
In periods when we recorded an Adjusted Net Loss, the diluted Adjusted EPS is the same as basic Adjusted EPS because the effects of potentially dilutive items were anti-dilutive given the Adjusted Net Loss position.
Liquidity and Capital Resources
The uncertainty caused by the COVID-19 pandemic continues both inthe United States and globally, with the duration and severity of the pandemic and the overall impact on consumer demand and overall economy still unknown. We are unable to forecast the full impact on our business; however, this represents a known area of uncertainty and we continue to expect the COVID-19 pandemic and its related economic disruption may have a material impact on our business, results of operations, financial condition and cash flows. We continue to evaluate our investment plans and discretionary expenditures and will make adjustments accordingly.
As of
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--------------------------------------------------------------------------------Liquidity Sources
The following table summarizes our cash, cash equivalents, restricted cash, and investments in marketable debt securities (in thousands):
December 31,
March 31, 2021 2020
Cash and cash equivalents $ 3,022,485 $ 3,158,058
Short-term restricted cash 32,891 30,279
Long-term restricted cash 63,509 13,526
Cash, cash equivalents, and restricted cash $ 3,118,885 $ 3,201,863
Investments in short-term debt securities 644,454 695,112
Investments in long-term debt securities 522,542 463,950
Cash, cash equivalents, restricted cash, and investments in marketable debt securities
$
4,285,881
Our principal sources of liquidity are our cash and cash equivalents and investments in marketable debt securities. As ofMarch 31, 2021 , we had$4.3 billion of cash and cash equivalents, restricted cash, and investments in marketable debt securities, which 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. From time to time, we have raised capital by issuing equity, equity-linked, or debt securities such as our convertible senior notes. As ofMarch 31, 2021 , we held over$3.0 billion in aggregate principal amount of convertible senior notes, comprised of$4.7 million in aggregate principal amount of outstanding convertible senior notes that mature onMarch 1, 2022 ("2022 Notes"),$862.5 million in aggregate principal amount of convertible senior notes that mature onMay 15, 2023 ("2023 Notes"),$1.0 billion in aggregate amount of convertible senior notes that mature onMarch 1, 2025 ("2025 Notes"), and$575.0 million and$575.0 million in aggregate amount of convertible senior notes that mature onMay 1, 2026 , andNovember 1, 2027 , respectively ("2026 Notes" and "2027 Notes," respectively). The 2022 Notes bear interest at a rate of 0.375% payable semi-annually onMarch 1 andSeptember 1 of each year, while the 2023 Notes bear interest at a rate of 0.50% payable semi-annually onMay 15 andNovember 15 of each year, and the 2025 Notes bear interest at a rate of 0.125% payable semi-annually onMarch 1 andSeptember 1 of each year. The 2026 Notes bear no interest, whereas, the 2027 Notes bear interest at a rate of 0.25% payable semi-annually onMay 1 andNovember 1 of each year. These notes can be converted or repurchased prior to maturity if certain conditions are met. We purchased$50.0 million and$170.0 million in bitcoin inOctober 2020 andFebruary 2021 , respectively, as 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 recorded an impairment charge of$19.9 million in the three months endedMarch 31, 2021 due to the observed market price of bitcoin decreasing below the carrying value during the period. As ofMarch 31, 2021 , the fair value of the investment in bitcoin was$472.0 million based on observable market prices which is$271.9 million in excess of the Company's carrying value of$200.1 million . Impairment losses cannot be recovered for any subsequent increase in fair value until the sale of the asset. InSeptember 2020 , we announced our intent to invest$100 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, 2021 , we had invested$11.2 million in aggregate towards this initiative. 53 -------------------------------------------------------------------------------- InJune 2020 , we entered into the Paycheck Protection Program Liquidity Facility 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. As ofMarch 31, 2021 ,$764.2 million of PPPLF advances were outstanding and collateralized by the same value of PPP loans. InMay 2020 , we entered into a new revolving credit agreement with certain lenders, as subsequently amended, which provides a$500 million senior unsecured revolving credit facility (the "2020 Credit Facility") maturing inMay 2023 . Loans under the 2020 Credit Facility 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 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. 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.
See Note 11, Indebtedness, of the Notes to the Condensed Consolidated Financial Statements for more details on these transactions.
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. Short-term restricted cash of$32.9 million as ofMarch 31, 2021 reflects pledged cash deposited into savings accounts at the financial institutions that process our sellers' payments transactions and as collateral pursuant to an agreement with the originating bank for the Company'sSquare Capital loan product. 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 condensed 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, discussed in the paragraph below, which we expect to become unrestricted within the next year. Long-term restricted cash of$63.5 million as ofMarch 31, 2021 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:
•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
54
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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 following table summarizes our cash flow activities (in thousands):
Three Months Ended
March 31,
2021 2020
Net cash provided by (used in) operating activities $ (97,741) $ 121,296
Net cash used in investing activities (158,023) (114,617)
Net cash provided by financing activities 180,992 918,120
Effect of foreign exchange rate on cash and cash equivalents (8,206)
(13,588)
Net increase (decrease) in cash, cash equivalents, and
restricted cash $ (82,978) $ 911,211 Cash Flows from Operating Activities
Cash provided by 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, as well as the effect of changes in operating assets and liabilities, including working capital. For the three months endedMarch 31, 2021 , cash used in operating activities was$97.7 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 PPP loans facilitated of$271.6 million , as well as a net outflow from changes in other assets and liabilities of$107.7 million due to timing. For the three months endedMarch 31, 2020 , cash provided by operating activities was$121.3 million . Net loss was$105.9 million , adjusted for the add back of non-cash expenses of$233.8 million , consisting primarily of transaction and loan losses, share-based compensation, depreciation and amortization, and non-cash interest and other expenses, which contributed positively to operating activities. Whereas the increase in transaction and loan losses was largely caused by estimated losses attributable to the COVID-19 pandemic, the increase in other non-cash expenses was primarily due to the growth and expansion of our business activities.
Cash Flows from Investing Activities
Cash flows 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, 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 , 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 . For the three months endedMarch 31, 2020 , cash used in investing activities was$114.6 million , primarily due to the net proceeds from investments of marketable securities including investments from customer funds of$75.7 million . Additional uses of cash were as a result of the purchase of property and equipment of$26.1 million and business acquisitions, net of cash acquired of$12.7 million . 55 -------------------------------------------------------------------------------- Cash Flows from Financing Activities For the three months endedMarch 31, 2021 , cash provided by financing activities was$181.0 million primarily as a result of the 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 , offset by payments for employee tax withholding related to vesting of restricted stock units of$152.0 million . For the three months endedMarch 31, 2020 , cash provided by financing activities was$918.1 million primarily as a result of$936.5 million in net proceeds from the 2025 Notes offering, and proceeds from issuances of common stock from the exercise of options and purchases under our employee share purchase plan of$31.4 million , offset by payments for employee tax withholding related to vesting of restricted stock units of$48.8 million . Contractual Obligations and Commitments OnJanuary 29, 2021 , we entered into a second Paycheck Protection Program Liquidity Facility agreement with theFederal Reserve Bank of San Francisco ("Second PPPLF Agreement" and together with the First PPPLF Agreement, "PPPLF Agreements") to secure additional credit in an aggregate principal amount of up to$1.0 billion under both PPPLF Agreements. Borrowings under the facilities accrue interest at a rate of 0.35% and must be collateralized with loans originated under the PPP. The maturity date of any PPPLF advances will be 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 also repayable if the underlying PPP loan is repaid by the customer. As ofMarch 31, 2020 ,$764.2 million of PPPLF advances were outstanding and collateralized by the same value of the PPP loans. See Note 11, Indebtedness, of the Notes to the Condensed Consolidated Financial Statements for more details on this transaction. With the exception of the PPPLF advances, there were no material changes in our commitments under contractual obligations, except for scheduled payments from the ongoing business, as disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements during the periods presented. 56 --------------------------------------------------------------------------------
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. We believe accounting policies and the assumptions and estimates associated with transaction and loan losses, especially due to uncertainties associated with the COVID-19 pandemic have the greatest potential effect on our condensed consolidated financial statements. Therefore, we consider this to be our critical accounting policy and estimate. Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Our critical accounting policies have not materially changed during the three months endedMarch 31, 2021 .
Recent Accounting Pronouncements
See "Recent Accounting Pronouncements" described in Note 1, Description of Business and Summary of Significant Accounting Policies, of the Notes to the Condensed Consolidated Financial Statements.
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