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MarketScreener Homepage  >  Equities  >  Nyse  >  Square, Inc.    SQ

SQUARE, INC.

(SQ)
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SQUARE : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/05/2020 | 04:29pm EST
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 in February 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 magnetic stripe (a
swipe), EMV (Europay, MasterCard, and Visa) (a dip), or NFC (Near Field
Communication) (a tap); 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, a business prepaid card, 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. Sellers
also gain access to business loans through Square Capital based on the seller's
payment processing history. 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, including the United States, Canada, Japan, Australia, and the
United 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 P2P (peer-to-peer) payments,
and receive direct deposit payments. Customers can make purchases with their
Cash Card, a Visa prepaid card that is linked to the balance stored in Cash App,
or withdraw funds from an ATM. 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.

Effective June 30, 2020, the Company changed from one reportable segment to two
reportable segments to reflect the way management and its chief operating
decision maker ("CODM") review and assess performance of the business. Our two
reportable segments are Seller and Cash App. Seller includes managed payment
services, software solutions, hardware and financial services products offered
to sellers, while Cash App includes financial tools available to individuals
such as P2P (peer-to-peer) payments, Cash Card transactions, bitcoin and stock
investing. The primary financial measures used by the CODM to evaluate
performance and allocate resources are revenue and gross profit.

In April 2020, we were licensed to participate in the Paycheck Protection
Program ("PPP") administered by the Small Business Administration ("SBA") that
was enacted in March 2020 under the Coronavirus Aid, Relief, and Economic
Security Act ("CARES Act") in response to the COVID-19 pandemic. The PPP is
intended to provide relief to eligible businesses impacted by COVID-19, and to
incentivize businesses to keep their workers on the payroll. As of September 30,
2020, we facilitated the issuance of $873.4 million in loans to our customers
under the PPP through an external bank partner, of which we sold $399.0 million
to an investor. These loans are guaranteed by the U.S. government. Additionally,
the loans are eligible for forgiveness if the borrowers meet certain criteria.

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On June 2, 2020, we entered into the Paycheck Protection Program Liquidity
Facility ("PPPLF") agreement with the Federal Reserve Bank of San Francisco to
secure additional credit in an aggregate principal amount of up to $500.0
million. The program was established by the Federal 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. Borrowings under the facility 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
this facility are also repayable if the associated PPP loans are forgiven,
repaid by the customer, or settled by the government guarantee. As of September
30, 2020, $473.5 million of PPPLF advances were outstanding and collateralized
by the same value of the PPP loans.

On March 5, 2020, we issued $1.0 billion in aggregate principal amount of
convertible senior notes (2025 Notes) that mature on March 1, 2025, unless
earlier converted or repurchased pursuant to their terms, and bear interest at a
rate of 0.1250% payable semi-annually on March 1 and September 1 of each year.
We intend to use the net proceeds for general corporate purposes, which may
include capital expenditures, investments, working capital, and potential
acquisitions and strategic transactions. From time to time, we evaluate
potential strategic transactions and acquisitions of businesses, technologies,
products or talent.

Impact of COVID-19 on Current Trends and Outlook


In March 2020, the World Health Organization declared the COVID-19 outbreak
(COVID-19) a global pandemic. We operate in locations that have been impacted by
COVID-19, and the pandemic has impacted and could further impact our operations
and the operations of our customers as a result of quarantines, various local,
state and federal government public health orders, facility and business
closures, and travel and logistics restrictions. Conditions may improve or
worsen as governments and businesses continue to take actions to respond to the
risks of the COVID-19 pandemic. While the COVID-19 pandemic continues to cause
uncertainty in the global economy and restrictive measures by governments and
businesses remain in place, we expect our business and results of operations to
be materially and adversely affected.

Beginning in the middle of March, the outbreak of COVID-19 led to adverse
impacts on the U.S. and global economies, bringing uncertainty to our operations
and customer demand. Various local governments issued orders requiring the
closure of non-essential businesses and to curtail all unnecessary travel, and
requiring individuals to comply with various shelter-in-place and social
distancing orders. Certain of our customers in those areas recorded a
significant decline in sales and thus, we experienced a slowdown in revenues
during the month of March 2020, which continued into the second quarter of 2020.
We have experienced some improvements as some of these shelter-in-place orders
were relaxed, but as new outbreaks arise and new measures to mitigate such
outbreaks are imposed, our future revenues may be impacted.

We however experienced improvements in our business, as some states started to
relax shelter-in-place measures, sellers adapted their businesses to contactless
commerce, new sellers joined Square, and various government assistance programs
led to an increase in consumer spending. We have also experienced positive
growth from higher priced card-not-present transactions as sellers continued to
shift their businesses to adapt to the COVID-19 outbreak. We have also noted
increased engagement by Cash App customers as they adopted multiple products.

Our customers are exposed to and face a variety of uncertainties that have and
could continue to negatively impact their continued use of our products and
services, their ability to repay outstanding amounts, or even their ability to
continue in business. While we have experienced some improvements in our
business performance beginning in the second quarter of 2020, including growth
during the third quarter of 2020 in our international markets in our Seller
segment due in part to the timing of regional recoveries, we may experience
reduced revenues in the future and we may incur increased charges related to
transaction and loan losses if these conditions continue into future periods. We
have revised our estimates and assumptions to reflect such increases in
transaction and loan losses in our financial statements.

Additionally, we have evaluated the potential impact of the COVID-19 outbreak on
our financial statements, including, but not limited to, the impairment of
goodwill and intangible assets, impairment of long-lived assets including
operating lease right-of-use assets, property and equipment, valuation of loans
held for sale, as well as determination of accrued transaction losses. We have
concluded that our goodwill and other long lived assets are not impaired. Where
applicable, we have incorporated judgments and estimates of the expected impact
of COVID-19 in the preparation of the financial statements based on information
currently available. These judgments and estimates may change, as new events
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develop and additional information is obtained, and are recognized in the consolidated financial statements as soon as they become known.


We also have taken steps to assist our customers that we believe will be in the
best interests of our sellers in the long term, including refunding software
subscription fees to sellers during the months of March and April 2020.
Additionally, we have introduced options for sellers to temporarily pause and
resume their subscriptions. As mentioned above, as of September 30, 2020, we
facilitated approximately 80,000 PPP loans totaling $873.4 million to sellers
through a bank partner, with the average loan size being less than $11,000.

We continue to actively monitor the situation and may take further actions that
alter our operations and business practices as may be required by federal, state
or local authorities or that we determine are in the best interests of our
partners, customers, suppliers, vendors, employees and shareholders. While the
disruption is currently expected to be temporary, the extent to which the
COVID-19 outbreak will further impact the Company's financial results will
depend on future developments, which are unknown and cannot be predicted,
including the duration and ultimate scope of the pandemic, advances in testing,
treatment and prevention, as well as actions taken by governments and
businesses.

Results of Operations
Revenue (in thousands, except for percentages)
                                                           Three Months Ended                                                                     Nine Months Ended
                                                              September 30,                                                                         September 30,
                                  2020                 2019               $ Change              % Change                2020                 2019               $ Change              % Change
Transaction-based revenue    $   925,294$   816,622$   108,672                     13  %       $ 2,365,967$ 2,248,894$   117,073                      5  %
Subscription and
services-based revenue           447,522              279,801              167,721                     60  %       $ 1,090,032$   750,041$   339,991                     45  %
Hardware revenue                  27,294               21,766                5,528                     25  %            67,291               62,238          $     5,053                      8  %
Bitcoin revenue                1,633,764              148,285            1,485,479                  1,002  %       $ 2,815,318$   338,898$ 2,476,420                    731  %
Total net revenue            $ 3,033,874$ 1,266,474$ 1,767,400                    140  %       $ 6,338,608$ 3,400,071$ 2,938,537                     86  %


Total net revenue for the three and nine months ended September 30, 2020
increased by $1.8 billion or 140% and $2.9 billion or 86%, respectively,
compared to the three and nine months ended September 30, 2019.
Transaction-based revenue for the three and nine months ended September 30, 2020
increased by $108.7 million or 13%, and $117.1 million or 5%, respectively,
compared to the three and nine months ended September 30, 2019. The increase was
in line with increase in GPV of 12% and 3% for the three and nine months ended
September 30, 2020, respectively. The increase was primarily attributable to and
affected by the following events and factors:

•In January and February of 2020, we benefited from the growth in payment volume
processed by existing sellers, in addition to meaningful contributions from new
sellers. GPV generated by our Seller business increased by 29% compared to the
same period in the prior year, which included a benefit from the impact of the
leap year;

•In the second half of March through mid-April, 2020, as a result of the
COVID-19 outbreak and subsequent shelter-in-place restrictions, we experienced a
significant slowdown in transaction-based revenue, with GPV generated by our
Seller business decreasing compared to the prior year;

•Beginning in mid-April 2020, we started to experience improving trends in GPV
generated by our Seller business, as some states started to relax
shelter-in-place measures, sellers adapted their businesses to contactless
commerce, new sellers joined Square and various government assistance programs
led to an increase in consumer spending;

•Since the second quarter of 2020, we have experienced positive growth of GPV and revenue from higher priced card-not-present transactions as sellers continued to shift their businesses to adapt to the COVID-19 outbreak.


Overall, the increase in transaction-based revenue was primarily driven by
growth in higher-priced card-not-present transactions as sellers shifted their
businesses to adapt to the COVID-19 outbreak, and the impact from our November
2019 card-present price change, as well as Cash App GPV which includes Cash for
Business and peer-to-peer payments sent from
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a credit card. Cash for Business activity includes peer-to-peer transactions to
business accounts using Cash App. The factors and events above had varying
impacts on the GPV growth and may continue to impact our revenues in the future.
In particular, card-present growth varies by region and product, depending
primarily on differences in the timing and phases of reopenings, which we expect
will have a significant impact on overall GPV trends.

Subscription and services-based revenue for the three and nine months ended
September 30, 2020 increased by $167.7 million or 60% and $340.0 million or 45%,
respectively, compared to the three and nine months ended September 30, 2019. On
October 31, 2019, we completed the sale of the Caviar business, and,
accordingly, Caviar no longer contributes to subscription and services-based
revenue. Excluding Caviar, subscription and services-based revenue grew by
$208.7 million, or 87%, and $470.9 million, or 76%, for the three and nine
months ended September 30, 2020, respectively compared to the three and nine
months ended September 30, 2019 driven primarily by Cash App. Cash App
subscription and services-based revenue is primarily comprised of transaction
fees from both Cash App Instant Deposit and Cash Card, with a small portion
generated from interest earned on customer funds. In March and April 2020 in an
effort to support our sellers we temporarily suspended charging and refunded
software subscription fees we had charged the sellers and we resumed charging
such fees in May 2020. Square Capital, which has historically been a significant
component of the subscriptions and services revenue, also suspended facilitating
loans to sellers in the second quarter of 2020 but has since resumed at the end
of July 2020 and is expected to take time before we get back to pre-COVID-19
outbreak loan volumes.

Hardware revenue for the three and nine months ended September 30, 2020
increased by $5.5 million or 25% and $5.1 million or 8%, respectively, compared
to the three and nine months ended September 30, 2019. The increase was
primarily a result of an increase in sales of hardware in our international
markets, as well as sales of contactless hardware as a result of certain
promotions offered in the second and third quarter of 2020. The increases during
the nine months ended September 30, 2020 were partially offset by reduced sales
in the second quarter of 2020 due to early impacts from the COVID-19 outbreak.
Bitcoin revenue for the three and nine months ended September 30, 2020 increased
by $1.5 billion or 1,002% and $2.5 billion or 731%, respectively, compared to
the three and nine months ended September 30, 2019. The increase was due to
growth in the number of active bitcoin customers, as well as volume per
customer. The amount of bitcoin revenue recognized will fluctuate depending on
customer demand.
Cost of Revenue (in thousands, except for percentages)
                                                          Three Months Ended                                                                    Nine Months Ended
                                                             September 30,                                                                        September 30,
                                  2020                2019              $ Change              % Change                2020                 2019               $ Change              % Change
Transaction-based costs      $   522,680$ 519,312$     3,368                      1  %       $ 1,376,565$ 1,418,730$   (42,165)                    (3) %
Subscription and
services-based costs              66,786             63,352                3,434                      5  %           157,666              183,994              (26,328)                   (14) %
Hardware costs                    45,220             35,672                9,548                     27  %           107,907               95,881               12,026                     13  %
Bitcoin costs                  1,601,615            146,167            1,455,448                    996  %         2,759,082              333,801            2,425,281                    727  %
Amortization of acquired
technology                         3,118              1,934                1,184                     61  %             7,669                5,029                2,640                     52  %
Total cost of revenue        $ 2,239,419$ 766,437$ 1,472,982                    192  %       $ 4,408,889$ 2,037,435$ 2,371,454                    116  %


Total cost of revenue for the three and nine months ended September 30, 2020 increased by $1,473.0 million or 192% and $2,371.5 million or 116%, respectively, compared to the three and nine months ended September 30, 2019.


Despite an increase in GPV of 12% and 3% for the three and nine months ended
September 30, 2020, respectively, compared to the three and nine months ended
September 30, 2019, transaction-based costs for the three and nine months ended
September 30, 2020 increased by only $3.4 million or 1%, and decreased $42.2
million or 3%, respectively, compared to the three and nine months ended
September 30, 2019. The slight increase and decrease in the three and nine
months ended September 30, 2020 was primarily attributable to growth in debit
card transactions and increase in average value per transaction which have lower
costs, offset by the increase in GPV.

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Subscription and services-based costs for the three and nine months ended
September 30, 2020 increased by $3.4 million or 5%, and decreased $26.3 million
or 14%, respectively, compared to the three and nine months ended September 30,
2019. The increase in the three months ended September 30, 2020 was driven
primarily by Cash Card and Instant Deposit, while the decrease in the nine
months ended September 30, 2020 was primarily a result of the sale of the Caviar
business on October 31, 2019. Caviar contributed approximately 45% and 51% of
total subscription and services-based costs in the three and nine months ended
September 30, 2019, respectively. Excluding Caviar, subscription and
services-based costs increased in the nine months ended September 30, 2020,
driven mainly by growth in costs associated with Cash Card and Instant Deposit.

Hardware costs for the three and nine months ended September 30, 2020 increased
by $9.5 million or 27% and $12.0 million or 13%, respectively, compared to the
three and nine months ended September 30, 2019. The increase was primarily due
to increased sales of hardware in our international markets, as well as sales of
contactless hardware as a result of certain promotions offered in the second and
third quarter of 2020. The increases during the nine months ended September 30,
2020 were partially offset by reduced sales in the second quarter of 2020 due to
the COVID-19 outbreak.

Bitcoin costs for the three and nine months ended September 30, 2020 increased
by $1.5 billion or 996% and $2.4 billion or 727%, respectively, compared to the
three and nine months ended September 30, 2019. Bitcoin costs of revenue
comprises amounts we pay to purchase bitcoin, which will fluctuate in line with
bitcoin revenue.


Operating Expenses (in thousands, except for percentages)

                                                     Three Months Ended                                                                 Nine Months Ended
                                                        September 30,                                                                     September 30,
                              2020               2019             $ Change             % Change                2020                 2019              $ Change             % Change

Product development $ 226,567$ 168,771$ 57,796

                   34  %       $   628,378$   497,322$ 131,056                     26  %
% of total net revenue            7  %              13  %                                                          10  %                15  %

Sales and marketing $ 348,463$ 149,467$ 198,996

                  133  %       $   781,094$   439,601$ 341,493                     78  %
% of total net revenue           11  %              12  %                                                          12  %                13  %
General and
administrative            $ 153,902$ 115,980$  37,922                     33  %       $   419,783$   318,086$ 101,697                     32  %
% of total net revenue            5  %               9  %                                                           7  %                 9  %
Transaction and loan
losses                    $  15,198$  32,722$ (17,524)                   (54) %       $   161,684$    94,827$  66,857                     71  %
% of total net revenue            1  %               3  %                                                           3  %                 3  %
Amortization of acquired
customer assets           $     983$   1,003$     (20)                    (2) %       $     2,778$     3,591$    (813)                   (23) %
% of total net revenue            -  %               -  %                                                           -  %                 -  %

Total operating expenses $ 745,113$ 467,943$ 277,170

                  59  %       $ 1,993,717$ 1,353,427$ 640,290                     47  %



Product development expenses for the three and nine months ended September 30,
2020 increased by $57.8 million or 34% and $131.1 million or 26%, respectively,
compared to the three and nine months ended September 30, 2019, due primarily to
the following:

•an increase of $42.6 million and $95.6 million in personnel costs for the three
and nine months ended September 30, 2020, related to 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 $22.4 million and $50.5 million for the three and nine
months ended September 30, 2020; and

•an increase of $6.7 million and $15.9 million in software and data center
operating costs for the three and nine months ended September 30, 2020, as a
result of increased capacity needs and expansion of our cloud-based services.

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Sales and marketing expenses for the three and nine months ended September 30,
2020 increased by $199.0 million or 133% and $341.5 million or 78%,
respectively, compared to the three and nine months ended September 30, 2019,
primarily due to the following:

•an increase of $148.5 million and $276.3 million in Cash App marketing costs
for the three and nine months ended September 30, 2020, the substantial majority
of which relates to processing costs and transaction losses associated with the
increased volume of activity with our Cash App peer to peer service. We offer
the Cash Card and certain peer-to-peer services to our Cash App customers for
free, and we consider these to be marketing tools to encourage the usage of Cash
App. The remaining increase in Cash App marketing costs consists of Cash Card
issuance costs and advertising.
•an increase of $27.4 million and $26.6 million in advertising costs for our
Seller Ecosystem services for the three and nine months ended September 30,
2020, primarily from increased online and television marketing campaigns.
General and administrative expenses for the three and nine months ended
September 30, 2020 increased by $37.9 million or 33% and $101.7 million or 32%,
respectively, compared to the three and nine months ended September 30, 2019,
primarily due to the following:

•an increase of $17.0 million and $32.4 million in general and administrative
personnel costs for the three and nine months ended September 30, 2020, mainly
as a result of additions to our customer support, finance, legal and compliance
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 $4.7 million
and $8.1 million for the three and nine months ended September 30, 2020; and

•the remaining increase was primarily due to facilities expansion, software and
subscription costs, local business-related taxes, third-party legal and other
professional fees and other administrative expenses, as well as impact of
revisions to our statutory reserves.

Transaction and loan losses for the three months ended September 30, 2020 decreased by $17.5 million or 54% and increased for the nine months ended September 30, 2020 by $66.9 million or 71%, respectively, compared to the three and nine months ended September 30, 2019, primarily due to the following:


•transaction losses for the three months ended September 30, 2020 decreased by
$15.5 million compared to the three months ended September 30, 2019, while
losses increased by $59.0 million for the nine months ended September 30, 2020,
compared to the nine months ended September 30, 2019. During the first quarter
of 2020, we had recorded incremental provisions for our Seller business due to
the expected impact of the COVID-19 outbreak and the subsequent shelter-in-place
orders that resulted in a significant slowdown in business. During the second
quarter of 2020, we revised and lowered our estimate of transaction loss
reserves recorded in the first quarter of 2020 due to better than expected
realized transaction losses. Provision for transaction losses declined during
the quarter as a result of better than expected performance, and we released
previously established risk loss provisions for the first and second quarter of
2020 amounting to $39.6 million.

•loan losses for the three months ended September 30, 2020 decreased by $2.0
million compared to the three months ended September 30, 2019, while the losses
increased $7.9 million in the nine months ended September 30, 2020 compared to
the nine months ended September 30, 2019. During the first quarter of 2020, we
recorded incremental provisions for loan losses associated with the COVID-19
outbreak, and to a lesser extent the growth and aging of our Square Capital loan
portfolio. During the second quarter of 2020, we noted improvements in
businesses as some states started reopening and relaxing the shelter-in place
measures and have accordingly adjusted the provisions for loan losses.
Additionally, other than PPP loans, we suspended offers for new loans in the
second quarter of 2020 which contributed to the decrease in loan losses. During
the third quarter of 2020, we continued to experience loan losses in line with
the second quarter provisions for loan losses.

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Interest Expense, Net, and Other Expense (Income), Net (in thousands, except for
percentages)
                                             Three Months Ended                                                            Nine Months Ended
                                                September 30,                                                                September 30,
                       2020              2019            $ Change            % Change               2020              2019             $ Change            % Change
Interest expense,
net                 $ 14,980$  5,632$  9,348                   166  %       $  38,955$ 15,456$  23,499                   152  %
Other expense
(income), net       $   (784)$ (5,541)$  4,757                       NM       $ (20,513)$  6,988$ (27,501)                 (394) %



Interest expense, net, for the three and nine months ended September 30, 2020
increased by $9.3 million and $23.5 million, respectively, compared to the three
and nine months ended September 30, 2019. The increases were primarily due to
higher interest expense related to our convertible notes as a result of the
issuance of the 2025 Notes in March 2020, in addition to a decrease in interest
income earned on our investments in marketable debt securities due to lower
interest rates prevailing in the market.

Other income for the three months ended September 30, 2020 decreased by $4.8
million compared to the three months ended September 30, 2019 primarily due to
the mark to market gain of our equity investment in Eventbrite, which was sold
in December 2019. Other income for the nine months ended September 30, 2020
increased by $27.5 million compared to the nine months ended September 30, 2019
primarily due to a $21.0 million gain from adjustments to our non-marketable
equity investments for observable price changes in the period, in addition to
the net losses on the investment in Eventbrite for the nine months ended
September 30, 2019. These activities are offset in part by the foreign exchange
gains and losses.

Segment Results

Seller Results

The following tables provide a summary of the revenue and gross profit for our
Seller segment for the three and nine months ended September 30, 2020 and 2019
(in thousands):


                                                   Three Months Ended                                                               Nine Months Ended
                                                      September 30,                                                                   September 30,
                             2020               2019            $ Change            % Change                2020                 2019             $ Change            % Change
Net revenue              $ 965,279$ 918,487            46,792                     5  %       $ 2,542,102$ 2,524,269            17,833                     1  %
Cost of revenue            555,948            554,603             1,345                     -  %         1,461,302            1,512,674           (51,372)                   (3) %
Gross profit             $ 409,331$ 363,884$ 45,447                    12  %       $ 1,080,800$ 1,011,595$ 69,205                     7  %



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Revenue


Revenue for the Seller segment for the three and nine months ended September 30,
2020 increased by $46.8 million or 5% and $17.8 million or 1%, respectively,
compared to the three and nine months ended September 30, 2019.

The COVID-19 outbreak and the subsequent shelter-in-place orders resulted in
material deceleration of Seller revenues in the latter half of March 2020
through mid-April 2020 due to lower GPV processed. Additionally, Square Capital
suspended facilitating loans to sellers from mid-March 2020 through the end of
July 2020, other than loans under PPP, further negatively impacting the growth
of Seller revenues. This was offset by the recovery and improvements in GPV
processed from mid-April through the third quarter of 2020 as states started
relaxing the shelter-in-place orders and businesses started to adapt with
introduction of delivery, curbside and to-go orders. Additionally, we saw a
higher percentage of card-not-present transactions in the second and third
quarters of 2020, which have a higher price, as well as the impact of our
November 2019 card-present price change. We also benefited from a higher
percentage of debit card transactions and an increase in average transaction
size. We recognize that recent increases in the percentage of debit, proportion
of card-not-present volumes, and average 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.

Cost of revenue


Cost of revenue for the Seller segment for the three and nine months ended
September 30, 2020 increased by $1.3 million and decreased by $51.4 million,
respectively, compared to the three and nine months ended September 30, 2019.
Seller costs benefited from a higher percentage of debit card transactions and
increase in average value per transaction which 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 and nine months ended September 30, 2020 and 2019
(in thousands):


                                                     Three Months Ended                                                                 Nine Months Ended
                                                        September 30,                                                                     September 30,
                              2020                2019             $ Change             % Change                2020                2019             $ Change             % Change
Net revenue              $ 2,068,595$ 307,040           1,761,555                   574  %       $ 3,796,506$ 744,935           3,051,571                   410  %
Cost of revenue            1,683,471            183,550           1,499,921                   817  %         2,947,587            431,293           2,516,294                   583  %
Gross profit             $   385,124$ 123,490$  261,634                   212  %       $   848,919$ 313,642$  535,277                   171  %




Revenue

Revenue for the Cash App segment for the three and nine months ended September
30, 2020 increased by $1.8 billion or 574% and $3.1 billion or 410%,
respectively, compared to the three and nine months ended September 30, 2019.
The primary drivers were growth in bitcoin revenue, as well as Cash App Instant
Deposit, Cash Card, and Cash for Business. Bitcoin revenue increased primarily
driven by an increase in the number of active bitcoin customers, as well as
growth in customer demand. Additionally, Cash App revenue benefited from
increased numbers of transacting active Cash App customers and from
disbursements of the CARES Act stimulus programs and unemployment benefits,
including a portion of customers who direct deposited these payments into their
Cash App accounts. In light of the end of such stimulus programs and benefits,
Cash App growth may not sustain at the same levels in future quarters.

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Cost of revenue


Cost of revenue for the Cash App segment for the three and nine months ended
September 30, 2020 increased by $1.5 billion or 817% and $2.5 billion or 583%,
respectively, compared to the three and nine months ended September 30, 2019.
The primary drivers for the increase were growth in Bitcoin revenue, as well as
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 payments solution providers.

                                                  Three Months Ended            Nine Months Ended
                                                    September 30,                 September 30,
                                                 2020           2019           2020           2019

Gross Payment Volume (GPV) (in millions) $ 31,729$ 28,228$ 80,272$ 77,599

 Adjusted EBITDA (in thousands)               $ 181,320$ 131,323

$ 288,582$ 298,324

Adjusted Net Income Per Share:

 Basic                                        $    0.39$    0.28$    0.57$    0.65
 Diluted                                      $    0.34$    0.25$    0.51$    0.57

Gross Payment Volume (GPV) We define GPV as the total dollar amount of all card payments processed by sellers using Square, net of refunds. Additionally, GPV includes Cash App activity related to Cash for Business 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 certain 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 12, Indebtedness, of the notes of the Condensed Consolidated Financial
Statements), we are required to recognize non-cash interest expense related to
amortization of debt discount and issuance costs. 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, since we intend to settle future
conversions of our convertible senior notes entirely in shares.

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•We exclude the gain or loss on the disposal of property and equipment, gain or
loss on revaluation of equity investment, gain or loss on debt extinguishment
related to the conversion of senior notes and impairment of intangible assets,
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
recurring 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.

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 loss and our other financial results presented in accordance with GAAP.

The following table presents a reconciliation of net loss to Adjusted EBITDA for each of the periods indicated (in thousands):

                                                  Three Months Ended            Nine Months Ended
                                                    September 30,                 September 30,
                                                 2020           2019           2020           2019
 Net income (loss)                            $  36,515$  29,397$ (80,854)$ (15,494)
 Share-based compensation expense               110,389         77,426      

283,872 217,980

 Depreciation and amortization                   20,624         19,125      

61,741 56,879

 Interest expense, net                           14,980          5,632      

38,955 15,456

 Other expense (income), net                       (784)        (5,541)     

(20,513) 6,988

 Loss on disposal of property and equipment         396            128          2,095            428

 Acquisition related and other costs                359          1,564      

3,939 8,479

 Acquired deferred revenue adjustment               281          1,224      

1,240 6,529

 Acquired deferred costs adjustment                 (71)          (238)     

(307) (1,180)

 Provision (benefit) for income taxes            (1,369)         2,606         (1,586)         2,259
 Adjusted EBITDA                              $ 181,320$ 131,323$ 288,582$ 298,324


                                       49
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The following table presents a reconciliation of net loss to Adjusted EPS for each of the periods indicated (in thousands, except per share data):

                                                             Three Months Ended                     Nine Months Ended
                                                                September 30,                         September 30,
                                                           2020               2019               2020               2019
Net income (loss)                                      $  36,515$  29,397$ (80,854)$ (15,494)
Share-based compensation expense                         110,389             77,426            283,872            217,980
Amortization of intangible assets                          5,236              3,841             13,522             11,286
Amortization of debt discount and issuance costs          17,516              9,843             47,624             29,176
Loss (gain) on revaluation of equity investment                -             (2,462)           (20,998)            16,467
Loss on extinguishment of long-term debt                   1,403                  -              2,393                  -
Loss on disposal of property and equipment                   396                128              2,095                428

Acquisition related and other costs                          359              1,564              3,939              8,479
Acquired deferred revenue adjustment                         281              1,224              1,240              6,529
Acquired deferred costs adjustment                           (71)              (238)              (307)            (1,180)
Adjusted Net Income - basic                            $ 172,024$ 120,723$ 252,526$ 273,671
Cash interest expense on convertible senior notes      $   1,544$   1,277$   4,482$   3,831
Adjusted Net Income - diluted                          $ 173,568          $ 

122,000 $ 257,008$ 277,502


Weighted-average shares used to compute Adjusted Net
Income Per Share:
Basic                                                    444,458            427,124            439,855            423,239
Diluted                                                  514,806            486,404            501,757            486,664

Adjusted Net Income Per Share:
Basic                                                  $    0.39$    0.28$    0.57$    0.65
Diluted                                                $    0.34$    0.25$    0.51$    0.57

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 outbreak continues both in the 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 and adverse 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 September 30, 2020, we had approximately $3.8 billion in available funds,
including undrawn amounts available under our revolving credit facility, as
described in Note 12, Indebtedness, of Notes to the Condensed Consolidated
Financial Statements. 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.

                                       50
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Liquidity Sources

The following table summarizes our cash, cash equivalents, restricted cash, and investments in marketable debt securities (in thousands):

                                                                September 30,         December 31,
                                                                    2020                  2019
Cash and cash equivalents                                      $  2,118,808$  1,047,118
Short-term restricted cash                                           27,556                38,873
Long-term restricted cash                                            13,702                12,715
Cash, cash equivalents, and restricted cash                    $  2,160,066$  1,098,706
Investments in short-term debt securities                           762,434               492,456
Investments in long-term debt securities                            399,122               537,303
Cash, cash equivalents, restricted cash, and investments in
marketable debt securities                                     $  3,321,622$  2,128,465



Our principal sources of liquidity are our cash and cash equivalents and
investments in marketable debt securities. As of September 30, 2020, we had $3.3
billion of cash and cash equivalents, restricted cash, and investments in
marketable debt securities, which were held primarily in cash deposits, money
market funds, 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.

As of September 30, 2020, we held over $2.0 billion in aggregate principal
amount of convertible senior notes, comprised of $146.0 million in aggregate
principal amount of outstanding convertible senior notes that mature on March 1,
2022 (2022 Notes), $862.5 million in aggregate principal amount of convertible
senior notes that mature on May 15, 2023 (2023 Notes), and $1.0 billion in
aggregate amount of convertible senior notes that mature on March 1, 2025 (2025
Notes). The 2022 Notes bear interest at a rate of 0.375% payable semi-annually
on March 1 and September 1 of each year, while the 2023 Notes bear interest at a
rate of 0.50% payable semi-annually on May 15 and November 15 of each year, and
the 2025 Notes bear interest at a rate of 0.125% payable semi-annually on March
1 and September 1 of each year. These notes can be converted or repurchased
prior to maturity if certain conditions are met. We currently expect to settle
future conversions of the notes entirely in shares of our Class A common stock
and will reevaluate this policy from time to time as conversion notices are
received from holders of the notes.

In October 2020, we invested $50 million in bitcoin to further our commitment to
cryptocurrencies. We expect to hold this investment for the long term. 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 cost as an impairment charge, with no upward revisions when the
market prices increase.

In September 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.

In June 2020, we entered into the PPPLF agreement with the Federal Reserve Bank
of San Francisco to secure additional credit collateralized by PPP loans. As of
September 30, 2020, $473.5 million of PPPLF advances were outstanding and
collateralized by the same value of 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.

In May 2020, we entered into a new revolving credit agreement with certain
lenders, which provides a $500 million senior unsecured revolving credit
facility (the "2020 Credit Facility") maturing in May 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 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
                                       51
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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 12, 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 $27.6 million as of September 30, 2020 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's 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 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 $13.7 million as of September 30, 2020 is primarily
related to cash deposited into money market funds that is used as collateral
pursuant to multi-year lease agreements. The Company has recorded this amount as
a non-current asset on the consolidated balance sheets as the lease terms extend
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 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.

                                       52
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Cash Flow Activities
The following table summarizes our cash flow activities (in thousands):
                                                                        Nine Months Ended
                                                                          September 30,
                                                                    2020                 2019
Net cash provided by operating activities                      $   260,877$   404,583
Net cash used in investing activities                             (531,713)            (296,678)
Net cash provided by (used in) financing activities              1,331,424              (86,209)
Effect of foreign exchange rate on cash and cash equivalents           772                 (673)

Net increase in cash, cash equivalents, and restricted cash $ 1,061,360

$ 21,023

Cash Flows from Operating Activities


Cash provided by operating activities consisted of our net loss adjusted for
certain non-cash items, including gain or loss on revaluation of equity
investment, depreciation and amortization, non-cash interest and other expense,
share-based compensation expense, transaction and loan 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 nine months ended September 30, 2020, cash provided by operating
activities was $260.9 million, primarily due to a net loss of $80.9 million, PPP
loans facilitated, less loans sold, of $462.1 million, adjusted for the add back
of non-cash expenses of $588.7 million, consisting primarily of share-based
compensation, transaction and loan losses, depreciation and amortization, and
non-cash interest and other expenses. 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. Additionally, the cash
generated from operating activities increased due to a net inflow from changes
in other assets and liabilities of $215.1 million due to timing.

For the nine months ended September 30, 2019, cash provided by operating
activities was $404.6 million, primarily due to a net loss of $15.5 million,
adjusted for the add back of non-cash expenses of $431.7 million, consisting
primarily of share-based compensation, transaction and loan losses, depreciation
and amortization, and non-cash interest and other expenses largely driven by
growth and expansion of our business activities. The cash generated from
operating activities was negatively affected by a net outflow from changes in
other assets and liabilities of $11.7 million.

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, and business
acquisitions.
For the nine months ended September 30, 2020, cash used in investing activities
was $531.7 million, primarily due to the net investments of marketable
securities including investments from customer funds of $416.1 million.
Additional uses of cash were as a result of the purchase of property and
equipment of $86.4 million and business acquisitions of $29.2 million.
For the nine months ended September 30, 2019, cash used in investing activities
was $296.7 million, primarily due to the net investments of marketable
securities including investments from customer funds of $228.5 million, the
purchase of property and equipment of $45.8 million, and business acquisitions
$20.4 million.
Cash Flows from Financing Activities
For the nine months ended September 30, 2020, cash provided by financing
activities was $1,331.4 million primarily as a result of $936.5 million in net
proceeds from the 2025 Notes offering, proceeds from the PPPLF advances of
$473.5 million, proceeds from issuances of common stock from the exercise of
options and purchases under our employee share purchase plan of $106.6 million,
offset by payments for employee tax withholding related to vesting of restricted
stock units of $182.6 million.
                                       53
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For the nine months ended September 30, 2019, cash used in financing activities
was $86.2 million primarily as a result of proceeds from issuances of common
stock from the exercise of options and purchases under our employee share
purchase plan of $81.8 million, offset by payments for employee tax withholding
related to vesting of restricted stock units of $164.0 million.
Contractual Obligations and Commitments
On March 5, 2020, we issued $1.0 billion in aggregate principal amount of 2025
Notes that mature on March 1, 2025, unless earlier converted or repurchased, and
bear interest at a rate of 0.125% or $0.6 million payable semi-annually on March
1 and September 1 of each year. See Note 12, Indebtedness, of the Notes to the
Condensed Consolidated Financial Statements for more details on this
transaction.
On June 2, 2020, we entered into the Paycheck Protection Program Liquidity
Facility ("PPPLF") agreement with the Federal Reserve Bank of San Francisco to
secure additional credit in an aggregate principal amount of up to $500.0
million. Borrowings under the facility 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.
With the exception of the issuance of 2025 Notes and 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 ended December 31, 2019.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements during the periods presented.


                                       54
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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 outbreak, and revenue recognition have the greatest potential effect on
our consolidated financial statements. Therefore, we consider these to be our
critical accounting policies and estimates.

Our critical accounting policies are disclosed in our Annual Report on Form 10-K
for the year ended December 31, 2019. Our critical accounting policies have not
materially changed during the nine months ended September 30, 2020.

Recent Accounting Pronouncements

See "Recent Accounting Pronouncements" described in Note 1 of the Notes to the Condensed Consolidated Financial Statements.

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