BLOCK, INC. This management's discussion and analysis provides a review of the results of operations, key operating metrics and non-GAAP financial measures, and liquidity and capital resources ofBlock, Inc. on a historical basis and outlines the factors that have affected recent earnings, as well as those factors that may affect future earnings. The following discussion and analysis should be read in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. This section of this Annual Report on Form 10-K generally discusses fiscal 2021 compared to fiscal 2020. The comparison of the fiscal 2020 results with the fiscal 2019 results that are not included in this Annual Report on Form 10-K can be found in the "Management's Discussion and Analysis Results of Operations" section in the Company's fiscal 2020 Annual Report on Part II, Item 7 of Form 10-K, filed onFebruary 23, 2021 . 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 Annual Report on Form 10-K. Our actual results may differ materially from those contained in or implied by any forward-looking statements. Overview OnDecember 1, 2021 , we changed our name from Square to Block. Block is the name for the company as a corporate entity. We started Block with the Square ecosystem inFebruary 2009 to enable businesses (sellers) to accept card payments, an important capability that was previously inaccessible to many businesses. However, sellers need many solutions to thrive, and we have expanded to provide them additional products and services and to give them access to a cohesive ecosystem of tools to help them manage and grow their businesses. Similarly, with Cash App, we have built an ecosystem of financial services to help individuals manage their money. We also added TIDAL, and TBD as businesses to contribute to our purpose of economic empowerment. TBD, a bitcoin-focused business was established to build an open developer platform with the goal of making it easy to create non-custodial, permissionless, and decentralized financial services. Our Square 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 the majority of these products through a combination of transaction, subscription, and service fees. Our suite of cloud-based software solutions are integrated to create a seamless experience and enable a holistic view of sales, customers, employees, and locations. With our offerings, a seller can accept payments in person via swipe, dip, or tap of a card, or online via Square Invoices,Square Virtual Terminal , or the seller's website. We also provide hardware to facilitate commerce for sellers, which includes magstripe readers, contactless and chip readers, Square Stand,Square Register ,Square Terminal , and third-party peripherals. Our Square ecosystem includes Square Banking launched inJuly 2021 for ourU.S. sellers, which consists of a suite of products including Square Savings, Square Checking, and Square Loans (formerly known asSquare Capital ). Square Checking is offered through a partner bank, and Square Savings and Square Loans are offered through our wholly-owned subsidiarySquare Financial Services, Inc. ("Square Financial Services"). The industrial loan company charter for Square Financial Services was approved by theFederal Deposit Insurance Corporation ("FDIC") onMarch 1, 2021 . Square Financial Services offers banking services including certain loan and deposit products. In the second quarter of 2021, we began offering Square Loans inAustralia . Square Savings allows sellers to automatically set aside funds from daily sales into savings accounts that earn interest. Square Checking provides sellers with anFDIC insured account allowing them instant access to their sales and the ability to use those funds for business expenses using their Square Debit Card, withdraw from an ATM, transfer via ACH, or paying employees via Square Payroll. Square Loans offers sellers access to business loans based on the seller's payment processing history. We recognize revenue upon the sale of the loans to third-party investors or over time as the sellers pay down the outstanding amounts for the loans that we hold as available for sale or for investment. We have grown rapidly to serve millions of sellers that represent a diverse set of industries (including services, food-related business, and retail businesses) and sizes, ranging from a single vendor at a farmers' market to multi-location businesses. Square sellers also span geographies, includingthe United States ,Canada ,Japan ,Australia , theUnited Kingdom ,Ireland ,France andSpain . Our Cash App ecosystem provides financial tools for individuals to store, send, receive, spend and invest money. With Cash App, customers can fund their account with a bank account or debit card, send and receive peer-to-peer payments, add physical cash at participating retailers, deposit mobile checks, and receive direct deposit payments. Customers can make 55 -------------------------------------------------------------------------------- purchases with their Cash Card, aVisa prepaid card that is linked to the balance stored in Cash App. Additionally, customers can use CashApp Pay , a checkout option which allows customers to pay using their Cash App account. With Cash Boost, customers receive instant discounts when they make Cash Card purchases at designated merchants. Customers can also use their stored funds to buy and sell bitcoin and equity investments within Cash App. The Cash App ecosystem also includes a tax filing product for individuals, providing a seamless, mobile-first solution for individuals to file their taxes for free. OnJanuary 31, 2022 (February 1, 2022 Australian Eastern Daylight Time), we completed the acquisition of Afterpay Limited ("Afterpay"), a global BNPL platform. The purchase consideration was comprised of 113,387,895 shares of the Company's Class A common stock with an aggregate fair value of$13.9 billion based on the closing price of the Company's Class A common stock on the acquisition date. In addition, under the terms of acquisition agreement, the Company issued replacement equity awards for outstanding equity awards to Afterpay employees. Refer to Note 8, Acquisitions, of Notes to the Condensed Consolidated Financial Statements for further details. OnApril 30, 2021 , we completed the acquisition of a majority ownership interest in TIDAL as detailed in Note 8, Acquisitions, of Notes to the Consolidated Financial Statements. 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. OnMay 20, 2021 , we issued an aggregate principal amount of$2.0 billion of senior unsecured notes comprised of$1.0 billion of senior unsecured notes that mature onJune 1, 2026 ("2026 Senior Notes") with a 2.75% interest rate, and$1.0 billion of senior unsecured notes that mature onJune 1, 2031 ("2031 Senior Notes") with a 3.50% interest rate. The 2026 Senior Notes and 2031 Senior Notes will mature on each of its respective dates, unless earlier redeemed or repurchased. Interest on the 2026 Senior Notes and 2031 Senior Notes will be payable semi-annually onJune 1 andDecember 1 of each year beginning onDecember 1, 2021 . We intend to use the net proceeds from our 2026 Senior Notes and 2031 Senior Notes offerings for general corporate purposes, which may include potential acquisitions and strategic transactions, capital expenditures, investments and working capital. We participated in two rounds of the Paycheck Protection Program ("PPP") under the provisions of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). These PPP loans are guaranteed by theU.S. government and are eligible for forgiveness if the borrowers meet certain criteria. As ofDecember 31, 2021 , we had facilitated the issuance of$1.5 billion of loans in the aggregate under the program, of which we had sold$399.1 million to an investor. As ofDecember 31, 2021 , approximately$725.9 million in the aggregate of PPP loans had been forgiven by the SBA, of which,$679.6 million was forgiven in the year endedDecember 31, 2021 . We approved and funded the last remaining PPP applications onMay 21, 2021 upon exhaustion of the funds in the program. To fund some of our PPP loans, we entered into Paycheck Protection Program Liquidity Facility agreements with theFederal Reserve Bank of San Francisco for an aggregate principal amount of up to$1.0 billion . Borrowings under the facility accrue interest at a rate of 0.35% and advances are collateralized by the same value of the loans originated under the PPP. The maturity date of any PPPLF advance is the maturity date of the PPP loan pledged to secure the advance, and will be accelerated upon the occurrence of certain events of default. The advances under the facility are repayable if the associated PPP loans are forgiven, repaid by the customer, or settled by the government guarantee. As ofDecember 31, 2021 ,$497.5 million of PPPLF advances were outstanding.
Update on the Impact of COVID-19 on Current Trends and Outlook
In 2021, we experienced improvements in our business, despite elevated infection rates across the country due to various COVID-19 variants. These improvements were mainly as a result of varying states of continued economic recovery and re-openings in the majority ofU.S. markets. We experienced growth in our Square GPV performance, as in-person activity at sellers continued to increase on a year-over-year basis. Overall, we continued to experience improvements in our business in our international markets, although regional lockdowns in select markets periodically affected in-person activity. Our Cash App business performed well due to increased consumer spending, as we continued to benefit from the strength of a broader macroeconomic recovery, regional re-openings, and government stimulus and relief programs enacted in response to COVID-19. Although our business results remain positive, the continued effects of the COVID-19 pandemic on our financial results and the broader economic recovery are unknown. The emergence of new and more transmissible variants of COVID-19 has at times led to a resurgence of the virus, particularly in populations with low vaccination rates. Further, the 56 --------------------------------------------------------------------------------
impacts of inflation on our business and the broader economy, which may be exacerbated by the economic recovery from the COVID-19 pandemic, may also impact our financial condition and results of operations.
Components of Results of OperationsRevenue
Transaction-based revenue. We charge our sellers a transaction fee that is generally calculated based on a percentage of the total transaction amount processed. We also selectively offer custom pricing for certain larger sellers. Transaction-based revenue also includes amounts we charge our Cash App customers for peer-to-peer transactions to business accounts and payments sent from a credit card. Subscription and services-based revenue. Revenue from Cash App, Square Loans (formerly known asSquare Capital ), and Instant Transfers for sellers currently comprise the majority of our subscription and services-based revenue. Cash App subscription and services-based revenue is primarily comprised of transaction fees from both Cash App Instant Deposit and Cash Card. Our other subscription and services-based products include website hosting and domain name registration services, Gift Cards, Square Appointments, Customer Engagement, Employee Management, Payroll, Square Checking, and other product offerings. Instant Deposit is a functionality within the Cash App and our managed payment solutions that enables customers to instantly deposit funds into their bank accounts, while Cash Card offers Cash App customers the ability use their stored funds via aVisa prepaid card that is linked to the balance the customer stores in Cash App. We charge a per transaction fee which we recognize as revenue when customers instantly deposit funds to their bank account, use their Cash Card to make a purchase, or withdraw funds. Square Loans originates loans to sellers that are generally repaid through withholding a percentage of the collections of the seller's receivables processed by us or a specified monthly amount. InApril 2021 , we began originating loans in theU.S. through our wholly-owned subsidiary bank, Square Financial Services. Prior to the launch of Square Financial Services, the loans were generally originated by a bank partner, from whom we purchased the loans to obtain all rights, title, and interests. We also originate loans to the customers of certain sellers which are generally repaid via ACH. For some of the loans, it is our intention to sell the rights, title, and interest to third-party investors for an upfront fee. We are retained by the third-party investors to service the loans and earn a servicing fee for facilitating the repayment of these loans through our payments solutions. Certain loans, for which we have the intention and ability to hold through maturity, are not immediately sold to third-party investors, in which case, interest and fees earned are recognized as revenue using the effective interest method. TIDAL primarily generates revenue from subscriptions to its customers, and such subscriptions allow access to the song library, video library, and improved sound quality. Customers can subscribe to services directly from the TIDAL website or through the Apple store, for which the Company charges a monthly fee which is recognized ratably as revenue as the service is provided. Hardware revenue. Hardware revenue includes revenue from sales of contactless and chip readers, Square Stand,Square Register ,Square Terminal , and third-party peripherals. Third-party peripherals include cash drawers, receipt printers, and barcode scanners, all of which can be integrated with Square Stand,Square Register , orSquare Terminal to provide a comprehensive point-of-sale solution. Bitcoin revenue. Our Cash App customers have the ability to purchase bitcoin, a cryptocurrency. We recognize revenue when customers purchase bitcoin and it is transferred to the customer's account. We purchase bitcoin from private broker dealers or from Cash App customers and apply a small margin before selling it to our customers. The sale amounts received from our customers are recorded as revenue on a gross basis and the associated bitcoin cost as cost of revenues, as we are the principal in the bitcoin sale transaction. We have determined we are the principal because we control the bitcoin before delivery to the customer, we are primarily responsible for the delivery of the bitcoin to the customer, we are exposed to risks arising from fluctuations of the market price of bitcoin before delivery to the customer, and we have discretion in setting prices charged to the customer. Bitcoin revenue may fluctuate as a result of changes in customer demand or the market price of bitcoin. 57 --------------------------------------------------------------------------------
Cost of Revenue and Gross Margin
Transaction-based costs. Transaction-based costs consist primarily of interchange and assessment fees, processing fees, and bank settlement fees paid to third-party payment processors and financial institutions.
Subscription and services-based costs. Subscription and services-based costs consist primarily of costs related to Cash App including Instant Deposit and Cash Card as well as Instant Transfer for sellers. Hardware costs. Hardware costs consist primarily of product costs associated with contactless and chip readers,Square Terminal , Square Stand,Square Register , and third-party peripherals. Product costs include manufacturing-related overhead and personnel costs, packaging, and fulfillment costs. Hardware is sold primarily as a means to grow our transaction-based revenue and, as a result, generating positive gross margins from hardware sales is not the primary goal of the hardware business. Bitcoin costs. Bitcoin cost of revenue is comprised of the amounts we pay to purchase bitcoin, which will fluctuate in line with the price of bitcoin in the market. We purchase bitcoin to facilitate customers' access to bitcoin.
Operating Expenses
Operating expenses consist of product development, sales and marketing, general and administrative expenses, transaction and loan losses, and bitcoin impairment losses. For product development and general and administrative expenses, the largest single component is personnel-related expenses, including salaries, commissions and bonuses, employee benefit costs, and share-based compensation. In the case of sales and marketing expenses, a significant portion is related to the Cash App peer-to-peer transactions and Cash Card issuance costs, in addition to paid advertising and personnel-related expenses. Operating expenses also include allocated overhead costs for facilities, human resources, and IT. Product development. Product development expenses currently represent the largest component of our operating expenses and consist primarily of expenses related to our engineering, data science, and design personnel; fees and supply costs related to maintenance at third-party data center facilities; hardware related development and tooling costs; and fees for software licenses, consulting, legal, and other services that are directly related to growing and maintaining our portfolio of products and services. Additionally, product development expenses include the depreciation of product-related infrastructure and tools, including data center equipment, internally developed software, and computer equipment. We continue to focus our product development efforts on adding new features and apps, and on enhancing the functionality and ease of use of our offerings. Our ability to realize returns on these investments is substantially dependent upon our ability to successfully address current and emerging requirements of sellers, buyers, and customers through the development and introduction of these new products and services. Sales and marketing. Sales and marketing expenses are aggregated into two main components. The first component consists of traditional advertising costs incurred such as direct sales expense, account management, local and product marketing, retail and e-commerce, partnerships, and communications personnel. The second component of sales and marketing expense consists of costs incurred for services, incentives and other costs that are not directly related to revenue generating transactions that we consider to be marketing costs to encourage the usage of Cash App. These expenses include, but are not limited to, Cash App peer-to-peer processing costs and transaction losses, card issuance costs, customer referral bonuses, and promotional giveaways that are expensed as incurred.
General and administrative. General and administrative expenses consist primarily of expenses related to our customer support, finance, legal, risk operations, human resources, and administrative personnel. General and administrative expenses also include costs related to fees paid for professional services, including legal, tax, and accounting services.
Transaction and loan losses. We are exposed to transaction losses due to chargebacks as a result of fraud or uncollectibility. We incur loan losses whenever the amortized cost of loans that have been retained exceeds their fair value.
Transaction losses include chargebacks for unauthorized credit card use and the
inability to collect on disputes between buyers and sellers over the delivery of
goods or services, as well as losses on Cash App activity related to
peer-to-peer payments sent from a credit card, Cash for Business, and Cash Card.
We base our reserve estimates on prior chargeback history and current period
data points indicative of transaction loss. We reflect additions to the reserve
in current operating
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results, while realized losses are offset against the reserve. The establishment
of appropriate reserves for transaction losses is an inherently uncertain
process, and ultimate losses may vary from the current estimates. We regularly
update our reserve estimates as new facts become known and events occur that may
affect the settlement or recovery of losses.
Loan losses are recorded at the lower of amortized cost or fair value determined
on an individual loan basis. To determine the fair value the Company utilizes
industry-standard valuation modeling, such as discounted cash flow models,
taking into account the estimated timing and amounts of periodic repayments. The
Company recognizes a charge whenever the amortized cost of a loan exceeds its
fair value, with such charges being reversed for subsequent increases in fair
value, but only to the extent that such reversals do not result in the amortized
cost of a loan exceeding its fair value.
Bitcoin impairment losses. Bitcoin held as an investment is accounted for as an
indefinite lived intangible asset, and thus, is subject to impairment losses if
the fair value of bitcoin decreases below the carrying value during the assessed
period. Impairment losses cannot be recovered for any subsequent increase in
fair value until the sale of the asset.
Interest and Other Income and Expense, net
Interest and other income and expense, net consists primarily of gains or losses arising from marking to market of equity investments, interest expense related to our long-term debt, interest income on our investment in marketable debt securities, and foreign currency-related gains and losses.
Provision (Benefit) for Income Taxes
The provision for income taxes consists primarily of federal, state, local, and foreign tax. Our effective tax rate fluctuates from period to period due to changes in the mix of income and losses in jurisdictions with a wide range of tax rates, the effect of acquisitions, changes resulting from the amount of recorded valuation allowance, permanent differences betweenU.S. generally accepted accounting principles and local tax laws, certain one-time items, and changes in tax contingencies. 59 -------------------------------------------------------------------------------- Results of Operations
Revenue (in thousands, except for percentages)
Year Ended
2021 2020 $ Change % Change
Transaction-based revenue $ 4,793,146 $ 3,294,978 $ 1,498,168 45 %
Subscription and services-based revenue 2,709,731 1,539,403 1,170,328 76 %
Hardware revenue 145,679 91,654 54,025 59 %
Bitcoin revenue 10,012,647 4,571,543 5,441,104 119 %
Total net revenue $ 17,661,203 $ 9,497,578 $ 8,163,625 86 %
Total net revenue for the year ended December 31, 2021 , increased by $8.2
billion , or 86%, compared to the year ended December 31, 2020 . Bitcoin revenue
increased by $5.4 billion , and represented 67% of the increase in total net
revenue. Excluding bitcoin revenue, total net revenue increased by $2.7 billion ,
or 55%, in the year ended December 31, 2021 , compared to the year ended December
31, 2020 .
Transaction-based revenue for the year ended December 31, 2021 increased by $1.5
billion or 45%, compared to the year ended December 31, 2020 . This increase in
revenue was in line with the increase in GPV of 49% for the year ended December
31, 2021 , compared to the year ended December 31, 2020 . The increase was
primarily attributable to and affected by the following events and factors:
•continued improvements in both card-present volumes as a result of regional re-openings and resumed in-person activity at sellers, as well as growth in card-not-present volume, which are higher-priced transactions;
•increase in consumer spending driven in part by a broader macro economic
recovery, regional re-openings and growth in our Square GPV in international
markets despite periodic lockdowns in certain markets, as well as
•growth in Cash App Business GPV which includes Cash for Business and peer-to-peer payments sent from a credit card. Cash for Business includes peer-to-peer transactions received by business accounts using Cash App.
These factors had varying impacts on GPV growth and may continue to impact our revenues in the future.
Subscription and services-based revenue for the year endedDecember 31, 2021 increased by$1.2 billion or 76%, compared to the year endedDecember 31, 2020 . The increase was primarily driven by both Cash App and Square subscription and services products. The increase in Cash App subscription and services-based revenue is primarily due to increased Cash Card usage and Cash App Instant Deposit volumes. Square subscription and services-based revenue increased primarily due to the increased origination volumes of Square Loans, other software subscriptions, and Instant Transfer for sellers. Subscription and services-based revenue also includes revenue generated from music streaming services following the acquisition of TIDAL in the second quarter of 2021. Hardware revenue for the year endedDecember 31, 2021 increased by$54.0 million or 59%, compared to the year endedDecember 31, 2020 . The increase was primarily a result of an overall increase in sales of hardware across many of our product offerings, due in particular toSquare Register ,Square Terminal , and third party peripherals. Bitcoin revenue for the year endedDecember 31, 2021 increased by$5.4 billion or 119% compared to the year endedDecember 31, 2020 . The increase was due to the market price of bitcoin and growth in the number of active bitcoin customers. The amount of bitcoin revenue recognized will fluctuate depending on customer demand as well as changes in the market price of bitcoin. During the year endedDecember 31, 2021 , we saw a significant growth in bitcoin revenue as compared to the year endedDecember 31, 2020 . While bitcoin contributed 57% and 48% of the total revenue in 2021 and 2020, respectively, and 67% and 85% of the increase in revenues in 2021 and 2020, respectively, gross profit generated from bitcoin was only 4.9% and 3.5% of the total gross profit in 2021 and 2020, respectively. 60 --------------------------------------------------------------------------------
Cost of Revenue (in thousands, except for percentages)
Year Ended December 31,
2021 2020 $ Change % Change
Transaction-based costs $ 2,729,442 $ 1,916,644 $ 812,798 42 %
Subscription and services-based costs 495,761 228,649 267,112 117 %
Hardware costs 221,185 144,342 76,843 53 %
Bitcoin costs 9,794,992 4,474,534 5,320,458 119 %
Total cost of revenue $ 13,241,380 $ 6,764,169 $ 6,477,211 96 %
Total cost of revenue for the year ended December 31, 2021 , increased by $6.5
billion , or 96%, compared to the year ended December 31, 2020 . Bitcoin costs of
revenue increased by $5.3 billion , and represented 82% of the increase in the
total cost of revenue. Excluding bitcoin costs of revenue, total cost of revenue
increased by approximately $1.2 billion , or 51%, in the year ended year ended
December 31, 2021 , compared to the year ended December 31, 2020 .
Transaction-based costs increased by $812.8 million or 42% for the year ended
December 31, 2021 , compared to the year ended December 31, 2020 . The increase in
transaction-based costs was primarily attributable to an increase in GPV of 49%
for the year ended December 31, 2021 compared to the year ended December 31,
2020 . The increase in GPV was partially offset by growth in card-present
volumes, debit card transactions and an increase in average transaction size,
lowering the average cost per transaction. Card-present and debit card
transactions are, generally, associated with lower costs per transaction.
Subscription and services-based costs for the year ended December 31, 2021
increased by $267.1 million or 117% compared to the year ended December 31,
2020 . The increase was driven primarily by growth in Cash Card, Instant Deposit
activity and costs related to music streaming services following the acquisition
of TIDAL in the second quarter of 2021.
Hardware costs for the year ended December 31, 2021 increased by $76.8 million
or 53%, compared to the year ended December 31, 2020 . The increase was primarily
due to the same drivers for the increase in hardware revenue discussed above as
well as increased costs in the second half of 2021 due to global chip shortages
and increased shipping costs.
Bitcoin costs for the year ended December 31, 2021 increased by $5.3 billion or
119%, compared to the year ended December 31, 2020 . Bitcoin costs of revenue
comprises of the total amounts we pay to purchase bitcoin, which will fluctuate
in line with bitcoin revenue.
Product Development (in thousands, except for percentages)
Year Ended December 31,
2021 2020 $ Change % Change
Product development $ 1,399,079 $ 885,681 $ 513,398 58 %
Percentage of total net revenue 8 % 9 %
Product development expenses for the year ended
•an increase of$376.0 million in personnel costs for the year endedDecember 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$157.0 million for the year endedDecember 31, 2021 ; and •an increase of$127.5 million in software and data center operating costs, consulting, depreciation and operating expense allocations, and certain Cash App crypto networks operating costs for the year endedDecember 31, 2021 as a result of increased capacity needs and expansion of our cloud-based services. 61 --------------------------------------------------------------------------------
Sales and Marketing (in thousands, except for percentages)
Year Ended December 31,
2021 2020 $ Change % Change
Sales and marketing $ 1,617,189 $ 1,109,670 $ 507,519 46 %
Percentage of total net revenue 9 % 12 %
Sales and marketing expenses for the year ended December 31, 2021 , increased by
$507.5 million , or 46%, compared to the year ended December 31, 2020 , primarily
due to the following:
•an increase in Cash App marketing costs of $272.3 million for the year ended
December 31, 2021 . Cash App customer acquisition costs increased by $167.1
million , in addition to processing costs and related transaction losses
increased by $93.7 million as a result of increased volumes of activity with our
Cash App peer-to-peer service and increased card issuance costs. Cash App
customer acquisition costs include advertising costs and costs associated with
various incentives to customers. We consider the free services such as stock
investing, Cash App Tax , and certain Cash Card and peer-to-peer services offered
Cash App customers to be marketing initiatives aimed at attracting new customers
and encouraging the usage of Cash App;
•an increase of $81.3 million in sales and marketing personnel costs to enable
growth initiatives. The increase in personnel related costs includes an increase
in share-based compensation expense of $20.4 million ;
•an increase of $72.5 million in advertising costs for our Square ecosystem
services for the year ended December 31, 2021 , primarily from increased online
and television marketing campaigns; and
•an increase in sales and marketing expenses due to the recent acquisition of TIDAL completed in the second quarter of 2021.
General and Administrative (in thousands, except for percentages)
Year Ended December 31,
2021 2020 $ Change % Change
General and administrative $ 983,326 $ 579,203 $ 404,123 70 %
Percentage of total net revenue 6 % 6 %
General and administrative expenses for the year ended
•an increase of$211.4 million in general and administrative personnel costs for the year endedDecember 31, 2021 , mainly as a result of additions to our customer support, legal, finance and human resource 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$33.0 million for the year endedDecember 31, 2021 ; and •the remaining increase was primarily due to an increase in third-party legal and other professional fees, including acquisition-related expenses, software and subscription costs, and other administrative expenses.
Transaction and Loan Losses (in thousands, except for percentages)
Year Ended December 31,
2021 2020 $ Change % Change
Transaction and loan losses $ 187,991 $ 177,670 $ 10,321 6 %
Transaction and loan losses for the year ended December 31, 2021 , increased by
$10.3 million , or 6%, compared to the year ended December 31, 2020 , primarily
due to the following:
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•transaction losses increased by $30.2 million for the year ended December 31,
2021 due to growth in our Cash App business. The increase in the year ended
December 31, 2021 was due to increased transaction volumes associated with Cash
Card in the year ended December 31, 2021 . This increase was offset by lower
Square risk loss provisions recorded as businesses recovered as a result of
regional re-openings and broader macro economic recovery, reducing the risk of
chargebacks related to uncollectibility. Overall, we recorded higher risk loss
provisions for our Square business in the prior year due to the expected impact
of COVID-19; and
•a decrease of $19.9 million in loan losses for the year ended December 31, 2021
primarily due to higher incremental provisions for loan losses associated with
the COVID-19 pandemic recorded during the year ended December 31, 2020 .
Bitcoin Impairment Losses (in thousands, except for percentages)
Year Ended December 31,
2021 2020 $ Change % Change
Bitcoin impairment losses $ 71,126 $ - $ 71,126 NM
Bitcoin impairment losses of $71.1 million were recorded in the year ended
December 31, 2021 due to the market price of bitcoin decreasing below the
carrying value of our bitcoin investment during the period. As of December 31,
2021 , the fair value of our investment in bitcoin was $371.0 million based on
observable market prices, which is $222.1 million in excess of the carrying
value of our investment of $149.0 million . Any unrealized gains on our bitcoin
investment will only be recognized upon the sale of such bitcoin investment.
Interest Expense, Net, and Other Expense (Income), Net (in thousands, except for
percentages)
Year Ended December 31,
2021 2020 $ Change % Change
Interest expense, net
Other expense (income), net (29,474) (291,725) 262,251
NM
Interest expense, net, for the year ended December 31, 2021 decreased by $23.8
million compared to the year ended December 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 on January 1, 2021 . Under 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. This was offset in part
by increases in cash interest expense related to the issuance of the 2031 Senior
Notes and 2026 Senior Notes issued in May 2021 . Refer to Note 13, Indebtedness,
of Notes to the Consolidated Financial Statements for further details.
Other expense (income), net is primarily driven by the amounts of gains or
losses arising from the revaluation of our equity investments, amortization of
investments in marketable debt securities, and foreign exchange losses. In
December 2020 , upon DoorDash's initial public offering, the preferred shares
held by the Company converted into common shares of DoorDash. As of December 31,
2020 , the Company revalued this investment and recorded a gain of $276.3 million
in the year ended December 31, 2020 . Additionally, in the fourth quarter of
2020, we recorded a gain on investment in a privately held entity of $19.0
million based on observable prices for similar equity instruments issued by the
same entity. During the year ended December 31, 2021 , we recorded a net gain
related to the investment in DoorDash of $44.4 million , partially offset by
$14.9 million of investment amortization. In June 2021 , we completed the sale of
our remaining investment in DoorDash, which will have no further impact on our
results in future periods.
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Segment Results
Square Results
The following tables provide a summary of the revenue and gross profit for our Square segment for the year endedDecember 31, 2021 and 2020 (in thousands): Year Ended December 31, 2021 2020 $ Change % Change Net revenue$ 5,193,348 $ 3,529,192 $ 1,664,156 47 % Cost of revenue 2,876,677 2,021,361 855,316 42 % Gross profit$ 2,316,671 $ 1,507,831 $ 808,840 54 % Revenue
Revenue for the Square segment for the year ended
The increase was primarily due to the growth in GPV attributable to increased consumer spending driven in part by a broader macro economic recovery, shelter-in-place orders being lifted, regional re-openings and resumed in-person activity at sellers. Additionally, government disbursements related to stimulus programs enacted through 2021 led to an increase in both card-present volumes and higher-priced card-not-present transactions.
Cost of revenue
Cost of revenue for the Square segment for the year endedDecember 31, 2021 increased by$855.3 million compared to the year endedDecember 31, 2020 . The increase was primarily due to growth in GPV and an increase in both card-present volumes and higher-priced card-not-present transactions, offset by a higher overall percentage of debit card transactions, which have a lower cost per transaction.
Cash App Results
The following tables provide a summary of the revenue and gross profit for our Cash App segment for the year endedDecember 31, 2021 and 2020 (in thousands): Year Ended December 31, 2021 2020 $ Change % Change Net revenue$ 12,315,499 $ 5,968,386 $ 6,347,113 106 % Cost of revenue 10,244,652 4,742,808 5,501,844 116 % Gross profit$ 2,070,847 $ 1,225,578 $ 845,269 69 % 64
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Revenue
Revenue for the Cash App segment for the year endedDecember 31, 2021 increased by$6.3 billion compared to the year endedDecember 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 and growth in the number of active bitcoin customers. While bitcoin contributed 57% and 48% of the total revenue in 2021 and 2020, respectively, and 67% and 85% of the increase in revenues in 2021 and 2020, respectively, gross profit generated from bitcoin was only 4.9% and 3.5% of the total gross profit in 2021 and 2020, respectively. Excluding bitcoin revenue, Cash App revenue increased$906.0 million or 65% compared to the year endedDecember 31, 2020 due to the growth in numbers of active Cash App customers, increase in the number of business accounts, broader macroeconomic recovery, and from government stimulus and relief programs in place in 2021. These relief programs provided government aid 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 periods 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 year endedDecember 31, 2021 increased by$5.5 billion compared to the year endedDecember 31, 2020 . The primary drivers for the increase were growth in bitcoin revenue and the associated costs of such bitcoin revenue, as discussed above. Excluding bitcoin cost of revenue, Cash App cost of revenue increased$181.4 million or 68% due to the growth in Cash Card, Cash App Instant Deposit, and Cash for Business.
Comparison of Years Ended
For a discussion of the 2020 Results of Operations, including a discussion of the financial results for the fiscal year endedDecember 31, 2020 compared to the fiscal year endedDecember 31, 2019 , refer to Part I, Item 7 of our Form 10-K filed with theSEC onFebruary 23, 2021 . 65 -------------------------------------------------------------------------------- Key Operating Metrics and Non-GAAP Financial Measures We collect and analyze operating and financial data to evaluate the health of our business, allocate our resources, and assess our performance. In addition to total net revenue, net income (loss), and other results under generally accepted accounting principles (GAAP), the following table sets forth key operating metrics and non-GAAP financial measures we use to evaluate our business. We believe these metrics and measures are useful to facilitate period-to-period comparisons of our business, and to facilitate comparisons of our performance to that of other payment solution providers. Year Ended December 31, 2021 2020 2019 2018 2017 (in thousands, except for GPV and per share data) Gross Payment Volume (GPV) (in millions)$ 167,720 $ 112,295
$ 1,013,657 $ 474,071 $ 416,853 $ 256,523 $ 139,009 Adjusted Net Income Per Share: Basic$ 1.94 $ 0.95 $ 0.90 $ 0.55 $ 0.30 Diluted$ 1.71 $ 0.84 $ 0.80 $ 0.47 $ 0.27
Gross Payment Volume (GPV)
We define GPV as the total dollar amount of all card payments processed by sellers using Square, net of refunds, and ACH transfers. Additionally, GPV includes Cash App Business GPV, which is comprised of Cash App activity related to peer-to-peer transactions received by business accounts, and peer-to-peer payments sent from a credit card.
Adjusted EBITDA and Adjusted Net Income (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 Annual Report on Form 10-K 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 13, Indebtedness, of the notes of the Consolidated Financial Statements), prior to the adoption of ASU No. 2020-06 onJanuary 1, 2021 , we were required to recognize non-cash interest expense related to amortization of debt discount and issuance costs. Subsequent to adoption, we only recognize non-cash interest expense related to amortization of debt issuance costs on convertible notes and unsecured notes. We believe that excluding these expenses from our non-GAAP measures is useful to investors because such incremental non-cash interest expense does not represent a current or future cash outflow for the Company and is therefore not indicative of our continuing operations or meaningful when comparing current results to past results. Additionally, for purposes of calculating diluted Adjusted EPS we add back cash interest expense on convertible senior notes, as if converted at the beginning of the period, if the impact is dilutive. •We exclude gain or loss on the disposal of property and equipment, gain or loss on revaluation of equity investments, bitcoin impairment losses, and prior to the adoption of ASU No. 2020-06 onJanuary 1, 2021 , gain or loss on debt extinguishment related to the conversion of convertible notes, as applicable, from non-GAAP financial measures because we do not believe that these items are reflective of our ongoing business operations. •We also exclude certain transaction and integration costs associated with business combinations, and various other costs that are not normal operating expenses. Transaction costs include amounts paid to redeem acquirees' unvested 66 -------------------------------------------------------------------------------- share-based compensation awards, and legal, accounting, valuation and due diligence costs. Integration costs include advisory and other professional services or consulting fees necessary to integrate acquired businesses. Other costs that are not reflective of our core business operating expenses may include contingent losses, litigation and regulatory charges. We also add back the impact of the acquired deferred revenue and deferred cost adjustment, which was written down to fair value in purchase accounting. In addition to the items above, Adjusted EBITDA as a non-GAAP financial measure also excludes depreciation, 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 income (loss) and our other financial results presented in accordance with GAAP.
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--------------------------------------------------------------------------------The following table presents a reconciliation of net income (loss) to Adjusted EBITDA for each of the periods indicated (in thousands):
Year Ended
2021 2020 2019 2018 2017
Net income (loss) attributable to common
stockholders $ 166,284 $ 213,105
(7,458) - - - -
Net income (loss) 158,826 213,105 375,446 (38,453) (62,813)
Share-based compensation expense 608,042 397,500 297,863 216,881 155,836
Depreciation and amortization 134,756 84,212 75,598 60,961 37,279
Acquisition related, integration and
other costs 35,474 7,482 9,739 4,708 -
Interest expense, net 33,124 56,943 21,516 17,982 10,053
Other expense (income), net (29,474) (291,725) 273 (18,469) (1,595)
Bitcoin impairment losses 71,126 - - - -
Provision (benefit) for income taxes (1,364) 2,862 2,767 2,326 149
Loss (gain) on disposal of property and
equipment 2,633 2,570 1,008 (224) 100
Gain on sale of asset group - - (373,445) - -
Acquired deferred revenue adjustment 744 1,497 7,457 12,853 -
Acquired deferred costs adjustment (230) (375) (1,369) (2,042) -
Adjusted EBITDA $ 1,013,657 $ 474,071 $ 416,853 $ 256,523 $ 139,009
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The following table presents a reconciliation of net income (loss) to Adjusted
Net Income (Loss) Per Share for each of the periods indicated (in thousands,
except per share data):
Year Ended December 31,
2021 2020 2019 2018 2017
Net income (loss) attributable to common
stockholders $ 166,284 $ 213,105
(7,458) - - - -
Net income (loss) $ 158,826 $ 213,105
608,042 397,500 297,863 216,881 155,836
Acquisition related, integration and
other costs 35,474 7,482 9,739 4,708 -
Amortization of intangible assets 40,522 19,239 15,000 13,103 7,615
Amortization of debt discount and
issuance costs 9,822 67,979 39,139 32,855 14,223
Loss (gain) on revaluation of equity
investments (35,493) (295,297) 12,326 (20,342) -
Bitcoin impairment losses 71,126 - - - -
Loss on extinguishment of long-term debt - 6,651 - 5,028 -
Loss (gain) on disposal of property and
equipment 2,633 2,570 1,008 (224) 100
Gain on sale of asset group - - (373,445) - -
Acquired deferred revenue adjustment 744 1,497 7,457 12,853 -
Acquired deferred cost adjustment (230) (375) (1,369) (2,042) -
Adjusted Net Income - basic $ 891,466 $ 420,351
6,099 6,078 5,108 1,292 -
Adjusted Net Income - diluted $ 897,565 $ 426,429 Adjusted Net Income Per Share: Basic$ 1.94 $ 0.95 $ 0.90 $ 0.55 $ 0.30 Diluted$ 1.71 $ 0.84 $ 0.80 $ 0.47 $ 0.27 Weighted-average shares used to compute Adjusted Net Income Per Share: Basic 458,432 443,126 424,999 405,731 379,344 Diluted 525,725 507,229 486,381 478,895 426,519
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.
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Liquidity and Capital Resources
We continued to experience improvements in our business as the majority of U.S.
markets transitioned to varying states of economic recovery and reopenings.
Although our outlook and business results continue to be positive, the extent to
which the COVID-19 pandemic will further impact our results of operations,
financial condition and cash flows in the future is unknown. We continue to
evaluate our investment plans and discretionary expenditures and will make
adjustments accordingly.
As of December 31, 2021 , we had approximately $7.4 billion in available funds,
including an undrawn amount of $500.0 million available under our revolving
credit facility, as described in Note 13, Indebtedness, of Notes to the
Consolidated Financial Statements. On February 23, 2022 , we entered into an
amendment to our revolving credit facility to increase the commitments under the
facility to $600 million , as described in Part II, Item 9B, Other Information.
We intend to continue focusing on our long-term business initiatives and believe
that our available funds are sufficient to meet our liquidity needs for the
foreseeable future. We are carefully monitoring and managing our cash position
in light of ongoing conditions and levels of operations. As of December 31,
2021 , we were in compliance with all financial covenants associated with the
2020 Credit Facility and Senior Notes.
The following table summarizes our cash, cash equivalents, restricted cash, customer funds and investments in marketable debt securities (in thousands):
Liquidity and Capital Sources
Year Ended December 31,
2021 2020
Cash and cash equivalents $ 4,443,669 $ 3,158,058
Short-term restricted cash 18,778 30,279
Long-term restricted cash 71,702 13,526
Customer funds cash and cash equivalents 2,440,941 1,591,308
Cash, cash equivalents, restricted cash and customer funds 6,975,090 4,793,171
Investments in short-term debt securities 869,283 695,112
Investments in long-term debt securities 1,526,430 463,950
Cash, cash equivalents, restricted cash, customer funds and investments in marketable debt securities
$
9,370,803
Our principal sources of liquidity are our cash and cash equivalents, and investments in marketable debt securities. As ofDecember 31, 2021 , we had$9.4 billion of cash and cash equivalents, restricted cash, customer funds cash and cash equivalents, and investments in marketable debt securities. Customer funds cash and cash equivalents are separate from the Company's corporate funds and are not used for any corporate purposes. These funds are not used for Company liquidity, but rather to meet the obligations set aside for customers. Investments in marketable debt securities were held primarily in cash deposits, money market funds, reverse repurchase agreements,U.S. government and agency securities, commercial paper, and corporate bonds. We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Our investments in marketable debt securities are classified as available-for-sale. Excluding customer funds, our total liquidity as ofDecember 31, 2021 was$6.9 billion . From time to time, we have raised capital by issuing equity, equity-linked, or debt securities such as our convertible notes and senior notes. 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 impairment charges of$71.1 million in the year endedDecember 31, 2021 due to the observed market price of bitcoin decreasing below the carrying value during the period. As ofDecember 31, 2021 , the fair value of the investment in bitcoin was$371.0 million based on observable market prices which is$222.1 million in excess of the Company's carrying value of$149.0 million . 70 -------------------------------------------------------------------------------- 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 ofDecember 31, 2021 , we have invested$21.9 million in aggregate towards this initiative, of which$21.5 million and$0.4 million were invested in the years endedDecember 31, 2021 and 2020, respectively.
Our principal commitments consist of convertible senior notes, liquidity facility, revolving credit facility, operating leases, capital leases, and purchase commitments.
As ofDecember 31, 2021 , we held$2.6 billion in aggregate principal amount of long-term debt, comprised of$0.5 million in aggregate principal amount of outstanding convertible senior notes that mature onMarch 1, 2022 ("2022 Convertible Notes"),$460.6 million in aggregate principal amount of convertible senior notes that mature onMay 15, 2023 ("2023 Convertible Notes"),$1.0 billion in aggregate amount of convertible senior notes that mature onMarch 1, 2025 ("2025 Convertible Notes"),$575.0 million in aggregate amount of convertible senior notes that mature onMay 1, 2026 ("2026 Convertible Notes"), and$575.0 million in aggregate amount of convertible senior notes that mature onNovember 1, 2027 ("2027 Convertible Notes," and together with the 2022 Convertible Notes, 2023 Convertible Notes, 2025 Convertible Notes, and 2026 Convertible Notes, the "Convertible Notes"). Additionally, onMay 20, 2021 , we issued$1.0 billion in aggregate principal amount of outstanding senior unsecured notes that mature onJune 1, 2026 ("2026 Senior Notes") and$1.0 billion in aggregate principal amount of outstanding senior unsecured notes that mature onJune 1, 2031 ("2031 Senior Notes" and, together with the 2026 Senior Notes, the "Senior Notes" and, together with the Convertible Notes, the "Notes"). The 2022 Convertible Notes bear interest at a rate of 0.375% payable semi-annually onMarch 1 andSeptember 1 of each year, while the 2023 Convertible Notes bear interest at a rate of 0.50% payable semi-annually onMay 15 andNovember 15 of each year, and the 2025 Convertible Notes bear interest at a rate of 0.125% payable semi-annually onMarch 1 andSeptember 1 of each year. The 2026 Convertible Notes bear no interest, whereas, the 2027 Convertible Notes bear interest at a rate of 0.25% payable semi-annually onMay 1 andNovember 1 of each year. These convertible notes can be converted or repurchased prior to maturity if certain conditions are met. The 2026 Senior Notes bear interest a rate of 2.75% payable semi-annually onJune 1 andDecember 1 , while the 2031 Senior Notes bear interest at a rate of 3.50% payable semi-annually onJune 1 andDecember 1 of each year. These Senior Notes can be redeemed or repurchased prior to maturity if certain conditions are met. InJune 2020 , we entered into the Paycheck Protection Program Liquidity Facility ("PPPLF") agreement with theFederal Reserve Bank of San Francisco ("First PPPLF Agreement") to secure additional credit collateralized by PPP loans. The advances under this facility are repayable if the associated PPP loans are forgiven, repaid by a customer or settled by the government guarantee. OnJanuary 29, 2021 , we entered into a second PPPLF agreement with theFederal Reserve Bank of San Francisco ("Second PPPLF Agreement") to secure additional credit, collateralized by loans from the second round of the PPP program, in an aggregate principal amount of up to$1.0 billion under both PPPLF Agreements. The maturity date of any PPPLF advances is the maturity date of the PPP loan pledged to secure the advance, and will be accelerated upon the occurrence of certain events of default. Although loans originated under the PPP have a stated maturity of between two and five years from origination, some of the loans may be forgiven 24 weeks after disbursement if they meet certain specified criteria. The PPPLF advances are repayable if the associated PPP loan is forgiven, repaid by the customer, or settled by the government guarantee. As ofDecember 31, 2021 ,$497.5 million of PPPLF advances were outstanding and are, generally, collateralized by the same value of PPP loans. Any differences between the amounts are generally due to the timing of PPP loan repayment or forgiveness, and repayment of PPPLF advances. InMay 2020 , we entered into a 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 13, Indebtedness, of the Notes to the Consolidated Financial Statements for more details on these transactions.
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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.
As of December 31, 2021 , we hold a non-investment grade rating by S&P Global
Ratings (BB), Fitch Ratings, Inc. (BB) and Moody's Corporation (Ba2). We expect
that these credit rating agencies will continue to monitor our performance,
including our capital structure and results of operations. Our liquidity, access
to capital, and borrowing costs could be adversely impacted by declines in our
credit rating.
We have entered into various non-cancelable operating leases for certain offices
with contractual lease periods expiring between 2022 and 2034. We recognized
total rental expenses under operating leases of $80.3 million , $75.2 million ,
and $32.5 million during the years ended December 31, 2021 , 2020, and 2019,
respectively. We had non-cancelable purchase obligations to hardware suppliers
for $85.7 million for the year ended December 31, 2021 . We do not have any
off-balance sheet arrangements during the periods presented.
Short-term restricted cash of $18.8 million as of December 31, 2021 reflects
pledged cash deposited into savings accounts at the financial institutions that
process our sellers' payments transactions and as collateral pursuant to
agreements with third party originating banks for certain loan products. We use
the restricted cash to secure letters of credit with these financial
institutions to provide collateral for liabilities arising from cash flow timing
differences in the processing of these payments. We have recorded this amount as
a current asset on our consolidated balance sheets given the short-term nature
of these cash flow timing differences and that there is no minimum time frame
during which the cash must remain restricted. Additionally, this balance
includes certain amounts held as collateral pursuant to multi-year lease
agreements, discussed in the paragraph above, which we expect to become
unrestricted within the next year.
Long-term restricted cash of $71.7 million as of December 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 the FDIC , 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 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 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
In the fourth quarter of 2021, we adjusted our Consolidated Statement of Cash
Flows to include changes in customer funds, cash and cash equivalents associated
with Customer payable as a financing activity. Previously, the changes in
customer funds and customer payable were presented within operating activities
our Consolidated Statements of Cash Flows. The adjustment results in the portion
of customer funds that is held in cash and cash equivalents, restricted cash and
customer
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funds being included in the beginning and ending period totals of cash, cash
equivalents, restricted cash and customer funds. Prior period amounts have been
adjusted to this presentation. Please see Note 1 of the Notes to our
consolidated financial statements for further details.
The following table summarizes our cash flow activities (in thousands):
Year Ended
2021 2020
Net cash provided by operating activities $ 847,830 $ 173,110
Net cash used in investing activities (1,310,879) (606,636)
Net cash provided by financing activities 2,652,034 3,676,735
Effect of foreign exchange rate on cash and cash equivalents (7,066) 12,995
Net increase in cash, cash equivalents, restricted cash and
customer funds $ 2,181,919 $ 3,256,204 Cash Flows from Operating Activities
Cash provided by operating activities consisted of our net income adjusted for certain non-cash items, including gain or loss on revaluation of equity investments, depreciation and amortization, non-cash interest and other expense, share-based compensation expense, transaction and loan losses, bitcoin impairment losses, deferred income taxes, non-cash lease expense, gain on sale of asset group, as well as the effect of changes in operating assets and liabilities, including working capital. For the year endedDecember 31, 2021 , cash provided by operating activities was$847.8 million , primarily due to net income of$158.8 million , adjusted for the add back of non-cash expenses of$1.1 billion consisting primarily of share-based compensation, transaction and loan losses, depreciation and amortization, non-cash interest, bitcoin impairment losses and other expenses. This was offset by a net outflow from changes in other assets and liabilities of$325.2 million due to timing of period end as well as PPP loans facilitated, less loans sold, of$56.0 million . For the year endedDecember 31, 2020 , cash provided by operating activities was$173.1 million , primarily due to a net income of$213.1 million , offset by PPP loans facilitated, less loans sold, of$420.8 million , adjusted for the add back of non-cash expenses of$509.4 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$79.9 million due to timing.
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, investment in privately held entity, and business acquisitions. For the year endedDecember 31, 2021 , cash used in investing activities was$1.3 billion , primarily due to the net investments of marketable securities including investments from customer funds of$1.2 billion . Additional uses of cash were as a result of business acquisitions, net of cash acquired of$164.0 million , the purchase of bitcoin investments of$170.0 million , the purchase of property and equipment of$134.3 million and purchases of other investments of$48.5 million . These were partially offset by proceeds from sales of equity investments of$420.6 million . For the year endedDecember 31, 2020 , cash provided by investing activities was$606.6 million , primarily due to the net investments of marketable securities including investments from customer funds of$337.7 million . Additional uses of cash in investing activities were a result of purchases of property and equipment of$138.4 million , business combinations, net of cash acquired of$79.2 million , and other investments of$1.3 million . 73 --------------------------------------------------------------------------------
Cash Flows from Financing Activities
For the year endedDecember 31, 2021 , cash provided by financing activities was$2.7 billion , primarily as a result of$2.0 billion in net proceeds from the 2031 Senior Notes and 2026 Senior Notes offerings, proceeds from issuances of common stock from the exercise of options and purchases under our employee share purchase plan of$126.7 million , offset by payments for employee tax withholding related to vesting of restricted stock units of$323.0 million . For the year endedDecember 31, 2020 , cash provided by financing activities was$2.3 billion , primarily as a result of$1.1 billion in net proceeds from the 2026 Convertible Notes and 2027 Convertible Notes offering,$936.5 million in net proceeds from the 2025 Convertible Notes offering, proceeds from the First PPPLF Agreement advances of$464.1 million , proceeds from issuances of common stock from the exercise of options and purchases under the employee stock purchase plan, net of$162.0 million , offset by payments for employee tax withholding related to vesting of restricted stock units of$314.0 million 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, and business combinations have the greatest potential effect on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
Transaction Losses
We are exposed to transaction losses due to chargebacks as a result of fraud or uncollectibility of transaction payments. We estimate accrued transaction losses based on available data as of the reporting date, including expectations of future chargebacks, and historical trends related to loss rates that is continuously adjusted for new information and incorporates, where applicable, reasonable and supportable forecasts about future expectations. The Company continues to revise its estimates to reflect expected chargebacks from non-delivery of goods and services as well as increased failure rates of its sellers due to the emergence of more transmissible variants of COVID-19.
Business Combinations
As a result of the acquisitions of TIDAL, completed in the second quarter of 2021, and Afterpay completed onJanuary 31, 2022 , we consider accounting for business combinations under ASC 805, Business Combinations, to also be a critical accounting policy and estimate as it requires management to make significant estimates and assumptions, including the valuation of intangible assets acquired, determination of fair values of liabilities assumed including pre-acquisition contingencies and valuation of contingent consideration, where applicable. Although we believe that the assumptions and estimates we have made have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
Recent Accounting Pronouncements
See "Recent Accounting Pronouncements" described in Note 1 of the Notes to our consolidated financial statements.
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