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SEC Filing Summary: Square, Inc. (Block, Inc.) 2015 10-K

Business Context and Reporting Period

This Annual Report on Form 10-K covers the fiscal year ended December 31, 2015. The registrant, Square, Inc. (now Block, Inc.), is a financial services and digital payments company. The company provides payment processing, point-of-sale (POS) software, financial services (Square Capital), and marketing services (Caviar) to sellers of all sizes. The company completed its Initial Public Offering (IPO) on November 24, 2015, listing Class A common stock on the New York Stock Exchange under the symbol "SQ".

Key Financial Metrics

Note: Adjusted Revenue and Adjusted EBITDA exclude the impact of the Starbucks payment processing agreement and transaction costs.

Material Changes vs. Prior Period

• Revenue Growth: Total net revenue increased 49% year-over-year to $1.267 billion, driven by a 50% increase in Gross Payment Volume (GPV) to $35.6 billion.
• Starbucks Transition: The company amended its agreement with Starbucks in August 2015 to remove exclusivity. Starbucks began transitioning to another processor in October 2015 and is expected to cease using Square's services entirely by Q3 2016. While Starbucks revenue grew 16% in 2015 due to higher rates, the company expects a meaningful decrease in total revenue going forward as this volume is lost.
• Software and Data Revenue: Revenue from software and data products (including Square Capital and Caviar) surged 382% to $58.0 million, now representing 5% of total net revenue.
• Operating Expenses: Total operating expenses increased 45% to $544.5 million. Product development expenses rose 38% to $199.6 million, and transaction/advance losses more than doubled to $54.0 million, partly due to a $4.4 million fraud loss from a single seller.
• Liquidity: Cash and cash equivalents more than doubled to $470.8 million, bolstered by $245.7 million in net proceeds from the November 2015 IPO.

Guidance, Outlook, and Risks

Outlook and Strategy: Management intends to continue investing heavily in product development, sales, and marketing to drive long-term growth, even if it impacts short-term profitability. The company expects revenue growth rates to decline as the business scales. Strategic focus includes expanding Square Capital (merchant cash advances) and Caviar (food delivery), and migrating sellers to EMV/NFC hardware.

Key Risks and Contingencies:

• Starbucks Departure: The loss of Starbucks transaction volume poses a significant risk to near-term revenue growth.
• Profitability: The company has a history of net losses and an accumulated deficit of $607.6 million. There is no assurance it will achieve or maintain profitability.
• Legal Proceedings: Ongoing litigation with Robert E. Morley regarding patent inventorship and ownership of the company. Additionally, a class-action lawsuit regarding the classification of Caviar couriers as independent contractors is pending.
• Regulatory Environment: The business is subject to extensive regulation regarding money transmission, anti-money laundering, and consumer protection. Changes in regulations could increase compliance costs or restrict operations.
• Competition: Intense competition from established payment processors and new entrants could pressure pricing and margins.

Investor Verification Checklist

• Starbucks Impact: Verify the timeline and financial impact of the Starbucks transition in upcoming quarterly reports.
• Adjusted Metrics: Review the reconciliation of GAAP to Non-GAAP metrics (Adjusted Revenue/EBITDA) to understand the true performance excluding transaction costs and Starbucks.
• Loss Provisions: Monitor the "Transaction and Advance Losses" line item for trends in fraud and chargeback rates, especially as the seller base expands.
• Legal Status: Track the status of the Morley litigation and the Caviar class-action lawsuit for potential financial liabilities.
• Capital Allocation: Assess the burn rate and cash runway given the continued investment in growth and the lack of GAAP profitability.