BLOCK(SQ) - 2023 Q4 - Annual Report

Financial Performance and Risks - The company generated a net income of $9.8 million for the year ended December 31, 2023, with an accumulated deficit of $528.4 million as of the same date[115] - The company's bitcoin investment is subject to high volatility, and any decrease in market value relative to purchase prices could adversely impact its financial condition[221] - Bitcoin investment fair value as of December 31, 2023 was $339.9 million[421] - A hypothetical 10% change in bitcoin fair value would not materially affect financial results[421] - The company adopted ASU 2023-08, remeasuring its bitcoin investment to fair value as of January 1, 2023, with future changes recognized in consolidated statements of operations[222] Revenue and Growth Challenges - The growth rate of Cash App revenue may be distorted by bitcoin price fluctuations, as bitcoin revenue can increase or decrease based on market demand and price changes[113] - The company's ability to retain and attract sellers and customers is critical for future revenue and gross profit growth, with no long-term contracts in place to ensure continued use of its services[112][113] - Pricing pressures from competitors and demands for customized pricing from sellers may reduce gross profit[131] - Economic downturns and inflation may disproportionately impact small business sellers, potentially reducing demand for the company's services and increasing transaction loss rates[204] Investments and Acquisitions - The company plans to continue investing in its business, including employee base, product development, international expansion, and acquisitions, which may lead to increased expenses and potential losses[116] - Acquisitions and strategic investments, such as the integration of Afterpay, pose risks including operational difficulties and potential failure to achieve expected benefits[134][140] - The integration of Afterpay and the company's majority interest in TIDAL present ongoing risks and challenges[106] - The company's expansion into new markets and product offerings may require significant investment and could fail to generate expected returns[123] Cryptocurrency and Bitcoin Risks - Cryptocurrency market risks, including bitcoin price volatility and regulatory actions, could negatively impact the company's Cash App and financial condition[132][133] - The theft, loss, or destruction of private keys required to access bitcoin could irreversibly harm the company's business, operating results, and financial condition[172] - The company holds the majority of bitcoin in offline and air-gapped cold storage, with a small portion in a networked hot wallet for transactions[173] Regulatory and Compliance Risks - The company is subject to extensive and evolving regulations across multiple jurisdictions, including banking, lending, cryptocurrency, and data protection, which could increase compliance costs and operational risks[233][234][235] - Cash App's bitcoin feature faces regulatory uncertainties, with potential compliance costs and operational changes due to evolving cryptocurrency regulations[236] - The company is subject to audits, investigations, and potential fines from regulators, including the SEC and Department of Justice, which could result in significant legal and financial consequences[238] - Regulatory scrutiny in the BNPL space may impose significant compliance costs, potentially making expansion into new markets uneconomical[249] Cybersecurity and Data Risks - The company faces operational risks from handling sensitive data, including potential breaches, reputational harm, and regulatory scrutiny, especially with AI integration[158] - Third-party product vulnerabilities and cyberattacks could lead to increased costs, liability, and reputational damage for the company[159] - A 2022 incident involving unauthorized access to Cash App Investing customer data resulted in investigation costs and potential future liabilities[160] - Cybersecurity insurance may be insufficient to cover liabilities from data breaches or cyberattacks, with potential impacts on financial condition and reputation[162] Operational and Market Risks - The company faces challenges in global expansion, including compliance with diverse regulations, cultural differences, and increased operational costs[143] - The company is exposed to supply chain risks, including component shortages, price increases, and tariffs, particularly for hardware devices manufactured in China[195][198] - The company's TIDAL business depends on complex licensing agreements with copyright owners, and inaccuracies in royalty payments could harm business relationships and financial results[201] - The company's investment portfolio is subject to credit, liquidity, and market risks, with potential impairment charges if global financial markets decline[206] Employee and Talent Management - The company plans to cap its employee base at approximately 12,000, which may impact its ability to attract and retain highly skilled employees[189] - Equity awards are a key component of employee compensation, and a decline in the company's stock price could adversely affect talent retention and recruitment[190] - The company faces challenges in managing growth, including improving internal controls, mitigating risks, and preserving core values as it shifts to a distributed workforce[192] Financial Instruments and Debt - The company has $1.0 billion outstanding aggregate principal amount of 2025 Convertible Notes, $575.0 million of 2026 Convertible Notes, $575.0 million of 2027 Convertible Notes, $1.0 billion of 2026 Senior Notes, and $1.0 billion of 2031 Senior Notes as of December 31, 2023[214] - The company may face challenges in servicing its Notes, including potential cash shortages for conversions, repurchases, or repayments, which could be impacted by market conditions and future performance[217] - The company's credit facility and Senior Notes contain restrictive covenants that could limit its ability to operate, raise capital, or pursue business opportunities[212] - The company's Warehouse Facilities, used to fund its BNPL platform, contain covenants that may negatively impact its ability to obtain additional funding if triggered[211] Tax and Legal Risks - The company may face greater-than-anticipated tax liabilities due to audits, changes in tax laws, or regulatory practices, which could materially affect its financial results[224][225] - The Inflation Reduction Act introduced a 1% excise tax on certain share repurchases and increased IRS funding, which could result in additional taxes payable by the company[226] - The company has a valuation allowance for deferred tax assets in the U.S. and certain other countries as of December 31, 2023, which may impact its results of operations[229] - The company is monitoring the likelihood of recovering deferred tax assets, with potential future adjustments in valuation allowance that could materially impact reported results[230] Environmental, Social, and Governance (ESG) - The company faces increased scrutiny and potential costs related to environmental, social, and governance (ESG) issues, including a commitment to achieve net zero carbon operations by 2030[271] - The company's ESG strategy focuses on financial inclusion, climate action, diversity, and corporate governance, with progress dependent on third-party verification and performance[271] Market and Stock Price Volatility - The market price of Class A common stock is subject to volatility due to factors such as economic conditions, public health crises, and fluctuations in bitcoin prices[276] - Dual-listing on NYSE and ASX may result in price variations due to differing trading schedules and currency exchange rates[279] - Convertible note hedge and warrant transactions may affect the value of Class A common stock by potentially reducing dilution or causing price fluctuations[280] - Class B common stockholders hold 52.14% of the voting power as of December 31, 2023, giving them control over corporate decisions[274] Foreign Currency and Interest Rate Risks - The company is exposed to foreign currency exchange rate fluctuations, which could negatively impact reported results of operations, despite hedging activities[223] - Foreign exchange derivative contracts are used to hedge currency exchange rate exposure[424] - No significant gains or losses from foreign currency transactions or derivatives as of December 31, 2023[424] - A hypothetical 10% change in interest rates would not materially affect financial results[422] Intellectual Property and Litigation Risks - Intellectual property risks include potential infringement, misappropriation, or challenges, which could reduce competitive advantages[266] - Third parties may assert intellectual property infringement claims against the company, potentially leading to significant legal costs and adverse financial impacts[269] - The company is exposed to litigation risks, including intellectual property claims and government investigations, which could result in material penalties or restrictions on business operations[245][246] Banking and Financial Services Risks - Square Financial Services is subject to quarterly FDIC deposit insurance premiums based on average consolidated total assets, with potential increases due to bank failures impacting profitability[149] - Square Loans' growth depends on third-party institutional investors purchasing eligible business loans, with reduced purchases potentially forcing the company to scale back operations[152] - Square Loans' business loans are unsecured and not guaranteed, with macroeconomic conditions and seller credit quality posing risks to repayment and servicing fees[153] - Net interest income for Square Financial Services is vulnerable to interest rate changes, impacting loan demand, credit profiles, and profitability[155] Payment Processing and Network Risks - Dependence on payment card networks and acquiring processors could harm the business if agreements are not maintained or if network rules change unfavorably[181] - The company relies on third parties for transaction processing and settlement, and their failure to perform adequately could materially and adversely affect the business[186] - The company relies on third-party partners for critical services such as transaction data transmission, payment processing, and liquidity provision for Cash App's Bitcoin feature, with potential disruptions if these partners fail to perform adequately[187] Product and Technology Risks - The company's ability to develop new products and services is challenged by rapid technological changes in payments, financial services, and AI, which may render existing offerings obsolete[124][125] - Generative AI adoption is growing, and the company is incorporating AI features into its products, with success depending on customer appeal[126] - The company relies on third parties, including competitors, for new technology development, and failure to adapt to industry changes could harm its business[127] - Intense competition in the payments industry, including BNPL (Buy Now, Pay Later) offerings, may erode market share and hinder expansion[129] Supply Chain and Manufacturing Risks - The company is exposed to supply chain risks, including component shortages, price increases, and tariffs, particularly for hardware devices manufactured in China[195][198] - A significant natural or man-made disaster, such as earthquakes or pandemics, could have a material adverse impact on the company's business, particularly in the San Francisco Bay Area[171] Customer and Transaction Risks - The company's Cash App transacting active metric is defined as accounts with at least one financial transaction within a specified period, with potential inaccuracies due to shared alias identifiers[194] - The company is exposed to risks associated with chargebacks and refunds, particularly during economic downturns or global supply chain disruptions[178] - Risk management efforts may not be effective in detecting and preventing fraud, leading to potential losses, liability, and regulatory enforcement actions[176] Legal and Regulatory Compliance - The company's compliance with Payment Card Industry Data Security Standards and other industry-specific regulations is critical to maintaining secure operations and protecting customer data[233] - Cash App Investing is subject to SEC and FINRA net capital requirements, with potential adverse effects if rules change or additional capital is required[255] - Square Financial Services must maintain a minimum leverage ratio of 20% after its first three years of operation, with initial paid-in capital of approximately $56 million[260] - Square Financial Services is required to maintain a reserve deposit of $50 million at an unaffiliated third-party bank to ensure capital adequacy[261] Financial Instruments and Market Risks - Non-marketable equity investments in privately-held companies totaled $205.3 million as of December 31, 2023, with a hypothetical 10% change in value not materially impacting financial results[420] - Cash and marketable debt securities as of December 31, 2023 were primarily held in short-term instruments[422] - Revenue is primarily earned in U.S. dollars, with some in Australian Dollars post-Afterpay acquisition[423] - Foreign currency exposure does not have a material effect on financial results[423]