Palantir Technologies Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX Page Report of Independent Registered Public Accounting Firm 109 Consolidated Balance Sheets 111 Consolidated Statements of Operations 112 Consolidated Statements of Comprehensive Loss 113 Consolidated Statements of Redeemable Convertible and Convertible Preferred Stock and Stockholders’ Equity (Deficit) 114 Consolidated Statements of Cash Flows 117 Notes to Consolidated Financial Statements 119 108 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Palantir Technologies Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Palantir Technologies Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, redeemable convertible and convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles (U.S. GAAP). Adoption of New Accounting Standard As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases in the year ended December 31, 2020 due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), and the related amendments. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates. 109 Table of Contents Description of the Matter Revenue Recognition As discussed in Note 2 to the consolidated financial statements, the Company derives its revenue primarily from the sale of subscriptions to access its software in the Company’s hosted environment with ongoing operations and maintenance (“O&M”) services (“Palantir Cloud”), software licenses, primarily term licenses in the customers’ environments, with ongoing O&M services (“On-Premises Software”), and professional services. Management applies significant judgment in identifying and evaluating any non-standard terms and conditions in customer arrangements which may impact the determination of performance obligations or the timing of revenue recognition. In addition, the determination as to whether the Company’s On-Premises Software licenses and O&M services are considered distinct performance obligations that should be accounted for separately or combined as a single performance obligation requires significant judgment. The Company has concluded that the On-Premises Software licenses and O&M services are highly interdependent and interrelated and represent a single distinct performance obligation within the context of the contract that is generally recognized ratably over the contract term. Auditing revenue recognition was complex and required a significant level of auditor judgment to identify and evaluate non-standard terms and conditions that impact revenue recognition and to assess whether the On-Premises software licenses and O&M services should be accounted for as distinct performance obligations or combined as a single performance obligation. How We Addressed the Matter in Our Audit Our substantive procedures included, among others, testing the completeness and accuracy of management’s identification and evaluation of non-standard terms and conditions, reading executed contracts for a sample of revenue transactions and evaluating whether the Company appropriately applied its revenue recognition policy to the arrangements based on the terms and conditions therein and consistent with U.S. GAAP. In addition, we evaluated management’s key assumptions and analysis of its performance obligations, including their assessment of the nature, interdependency, and level of integration between the On-Premises software license and O&M services. We also evaluated the appropriateness of the related disclosures in the consolidated financial statements. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2008. San Jose, California February 26, 2021 110 Table of Contents Palantir Technologies Inc. Consolidated Balance Sheets (in thousands, except share and per share amounts) As of December 31, 2020 2019 Assets Current assets: Cash and cash equivalents $ 2,011,323 $ 1,079,154 Restricted cash 37,285 52,099 Accounts receivable 156,932 50,315 Prepaid expenses and other current assets 51,889 32,585 Total current assets 2,257,429 1,214,153 Property and equipment, net 29,541 31,589 Restricted cash, noncurrent 79,538 270,709 Operating lease right-of-use assets 217,075 — Other assets 106,921 77,574 Total assets $ 2,690,504 $ 1,594,025 Liabilities, Redeemable Convertible and Convertible Preferred Stock, and Stockholders’ Equity (Deficit) Current liabilities: Accounts payable $ 16,358 $ 51,735 Accrued liabilities 158,546 126,620 Deferred revenue (1) 189,520 186,105 Customer deposits 210,320 364,138 Operating lease liabilities 29,079 — Total current liabilities 603,823 728,598 Deferred revenue, noncurrent (1) 50,525 77,030 Customer deposits, noncurrent 81,513 167,538 Debt, noncurrent, net 197,977 396,065 Operating lease liabilities, noncurrent 229,800 — Other noncurrent liabilities 4,316 78,205 Total liabilities 1,167,954 1,447,436 Commitments and Contingencies (Note 9) Redeemable convertible preferred stock, $0.001 par value: 0 and 35,002,700 shares authorized as of December 31, 2020 and 2019, respectively; 0 and 4,017,378 shares issued and outstanding as of December 31, 2020 and 2019, respectively — 33,569 Convertible preferred stock, $0.001 par value: 0 and 877,442,966 shares authorized as of December 31, 2020 and 2019, respectively; 0 and 742,839,990 shares issued and outstanding as of December 31, 2020 and 2019, respectively — 2,093,662 Stockholders’ equity (deficit): Preferred stock, $0.001 par value: 2,000,000,000 and 0 shares authorized, issued and outstanding as of December 31, 2020 and 2019 — — Common stock, $0.001 par value: 20,000,000,000 and 2,200,000,000 Class A shares authorized as of December 31, 2020 and 2019, respectively; 1,542,057,292 shares issued and outstanding as of December 31, 2020, and 315,615,753 shares issued and 309,223,182 shares outstanding as of December 31, 2019; 2,700,000,000 and 1,800,000,000 Class B shares authorized as of December 31, 2020 and 2019, respectively; 249,077,252 and 272,273,934 shares issued and outstanding as of December 31, 2020 and 2019, respectively; and 1,005,000 and 0 Class F shares authorized, issued, and outstanding as of December 31, 2020 and 2019 1,792 588 Additional paid-in capital 6,488,857 1,857,331 Treasury stock, at cost: 0 and 6,392,571 shares held as of December 31, 2020 and 2019, respectively — (38,895 ) Accumulated other comprehensive loss (2,745 ) (703 ) Accumulated deficit (4,965,354 ) (3,798,963 ) Total stockholders’ equity (deficit) 1,522,550 (1,980,642 ) Total liabilities, redeemable convertible and convertible preferred stock, and stockholders’ equity (deficit) $ 2,690,504 $ 1,594,025 (1) Deferred revenue as of December 31, 2020 and 2019 includes $68.2 million and $75.0 million, respectively, from Palantir Technologies Japan, K.K. See Note 6. Equity Method Investments for more information. The accompanying notes are an integral part of these consolidated financial statements. 111 Table of Contents Palantir Technologies Inc. Consolidated Statements of Operations (in thousands, except share and per share amounts) Years Ended December 31, 2020 2019 2018 Revenue $ 1,092,673 $ 742,555 $ 595,409 Cost of revenue 352,547 242,373 165,401 Gross profit 740,126 500,182 430,008 Operating expenses: Sales and marketing 683,701 450,120 461,762 Research and development 560,660 305,563 285,451 General and administrative 669,444 320,943 306,235 Total operating expenses 1,913,805 1,076,626 1,053,448 Loss from operations (1,173,679) (576,444) (623,440) Interest income 4,680 15,090 10,500 Interest expense (14,139) (3,061) (3,440) Change in fair value of warrants 811 (3) 48,093 Other income (expense), net 3,300 (2,853) (2,638) Loss before provision (benefit) for income taxes (1,179,027) (567,271) (570,925) Provision (benefit) for income taxes (12,636) 12,375 9,102 Net loss $ (1,166,391) $ (579,646) $ (580,027) Net loss attributable to common stockholders $ (1,166,391) $ (588,127) $ (598,125) Net loss per share attributable to common stockholders, basic $ (1.19) $ (1.02) $ (1.11) Net loss per share attributable to common stockholders, diluted $ (1.20) $ (1.02) $ (1.17) Weighted-average shares of common stock outstanding used in computing net loss per share attributable to common stockholders, basic 977,721,736 576,958,560 537,280,394 Weighted-average shares of common stock outstanding used in computing net loss per share attributable to common stockholders, diluted 979,330,067 576,958,560 544,014,393 The accompanying notes are an integral part of these consolidated financial statements. 112 Table of Contents Palantir Technologies Inc. Consolidated Statements of Comprehensive Loss (in thousands) Years Ended December 31, 2020 2019 2018 Net loss $ (1,166,391) $ (579,646) $ (580,027) Other comprehensive income (loss): Foreign currency translation adjustments (2,042) (1,465) (1,045) Comprehensive loss $ (1,168,433) $ (581,111) $ (581,072) The accompanying notes are an integral part of these consolidated financial statements. 113 Table of Contents Palantir Technologies Inc. Consolidated Statements of Redeemable Convertible and Convertible Preferred Stock and Stockholders’ Equity (Deficit) (in thousands, except share amounts) Redeemable Convertible Preferred Stock Convertible Preferred Stock Common Stock Additional Paid-in Capital Treasury Stock Accumulated Other Comprehensive Income Accumulated Deficit Total Stockholders’ Deficit Shares Amount Shares Amount Shares Amount Shares Amount Balance as of December 31, 2017 25,947,422 $ 154,065 740,934,057 $ 2,073,171 525,602,270 $ 561 $ 1,402,261 35,288,149 $ (259,315) $ 1,807 $ (2,646,876) $ (1,501,562) Cumulative effect of accounting changes — — — — — — 4,973 — — — (4,973) — Issuance of Series C convertible preferred stock upon exercise of warrants — — 1,910,919 14,499 — — — — — — — — Conversion of Series G convertible preferred stock to common stock — — (30,000) (92) 30,000 — 92 — — — — 92 Forfeiture of Series K convertible preferred stock — — (1,604) (18) — — — — — — — — Repurchase of common stock, held in treasury — — — — (1,348,649) — — 1,348,649 (7,706) — — (7,706) Sale of common stock, held in treasury — — — — 16,000,000 — (21,920) (16,000,000) 118,400 — — 96,480 Issuance of common stock from the exercise of stock options — — — — 9,084,070 9 11,930 — — — — 11,939 Accretion of Series H redeemable convertible preferred stock to redemption value — 18,098 — — — — (18,098) — — — — (18,098) Stock-based compensation — — — — — — 248,503 — — — — 248,503 Excess tax deficiency from stock-based compensation — — — — — — (4) — — — — (4) Cumulative translation adjustment — — — — — — — — — (1,045) — (1,045) Net loss — — — — — — — — — — (580,027) (580,027) Balance as of December 31, 2018 25,947,422 $ 172,163 742,813,372 $ 2,087,560 549,367,691 $ 570 $ 1,627,737 20,636,798 $ (148,621) $ 762 $ (3,231,876) $ (1,751,428) The accompanying notes are an integral part of these consolidated financial statements. 114 Table of Contents Palantir Technologies Inc. Consolidated Statements of Redeemable Convertible and Convertible Preferred Stock and Stockholders’ Equity (Deficit) (in thousands, except share amounts) Redeemable Convertible Preferred Stock Convertible Preferred Stock Common Stock Additional Paid-in Capital Treasury Stock Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Deficit Shares Amount Shares Amount Shares Amount Shares Amount Balance as of December 31, 2018 25,947,422 $ 172,163 742,813,372 $ 2,087,560 549,367,691 $ 570 $ 1,627,737 20,636,798 $ (148,621) $ 762 $ (3,231,876) $ (1,751,428) Cumulative effect of accounting changes — — — — — — (34) — — — 12,559 12,525 Issuance of Series H redeemable convertible preferred stock upon exercise of warrants 2,949,002 26,069 — — — — — — — — — — Redemption of Series H redeemable convertible preferred stock (23,931,624) (168,000) — — — — — — — — — — Sale of Series H redeemable convertible preferred stock 1,068,376 7,500 — — — — — — — — — — Reclassification of Series H redeemable convertible preferred stock into convertible preferred stock upon expiration of redemption option (2,015,798) (4,163) 2,015,798 4,163 — — — — — — — — Repurchase of Series A convertible preferred stock — — (1,088) — — — — — — — — — Repurchase of Series D convertible preferred stock — — (8,298) (6) — — — — — — — — Repurchase of Series F convertible preferred stock — — (3,036,810) (5,386) — — — — — — — — Distributed earnings attributable to participating securities — — — — — — (8,481) — — — — (8,481) Conversion of Series F convertible stock to common stock — — (10,078) (20) 10,078 — 20 — — — — 20 Issuance of Series D convertible preferred stock upon exercise of warrants — — 1,097,094 7,375 — — — — — — — — Conversion of Series D convertible stock to common stock — — (30,000) (24) 30,000 — 24 — — — — 24 Sale of common stock, held in treasury — — — — 16,583,747 — (20,928) (16,583,747) 120,928 — — 100,000 Repurchase of common stock, held in treasury — — — — (2,339,520) — — 2,339,520 (11,202) — — (11,202) Issuance of common stock from the exercise of stock options — — — — 17,845,120 18 16,879 — — — — 16,897 Stock-based compensation — — — — — — 242,114 — — — — 242,114 Cumulative translation adjustment — — — — — — — — — (1,465) — (1,465) Net loss — — — — — — — — — — (579,646) (579,646) Balance as of December 31, 2019 4,017,378 $ 33,569 742,839,990 $ 2,093,662 581,497,116 $ 588 $ 1,857,331 6,392,571 $ (38,895) $ (703) $ (3,798,963) $ (1,980,642) The accompanying notes are an integral part of these consolidated financial statements. 115 Table of Contents Palantir Technologies Inc. Consolidated Statements of Redeemable Convertible and Convertible Preferred Stock and Stockholders’ Equity (Deficit) (in thousands, except share amounts) Redeemable Convertible Preferred Stock Convertible Preferred Stock Common Stock Additional Paid-in Capital Treasury Stock Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity (Deficit) Shares Amount Shares Amount Shares Amount Shares Amount Balance as of December 31, 2019 4,017,378 $ 33,569 742,839,990 $ 2,093,662 581,497,116 $ 588 $ 1,857,331 6,392,571 $ (38,895) $ (703) $ (3,798,963) $ (1,980,642) Conversion of Series H-1 convertible preferred stock to common stock — — (28,490) (100) 28,490 — 100 — — — — 100 Issuance of Series K convertible preferred stock — — 121,265 947 — — — — — — — — Issuance of Series D preferred stock upon net exercise of Series D preferred stock warrants — — 2,380,034 10,810 — — — — — — — — Repurchase of common stock, held in treasury — — — — (808,201) — — 808,201 (3,777) — — (3,777) Retirement of treasury stock — — — — — (7) (42,665) (7,200,772) 42,672 — — — Issuance of common stock upon net exercise of common stock warrants — — — — 7,631,329 8 (8) — — — — — Issuance of common stock, net of issuance costs — — — — 206,500,523 207 942,322 — — — — 942,529 Conversion of redeemable convertible preferred stock to common stock (4,017,378) (33,569) — — 4,017,378 4 33,565 — — — — 33,569 Conversion of convertible preferred stock to common stock — — (745,312,799) (2,105,319) 793,725,807 794 2,104,525 — — — — 2,105,319 Conversion of preferred stock warrants to common stock warrants — — — — — — 31,007 — — — — 31,007 Issuance of common stock from the exercise of stock options — — — — 120,617,527 120 298,709 — — — — 298,829 Issuance of common stock upon vesting of restricted stock units (“RSUs”) — — — — 82,429,575 82 (82) — — — — — Stock-based compensation — — — — — — 1,264,254 — — — — 1,264,254 Settlement of employee loan accounted for as a modification to stock option — — — — (3,500,000) (4) (201) — — — — (205) Other comprehensive income — — — — — — — — — (2,042) — (2,042) Net loss — — — — — — — — — — (1,166,391) (1,166,391) Balance as of December 31, 2020 — $ — — $ — 1,792,139,544 $ 1,792 $ 6,488,857 — $ — $ (2,745) $ (4,965,354) $ 1,522,550 The accompanying notes are an integral part of these consolidated financial statements. 116 Table of Contents Palantir Technologies Inc. Consolidated Statements of Cash Flows (in thousands) Years Ended December 31, 2020 2019 2018 Operating activities Net loss $ (1,166,391) $ (579,646) $ (580,027) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 13,871 12,255 13,910 Stock-based compensation 1,270,702 241,970 248,503 Change in fair value of warrants (811) 3 (48,093) Impairment of assets 674 23,407 23,700 Non-cash operating lease expense 35,049 — — Other operating activities 4,417 2,769 420 Changes in operating assets and liabilities: Accounts receivable (108,476) (23,905) (10,483) Prepaid expenses and other current assets (18,565) 18,806 (19,361) Other assets (28,990) (29,447) (3,424) Accounts payable (34,681) 23,424 10,968 Accrued liabilities 38,505 3,733 26,424 Deferred revenue, current and noncurrent (30,905) (134,396) 173,744 Customer deposits, current and noncurrent (230,873) 279,226 126,028 Operating lease liability, current and noncurrent (43,639) — — Deferred rent — (3,414) (1,321) Other noncurrent liabilities 3,505 — — Net cash used in operating activities (296,608) (165,215) (39,012) Investing activities Purchases of property and equipment (12,236) (13,096) (13,004) Purchase of assets held for sale — — (2,400) Proceeds from the sale of assets held for sale 250 — 8,620 Purchase of equity method investment (2,934) (25,868) — Return of capital from equity method investment — 17,000 — Net cash used in investing activities (14,920) (21,964) (6,784) Financing activities Proceeds from the issuance of common stock, net of issuance costs 942,529 100,000 96,480 Proceeds from issuance of debt, net of issuance costs 199,369 544,413 — Principal payments on borrowings (400,000) (150,000) (56,491) Proceeds from the exercise of common stock options 298,829 16,897 12,671 Repurchase of common stock (3,777) (11,202) (7,706) Proceeds from the sale of redeemable convertible preferred stock — 7,500 — Redemption of redeemable convertible preferred stock — (168,000) — Repurchase of convertible preferred stock — (13,873) — Other financing activities (497) (1,202) 1,200 Net cash provided by financing activities 1,036,453 324,533 46,154 Effect of foreign exchange on cash, cash equivalents, and restricted cash 1,259 (2,227) (3,703) Net increase (decrease) in cash, cash equivalents, and restricted cash 726,184 135,127 (3,345) Cash, cash equivalents, and restricted cash—beginning of period 1,401,962 1,266,835 1,270,180 Cash, cash equivalents, and restricted cash—end of period $ 2,128,146 $ 1,401,962 $ 1,266,835 117 Table of Contents Palantir Technologies Inc. Consolidated Statements of Cash Flows (in thousands) Years Ended December 31, 2020 2019 2018 Supplemental disclosures of cash flow information: Cash paid for income taxes $ 14,283 $ 8,579 $ 17,098 Cash paid for interest 11,432 2,710 2,438 Supplemental disclosures of non-cash investing and financing information: Conversion of redeemable convertible and convertible preferred stock to common stock $ 2,138,988 $ — $ — Conversion of convertible preferred stock warrants to common stock warrants 31,007 — — Cashless net exercise of warrants for convertible preferred stock 10,810 7,375 14,499 Cashless net exercise of warrants for redeemable convertible preferred stock — 26,069 — Reclassification of redeemable convertible preferred stock into convertible preferred stock upon expiration of redemption option — 4,163 — Accretion of redeemable convertible preferred stock to redemption value — — 18,098 The accompanying notes are an integral part of these consolidated financial statements. 118 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements 1. Organization Palantir Technologies Inc. (including its subsidiaries, “Palantir” or “the Company”) was incorporated in Delaware on May 6, 2003. The Company builds and deploys software platforms, Palantir Gotham and Palantir Foundry, that serve as the central operating systems for its customers. Direct Listing On September 30, 2020, the Company completed a direct listing of its Class A common stock on the New York Stock Exchange (“NYSE”) (the “Direct Listing”). In connection with the Direct Listing, on September 22, 2020, the Company filed an amended and restated certificate of incorporation, which became effective on that date. The amended and restated certificate of incorporation authorized the issuance of a total of 20,000,000,000 shares of Class A common stock and 2,700,000,000 shares of Class B common stock, authorized 1,005,000 shares of a new class of common stock (“Class F common stock”) and 2,000,000,000 shares of undesignated preferred stock. In connection with the Direct Listing, Alexander Karp, Stephen Cohen, and Peter Thiel (the “Founders”) each transferred 335,000 shares of their Class B common stock to a voting trust, which were then exchanged for an equivalent number of Class F common stock. Immediately prior to the filing of the amended and restated certificate of incorporation, all outstanding shares of redeemable convertible preferred stock and convertible preferred stock were converted into 797,743,185 shares of the Company’s Class B common stock, and all of the Company’s outstanding preferred stock warrants were converted into common stock warrants, which resulted in the reclassification of the warrants liability to additional paid-in capital. Subsequent to the filing of the amended and restated certificate of incorporation, there were no shares of redeemable convertible preferred stock or convertible preferred stock outstanding. Furthermore, upon the occurrence of the Direct Listing, the Company determined that the performance-based vesting condition was satisfied for 68,149,214 RSUs, which resulted in the issuance of an equivalent number of shares of Class A common stock. See further discussion in Note 12. Stock-Based Compensation regarding the cumulative stock-based compensation charge recognized upon the Direct Listing. 2. Significant Accounting Policies Basis of Presentation and Consolidation The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding annual financial reporting. The accompanying consolidated financial statements include the accounts of Palantir Technologies Inc. and its consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Investments in entities where the Company holds at least a 20% ownership interest and has the ability to exercise significant influence over the investee, but not control, are accounted for using the equity method of accounting. For such investments, the share of the investee’s results of operations is included as a component of other income (expense), net in the consolidated statements of operations and the investment balance is included in other assets and classified as noncurrent in the consolidated balance sheets. The Company’s fiscal year ends on December 31. Use of Estimates The preparation of the consolidated financial statements in conformity with GAAP requires management to make certain estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities, disclosure 119 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions made in the accompanying consolidated financial statements include, but are not limited to, identification of performance obligations in customer contracts, the fair value of common stock and other assumptions used to measure stock-based compensation, the fair value of warrants, the valuation of deferred tax assets and uncertain tax positions, collectability of accounts receivable, useful lives of tangible assets and the incremental borrowing rate for operating leases. Estimates and judgments are based on historical experience, forecasted events, and various other assumptions that management believes to be reasonable under the circumstances. Actual results could differ from those estimates and such differences could affect the Company’s financial position and results of operations. Segments The Company has two operating segments, commercial and government, which were determined based on the manner in which the chief operating decision maker (“CODM”), who is the chief executive officer, manages the operations of the Company for purposes of allocating resources and evaluating performance. Various factors, including the Company’s organizational and management reporting structure and customer type, were considered in determining these operating segments. The Company’s operating segments are described below: • Commercial : This segment primarily serves customers working in non-government industries. • Government : This segment primarily serves customers that are agencies in the United States (“U.S.”) federal government and non-U.S. governments. Cash, Cash Equivalents, and Restricted Cash The Company considers all highly liquid investments purchased with an original maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents consists of amounts invested in money market funds. Restricted cash primarily consists of cash and certificates of deposit that are held as collateral against letters of credit and guarantees the Company is required to maintain for operating lease agreements, certain customer contracts, and other guarantees and financing arrangements. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the amounts shown in the consolidated statements of cash flows (in thousands): As of December 31, 2020 2019 2018 Cash and cash equivalents $ 2,011,323 $ 1,079,154 $ 1,116,342 Restricted cash 37,285 52,099 10,484 Restricted cash, noncurrent 79,538 270,709 140,009 Total cash, cash equivalents, and restricted cash $ 2,128,146 $ 1,401,962 $ 1,266,835 120 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) Accounts Receivable and Allowance for Credit Losses Accounts receivable are recorded at the invoiced amount, net of an allowance for credit losses, if any. The Company generally grants non-collateralized credit terms to its customers. Allowance for credit losses is based on the Company’s best estimate of probable losses inherent in its accounts receivable portfolio and is determined based on expectations of the customer’s ability to pay by considering factors such as customer type (commercial or government), historical experience, financial position of the customer, age of the accounts receivable, current economic conditions, including the ongoing COVID-19 pandemic, and as well as reasonable and supportable forward-looking factors about its portfolio and future economic conditions. Accounts receivable are written-off and charged against an allowance for credit losses when the Company has exhausted collection efforts without success. Based upon the Company’s assessment as of December 31, 2020 and 2019, it did not record an allowance for credit losses as probable losses are not expected to be material. Concentrations of Credit Risk and Other Concentrations Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, restricted cash, and accounts receivable. Cash equivalents consist of money market funds with original maturities of three months or less, which are invested primarily with U.S. financial institutions. Cash deposits with financial institutions, including restricted cash, generally exceed federally insured limits. Management believes minimal credit risk exists with respect to these financial institutions and the Company has not experienced any losses on such amounts. The Company is exposed to concentrations of credit risk with respect to accounts receivable presented on the consolidated balance sheets. The Company’s accounts receivable balance as of December 31, 2020 and 2019 was $156.9 million and $50.3 million, respectively. Customer G represented 13% of total accounts receivable as of December 31, 2020. Customers A and C represented 38% and 21% of total accounts receivable as of December 31, 2019, respectively. No other customer represented more than 10% of total accounts receivable as of December 31, 2020 and 2019. The Company seeks to mitigate its credit risk with respect to accounts receivable by contracting with large commercial customers and government agencies and regularly monitoring the aging of accounts receivable balances. As of December 31, 2020 and 2019, the Company had not experienced any significant losses on its accounts receivable. For the year ended December 31, 2020, Customer F, which is in the government operating segment, represented 10% of total revenue. For the years ended December 31, 2019 and 2018, Customer D, which is in the commercial operating segment, represented 12%, and 15% of total revenue, respectively. No other customer represented more than 10% of total revenue for the years ended December 31, 2020, 2019 and 2018. The Company relies on the technology, infrastructure, and software applications, including software-as-a-service offerings, of third parties in order to host or operate certain key products and functions of its business. Assets Held for Sale Assets are classified as held for sale if their carrying amounts will be recovered principally through a sale rather than through continuing use and when all of the following criteria have been met: (i) management commits to a plan to sell the asset, (ii) the asset is available for immediate sale in its present condition, (iii) the asset is being actively marketed for sale at or near its current fair value, (iv) significant changes to the plan of sale are unlikely, and (v) the sale of the asset is probable within one year. Upon classification as held for sale, long-lived assets are not depreciated, and the Company evaluates the assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or the fair value less costs to sell are less 121 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) than the carrying amount. If such assets are considered to be impaired, the Company records an impairment loss for the amount of the excess of carrying value over the fair value less costs to sell as general and administrative expense in the consolidated statements of operations. See Note 4. Fair Value Measurements for more information. Property and Equipment, Net Property and equipment, net are stated at cost less accumulated depreciation and amortization. Depreciation is recognized using the straight-line method over the estimated useful lives of the respective assets, which are generally three years. Leasehold improvements are capitalized and amortized using the straight-line method over the shorter of the remaining lease term or the estimated useful life, which is generally five years. Maintenance and repairs that do not improve or extend the useful lives of the assets are expensed when incurred. Upon sale or retirement of assets, the cost and related accumulated depreciation and amortization are derecognized from the consolidated balance sheet and any resulting gain or loss is recorded in the consolidated statements of operations in the period realized. Equity Method Investments In general, nonconsolidated investments in which the Company owns 20% to 50% of the affiliate’s equity and has the ability to exercise significant influence but does not control are accounted for under the equity method. In making this determination, the Company first considers whether it has a direct or indirect controlling financial interest based on either the variable interest entity (“VIE”) model or the voting interest entity (“VOE”) model. The Company adjusts the carrying value of its investment by its proportionate share of the net earnings or losses of the investee, adjustments for unrealized profits or losses on intra-entity transactions, impairment charges, dividends received, additional capital investments, and the amortization of basis differences during the respective reporting period. The Company’s proportionate share of the net earnings or loss of its equity method investment is based on the most recently available financial statements of the investee and is reflected as a component of other income (expense), net in the consolidated statements of operations. The income tax benefit or expense related to the Company’s interest in the net earnings or loss of the equity method investee is reported in the consolidated provision (benefit) for income taxes. The Company reviews the investments for impairment whenever factors indicate that the carrying amount of the investment might not be recoverable. In such a case, the decrease in value is recognized in the period the impairment occurs in the consolidated statements of operations. No impairment charge was recognized during the years ended December 31, 2020, 2019 and 2018. Impairment of Long-Lived Assets Long-lived assets are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset to the future net undiscounted cash flows that the asset is expected to generate. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. There was no impairment of long-lived assets recognized during the years ended December 31, 2020, 2019 and 2018. Leases The Company adopted the Accounting Standard Update (“ASU”) 2016-02, Leases, and additional ASUs issued to clarify and update the guidance in ASU 2016-02 (collectively, “ASC 842”), as of January 1, 2020. See the section Recently Adopted Accounting Pronouncements below for more information. 122 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) The Company determines if an arrangement is a lease at inception. An arrangement is or contains a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. If a lease is identified, classification is determined at lease commencement. Operating lease liabilities are recognized at the present value of the future lease payments at the lease commencement date. The Company’s leases do not provide an implicit interest rate and therefore the Company estimates its incremental borrowing rate to discount lease payments. The incremental borrowing rate reflects the interest rate that the Company would have to pay to borrow on a collateralized basis an amount equal to the lease payments in a similar economic environment over a similar term. Operating lease right-of-use (“ROU”) assets are based on the corresponding lease liability adjusted for any lease payments made at or before commencement, initial direct costs, and lease incentives. Renewals or early terminations are not accounted for unless the Company is reasonably certain to exercise these options. Operating lease expense is recognized and the ROU asset is amortized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease component. The Company elected to use the transition relief package of practical expedients but did not elect to use the hindsight practical expedient in determining a lease term and impairment of ROU assets at the adoption date. For short-term leases, defined as leases with a term of twelve months or less, the Company elected the practical expedient to not recognize an associated lease liability and ROU asset. Lease payments for short-term leases are expensed on a straight-line basis over the lease term. Operating leases are included in operating lease right-of-use assets, operating lease liabilities, and operating lease liabilities, non-current on the Company’s consolidated balance sheets. Finance leases are not material. Lease accounting prior to the adoption of ASC 842 For operating leases, the Company recorded rent expense on a straight-line basis over the noncancelable lease term and recorded the difference between the rent paid and the recognition of rent expense as a deferred rent asset or liability. Rent escalation, rent abatement, or other concessions, such as rent holidays, and landlord or tenant incentives or allowances, were recorded as deferred rent and amortized over the remaining lease term. Warrants Warrants to purchase shares of redeemable convertible and convertible preferred stock (collectively, the “preferred stock warrants”) were freestanding financial instruments classified as other noncurrent liabilities on the Company’s consolidated balance sheets as the underlying securities were redeemable or contingently redeemable upon the occurrence of events which were outside of the Company’s control. The preferred stock warrants were recorded at their respective fair values upon issuance and were subject to re-measurement at the end of each reporting period. Any change in the fair value of the preferred stock warrants was recognized as a change in fair value of warrants in the consolidated statements of operations. The Company adjusted the liability for changes in fair value of the preferred stock warrants until the completion of the Company’s Direct Listing. Immediately prior to the filing of the amended and restated certificate of incorporation, all of the Company’s outstanding preferred stock warrants were converted into common stock warrants, which resulted in the reclassification of the warrants liability to additional paid-in capital. Treasury Stock Repurchased treasury stock is recorded at cost. When treasury stock is resold at a price different than its historical acquisition cost, the difference is recorded as a component of additional paid-in capital in the consolidated balance sheets. The Company’s treasury stock was fully retired as of April 2020. As of December 31, 2020 the Company held no shares as treasury stock. 123 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) Fair Value Measurement Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, or an exit price, in the principal or most advantageous market for that asset or liability in an orderly transaction between market participants on the measurement date. The Company measures fair value based on a three-level hierarchy of inputs, maximizing the use of observable inputs, where available, and minimizing the use of unobservable inputs when measuring fair value. A financial instrument’s level within the three-level hierarchy is based on the lowest level of input that is significant to the fair value measurement. The three-level hierarchy of inputs is as follows: Level 1 : Observable inputs such as unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date; Level 2 : Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and Level 3 : Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. These inputs are based on the Company’s own assumptions about current market conditions and require significant management judgment or estimation. Financial instruments consist of cash equivalents, restricted cash, accounts receivable, other assets accounted for at fair value, accounts payable, accrued liabilities, and the warrants liability. Cash equivalents, restricted cash, assets held for sale, and the warrants liability are stated at fair value on a recurring basis. Accounts receivable, accounts payable, and accrued liabilities are stated at their carrying value, which approximates fair value due to the short time to the expected receipt or payment date. The carrying amount of the Company’s outstanding debt approximates the fair value as the debt bears a floating rate that approximates the market interest rate. Revenue Recognition The Company generates revenue from the sale of subscriptions to access the software in the Company’s hosted environment with ongoing operations and maintenance (“O&M”) services (“Palantir Cloud”), software licenses, primarily term licenses in the customers’ environments, with ongoing O&M services (“On-Premises Software”), and professional services. In accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), the Company recognizes revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for promised goods or services. The Company applies the following five-step revenue recognition model in accounting for its revenue arrangements: • Identification of the contract(s) with the customer; • Identification of the performance obligations in the contract; • Determination of the transaction price; • Allocation of the transaction price to the performance obligations in the contract; and • Recognition of revenue when, or as, the Company satisfies a performance obligation. 124 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) Each of the Company’s significant performance obligations and the Company’s application of ASC 606 to its revenue arrangements is discussed in further detail below. Palantir Cloud The Company’s Palantir Cloud subscriptions grant customers the right to access the software functionality in a hosted environment controlled by Palantir and are sold together with stand-ready O&M services, as further described below. The Company promises to provide continuous access to the hosted software throughout the contract term. Revenue associated with Palantir Cloud subscriptions is recognized over the contract term on a ratable basis, which is consistent with the transfer of control of the Palantir Cloud subscription to the customer. On-Premises Software Sales of the Company’s software licenses, primarily term licenses, grant customers the right to use functional intellectual property, either on their internal hardware infrastructure or on their own cloud instance, over the contractual term and are also sold together with stand-ready O&M services. The O&M services include critical updates, support, and maintenance services required to operate the software and, as such, are necessary for the software to maintain its intended utility over the contractual term. Because of this requirement, the Company has concluded that the software licenses and O&M services, which together the Company refers to it as its On-Premises Software, are highly interdependent and interrelated and represent a single distinct performance obligation within the context of the contract. Revenue is generally recognized over the contract term on a ratable basis. Professional Services The Company’s professional services support the customers’ use of the software and include, as needed, on-demand user support, user-interface configuration, training, and ongoing ontology and data modeling support. Professional services contracts typically include the provision of on-demand professional services for the duration of the contractual term. These services are typically coterminous with a Palantir Cloud subscription or the On-Premises Software. Professional services are on-demand, whereby the Company performs services throughout the contract period; therefore, the revenue is recognized over the contractual term. Contract Balances The timing of customer billing and payment relative to the start of the service period varies from contract to contract; however, the Company bills many of its customers in advance of the provision of services under its contracts, resulting in contract liabilities consisting of either deferred revenue or customer deposits (“contract liabilities”). Deferred revenue represents billings under noncancelable contracts before the related product or service is transferred to the customer. Customer deposits consist of payments received in advance of the start of the contractual term or for anticipated revenue generating activities for the portion of a contract term that is subject to cancellation and refund. The Company’s arrangements generally include terms that allow the customer to terminate the contract for convenience and receive a pro-rata refund of the amount of the customer deposit for the period of time remaining in the contract term after the applicable termination notice period expires. In these arrangements, the Company concluded there are no enforceable rights and obligations after such notice period and therefore the consideration received or due from the customer that is subject to termination for convenience is recorded as customer deposits. The payment terms and conditions vary by contract; however, the Company’s terms generally require payment within 30 to 60 days from the invoice date. In instances where the timing of revenue recognition differs from the 125 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) timing of payment, the Company elected to apply the practical expedient in accordance with ASC 606 to not adjust contract consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period between when promised goods and services are transferred to the customer and when the customer pays for those goods and services will be one year or less. As such, the Company determined its contracts do not generally contain a significant financing component. Areas of Judgment and Estimation The Company’s contracts with customers can include multiple promises to transfer goods or services to the customer. Determining whether promises are distinct performance obligations that should be accounted for separately – or not distinct within the context of the contract and, thus, accounted for together – requires significant judgment. The Company concluded that the promise to provide a software license is highly interdependent and interrelated with the promise to provide O&M services and such promises are not distinct within the context of its contracts and are accounted for as a single performance obligation as the Company’s On-Premises Software. Additionally, the pricing of the Company’s contracts is generally fixed; however, it is possible for contracts to include variable consideration in the form of performance bonuses, which can be based on subjective or objective criteria. The Company includes the estimated amount of variable consideration that it expects to receive to the extent it is probable that a significant revenue reversal will not occur. Any amounts received in the form of performance bonuses were not material in the periods presented. Costs to Obtain and Fulfill Contracts Incremental costs of obtaining a contract include only those costs that are directly related to the acquisition of contracts, including sales commissions, and that would not have been incurred if the contract had not been obtained. The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if it is expected that the economic benefit and amortization period will be longer than one year. Costs to obtain contracts were not material in the periods presented. The Company recognizes an asset for the costs to fulfill a contract with a customer if the costs are specifically identifiable, generate or enhance resources used to satisfy future performance obligations, and are expected to be recovered. Costs to fulfill contracts were not material in the periods presented. Deferred Revenue Deferred revenue represents billings under noncancelable contracts before the related product or service is transferred to the customer. The portion of deferred revenue that is anticipated to be recognized as revenue during the succeeding twelve-month period is recorded as deferred revenue and the remaining portion is recorded as deferred revenue, noncurrent. Customer Deposits Customer deposits consist of payments received for anticipated revenue generating activities in advance of the start of the contractual term or for the portion of a contract term that is subject to cancellation and refund. The portion of customer deposits that is anticipated to be recognized as revenue during the succeeding twelve-month period is recorded as customer deposits and the remaining portion is recorded as customer deposits, noncurrent. 126 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) Cost of Revenue Cost of revenue primarily includes salaries, stock-based compensation expense, and benefits for personnel involved in performing O&M and professional services, as well as third-party cloud hosting services, allocated overhead, and other direct costs. Software Development Costs The Company evaluates capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company’s product development process and substantial development risks, technological feasibility is established for the Company’s products when they are made available for general release. Accordingly, the Company has charged all such costs to research and development expense in the period incurred. Sales and Marketing Costs Sales and marketing costs primarily include salaries, stock-based compensation expense, and benefits for personnel involved in executing on pilots and performing other brand building activities, as well as third-party cloud hosting services for our pilots, marketing and sales event-related costs, and allocated overhead. The Company generally charges all such costs to sales and marketing expense in the period incurred. Research and Development Costs Research and development costs primarily include salaries, stock-based compensation expense, and benefits for personnel involved in performing the activities to develop and improve the Company’s platforms, as well as third-party cloud hosting services, and allocated overhead. Research and development costs are expensed as incurred. Commitments and Contingencies Liabilities for loss contingencies arising from claims, disputes, legal proceedings, fines and penalties, and other sources are recorded when it is probable that a liability has been or will be incurred and the amount of the liability can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Recoveries of such legal costs from insurance policies are recorded as an offset to legal expenses in the period they are received. Stock-Based Compensation The Company accounts for stock-based compensation expense in accordance with the fair value recognition and measurement provisions of GAAP, which require compensation cost for the grant-date fair value of stock-based awards to be recognized over the requisite service period. The Company determines the fair value of stock-based awards granted or modified on the grant date or modification date using appropriate valuation techniques. Service-Based Vesting The Company grants stock option awards and RSUs, that vest only based upon the satisfaction of a service condition. For stock option awards, the Company uses the Black-Scholes option pricing model to determine the fair value of the stock options granted. The Black-Scholes option pricing model requires the input of highly subjective assumptions, including the fair value of the underlying common stock, the expected term of the 127 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) option, the expected volatility of the price of the common stock, risk-free interest rates, and the expected dividend yield of the common stock. The assumptions used to determine the fair value of the option awards represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. For RSUs, the Company determines the grant-date fair value of the RSUs as the fair value of the Company’s common stock on the grant date. The Company records stock-based compensation expense for stock options and RSUs that vest only based upon the satisfaction of a service condition on a straight-line basis over the requisite service period, which is generally four years. The Company recognizes forfeitures as they occur. Performance-Based Vesting The Company grants awards, including RSUs and “growth units,” that vest upon the satisfaction of both a service condition and a performance condition. The performance-based vesting condition for the RSUs granted prior to the Company’s Direct Listing was satisfied upon the occurrence of the Direct Listing. The service-based vesting period for growth units has been satisfied for all growth units outstanding as of December 31, 2019. The performance-based vesting condition will be satisfied if the recipient remains a service provider through the 180-day period following the Direct Listing. Alternatively, if the holder of the growth units leaves the Company before the date of the public listing plus 180 days, then the growth units will vest if the Company meets certain performance targets for the performance year. Unless determined otherwise by the Company, if a change in control of the Company occurs before vesting, the growth units are forfeited. Employee Benefit Plan The Company sponsors a 401(k) tax-deferred savings plan for all employees who meet certain eligibility requirements. Participants may contribute, on a pretax and post-tax basis, a percentage of their qualifying annual compensation, but not to exceed a maximum contribution amount pursuant to Section 401(k) of the Internal Revenue Code. The Company may make additional matching contributions on behalf of the participants. The Company did not make matching contributions for the years ended December 31, 2020, 2019 and 2018. Income Taxes The Company estimates its current tax expense together with assessing temporary differences resulting from differing treatment of items not currently deductible for tax purposes. These differences result in deferred tax assets and liabilities on the Company’s consolidated balance sheets, which are estimated based upon the difference between the financial statement and tax bases of assets and liabilities using the enacted tax rates that will be in effect when these differences reverse. In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in the Company’s consolidated statements of operations become deductible expenses under applicable income tax laws or loss or credit carryforwards are utilized. Accordingly, the realization of the Company’s deferred tax assets are dependent on future taxable income against which these deductions, losses, and credits can be utilized. The Company evaluates the realizability of its deferred tax assets and recognizes a valuation allowance when it is more likely than not that a future benefit on such deferred tax assets will not be realized. Changes in the valuation allowance, when recorded, would be included in the Company’s consolidated statements of operations. Management’s judgment is required in determining the Company’s valuation allowance recorded against its net deferred tax assets. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the 128 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) position. The tax benefits recognized in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. The Company recognizes interest and penalties related to uncertain tax positions in its provision (benefit) for income taxes. On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (“Tax Act”). The Tax Act includes significant changes to the U.S. corporate income tax system including: a federal corporate rate reduction from 35% to 21%; limitations on the deductibility of interest expense; creation of new minimum taxes, such as the base erosion anti-abuse tax (“BEAT”) and Global Intangible Low-Taxed Income (“GILTI”) tax; and the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system, which resulted in a one time U.S. tax liability on those earnings which have not previously been repatriated to the United States (“Transition Tax”). A majority of the provisions in the Tax Act were effective January 1, 2018. The Company has elected to record taxes associated with GILTI as period costs if and when incurred. Net Loss Per Share Attributable to Common Stockholders The Company computes net loss per share attributable to its common stockholders using the two-class method required for participating securities, which determines net loss per common share for each class of common stock and participating securities according to dividends declared or accumulated and participation rights in distributed and undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common stock and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. The Company’s redeemable convertible and convertible preferred stock contractually entitled the holders of such shares to participate in dividends, but do not contractually require the holders of such shares to participate in the Company’s losses. As such, net losses for the periods presented were not allocated to these securities. The rights, including the liquidation and dividend rights, of the holders of Class A, Class B, and Class F common stock (collectively, the “common stock”) are identical, except with respect to voting and conversion. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis and the resulting net loss per share will, therefore, be the same for all classes of common stock on an individual or combined basis. As such, the Company has presented the net loss attributed to its common stock on a combined basis. Foreign Currency Generally the functional currency of the Company’s international subsidiaries is the local currency of the country in which they operate. The Company translates the assets and liabilities of its non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect at the end of each reporting period. Revenue and expenses for these subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses from these translations are recognized as a cumulative translation adjustment and included in accumulated other comprehensive income (loss). For transactions that are not denominated in the local functional currency, the Company remeasures monetary assets and liabilities at exchange rates in effect at the end of each reporting period. Transaction gains and losses from the remeasurement are recognized in other income (expense), net within the consolidated statements of operations. Recently Adopted Accounting Pronouncements Under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, emerging growth companies (“EGC”) can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act 129 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) until such time as those standards apply to private companies. The Company elected to retain the ability to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that the Company (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. The Company lost its emerging growth company status on December 31, 2020 as its annual gross revenue exceeded the EGC revenue criteria of $1.07 billion. As such the Company became subject to new accounting pronouncement effective dates for non-EGC’s during 2020. The Company adopted the following accounting standards during the year ended December 31, 2020: ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This standard update modified the disclosure requirements on fair value measurements by removing, modifying, or adding certain disclosures. The ASU eliminated such disclosures as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and valuation processes for Level 3 fair value measurements. The ASU adds new disclosure requirements for Level 3 measurements. The Company adopted ASU 2018-13 as of January 1, 2020. The Company’s disclosures related to its Level 3 financial instruments did not materially change for the periods presented. See Note 4. Fair Value Measurements for more information. ASU 2016-02, Leases (Topic 842). ASC 842 requires companies to generally recognize operating and financing lease liabilities and corresponding ROU assets on their balance sheet. Leases will be classified as finance or operating leases, with classification affecting the pattern and classification of expense recognition in the consolidated statements of operation. Effective January 1, 2020, the Company adopted this new standard prospectively using a modified retrospective transition approach. The Company elected the package of practical expedients permitted under the transition guidance of the new standard, which allowed the Company to carry forward its historical assessment on whether a contract is or contains a lease, lease classification, and initial direct costs. Upon adoption on January 1, 2020, the Company recognized operating lease ROU assets of $234.1 million, and current and non-current operating lease liabilities of $43.3 million and $237.2 million, respectively. Finance lease assets and liabilities were not material. The adoption of ASC 842 did not have a material impact to Company’s consolidated statements of operations and cash flows from operations. ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software – (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This standard update requires a customer in a hosting arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. The Company adopted this guidance as of January 1, 2020 on a prospective basis. Upon the adoption, the Company capitalized $4.0 million of software implementation costs incurred during the year ended December 31, 2020, which were included in prepaid expenses and other current assets and other assets on the consolidated balance sheets. ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This standard update, along with subsequent ASUs, replaces the incurred loss impairment methodology with an expected credit loss model for which a company recognizes an allowance based on the estimate of expected credit loss. The Company adopted the standard effective January 1, 2020 on a modified retrospective basis. The adoption of the new standard did not have a material impact on the Company’s consolidated financial statements. 130 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) Recently Issued Accounting Pronouncements In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740) , which is intended to simplify various aspects related to accounting for income taxes. The new standard is effective for the Company on January 1, 2021. The Company is currently evaluating the impact of the new standard on its consolidated financial statements and related disclosures but does not expect it to have a material impact. 3. Revenue Recognition Contract Balances The Company’s contract liabilities consist of deferred revenue and customer deposits. The changes in the Company’s contract liabilities were as follows (in thousands): Contract liabilities as of January 1, 2019 $ 657,112 Billings and other (1)(2) 898,254 Revenue recognized (742,555) Refunds accrued or paid to customers (18,000) Contract liabilities as of December 31, 2019 794,811 Billings and other (2) 839,740 Revenue recognized (1,092,673) Refunds accrued or paid to customers (10,000) Contract liabilities as of December 31, 2020 $ 531,878 (1) Billings include $75.0 million at December 31, 2019 from Palantir Technologies Japan, K.K. See Note 6. Equity Method Investments for more information. (2) Other primarily includes the impact of foreign currency translation. Remaining Performance Obligations The Company’s arrangements with its customers often have terms that span over multiple years. However, the Company generally allows its customers to terminate contracts for convenience prior to the end of the stated term with less than twelve months’ notice. Revenue allocated to remaining performance obligations represents noncancelable contracted revenue that has not yet been recognized, which includes deferred revenue and, in certain instances, amounts that will be invoiced. The Company has elected the practical expedient allowing the Company to not disclose remaining performance obligations for contracts with original terms of twelve months or less. Cancelable contracted revenue, which includes customer deposits, is not considered a remaining performance obligation. The Company’s remaining performance obligations were $597.4 million as of December 31, 2020, of which the Company expects to recognize approximately 54% as revenue over the next twelve months. Disaggregation of Revenue See Note 15. Segment and Geographic Information for disaggregated revenue by customer segment and geographic region. 131 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) 4. Fair Value Measurements The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring and nonrecurring basis and indicates the fair value hierarchy of the valuation (in thousands): As of December 31, 2020 Total Level 1 Level 2 Level 3 Assets: Cash equivalents: Money market funds $ 1,075,783 $ 1,075,783 $ — $ — Restricted cash: Certificates of deposit 74,097 — 74,097 — Total $ 1,149,880 $ 1,075,783 $ 74,097 $ — As of December 31, 2019 Total Level 1 Level 2 Level 3 Assets: Cash equivalents: Money market funds $ 650,498 $ 650,498 $ — $ — Restricted cash: Certificates of deposit 102,904 — 102,904 — Prepaid expenses and other current assets: Assets held for sale 980 — — 980 Total $ 754,382 $ 650,498 $ 102,904 $ 980 Liabilities: Warrants liability $ 42,628 $ — $ — $ 42,628 Total $ 42,628 $ — $ — $ 42,628 Certificates of Deposit The Company’s Level 2 instruments consist of restricted cash invested in certificates of deposit. The fair value of such instruments is estimated based on valuations obtained from third-party pricing services that utilize industry standard valuation models, including both income-based and market-based approaches, for which all significant inputs are observable either directly or indirectly. These inputs include interest rate curves, foreign exchange rates, and credit ratings. Gross unrealized gains or losses for cash equivalents as of December 31, 2020 and 2019 were not material. Assets Held for Sale The fair value of assets held for sale were determined based on the Company’s best estimate of fair market value considering the limited market conditions for the assets, recent comparable sales, the age and condition of the assets, current demand, including letters of intent for the sale of the assets, and the views of informed industry sources and third-party specialists. In determining the fair market value of the assets at December 31, 2019, the Company considered a letter of intent it executed with a prospective buyer during November 2019 and its costs to sell the assets. As a result, an impairment charge for the excess of carrying value over the fair value less costs to sell was recorded as general and administrative expense in the consolidated statements of operations. All assets held for sale were sold as of December 31, 2020. 132 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) The following table sets forth a summary of the changes in the estimated fair value of the Company’s assets held for sale (in thousands): Balance as of December 31, 2018 $ 24,008 Impairment of assets held for sale (23,407) Foreign currency adjustments 379 Balance as of December 31, 2019 $ 980 Sale of assets held for sale (250) Impairment of assets held for sale (674) Foreign currency adjustments (56) Balance as of December 31, 2020 $ — Warrants Liability In connection with the completion of the Company’s Direct Listing, all of the outstanding warrants to purchase shares of redeemable convertible and convertible preferred stock converted into warrants to purchase shares of Class B common stock. As a result, the Company reclassified the warrants liability to additional paid-in capital. Immediately prior to the Direct Listing and the reclassification to additional paid-in capital, the fair value of the warrants liability was estimated using a Black Scholes model and considered the closing price of the Company’s common stock on the first day of trading, the strike price of the warrants, the remaining term of the warrants, a risk-free interest rate that corresponds to the remaining term, and the volatility of comparable companies. For the year ended December 31, 2019, the warrants liability was included in other noncurrent liabilities in the consolidated balance sheet and the fair value of the warrant liability was estimated using a combination of an option-pricing model and a Monte Carlo simulation model with equal weighting applied to both models in determining the fair values. These models considered many assumptions, including the likelihood of various potential liquidity events, the nature and timing of such potential events, actions taken with regard to the warrants at expiration, as well as discounts for lack of marketability of the underlying securities and warrants. The assumptions used to calculate the warrants liability as of September 29, 2020, the date immediately before the Direct Listing, and December 31, 2019 were as follows: September 29, December 31, 2020 2019 Discounts for lack of marketability — 20.0% - 28.0 % Fair value of underlying securities $9.50 $6.81 - $8.04 Expected volatility 66.0 % 66.0 % Dividend rate — — Risk-free interest rate 0.1 % 1.3 % 133 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) The following table sets forth a summary of the changes in the estimated fair value of the Company’s warrants liability (in thousands): Balance as of December 31, 2018 $ 76,069 Net exercises in the period (33,444) Change in fair value of warrants 3 Balance as of December 31, 2019 $ 42,628 Net exercises in the period (10,810) Change in fair value of warrants (811) Reclassification to additional paid-in capital as a result of conversion of preferred stock warrants to common stock warrants (31,007) Balance as of December 31, 2020 $ — 5. Balance Sheet Components Property and Equipment, Net Property and equipment, net consisted of the following (in thousands): As of December 31, 2020 2019 Leasehold improvements $ 85,196 $ 93,530 Computer equipment, software, and other 22,275 32,757 Furniture and fixtures 9,976 10,753 Construction in progress 493 3,161 Total property and equipment, gross 117,940 140,201 Less: accumulated depreciation and amortization (88,399) (108,612) Total property and equipment, net $ 29,541 $ 31,589 Depreciation and amortization expense related to property and equipment, net was $13.9 million, $12.2 million, and $13.8 million for the years ended December 31, 2020, 2019, and 2018, respectively. Accrued Liabilities Accrued liabilities consisted of the following (in thousands): As of December 31, 2020 2019 Accrued payroll and related expenses $ 85,466 $ 31,355 Accrued other liabilities 73,080 95,265 Total accrued liabilities $ 158,546 $ 126,620 134 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) 6. Equity Method Investments Palantir Technologies Japan, K.K. During November 2019, the Company and SOMPO Holdings, Inc. (“SOMPO”) created a Japanese Kabushiki Kaisha (“K.K.”), Palantir Technologies Japan, K.K. (“Palantir Japan”) to distribute Palantir platforms to the Japanese market. Upon closing of the transaction with SOMPO, the Company purchased a total of 100,000 shares of Palantir Japan common stock for $25.0 million. The shares the Company received in exchange represent a 50% voting interest in Palantir Japan. The remaining 50% of the voting interest is held by SOMPO. The Company’s investment in Palantir Japan is accounted for as an equity method investment as the Company is able to exercise significant influence over, but does not control, the investee. The Company recorded a $25.9 million initial investment in Palantir Japan, of which $0.9 million was related to direct costs incurred in connection with the transaction. The Company’s 50% share of profits or losses generated from Palantir Japan are reported on a quarter lag. The Company recorded $1.7 million share of losses during the year ended December 31, 2020. Concurrently with the formation of Palantir Japan, the Company entered into a ten-year license and services agreement with Palantir Japan for a limited non-transferable right to resell the Company’s platforms and use certain of the Company’s trademarks in exchange for $25.0 million and future quarterly royalty payments to be paid based on Palantir Japan’s net revenue. In addition, the Company received a prepayment of $50.0 million to be used toward future products or services provided by the Company to support the business operations and future deployments of the Company’s platforms by Palantir Japan (“service credit”). In connection with the license rights sold to Palantir Japan, the Company recorded the receipt of the $25.0 million in deferred revenue which will be recognized over the term of the agreement. The Company recorded the $50.0 million service credit in deferred revenue, which will be utilized on an as-needed basis and expires after five years. In the event there was a dissolution of Palantir Japan in the first five years following its formation, any remaining service credit would be refunded by the Company to Palantir Japan. For the years ended December 31, 2020 and 2019, Palantir Japan utilized $4.2 million and $0 of the outstanding service credit, respectively. 7. Debt 2014 Credit Facility In October 2014, the Company entered into an unsecured revolving credit facility which has been subsequently amended (the “2014 Credit Facility”). The 2014 Credit Facility bears interest at the London Interbank Offered Rate (“LIBOR”) plus a margin of 2.75% per annum, subject to certain adjustments, and incurs a commitment fee of 0.375% assessed on the daily average undrawn portion of revolving commitments. Interest and commitment fees are payable at the end of an interest period or at each three-month interval if the interest period is longer than three months. In December 2019, the Company drew down the $150.0 million term loan and $150.0 million under the existing revolving credit facility. The term loan portion of the 2014 Credit Facility was fully repaid and terminated, and the $150.0 million revolving credit facility remained outstanding as of December 31, 2019. In June 2020, the Company amended the 2014 Credit Facility to include a new $150.0 million term loan, extend the maturity date to June 4, 2023, and add an additional lender. Additionally, this amendment increased the minimum liquidity required to be maintained and provided the Company with an option to increase the total commitments by up to an additional $200.0 million, subject to the lenders’ approval. All other terms and conditions remained substantially the same upon the effectiveness of the amendment. Upon entering into this amendment, the Company drew down the total available term loan commitment of $150.0 million. 135 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) In July 2020, the Company entered into another amendment to the 2014 Credit Facility, which added an additional lender and provided for an increase of $50.0 million to the revolving credit facility and a $50.0 million term loan. The incremental commitments were provided under the same terms as the existing commitments under the 2014 Credit Facility. During July 2020, the Company drew down the additional available term loan of $50.0 million and repaid the $150.0 million outstanding revolving credit facility. As of December 31, 2020, the Company had $200.0 million of term loans outstanding under the 2014 Credit Facility and an additional $200.0 million undrawn revolving credit facility available. The 2014 Credit Facility is secured with substantially all of the Company’s assets. The 2014 Credit Facility contains customary representations and warranties, and certain financial and nonfinancial covenants, including but not limited to maintaining minimum liquidity of $50.0 million, and certain limitations on liens and indebtedness. The Company was in compliance with all covenants associated with the 2014 Credit Facility as of December 31, 2020. 2019 Credit Facility On December 31, 2019, the Company entered into a senior secured revolving credit facility (the “2019 Credit Facility”) with a second lender. The 2019 Credit Facility allowed for the drawdown of up to $250.0 million. Amounts outstanding under the 2019 Credit Facility incurred interest at LIBOR plus a margin of 2.0% per annum, subject to certain adjustments. Interest was payable at the end of an interest period or at each three-month interval if the interest period was longer than three months. The 2019 Credit Facility also required the Company to maintain 50% of the aggregate revolving commitment in a specified collateral account, which was reported in restricted cash, noncurrent on the consolidated balance sheets. As of December 31, 2019, the Company had $250.0 million outstanding and elected to incur interest at three-month LIBOR plus 2.0%. In June 2020, the outstanding balance was fully repaid and the 2019 Credit Facility was terminated, which released all restrictions on the cash collateral. The Company’s outstanding debt consisted of the following as of December 31, 2020 and 2019 (in thousands): As of December 31, 2020 2019 Principal amount $ 200,000 $ 400,000 Unamortized discount (2,023) (3,935) Carrying value of debt $ 197,977 $ 396,065 Future minimum payments of principal on the Company’s outstanding debt as of December 31, 2020 were as follows (in thousands): 2021 $ — 2022 — 2023 200,000 Total payments $ 200,000 8. Leases The Company has operating leases primarily for corporate office space, and equipment. Certain lease agreements contain renewal options, rent abatement, and escalation clauses that are factored into our determination of lease 136 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) payments when appropriate. The Company’s leases have remaining terms up to March 2032 with renewal terms up to June 2033 or options to terminate leases within the next six years. Supplemental balance sheet information related to lease liabilities at December 31, 2020, was as follows (in thousands): Lease-Related Assets and Liabilities Financial Statement Line Items As of December 31, 2020 Right-of-use assets: Operating leases Operating lease right-of-use assets $ 217,075 Total right-of-use assets $ 217,075 Lease liabilities: Operating leases Operating lease liabilities $ 29,079 Operating lease liabilities, noncurrent 229,800 Total lease liabilities $ 258,879 The components of lease expense included in the Company’s consolidated statements of operations include (in thousands): Year Ended December 31, 2020 Operating lease expense $ 53,576 Short-term lease expense 8,942 Variable lease expense 9,433 Less: Sublease income 19,769 Total lease expense, net $ 52,182 Variable lease costs are primarily related to payments made to lessors for common area maintenance, property taxes, insurance, and other operating expenses. Short-term lease costs primarily represent temporary employee housing. Finance leases were not material for the year ended December 31, 2020. Maturities of operating lease liabilities as of December 31, 2020 were as follows (in thousands): As of December 31, 2020 Year ended December 31, Operating Lease Commitments Less: Sublease Income Net Lease Commitments 2021 $ 44,630 $ 17,582 $ 27,048 2022 40,099 12,418 27,681 2023 45,085 18,288 26,797 2024 41,629 16,407 25,222 2025 40,066 14,210 25,856 Thereafter 124,935 71,403 53,532 Total undiscounted liabilities 336,444 150,308 186,136 Less: Leases not yet commenced (1,082 ) — (1,082 ) Less: Imputed interest (76,483 ) — (76,483 ) Total operating lease liabilities $ 258,879 $ 150,308 $ 108,571 137 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) The weighted-average remaining lease term and discount rate related to the Company’s operating lease liabilities as of December 31, 2020 were 8.05 years and 6.34%, respectively. The following table sets forth the supplemental information related to the Company’s operating leases for the year ended December 31, 2020 (in thousands): Year Ended December 31, 2020 Cash paid for operating lease liabilities $ 58,157 Lease liabilities arising from obtaining right-of-use assets $ 17,647 As of December 31, 2020, the Company has additional operating leases for office space that have not yet commenced with future lease obligations of $1.1 million. These operating leases will commence in 2021 with lease terms of four years. As of December 31, 2019, prior to the Company’s adoption of ASC 842, annual minimum payments under noncancelable operating leases were as follows (in thousands): Operating Lease Commitments Less: Sublease Income Net Operating Lease Commitments 2020 $ 58,914 $ 18,192 $ 40,722 2021 49,093 17,582 31,511 2022 45,894 17,665 28,229 2023 44,861 17,532 27,329 2024 41,968 15,636 26,332 Thereafter 133,883 84,985 48,898 Total minimum lease payments $ 374,613 $ 171,592 $ 203,021 Under ASC 840, during the years ended December 31, 2019 and 2018, net rent expense was $38.5 million and $43.6 million, respectively, which included sublease income of $14.8 million and $13.1 million, respectively. 9. Commitments and Contingencies Letters of Credit and Guarantees The Company had irrevocable standby letters of credit and guarantees, including bank guarantees, outstanding in the amounts of $116.8 million and $322.8 million as of December 31, 2020 and 2019, respectively, which were fully collateralized. The Company is required to maintain these letters of credit and guarantees primarily in connection with operating lease agreements, certain customer contracts, and other guarantees and financing arrangements. These letters of credit and guarantees had expiration dates through August 2028 as of December 31, 2020. Purchase Commitments In December 2019, the Company entered into a minimum annual commitment to purchase cloud hosting services of at least $1.49 billion over six contract years, with an optional seventh carryover year, effective beginning January 1, 2020, in exchange for various discounts on such services. If the spend does not meet the minimum annual commitment each year or at the end of the term, the Company is obligated to make a return payment. If the difference is greater than $30.0 million for each of the first three contract years or $50.0 million for each of 138 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) the contract years thereafter (“relief amounts”), the Company has the option to pay the respective relief amount for that year for services to be utilized in the future and the excess amount of the difference above the relief amount would be added to the minimum annual commitment of the following year through the end of the contract. In December 2020, the agreement was amended to extend the first contract year until June 30, 2021, and the optional carryover period to June 30, 2029. As of December 31, 2020, the Company had satisfied $84.5 million of its $126.0 million commitment for the contract year ending June 30, 2021. In June 2020, the Company entered into an additional commitment to purchase at least $45.0 million of cloud hosting services over a period of five years commencing on June 1, 2020 and ending on May 31, 2025. If the spend commitment is not met at the end of the term, the Company is obligated to pay the full amount of the outstanding balance (“shortfall payment”). The shortfall payment may be applied as a prepayment against consumption during an additional twelve-month coverage period expiring on May 31, 2026, at which time any unused amount would be forfeited. As of December 31, 2020, the Company had satisfied $2.8 million of its commitment. Litigation and Legal Proceedings From time to time, third parties may assert patent infringement claims against the Company. In addition, from time to time, the Company may be subject to other legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of trademarks, copyrights, and other intellectual property rights; employment claims; securities claims; investor claims; corporate claims; class action claims; and general contract, tort, or other claims. The Company may from time to time also be subject to various legal or government claims, disputes, or investigations. Such matters may include, but not be limited to, claims, disputes, allegations, or investigations related to warranty; refund; breach of contract; breach, leak, or misuse of personal data or confidential information; employment; government procurement; intellectual property; government regulation or compliance (including but not limited to anti-corruption requirements, export or other trade controls, data privacy or data protection, cybersecurity requirements, or antitrust/competition law requirements); securities; investor; corporate; or other matters. The Company is unable to predict whether or when any such matters may arise, the outcome of these matters, or the ultimate legal and financial liability, and cannot reasonably estimate the possible loss or range of loss at this time and accordingly has not accrued a related liability. On December 14, 2017, members of KT4 Partners LLC (Managing Member Marc Abramowitz) and Sandra Martin Clark, as trustee for the Marc Abramowitz Irrevocable Trust Number 7 (together, “KT4 Plaintiffs”) filed an action in the Delaware Superior Court against the Company and Disruptive Technology Advisers LLC. The complaint alleges tortious interference with prospective economic advantage and civil conspiracy in connection with a potential sale of stock by the KT4 Plaintiffs to a third party. The KT4 Plaintiffs seek compensatory and punitive damages, interest, fees, and costs. On August 30, 2019, BTIG, LLC (the “BTIG Plaintiff”), the alleged broker of the potential sale of stock that is the subject of the KT4 Plaintiffs’ December 2017 action, filed an action in the Delaware Superior Court against the Company and Disruptive Technology Advisers LLC. The complaint alleged tortious interference with prospective economic advantage and civil conspiracy in connection with the same potential sale of stock at issue in the KT4 Plaintiffs’ action by a group of sellers purportedly represented by the BTIG Plaintiff to a third party. The BTIG Plaintiff dismissed its claim with prejudice on January 21, 2021. The Company believes the lawsuit brought by the KT4 Plaintiffs is without merit and is vigorously defending itself against it. Given the uncertainty of litigation it may be reasonably possible that the Company will incur a loss with regards to the matter; however, it cannot currently estimate a range of possible losses. Accordingly, the 139 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) Company is unable at this time to estimate the overall effects that may result from the remaining case on its financial condition, results of operations, or cash flows. As of December 31, 2020 and 2019, the Company was not aware of any currently pending legal matters or claims, individually or in the aggregate, that are expected to have a material adverse impact on its consolidated financial statements. Warranties and Indemnification The Company generally provides a warranty for its software products and services and a service level agreement (“SLA”) for the Company’s performance of software operations via its O&M services to its customers. The Company’s products are generally warranted to perform substantially as described in the associated product documentation during the subscription term or for a period of up to 90 days where the software is hosted by the customer; and the Company includes O&M services as part of its subscription and license agreements to support this warranty and maintain the operability of the software. The Company’s services are generally warranted to be performed in a professional manner and by an adequate staff with knowledge about the products. In the event there is a failure of such warranties, the Company generally is obligated to correct the product or service to conform to the warranty provision, as set forth in the applicable SLA, or, if the Company is unable to do so, the customer is entitled to seek a refund of the purchase price of the product and service (generally prorated over the contract term). Due to the absence of historical warranty claims, the Company’s expectations of future claims related to products under warranty continue to be insignificant. The Company has not recorded warranty expense or related accruals as of December 31, 2020 and 2019. The Company generally agrees to indemnify its customers against legal claims that the Company’s software products infringe certain third-party intellectual property rights and accounts for its indemnification obligations. In the event of such a claim, the Company is generally obligated to defend its customer against the claim and to either settle the claim at the Company’s expense or pay damages that the customer is legally required to pay to the third-party claimant. In addition, in the event of an infringement, the Company generally agrees to secure the right for the customer to continue using the infringing product; to modify or replace the infringing product; or, if those options are not commercially practicable, to refund the cost of the software, as prorated over the period. To date, the Company has not been required to make any payment resulting from infringement claims asserted against its customers and does not believe that the Company will be liable for such claims in the foreseeable future. As such, the Company has not recorded a liability for infringement costs as of December 31, 2020 and 2019. The Company has obligations under certain circumstances to indemnify each of the defendant directors and certain officers against judgments, fines, settlements, and expenses related to claims against such directors and certain officers and otherwise to the fullest extent permitted under the law and the Company’s bylaws and Amended and Restated Certificate of Incorporation. 10. Stockholders’ Equity (Deficit) Redeemable Convertible and Convertible Preferred Stock In connection with the Direct Listing in September 2020, all outstanding shares of redeemable convertible preferred stock and convertible preferred stock were converted into 4,017,378 and 793,725,807 shares of Class B common stock, respectively. In addition, the amended and restated certificate of incorporation filed in September 2020 in connection with the Direct Listing authorized the issuance of 2,000,000,000 shares of undesignated preferred stock. 140 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) Common Stock During September 2020, the Company filed an amended and restated certificate of incorporation, which became effective on the date of its filing. The amended and restated certificate of incorporation authorized the issuance of a total of 20,000,000,000 shares of Class A common stock, 2,700,000,000 shares of Class B common stock, and 1,005,000 shares of Class F common stock. Additionally, each of the Founders exchanged 335,000 shares of their Class B common stock for an equivalent number of shares of Class F common stock. The Company’s Class A, Class B, and Class F common stock all have the same rights, except with respect to voting and conversion rights. Class A and Class B common stock have voting rights of 1 and 10 votes per share, respectively. The Class F common stock has a variable number of votes and is convertible at any time, at the option of the holder thereof, into one share of Class B common stock. All shares of Class F common stock are held by a voting trust established by the Founders. The Class F common stock generally give the Founders the ability to control up to 49.999999% of the total voting power of the Company’s capital stock, so long as the Founders and certain of their affiliates collectively meet a minimum ownership threshold, which was 100.0 million of the Company’s equity securities as of December 31, 2020. Holders of the common stock are entitled to dividends when, as, and if declared by the Company’s Board of Directors, subject to the rights of the holders of all classes of stock outstanding having priority rights to dividends. No dividends have been declared as of December 31, 2020. During the year ended December 31, 2020, the Company sold a total of 206,500,523 shares of its Class A common stock at a price of $4.65 per share, for aggregate proceeds of $942.5 million, net of issuance costs of $17.7 million. Included in these sales were 107,526,881 shares of Class A common stock sold to SOMPO, a partner investor in the Company’s equity method investee, Palantir Japan. The following represented the total authorized, issued, and outstanding shares for each class of common stock: As of December 31, 2020 As of December 31, 2019 Authorized Issued Outstanding Authorized Issued Outstanding Common stock: Class A 20,000,000,000 1,542,057,292 1,542,057,292 2,200,000,000 315,615,753 309,223,182 Class B 2,700,000,000 249,077,252 249,077,252 1,800,000,000 272,273,934 272,273,934 Class F 1,005,000 1,005,000 1,005,000 — — — Total 22,701,005,000 1,792,139,544 1,792,139,544 4,000,000,000 587,889,687 581,497,116 Treasury Stock On April 30, 2020, the Board of Directors approved the retirement of all shares of treasury stock. Retirement of treasury stock was recorded as a reduction of common stock and additional paid-in capital. As of December 31, 2020, the Company held no shares as treasury stock. 11. Warrants As of December 31, 2019, warrants outstanding included warrants to purchase up to 21,831,545 shares of convertible preferred stock and 8,625,420 shares of Class B common stock, respectively. In December 2019, the Company and holders of the Series I Lead Warrants issued in February 2014 agreed to amend the Series I Lead Warrants to extend their expiration dates to January 2025. In connection with this 141 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) amendment, the holders agreed to a 20% reduction in the number of shares of Series I convertible preferred stock issuable upon exercise of the Series I Lead Warrant, which was effective January 2020. In September 2020, a warrant for 2,586,208 shares of Series D preferred stock with a strike price of $0.7406 was cashless exercised and net settled into 2,380,034 shares of Series D convertible preferred stock. Additionally, a warrant for 7,632,154 shares of Class B common stock with a strike price of $0.001 was cashless exercised and net settled into 7,631,329 shares of Class B common stock. Upon the effectiveness of the amended and restated certificate of incorporation filed in connection with the Direct Listing, all of the outstanding preferred stock warrants were converted into common stock warrants. As a result of the conversion, the warrants became equity-classified and the warrants liability was reclassified to additional paid-in capital. As of December 31, 2020, warrants outstanding include warrants to purchase 5,211,093 shares of Class B common stock with a strike price of $6.13 per share and warrants to purchase 814,666 shares of Class B common stock with a strike price of $3.51 per share. The warrants expire in between December 2021 to January 2025. In addition, the Company has warrants outstanding to purchase up to 13,042,415 shares of Class B common stock that will be automatically net exercised upon a Qualifying IPO, which did not include the Company’s Direct Listing, and only if the valuation of the Company immediately prior to such IPO (“IPO Valuation”) is less than $12.9 billion. These warrants expire in November 2023 and, as of December 31, 2020, were considered not probable of vesting. 12. Stock-Based Compensation 2010 Equity Incentive Plan In 2010, the Company adopted the 2010 Equity Incentive Plan, as amended from time to time (“Amended 2010 Equity Incentive Plan”, or “2010 Plan”). The 2010 Plan permitted the granting of incentive stock options (“ISOs”), non-statutory stock options (“NSOs”), stock appreciation rights (“SARs”), restricted stock, RSUs, and growth units to eligible participants. Under the 2010 Plan, the exercise price of options granted generally was at least equal to the fair market value of the applicable class of the Company’s common stock on the date of grant. Options and other equity awards become vested and, if applicable, exercisable based on terms determined by the Board of Directors or other plan administrator on the date of grant (or per later modification). Under the 2010 Plan, unless provided otherwise for an applicable award, the vesting and exercisability of awards accelerates by 25% on a change in control, if the award holder remains a service provider as of or immediately prior to such event. The 2010 Plan was terminated prior to the Company’s Direct Listing, and no additional awards will be granted under the 2010 Plan. However, the 2010 Plan will continue to govern the terms and conditions of the outstanding awards previously granted under the 2010 Plan. 2020 Executive Equity Incentive Plan In August 2020, the Company’s Board of Directors approved the 2020 Executive Equity Incentive Plan (the “Executive Equity Plan”). The Executive Equity Plan permitted the granting of NSOs and RSUs to the Company’s employees, consultants, and directors. A total of 165,900,000 shares of the Company’s Class B common stock were reserved for issuance under the Executive Equity Plan. During August 2020, options to purchase 162,000,000 shares of Class B common stock and restricted stock units covering 3,900,000 shares of the Company’s Class B common stock were granted to certain officers. 142 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) The Executive Equity Plan was terminated prior to the Company’s Direct Listing, and no additional awards will be granted under the Executive Equity Plan. However, the Executive Equity Plan will continue to govern the terms and conditions of the outstanding awards previously granted under the Executive Equity Plan. 2020 Equity Incentive Plan In September 2020, prior to the Direct Listing, the Company’s Board of Directors approved the 2020 Equity Incentive Plan (“2020 Plan”). The 2020 Plan provides for the grant of ISOs, NSOs, restricted stock, RSUs, SARs, and performance awards to the Company’s employees, directors, and consultants. A total of 150,000,000 shares of the Company’s Class A common stock were initially reserved for issuance pursuant to the 2020 Plan. In addition, the number of shares of Class A common stock reserved for issuance under the 2020 Plan includes certain shares of common stock subject to awards under the 2010 Plan and Executive Equity Plan, in the case of certain occurrences such as expirations, terminations, exercise and tax-related withholding, or failures to vest. Shares of Class B common stock added to the 2020 Plan from the 2010 Plan or Executive Equity Plan are reserved for issuance under the Company’s 2020 Plan as Class A common stock. The number of shares of Class A common stock available for issuance under the 2020 Plan will also include an annual increase on the first day of each fiscal year beginning on January 1, 2022, equal to the least of: • 250,000,000 shares of the Company’s Class A common stock; • Five percent of the outstanding shares of the Company’s common stock as of the last day of the immediately preceding fiscal year; or • such other amount as the administrator of the 2020 Plan determines. Under the 2020 Plan, the exercise price of options granted is generally at least equal to the fair market value of the Company’s Class A common stock on the date of grant. The term of an ISO generally may not exceed ten years. Additionally, the exercise price of any ISO granted to a 10% stockholder shall not be less than 110% of the fair market value of the common stock on the date of grant, and the term of such option grant shall not exceed five years. Options and other equity awards become vested and, if applicable, exercisable based on terms determined by the Board of Directors or another plan administrator on the date of grant, which is typically four years for new employees and varies for subsequent grants. Stock Options The following table summarizes stock option activity for the year ended December 31, 2020 (in thousands, except share and per share amounts): Options Outstanding Weighted- Average Exercise Price Per Share Weighted- Average Remaining Contractual Life (years) Aggregate Intrinsic Value Balance as of December 31, 2019 497,441,159 $ 4.10 5.81 $ 975,798 Options granted (1) 397,885,337 7.43 Options exercised (120,617,527) 2.48 Options canceled and forfeited (1) (238,942,466) 5.95 Balance as of December 31, 2020 535,766,503 $ 6.12 7.99 $ 9,340,245 Options vested and exercisable as of December 31, 2020 304,428,660 $ 3.67 5.84 $ 6,051,074 (1) Includes options that were canceled and re-granted as part of the option repricing modification, as further discussed below. 143 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) The aggregate intrinsic value of options outstanding, exercisable, and vested and exercisable is calculated as the difference between the exercise price of the underlying options and the fair value of the Company’s common stock as of December 31, 2020. The aggregate intrinsic value of options exercised during the years ended December 31, 2020, 2019, and 2018 was $974.2 million, $90.7 million, and $49.0 million, respectively, and is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of the exercise date. The weighted average grant-date fair value of options granted during the years ended December 31, 2020, 2019, and 2018 was $2.57, $3.67, and $3.81 per share, respectively. The total grant-date fair value of options that vested during the years ended December 31, 2020, 2019, and 2018 was $214.7 million, $229.4 million, and $221.2 million, respectively. As of December 31, 2020, the unrecognized expense related to options outstanding was $1.1 billion, which is expected to be recognized over a weighted-average service period of 8.06 years. Determination of Stock Option Fair Value The estimated grant-date fair value of all the Company’s stock-based option awards was calculated using the Black-Scholes option-pricing model, based on the following assumptions: Years Ended December 31, 2020 (1) 2019 (1) 2018 (1) Fair value of common stock $ 7.60 $ 6.03 $ 6.03 Expected volatility 71.00% 65.00% 65.00% Expected term (in years) 12.04 6.36 6.50 Expected dividend yield —% —% —% Risk-free interest rate 0.64% 1.65% 2.97% (1) Excludes the impact of repricing of stock options modified during the years ended December 31, 2020, 2019, and 2018. See the “Stock Option Modification” subsection below for further information. Fair value of common stock – Prior to the Direct Listing, the fair value of the common stock underlying the options had historically been determined by the Company’s Board of Directors given the absence of a public trading market. The Board of Directors determined the fair value of the common stock by considering a number of objective and subjective factors, including: (i) third-party valuations of common stock and secondary market trading information; (ii) the prices, rights, preferences, and privileges of the preferred stock relative to those of the common stock; (iii) the lack of marketability of the common stock; (iv) the actual operating and financial results; (v) the Company’s current business conditions and projections; and (vi) the likelihood of various potential liquidity events, such as an initial public offering or sale of the Company, given prevailing market conditions. After the Direct Listing, the fair value of the common stock underlying the options was the Company’s closing stock price on the NYSE on the grant date. Expected volatility – As the Company recently completed its Direct Listing on September 30, 2020 and there is no sufficient stock volatility historical data, the expected volatility was based on the average historical stock price volatility of comparable publicly-traded companies in its industry peer group. Expected term – The expected term represents the period of time the options are expected to be outstanding. The expected term assumptions were determined based on the vesting terms, exercise period, and contractual lives of the options. 144 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) Expected dividend yield – The Company has never paid and has no plans to pay dividends on its common stock. Therefore, the expected dividend yield assumption is zero. Risk-free interest rate – The risk-free rate is based on the U.S. treasury zero-coupon issues in effect at the time of grant for periods corresponding with the expected term of the option. Stock Option Modifications During the year ended December 31, 2018, the Company modified 158,646,785 options held by then-current employees. In September 2018, the Company repriced options held by then-current employees with an exercise price greater than $6.03 per share. As part of the repricing, the original options were canceled and new options were granted with an exercise price of $6.03 per share and a remaining contractual term of ten years. The new options were subject to the same service-based vesting schedule as the original options. The repricing was recorded as a stock option modification whereby the incremental fair value of each option was determined at the date of the modification and $43.7 million was immediately recognized related to vested options. During the years ended December 31, 2020, 2019, and 2018, the Company recognized total stock-based compensation expense of $11.9 million, $18.2 million, and $44.6 million, respectively, related to these repriced options. As of December 31, 2020, there was remaining incremental fair value of $7.8 million which will be recognized over the remaining requisite service period. During the year ended December 31, 2019, the Company recognized stock-based compensation expense of $9.2 million related to the modification of 13,401,568 options held by certain of its directors. As part of the repricing, the original options were canceled and new options were granted with an exercise price of $6.03 per share, the then-current fair market value of the Company’s common stock, and a remaining contractual term of ten years. The new options were subject to the same vesting schedule as the original options. During the year ended December 31, 2020, the Company recognized total stock-based compensation expense of $2.0 million. As of December 31, 2020, there was remaining incremental fair value of $0.9 million which will be recognized over the remaining requisite service period. During the year ended December 31, 2019, the Company also modified 26,040,393 fully vested and outstanding options which were approaching expiration. The extension of the original options was recorded as a stock option modification whereby the incremental fair value of each option was determined at the date of the modification and $5.6 million was immediately recognized related to vested options. The weighted average extended term for the modified options was approximately 0.9 years. In June 2020, the Company repriced 235,885,337 stock options. As part of the repricing, the original options were canceled and new options were granted with an exercise price of $4.72 per share and a remaining contractual term of ten years. The new options were generally subject to the same service-based vesting schedule as the original options. The repricing was recorded as a stock option modification whereby the incremental fair value of each option was determined at the date of the modification and $74.0 million was immediately recognized related to vested options in June 2020 and an additional $8.3 million was recognized during the year ended December 31, 2020. As of December 31, 2020, there was remaining incremental fair value of $22.9 million which will be recognized over the remaining requisite service period. During the year ended December 31, 2020, the Company also modified 57,659,626 fully vested and outstanding options that were approaching expiration. The extension of the original options was recorded as a stock option modification whereby the incremental fair value of each option was determined at the date of the modification and $9.9 million was immediately recognized related to vested options. The weighted average extended term for the modified options was approximately 0.47 years. 145 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) RSUs The following table summarizes the RSU activity for the year ended December 31, 2020: RSUs Outstanding Weighted Average Grant Date Fair Value per Share Unvested and outstanding as of December 31, 2019 179,494,619 $ 6.03 RSUs granted 98,667,215 8.15 RSUs vested (82,429,575) 6.45 RSUs canceled (10,862,021) 6.06 Unvested and outstanding at December 31, 2020 184,870,238 $ 6.97 During the year ended December 31, 2019, the Company granted RSUs with both a service-based vesting condition and a liquidity event-related performance condition which was considered a performance-based vesting condition. The stock-based compensation expense related to such RSUs will be recognized using the accelerated attribution method from the grant date. The service-based vesting period for these awards varies across service providers and is up to five years. The performance-based vesting condition for the RSUs was satisfied upon the Company’s Direct Listing, which occurred on September 30, 2020. Additionally, subsequent to September 30, 2020 the Company granted RSUs with only a service based-based vesting condition. The stock-based compensation expense related to such RSUs will be recognized ratably over the service period. During the year ended December 31, 2020, the Company recognized $940.0 million in stock-based compensation expense related to RSUs, of which $769.5 million was recognized upon the Company’s Direct Listing which satisfied the performance-based vesting condition. No compensation expense was recognized for the year ended December 31, 2019 as the performance-based vesting condition was not achieved. The total grant-date fair value of RSUs vested during the year ended December 31, 2020 was $531.9 million. As of December 31, 2020, the total unrecognized stock-based compensation expense related to the RSUs outstanding was $873.5 million, which the Company expects to recognize over 3.2 years. Growth Units In May 2019, the Company granted growth units which vest upon the satisfaction of both a performance-based vesting condition, which was satisfied upon the Company’s Direct Listing, and a service-based vesting condition. The growth units have a formula used to calculate the number of shares of the Company’s common stock that would be earned by the holder upon the satisfaction of all vesting criteria. The Company did not grant any additional growth units during the year ended December 31, 2020. During the year ended December 31, 2020, the Company recognized $9.6 million of stock-based compensation expense related to the growth units, of which $8.4 million was recognized upon the Company’s Direct Listing which satisfied the performance-based vesting condition. As of December 31, 2020, the total unrecognized stock-based compensation expense related to the 3,582,674 growth units outstanding was $1.2 million, which the Company expects to recognize through March 2021 at which point the outstanding growth units will fully vest and convert into 1.5 million shares of common stock. No compensation expense was recognized for the year ended December 31, 2019 as the performance-based vesting condition was not achieved. 146 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) Stock-based Compensation Expense Total stock-based compensation expense was as follows (in thousands): Years Ended December 31, 2020 2019 2018 Cost of revenue $ 139,627 $ 27,904 $ 19,629 Sales and marketing 398,205 79,215 93,510 Research and development 357,063 67,933 72,039 General and administrative 375,807 66,918 63,325 Total stock-based compensation expense $ 1,270,702 $ 241,970 $ 248,503 The Company recognized a benefit for income taxes related to stock-based compensation expense for the years ended December 31, 2020, 2019, and 2018 of $18.2 million, $6.4 million, and $6.0 million, respectively. Related Party Non-Recourse Note In November 2016, the Company entered into a non-recourse promissory note to lend an employee director $25.9 million, which was secured by 10,500,000 shares of the Company common stock held by the employee director (“pledged collateral”). Such arrangement was accounted for as a stock option issued to the employee, and the Company recorded the related stock-based compensation expense upon the issuance of the note. The promissory note accrued interest at a rate of 1.5% per annum, compounded semi-annually. In August 2020, the Company received a payment of $26.6 million for a portion of the principal and accrued interest on the outstanding non-recourse promissory note in the form of 3,500,000 shares of common stock based on the fair market value of the common stock on the date of repayment. The Company forgave the remaining $0.8 million owed under the note, guaranteed the employee director a tax neutrality payment to cover his additional tax liability associated with the transaction, and terminated its security interest in the remaining shares of common stock that were originally pledged as collateral. The forgiveness of the remaining debt and the provision of the tax neutrality payment was accounted for as a modification to the original stock option, and the Company recorded additional stock-based compensation expense of $4.5 million during the year ended December 31, 2020. As of December 31, 2020, the Company paid $0.8 million in tax neutrality payments and accrued a $4.0 million liability for its estimate of the remaining amount to be paid to the employee director. 13. Income Taxes Loss before provision (benefit) for income taxes consisted of the following (in thousands): Years Ended December 31, 2020 2019 2018 United States $ (1,203,682) $ (580,362) $ (558,974) Foreign 24,655 13,091 (11,951) Loss before provision (benefit) for income taxes $ (1,179,027) $ (567,271) $ (570,925) 147 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) Provision (benefit) for income taxes consisted of the following (in thousands): Years Ended December 31, 2020 2019 2018 Current: Federal $ — $ — $ — State 500 139 142 Foreign 7,249 19,435 15,945 Total current provision 7,749 19,574 16,087 Deferred: Federal — — — State — — — Foreign (20,385) (7,199) (6,985) Total deferred benefit (20,385) (7,199) (6,985) Total provision (benefit) for income taxes $ (12,636) $ 12,375 $ 9,102 A reconciliation of the expected tax provision (benefit) at the statutory federal income tax rate to the Company’s recorded tax provision (benefit) consisted of the following (in thousands): Years Ended December 31, 2020 2019 2018 Expected (benefit) at U.S. federal statutory rate $ (247,596) $ (119,127) $ (119,894) State income taxes – net of federal benefit 500 139 142 Foreign tax rate differential (4,131) 25,430 8,028 Research and development tax credits (26,294) (2,106) (4,565) Stock-based compensation (194,730) (6,069) 2,629 Warrants revaluation — — (10,099) Non-deductible officers’ compensation 76,093 — — Change in valuation allowance 373,632 112,149 126,395 Other 9,890 1,959 6,466 Total provision (benefit) for income taxes $ (12,636) $ 12,375 $ 9,102 For the year ended December 31, 2020, the Company recorded a benefit for income taxes compared to a provision for income taxes for the year ended December 31, 2019, primarily due to decreases in profits from our international operations and foreign benefits from stock-based compensation. For the year ended December 31, 2019, the provision for income taxes increased compared to the year ended December 31, 2018, primarily due to an increase of foreign income as a result of increased foreign business. Deferred tax assets and liabilities are recognized for the future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax basis using enacted tax rates in effect for the 148 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) year in which the differences are expected to reverse. Significant deferred tax assets and liabilities consisted of the following (in thousands): As of December 31, 2020 2019 Net operating loss carryforwards $ 853,861 $ 570,583 Reserves and accruals 55,685 36,269 Tax credit carryforwards 68,626 28,459 Stock-based compensation 246,380 181,901 Lease liabilities 57,543 — Depreciation and amortization 28,970 23,709 Gross deferred tax assets 1,311,065 840,921 Right-of-use assets (48,120) — Total net deferred tax assets before valuation allowance 1,262,945 840,921 Valuation allowance (1,220,093) (819,738) Net deferred tax assets $ 42,852 $ 21,183 The Company performs an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction by jurisdiction basis. The Company reviews the recognition of deferred tax assets on a regular basis to determine if realization of such assets is more likely than not. A valuation allowance is provided when it is more likely than not that such assets will not be realized. As of December 31, 2020, the Company had U.S. federal and state net operating losses of approximately $3.6 billion and $1.5 billion, respectively. As of December 31, 2019, the Company had U.S. federal and state net operating losses of approximately $2.4 billion and $1.1 billion, respectively. The U.S. federal net operating loss carryforwards will expire at various dates beginning in 2024 through 2037 if not utilized with the exception of $2.0 billion, which can be carried forward indefinitely. The state net operating loss carryforwards will expire at various dates beginning in 2022 through 2040 if not utilized. Additionally, as of December 31, 2020, the Company had federal and California research and development credits of approximately $85.1 million and $66.0 million, respectively. As of December 31, 2019, the Company had federal and California research and development credits of approximately $32.5 million and $30.9 million, respectively. The federal research and development credits will begin to expire in the years 2027 through 2040 if not utilized and the California research and development credits have no expiration date. Utilization of the net operating losses and research and development credit carryforwards may be subject to an annual limitation due to the ownership percentage change limitations provided by the Internal Revenue Code (“IRC”) of 1986 and similar state provisions. The annual limitation may result in the expiration of the net operating loss and research and development credit carryforwards before utilization. As of December 31, 2020, the Company had an immaterial amount of earnings indefinitely reinvested outside the U.S. The Company does not intend to repatriate these earnings and, accordingly, the Company does not provide for U.S. income taxes and foreign withholding tax on these earnings. 149 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) Uncertain Tax Positions A reconciliation of the gross unrecognized tax benefits consists of the following (in thousands): Years Ended December 31, 2020 2019 2018 Unrecognized tax benefit beginning of year $ 31,702 $ 27,812 $ 18,793 Increases in current year tax positions 43,855 6,301 8,437 Increases in prior year tax positions — 114 582 Decreases in prior year tax positions — (1,829 ) — Decreases in prior year tax positions due to settlements — (696 ) — Decreases in prior year tax positions due to lapse of statute of limitations — — — Unrecognized tax benefit end of year $ 75,557 $ 31,702 $ 27,812 For the years ended December 31, 2020, 2019, and 2018, the Company recorded gross unrecognized tax benefits of $75.6 million, $31.7 million, and $27.8 million, respectively, that, if recognized, would not benefit the Company’s effective tax rate. As of December 31, 2020, no significant increases or decreases are expected to the Company’s uncertain tax positions within the next twelve months. It is the Company’s policy to recognize interest and penalties related to income tax matters in income tax expense. The Company has not accrued interest and penalties related to uncertain tax positions due to offsetting tax attributes as of December 31, 2020 or 2019. The Company files U.S. federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitation. The material jurisdictions where the Company is subject to potential examination by tax authorities are the U.S. (federal and state) for tax years 2004 through 2020 and the UK for tax years 2013 through 2020. 150 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) 14. Net Loss Per Share Attributable to Common Stockholders The following table presents the calculation of basic and diluted net loss per share attributable to common stockholders (in thousands, except share and per share amounts): As of December 31, 2020 2019 2018 Numerator Net loss $ (1,166,391 ) $ (579,646 ) $ (580,027 ) Less: Accretion of Series H redeemable convertible preferred stock to redemption value — — (18,098 ) Less: Distributed earnings attributable to participating securities — (8,481 ) — Net loss attributable to common stockholders $ (1,166,391 ) $ (588,127 ) $ (598,125 ) Less: Change in fair value attributable to participating securities (5,483 ) — (38,953 ) Net loss attributable to common stockholders, for diluted net loss per share $ (1,171,874 ) $ (588,127 ) $ (637,078 ) Denominator Weighted-average shares used in computing net loss per share, basic 977,721,736 576,958,560 537,280,394 Weighted-average shares used in computing net loss per share, diluted 979,330,067 576,958,560 544,014,393 Net loss per share Net loss per share attributable to common stockholders, basic $ (1.19 ) $ (1.02 ) $ (1.11 ) Net loss per share attributable to common stockholders, diluted $ (1.20 ) $ (1.02 ) $ (1.17 ) The following outstanding potentially dilutive common stock equivalents have been excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented due to their anti-dilutive effect: As of December 31, 2020 2019 2018 Redeemable convertible preferred stock — 4,017,378 25,947,422 Convertible preferred stock — 791,252,998 791,263,372 Warrants to purchase redeemable convertible and convertible preferred stock — 21,831,545 22,245,552 Warrants to purchase common stock 19,068,174 993,266 993,266 Options and SARs issued and outstanding 535,791,503 497,541,159 487,299,359 RSUs outstanding 184,870,238 179,494,619 — Growth units outstanding 3,582,674 3,582,674 — Total 743,312,589 1,498,713,639 1,327,748,971 15. Segment and Geographic Information The following reporting segment tables reflect the results of the Company’s reportable operating segments consistent with the manner in which the CODM evaluates the performance of each segment and allocates the 151 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) Company’s resources. The CODM does not evaluate the performance of the Company’s assets on a segment basis for internal management reporting and, therefore, such information is not presented. Contribution is used, in part, to evaluate the performance of, and allocate resources to, each of the segments. Segment contribution is segment revenue less the related costs of revenue and sales and marketing expenses. It excludes certain operating expenses that are not allocated to segments because they are separately managed at the consolidated corporate level. These unallocated costs include stock-based compensation expense, research and development expenses, and general and administrative expenses. Financial information for each reportable segment was as follows (in thousands): Years Ended December 31, 2020 2019 2018 Revenue: Government $ 610,198 $ 345,521 $ 255,131 Commercial 482,475 397,034 340,278 Total revenue $ 1,092,673 $ 742,555 $ 595,409 Years Ended December 31, 2020 2019 2018 Amount % Amount % Amount % Contribution: Government $ 346,937 57% $ 79,606 23% $ 30,963 12% Commercial 247,320 51% 77,575 20% 50,422 15% Total contribution $ 594,257 54% $ 157,181 21% $ 81,385 14% The reconciliation of contribution to loss from operations is as follows (in thousands): Years Ended December 31, 2020 2019 2018 Loss from operations $ (1,173,679 ) $ (576,444 ) $ (623,440 ) Research and development expenses (1) 203,597 237,630 213,412 General and administrative expenses (1) 293,637 254,025 242,910 Stock-based compensation expense 1,270,702 241,970 248,503 Total contribution $ 594,257 $ 157,181 $ 81,385 (1) Excludes stock-based compensation expense. 152 Table of Contents Palantir Technologies Inc. Notes to Consolidated Financial Statements (continued) Geographic Information Revenue by geography is based on the customer’s headquarters or agency location at the time of sale. Revenue is as follows (in thousands, except percentages): Years Ended December 31, 2020 2019 2018 Amount % Amount % Amount % Revenue: United States $ 573,549 52% $ 295,753 40% $ 208,620 35% United Kingdom 132,427 12% 120,185 16% 121,563 20% France 97,702 9% 76,220 10% 64,427 11% Rest of world (1) 288,995 27% 250,397 34% 200,799 34% Total revenue $ 1,092,673 100% $ 742,555 100% $ 595,409 100% (1) No other country represents 10% or more of total revenue for the years ended December 31, 2020, 2019, or 2018. Property and equipment, net is attributed to the Company’s office locations as follows (in thousands, except percentages): As of December 31, 2020 2019 2018 Amount % Amount % Amount % Property and equipment, net: United States 13,268 45% 15,956 51% 14,168 47% United Kingdom 13,325 45% 12,461 39% 14,446 48% Rest of world 2,948 10% 3,172 10% 1,420 5% Total property and equipment, net $ 29,541 100% $ 31,589 100% $ 30,034 100% 153 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.