Snap Inc 10-K

Item 8. Financial Statements and Supplementary Data. SNAP INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Reports of Independent Registered Public Accounting Firm 75 Consolidated Financial Statements: Consolidated Statements of Cash Flows 78 Consolidated Statements of Operations 79 Consolidated Statements of Comprehensive Income (Loss) 80 Consolidated Balance Sheets 81 Consolidated Statements of Stockholders’ Equity 82 Notes to Consolidated Financial Statements 83 74 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Snap Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Snap Inc. (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 31, 2022, 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 at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated January 31, 2023 expressed an unqualified opinion thereon. 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 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. 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 disclosure to which it relates. 75 Table of Contents Revenue Recognition Description of the Matter As described in Note 2 to the consolidated financial statements, the Company generates substantially all of its revenues by offering various advertising products on Snapchat. The substantial majority of such advertising revenues is generated based upon contractual agreements with customers that are on a fixed fee basis for advertisements delivered over a period of time, or fees based on the number of advertising impressions delivered. Revenues related to fixed fee agreements are recognized ratably over the service period while revenues related to agreements based on the number of advertising impressions delivered are recognized when the advertisements are served. The Company’s revenue recognition process utilizes multiple complex, proprietary systems and tools for the initiation, processing and recording of transactions which comprise a high volume of individually low monetary value transactions. This process is dependent on the effective design and operation of multiple systems, sub-processes, data sources and controls which required significant audit effort. Also, the identification and evaluation of certain non-standard terms and conditions, which may arise through side agreements, required incremental audit effort to determine the distinct performance obligations and the timing of revenue recognition. How We Addressed the Matter in Our Audit With the support of our information technology professionals, we identified and tested the relevant systems and tools used for the determination of initiation, processing, recording and billing of revenue, which included processes and controls related to access to the relevant systems and data, changes to the relevant systems and interfaces, and configuration of the relevant systems. We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company's internal controls over the identification and evaluation of revenue recognition for standard and non-standard terms and conditions. To test the Company’s recognition of revenue, our audit procedures included, among others, testing the completeness and accuracy of the underlying data within the Company’s billing systems by agreeing amounts recognized to contractual terms and conditions, and testing revenue recognized to accounts receivable and cash receipts. Additionally, we examined standard customer online terms and conditions to understand the distinct performance obligations and tested the timing of revenue recognition. Further, we selected a sample of non-standard contractual arrangements to understand the performance obligations and the timing of revenue recognition. To assess completeness of non-standard terms and conditions, we obtained external confirmations of terms and conditions for a sample of customers. /s/ Ernst & Young LLP We have served as the Company's auditor since 2016. Los Angeles, California January 31, 2023 76 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Snap Inc. Opinion on Internal Control Over Financial Reporting We have audited Snap Inc.’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Snap Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and our report dated January 31, 2023 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP Los Angeles, California January 31, 2023 77 Table of Contents Snap Inc. Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 2022 2021 2020 Cash flows from operating activities Net loss $ ( 1,429,653 ) $ ( 487,955 ) $ ( 944,839 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 202,173 119,141 86,744 Stock-based compensation 1,387,787 1,092,135 770,182 Amortization of debt discount and issuance costs 6,865 4,311 81,401 Losses (gains) on debt and equity securities, net 36,838 ( 289,052 ) ( 10,250 ) Induced conversion expense related to convertible notes — 41,538 — Other 15,596 8,643 2,963 Change in operating assets and liabilities, net of effect of acquisitions: Accounts receivable, net of allowance ( 119,780 ) ( 332,967 ) ( 255,818 ) Prepaid expenses and other current assets ( 40,917 ) ( 26,607 ) ( 14,587 ) Operating lease right-of-use assets 71,441 47,258 38,940 Other assets ( 504 ) ( 10,916 ) ( 11,442 ) Accounts payable 46,492 53,579 20,374 Accrued expenses and other current liabilities 71,706 117,092 108,601 Operating lease liabilities ( 68,886 ) ( 49,294 ) ( 49,730 ) Other liabilities 5,456 5,974 9,817 Net cash provided by (used in) operating activities 184,614 292,880 ( 167,644 ) Cash flows from investing activities Purchases of property and equipment ( 129,306 ) ( 69,875 ) ( 57,832 ) Purchases of strategic investments ( 26,346 ) ( 41,160 ) ( 111,586 ) Sales of strategic investments 63,276 36,777 — Cash paid for acquisitions, net of cash acquired ( 67,067 ) ( 310,915 ) ( 168,850 ) Purchases of marketable securities ( 3,485,638 ) ( 2,438,983 ) ( 3,524,599 ) Sales of marketable securities 75,716 379,555 389,974 Maturities of marketable securities 2,525,215 2,536,725 2,737,523 Other ( 18,125 ) ( 1,897 ) 5,506 Net cash provided by (used in) investing activities ( 1,062,275 ) 90,227 ( 729,864 ) Cash flows from financing activities Proceeds from issuance of convertible notes, net of issuance costs 1,483,500 1,137,227 988,582 Purchase of capped calls ( 177,000 ) ( 86,825 ) ( 100,000 ) Proceeds from the exercise of stock options 4,272 14,671 34,209 Payments of debt issuance costs ( 3,006 ) — — Repurchases of Class A non-voting common stock ( 1,001,052 ) — — Net cash provided by (used in) financing activities 306,714 1,065,073 922,791 Change in cash, cash equivalents, and restricted cash ( 570,947 ) 1,448,180 25,283 Cash, cash equivalents, and restricted cash, beginning of period 1,994,723 546,543 521,260 Cash, cash equivalents, and restricted cash, end of period $ 1,423,776 $ 1,994,723 $ 546,543 Supplemental disclosures Cash paid for income taxes, net $ 12,087 $ 25,333 $ 3,692 Cash paid for interest $ 8,873 $ 10,887 $ 12,019 See Notes to Consolidated Financial Statements. 78 Table of Contents Snap Inc. Consolidated Statements of Operations (in thousands, except per share amounts) Year Ended December 31, 2022 2021 2020 Revenue $ 4,601,847 $ 4,117,048 $ 2,506,626 Costs and expenses: Cost of revenue 1,815,342 1,750,246 1,182,505 Research and development 2,109,800 1,565,467 1,101,561 Sales and marketing 1,118,746 792,764 555,468 General and administrative 953,265 710,640 529,164 Total costs and expenses 5,997,153 4,819,117 3,368,698 Operating loss ( 1,395,306 ) ( 702,069 ) ( 862,072 ) Interest income 58,597 5,199 18,127 Interest expense ( 21,459 ) ( 17,676 ) ( 97,228 ) Other income (expense), net ( 42,529 ) 240,175 14,988 Loss before income taxes ( 1,400,697 ) ( 474,371 ) ( 926,185 ) Income tax benefit (expense) ( 28,956 ) ( 13,584 ) ( 18,654 ) Net loss $ ( 1,429,653 ) $ ( 487,955 ) $ ( 944,839 ) Net loss per share attributable to Class A, Class B, and Class C common stockholders (Note 3): Basic $ ( 0.89 ) $ ( 0.31 ) $ ( 0.65 ) Diluted $ ( 0.89 ) $ ( 0.31 ) $ ( 0.65 ) Weighted average shares used in computation of net loss per share: Basic 1,608,304 1,558,997 1,455,693 Diluted 1,608,304 1,558,997 1,455,693 See Notes to Consolidated Financial Statements. 79 Table of Contents Snap Inc. Consolidated Statements of Comprehensive Income (Loss) (in thousands) Year Ended December 31, 2022 2021 2020 Net loss $ ( 1,429,653 ) $ ( 487,955 ) $ ( 944,839 ) Other comprehensive income (loss), net of tax Unrealized gain (loss) on marketable securities, net of tax ( 9,307 ) ( 1,735 ) ( 516 ) Foreign currency translation ( 10,188 ) ( 14,107 ) 21,306 Total other comprehensive income (loss), net of tax ( 19,495 ) ( 15,842 ) 20,790 Total comprehensive loss $ ( 1,449,148 ) $ ( 503,797 ) $ ( 924,049 ) See Notes to Consolidated Financial Statements. 80 Table of Contents Snap Inc. Consolidated Balance Sheets (in thousands, except par value) December 31, 2022 2021 Assets Current assets Cash and cash equivalents $ 1,423,121 $ 1,993,809 Marketable securities 2,516,003 1,699,076 Accounts receivable, net of allowance 1,183,092 1,068,873 Prepaid expenses and other current assets 134,431 92,244 Total current assets 5,256,647 4,854,002 Property and equipment, net 271,777 202,644 Operating lease right-of-use assets 370,952 322,252 Intangible assets, net 204,480 277,654 Goodwill 1,646,120 1,588,452 Other assets 279,562 291,302 Total assets $ 8,029,538 $ 7,536,306 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 181,774 $ 125,282 Operating lease liabilities 46,485 52,396 Accrued expenses and other current liabilities 987,340 674,108 Total current liabilities 1,215,599 851,786 Convertible senior notes, net 3,742,520 2,253,087 Operating lease liabilities, noncurrent 386,271 325,509 Other liabilities 104,450 315,756 Total liabilities 5,448,840 3,746,138 Commitments and contingencies (Note 8) Stockholders’ equity Class A non-voting common stock, $ 0.00001 par value. 3,000,000 shares authorized, 1,371,242 shares issued, 1,319,930 shares outstanding at December 31, 2022 and 3,000,000 shares authorized, 1,364,887 shares issued and outstanding at December 31, 2021. 13 14 Class B voting common stock, $ 0.00001 par value. 700,000 shares authorized, 22,529 shares issued and outstanding at December 31, 2022 and 700,000 shares authorized, 22,769 shares issued and outstanding at December 31, 2021. — — Class C voting common stock, $ 0.00001 par value. 260,888 shares authorized, 231,627 shares issued and outstanding at December 31, 2022 and 260,888 shares authorized, 231,627 shares issued and outstanding at December 31, 2021. 2 2 Treasury stock, at cost. 51,312 shares of Class A non-voting common stock at December 31, 2022. ( 500,514 ) — Additional paid-in capital 13,309,828 12,069,097 Accumulated deficit ( 10,214,657 ) ( 8,284,466 ) Accumulated other comprehensive income (loss) ( 13,974 ) 5,521 Total stockholders’ equity 2,580,698 3,790,168 Total liabilities and stockholders’ equity $ 8,029,538 $ 7,536,306 See Notes to Consolidated Financial Statements. 81 Table of Contents Snap Inc. Consolidated Statements of Stockholders’ Equity (in thousands) Year Ended December 31, 2022 2021 2020 Shares Amount Shares Amount Shares Amount Class A non-voting common stock Balance, beginning of period 1,364,887 $ 14 1,248,010 $ 12 1,160,127 $ 12 Shares issued in connection with exercise of stock options under stock-based compensation plans 334 — 1,174 — 3,824 — Issuance of Class A non-voting common stock in connection with acquisitions 1,277 — 6,732 — — — Issuance of Class A non-voting common stock for vesting of restricted stock units and restricted stock awards, net 58,342 — 55,466 1 78,042 — Issuance of Class A non-voting common stock for the induced conversion related to convertible senior notes — — 52,410 1 — — Conversion of Class B voting common stock to Class A non-voting common stock 298 — 1,095 — 6,017 — Repurchases of Class A non-voting common stock ( 105,208 ) ( 1 ) — — — — Balance, end of period 1,319,930 13 1,364,887 14 1,248,010 12 Class B voting common stock Balance, beginning of period 22,769 — 23,696 — 24,522 — Shares issued in connection with exercise of stock options under stock-based compensation plans 58 — 168 — 754 — Conversion of Class B voting common stock to Class A non-voting common stock ( 298 ) — ( 1,095 ) — ( 6,017 ) — Conversion of Class C voting common stock to Class B voting common stock — — — — 4,437 — Balance, end of period 22,529 — 22,769 — 23,696 — Class C voting common stock Balance, beginning of period 231,627 2 231,627 2 231,147 2 Conversion of Class C voting common stock to Class B voting common stock — — — — ( 4,437 ) — Issuance of Class C voting common stock for settlement of restricted stock units, net — — — — 4,917 — Balance, end of period 231,627 2 231,627 2 231,627 2 Treasury stock Balance, beginning of period — — — — — — Repurchases of Class A non-voting common stock 105,208 ( 1,001,052 ) — — — — Retirement of Class A non-voting common stock ( 53,896 ) 500,538 — — — — Balance, end of period 51,312 ( 500,514 ) — — — — Additional paid-in capital Balance, beginning of period — 12,069,097 — 10,200,141 — 9,205,256 Stock-based compensation expense — 1,369,407 — 1,088,506 — 771,084 Shares issued in connection with exercise of stock options under stock-based compensation plans — 4,285 — 14,680 — 34,209 Cumulative-effect adjustment from accounting changes — — — ( 664,021 ) — — Issuance of Class A non-voting common stock in connection with acquisitions and divestitures — 44,039 — 341,425 — 3,003 Equity component of convertible senior notes, net — — — — — 286,589 Issuance of Class A non-voting common stock for the induced conversion related to convertible senior notes — — — 1,175,191 — — Purchase of capped calls — ( 177,000 ) — ( 86,825 ) — ( 100,000 ) Balance, end of period — 13,309,828 — 12,069,097 — 10,200,141 Accumulated deficit Balance, beginning of period — ( 8,284,466 ) — ( 7,891,542 ) — ( 6,945,930 ) Cumulative-effect adjustment from accounting changes — — — 95,031 — ( 773 ) Net loss — ( 1,429,653 ) — ( 487,955 ) — ( 944,839 ) Retirement of Class A non-voting common stock — ( 500,538 ) — — — — Balance, end of period — ( 10,214,657 ) — ( 8,284,466 ) — ( 7,891,542 ) Accumulated other comprehensive income (loss) Balance, beginning of period — 5,521 — 21,363 — 573 Other comprehensive income (loss), net of tax — ( 19,495 ) — ( 15,842 ) — 20,790 Balance, end of period — ( 13,974 ) — 5,521 — 21,363 Total stockholders’ equity 1,625,398 $ 2,580,698 1,619,283 $ 3,790,168 1,503,333 $ 2,329,976 See Notes to Consolidated Financial Statements. 82 Table of Contents Snap Inc. Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies Snap Inc. is a technology company. Snap Inc. (“we,” “our,” or “us”) was formed as Future Freshman, LLC, a California limited liability company, in 2010. We changed our name to Toyopa Group, LLC in 2011, incorporated as Snapchat, Inc., a Delaware corporation, in 2012, and changed our name to Snap Inc. in 2016. Snap Inc. is headquartered in Santa Monica, California. Our flagship product, Snapchat, is a visual messaging application that was created to help people communicate through short videos and images called “Snaps.” Basis of Presentation Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Our consolidated financial statements include the accounts of Snap Inc. and our wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Our fiscal year ends on December 31. Certain reclassifications have been made in the prior periods to conform to the current year's presentation. None of these reclassifications had a material impact on our consolidated financial statements. Use of Estimates The preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements. Management’s estimates are based on historical information available as of the date of the consolidated financial statements and various other assumptions that we believe are reasonable under the circumstances. Actual results could differ from those estimates. Key estimates relate primarily to determining the fair value of assets and liabilities assumed in business combinations, evaluation of contingencies, uncertain tax positions, forfeiture rate, the fair value of stock-based awards, and the fair value of strategic investments. On an ongoing basis, management evaluates our estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of assets and liabilities. Concentrations of Business Risk We currently use both Google Cloud and Amazon Web Services for our hosting requirements. A disruption or loss of service from one or both of these partners could seriously harm our ability to operate. Although we believe there are other qualified providers that can provide these services, a transition to a new provider could create a significant disruption to our business and negatively impact our consolidated financial statements. Concentrations of Credit Risk Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash, cash equivalents, marketable securities, and accounts receivable. We maintain cash deposits, cash equivalent balances, and marketable securities with several financial institutions. Cash and cash equivalents may be withdrawn or redeemed on demand. We believe that the financial institutions that hold our cash and cash equivalents are financially sound and, accordingly, minimal credit risk exists with respect to these balances. We also maintain investments in U.S. government debt and agency securities, publicly traded equity securities, corporate debt securities, certificates of deposit, and commercial paper that carry high credit ratings and accordingly, minimal credit risk exists with respect to these balances. We extend credit to our customers based on an evaluation of their ability to pay amounts due under contractual arrangement and generally do not obtain or require collateral. 83 Table of Contents Revenue Recognition Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to receive in exchange for those goods or services. See Note 2 for additional information. Cost of Revenue Cost of revenue includes payments for content, developer, and advertiser partner costs. Under some of these arrangements, we pay a portion of the fees we receive from the advertisers for Snap Ads that are displayed within partner content on Snapchat. Partner arrangement costs were $ 681.9 million, $ 679.0 million, and $ 324.3 million for the years ended December 31, 2022, 2021, and 2020, respectively. In addition, cost of revenue consists of payments to third-party infrastructure partners for hosting our products, which include expenses related to storage, computing, and bandwidth costs. Cost of revenue also includes third-party selling costs, personnel-related costs, facilities and other supporting overhead costs, including depreciation and amortization, and inventory costs. Advertising Advertising costs are expensed as incurred and were $ 42.7 million, $ 62.4 million, and $ 29.5 million for the years ended December 31, 2022, 2021, and 2020, respectively. Capital Structure We have three classes of authorized common stock – Class A common stock, Class B common stock, and Class C common stock. Class A common stockholders have no voting rights, Class B common stockholders are entitled to one vote per share, and Class C common stockholders are entitled to ten votes per share. Shares of our Class B common stock are convertible into an equivalent number of shares of our Class A common stock and generally convert into shares of our Class A common stock upon transfer. Shares of our Class C common stock are convertible into an equivalent number of shares of our Class B common stock and generally convert into shares of our Class B common stock upon transfer. Future Stock Split to be Effected in the Form of a Stock Dividend In July 2022, our board of directors determined that it was advisable and in our best interest to approve a stock split to be effected in the form of a special dividend of one share of Class A common stock on each outstanding share of our common stock at a future date (the “Future Stock Split”). In connection with the Future Stock Split, we entered into certain agreements (the “Co-Founder Agreements”) with Evan Spiegel and Robert Murphy, our co-founders, and certain of their respective affiliates requiring them, among other things, to convert shares of Class B common stock and Class C common stock into Class A common stock under certain circumstances. The Future Stock Split will be not be declared and paid until the later of (i) June 30, 2023 and (ii) the first business day following the date on which the average of the volume weighted average price per share of Class A common stock equals or exceeds $ 40 per share for 65 consecutive trading days. If this does not occur by July 21, 2032, the Future Stock Split will not be declared and paid, and the Co-Founder Agreements will terminate. No adjustments have been made to share or per share amounts for Class A common stock in the accompanying consolidated financial statements for the effects of the Future Stock Split as these triggering conditions have not been met. Stock-based Compensation We measure and recognize compensation expense for stock-based payment awards, including stock options, restricted stock units (“RSUs”), and restricted stock awards (“RSAs”) granted to employees, directors, and advisors, based on the grant date fair value of the awards. The grant date fair value of stock options is estimated using a Black-Scholes option pricing model. The fair value of stock-based compensation for stock options is recognized on a straight-line basis, net of estimated forfeitures, over the period during which services are provided in exchange for the award. The grant date fair value of RSUs and RSAs is estimated based on the fair value of our underlying common stock. RSUs and RSAs are subject to the satisfaction of service conditions. The service condition for RSUs granted prior to February 2018 is generally satisfied over four years , 10 % after the first year of service, 20 % over the second year, 30 % 84 Table of Contents over the third year, and 40 % over the fourth year. In limited instances, we have issued RSUs with vesting periods in excess of four years. The service condition for RSUs and RSAs granted after February 2018 is generally satisfied in equal monthly or quarterly installments over three or four years . For these awards, we recognize stock-based compensation expense on a straight-line basis over the requisite service p eriod. Stock-based compensation expense recognized for all periods presented is based on awards that are expected to vest, including an estimate of forfeitures. We estimate the forfeiture rate using historical forfeitures of equity awards and other expected changes in facts and circumstances, if any. A modification of the terms of a stock-based award is treated as an exchange of the original award for a new award with total compensation cost equal to the grant-date fair value of the original award plus the incremental value of the modification to the award. The future tax benefits on settlement of the above RSUs and RSAs is not expected to be material as currently we have established valuation allowances to reduce our net deferred tax assets to the amount that is more likely than not to be realized. The majority of the future tax benefits that arise on settlement of the above RSUs are in jurisdictions for which our net deferred tax assets have a full valuation allowance. Income Taxes We are subject to income taxes in the United States and numerous foreign jurisdictions. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the deferred tax asset or liability is expected to be realized or settled. In evaluating our ability to recover deferred tax assets, we consider all available positive and negative evidence, including historical operating results, ongoing tax planning, and forecasts of future taxable income on a jurisdiction-by-jurisdiction basis. Based on the level of historical losses, we have established a valuation allowance to reduce our net deferred tax assets to the amount that is more likely than not to be realized. We recognize a 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 position. The tax benefits recognized in our consolidated financial statements from such positions are measured based on the largest benefit that has a greater than 50 % likelihood of being realized. We recognize interest and penalties associated with tax matters as part of the income tax provision and include accrued interest and penalties with the related income tax liability on our consolidated balance sheets. Currency Translation and Remeasurement The functional currency of the majority of our foreign subsidiaries is the U.S. dollar. Monetary assets and liabilities denominated in a foreign currency are remeasured into U.S. dollars at the exchange rate on the balance sheet date. Revenue and expenses are remeasured at the average exchange rates during the period. Equity transactions and other non-monetary assets are remeasured using historical exchange rates. Foreign currency transaction gains and losses are recorded in other income (expense), net on our consolidated statement of operations. For those foreign subsidiaries where the local currency is the functional currency, adjustments to translate those statements into U.S. dollars are recorded in accumulated other comprehensive income (loss) in stockholders’ equity. Cash and Cash Equivalents Cash and cash equivalents consist of highly liquid investments with original maturities of 90 days or less from the date of purchase. Restricted Cash We are required to maintain restricted cash deposits to back letters of credit for certain property leases. These funds are restricted and have been classified in other assets on our consolidated balance sheets due to the nature of restriction. At December 31, 2022 and 2021, restricted cash balances were immaterial. 85 Table of Contents Marketable Securities We hold investments in marketable securities consisting of U.S. government securities, U.S. government agency securities, publicly traded equity securities, corporate debt securities, certificates of deposit, and commercial paper. We classify marketable investments in debt securities as available-for-sale investments in our current assets because they represent investments available for current operations. Our available-for-sale investments in debt securities are carried at fair value with any unrealized gains and losses, included in accumulated other comprehensive (loss) income in stockholders’ equity. Available-for-sale debt securities with an amortized cost basis in excess of estimated fair value are assessed to determine what amount of that difference, if any, is caused by expected credit losses, with any allowance for credit losses recognized as a charge in other income (expense), net on our consolidated statements of income. We did not record any credit losses on our available-for-sale debt securities in any of the periods presented. We determine gains or losses on the sale or maturities of marketable securities using the specific identification method and these gains or losses are recorded in other income (expense), net in our consolidated statements of operations. Publicly traded equity securities are carried at fair value with any unrealized gains and losses recorded in other income (expense), net in our consolidated statements of operations. Strategic Investments We hold strategic investments primarily in privately held companies, consisting primarily of equity securities without readily determinable fair values, and to a lesser extent, debt securities. We adjust the carrying value of these equity securities to fair value upon observable transactions for identical or similar investments of the same issuer or upon impairment. Any adjustments to carrying value of these investments are recorded in other income (expense), net in our consolidated statements of operations. Strategic investments are included within other assets on the consolidated balance sheets. When we exercise significant influence over, but do not control the investee, such strategic investments are accounted for using the equity method. Under the equity method of accounting, we record our share of the results of the investments within other income (expense), net in our consolidated statements of operations. Fair Value Measurements Certain financial instruments are required to be recorded at fair value. Other financial instruments, including cash and cash equivalents and restricted cash, are recorded at cost, which approximates fair value. Additionally, accounts receivable, accounts payable, and accrued expenses approximate fair value because of the short-term nature of these financial instruments. Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable are recorded at the invoiced amount less any allowance for doubtful accounts to reserve for potentially uncollectible receivables. To determine the amount of the allowance, we make judgments about the creditworthiness of customers based on ongoing credit evaluation and historical experience. At December 31, 2022 and 2021, the allowance for doubtful accounts was immaterial. Property and Equipment Property and equipment are stated at cost, less accumulated depreciation. We compute depreciation using the straight-line method over the estimated useful lives of the assets, which is generally three years for computer hardware, software, and equipment, five years for furniture, and over the shorter of lease term or useful life of the assets for leasehold improvements. Buildings are generally depreciated over a useful life ranging from 20 to 45 years. Maintenance and repairs are expensed as incurred. Leases We have non-cancelable lease agreements for certain of our offices with original lease terms expiring between 2023 and 2042 . Leases are recorded as operating lease right-of-use assets and operating lease liabilities on the consolidated balance sheets. We account for lease and non-lease components as a single lease component and do not record leases with 86 Table of Contents an initial term of twelve months or less on the consolidated balance sheets. We use our incremental borrowing rate based on the information available at the lease commencement date to determine the present value of lease payments over the lease term . Our lease terms may include options to extend or terminate the lease when it is reasonably certain we will exercise that option. Certain agreements have free rent periods or escalating rent payment provisions. Rent expense is recognized on a straight-line basis over the lease term. Software Development Costs Software development costs include costs to develop software to be used to meet internal needs and applications used to deliver our services. We capitalize development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed and the software will be used to perform the function intended. Costs capitalized for developing such software applications were not material for the periods presented. Segments Our CEO is our chief operating decision maker. We have determined that we have a single operating segment. Our CEO evaluates performance and makes operating decisions about allocating resources based on financial data presented on a consolidated basis accompanied by disaggregated information about revenue by geographic region. Business Combinations We include the results of operations of the businesses that we acquire from the date of acquisition. We determine the fair value of the assets acquired and liabilities assumed based on their estimated fair values as of the respective date of acquisition. The excess purchase price over the fair values of identifiable assets and liabilities is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates, and selection of comparable companies. Our estimates of fair value are based on assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, not to exceed one year from the date of acquisition, we may record adjustments to the assets acquired and liabilities assumed, with a corresponding offset to goodwill. At the conclusion of the measurement period, any subsequent adjustments are reflected in the consolidated statements of operations. When we issue payments or grants of equity to selling stockholders in connection with an acquisition, we evaluate whether the payments or awards are compensatory. This evaluation includes whether cash payments or stock award vesting is contingent on the continued employment of the selling stockholder beyond the acquisition date. If continued employment is required for the cash to be paid or stock awards to vest, the award is treated as compensation for post-acquisition services and is recognized as compensation expense. Transaction costs associated with business combinations are expensed as incurred, and are included in general and administrative expenses in our consolidated statements of operations. Goodwill Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. We test goodwill for impairment at least annually, in the fourth quarter, or whenever events or changes in circumstances indicate that goodwill might be impaired. For all periods presented, we had a single operating segment and reporting unit structure. There were no impairment charges in any of the periods presented. 87 Table of Contents Intangible Assets Intangible assets are carried at cost and amortized on a straight-line basis over their estimated useful lives. We determine the appropriate useful life of our intangible assets by measuring the expected cash flows of acquired assets. The estimated useful lives of intangible assets are generally as follows: Intangible Asset Estimated Useful Life Domain names 5 Years Trademarks 3 Years Acquired developed technology 3 to 7 Years Customer relationships 2 to 8 Years Patents 4 to 14 Years Impairment of Long-Lived Assets We evaluate recoverability of our property and equipment and intangible assets, excluding goodwill, when events or changes indicate the carrying amount of an asset may not be recoverable. Events and changes in circumstances considered in determining whether the carrying value of long-lived assets may not be recoverable include: significant changes in performance relative to expected operating results; significant changes in asset use; and significant negative industry or economic trends and changes in our business strategy. Recoverability of these assets is measured by comparison of their carrying amount to future undiscounted cash flows to be generated. If impairment is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Legal Contingencies For legal contingencies, we accrue a liability for an estimated loss if the potential loss from any claim or legal proceeding is considered probable, and the amount can be reasonably estimated. Legal fees and expenses are expensed as incurred. Note 8 provides additional information regarding our legal contingencies. Recent Accounting Pronouncements In June 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, which clarifies the guidance when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security and introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The guidance is effective for annual periods beginning after December 15, 2023, with early adoption permitted. Effective April 1, 2022, we early adopted ASU 2022-03 on a prospective basis. The impact of adoption of this standard on our consolidated financial statements, including accounting policies, processes, and systems, was not material. In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosure by Business Entities about Government Assistance, which improves the transparency of government assistance received by requiring the disclosure of: (1) the types of government assistance received; (2) the accounting for such assistance; and (3) the effect of the assistance on an entity's financial statements. The guidance is effective for annual periods beginning after December 15, 2021, with early adoption permitted. Effective January 1, 2022, we early adopted ASU 2021-10 on a prospective basis. The impact of adoption of this standard on our consolidated financial statements, including accounting policies, processes, and systems, was not material. In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. Under ASU 2021-08, an acquirer must recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The guidance is effective for interim and annual periods beginning after December 15, 2022, with early adoption permitted. Effective January 1, 2022, we early adopted ASU 2021-08 on a prospective basis. The impact of adoption of this standard on our consolidated financial statements, including accounting policies, processes, and systems, was not material. 88 Table of Contents In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. Under ASU 2020-06, the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Derivatives and Hedging (Topic 815), or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The guidance also requires the if-converted method to be applied for all convertible instruments. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. Adoption of the standard requires using either a modified retrospective or a full retrospective approach. Effective January 1, 2021, we early adopted ASU 2020-06 using the modified retrospective approach. Adoption of the new standard resulted in a decrease to accumulated deficit of $ 95.0 million, a decrease to additional paid-in capital of $ 664.0 million, and an increase to convertible senior notes, net of $ 569.0 million. Interest expense recognized in periods subsequent to the adoption date will be reduced as a result of accounting for the convertible debt instrument as a single liability measured at its amortized cost. In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), which clarifies the interaction between the accounting for equity securities in Topic 321, the accounting for equity method investments in Topic 323, and the accounting for certain forward contracts and purchased options in Topic 815. The guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. Effective January 1, 2021, we adopted this standard on a prospective basis. The impact of adoption of this standard on our consolidated financial statements, including accounting policies, processes, and systems, was not material. 2. Revenue We determine revenue recognition by first identifying the contract or contracts with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract, and recognizing revenue when, or as, we satisfy a performance obligation. Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to receive in exchange for those goods or services. We determine collectability by performing ongoing credit evaluations and monitoring customer accounts receivable balances. Sales tax, including value added tax, is excluded from reported revenue. We generate substantially all of our revenues by offering various advertising products on Snapchat, which include Snap Ads and AR Ads, referred to as advertising revenue. AR Ads include Sponsored Lenses, which allow users to interact with an advertiser’s brand by enabling branded augmented reality experiences, and Sponsored Filters, which allow users to interact with an advertiser’s brand by enabling stylized brand artwork to be overlaid on a Snap. The substantial majority of advertising revenue is generated from the display of advertisements on Snapchat through contractual agreements that are either on a fixed fee basis over a period of time or based on the number of advertising impressions delivered. Revenue related to agreements based on the number of impressions delivered is recognized when the advertisement is served. Revenue related to fixed fee arrangements is recognized ratably over the service period, typically less than 30 days in duration, and such arrangements do not contain minimum impression guarantees. In arrangements where another party is involved in providing specified services to a customer, we evaluate whether we are the principal or agent. In this evaluation, we consider if we obtain control of the specified goods or services before they are transferred to the customer, as well as other indicators such as the party primarily responsible for fulfillment, inventory risk, and discretion in establishing price. For advertising revenue arrangements where we are not the principal, we recognize revenue on a net basis. For the periods presented, revenue for arrangements where we are the agent was not material. We also generate revenue from subscriptions and sales of hardware products. For the periods presented, all such revenue was not material. 89 Table of Contents The following table represents our revenue disaggregated by geography based on the billing address of the advertising customer: Year Ended December 31, 2022 2021 2020 (in thousands) Revenue: North America (1) (2) $ 3,205,554 $ 2,871,369 $ 1,649,937 Europe (3) 712,764 660,473 425,445 Rest of world 683,529 585,206 431,244 Total revenue $ 4,601,847 $ 4,117,048 $ 2,506,626 (1) North America includes Mexico, the Caribbean, and Central America. (2) United States revenue was $ 3.1 billion, $ 2.8 billion, and $ 1.6 billion for the years ended December 31, 2022, 2021, and 2020, respectively. (3) Europe includes Russia and Turkey. Effective March 2022, we halted advertising sales to Russian and Belarusian entities. 3. Net Loss per Share We compute net loss per share using the two-class method required for multiple classes of common stock. We have three classes of authorized common stock for which voting rights differ by class. Basic net loss per share is computed by dividing net loss attributable to each class of stockholders by the weighted-average number of shares of stock outstanding during the period, adjusted for RSAs for which the risk of forfeiture has not yet lapsed. For the calculation of diluted net loss per share, net loss per share attributable to common stockholders for basic net loss per share is adjusted by the effect of dilutive securities, including awards under our equity compensation plans. Diluted net loss per share attributable to common stockholders is computed by dividing the resulting net loss attributable to common stockholders by the weighted-average number of fully diluted common shares outstanding. We use the if-converted method for calculating any potential dilutive effect of the Convertible Notes on diluted net loss per share. The Convertible Notes would have a dilutive impact on net income per share when the average market price of Class A common stock for a given period exceeds the respective conversion price of the Convertible Notes. For the periods presented, our potentially dilutive shares relating to stock options, RSUs, RSAs, and Convertible Notes were not included in the computation of diluted net loss per share as the effect of including these shares in the calculation would have been anti-dilutive. 90 Table of Contents The numerators and denominators of the basic and diluted net loss per share computations for our common stock are calculated as follows for the years ended December 31, 2022, 2021, and 2020: Year Ended December 31, 2022 2021 2020 (in thousands, except per share data) Class A Class B Class C Class A Class B Class C Class A Class B Class C Numerator: Net loss $ ( 1,203,614 ) $ ( 20,141 ) $ ( 205,898 ) $ ( 408,118 ) $ ( 7,339 ) $ ( 72,498 ) $ ( 775,801 ) $ ( 15,577 ) $ ( 153,461 ) Net loss attributable to common stockholders $ ( 1,203,614 ) $ ( 20,141 ) $ ( 205,898 ) $ ( 408,118 ) $ ( 7,339 ) $ ( 72,498 ) $ ( 775,801 ) $ ( 15,577 ) $ ( 153,461 ) Denominator: Basic shares: Weighted-average common shares - Basic 1,354,019 22,658 231,627 1,303,921 23,449 231,627 1,195,259 23,999 236,435 Diluted shares: Weighted-average common shares - Diluted 1,354,019 22,658 231,627 1,303,921 23,449 231,627 1,195,259 23,999 236,435 Net loss per share attributable to common stockholders: Basic $ ( 0.89 ) $ ( 0.89 ) $ ( 0.89 ) $ ( 0.31 ) $ ( 0.31 ) $ ( 0.31 ) $ ( 0.65 ) $ ( 0.65 ) $ ( 0.65 ) Diluted $ ( 0.89 ) $ ( 0.89 ) $ ( 0.89 ) $ ( 0.31 ) $ ( 0.31 ) $ ( 0.31 ) $ ( 0.65 ) $ ( 0.65 ) $ ( 0.65 ) The following potentially dilutive shares were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented: Year Ended December 31, 2022 2021 2020 (in thousands) Stock options 3,159 4,304 5,624 Unvested RSUs and RSAs 132,392 86,180 131,172 Convertible Notes (if-converted) 89,379 62,755 101,591 4. Stockholders’ Equity Common Stock As of December 31, 2022, we are authorized to issue 3,000,000,000 shares of Class A nonvoting common stock, 700,000,000 shares of Class B voting common stock, and 260,887,848 shares of Class C voting common stock, each with a par value of $ 0.00001 per share. Class A common stockholders have no voting rights, Class B common stockholders are entitled to one vote per share, and Class C common stockholders are entitled to ten votes per share. Shares of our Class B common stock are convertible into an equivalent number of shares of our Class A common stock and generally convert into shares of our Class A common stock upon transfer. Shares of our Class C common stock are convertible into an equivalent number of shares of our Class B common stock and generally convert into shares of our Class B common stock upon transfer. Any dividends paid to the holders of the Class A common stock, Class B common stock, and Class C common stock will be paid on a pro rata basis. For the year ended December 31, 2022, we did not declare any dividends. On a liquidation event, as defined in our certificate of incorporation, any distribution to common stockholders is made on a pro rata basis to the holders of the Class A common stock, Class B common stock, and Class C common stock. As of December 31, 2022, there were 1,371,241,822 shares issued and 1,319,929,508 shares outstanding of Class A common stock, and 22,529,132 shares and 231,626,943 shares issued and outstanding of Class B common stock and Class C common stock, respectively. Stock-based Compensation Plans We maintain three share-based employee compensation plans: the 2017 Equity Incentive Plan (“2017 Plan”), the 2014 Equity Incentive Plan (“2014 Plan”), and the 2012 Equity Incentive Plan (“2012 Plan”, and collectively with the 2017 Plan and the 2014 Plan, the “Stock Plans”). In January 2017, our board of directors adopted the 2017 Plan, and in February 91 Table of Contents 2017 our stockholders approved the 2017 Plan, effective on March 1, 2017, which serves as the successor to the 2014 Plan and 2012 Plan and provides for the grant of incentive stock options to employees, including employees of any parent or subsidiary, and for the grant of nonstatutory stock options, stock appreciation rights, RSAs, RSUs, performance stock awards, performance cash awards, and other forms of stock awards to employees, directors, and consultants, including employees and consultants of our affiliates. We do not expect to grant any additional awards under the 2014 Plan or 2012 Plan as of the effective date of the 2017 Plan, other than awards for up to 2,500,000 shares of Class A common stock to our employees and consultants in France under the 2014 Plan. Outstanding awards under the 2014 Plan and 2012 Plan continue to be subject to the terms and conditions of the 2014 Plan and 2012 Plan, respectively. Shares available for grant under the 2014 Plan and 2012 Plan, which were reserved but not issued or subject to outstanding awards under the 2014 Plan or 2012 Plan, respectively, as of the effective date of the 2017 Plan, were added to the reserves of the 2017 Plan. We initially reserved 87,270,108 shares of our Class A common stock for future issuance under the 2017 Plan. An additional number of shares of Class A common stock will be added to the 2017 Plan equal to (i) 96,993,064 shares of Class A common stock reserved for future issuance pursuant to outstanding stock options and unvested RSUs under the 2014 Plan, (ii) 37,228,865 shares of Class A common stock issuable on conversion of Class B common stock underlying stock options and unvested RSUs outstanding under the 2012 Plan, (iii) 17,858,235 shares of Class A common stock that were reserved for issuance under the 2014 Plan as of the date the 2017 Plan became effective, (iv) 11,004,580 shares of Class A common stock issuable on conversion of Class B common stock that were reserved for issuance under the 2012 Plan as of the date the 2017 Plan became effective, and (v) a maximum of 86,737,997 shares of Class A common stock that will be added pursuant to the following sentence. With respect to each share that returns to the 2017 Plan pursuant to (i) and (ii) of the prior sentence that was associated with an award that was outstanding under the 2014 Plan and 2012 Plan as of October 31, 2016, an additional share of Class A common stock will be added to the share reserve of the 2017 Plan, up to a maximum of 86,737,997 shares . The number of shares reserved for issuance under the 2017 Plan will increase automatically on January 1st of each calendar year, beginning on January 1, 2018 through January 1, 2027, by the lesser of (i) 5.0 % of the total number of shares of our capital stock outstanding on December 31st of the immediately preceding calendar year, and (ii) a number determined by our board of directors. The maximum term for stock options granted under the 2017 Plan may not exceed ten years from the date of grant. The 2017 Plan will terminate ten years from the date our board of directors approved the plan, unless it is terminated earlier by our board of directors. 2017 Employee Stock Purchase Plan In January 2017, our board of directors adopted the 2017 Employee Stock Purchase Plan (“2017 ESPP”). Our stockholders approved the 2017 ESPP in February 2017. The 2017 ESPP became effective in connection with the IPO. A total of 16,484,690 shares of Class A common stock were initially reserved for issuance under the 2017 ESPP. No shares of our Class A common stock have been issued or offered under the 2017 ESPP. The number of shares of our Class A common stock reserved for issuance will automatically increase on January 1st of each calendar year, beginning on January 1, 2018 through January 1, 2027, by the lesser of (i) 1.0 % of the total number of shares of our common stock outstanding on the last day of the calendar month before the date of the automatic increase, and (ii) 15,000,000 shares; provided that before the date of any such increase, our board of directors may determine that such increase will be less than the amount set forth in clauses (i) and (ii). Restricted Stock Units and Restricted Stock Awards The following table summarizes the RSU and RSA activity during the year ended December 31, 2022: Class A Number of Shares Weighted- Average Grant Date Fair Value (in thousands, except per share data) Unvested at December 31, 2021 86,180 $ 26.07 Granted 134,446 $ 15.17 Vested ( 62,349 ) $ 19.36 Forfeited ( 25,885 ) $ 25.46 Unvested at December 31, 2022 132,392 $ 18.28 92 Table of Contents The total fair value of RSUs and RSAs vested during the years ended December 31, 2022, 2021, and 2020 was $ 1.2 billion, $ 3.6 billion, and $ 1.7 billion, respectively. Total unrecognized compensation cost related to outstanding RSUs and RSAs was $ 2.0 billion as of December 31, 2022 and is expected to be recognized over a weighted-average period of 1.8 years. Stock Options The following table summarizes the stock option award activity under the Stock Plans during the year ended December 31, 2022: Class A Number of Shares Class B Number of Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (1) (in thousands, except per share data) Outstanding at December 31, 2021 3,676 628 $ 10.59 4.19 $ 157,374 Granted 119 — $ 15.03 Exercised ( 334 ) ( 58 ) $ 10.94 Forfeited ( 872 ) — $ 14.33 Outstanding at December 31, 2022 2,589 570 $ 9.68 4.05 $ 9,669 Exercisable at December 31, 2022 2,463 570 $ 9.47 3.83 $ 9,662 Vested and expected to vest at December 31, 2022 2,587 570 $ 9.68 4.05 $ 9,669 (1) The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the closing market price of our Class A common stock as of December 31, 2022 and December 31, 2021, respectively. The weighted-average fair value of stock options granted during the years ended December 31, 2022 and 2021 was $ 8.41 and $ 36.17 per share, respectively. The expense is estimated based on the option’s fair value as calculated by the Black-Scholes option pricing model. Stock-based compensation expense for stock options was not material in the years ended December 31, 2022, 2021, and 2020. Total unrecognized compensation cost related to unvested stock options was $ 0.8 million as of December 31, 2022 and is expected to be recognized over a weighted-average period of 1.2 years. The total grant date fair value of stock options that vested in the years ended December 31, 2022, 2021, and 2020 was $ 3.2 million, $ 7.7 million, and $ 11.1 million, respectively. The intrinsic value of stock options exercised in the years ended December 31, 2022, 2021, and 2020 was $ 5.9 million, $ 69.4 million, and $ 75.5 million, respectively. Stock-Based Compensation Expense Total stock-based compensation expense by function was as follows: Year Ended December 31, 2022 2021 2020 (in thousands) Cost of revenue $ 12,288 $ 17,221 $ 9,367 Research and development 970,746 740,130 533,272 Sales and marketing 203,092 164,241 108,270 General and administrative 201,661 170,543 119,273 Total $ 1,387,787 $ 1,092,135 $ 770,182 93 Table of Contents Stock Repurchases In October 2022, our board of directors authorized a stock repurchase program of up to $ 500.0 million of our Class A common stock. The program was completed in the fourth quarter of 2022, during which we repurchased, and subsequently retired, 53.9 million shares of our Class A common stock for an aggregate of $ 500.5 million, representing the entire amount approved by our board of directors and including costs associated with the repurchases. In July 2022, our board of directors authorized a stock repurchase program of up to $ 500.0 million of our Class A common stock. The program was completed in the third quarter of 2022, during which we repurchased 51.3 million shares of our Class A common stock for an aggregate of $ 500.5 million, representing the entire amount approved by our board of directors and including costs associated with the repurchases. These shares are recorded as treasury stock on our consolidated balance sheets and remain available for re-issuance. 5. Business Acquisitions and Divestitures 2022 Acquisitions In 2022, we completed acquisitions to enhance our existing platform, technology, and workforce. The aggregate purchase consideration was $ 120.5 million, which included $ 17.7 million in cash, $ 44.0 million in shares of our Class A common stock, and $ 58.8 million recorded in other liabilities on our consolidated balance sheets. Of the aggregate purchase consideration, $ 69.3 million was allocated to goodwill and the remainder primarily to identifiable intangible assets. The goodwill amount represents synergies related to our existing platform expected to be realized from the business acquisitions and assembled workforces. Of the acquired goodwill and intangible assets, $ 101.7 million is deductible for tax purposes. 2021 Acquisitions Wave Optics In May 2021, we acquired Wave Optics Limited (“Wave Optics”), a display technology company that supplies light engines and diffractive waveguides for augmented reality displays. The total consideration was $ 541.8 million, of which $ 510.4 million represented purchase consideration and primarily consisted of 4.7 million shares of our Class A common stock with a fair value of $ 252.0 million, cash of $ 13.7 million, and a $ 238.4 million payable due no later than May 2023 in either cash, shares of our Class A common stock, or a combination of cash and shares of our Class A common stock, at our election. The remaining $ 31.4 million of total consideration transferred represented compensation for future employment services. The allocation of the total purchase consideration for this acquisition was as follows: Total (in thousands) Trademarks $ 20,584 Technology 77,118 Customer relationships 32,708 Goodwill 370,236 Net deferred tax liability ( 3,313 ) Other assets acquired and liabilities assumed, net 13,111 Total $ 510,444 The goodwill amount represents synergies expected to be realized from the business combination and assembled workforce. The associated goodwill and intangible assets are not deductible for tax purposes. Fit Analytics In March 2021, we acquired Fit Analytics GmbH (“Fit Analytics”), a sizing technology company that powers solutions for retailers and brands, to grow our e-commerce and shopping offerings. The purchase consideration for Fit Analytics was $ 124.4 million, which primarily represented current and future cash consideration payments. 94 Table of Contents The allocation of the total purchase consideration for this acquisition was as follows: Total (in thousands) Trademarks $ 800 Technology 17,000 Customer relationships 17,000 Goodwill 88,132 Net deferred tax liability ( 5,643 ) Other assets acquired and liabilities assumed, net 7,160 Total $ 124,449 The goodwill amount represents synergies expected to be realized from this business combination and assembled workforce. The associated goodwill and intangible assets are not deductible for tax purposes. Other 2021 Acquisitions For the year ended December 31, 2021, we completed other acquisitions to enhance our existing platform, technology, and workforce. The aggregate purchase consideration was $ 266.1 million, which included $ 139.5 million in cash, $ 93.7 million in shares of our Class A common stock, and $ 32.9 million recorded in other liabilities on our consolidated balance sheets. The aggregate allocation of purchase consideration was as follows: Total (in thousands) Technology $ 64,150 Customer relationships 4,000 Goodwill 203,482 Net deferred tax liability ( 11,871 ) Other assets acquired and liabilities assumed, net 6,325 Total $ 266,086 The goodwill amount represents synergies related to our existing platform expected to be realized from the business acquisitions and assembled workforces. Of the acquired goodwill and intangible assets, $ 8.2 million is deductible for tax purposes. 2020 Acquisitions For the year ended December 31, 2020, we completed acquisitions to enhance our existing platform, technology, and workforce. The aggregate allocation of acquisition date fair value was as follows: Total (in thousands) Technology $ 46,112 Goodwill 162,747 Net deferred tax liability ( 5,741 ) Other assets acquired and liabilities assumed, net 1,392 Total $ 204,510 95 Table of Contents The goodwill amount represents synergies related to our existing platform expected to be realized from the business acquisitions and assembled workforces. Of the acquired goodwill and intangible assets, $ 49.6 million is deductible for tax purposes. Additional Information on 2022, 2021, and 2020 Acquisitions The operating results of the above acquisitions were included in the results of our operations from the acquisition date and were not material to our consolidated revenue or consolidated operating loss. In addition, unaudited pro forma results of operations assuming the above acquisitions had taken place at the beginning of each period are not provided because the historical operating results of the acquired entities were not material and pro forma results would not be materially different from reported results for the periods presented. 6. Goodwill and Intangible Assets The changes in the carrying amount of goodwill for the years ended December 31, 2022 and 2021 were as follows: Goodwill (in thousands) Balance as of December 31, 2020 $ 939,259 Goodwill acquired 661,850 Foreign currency translation ( 12,657 ) Balance as of December 31, 2021 $ 1,588,452 Goodwill acquired 69,291 Foreign currency translation ( 11,623 ) Balance as of December 31, 2022 $ 1,646,120 Intangible assets consisted of the following: December 31, 2022 Weighted- Average Remaining Useful Life - Years Gross Carrying Amount Accumulated Amortization Net (in thousands, except years) Domain names 4.0 $ 954 $ ( 690 ) $ 264 Trademarks 1.2 800 ( 478 ) 322 Technology 3.1 340,375 ( 178,427 ) 161,948 Customer relationships 5.7 21,000 ( 6,641 ) 14,359 Patents 9.1 39,373 ( 14,912 ) 24,461 Other 1.0 6,000 ( 2,874 ) 3,126 $ 408,502 $ ( 204,022 ) $ 204,480 96 Table of Contents December 31, 2021 Weighted- Average Remaining Useful Life - Years Gross Carrying Amount Accumulated Amortization Net (in thousands, except years) Domain names 4.6 $ 967 $ ( 365 ) $ 602 Trademarks 4.3 21,384 ( 2,613 ) 18,771 Technology 3.6 343,800 ( 142,588 ) 201,212 Customer relationships 5.1 53,709 ( 6,332 ) 47,377 Patents 4.0 21,195 ( 11,503 ) 9,692 $ 441,055 $ ( 163,401 ) $ 277,654 Amortization of intangible assets for the years ended December 31, 2022, 2021, and 2020 was $ 132.3 million, $ 63.2 million, and $ 33.5 million, respectively. In 2022, we revised the useful lives of certain customer relationships, trademarks, domain names, and technology, which resulted in a $ 49.3 million increase to amortization expense for the year ended December 31, 2022. As of December 31, 2022, the estimated intangible asset amortization expense for the next five years and thereafter is as follows: Estimated Amortization (in thousands) Year ending December 31, 2023 $ 70,126 2024 57,181 2025 41,106 2026 16,677 2027 7,297 Thereafter 12,093 Total $ 204,480 7. Long-Term Debt Convertible Notes 2028 Notes In February 2022, we entered into a purchase agreement with certain counterparties for the sale of an aggregate of $ 1.50 billion principal amount of convertible senior notes due in 2028 (the “2028 Notes”) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The 2028 Notes consisted of a $ 1.30 billion initial placement and an over-allotment option that provided the initial purchasers of the 2028 Notes with the option to purchase an additional $ 200.0 million aggregate principal amount of the 2028 Notes, which was fully exercised. The 2028 Notes were issued pursuant to an indenture dated February 11, 2022.The net proceeds from the issuance of the 2028 Notes were $ 1.31 billion, net of debt issuance costs and cash used to purchase the capped call transactions (“2028 Capped Call Transactions”) discussed below. The debt issuance costs are amortized to interest expense using the effective interest rate method. The 2028 Notes are unsecured and unsubordinated obligations. Interest is payable in cash semi-annually in arrears beginning on September 1, 2022 at a rate of 0.125 % per year. The 2028 Notes mature on March 1, 2028 unless repurchased, redeemed, or converted in accordance with their terms prior to such date. The 2028 Notes are convertible into cash, shares of our Class A common stock, or a combination of cash and shares of our Class A common stock, at our election, at an initial conversion rate of 17.7494 shares of Class A common 97 Table of Contents stock per $ 1,000 principal amount of 2028 Notes, which is equivalent to an initial conversion price of approximately $ 56.34 per share of our Class A common stock. The conversion rate is subject to customary adjustments for certain events as described in the indenture governing the 2028 Notes. We may redeem for cash all or any portion of the 2028 Notes, at our option, on or after March 5, 2025 if the last reported sale price of our Class A common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days at a redemption price equal to 100 % of the principal amount of the 2028 Notes to be redeemed, plus accrued and unpaid interest, if any. Holders of the 2028 Notes may convert all or a portion of their 2028 Notes at their option prior to December 1, 2027, in multiples of $ 1,000 principal amounts, only under the following circumstances: • if the last reported sale price of our Class A common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is greater than or equal to 130 % of the applicable conversion price of the 2028 Notes on each such trading day; • during the five business day period after any ten consecutive trading day period in which the trading price per $ 1,000 principal amount of the 2028 Notes for each day of that ten consecutive trading day period was less than 98 % of the product of the last reported sale price of our Class A common stock and the applicable conversion rate of the 2028 Notes on such trading day; • on a notice of redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date, in which case we may be required to increase the conversion rate for the 2028 Notes so surrendered for conversion in connection with such redemption notice; or • on the occurrence of specified corporate events. On or after December 1, 2027, the 2028 Notes are convertible at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. Holders of the 2028 Notes who convert the 2028 Notes in connection with a make-whole fundamental change, as defined in the indenture governing the 2028 Notes, or in connection with a redemption are entitled to an increase in the conversion rate. Additionally, in the event of a fundamental change, holders of the 2028 Notes may require us to repurchase all or a portion of the 2028 Notes at a price equal to 100 % of the principal amount of 2028 Notes, plus any accrued and unpaid interest, if any. We accounted for the issuance of the 2028 Notes as a single liability measured at its amortized cost, as no other embedded features require bifurcation and recognition as derivatives. 2027 Notes In April 2021, we entered into a purchase agreement for the sale of an aggregate of $ 1.15 billion principal amount of convertible senior notes due in 2027 (the “2027 Notes”) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The net proceeds from the issuance of the 2027 Notes were $ 1.05 billion, net of debt issuance costs and cash used to purchase the capped call transactions (the “2027 Capped Call Transactions”) discussed below. The debt issuance costs are amortized to interest expense using the effective interest rate method. The 2027 Notes are unsecured and unsubordinated obligations which do not bear regular interest and for which the principal balance will not accrete. The 2027 Notes will mature on May 1, 2027 unless repurchased, redeemed, or converted in accordance with their terms prior to such date. The 2027 Notes are convertible into cash, shares of our Class A common stock, or a combination of cash and shares of our Class A common stock, at our election, at an initial conversion rate of 11.2042 shares of Class A common stock per $ 1,000 principal amount of 2027 Notes, which is equivalent to an initial conversion price of approximately $ 89.25 per share of our Class A common stock. We may redeem for cash all or portions of the 2027 Notes, at our option, on or after May 5, 2024 based on certain circumstances. 2025 Notes In April 2020, we entered into a purchase agreement for the sale of an aggregate of $ 1.0 billion principal amount of convertible senior notes due in 2025 (the “2025 Notes”) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The net proceeds from the issuance of the 2025 Notes were $ 888.6 million, net of debt 98 Table of Contents issuance costs and cash used to purchase the capped call transactions (the “2025 Capped Call Transactions”) discussed below. The debt issuance costs are amortized to interest expense using the effective interest rate method. The 2025 Notes are unsecured and unsubordinated obligations. Interest is payable in cash semi-annually in arrears beginning on November 1, 2020 at a rate of 0.25 % per year. The 2025 Notes mature on May 1, 2025 unless repurchased, redeemed, or converted in accordance with their terms prior to such date. The 2025 Notes are convertible into cash, shares of our Class A common stock, or a combination of cash and shares of our Class A common stock, at our election, at an initial conversion rate of 46.1233 shares of Class A common stock per $ 1,000 principal amount of 2025 Notes, which is equivalent to an initial conversion price of approximately $ 21.68 per share of our Class A common stock. We may redeem for cash all or portions of the 2025 Notes, at our option, on or after May 6, 2023 based on certain circumstances. 2026 Notes In August 2019, we entered into a purchase agreement for the sale of an aggregate of $ 1.265 billion principal amount of convertible senior notes due in 2026 (the “2026 Notes”) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The net proceeds from the issuance of the 2026 Notes were $ 1.15 billion, net of debt issuance costs and cash used to purchase the capped call transactions (“2026 Capped Call Transactions”) discussed below. The debt issuance costs are amortized to interest expense using the effective interest rate method. The 2026 Notes are unsecured and unsubordinated obligations. Interest is payable in cash semi-annually in arrears beginning on February 1, 2020 at a rate of 0.75 % per year. The 2026 Notes mature on August 1, 2026 unless repurchased, redeemed, or converted in accordance with the terms prior to such date. The 2026 Notes are convertible into cash, shares of our Class A common stock, or a combination of cash and shares of our Class A common stock, at our election, at an initial conversion rate of 43.8481 shares of Class A common stock per $ 1,000 principal amount of 2026 Notes, which is equivalent to an initial conversion price of approximately $ 22.81 per share of our Class A common stock. We may redeem for cash all or portions of the 2026 Notes, at our option, on or after August 6, 2023 based on certain circumstances. Exchange Transactions In 2021, we entered into various exchange agreements (collectively, the “Exchange Agreements”) with certain holders of the 2025 Notes and the 2026 Notes pursuant to which we exchanged approximately $ 715.9 million principal amount of the 2025 Notes and approximately $ 426.5 million principal amount of the 2026 Notes for aggregate consideration of approximately 52.4 million shares of Class A common stock (the “Exchange Shares”). The Exchange Shares included an additional 0.7 million shares of our Class A common stock not provided for under the original conversion terms of the 2025 Notes and the 2026 Notes to induce the holders to agree to the exchange. The Exchange Agreements were accounted for as an induced conversion with the fair value of 0.7 million Exchange Shares, less accrued interest, recognized as an inducement expense in other income (expense), net in our consolidated statements of operations and included as an adjustment to reconcile net loss to net cash provided by (used in) operating activities in our consolidated statements of cash flows. Inducement expense recorded for the year ended December 31, 2021 was $ 41.5 million. The common stock consideration issued under the original terms of the 2025 Notes and 2026 Notes was accounted for under the general conversion accounting guidance with the net carrying amount of $ 1,132.6 million recorded in additional paid-in-capital and as a non-cash transaction excluded from cash activities on the consolidated statements of cash flows. 99 Table of Contents The Convertible Notes consisted of the following: As of December 31, 2022 2021 Principal Unamortized Debt Issuance Costs Net Carrying Amount Principal Unamortized Debt Issuance Costs Net Carrying Amount (in thousands) 2025 Notes $ 284,105 $ ( 1,521 ) $ 282,584 $ 284,105 $ ( 2,168 ) $ 281,937 2026 Notes 838,482 ( 4,698 ) 833,784 838,493 ( 5,982 ) 832,511 2027 Notes 1,150,000 ( 9,239 ) 1,140,761 1,150,000 ( 11,361 ) 1,138,639 2028 Notes 1,500,000 ( 14,609 ) 1,485,391 — — — Total $ 3,772,587 $ ( 30,067 ) $ 3,742,520 $ 2,272,598 $ ( 19,511 ) $ 2,253,087 As of December 31, 2022, the debt issuance costs on the 2025 Notes, 2026 Notes, 2027 Notes, and 2028 Notes will be amortized over the remaining period of approximately 2.3 years, 3.6 years, 4.3 years and 5.2 years, respectively. Interest expense related to the amortization of debt issuance costs was $ 6.5 million and $ 4.3 million for the years ended December 31, 2022 and 2021, respectively. Interest expense related to the amortization of debt discount and issuance costs was $ 81.4 million for the year ended December 31, 2020. Contractual interest expense was $ 8.7 million, $ 8.9 million, and $ 11.2 million for the years ended December 31, 2022, 2021, and 2020, respectively. As of December 31, 2022, the if-converted value of the Convertible Notes did not exceed the principal amount. The sale price for conversion was not satisfied as of December 31, 2022 for the Convertible Notes, and as a result, the Convertible Notes will not be eligible for optional conversion during the first quarter of 2023. No sinking fund is provided for the Convertible Notes, which means that we are not required to redeem or retire them periodically. Capped Call Transactions In connection with the pricing of the 2025 Notes, the 2026 Notes, the 2027 Notes, and the 2028 Notes, we entered into the 2025 Capped Call Transactions, the 2026 Capped Call Transactions, the 2027 Capped Call Transactions, and the 2028 Capped Call Transactions (collectively, the “Capped Call Transactions”), respectively, with certain counterparties at a net cost of $ 100.0 million, $ 102.1 million, $ 86.8 million, and $ 177.0 million, respectively. The cap price of the 2025 Capped Call Transactions, the 2026 Capped Call Transactions, the 2027 Capped Call Transactions, and the 2028 Capped Call Transactions is initially $ 32.12 , $ 32.58 , $ 121.02 , and $ 93.90 per share of our Class A common stock, respectively. All are subject to certain adjustments under the terms of the Capped Call Transactions. Conditions that cause adjustments to the initial strike price of the Capped Call Transactions mirror conditions that result in corresponding adjustments for the Convertible Notes. The Capped Call Transactions are intended to reduce potential dilution to holders of our Class A common stock beyond the conversion prices up to the cap prices on any conversion of the Convertible Notes or offset any cash payments we are required to make in excess of the principal amount, as the case may be, with such reduction or offset subject to a cap. The cost of the Capped Call Transactions was recorded as a reduction of our additional paid-in capital in our consolidated balance sheets. The Capped Call Transactions will not be remeasured as long as they continue to meet the conditions for equity classification. As of December 31, 2022, the Capped Call Transactions were out-of-the-money. Credit Facility In May 2022, we entered into a five-year senior unsecured revolving credit facility (“Credit Facility”) with certain lenders that allows us to borrow up to $ 1.05 billion to fund working capital and general corporate-purpose expenditures. The prior revolving credit facility entered into in July 2016 (as amended) was terminated concurrently with the entry into the Credit Facility. The prior credit facility was never drawn upon and, as of December 31, 2021, there were no amounts outstanding on the prior credit facility. On the Credit Facility, loans bear interest, at our option, at a rate equal to (i) a term secured overnight financing rate (“SOFR”) plus 0.75 % or the base rate, if selected by us, for loans made in U.S. dollars, (ii) the Sterling overnight index average plus 0.7826 % for loans made in Sterling, and (iii) foreign indices as stated in the credit agreement plus 0.75 % for loans made in other permitted foreign currencies. The base rate is defined as the greatest of (i) the Wall Street Journal prime rate, (ii) the greater of the (a) federal funds rate and (b) the overnight bank funding rate, 100 Table of Contents plus 0.50 %, and (iii) the applicable SOFR for a period of one month (but not less than zero) plus 1.00 . The Credit Facility also contains an annual commitment fee of 0.10 % on the daily undrawn balance of the facility. As of December 31, 2022, we had $ 40.1 million in the form of outstanding standby letters of credit, with no amounts outstanding under the Credit Facility. 8. Commitments and Contingencies Commitments We have non-cancelable contractual agreements primarily related to the hosting of our data processing, storage, and other computing services, as well as lease, content and developer partner, and other commitments. We had $ 3.7 billion in commitments as of December 31, 2022, primarily due within 3 years. For additional discussion on leases, see Note 9 to our consolidated financial statements. Contingencies We record a loss contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We also disclose material contingencies when we believe a loss is not probable but reasonably possible. Accounting for contingencies requires us to use judgment related to both the likelihood of a loss and the estimate of the amount or range of loss. Many legal and tax contingencies can take years to be resolved. Pending Matters In November 2021, we and certain of our officers and directors, were named as defendants in a securities class actions purportedly brought on behalf of purchasers of our Class A common stock, alleging that we and certain of our officers made false or misleading statements and omissions concerning the impact that Apple’s App Tracking Transparency framework would have on our business. Management believes these lawsuits are without merit and intends to vigorously defend them. Based on the preliminary nature of the proceedings in this case, the outcome of this matter remains uncertain. The outcomes of our legal proceedings are inherently unpredictable, subject to significant uncertainties, and could be material to our financial condition, results of operations, and cash flows for a particular period. For the pending matters described above, it is not possible to estimate the reasonably possible loss or range of loss. We are subject to various other legal proceedings and claims in the ordinary course of business, including certain patent, trademark, privacy, regulatory, and employment matters. Although occasional adverse decisions or settlements may occur, we do not believe that the final disposition of any of our other pending matters will seriously harm our business, financial condition, results of operations, and cash flows. Indemnifications In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, investors, directors, officers, employees, and other parties with respect to certain matters. Indemnification may include losses from our breach of such agreements, services we provide, or third party intellectual property infringement claims. These indemnifications may survive termination of the underlying agreement and the maximum potential amount of future indemnification payments may not be subject to a cap. We have not incurred material costs to defend lawsuits or settle claims related to these indemnifications as of December 31, 2022. We believe the fair value of these liabilities is immaterial and accordingly have no liabilities recorded for these agreements at December 31, 2022. 101 Table of Contents 9. Leases The components of lease cost were as follows: Year Ended December 31, 2022 2021 2020 (in thousands) Operating lease expense $ 109,506 $ 69,831 $ 60,450 Sublease income ( 1,086 ) ( 2,478 ) ( 2,815 ) Total net lease costs $ 108,420 $ 67,353 $ 57,635 The weighted-average remaining lease term (in years) and discount rate related to the operating leases were as follows: For the Year Ended December 31, 2022 2021 Weighted-average remaining lease term 6.8 6.6 Weighted-average discount rate 5.0 % 5.0 % The maturities of our operating lease liabilities as of December 31, 2022, were as follows: Operating Leases (in thousands) Year ending December 31, 2023 $ 66,698 2024 102,440 2025 98,524 2026 51,717 2027 36,843 Thereafter 166,883 Total lease payments $ 523,105 Less: Imputed interest ( 90,349 ) Present value of lease liabilities $ 432,756 As of December 31, 2022, we had additional operating leases that have not yet commenced for facilities with lease obligations of $ 31.2 million. These operating leases will commence in 2023 with lease terms of approximately 7 years to 11 years. Cash payments included in the measurement of our o perating lease liabilities were $ 94.9 million, $ 73.9 million, and $ 73.3 million for the years ended December 31, 2022, 2021, and 2020, respectively. Lease liabilities arising from obtaining operating lease right-of-use assets were $ 147.4 million, $ 99.3 million, and $ 36.2 million for the years ended December 31, 2022, 2021, and 2020, respectively . 10. Strategic Investments We hold strategic investments primarily in privately held companies with a carrying value of $ 252.3 million and $ 262.7 million as of December 31, 2022 and December 31, 2021, respectively, which consist primarily of equity securities, and to a lesser extent, debt securities. These strategic investments are primarily recorded at fair value on a non-recurring basis. The estimation of fair value for these privately held strategic investments requires the use of significant unobservable inputs, such as the issuance of new equity by the company, and as a result, we deem these assets as Level 3 financial instruments within the fair value measurement framework. 102 Table of Contents The components of gains and losses on strategic investments were as follows: Year Ended December 31, 2022 2021 2020 (in thousands) Unrealized gains (losses) on investments in privately held companies, net $ 19,946 $ 145,010 $ 42,363 Realized gains (losses) on investments in privately held companies, net 45,935 27,820 — Unrealized and realized gains on all strategic investments are included within other income (expense), net on the consolidated statements of operations and included as an adjustment to reconcile net loss to net cash provided by (used in) operating activities in our consolidated statements of cash flows. Strategic investments are included within other assets on the consolidated balance sheets. All strategic investments are reviewed periodically for impairment. Impairment expense was not material for the years ended December 31, 2022 and 2021, respectively. Impairment expense for the year ended December 31, 2020 was $ 29.5 million. 11. Fair Value Measurements Assets and liabilities measured at fair value are classified into the following categories: • Level 1: Quoted market prices in active markets for identical assets or liabilities. • Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. • Level 3: Unobservable inputs reflecting the reporting entity’s own assumptions or external inputs from inactive markets. We classify our cash equivalents and marketable securities within Level 1 or Level 2 because we use quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value. The following table sets forth our financial assets as of December 31, 2022 and 2021 that are measured at fair value on a recurring basis during the period: December 31, 2022 Cost or Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Total Estimated Fair Value (in thousands) Cash $ 1,325,946 $ — $ — $ 1,325,946 Level 1 securities: U.S. government securities 1,630,224 109 ( 9,484 ) 1,620,849 U.S. government agency securities 175,269 19 ( 188 ) 175,100 Publicly traded equity securities (1) 102,189 20,859 ( 31,548 ) 91,500 Level 2 securities: Corporate debt securities 309,942 32 ( 1,462 ) 308,512 Commercial paper 290,589 — — 290,589 Certificates of deposit 157,965 — ( 1 ) 157,964 Total $ 3,992,124 $ 21,019 $ ( 42,683 ) $ 3,970,460 (1) During the year ended December 31, 2022, we reclassified strategic investments from Level 3 to Level 1 at their fair value using the beginning-of-period approach, following the commencement of public market trading of the investments during the quarter (a portion of which was subject to short-term lock-up restrictions as of December 31, 2022). 103 Table of Contents December 31, 2021 Cost or Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Total Estimated Fair Value (in thousands) Cash $ 1,966,966 $ — $ — $ 1,966,966 Level 1 securities: U.S. government securities 811,092 1 ( 1,454 ) 809,639 U.S. government agency securities 77,409 1 ( 8 ) 77,402 Publicly traded equity securities 71,139 122,064 — 193,203 Level 2 securities: Corporate debt securities 143,124 — ( 207 ) 142,917 Commercial paper 422,328 — ( 1 ) 422,327 Certificates of deposit 80,431 — — 80,431 Total $ 3,572,489 $ 122,066 $ ( 1,670 ) $ 3,692,885 We held investments in publicly traded companies with an aggregate carrying value of $ 91.5 million and $ 193.2 million as of December 31, 2022 and 2021, respectively, primarily recorded as marketable securities. We recorded total losses of $ 101.3 million and unrealized gains of $ 122.1 million related to these investments for the years ended December 31, 2022 and 2021, respectively, within other income (expense), net on our consolidated statements of operations. Unrealized losses related to publicly traded equity securities still held as of December 31, 2022 were $ 79.2 million for the year ended December 31, 2022. Gross unrealized losses on marketable debt securities were not material as of December 31, 2022 and 2021, respectively. As of December 31, 2022, we considered any decreases in fair value on our marketable debt securities to be driven by factors other than credit risk, including market risk. As of December 31, 2022, $ 357.5 million of our total $ 2.5 billion in marketable debt securities have contractual maturities between one and five years . All other marketable debt securities have contractual maturities less than one year. We carry the Convertible Notes at face value less the unamortized debt issuance costs on our consolidated balance sheets and present the fair value for disclosure purposes only. As of December 31, 2022, the fair value of the 2025 Notes, the 2026 Notes, the 2027 Notes, and the 2028 Notes was $ 257.0 million, $ 711.9 million, $ 796.2 million, and $ 1.0 billion, respectively. As of December 31, 2021, the fair value of the 2025 Notes, the 2026 Notes, and the 2027 Notes was $ 650.1 million, $ 1.9 billion, and $ 1.1 billion, respectively. The estimated fair value of the Convertible Notes, which are classified as Level 2 financial instruments, was determined based on the estimated or actual bid prices of the Convertible Notes in an over-the-counter market on the last business day of the period. 12. Income Taxes The domestic and foreign components of pre-tax loss were as follows: Year Ended December 31, 2022 2021 2020 (in thousands) Domestic (1) $ ( 538,311 ) $ 364,989 $ ( 320,757 ) Foreign (1) ( 862,386 ) ( 839,360 ) ( 605,428 ) Loss before income taxes $ ( 1,400,697 ) $ ( 474,371 ) $ ( 926,185 ) (1) Includes the impact of intercompany charges to foreign affiliates for management fees and research and development cost sharing, inclusive of stock-based compensation. 104 Table of Contents The components of our income tax (benefit) expense were as follows: Year Ended December 31, 2022 2021 2020 (in thousands) Current: Federal $ — $ — $ — State 10,704 919 1,035 Foreign 22,404 22,078 23,945 Total current income tax expense (benefit) 33,108 22,997 24,980 Deferred: Federal 1,212 ( 6,295 ) ( 1,720 ) State 837 ( 445 ) ( 414 ) Foreign ( 6,201 ) ( 2,673 ) ( 4,192 ) Total deferred income tax expense (benefit) ( 4,152 ) ( 9,413 ) ( 6,326 ) Income tax expense (benefit) $ 28,956 $ 13,584 $ 18,654 The following is a reconciliation of the statutory federal income tax rate to our effective tax rate: Year Ended December 31, 2022 2021 2020 Tax benefit (expense) computed at the federal statutory rate 21.0 % 21.0 % 21.0 % State tax benefit (expense), net of federal benefit (1) 2.9 31.5 8.3 Change in valuation allowance ( 32.0 ) ( 246.3 ) ( 58.9 ) Differences between U.S. and foreign tax rates on foreign income 2.5 3.9 ( 1.4 ) Stock-based compensation benefit ( 0.1 ) 119.3 17.8 U.S. federal research & development credit benefit 5.0 36.7 8.4 U.K. corporate rate increase — 39.8 4.3 Acquisitions and divestitures ( 0.7 ) ( 8.0 ) ( 0.5 ) Other benefits (expenses) ( 0.7 ) ( 0.8 ) ( 1.0 ) Total income tax benefit (expense) ( 2.1 ) % ( 2.9 ) % ( 2.0 ) % (1) Inclusive of state research and development credits. 105 Table of Contents The significant components of net deferred tax balances were as follows: Year Ended December 31, 2022 2021 (in thousands) Deferred tax assets: Accrued expenses $ 37,731 $ 30,169 Intangible assets 177,762 183,441 IRC 174 Capitalized R&D (1) 265,485 — Stock-based compensation 102,364 61,885 Loss carryforwards 2,651,812 2,631,230 Tax credit carryforwards 824,220 715,844 Lease liability 98,668 93,312 Other 20,154 29,572 Total deferred tax assets $ 4,178,196 $ 3,745,453 Deferred tax liabilities: Right-of-use asset ( 75,212 ) ( 75,782 ) Investments ( 30,962 ) ( 66,792 ) Other ( 17,309 ) ( 2,549 ) Total deferred tax liabilities $ ( 123,483 ) $ ( 145,123 ) Total net deferred tax assets before valuation allowance 4,054,713 3,600,330 Valuation allowance ( 4,060,943 ) ( 3,611,242 ) Net deferred taxes $ ( 6,230 ) $ ( 10,912 ) (1) An offsetting reduction is included in loss carryforwards as of December 31, 2022 as U.S. federal and state loss carryforwards were utilized to offset the increase in federal and state tax liability resulting from capitalization under Section 174 of the Internal Revenue Code. On July 22, 2020 the U.K. Finance Act 2020 was enacted, increasing the U.K. tax rate from 17 % to 19 % effective April 1, 2020. On June 10, 2021, the U.K. Finance Act 2021 was enacted, further increasing the U.K. tax rate from 19 % to 25 % effective April 1, 2023. These changes to the U.K. tax rate resulted in an increase to our U.K. net deferred tax assets (before valuation allowance) of $ 188.9 million and $ 39.7 million for the period ending December 31, 2021 and 2020, respectively, both of which were fully offset by an increase in our valuation allowance. As of December 31, 2022, we had an immaterial amount of unremitted earnings related to certain foreign subsidiaries. We intend to continue to reinvest these foreign earnings indefinitely and do not expect to incur any significant taxes related to such amounts. As of December 31, 2022, we had accumulated U.S. federal and state net operating loss carryforwards of $ 7.4 billion and $ 4.6 billion, respectively. Of the $ 7.4 billion of federal net operating loss carryforwards, $ 1.2 billion was generated before January 1, 2018 and is subject to a 20 -year carryforward period. The remaining $ 6.2 billion can be carried forward indefinitely but is subject to an 80 % taxable income limitation. The pre-2018 federal and certain significant state net operating loss carryforwards will begin to expire in 2037 and 2031, respectively. As of December 31, 2022, we had $ 3.6 billion of U.K. net operating loss carryforwards that can be carried forward indefinitely; however, use of such carryforwards in a given year is generally limited to 50 % of such year’s taxable income. As of December 31, 2022, we had accumulated U.S. federal and state research tax credits of $ 691.5 million and $ 430.7 million, respectively. The U.S. federal research tax credits will begin to expire in 2032. The U.S. state research tax credits do not expire. We recognize valuation allowances on deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized. We had valuation allowances against net deferred tax assets of $ 4.1 billion and $ 3.6 billion as of December 31, 2022 and 2021, respectively. In 2022, the increase in the valuation allowance was primarily attributable to a net increase in our deferred tax assets resulting from the loss from operations. 106 Table of Contents Uncertain Tax Positions The following table summarizes the activity related to our gross unrecognized tax benefits during the years ended December 31, 2022 and 2021: Year Ended December 31, 2022 2021 (in thousands) Beginning balance of unrecognized tax benefits $ 469,573 $ 344,971 Additions for current year tax positions 47,366 119,938 Additions for prior year tax positions 115 180 Reductions for prior year tax positions ( 3,569 ) ( 996 ) Changes due to lapse of statute of limitations ( 1,887 ) ( 2,077 ) Changes due to foreign currency translation adjustments ( 929 ) ( 357 ) U.K. corporate rate increase — 7,914 Ending balance of unrecognized tax benefits (excluding interest and penalties) $ 510,669 $ 469,573 Interest and penalties associated with unrecognized tax benefits 385 124 Ending balance of unrecognized tax benefits (including interest and penalties) $ 511,054 $ 469,697 The total amount of gross unrecognized tax benefits, including related interest and penalties, was $ 511.1 million and $ 469.7 million as of December 31, 2022 and 2021, respectively. Substantially all of the unrecognized tax benefit was recorded as a reduction in our gross deferred tax assets, offset by a corresponding reduction in our valuation allowance. We have net unrecognized tax benefits of $ 21.7 million and $ 15.9 million included in other liabilities on our consolidated balance sheet as of December 31, 2022 and 2021, respectively. Assuming there continues to be a valuation allowance against deferred tax assets in future periods when gross unrecognized tax benefits are realized, this would result in a tax benefit of $ 21.7 million within our income tax provision at such time. Our policy is to recognize interest and penalties associated with tax matters as part of the income tax provision and include accrued interest and penalties with the related income tax liability on our consolidated balance sheet. During the year ended December 31, 2022, interest expense recorded related to uncertain tax positions was not material. The income taxes we pay are subject to review by taxing jurisdictions globally. Our estimate of the potential outcome of any uncertain tax position is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time. We believe that our estimate has adequately provided for these matters. However, our future results may include adjustments to estimates in the period the audits are resolved, which may impact our effective tax rate. Tax years ending on or after December 31, 2012 are subject to examination in the U.S., and tax years ending on or after December 31, 2020 are subject to examination in the U.K. We are currently under examination by the U.S. Internal Revenue Service for the tax year ending December 31, 2018, and by the U.K. tax authorities for the tax year ending December 31, 2020. 107 Table of Contents 13. Accumulated Other Comprehensive Income (Loss) The table below presents the changes in accumulated other comprehensive income (loss) (“AOCI”) by component and the reclassifications out of AOCI: Changes in Accumulated Other Comprehensive Income (Loss) by Component Marketable Securities Foreign Currency Translation Total (in thousands) Balance at December 31, 2021 $ ( 1,822 ) $ 7,343 $ 5,521 OCI before reclassifications ( 9,289 ) ( 10,188 ) ( 19,477 ) Amounts reclassified from AOCI (1) ( 18 ) — ( 18 ) Net current period OCI ( 9,307 ) ( 10,188 ) ( 19,495 ) Balance at December 31, 2022 $ ( 11,129 ) $ ( 2,845 ) $ ( 13,974 ) (1) Realized gains and losses on marketable securities are reclassified from AOCI into other income (expense), net in the consolidated statements of operations. 14. Property and Equipment, Net Property and equipment, net, consisted of the following: As of December 31, 2022 2021 (in thousands) Computer hardware and software $ 62,945 $ 51,984 Buildings 21,486 — Leasehold improvements 225,647 203,124 Furniture and equipment 100,025 78,492 Construction in progress 80,267 44,304 Total 490,370 377,904 Less: accumulated depreciation and amortization ( 218,593 ) ( 175,260 ) Property and equipment, net $ 271,777 $ 202,644 Depreciation and amortization expense on property and equipment was $ 69.9 million, $ 55.9 million, and $ 53.2 million for the years ended December 31, 2022, 2021, and 2020, respectively. Noncash property and equipment additions in accounts payable, accrued expenses and other current liabilities were $ 28.0 million, $ 14.2 million, and $ 7.0 million as of December 31, 2022, 2021, and 2020, respectively. 108 Table of Contents The following table lists property and equipment, net by geographic area: As of December 31, 2022 2021 (in thousands) Property and equipment, net: United States $ 214,857 $ 174,826 United Kingdom 36,774 15,843 Rest of world (1) 20,146 11,975 Total property and equipment, net $ 271,777 $ 202,644 (1) No individual country exceeded 10% of our total property and equipment, net for any period presented. 15. Balance Sheet Components Accrued expenses and other current liabilities at December 31, 2022 and 2021 consisted of the following: As of December 31, 2022 2021 (in thousands) Accrued compensation and related expenses $ 206,441 $ 177,659 Accrued infrastructure costs 169,886 168,942 Partner revenue share liability 83,395 86,991 Acquisition liability 293,332 49,870 Other operating costs 75,376 48,635 Deferred revenue 50,782 44,473 Other 108,128 97,538 Total accrued expenses and other current liabilities $ 987,340 $ 674,108 Other liabilities at December 31, 2022 and 2021 consisted of the following: As of December 31, 2022 2021 (in thousands) Acquisition liability $ 66,020 $ 280,194 Other 38,430 35,562 Total other liabilities $ 104,450 $ 315,756 16. Employee Benefit Plans We have a defined contribution 401(k) plan (the “401(k) Plan”) for our U.S.-based employees. The 401(k) Plan is available for all full-time employees who meet certain eligibility requirements. Eligible employees may contribute up to 100 % of their eligible compensation, but are limited to the maximum annual dollar amount allowable under the Code. We match 100 % of each participant’s contribution up to a maximum of 3 % of the participant’s eligible compensation paid during the period, and also match 50 % of each participant’s contribution between 3 % and 5 % of the participant’s eligible compensation paid during the period. During the years ended December 31, 2022, 2021, and 2020, we recognized expense of $ 33.6 million, $ 25.0 million, and $ 18.4 million, respectively, related to matching contributions. 109 Table of Contents 17. Related Party Transactions In November 2020, we entered into a ground sublease with an entity that is controlled by our CEO that allows us to build and operate a hangar to support our aviation program. This entity subleases the ground to us for $ 0 and in exchange may utilize a specified percentage of the hangar space. If the entity needs additional space within the hangar, it will pay rent to Snap at a fair market value rate determined at the time this arrangement was entered into. Any space utilized by this entity will be space that is not required for Snap’s aviation program. Subject to certain limited exceptions, neither party may terminate this sublease for at least six years . After this period, Snap or this entity may terminate the lease at any time on 24 months’ prior written notice. Upon termination of the sublease, this entity will purchase the hangar from Snap at its fair market value on the termination date. The value of these arrangements is not material to our consolidated financial statements for the current period or for the term of the agreement. 18. Restructuring In the third quarter of 2022, we initiated a strategic reprioritization plan, which included a reduction of our global employee headcount by approximately 20 %. We substantially completed the reprioritization plan in the fourth quarter of 2022. The following table summarizes the restructuring charges (benefits) in our consolidated statements of operations for the year ended December 31, 2022: Severance and Related Charges (1) Stock-Based Compensation Expense (Benefit) Lease Exit and Related Charges (2) Other (3) Total (in thousands) Cost of revenue $ 2,291 $ 709 $ — $ 17,585 $ 20,585 Research and development 46,994 29,188 — 2,733 78,915 Sales and marketing 30,565 ( 504 ) — 730 30,791 General and administrative 17,211 5,111 31,227 5,109 58,658 Total $ 97,061 $ 34,504 $ 31,227 $ 26,157 $ 188,949 (1) Severance and related charges include cash severance expense and other termination benefits. The majority of cash paid for restructuring in 2022 was related to severance and benefits. (2) Lease exit and related charges are non-cash and presented in other cash flows from operating activities in our consolidated statements of cash flows. (3) Other includes impairment charges, contract termination charges, and intangible asset amortization. The liabilities related to the reprioritization plan were immaterial as of December 31, 2022. 110 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.