What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-02-05 compared with 2020-02-05 · 207 added, 337 removed, 809 unchanged (40% of the section changed)

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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 advertising revenues is generated based upon contractual agreements with customers on a fixed fee for advertisements delivered over a period of time, or fees based on the number of advertising impressions delivered.

Revenue related to fixed fee agreements is recognized ratably over the service period while revenue related to agreements based on the number of impressions delivered is recognized when the advertisement is displayed.

The Company’s revenue recognition process utilizes multiple, complex, proprietary systems and tools for the initiation, processing and recording of transactions which includes a high volume of individually low monetary value transactions.

The substantial majority of such advertising revenues is generated based upon contractual agreements with customers that are on a fixed fee for advertisements delivered over a period of time, or fees based on the number of advertising impressions delivered.

Revenue related to fixed fee agreements is recognized ratably over the service period while revenue related to agreements based on the number of advertising impressions delivered is recognized when the advertisement is displayed.

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, processes, data sources and controls which required significant audit effort.

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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.

With the support of our information technology professionals, we identified and tested the relevant systems and tools used for the determination of initiation, delivery, 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.

Among other procedures, to test the Company’s recognition of revenue, we tested the completeness and accuracy of the underlying data within the Company’s billing systems, by agreeing amounts recognized to contractual terms and conditions, and tested revenue recognized to accounts receivables and cash receipts.

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 tested revenue recognized to accounts receivables 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.

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Description of the Matter

As described in Note 7 to the consolidated financial statements, in August 2019 the Company issued $1.265 billion of convertible senior notes due in 2026 (Convertible Notes), which permits the Company to settle in cash or stock at its option.

As described in Note 7 to the consolidated financial statements, in April 2020 the Company issued $1.0 billion of convertible senior notes due in 2025 (Convertible Notes), which permits the Company to settle the Convertible Notes in cash or stock at its option.

The Company entered into separate capped call transactions to reduce potential dilution upon conversion of the Convertible Notes.

These transactions are collectively referred to as the Convertible Notes Transactions.

Auditing the Company’s accounting for the Convertible Notes Transactions was complex due to the significant judgment required in determining the liability component of the Convertible Notes as well as the balance sheet classification of the elements of the Convertible Notes.

The accounting for the Convertible Notes Transactions was complex as it required assessment of whether features in the Convertible Notes required bifurcation and an evaluation of the appropriate classification of those features in the financial statements.

Additionally, the Convertible Notes Transactions were complex as the valuation of the conversion feature in the Convertible Notes involved estimation of the fair value of the liability component of the Convertible Notes on a stand-alone basis.

Auditing the Company’s accounting for the Convertible Notes Transactions involved addressing the complexity in assessing the components for separability and assessing the valuation of the liability component on a stand-alone basis.

The Company estimated the fair value of the liability component of the Convertible Notes, absent any embedded conversion features, using a discounted cash flow model with a risk adjusted yield.

In estimating the risk adjusted yield, the Company utilized both an income and market approach.

In estimating the risk adjusted yield, the Company utilized both income and market approaches.

For the income approach, the Company used a convertible bond pricing model, which included several assumptions including estimates of the Company’s equity volatility, dividend yield and a market risk free rate.

For the market approach, the Company performed an evaluation of comparable issuances of debt securities issued by companies with a similar credit risk rating to determine the fair value of the liability component.

For the market approach, the Company performed an evaluation of debt securities issued by companies with a similar credit risk rating to determine the fair value of the liability component.

Additionally, the Company performed a detailed analysis of the terms of the Convertible Notes Transactions to identify whether any derivatives that required separate mark-to-market accounting under applicable accounting guidance were present.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s Convertible Notes Transactions.

For example, we tested the Company’s controls over the initial recognition and measurement of the Convertible Notes Transactions, including the recording of the associated liability and equity components.

Our testing of the Company’s initial accounting for the Convertible Notes Transactions, among other procedures, included reading the underlying agreements and evaluating the Company’s accounting analysis of the initial accounting of the Convertible Notes Transactions, including the determination of the balance sheet classification of each transaction and identification of any derivatives included in the arrangements.

Our testing of the fair value of the liability component, included, among other procedures, evaluating the Company’s selection of the valuation methodology and significant assumptions used by the Company, and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates.

Specifically, when assessing the key assumptions, we evaluated the appropriateness of the Company’s estimates of its credit risk, volatility, dividend yield and the market risk free rate as well as its analysis of comparable issuances of debt securities by companies with a similar credit risk rating.

We obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls over the Company’s Convertible Notes Transactions, including its controls over the estimation of the fair value of the stand-alone liability component and evaluating the existence of embedded derivatives.

To test the Company’s initial accounting for the Convertible Notes Transactions, our audit procedures included, among others, reading the underlying agreements and evaluating the Company’s analysis of the initial accounting of the Convertible Notes Transactions, including the identification of any derivatives included in the arrangements.

Our testing of the fair value of the liability component included, among other procedures, evaluating the Company's selection of the valuation methodology and significant assumptions used by the Company, and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions.

In addition, we involved a valuation specialist to assist in our evaluation of the methodology used by the Company and the appropriateness of significant assumptions.

Accounting for Loss Contingencies

Description of the Matter

As described in Note 8 to the financial statements, the Company is involved in various claims and legal proceedings.

The Company accrues 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.

The Company also performs an assessment of the materiality of loss contingencies where a loss is either reasonably possible or it is reasonably possible that an exposure to loss exists in excess of the amount accrued.

If it is reasonably possible that such a loss or an additional loss may have been incurred and the effect on the financial statements is material, the Company discloses the nature of the loss contingency and an estimate of the possible loss or range of loss or a statement that such an estimate cannot be made within the notes to the financial statements.

Auditing management’s determination of whether a loss is probable and reasonably estimable, reasonably possible or remote, and the related disclosures, is highly subjective and requires significant judgment.

In particular, these determinations are sensitive to the uncertainties related to the ultimate outcome of the legal contingency, the status and uncertainty of the litigation and/or the appeals process, the jurisdiction where the lawsuit has been filed, the extent of recovery of losses from insurers, and the status of any settlement discussions associated with the legal contingency.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design, and tested the operating effectiveness of the controls related to the Company’s process for recognition, measurement and disclosure of legal contingencies.

To test the Company’s legal contingencies, we assessed the completeness of the legal contingencies subject to evaluation by the Company, and assessed the Company’s determination of the probability of outcomes for legal contingencies through inspection of responses to inquiry letters sent to both internal and external legal counsel, discussions with internal and external legal counsel to confirm our understanding of the allegations, and obtained written representations from executives of the Company.

For those legal contingencies for which the Company has determined that a loss is probable and reasonably estimable and is therefore required to be recognized, we evaluated the measurement of the recorded loss.

For those legal contingencies for which the Company has determined that a loss is either probable or reasonably possible, but the Company is unable to estimate the range of loss, and is therefore required to be disclosed, we assessed the sufficiency of the disclosures of legal contingencies.

We assessed the Company’s estimate of the amount of the loss, for both contingencies that are probable and reasonably possible, through inspection of correspondence received from internal and external legal counsel, direct discussions with internal and external legal counsel, inspection of court rulings, inspection of settlement agreements, and evaluated the extent of recovery of losses from insurers.

We also obtained written representations from executives of the Company.

/s/ Ernst & Young LLP

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Lease exit charges

Excess inventory reserve and related asset impairment

Change in operating assets and liabilities, net of effect of acquisitions:

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Purchases of property and equipment

Sales of property and equipment

Proceeds from divestiture, net

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Stock repurchases from employees for tax withholdings

Proceeds from issuance of Class A common stock in initial public offering, net

of underwriting commissions

Payments of deferred offering costs

Net cash provided by financing activities

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Cash paid for income taxes, net

Cash paid for interest

Supplemental disclosures of non-cash activities

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Additional paid-in capital

Accumulated other comprehensive income

Accumulated other comprehensive income (loss)

Accumulated deficit

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Year Ended December 31,

Convertible voting preferred stock—Series A, A-1, and B

Balance, beginning of period

Conversion of Series A, A-1, and B to Class B

voting common stock

Balance, end of period

Convertible non-voting preferred stock—Series C

Balance, beginning of period

Conversion of Series C to Class B voting common

Balance, end of period

Convertible non-voting preferred stock—Series D, E, and F

Balance, beginning of period

Conversion of Series D, E, and F to Class B voting

Balance, end of period

Convertible voting preferred stock—Series FP

Balance, beginning of period

Conversion of Series FP to Class C voting common

Balance, end of period

Class A non-voting common stock

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stock options under stock-based compensation

Shares issued in connection with exercise of stock

options, converted from Class B voting common

stock and subsequently sold

Issuance of Class A non-voting common stock in

connection with acquisitions and divestitures

Issuance of Class A non-voting common stock

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restricted stock awards, net

Issuance of Class A non-voting common stock upon initial public offering, net of issuance costs

Conversion of Class B voting common stock to

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Stock repurchases from employees for tax withholdings

Class A non-voting common stock sold on behalf of

employees to cover taxes

Balance, end of period

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Balance, beginning of period

Conversion of Series A-F preferred to Class B

voting common stock

Shares issued in connection with exercise of

stock options under stock-based compensation

Shares issued in connection with exercise of stock

options, converted to Class A non-voting common

stock and subsequently sold

Issuance of Class B voting common stock for

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Class A non-voting common stock

Stock repurchases from employees for tax

Shares converted to Class A non-voting common

stock and subsequently sold on behalf of

employees to cover taxes

Conversion of Class C voting common stock to

Class B voting common stock

Balance, end of period

See Notes to Consolidated Financial Statements.

Consolidated Statements of Stockholders’ Equity (Continued)

(in thousands)

Year Ended December 31,

Class C voting common stock

Balance, beginning of period

Conversion of Series FP preferred stock to Class C voting common stock

Conversion of Class C voting common stock to

Class B voting common stock

Issuance of Class C voting common stock for

settlement of restricted stock units, net

Shares converted to Class A non-voting common stock and subsequently sold on behalf of employees to cover taxes

Balance, end of period

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Shares issued in connection with exercise of

stock options under stock-based

compensation plans

stock options under stock-based compensation

Issuance of Class A non-voting common stock in connection with acquisitions and divestitures

Issuance of common stock upon initial public offering, net of issuance costs

Stock repurchases from employees for tax

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Our fiscal year ends on December 31.

Initial Public Offering

In March 2017, we completed our initial public offering (“IPO”) in which we issued and sold 160.3 million shares of Class A common stock, inclusive of the over-allotment, at an initial public offering price of $ 17.00 per share and excluding shares sold in the IPO by certain of our existing stockholders.

We received net proceeds of $ 2.6 billion after deducting underwriting discounts and commissions of $ 68.1 million and other offering expenses of $ 14.7 million.

On the closing of the IPO, all shares of our then-outstanding convertible preferred stock other than Series FP preferred stock automatically converted into an aggregate of 246.8 million shares of Class B common stock and all outstanding shares of Series FP preferred stock automatically converted into 215.9 million shares of Class C common stock.

Following the IPO, we have three classes of authorized common stock – Class A common stock, Class B common stock, and Class C common stock.

Restricted stock units (“RSUs”) granted to employees before January 1, 2017 (“Pre-2017 RSUs”) included both service-based and performance conditions to vest in the underlying common stock.

The performance condition related to these awards was satisfied on the effectiveness of the registration statement for our IPO, which occurred in March 2017.

On the effectiveness of the registration statement for our IPO, we recognized $ 1.3 billion of stock-based compensation expense for Pre-2017 RSUs.

To meet the related tax withholding requirements, we withheld 12.1 million of the 26.7 million shares of common stock issued.

Based on the initial public offering price of $ 17.00 per share, the tax withholding obligation for these vested Pre-2017 RSUs was $ 206.6 million.

In addition, on the closing of the IPO, our Chief Executive Officer (“CEO”) received an RSU award (“CEO award”) for 37.4 million shares of Series FP preferred stock, which automatically converted into an equivalent number of shares of Class C common stock on the closing of the IPO.

The CEO award represented 3.0 % of all outstanding shares on the closing of the IPO, including shares sold by us in the IPO and vested stock options and RSUs, net of shares withheld to satisfy tax withholding obligations, on the closing of the IPO.

The CEO award vested immediately on the closing of the IPO, and such shares are being delivered to the CEO in quarterly installments over three years which began in November 2017.

There is no continuing service requirement for our CEO.

The stock-based compensation expense recognized related to the CEO award was $ 636.6 million, which is based on the vesting of 37.4 million shares of Class C common stock on the closing of the IPO, at the initial public offering price of $ 17.00 per share.

As of December 31, 2019 and 2018, in accordance with terms of the CEO award, 28.0 million and 15.6 million shares of Class C common stock were issued, respectively.

At December 31, 2019 and 2018, 9.4 million and 21.8 million shares of Class C common stock were to be issued in future periods in equal quarterly installments through 2020, respectively.

The future tax benefits on settlement of the above RSUs 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.

Use of Estimates

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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, excess inventory reserves, lease exit charges, forfeiture rate, the fair value of convertible senior notes, and the fair value of stock-based awards.

Key estimates relate primarily to determining the fair value of assets and liabilities assumed in business combinations, evaluation of contingencies, uncertain tax positions, lease exit charges, forfeiture rate, the fair value of convertible senior notes, the fair value of stock-based awards, and the fair value of non-marketable 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.

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Cost of Revenue

Cost of revenue includes payments for content and third party selling costs, referred to as revenue share.

Cost of revenue includes payments for content and third-party selling costs, referred to as partner arrangements.

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.

Revenue-share costs were $ 174.7 million, $ 120.3 million, and $ 96.3 million for the years ended December 31, 2019, 2018, and 2017, respectively.

Partner arrangement costs were $ 324.3 million, $ 174.7 million, and $ 120.3 million for the years ended December 31, 2020, 2019, and 2018, respectively.

In addition, cost of revenue consists of expenses associated with infrastructure costs of the Snapchat mobile application, advertising measurement services, and personnel-related costs.

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Advertising costs are expensed as incurred and were $ 29.5 million, $ 31.4 million, and $ 11.3 million for the years ended December 31, 2020, 2019, and 2018, respectively.

Capital Structure

Following the IPO, we have three classes of authorized common stock – Class A common stock, Class B common stock, and Class C common stock.

On the closing of the IPO, our Chief Executive Officer (“CEO”) received a restricted stock unit (“RSU”) award (“CEO award”) for 37.4 million shares of Series FP preferred stock, which automatically converted into an equivalent number of shares of Class C common stock on the closing of the IPO.

The CEO award vested immediately on the closing of the IPO, and such shares were delivered to the CEO in quarterly installments over three years beginning in November 2017.

There was no continuing service requirement for our CEO.

The stock-based compensation expense recognized related to the CEO award was $ 636.6 million, which was based on the vesting of 37.4 million shares of Class C common stock on the closing of the IPO, at the initial public offering price of $ 17.00 per share.

As of December 31, 2020, all shares of Class C common stock deliverable under the CEO award were settled.

Stock-based Compensation

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In limited instances, we have issued Post-2017 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 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 vesting period.

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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.

We are subject to income taxes in the United States and numerous foreign jurisdictions.

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Unrealized losses are recorded in other income (expense), net when a decline in fair value is determined to be other than temporary.

Prepaid expenses and other current assets include our Spectacles inventory, which consists of finished goods purchased from contract manufacturers.

Inventory is stated at the lower of cost or market on a weighted-average cost basis.

Inventories are written down for estimated obsolescence or excess inventory equal to the difference between the cost of inventory and estimated market value.

Adjustments to reduce inventory to net realizable value are recognized in cost of revenue.

Non-Marketable Investments

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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.

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.

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Recent Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Simplifying the Accounting for Income Taxes, as part of its Simplification Initiative to reduce the cost and complexity in accounting for income taxes.

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 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 new 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 future periods 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 under 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 .

We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements, including accounting policies, processes, and systems.

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, as part of its Simplification Initiative to reduce the cost and complexity in accounting for income taxes.

ASU 2019-12 removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences.

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We early adopted ASU 2019-12 in the fourth quarter of 2019.

The adoption did not have a material impact on our consolidated financial statements.

The impact of adoption of this standard on our consolidated financial statements, including accounting policies, processes, and systems, was not material.

In August 2018, the FASB issued ASU 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40):

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The guidance is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted.

We do not expect this new standard will have a material impact on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326):

We adopted ASU 2018-15 effective January 1, 2020 .

The impact of adoption of this standard on our consolidated financial statements, including accounting policies, processes, and systems, was not material.

June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.

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We adopted ASU 2016-13 and ASU 2019-11 effective January 1, 2020 .

The impact of adoption of these standards on our consolidated financial statements, including accounting policies, processes, and systems, is not material.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) .

ASU 2016-02 requires lessees to recognize lease assets and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements.

Effective January 1, 2019, we adopted ASU 2016-02 using the modified retrospective approach.

We elected certain practical expedients permitted under the transition guidance, including the election to carryforward historical lease classification.

We also elected the short-term lease practical expedient, which allowed us to not recognize leases with a term of less than twelve months on our consolidated balance sheets.

In addition, we elected the lease and non-lease components practical expedient, which allowed us to calculate the present value of the fixed payments without performing an allocation of lease and non-lease components.

Adoption of the new standard resulted in recording operating lease right-of-use assets and operating lease liabilities of approximately $ 284.5 million and $ 375.4 million, respectively, on our consolidated balance sheets as of March 31, 2019.

The impact of the adoption was recorded as an adjustment to accumulated deficit as of January 1, 2019 and was not material.

The standard did not have a material impact on our consolidated statements of operations or cash flows.

The impact of adoption of these standards on our consolidated financial statements, including accounting policies, processes , and systems, was not material .

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 taxes, including value added taxes, are excluded from reported revenue.

We generate substantially all of our revenues by offering various advertising products on Snapchat, which include Snap Ads and Sponsored Creative Tools, and measurement services, referred to as advertising revenue.

Sponsored Creative Tools include Sponsored Geofilters and Sponsored Lenses.

Sponsored Geofilters allow users to interact with an advertiser’s brand by enabling stylized brand artwork to be overlaid on a Snap.

Sales tax, including value added tax, is excluded from reported 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.

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 Filters and Sponsored Lenses.

Sponsored Filters allow users to interact with an advertiser’s brand by enabling stylized brand artwork to be overlaid on a Snap.

Sponsored Lenses allow users to interact with an advertiser’s brand by enabling branded augmented reality experiences.

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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 determining whether an arrangement exists, we ensure that an agreement, such as an insertion order or self-serve terms, have been fully executed or accepted electronically.

We sell advertising directly to advertisers (“Snap-sold” revenue) and certain partners that provide content on Snapchat (“content partners”) also sell directly to advertisers (“partner-sold” revenue).

Snap Ads may be subject to revenue sharing agreements between us and our content partners.

Our Sponsored Creative Tools and measurement services are only Snap-sold and are not subject to revenue sharing arrangements.

Snap-sold revenue is recognized based on the gross amount that we charge the advertiser.

Partner-sold revenue is recognized based on the net amount of revenue to be received from the content partners.

We recognize Snap-sold revenue on a gross basis predominantly because we are the primary obligor responsible for fulfilling advertisement delivery, including the acceptability of the services delivered.

For Snap-sold advertising, we enter into contractual arrangements directly with advertisers.

We are directly responsible for the fulfillment of the contractual terms and any remedy for issues with such fulfillment.

For Snap-sold revenue, we also have latitude in establishing the selling price with the advertiser, as we sell advertisements at a rate determined at our sole discretion.

We recognize partner-sold revenue on a net basis predominantly because the content partner, and not Snap, is the primary obligor responsible for fulfillment, including the acceptability of the services delivered.

In partner-sold advertising arrangements, the content partner has a direct contractual relationship with the advertiser.

There is no contractual relationship between us and the advertiser for partner-sold transactions.

When a content partner sells advertisements, the content partner is responsible for fulfilling the advertisements, and accordingly, we have determined the content partner is the primary obligor.

Additionally, we do not have any latitude in establishing the price with the advertiser for partner-sold advertising.

The content partner may sell advertisements at a rate determined at its sole discretion.

For the periods presented, partner-sold revenue was not material.

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 sales of our hardware product, Spectacles.

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North America includes Mexico, the Caribbean, and Central America.

United States revenue was $ 1.0 billion, $ 752.9 million, and $ 643.0 million for the years ended December 31, 2019, 2018, and 2017, respectively.

United States revenue was $ 1.6 billion, $ 1.0 billion, and $ 752.9 million for the years ended December 31, 2020, 2019, and 2018, respectively.

Europe includes Russia and Turkey.

Net Loss per Share

We compute net loss per share using the two-class method required for multiple classes of common stock and participating securities.

Our participating securities include any shares issued on the early exercise of stock options subject to repurchase because holders of such shares have non-forfeitable dividend rights in the event a dividend is paid on common stock.

In March 2017, we completed our IPO in which we issued and sold 160.3 million shares of Class A common stock, inclusive of the over-allotment, at an initial public offering price of $ 17.00 per share and excluding shares sold in the IPO by certain of our existing stockholders.

We received net proceeds of $ 2.6 billion after deducting underwriting discounts and commissions of $ 68.1 million and other offering expenses of $ 14.7 million.

Following the IPO, we have three classes of authorized common stock – Class A common stock, Class B common stock, and Class C common stock.

Before our IPO, our participating securities also included Series D, E, F, and FP preferred stock and Series A, A-1, B, and C convertible preferred stock.

The rights, including the liquidation and dividend rights, of the Class A common stock and Class B common stock, and the Series D, E, F, and FP preferred stock were substantially identical, other than voting rights.

Accordingly, the Class A common stock, Class B common stock, and the Series D, E, F, and FP preferred stock shared equally in our net losses.

The holders of early exercised shares subject to repurchase and the holders of Series A, A-1, B, and C convertible preferred stock did not have a contractual obligation to share in our losses, and as a result our net losses were not allocated to these participating securities.

In connection with our IPO, our Series D, E, and F preferred stock converted on a one -to-one basis into Class B common stock, and our Series FP preferred stock converted on a one -to-one basis into Class C common stock.

The liquidation and dividend rights of the aforementioned preferred series are substantially identical to the rights of the common classes into which they converted.

Accordingly, we have presented the Series D, E, and F preferred stock outstanding before the IPO together with the Class B common stock, and the Series FP preferred stock outstanding before the IPO together with the Class C common stock for purposes of calculating net loss per share.

The prior period presentation has been adjusted to conform to our current period presentation.

Also in connection with our IPO, our Series A, A-1, B, and C preferred stock converted on a one -to-one basis into Class B common stock.

The shares of Class B common stock that resulted from the conversion of the Series A, A-1, B, and C preferred stock are weighted in the denominator of net loss per share for Class B common stock for the portion of the time outstanding subsequent to our IPO.

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.

Vested RSUs that have not been settled, including the

vested CEO award, and RSAs for which the risk of forfeiture has lapsed have been included in the appropriate common share class used to calculate basic 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 vested RSUs that have not been settled and 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, subject to meeting the criteria for using the treasury stock method in future periods.

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 conversion price of the Convertible Notes.

For the periods presented, our potentially dilutive shares relating to stock options, RSUs, RSAs, Convertible Notes, and common stock subject to repurchase 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.

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.

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, 2020, 2019, and 2018:

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common stockholders:

Included in the Class B common stock, for all periods presented, is Series D, E, and F preferred stock, which automatically converted to Class B common stock on the closing of the IPO.

Series A, A-1, B, and C preferred stock are included in Class B common stock on the automatic conversion of such shares to 163.0 million shares of Class B common stock on the closing of our IPO.

Included in the Class C common stock, for all periods presented, is Series FP preferred stock which automatically converted to Class C common stock on the closing of the IPO.

Additionally, 37.4 million shares of Class C common stock related to the CEO award are included in Class C common stock on the closing of our IPO.

Class A common stock includes the issuance of 160.3 million shares of Class A common stock issued by us in connection with our IPO.

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:

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Class A common stock has no voting rights , Class B common stock is entitled to one vote per share, and Class C common stock is 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 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, 2019, we did not declare any dividends.

On a liquidation event, as defined in our amended and restated 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.

For the year ended December 31, 20 20 , we did no t 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, 2020, there were 1,248,010,076 shares, 23,696,369 shares, and 231,626,943 shares of Class A common stock, Class B common stock, and Class C common stock, respectively, issued and outstanding.

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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

The following table summarizes the RSU award activity during the year ended December 31, 2019:

(in thousands, except per share data)

Unvested at December 31, 2018

Unvested at December 31, 2019

The total fair value of RSUs vested during the years ended December 31, 2019, 2018, and 2017 was $ 937.2 million, $ 884.1 million, and $ 966.0 million, respectively.

Total unrecognized compensation cost related to Pre-2017 RSUs was $ 34.5 million as of December 31, 2019 and is expected to be recognized over a weighted-average period of 0.8 years.

Total unrecognized compensation cost related to Post-2017 RSUs was $ 1.4 billion as of December 31, 2019 and is expected to be recognized over a weighted-average period of 2.9 years.

Additionally, we have 9.4 million and 22.4 million RSUs that are vested but have not yet settled as of December 31, 2019 and December 31, 2018, respectively.

These RSUs are primarily related to the CEO award.

Restricted Stock Awards

The following table summarizes the RSA activity during the year ended December 31, 2019:

Restricted Stock Units and Restricted Stock Awards

The following table summarizes the RSU and RSA activity during the year ended December 31, 2020:

(in thousands, except per share data)

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Unvested at December 31, 2020

The total fair value of RSAs vested during the years ended December 31, 2019, 2018 and 2017 was $ 27.5 million, $ 6.3 million, and $ 1.6 million, respectively.

Total unrecognized compensation cost related to RSAs was $ 74.2 million as of December 31, 2019 and is expected to be recognized over a weighted-average period of 3.3 years.

The total fair value of RSUs and RSAs vested during the years ended December 31, 2020, 2019, and 2018 was $ 969.4 million, $ 964.7 million, and $ 890.4 million, respectively.

All compensation cost related to Pre-2017 RSUs was recognized as of December 31, 2020.

Total unrecognized compensation cost related to Post-2017 Awards was $ 1.8 billion as of December 31, 2020 and is expected to be recognized over a weighted-average period of 2.6 years

Additionally, we had 9.4 million RSUs that were vested but have not yet settled as of December 31, 2019, respectively.

The balance as of December 31, 2019 was primarily related to the CEO Award .

RSUs related to the CEO Award were fully settled as of December 31, 2020 .

Stock Options

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Business Acquisitions and Divestitures

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:

(in thousands)

Net deferred tax liability

Other assets acquired and liabilities assumed, net

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.

2019 Acquisitions and Divestiture

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The allocation of acquisition date fair value is preliminary and is subject to additional information related to the assets and liabilities that existed as of the acquisition date.

The preliminary allocation of acquisition date fair value is estimated as follows:

The allocation of acquisition date fair value was as follows:

(in thousands)

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The associated goodwill and intangible assets are not deductible for tax purposes.

In June 2019, we divested our membership interest in Placed, LLC (“Placed”), a location-based measurement services company, to Foursquare Labs, Inc.

In June 2019, we divested our membership interest in Placed, a location-based measurement services company, to Foursquare Labs, Inc.

(“Foursquare”).

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The associated goodwill and intangible assets are deductible for tax purposes.

Additional Information on 2019 Acquisitions

For all acquisitions in 2019, we will grant a combined $ 71.3 million in the form of RSUs to certain continuing employees in exchange for future service.

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.

2018 Acquisitions

Acquisitions were not material for the year ended December 31, 2018.

2017 Acquisitions

In July 2017, we acquired Placed (originally Placed, Inc.).

The purpose of the acquisition was to enhance our measurement capabilities.

The total consideration was $ 185.9 million, of which $ 139.6 million represents purchase consideration and includes $ 135.2 million in cash paid to sellers, $ 3.9 million for the fair value of assumed options, and $ 0.5 million of liabilities due to the sellers.

The remaining $ 46.3 million of total consideration transferred represents compensation for future employment services.

The allocation of the total purchase consideration for this acquisition is estimated as follows:

(in thousands)

Customer relationships

Net deferred tax liability

Other assets acquired and liabilities assumed, net

The goodwill amount represents synergies related to our existing platform expected to be realized from this business combination and assembled workforce.

The associated goodwill and intangible assets are not deductible for tax purposes.

In May 2017, we acquired Zenly, a company that develops a location-based application that allows users to see where their friends are on a map.

The purpose of the acquisition was to enhance the functionality of our platform.

The total consideration paid was $ 213.3 million in cash, of which $ 196.1 million represents purchase consideration and includes $ 186.8 million in cash paid to the sellers and $ 9.3 million of liabilities due to the sellers.

The remaining $ 17.2 million of total consideration transferred represents compensation for future employment services.

The allocation of the total purchase consideration for this acquisition is estimated as follows:

(in thousands)

Net deferred tax liability

Other assets acquired and liabilities assumed, net

The goodwill amount represents synergies related to our existing platform expected to be realized from this business combination and assembled workforce.

The associated goodwill and intangible assets were not deductible for tax purposes as of the acquisition date .

Other Acquisitions

In March 2017, we acquired all outstanding shares of a company that operates a cloud hosted platform for building content online.

The company was acquired to enhance the functionality of our platform.

In June 2017, we acquired a component of a business from a social advertising software company that was integrated with our existing advertising platform and adds advertising tools to our advertising customers.

In the fourth quarter 2017, we acquired several companies to enhance our existing platform, technology, and workforce.

The total purchase consideration for these other acquisitions was $ 101.9 million, which included $ 95.3 million in cash and $ 6.6 million recorded in other liabilities on the consolidated balance sheets.

The allocation of the total purchase consideration for the above other acquisitions in 2017 is as follows:

(in thousands)

Customer relationships

Net deferred tax liability

Other assets acquired and liabilities assumed, net

The goodwill amount represents synergies related to our existing platform expected to be realized from these business combinations and assembled workforce.

Of the technology intangible assets, customer relationships, and goodwill in the above table, $ 40.1 million, $ 1.6 million, and $ 30.3 million, is deductible for tax purposes, respectively.

Additional Information on 2017 Acquisitions

For all acquisitions in 2017, we provided for a combined $ 171.1 million in the form of RSUs and RSAs to certain continuing employees of the companies in exchange for future service.

Additional Information on 2020 and 2019 Acquisitions

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.

Goodwill and Intangible Assets

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Goodwill acquired

Goodwill divested

Foreign currency translation

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Goodwill acquired

Goodwill divested

Foreign currency translation

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Acquired developed technology

Customer relationships

December 31, 2019

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Convertible Notes

In August 2019, we entered into a purchase agreement with certain counterparties for the sale of an aggregate of $ 1.265 billion principal amount of the Convertible 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 Convertible Notes consisted of a $ 1.1 billion initial placement and an over-allotment option that provided the initial purchasers of the Convertible Notes with the option to purchase an additional $ 165.0 million aggregate principal amount of the Convertible Notes, which was fully exercised.

The Convertible Notes were issued pursuant to an Indenture, dated August 9, 2019 (the “Indenture”).

The net proceeds from the

issuance of the Convertible Notes were $ 1.15 billion, net of debt issuance costs and cash used to purchase the capped call transactions (“ Capped Call Transactions ”) discussed below.

The Convertible 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 Convertible Notes mature on August 1, 2026 unless repurchased, redeemed, or converted in accordance with the terms prior to such date.

The Convertible 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 Convertible Notes, which is equivalent to an initial conversion price of approximately $ 22.81 (the “Conversion Price”) per share of our Class A common stock.

In April 2020, we entered into a purchase agreement for the sale of an aggregate of $ 1.0 billion principal amount of senior convertible notes (the “2025 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 2025 Notes consisted of an $ 850.0 million initial placement and an over-allotment option that provided the initial purchasers of the 2025 Notes with the option to purchase an additional $ 150.0 million aggregate principal amount of the 2025 Notes, which was fully exercised.

The 2025 Notes were issued pursuant to an Indenture, dated April 28, 2020 (the “Indenture”).

The net proceeds from the issuance of the 2025 Notes were $ 888.6 million, net of debt issuance costs and cash used to purchase the 2025 Capped Call Transactions discussed below.

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 the 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 (the “2025 Conversion Price”) per share of our Class A common stock.

The conversion rate is subject to customary adjustments for certain events as described in the Indenture.

We may redeem for cash all or any portion of the Convertible Notes, at our option, on or after August 6, 2023 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 Convertible Notes to be redeemed, plus accrued and unpaid interest.

Holders of the Convertible Notes may convert all or a portion of their Convertible Notes at their option prior to May 1, 2026, in multiples of $ 1,000 principal amounts, only under the following circumstances:

during any calendar quarter commencing after December 31, 2019, 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 Convertible 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 Convertible 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 Convertible Notes on such trading day;

on a notice of redemption, in which case we may be required to increase the conversion rate for the Convertible Notes so surrendered for conversion in connection with such redemption notice;

We may redeem for cash all or any portion of the 2025 Notes, at our option, on or after May 6, 2023 if the last reported sale price of our Class A common stock has been at least 130 % of the 2025 Conversion Price then in effect for at least 20 trading days at a redemption price equal to 100 % of the principal amount of the 2025 Notes to be redeemed, plus accrued and unpaid interest.

Holders of the 2025 Notes may convert all or a portion of their 2025 Notes at their option prior to February 1, 2025, 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 2025 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 2025 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 2025 Notes on such trading day;

on a notice of redemption, in which case we may be required to increase the conversion rate for the 2025 Notes so surrendered for conversion in connection with such redemption notice;

on the occurrence of specified corporate events.

On or after May 1, 2026, the Convertible 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 Convertible Notes who convert in connection with a make-whole fundamental change, as defined in the Indenture, 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 Convertible Notes may require us to repurchase all or a portion of the Convertible Notes at a price equal to 100 % of the principal amount of Convertible Notes, plus any accrued and unpaid interest, including any additional interest.

In accounting for the issuance of the Convertible Notes, we separated the Convertible Notes into liability and equity components.

On or after February 1, 2025, the 2025 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 2025 Notes who convert in connection with a make-whole fundamental change, as defined in the Indenture, 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 2025 Notes may require us to repurchase all or a portion of the 2025 Notes at a price equal to 100 % of the principal amount of 2025 Notes, plus any accrued and unpaid interest, including any additional interest.

In accounting for the issuance of the 2025 Notes, we separated the 2025 Notes into liability and equity components.

The carrying amount of the equity component was $ 289.9 million and was recorded as a debt discount, which is amortized to interest expense at an effective interest rate of 7.39 %.

We allocated $ 3.3 million of debt issuance costs to the equity component and the remaining debt issuance costs of $ 8.1 million were allocated to the liability component, which are amortized to interest expense under the effective interest rate method.

The equity component of the Convertible Notes will not be remeasured as long as it continues to meet the conditions for equity classification.

The Convertible Notes consisted of the following as of December 31, 2019:

The equity component of the 2025 Notes will not be remeasured as long as it continues to meet the conditions for equity classification.

In August 2019, we entered into a purchase agreement for the sale of an aggregate of $ 1.265 billion principal amount of senior convertible notes (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 2026 Capped Call Transactions discussed below.

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 (the “2026 Conversion Price”) per share of our Class A common stock.

The Convertible Notes consisted of the following:

December 31, 2020

December 31, 2019

(in thousands)

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Carrying amount of the equity component

As of December 31, 2019, the debt discount and debt issuance costs on the Convertible Notes will be amortized over the remaining period of approximately 6.6 years.

The following table details interest expense recognized related to the Convertible Notes for the year ended December 31, 2019:

(in thousands)

Contractual interest expense

Amortization of debt issuance costs

Amortization of debt discount

As of December 31, 2019, the if-converted value of the Convertible Notes did not exceed the principal amount.

As of December 31, 2020, the debt discount and debt issuance costs on the 2025 Notes and 2026 Notes will be amortized over the remaining period of approximately 4.3 years and 5.6 years, respectively.

Interest expense related to the amortization of debt discount and issuance costs was $ 81.4 million and $ 17.8 million for the years ended December 31, 2020 and 2019, respectively, while contractual interest expense was $ 11.2 million and $ 3.7 million for the years ended December 31, 2020 and 2019, respectively.

As neither of the Convertible Notes were outstanding in 2018, no interest expense related to these notes was recorded for the year ended December 31, 2018.

As of December 31, 2020, the if-converted value of the 2025 Notes and 2026 Notes exceeded the principal amount by $ 1,512 million and $ 1,309 million, respectively.

The sale price for conversion was satisfied as of December 31, 2020 and as a result, the Convertible Notes first became eligible for optional conversion during the first quarter of 2021.

Capped Call Transactions

In connection with the pricing of the Convertible Notes, we entered into separate Capped Call Transactions with certain counterparties at a net cost of $ 102.1 million.

The cap price of the Capped Call Transactions is initially $ 32.58 per share of our Class A common stock, representing a premium of 100 % above the last reported sale price of $ 16.29 per share of our Class A common stock on August 6, 2019, and is subject to certain adjustments under the terms of the Capped Call Transactions.

In connection with the pricing of the 2025 Notes and 2026 Notes, we entered into the 2025 Capped Call Transactions and the 2026 Capped Call Transactions (together, the “Capped Call Transactions”), respectively, with certain counterparties at a net cost of $ 100.0 million and $ 102.1 million, respectively.

The cap price of the 2025 Capped Call Transactions is initially $ 32.12 per share of our Class A common stock and the cap price of the 2026 Capped Call Transaction is $ 32.58 per share of our Class A common stock.

Both 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 price of $ 22.81 , up to $ 32.58 , on any conversion of the Convertible Notes or offset any cash payments we are required to make in excess of the principal amount of such converted Convertible Notes, as the case may be, with such reduction or offset subject to a cap.

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.

As of December 31, 2020, the Capped Call Transactions were in-the-money and will not be remeasured as long as they continue to meet the conditions for equity classification.

Credit Facility

In July 2016, we entered into a five-year senior unsecured revolving credit facility (“Credit Facility”) with lenders, some of which are affiliated with certain members of the underwriting syndicate for our IPO and convertible note offering,

that allows us to borrow up to $ 1.1 billion to fund working capital and general corporate-purpose expenditures.

In July 2016, we entered into a five-year senior unsecured revolving credit facility (“Credit Facility”) with lenders some of which are affiliated with certain members of the underwriting syndicate for our Convertible Notes offering, that allows us to borrow up to $ 1.1 billion to fund working capital and general corporate-purpose expenditures.

The loan bears interest at LIBO plus 0.75 %, as well as an annual commitment fee of 0.10 % on the daily undrawn balance of the facility.

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In August 2018 , we amended the Credit Facility to extend the term to August 2023 with respect to an aggregate of $1.05 billion of the $ 1.25 billion that we may borrow under the Credit Facility.

In August 2019, we amended the Credit Facility to revise the covenants that restrict the repurchase of equity securities and the incurrence of indebtedness to permit the Capped Call Transactions and issuance of the Convertible Notes.

A s of December 31, 2019, no amounts were outstanding under the Credit Facility .

A s of December 31, 2019, we had $ 25.5 million in the form of outstanding standby letters of credit.

In August 2019, we amended the Credit Facility to revise the covenants that restrict the repurchase of equity securities and the

incurrence of indebtedness to permit the 2026 Capped Call Transactions and issuance of the 2026 Notes.

In April 2020, we amended the Credit Facility to revise the covenants that restrict the incurrence of indebtedness to permit the 2025 Capped Call Transactions and issuance of the 2025 Notes.

As of December 31, 2020, no amounts were outstanding under the Credit Facility.

As of December 31, 2020, we had $ 25.4 million in the form of outstanding standby letters of credit.

Commitments and Contingencies

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The amount was recorded in general and administrative expense in our consolidated statements of operations.

See Note 17 for additional discussion.

The settlement agreement was preliminarily approved by the federal court in April 2020 and by the state court in November 2020.

The settlement amount was paid into escrow in December 2020 and will be released following final approval.

On April 3, 2018, BlackBerry Limited filed a lawsuit against us alleging that we infringe six of its patents.

This lawsuit was recently dismissed after four of the patents were ruled to be invalid;

however, Blackberry Limited has since appealed the ruling to the U.S.

Court of Appeals for the Federal Circuit.

Management believes we have meritorious defenses to these claims.

This lawsuit was dismissed in November 2019 after four of the patents were ruled to be invalid;

and in December 2020, the U.S.

Court of Appeals for the Federal Circuit affirmed the dismissal.

In 2017, Vaporstream, Inc.

filed a lawsuit against us alleging that we infringe a number of its patents.

We filed a motion to dismiss, which the court denied without prejudice to re-file after further factual development.

Later in 2017, we filed a motion for summary judgment.

On February 27, 2018, the court issued an order denying our motion for summary judgment.

On June 13, 2018, the court stayed the lawsuit pending the outcome of several challenges to the validity of the patents, filed by us at the U.S.

Patent and Trademark Office (“USPTO”).

On September 13, 2019, the court removed the stay with respect to several of Vaporstream's patents that the USPTO determined were not shown to be unpatentable.

A trial date has been scheduled for early 2020.

While management believes we have meritorious defenses to Vaporstream’s claims, the outcome of this matter remains uncertain.

In March 2020, we reached a preliminary agreement to settle the matter and in the first quarter of 2020 we recorded legal expense of $ 10.0 million related to the expected settlement since we concluded the loss was probable and estimable.

The amount was recorded in general and administrative expense in our consolidated statements of operations.

In April 2020, the case was dismissed pursuant to a settlement agreement.

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.

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The weighted-average remaining lease term (in years) and discount rate related to the operating leases were as follows:

December 31, 2019

For the Year Ended December 31,

Weighted-average remaining lease term

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As part of the adoption of Topic 842, we derecognized those assets and liabilities and recorded the difference as an adjustment to accumulated deficit at January 1, 2019.

These leases are included within the right-of-use asset and lease liability balances on our consolidated balance sheet as of December 31, 2019.

These leases are included within the right-of-use asset and lease liability balances on our consolidated balance sheet as of December 31, 2020 and 2019.

Other Information

Cash payments included in the measurement of our o perating lease liabilities were $ 66.3 million for the year ended December 31, 2019.

Lease liabilities arising from obtaining operating lease right-of-use assets were $ 35.2 million for the year ended December 31, 2019 .

Cash payments included in the measurement of our o perating lease liabilities were $ 73.3 million and $ 66.3 million for the years ended December 31, 2020 and 2019, respectively.

Lease liabilities arising from obtaining operating lease right-of-use assets were $ 36.2 million and $ 35.2 million for the years ended December 31, 2020 and 2019, respectively .

Fair Value Measurements

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Certificates of deposit

Gross unrealized losses in a continuous loss position for 12 months or longer are not material as of December 31, 2019 and 2018.

As of December 31, 2019, we considered any decreases in market value on our marketable securities to be temporary in nature and did no t consider any of our investments to be other-than-temporarily impaired.

Gross unrealized losses were not material as of December 31, 2020 and December 31, 2019, respectively.

As of December 31, 2020, we considered any decreases in fair value on our marketable securities to be driven by factors other than credit risk, including market risk.

All of our marketable securities have contractual maturities of less than one year.

We carry the Convertible Notes at face value less the unamortized discount and issuance costs on our consolidated balance sheets and present that fair value for disclosure purposes only.

As of December 31, 2019, the fair value of the Convertible Notes was $ 1.3 billion.

For certain non-marketable investments we have elected the fair value option, using Level 3 inputs, where changes in fair value are recorded in other income (expense), net.

Unrealized gains and losses related to these debt investments were not material for the period ended December 31, 2020.

As of December 31, 2020 the fair value of the debt investments was recorded within other assets and was not material.

W e carry the Convertible Notes at face value less the unamortized discount and issuance costs on our consolidated balance sheets and present that fair value for disclosure purposes only.

As of December 31, 2020, the fair value of the 2025 Notes and the 2026 Notes was $ 2.4 billion and $ 2.8 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 .

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Change in valuation allowance

corporate tax rate reduction

Differences between U.S.

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federal research & development credit benefit

corporate rate increase

Acquisitions and divestitures

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Tax credit carryforwards

Property and equipment

Lease liability

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Deferred tax liabilities:

Property and equipment

Convertible debt

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Net deferred taxes

“Other” was originally presented net in our Annual Report on Form 10-K for the period ending December 31, 2019, and is now separated into “Other Assets” and “Other Liabilities” for both comparative periods.

“Property and Equipment” for the year ended December 31, 2019 was originally presented on a standalone basis in our December 31, 2019 Annual Report, and is now included within “Other Liabilities”.

Income tax expense was $ 18.7 million for the year ended December 31, 2020, compared to a tax expense of $ 0.4 million for the year ended December 31, 2019.

The Tax Act made significant changes to the Code, including a corporate income tax rate decrease to 21 % effective for tax years beginning after December 31, 2017.

The Tax Act also introduced the global intangible low-taxed income (“GILTI”) provisions, which generally impose a tax on the net income of foreign corporate subsidiaries in excess of a deemed return on their tangible assets.

We recognize the tax on GILTI as an expense in the period the tax is incurred.

We have not provided deferred taxes related to temporary differences that on their reversal will affect the amount of income subject to GILTI in the period the tax is incurred.

Upon the adoption of ASU 2016-12 on January 1, 2019, we recognized a $ 90.9 million deferred tax asset and a $ 69.0 million deferred tax liability for operating lease liabilities and operating lease right-of-use assets, respectively, with offsetting $ 14.4 million and $ 7.5 million reductions to the deferred tax assets for accrued expenses and property and equipment, respectively.

Taken together on a net basis, there is no change to our total net deferred tax assets before valuation allowance as a result of these changes.

The issuance of the Convertible Notes in August 2019 resulted in a temporary difference between the carrying amount and tax basis of the Convertible Notes due to the allocation of debt proceeds and debt issuance costs between the liability and equity components.

This basis difference resulted in the recognition of a $ 92.1 million net deferred tax liability and an offsetting change to our valuation allowance, both of which were recorded to additional paid-in-capital on our consolidated balance sheets.

This increase was primarily driven by a discrete expense resulting from intra-entity transfers of intangible assets, partially offset by a discrete benefit resulting from a partial valuation allowance release on our deferred tax assets due to deferred tax liabilities originating from acquisitions.

On July 22, 2020 the U.K.

Finance Bill 2020 was enacted, increasing the U.K.

tax rate from 17 % to 19 % effective April 1, 2020.

This change in tax rate resulted in an increase to our U.K.

net deferred tax assets, which are predominantly loss carryforwards, before valuation allowance of $ 39.7 million, which was fully offset by an increase in our valuation allowance.

The issuance of the Convertible Notes in April 2020 and August 2019 resulted in a temporary difference between the carrying amount and tax basis of the Convertible Notes due to the allocation of debt proceeds and debt issuance costs between the liability and equity components.

This basis difference resulted in the recognition of a $ 69.9 million and $ 92.1 million net deferred tax liability recorded to additional paid-in-capital in 2020 and 2019, respectively, which is fully offset by a change to our valuation allowance, also recorded to additional paid-in-capital.

In June 2019, the United States Court of Appeals for the Ninth Circuit overturned the 2015 U.S.

Tax Court decision in Altera Corp.

Commissioner, thereby upholding the portion of the Treasury regulations issued under Section 482 of the Code, requiring related-party participants in a cost sharing arrangement to share stock-based compensation costs.

In June 2020, the U.S.

Supreme Court denied the taxpayer’s petition to review the Ninth Circuit’s decision.

As a result, we recorded a cumulative adjustment to our intercompany cost sharing transactions from prior years, which resulted in an immaterial reduction to our deferred tax assets, caused by the differences in tax rates in the impacted jurisdictions.

This reduction in our deferred tax assets resulted in an offsetting reduction to our valuation allowance.

As of December 31, 2020, we had an immaterial amount of unremitted earnings related to certain foreign subsidiaries.

We intend to continue to reinvest our foreign earnings indefinitely and do not expect to incur any significant taxes related to such amounts.

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, 2020, we had accumulated U.S.

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The remaining $ 3.8 billion can be carried forward indefinitely but is subject to an 80 % taxable income limitation.

The pre-Tax Act losses and state net operating loss carryforwards will begin to expire in 2031 and 2026 , respectively.

The pre-2018 federal and all state net operating loss carryforwards will begin to expire in 2031 and 2026 , respectively.

As of December 31, 2020, we had $ 2.1 billion of U.K.

net operating loss carryforwards that can be carried forward indefinitely.

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, 2020, we had accumulated U.S.

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We had valuation allowances against net deferred tax assets of $ 2.3 billion and $ 1.8 billion as of December 31, 2020 and 2019, respectively.

In 2019, the increase in valuation allowance attributable to the net increase in our deferred tax assets resulting from the loss from operations was partially offset by the release of valuation allowance in additional paid-in-capital related to the Convertible Note issuance.

In 2020, the increase in the valuation allowance was primarily attributable to a net increase in our deferred tax assets resulting from the loss from operations and windfall tax benefits from share-based compensation, which was partially offset by the release of valuation allowance in additional paid-in-capital related to the issuance of the 2025 Notes .

Uncertain Tax Positions

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Reductions for prior year tax positions

Changes due to lapse of statute of limitations

Changes due to foreign currency translation adjustments

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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 $ 1.5 million and $ 2.7 million that is included in other liabilities on our consolidated balance sheet as of December 31, 2019 and 2018, respectively.

We have net unrecognized tax benefits of $ 11.8 million and $ 1.5 million that are included in other liabilities on our consolidated balance sheet as of December 31, 2020 and 2019, 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 $ 12.3 million within our provision of income taxes at such time.

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During the year ended December 31, 20 20 , interest expense recorded related to uncertain tax positions was not material.

In June 2019, the United States Court of Appeals for the Ninth Circuit overturned the 2015 Tax Court decision in Altera Corp.

Commissioner, upholding the portion of the Treasury regulations issued under Section 482 of the Code requiring related-party participants in a cost sharing arrangement to share stock-based compensation costs.

In July 2019, the taxpayer filed a petition for an en banc rehearing before the Ninth Circuit, which was denied in November 2019.

The taxpayer has 90 days from that date to petition the U.S.

Supreme Court for review of the decision.

Depending on the final resolution of this matter, there is a reasonable possibility that there will be a significant impact on our gross unrecognized tax benefits.

As a result of the valuation allowance held against our deferred tax assets, we do not believe the final resolution will result in a material impact on our income tax expense, net deferred taxes, net unrecognized tax benefits, or consolidated financials.

The income taxes we pay are subject to review by taxing jurisdictions globally.

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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, 201 9 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 .

Accumulated Other Comprehensive Income (Loss)

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(in thousands)

Accrued infrastructure costs

Securities class actions legal charges

Accrued compensation and related expenses

Accrued infrastructure costs

Partner revenue share liability

Deferred revenue

Acquisition liability

Accrued tax liability

Securities class actions legal charges

Total accrued expenses and other current liabilities

Other liabilities at December 31, 2019 and 2018 consisted of the following:

As of December 31,

(in thousands)

Sublease liability

Deferred rent

Lease incentive liability

Total other liabilities

Non-Marketable Investments

We held investments in privately held companies with a carrying value of $ 55.0 million and $ 43.6 million as of December 31, 2019 and 2018, respectively.

Our share of gains and losses in equity method investments was not material for the years ended December 31, 2019, 2018, and 2017, and is included in other income (expense), net in our consolidated statements of operations.

We held investments in privately held companies with a carrying value of $ 169.5 million and $ 55.0 million as of December 31, 2020 and 2019, respectively, which consist primarily of equity securities.

Non-marketable investments are included within other assets on the consolidated balance sheet.

Such investments are reviewed periodically for impairments.

Impairment recorded for the year ended December 31, 2019 was not material.

We recorded impairments of $ 7.2 million for the year ended December 31, 2018 million within other income (expense), net in the consolidated statements of operations.

No impairments were recorded in the year ended December 31, 2017.

Additionally, we recognized gains on non-marketable investments of $ 20.8 million within other income (expense), net on the consolidated statement of operations.

We recorded impairments of $ 29.5 million for the year ended December 31, 2020 and $ 7.2 million for the year ended December 31, 2018, within other income (expense), net in the consolidated statements of operations.

The impairment recorded for the year ended December 31, 2019 was not material.

Additionally, we recognized gains on non-marketable investments of $ 42.4 million and $ 20.8 million for the years ended December 31, 2020 and 2019, respectively, within other income (expense), net on the consolidated statement of operations.

The gains on non-marketable investments for the year ended December 31, 2018 were not material.

Employee Benefit Plans

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During the years ended December 31, 2020, 2019, and 2018, we recognized expense of $ 18.4 million, $ 15.4 million, and $ 16.1 million, respectively, related to matching contributions.

Subsequent Events

On January 17, 2020, we reached a preliminary agreement to settle the securities class actions that arose following our IPO.

The preliminary settlement agreement was signed in January 2020 and provided for a resolution of all of the pending claims in the securities class actions for $ 187.5 million.

The agreement is subject to approval by the federal and state courts before which the securities class actions are pending.

The terms of the settlement include a full release of all claims against all defendants including Snap, its officers and directors, and the underwriters for our IPO.

We evaluated this subsequent event, concluding it provided additional evidence about a condition that existed as of December 31, 2019.

In the fourth quarter of 2019, we recorded legal expense, net of amounts directly covered by insurance, of $ 100.0 million for the expected

settlement of the securities class action s .

The amount was recorded in general and administrative expense in our consolidated statements of operations.

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 are not material to our consolidated financial statements for the current period or for the term of the agreement.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data