What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-04 compared with 2021-02-05 · 145 added, 203 removed, 283 unchanged (55% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs that involve significant risks and uncertainties.

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Financial Results

Cash used in operating activities was $(167.6) million in 2020, compared to $(305.0) million in 2019.

Free Cash Flow was $(225.5) million in 2020, compared to $(341.4) million in 2019.

Common shares outstanding plus shares underlying stock-based awards, including restricted stock units, restricted stock awards, and outstanding stock options, totaled 1,630 million at December 31, 2020, compared with 1,576 million one year ago.

Revenue increased 64% year-over-year to reach $4.1 billion in 2021.

Total costs and expenses excluding stock-based compensation and other payroll related tax expense, increased 42% to $3.6 billion in 2021.

Net loss improved by $456.9 million year-over-year to $(488.0) million in 2021.

Diluted net loss per share improved by 52% to $(0.31) in 2021, compared to $(0.65) in 2020.

Adjusted EBITDA improved by $571.5 million year-over-year to $616.7 million in 2021.

Cash provided by (used in) operating activities was $292.9 million in 2021, compared to $(167.6) million in 2020.

Capital expenditures were $69.9 million in 2021, compared to $57.8 million in 2020.

Free Cash Flow was $223.0 million in 2021, compared to $(225.5) million in 2020.

Cash, cash equivalents, and marketable securities were $3.7 billion as of December 31, 2021.

Revenue increased 46% to $2.5 billion in 2020, compared to $1.7 billion in 2019.

Total costs and expenses excluding stock-based compensation and related payroll tax expense increased 21% to $2.5 billion in 2020, compared to $2.1 billion in 2019.

Net loss decreased 9% to $(944.8) million in 2020, compared to $(1.0) billion in 2019.

Diluted net loss per share decreased 13% to $(0.65) in 2020, compared to $(0.75) in 2019.

Adjusted EBITDA increased 122% to $45.2 million in 2020, compared to $(202.2) million in 2019.

Common shares outstanding plus shares underlying stock-based awards, including restricted stock units, restricted stock awards, and outstanding stock options, totaled 1,702 million at December 31, 2021, compared to 1,630 million one year ago.

is a camera company.

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We assess the health of our business by measuring DAUs and ARPU because we believe that these metrics are important ways for both management and investors to understand engagement and monitor the performance of our platform.

We also measure ARPU because we believe that this metric helps our management and investors to assess the extent to which we are monetizing our service.

User Engagement

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Components of Results of Operations

We generate substantially all of our revenue through the sale of our advertising products, which primarily include Snap Ads and AR Ads, and measurement services, referred to as advertising revenue.

We generate substantially all of our revenue through the sale of our advertising products, which primarily include Snap Ads and AR Ads, referred to as advertising revenue.

Snap Ads may be subject to revenue sharing arrangements between us and the media partner.

We also generate revenue from sales of our hardware product, Spectacles.

We also generate revenue from the sales of hardware products.

This revenue is reported net of allowances for returns.

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Cost of revenue consists primarily of payments to third-party infrastructure partners for hosting our products, which include expenses related to storage, computing, and bandwidth costs.

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

In addition, cost of revenue includes advertising measurement services, and personnel-related costs, including salaries, benefits, and stock-based compensation expenses.

Cost of revenue also includes facilities and other supporting overhead costs, including depreciation and amortization, and inventory costs for Spectacles.

Cost of revenue also includes payments for content, developer, and advertiser partner costs.

In addition, cost of revenue includes third-party selling costs, personnel-related costs, including salaries, benefits, and stock-based compensation expenses.

Cost of revenue also includes facilities and other supporting overhead costs, including depreciation and amortization, and inventory costs.

Research and Development Expenses

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Interest Expense

Interest expense consists primarily of interest expense associated with our senior convertible notes, or the Convertible Notes, and commitment fees and amortization of financing costs related to our revolving credit facility.

Interest expense consists primarily of interest expense associated with our senior convertible notes, or the Convertible Notes, and commitment fees related to our revolving credit facility.

Other Income (Expense), Net

Other income (expense), net consists of realized gains and losses on sales of marketable securities, our portion of non-marketable investment income and losses, foreign currency transaction gains and losses, and gains and impairments on non-marketable investments.

Other income (expense), net also includes any gains or losses on divestitures of businesses.

Other income (expense), net consists of realized and unrealized gains and losses on marketable securities, foreign currency transaction gains and losses, and gains and impairment on strategic investments.

Income Tax Benefit (Expense)

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These foreign jurisdictions have different statutory tax rates than the United States.

Additionally, certain of our foreign earnings may also be taxable in the United States.

Additionally, certain of our foreign earnings may also be taxable in the

United States.

Accordingly, our effective tax rates will vary depending on the relative proportion of foreign to domestic income, use of tax credits, changes in the valuation of our deferred tax assets and liabilities, and changes in tax laws.

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depreciation and amortization;

stock-based compensation expense and related payroll tax expense;

stock-based compensation expense;

and payroll and other tax expense related to stock-based compensation;

and certain other non-cash or non-recurring items impacting net income (loss) from time to time.

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Additionally, we believe that Adjusted EBITDA is an important measure since we use third-party infrastructure partners to host our services and therefore we do not incur significant capital expenditures to support revenue-generating activities.

See “Selected Financial Data — Non-GAAP Financial Measures” for additional information and a reconciliation of net loss to Adjusted EBITDA.

See “Non-GAAP Financial Measures” for additional information and a reconciliation of net loss to Adjusted EBITDA.

Discussion of Results of Operations

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General and administrative

See “Selected Financial Data—Non-GAAP Financial Measures” of this Annual Report on Form 10-K for more information and for a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP.

See “Non-GAAP Financial Measures” of this Annual Report on Form 10-K for more information and for a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP.

The following table sets forth the components of our consolidated statements of operations data for each of the periods presented as a percentage of revenue:

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Revenue for the year ended December 31, 2021 increased $1,610.4 million compared to the same period in 2020.

Revenue increased due to a combination of growth in advertisers and advertising demand and optimization efficiencies, as well as a shift towards higher yielding products and regions.

Revenue increased due to a combination of growth in advertisers and auction-based advertising demand and optimization efficiencies.

Cost of Revenue

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Cost of revenue for the year ended December 31, 2021 increased $567.7 million compared to the same period in 2020.

The increase in cost of revenue primarily consisted of increased infrastructure costs of $96.7 million, attributable to DAU growth and increased user activity between the periods, net of infrastructure cost efficiencies.

The increase was also a result of higher revenue share due to both the overall increase in revenue and a higher mix of revenue subject to revenue share as well as higher content acquisition costs.

T he increase in cost of revenue was primarily driven by higher content costs, including Spotlight, which launched in the fourth quarter of 2020 as well as growth in revenue share due to the overall increase in revenue and higher proportion of revenue subject to revenue share.

The increases were also a result of increased infrastructure costs attributable to DAU growth net of infrastructure cost efficiencies and content review costs across the platform.

Research and Development Expenses

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Research and development expenses for the year ended December 31, 2021 increased $463.9 million compared to the same period in 2020.

The increase primarily consisted of an increase in personnel costs, driven by growth in research and development headcount that contributed to higher stock-based compensation expense, and changes to our cash compensation programs.

The increase was primarily driven by greater personnel expenses due to growth in research and development headcount, including increased cash- and stock-based compensation expenses .

Sales and Marketing Expenses

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Sales and marketing expenses for the year ended December 31, 2021 increased $237.3 million compared to the same period in 2020.

T he increase was primarily driven by increased marketing investments and an increase in personnel expenses due to the growth in sales and marketing headcount and stock-based compensation expense.

The increase was partially offset by the impact of lower travel and event-related spending due to COVID-19 related restrictions on these activities.

The increase was primarily driven by greater personnel expenses due to growth in sales and marketing headcount, including increased cash- and stock-based compensation expenses , as well as increased marketing investments.

General and Administrative Expenses

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2021 compared to 2020

General and administrative expenses for the year ended December 31, 2020 decreased $51.8 million compared to the same period in 2019.

The decrease was primarily due to the $100.0 million preliminary settlement of the securities class action in the prior period, partially offset by an increase in personnel expenses driven by an increase in headcount and changes to our cash compensation programs.

This decrease was also due to a lower cost per head driven by a decrease in stock-based compensation expense as well as the impact of lower travel and event-related spending due to COVID-19 related restrictions on these activities.

General and administrative expenses for the year ended December 31, 2021 increased $181.5 million compared to the same period in 2020.

The increase was primarily driven by greater personnel expenses due to growth in headcount, including increased cash- and stock-based compensation expenses, as well as an increase in professional service fees.

Interest Income

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(dollars in thousands)

(NM = Not Meaningful)

Interest Expense

2021 compared to 2020

Interest expense for the year ended December 31, 2020 increased $72.2 million, compared to the same period in 2019.

The increase in interest expense in the current period relates to the Convertible Notes.

Interest expense for the year ended December 31, 2021 decreased $79.6 million, compared to the same period in 2020 primarily due to the early adoption of ASU 2020-06 on January 1, 2021.

As a result of this adoption, we account for the Convertible Notes as a single liability, which eliminates the amortization of the debt discount.

Prior to January 1, 2021, the carrying amount of the equity component was recorded as a debt discount and amortized to interest expense.

Interest expense related to the amortization of debt issuance costs was $4.3 million for the year ended December 31, 2021, while interest expense related to the amortization of debt discount and issuance costs was $81.4 million for the year ended December 31, 2020.

Contractual interest expense was $8.9 million for the year ended December 31, 2021 and $11.2 million for the year ended December 31, 2020.

Other Income (Expense), Net

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(dollars in thousands)

(NM = Not Meaningful)

Other Income (Expense), Net

2021 compared to 2020

Other income, net for the year ended December 31, 2020 decreased $44.0 million, compared to other income, net for the same period in 2019.

Other income, net for the current year was primarily a result of gains on non-marketable investments partially offset by impairments of non-marketable investments.

Other income, net in the comparable period in 2019 was primarily a result of a gain of $39.9 million on the divestiture of Placed, LLC, or Placed, a location-based measurement services company, as well as gains on non-marketable investments.

Other income, net for the year ended December 31, 2021 increased $225.2 million, compared to other income, net for the same period in 2020.

Other income, net for the current year was primarily a result of $207.7 million of unrealized gains and $27.8 million of realized gains on strategic investments, and $59.4 million of unrealized gains on publicly traded securities reclassified from strategic investments to marketable securities in the fourth quarter.

This increase is partially offset by an induced conversion expense related to the Convertible Notes of $41.5 million .

Other income, net in the comparable period in 2020 was primarily a result of unrealized gains on strategic investments partially offset by impairments of strategic investments.

Income Tax Benefit (Expense)

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Income tax expense was $13.6 million for the year ended December 31, 2021, compared to $18.7 million for the same period in 2020.

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.

Our effective tax rate differs from the U.S.

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2021 compared to 2020

Net loss for the year ended December 31, 2020 was $944.8 million, compared to $1.0 billion for the same period in 2019.

Net loss for the year ended December 31, 2021 was $488.0 million, compared to $944.8 million for the same period in 2020.

Adjusted EBITDA for the year ended December 31, 2021 was $616.7 million, compared to $45.2 million for the same period in 2020.

The decrease in net loss was attributable to a legal expense of $100.0 million for the preliminary settlement agreement of securities class actions in the prior period, partially offset by a gain of $39.9 million on the divestiture of Placed recognized in the prior period.

The increase in Adjusted EBITDA was driven by increased revenues, partially offset by increased cost of revenue mainly due to higher infrastructure costs attributable to DAU growth and increased user activity between the periods.

For a discussion of the limitations associated with using Adjusted EBITDA rather than GAAP measures and a reconciliation of this measure to net loss, see “Selected Financial Data—Non-GAAP Financial Measures.”

Unaudited Quarterly Results of Operations Data

The following table sets forth the primary components of our unaudited quarterly consolidated statements of cash flows for each of the four quarters in the periods ended December 31, 2020 and December 31, 2019.

These unaudited quarterly statements of cash flows have been prepared on the same basis as our audited consolidated financial statements included in “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.

In the opinion of management, the financial information reflects all normal recurring adjustments necessary for the fair statement of results of operations for these periods.

This information should be read in conjunction with our consolidated financial statements and the related notes included in “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.

The results of historical periods are not necessarily indicative of the results in any future period.

September 30,

(in thousands)

Consolidated Statements of Cash Flows Data:

Net cash provided by (used in) operating activities

Net cash provided by (used in) investing activities

Net cash provided by (used in) financing activities

Change in cash, cash equivalents, and restricted cash

The following table sets forth the major components of our unaudited quarterly consolidated statements of operations for each of the four quarters in the periods ended December 31, 2020 and December 31, 2019.

These unaudited quarterly results of operations have been prepared on the same basis as our audited consolidated financial statements included in “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.

In the opinion of management, the financial information reflects all normal recurring adjustments necessary for the fair statement of results of operations for these periods.

The results of historical periods are not necessarily indicative of the results in any future period.

September 30,

(in thousands)

Consolidated Statements of

Operations Data:

Costs and expenses (1) (2) :

Cost of revenue

Research and development

Sales and marketing

General and administrative

Total costs and expenses

Operating loss

Interest income

Interest expense

Other income (expense), net

Loss before income taxes

Income tax benefit (expense)

Stock-based compensation expense included in the above line items:

September 30,

(in thousands)

Stock-based compensation expense:

Cost of revenue

Research and development

Sales and marketing

General and administrative

Depreciation and amortization expense included in the above line items:

September 30,

(in thousands)

Depreciation and amortization expense:

Cost of revenue

Research and development

Sales and marketing

General and administrative

The following table presents a reconciliation of Free Cash Flow to net cash used in operating activities, the most comparable GAAP financial measure, for each of the periods presented:

September 30,

(in thousands)

Reconciliation of Free Cash Flow:

Net cash provided by (used in) operating activities

Purchases of property and equipment

Free Cash Flow

The following table presents a reconciliation of Adjusted EBITDA to net loss, the most comparable GAAP financial measure, for each of the periods presented:

September 30,

(in thousands)

Reconciliation of Adjusted EBITDA:

Add (deduct):

Interest income

Interest expense

Other (income) expense, net

Income tax (benefit) expense

Depreciation and amortization

Stock-based compensation expense

Payroll tax expense related to stock-based compensation

Securities class actions legal charges

Adjusted EBITDA

The following table sets forth the components of our unaudited quarterly consolidated statements of operations for each of the periods presented as a percentage of revenue:

September 30,

Consolidated Statements of Operations Data:

Costs and expenses:

Cost of revenue

Research and development

Sales and marketing

General and administrative

Total costs and expenses

Operating loss

Interest income

Interest expense

Other income (expense), net

Loss before income taxes

Income tax benefit (expense)

The increase in Adjusted EBITDA was attributable to increased revenues, partially offset by increased cost of revenue primarily due to higher content acquisition costs between the periods.

The decreases in net loss were also partially offset by an increase in stock-based compensation expense.

For a discussion of the limitations associated with using Adjusted EBITDA rather than GAAP measures and a reconciliation of this measure to net loss, see “Non-GAAP Financial Measures.”

Liquidity and Capital Resources

Cash, cash equivalents, and marketable securities were $3.7 billion as of December 31, 2021, primarily consisting of cash on deposit with banks and highly liquid investments in U.S.

government and agency securities, corporate debt securities, certificates of deposit, and commercial paper.

government and agency securities, publicly traded equity securities, corporate debt securities, certificates of deposit, and commercial paper.

Our primary source of liquidity is cash generated through financing activities.

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We may contemplate and engage in merger and acquisition activity that could materially impact our liquidity and capital resource position.

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, or the 2025 Notes .

The net proceeds from the issuance of the 2025 Notes were $888.6 million, net of debt issuance costs and cash used to pay the costs of the capped call transactions, or the 2025 Capped Call Transactions, discussed further in Note 7 .

In 2021, we entered into various exchange agreements, or the Exchange Agreements, with certain holders of the convertible senior notes due in 2025, or the 2025 Notes, and the convertible senior notes due in 2026, or the 2026 Notes, pursuant to which we exchanged approximately $715.9 million principal amount of the 2025 Notes and approximately $426.5 million principal amount of the 2026 Notes for aggregate consideration of approximately 52.4 million shares of Class A common stock.

In April 2021, we entered into a purchase agreement for the sale of an aggregate of $1.15 billion principal amount of convertible senior notes due in 2027, or the 2027 Notes.

The net proceeds from the issuance of the 2027 Notes were $1.05

billion, net of debt issuance costs and the cash used to pay the costs of the capped call transactions, or the 2027 Capped Call Transactions discussed further in Note 7.

The 2027 Notes mature on May 1, 2027 unless repurchased, redeemed, or converted in accordance with their terms prior to such date.

The sale price for conversion was satisfied as of December 31, 2020 and as a result, the 2025 Notes first became eligible for optional conversion during the first quarter of 2021.

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, or the 2026 Notes .

The net proceeds from the issuance of the 2026 Notes were $1.15 billion, net of debt issuance costs and cash used to pay the costs of the capped call transactions, or the 2026 Capped Call Transactions, discussed further in Note 7 .

The 2027 Notes were not convertible as of December 31, 2021.

In April 2020, we entered into a purchase agreement for the sale of an aggregate of $1.0 billion principal amount of the 2025 Notes.

The net proceeds from the issuance of the 2025 Notes were $888.6 million, net of debt issuance costs and the cash used to pay the costs of the capped call transactions, or the 2025 Capped Call Transactions, discussed further in Note 7.

The 2025 Notes mature on May 1, 2025 unless repurchased, redeemed, or converted in accordance with their terms prior to such date.

The sale price requirement for conversion was satisfied as of December 31, 2021 and as a result, the 2025 Notes will continue to be eligible for optional conversion during the first quarter of 2022.

In August 2019, we entered into a purchase agreement for the sale of an aggregate of $1.265 billion principal amount of the 2026 Notes.

The net proceeds from the issuance of the 2026 Notes were $1.15 billion, net of debt issuance costs and the cash used to pay the costs of the capped call transactions, or the 2026 Capped Call Transactions, discussed further in Note 7.

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

The sale price for conversion was satisfied as of December 31, 2020 and as a result, the 2026 Notes first became eligible for optional conversion during the first quarter of 2021.

In July 2016, we entered into a five-year senior unsecured revolving credit facility, or the 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.

No origination fees were incurred at the closing of the Credit Facility.

In December 2016, the amount we are permitted to borrow under the Credit Facility was increased to $1.2 billion.

In February 2018, the amount we are permitted to borrow under the Credit Facility was increased to $1.25 billion.

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 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.

The sale price requirement for conversion was satisfied as of December 31, 2021 and as a result, the 2026 Notes will continue to be eligible for optional conversion during the first quarter of 2022.

In July 2016, we entered into a senior unsecured revolving credit facility, or the Credit Facility, with certain lenders, some of which are affiliated with certain members of the underwriting syndicate for our Convertible Notes offerings, to fund working capital and general corporate-purpose expenditures.

Since July 2016, we have amended the Credit Facility multiple times.

As of December 31, 2021, the Credit Facility has a maximum borrowing amount of $1.05 billion, 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 and terminates in August 2023.

As of December 31, 2021, no amounts were outstanding under the Credit Facility.

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(dollars in thousands)

Net cash used in operating activities

Net cash provided by (used in) operating activities

Net cash provided by (used in) investing activities

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Free Cash Flow (1)

For information on how we define and calculate Free Cash Flow and a reconciliation to net cash used in operating activities to Free Cash Flow, see “Selected Financial Data — Non-GAAP Financial Measures.”

Net Cash Used in Operating Activities

For information on how we define and calculate Free Cash Flow and a reconciliation to net cash used in operating activities to Free Cash Flow, see “Non-GAAP Financial Measures.”

Net Cash Provided By ( Used I n ) Operating Activities

2021 compared to 2020

Net cash used in operating activities decreased $137.3 million in the year ended December 31, 2020 compared to the same period in 2019.

Net cash used in operating activities was $167.6 million for the year ended December 31, 2020, resulting primarily from net loss, adjusted for non-cash items, including stock-based compensation expense of $770.2 million, depreciation and amortization expense of $86.7 million, and amortization of debt discount and issuance costs of $81.4 million.

Net cash used in operating activities was also driven by a $255.8 million increase in the accounts receivable balance due to an increase in revenue, partially offset by an increase in accrued expenses and other current liabilities of $108.6 million primarily due to the timing of payments.

Net Cash Used in Investing Activities

Net cash provided by operating activities was $292.9 million in the year ended December 31, 2021, as compared to net cash used in operations of $167.6 million in the year ended December 31, 2020, resulting primarily from our net loss, adjusted for non-cash items, including stock-based compensation expense of $1.1 billion and depreciation and amortization expense of $119.1 million, partially offset by gains on debt and equity securities, net of $289.1 million.

Net cash provided by operating activities for the year ended December 31, 2021 was also impacted by an increase in the accounts receivable balance of $333.0 million due to an increase in revenue compared to the prior period.

Net Cash Provided By (Used In) Investing Activities

2021 compared to 2020

Net cash used in investing activities was $729.9 million and $728.6 million for the years ended December 31, 2020 and 2019, respectively.

Our investing activities in the current period consisted primarily of the purchase of marketable securities of $3.5 billion, partially offset by the sales and maturities of marketable securities of $3.1 billion.

Net cash used in investing activities in the prior period consisted of the purchase of marketable securities of $2.5 billion partially offset by the sales and maturities of marketable securities of $1.8 billion.

Net cash provided by investing activities was $90.2 million for the year ended December 31, 2021, compared to net cash used in investing activities of $729.9 million for the same period in 2020.

Our investing activities in the year ended December 31, 2021 consisted of cash provided by the sales and maturities of marketable securities of $2.9 billion, partially offset by the purchase of marketable securities of $2.4 billion and cash paid for acquisitions of $310.9 million.

Net cash used in investing activities for the year ended December 31, 2020 consisted of cash used in the purchase of marketable securities of $3.5 billion, cash paid for acquisitions of $168.9 million, and cash used in strategic investments of $111.6 million, partially offset by the sales and maturities of marketable securities of $3.1 billion.

Net Cash Provided By Financing Activities

2021 compared to 2020

Net cash provided by financing activities was $922.8 million and $1.2 billion for the years ended December 31, 2020 and 2019, respectively.

Our financing activities in the current period consisted primarily of net proceeds of $888.6 million from the issuance of the 2025 Notes and the purchase of the 2025 Capped Call Transactions.

Net cash provided by financing activities in the prior periods consisted of net proceeds of $1.15 billion from the issuance of the 2026 Convertible Notes and the purchase of the 2026 Capped Call Transactions.

Net cash provided by financing activities was $1.1 billion and $0.9 billion for the years ended December 31, 2021 and 2020, respectively.

Our financing activities for the year ended December 31, 2021 consisted primarily of net proceeds of $1.1 billion from the issuance of the 2027 Notes, offset by the purchase of the 2027 Capped Call Transactions of $86.8 million.

Our financing activities for the year ended December 31, 2020 consisted primarily of net proceeds of $988.6 million from the issuance of the 2025 Notes, offset by the purchase of the 2025 Capped Call Transactions of $100.0 million.

Net cash provided by financing activities in all periods presented includes proceeds from the exercise of stock options.

Free Cash Flow

2021 compared to 2020

Free Cash Flow was $(225.5) million and $(341.4) million for the years ended December 31, 2020 and 2019, respectively, and was composed of net cash used in operating activities, resulting primarily from net loss, adjusted for non-cash items and changes in working capital.

Free Cash Flow also included purchases of property and equipment of $57.8 million and $36.5 million for the years ended December 31, 2020 and 2019, respectively.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements for any of the periods presented.

Free Cash Flow was $223.0 million for the year ended December 31, 2021 and was composed of net cash provided by operating activities, resulting primarily from net loss, adjusted for non-cash items and changes in working capital.

Free Cash Flow also included purchases of property and equipment of $69.9 million for the year ended December 31, 2021.

See “Non-GAAP Financial Measures.”

Free Cash Flow was $(225.5) million for the year ended December 31, 2020 and was composed of net cash used in operating activities, resulting primarily from net loss, adjusted for non-cash items and changes in working capital.

Free Cash Flow also included purchases of property and equipment of $57.8 million for the year ended December 31, 2020.

See “Non-GAAP Financial Measures.”

Non-GAAP Financial Measures

To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we use certain non-GAAP financial measures, as described below, to understand and evaluate our core operating performance.

These non-GAAP financial measures, which may be different than similarly titled measures used by other companies, are presented to enhance investors’ overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.

We use the non-GAAP financial measure of Free Cash Flow, which is defined as net cash provided by (used in) operating activities, reduced by purchases of property and equipment.

We believe Free Cash Flow is an important liquidity measure of the cash that is available, after capital expenditures, for operational expenses and investment in our business and is a key financial indicator used by management.

Additionally, we believe that Free Cash Flow is an important measure since we use

third-party infrastructure partners to host our services and therefore we do not incur significant capital expenditures to support revenue generating activities.

Free Cash Flow is useful to investors as a liquidity measure because it measures our ability to generate or use cash.

Once our business needs and obligations are met, cash can be used to maintain a strong balance sheet and invest in future growth.

We use the non-GAAP financial measure of Adjusted EBITDA, which is defined as net income (loss);

excluding interest income;

interest expense;

other income (expense), net;

income tax benefit (expense);

depreciation and amortization;

stock-based compensation expense;

and payroll and other tax expense related to stock-based compensation;

and certain other non-cash or non-recurring items impacting net income (loss) from time to time.

We believe that Adjusted EBITDA helps identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude in Adjusted EBITDA.

We believe that both Free Cash Flow and Adjusted EBITDA provide useful information about our financial performance, enhance the overall understanding of our past performance and future prospects, and allow for greater transparency with respect to key metrics used by our management for financial and operational decision-making.

We are presenting the non-GAAP measures of Free Cash Flow and Adjusted EBITDA to assist investors in seeing our financial performance through the eyes of management, and because we believe that these measures provide an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry.

These non-GAAP financial measures should not be considered in isolation from, or as substitutes for, financial information prepared in accordance with GAAP.

There are a number of limitations related to the use of these non-GAAP financial measures compared to the closest comparable GAAP measure.

Some of these limitations are that:

Free Cash Flow does not reflect our future contractual commitments.

Adjusted EBITDA excludes certain recurring, non-cash charges such as depreciation of fixed assets and amortization of acquired intangible assets and, although these are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future;

Adjusted EBITDA excludes stock-based compensation expense and payroll and other tax expense related to stock-based compensation, which have been, and will continue to be for the foreseeable future, significant recurring expenses in our business and an important part of our compensation strategy;

Adjusted EBITDA excludes income tax expense.

The following table presents a reconciliation of Free Cash Flow to net cash used in operating activities, the most comparable GAAP financial measure, for each of the periods presented:

Year Ended December 31,

(in thousands)

Free Cash Flow reconciliation:

Net cash provided by (used in) operating activities

Purchases of property and equipment

Free Cash Flow

The following table presents a reconciliation of Adjusted EBITDA to net loss, the most comparable GAAP financial measure, for each of the periods presented:

Year Ended December 31,

(in thousands)

Adjusted EBITDA reconciliation:

Add (deduct):

Interest income

Interest expense

Other (income) expense, net

Income tax (benefit) expense

Depreciation and amortization

Stock-based compensation expense

Payroll and other tax expense related to stock-based compensation

Securities class actions legal charges (1)

Adjusted EBITDA

Securities class actions legal charges in the fourth quarter of 2019 were related to a preliminary agreement to settle the securities class actions that arose following our initial public offering in 2017.

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

We recorded legal settlement expense, net of amounts directly covered by insurance, of $100.0 million.

These charges are non-recurring and not reflective of underlying trends in our business.

Contingencies

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Should any of these estimates and assumptions change or prove to be incorrect, it could have a material impact on our results of operations, financial position, and cash flows.

The following table summarizes our contractual obligations as of December 31, 2020:

(2022 and 2023)

(2024 and 2025)

(in thousands)

Hosting commitments

Lease commitments

Other commitments

Total contractual commitments

For additional discussion on our leases, hosting, and other purchase commitments, see Note 8 and Note 9 to our consolidated financial statements included in “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.

In January 2017, we entered into the Google Cloud Platform License Agreement.

Under the agreement, we were granted a license to access and use certain cloud services.

The agreement has an initial term of five years and we are required to purchase at least $400.0 million of cloud services in each year of the agreement.

For each of the first four years, up to 15% of this amount may be moved to a subsequent year.

If we fail to meet the minimum purchase commitment during any year, we are required to pay the difference.

In March 2016, we entered into the AWS Enterprise Agreement for the use of cloud services from Amazon Web Services, Inc.

We are committed to spend an aggregate of $1.1 billion between January 2017 and December 2022 on AWS services ($90.0 million in 2018, $150.0 million in 2019, $215.0 million in 2020, $280.0 million in 2021, and $349.0 million in 2022).

If we fail to meet the minimum purchase commitment during any year, we are required to pay the difference.

Any such payment may be applied to future use of AWS services during the term, although it will not count towards meeting the future minimum purchase commitments.

We have non-cancelable contractual agreements primarily related to the hosting of our data storage processing, storage, and other computing services, as well as lease, content and developer partner, and other commitments.

We had $2.7 billion in commitments, as of December 31, 2021, primarily due within three years.

Critical Accounting Policies and Estimates

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Stock-Based Compensation

In the year ended December 31, 2020, total stock-based compensation expense recognized was $770.2 million.

In the year ended December 31, 2021, total stock-based compensation expense recognized was $1.1 billion.

We have granted stock-based awards consisting primarily of restricted stock units, or RSUs, restricted stock awards, or RSAs, and to a lesser extent, stock options to employees, members of our board of directors, and non-employee advisors.

The substantial majority of our stock-based awards have been made to employees.

RSUs granted before January 1, 2017, or Pre-2017 RSUs, included both service-based and performance conditions to vest in the underlying common stock.

The service-based condition for the majority of these awards is satisfied over four years.

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 in stock-based compensation expense.

All RSUs and RSAs granted after December 31, 2016, or Post-2017 Awards, vest on the satisfaction of only service-based conditions.

The service condition for Post-2017 Awards granted prior to February 2018 is generally satisfied over four years, 10% after the first year of service, 20% over the second year, 30% over the third year, and 40% over the fourth year.

The service condition for Post-2017 Awards granted after February 2018 is generally satisfied in equal monthly or quarterly installments over three or four years.

RSUs vest and RSAs lapse to a forfeiture condition on the satisfaction of service conditions.

The service conditions for RSUs and RSAs granted prior to February 2018 is generally satisfied over four years, 10% after the first year of service, 20% over the second year, 30% over the third year, and 40% over the fourth year.

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.

We account for stock-based employee compensation under the fair value recognition and measurement provisions, in accordance with applicable accounting standards, which requires stock-based awards to be measured based on the grant date fair value.

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Restricted Stock Units and Restricted Stock Awards

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

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

On the closing of the IPO, our CEO received the 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 on the closing of the IPO, net of shares withheld to satisfy tax withholding obligations.

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

As of December 31, 2020, all shares subject to the CEO award have been settled.

As of December 31, 2021, total unrecognized compensation cost related to outstanding RSUs and RSAs was $2.0 billion and is expected to be recognized over a weighted-average period of 2.2 years.

Business Combinations and Valuation of Goodwill and Other Acquired Intangible Assets

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Convertible Notes

We account for the Convertible Notes as separate liability and equity components.

The carrying amount of the liability component is calculated by measuring the fair value of a similar liability that does not have an associated convertible feature.

The carrying amount of the equity component representing the conversion option is calculated by deducting the fair value of the liability component from the principal amount of the Convertible Notes as a whole.

Prior to January 1, 2021, we accounted for the 2025 Notes and the 2026 Notes as separate liability and equity components.

On issuance, the carrying amount of the liability component was calculated by measuring the fair value of a similar liability that did not have an associated convertible feature.

The carrying amount of the equity component representing the conversion option was calculated by deducting the fair value of the liability component from the principal amount of the Convertible Notes as a whole.

We estimated the fair value of the liability and equity components using a convertible bond model, which includes subjective assumptions such as the expected term, expected volatility, and the interest rate of a similar non-convertible debt instrument.

These assumptions involve inherent uncertainties and management judgement.

These assumptions involved inherent uncertainties and management judgement.

Effective January 1, 2021, we early adopted Accounting Standards Update, or ASU, 2020-06 using the modified retrospective approach.

As a result, the 2025 Notes and 2026 Notes are each accounted for as a single liability measured at its amortized cost, as no other embedded features require bifurcation and recognition as derivatives.

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.

Loss Contingencies

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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 7. Management’s Discussion and Analysis