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2019-12-31

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2020

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                 to                

Commission File Number: 001-38017

 

SNAP INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

45-5452795

(State or other jurisdiction of

incorporation or organizations)

 

(I.R.S. Employer

Identification Number)

 

2772 Donald Douglas Loop North

Santa Monica, California 90405

(Address of principal executive offices, including zip code)

(310) 399-3339

(Registrant's telephone, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A Common Stock, par value $0.00001 per share

SNAP

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.      

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 

Class

 

Number of Shares Outstanding

Class A common stock, $0.00001 par value

 

1,188,374,911 shares outstanding as of April 17, 2020

Class B common stock, $0.00001 par value

 

24,279,209 shares outstanding as of April 17, 2020

Class C common stock, $0.00001 par value

 

232,782,607 shares outstanding as of April 17, 2020

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

 

 

 

Note Regarding Forward-Looking Statements

 

3

Note Regarding User Metrics and Other Data

 

4

 

 

 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

Item 1.

 

Consolidated Financial Statements

 

5

 

 

Consolidated Statements of Cash Flows

 

5

 

 

Consolidated Statements of Operations

 

6

 

 

Consolidated Statements of Comprehensive Income (Loss)

 

7

 

 

Consolidated Balance Sheets

 

8

 

 

Consolidated Statements of Stockholders’ Equity

 

9

 

 

Notes to Consolidated Financial Statements

 

10

Item 2.

 

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

 

23

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

36

Item 4.

 

Controls and Procedures

 

37

 

 

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

38

Item 1A.

 

Risk Factors

 

38

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

68

Item 3.

 

Defaults Upon Senior Securities

 

68

Item 4.

 

Mine Safety Disclosures

 

68

Item 5.

 

Other Information

 

68

Item 6.

 

Exhibits

 

69

Signatures

 

 

 

70

 

Snap Inc., “Snapchat,” and our other registered and common-law trade names, trademarks, and service marks appearing in this Quarterly Report on Form 10-Q are the property of Snap Inc. or our subsidiaries.

 

2


 

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this report, including statements regarding guidance, our future results of operations or financial condition, business strategy and plans, user growth and engagement, product initiatives, and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “going to,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would” or the negative of these words or other similar terms or expressions. We caution you that the foregoing may not include all of the forward-looking statements made in this report.

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. These forward-looking statements are subject to risks, uncertainties, and other factors described in “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, including among other things:

 

our financial performance, including our revenues, cost of revenues, operating expenses, and our ability to attain and sustain profitability;

 

our ability to generate and sustain positive cash flow;

 

our ability to attract and retain users and publishers;

 

our ability to attract and retain advertisers;

 

our ability to compete effectively with existing competitors and new market entrants;

 

our ability to effectively manage our growth and future expenses;

 

our ability to comply with modified or new laws and regulations applying to our business;

 

our ability to maintain, protect, and enhance our intellectual property;

 

our ability to successfully expand in our existing market segments and penetrate new market segments;

 

our ability to attract and retain qualified employees and key personnel;

 

our ability to repay outstanding debt;

 

future acquisitions of or investments in complementary companies, products, services, or technologies; and

 

the potential adverse impact of the COVID-19 pandemic on our business, operations, and the markets and communities in which we and our partners, advertisers, and users operate.

Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. And while we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this report to reflect events or circumstances after the date of this report or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, dispositions, joint ventures, restructurings, legal settlements, or investments.

Investors and others should note that we may announce material business and financial information to our investors using our investor relations website (investor.snap.com), filings with the U.S. Securities and Exchange Commission, or SEC, webcasts, press releases, and conference calls. We use these mediums, including Snapchat and our website, to communicate with our members and the public about our company, our products, and other issues. It is possible that the information that we make available may be deemed to be material information. We therefore encourage investors and others interested in our company to review the information that we make available on our website.

3


 

NOTE REGARDING USER METRICS AND OTHER DATA

We define a Daily Active User, or DAU, as a registered Snapchat user who opens the Snapchat application at least once during a defined 24-hour period. We calculate average DAUs for a particular quarter by adding the number of DAUs on each day of that quarter and dividing that sum by the number of days in that quarter. DAUs are broken out by geography because markets have different characteristics. We define average revenue per user, or ARPU, as quarterly revenue divided by the average DAUs. For purposes of calculating ARPU, revenue by user geography is apportioned to each region based on our determination of the geographic location in which advertising impressions are delivered, as this approximates revenue based on user activity. This allocation differs from our components of revenue disclosure in the notes to our consolidated financial statements, where revenue is based on the billing address of the advertising customer. For information concerning these metrics as measured by us, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Unless otherwise stated, statistical information regarding our users and their activities is determined by calculating the daily average of the selected activity for the most recently completed quarter included in this report.

While these metrics are determined based on what we believe to be reasonable estimates of our user base for the applicable period of measurement, there are inherent challenges in measuring how our products are used across large populations globally. For example, there may be individuals who have unauthorized or multiple Snapchat accounts, even though we forbid that in our Terms of Service and implement measures to detect and suppress that behavior. We have not determined the number of such multiple accounts.

Changes in our products, infrastructure, mobile operating systems, or metric tracking system, or the introduction of new products, may impact our ability to accurately determine active users or other metrics and we may not determine such inaccuracies promptly. We also believe that we don’t capture all data regarding each of our active users. Technical issues may result in data not being recorded from every user’s application. For example, because some Snapchat features can be used without internet connectivity, we may not count a DAU because we don’t receive timely notice that a user has opened the Snapchat application. This undercounting may grow as we grow in Rest of World markets where users may have poor connectivity. We do not adjust our reported metrics to reflect this underreporting. We believe that we have adequate controls to collect user metrics, however, there is no uniform industry standard. We continually seek to identify these technical issues and improve both our accuracy and precision, including ensuring that our investors and others can understand the factors impacting our business, but these and new issues may continue in the future, including if there continues to be no uniform industry standard.

Some of our demographic data may be incomplete or inaccurate. For example, because users self-report their dates of birth, our age-demographic data may differ from our users’ actual ages. And because users who signed up for Snapchat before June 2013 were not asked to supply their date of birth, we exclude those users and estimate their ages based on a sample of the self-reported ages we do have. If our active users provide us with incorrect or incomplete information regarding their age or other attributes, then our estimates may prove inaccurate and fail to meet investor expectations.

In the past we have relied on third-party analytics providers to calculate our metrics, but today we rely primarily on our analytics platform that we developed and operate. We count a DAU only when a user opens the application and only once per user per day. We believe this methodology more accurately measures our user engagement. We have multiple pipelines of user data that we use to determine whether a user has opened the application during a particular day, and thus is a DAU. This provides redundancy in the event one pipeline of data were to become unavailable for technical reasons, and also gives us redundant data to help measure how users interact with our application.

If we fail to maintain an effective analytics platform, our metrics calculations may be inaccurate. We regularly review, have adjusted in the past, and are likely in the future to adjust our processes for calculating our internal metrics to improve their accuracy. As a result of such adjustments, our DAUs or other metrics may not be comparable to those in prior periods. Our measures of DAUs may differ from estimates published by third parties or from similarly titled metrics of our competitors due to differences in methodology or data used.

4


 

PART I - FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

Snap Inc.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

Three Months Ended March 31,

 

 

2020

 

 

2019

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

$

(305,936

)

 

$

(310,407

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

21,204

 

 

 

23,319

 

Stock-based compensation

 

172,049

 

 

 

162,556

 

Deferred income taxes

 

(394

)

 

 

(266

)

Amortization of debt discount and issuance costs

 

11,563

 

 

 

 

Other

 

10,424

 

 

 

(1,917

)

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

 

 

 

 

 

 

 

Accounts receivable, net of allowance

 

92,892

 

 

 

71,870

 

Prepaid expenses and other current assets

 

(12,867

)

 

 

271

 

Operating lease right-of-use assets

 

8,716

 

 

 

9,812

 

Other assets

 

(1,155

)

 

 

(368

)

Accounts payable

 

5,734

 

 

 

3,090

 

Accrued expenses and other current liabilities

 

17,910

 

 

 

(14,323

)

Operating lease liabilities

 

(13,994

)

 

 

(10,470

)

Other liabilities

 

137

 

 

 

655

 

Net cash provided by (used in) operating activities

 

6,283

 

 

 

(66,178

)

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

(10,891

)

 

 

(11,814

)

Non-marketable investments

 

(35,500

)

 

 

(2,250

)

Purchases of marketable securities

 

(552,675

)

 

 

(525,520

)

Sales of marketable securities

 

217,958

 

 

 

 

Maturities of marketable securities

 

752,685

 

 

 

458,627

 

Other

 

 

 

 

29

 

Net cash provided by (used in) investing activities

 

371,577

 

 

 

(80,928

)

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from the exercise of stock options

 

3,130

 

 

 

5,596

 

Net cash provided by financing activities

 

3,130

 

 

 

5,596

 

Change in cash, cash equivalents, and restricted cash

 

380,990

 

 

 

(141,510

)

Cash, cash equivalents, and restricted cash, beginning of period

 

521,260

 

 

 

388,974

 

Cash, cash equivalents, and restricted cash, end of period

$

902,250

 

 

$

247,464

 

Supplemental disclosures

 

 

 

 

 

 

 

Cash paid for income taxes, net

$

808

 

 

$

320

 

Cash paid for interest

 

4,899

 

 

 

358

 

 

See Notes to Consolidated Financial Statements.

 

5


 

Snap Inc.

Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)

 

 

Three Months Ended March 31,

 

 

2020

 

 

2019

 

Revenue

$

462,478

 

 

$

320,426

 

Costs and expenses:

 

 

 

 

 

 

 

Cost of revenue

 

253,410

 

 

 

203,767

 

Research and development

 

238,613

 

 

 

216,185

 

Sales and marketing

 

122,205

 

 

 

97,882

 

General and administrative

 

134,614

 

 

 

118,653

 

Total costs and expenses

 

748,842

 

 

 

636,487

 

Operating loss

 

(286,364

)

 

 

(316,061

)

Interest income

 

8,589

 

 

 

7,816

 

Interest expense

 

(15,113

)

 

 

(756

)

Other income (expense), net

 

(12,389

)

 

 

(1,127

)

Loss before income taxes

 

(305,277

)

 

 

(310,128

)

Income tax benefit (expense)

 

(659

)

 

 

(279

)

Net loss

$

(305,936

)

 

$

(310,407

)

Net loss per share attributable to Class A, Class B, and Class C

   common stockholders (Note 3):

 

 

 

 

 

 

 

Basic

$

(0.21

)

 

$

(0.23

)

Diluted

$

(0.21

)

 

$

(0.23

)

Weighted average shares used in computation of net loss per share:

 

 

 

 

 

 

 

Basic

 

1,426,305

 

 

 

1,340,615

 

Diluted

 

1,426,305

 

 

 

1,340,615

 

 

See Notes to Consolidated Financial Statements.

6


 

Snap Inc.

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)

 

 

Three Months Ended March 31,

 

 

2020

 

 

2019

 

Net loss

$

(305,936

)

 

$

(310,407

)

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

Unrealized gain (loss) on marketable securities, net of tax

 

3,694

 

 

 

309

 

Foreign currency translation

 

(7,163

)

 

 

(3,524

)

Total other comprehensive income (loss), net of tax

 

(3,469

)

 

 

(3,215

)

Total comprehensive income (loss)

$

(309,405

)

 

$

(313,622

)

 

See Notes to Consolidated Financial Statements.

7


 

Snap Inc.

Consolidated Balance Sheets

(in thousands, except par value)

 

 

March 31,

2020

 

 

December 31,

2019

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

901,342

 

 

$

520,317

 

Marketable securities

 

1,180,533

 

 

 

1,592,488

 

Accounts receivable, net of allowance

 

394,053

 

 

 

492,194

 

Prepaid expenses and other current assets

 

51,943

 

 

 

38,987

 

Total current assets

 

2,527,871

 

 

 

2,643,986

 

Property and equipment, net

 

173,751

 

 

 

173,667

 

Operating lease right-of-use assets

 

267,479

 

 

 

275,447

 

Intangible assets, net

 

83,900

 

 

 

92,121

 

Goodwill

 

756,389

 

 

 

761,153

 

Other assets

 

89,120

 

 

 

65,550

 

Total assets

$

3,898,510

 

 

$

4,011,924

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

$

54,068

 

 

$

46,886

 

Operating lease liabilities

 

40,189

 

 

 

42,179

 

Accrued expenses and other current liabilities

 

428,934

 

 

 

410,610

 

Total current liabilities

 

523,191

 

 

 

499,675

 

Convertible senior notes, net

 

903,339

 

 

 

891,776

 

Operating lease liabilities, noncurrent

 

289,754

 

 

 

303,178

 

Other liabilities

 

57,319

 

 

 

57,382

 

Total liabilities

 

1,773,603

 

 

 

1,752,011

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Class A non-voting common stock, $0.00001 par value. 3,000,000 shares

   authorized, 1,160,127 shares issued and outstanding at December 31, 2019, and

   3,000,000 shares authorized, 1,182,527 shares issued and outstanding

   at March 31, 2020.

 

12

 

 

 

12

 

Class B voting common stock, $0.00001 par value. 700,000 shares authorized,

   24,522 shares issued and outstanding at December 31, 2019, and 700,000 shares

   authorized, 24,279 shares issued and outstanding at March 31, 2020.

 

 

 

 

 

Class C voting common stock, $0.00001 par value. 260,888 shares authorized,

   231,147 shares issued and outstanding at December 31, 2019, and 260,888 shares

   authorized, 232,783 shares issued and outstanding at March 31, 2020.

 

2

 

 

 

2

 

Additional paid-in capital

 

9,380,435

 

 

 

9,205,256

 

Accumulated other comprehensive income (loss)

 

(2,896

)

 

 

573

 

Accumulated deficit

 

(7,252,646

)

 

 

(6,945,930

)

Total stockholders’ equity

 

2,124,907

 

 

 

2,259,913

 

Total liabilities and stockholders’ equity

$

3,898,510

 

 

$

4,011,924

 

 

See Notes to Consolidated Financial Statements.

 

8


 

Snap Inc.

Consolidated Statements of Stockholders’ Equity

(in thousands)

(unaudited)

 

 

Three Months Ended March 31,

 

 

2020

 

 

2019

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

Class A non-voting common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

1,160,127

 

 

$

12

 

 

 

999,304

 

 

$

10

 

Shares issued in connection with exercise of stock options under stock-based compensation plans

 

396

 

 

 

 

 

 

1,260

 

 

 

 

Issuance of Class A non-voting common stock for vesting of restricted stock units and restricted stock awards, net

 

21,759

 

 

 

 

 

 

13,382

 

 

 

 

Conversion of Class B voting common stock to Class A non-voting common stock

 

245

 

 

 

 

 

 

43,189

 

 

 

1

 

Balance, end of period

 

1,182,527

 

 

 

12

 

 

 

1,057,135

 

 

 

11

 

Class B voting common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

24,522

 

 

 

 

 

 

93,846

 

 

 

1

 

Shares issued in connection with exercise of stock options under stock-based compensation plans

 

2

 

 

 

 

 

 

650

 

 

 

 

Issuance of Class B voting common stock for vesting of restricted stock units, net

 

 

 

 

 

 

 

203

 

 

 

 

Conversion of Class B voting common stock to Class A non-voting common stock

 

(245

)

 

 

 

 

 

(43,189

)

 

 

 

Balance, end of period

 

24,279

 

 

 

 

 

 

51,510

 

 

 

1

 

Class C voting common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

231,147

 

 

 

2

 

 

 

224,611

 

 

 

2

 

Issuance of Class C voting common stock for settlement of restricted stock units, net

 

1,636

 

 

 

 

 

 

1,676

 

 

 

 

Balance, end of period

 

232,783

 

 

 

2

 

 

 

226,287

 

 

 

2

 

Additional paid-in capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

 

 

9,205,256

 

 

 

 

 

 

8,220,417

 

Stock-based compensation expense

 

 

 

 

172,049

 

 

 

 

 

 

162,556

 

Shares issued in connection with exercise of stock options under stock-based compensation plans

 

 

 

 

3,130

 

 

 

 

 

 

5,635

 

Balance, end of period

 

 

 

 

9,380,435

 

 

 

 

 

 

8,388,608

 

Accumulated deficit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

 

 

(6,945,930

)

 

 

 

 

 

(5,912,578

)

Cumulative-effect adjustment from accounting changes

 

 

 

 

(780

)

 

 

 

 

 

308

 

Net loss

 

 

 

 

(305,936

)

 

 

 

 

 

(310,407

)

Balance, end of period

 

 

 

 

(7,252,646

)

 

 

 

 

 

(6,222,677

)

Accumulated other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

 

 

573

 

 

 

 

 

 

3,147

 

Other comprehensive income (loss), net of tax

 

 

 

 

(3,469

)

 

 

 

 

 

(3,215

)

Balance, end of period

 

 

 

 

(2,896

)

 

 

 

 

 

(68

)

Total stockholders’ equity

 

1,439,589

 

 

$

2,124,907

 

 

 

1,334,932

 

 

$

2,165,877

 

 

See Notes to Consolidated Financial Statements.

9


 

Snap Inc.

Notes to Consolidated Financial Statements

 

1. Description of Business and Summary of Significant Accounting Policies

Snap Inc. is a camera company.

Snap Inc. (“we,” “our,” or “us”) was formed as Future Freshman, LLC, a California limited liability company, in 2010. We changed our name to Toyopa Group, LLC in 2011, incorporated as Snapchat, Inc., a Delaware corporation, in 2012, and changed our name to Snap Inc. in 2016. Snap Inc. is headquartered in Santa Monica, California. Our flagship product, Snapchat, is a camera application that was created to help people communicate through short videos and images called “Snaps.”

Basis of Presentation

The accompanying unaudited consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Our consolidated financial statements include the accounts of Snap Inc. and our wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Our fiscal year ends on December 31. These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as filed with the SEC on February 4, 2020 (the “Annual Report”).

In our opinion, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of our financial position, results of operations, and cash flows. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020.

Other than described below, there have been no changes to our significant accounting policies described in our Annual Report that have had a material impact on our consolidated financial statements and related notes.

Use of Estimates

The preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements. Management’s estimates are based on historical information available as of the date of the consolidated financial statements and various other assumptions that we believe are reasonable under the circumstances. Actual results could differ from those estimates.

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

Recent Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. The guidance is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. We adopted ASU 2018-15 effective January 1, 2020. The impact of adoption of these standards on our consolidated financial statements, including accounting policies, processes, and systems, was not material.

10


 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaced the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 requires use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. Adoption of the standard requires using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align existing credit loss methodology with the new standard. In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. ASU 2019-11 requires entities that did not adopt the amendments in ASU 2016-13 as of November 2019 to adopt ASU 2019-11. This ASU contains the same effective dates and transition requirements as ASU 2016-13. 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, was not material.

2. Revenue

Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to receive in exchange for those goods or services. We determine collectability by performing ongoing credit evaluations and monitoring customer accounts receivable balances. Sales tax, including value added tax, is excluded from reported revenue.

We generate substantially all of our revenues by offering various advertising products on Snapchat, which include Snap Ads and 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. Sponsored Lenses allow users to interact with an advertiser’s brand by enabling branded augmented reality experiences.

The substantial majority of advertising revenue is generated from the display of advertisements on Snapchat through contractual agreements that are either on a fixed fee basis over a period of time or based on the number of advertising impressions delivered. Revenue related to agreements based on the number of impressions delivered is recognized when the advertisement is displayed. 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.

11


 

We also generate revenue from sales of our hardware product, Spectacles. For the periods presented, revenue from the sales of Spectacles was not material.

The following table represents our revenue disaggregated by geography based on the billing address of the advertising customer:

 

 

Three Months Ended March 31,

 

 

2020

 

 

2019

 

 

(in thousands)

 

Revenue:

 

 

 

 

 

 

 

North America (1) (2)

$

281,274

 

 

$

195,958

 

Europe (3)

 

81,077

 

 

 

56,581

 

Rest of world

 

100,127

 

 

 

67,887

 

Total revenue

$

462,478

 

 

$

320,426

 

 

(1)

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

(2)

United States revenue was $273.2 million and $188.8 million for the three months ended March 31, 2020 and 2019, respectively.

(3)

Europe includes Russia and Turkey.

3. Net Loss per Share

We compute net loss per share using the two-class method required for multiple classes of common stock. We have three classes of authorized common stock for which voting rights differ by class.

Basic net loss per share is computed by dividing net loss attributable to each class of stockholders by the weighted-average number of shares of stock outstanding during the period. Vested restricted stock units (“RSUs”) that have not been settled, including the vested Chief Executive Officer (“CEO”) RSU award that was received upon our initial public offering (“IPO”) (“CEO Award”), and restricted stock awards (“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.

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 senior convertible notes (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.

12


 

The numerators and denominators of the basic and diluted net loss per share computations for our common stock are calculated as follows for the three months ended March 31, 2020 and 2019:

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

(in thousands, except per share data)

 

 

 

Class A

Common

 

 

Class B

Common

 

 

Class C

Common

 

 

Class A

Common

 

 

Class B

Common

 

 

Class C

Common

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(249,240

)

 

$

(5,223

)

 

$

(51,473

)

 

$

(239,860

)

 

$

(13,601

)

 

$

(56,946

)

Net loss attributable to common

   stockholders

 

$

(249,240

)

 

$

(5,223

)

 

$

(51,473

)

 

$

(239,860

)

 

$

(13,601

)

 

$

(56,946

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common

   shares - Basic

 

 

1,161,982

 

 

 

24,352

 

 

 

239,971

 

 

 

1,035,932

 

 

 

58,741

 

 

 

245,942

 

Diluted shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common

   shares - Diluted

 

 

1,161,982

 

 

 

24,352

 

 

 

239,971

 

 

 

1,035,932

 

 

 

58,741

 

 

 

245,942

 

Net loss per share attributable to

   common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.21

)

 

$

(0.21

)

 

$

(0.21

)

 

$

(0.23

)

 

$

(0.23

)

 

$

(0.23

)

Diluted

 

$

(0.21

)

 

$

(0.21

)

 

$

(0.21

)

 

$

(0.23

)

 

$

(0.23

)

 

$

(0.23

)

 

 

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:

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

(in thousands)

 

Stock options

 

 

9,793

 

 

 

13,382

 

Unvested RSUs and RSAs

 

 

143,511

 

 

 

181,321

 

Convertible Notes (if-converted)

 

 

55,468

 

 

 

 

 

4. Stockholders’ Equity

We maintain three share-based employee compensation plans: the 2017 Equity Incentive Plan (“2017 Plan”), the 2014 Equity Incentive Plan (“2014 Plan”), and the 2012 Equity Incentive Plan (“2012 Plan”, and collectively with the 2017 Plan and the 2014 Plan, the “Stock Plans”). In January 2017, our board of directors adopted the 2017 Plan, and in February 2017 our stockholders approved the 2017 Plan, effective on March 1, 2017, which serves as the successor to the 2014 Plan and 2012 Plan and provides for the grant of incentive stock options to employees, including employees of any parent or subsidiary, and for the grant of nonstatutory stock options, stock appreciation rights, RSAs, RSUs, performance stock awards, performance cash awards, and other forms of stock awards to employees, directors, and consultants, including employees and consultants of our affiliates.

Restricted Stock Units and Restricted Stock Awards

The following table summarizes the RSU and RSA activity during the three months ended March 31, 2020:

 

 

 

Class A

Outstanding

 

 

Weighted-

Average

Grant Date

Fair Value

 

 

 

(in thousands, except per share data)

 

Unvested at December 31, 2019

 

 

148,797

 

 

$

12.39

 

Granted

 

 

14,903

 

 

$

16.58

 

Vested

 

 

(17,915

)

 

$

13.43

 

Forfeited

 

 

(2,274

)

 

$

13.59

 

Unvested at March 31, 2020

 

 

143,511

 

 

$

12.68

 

 

13


 

RSUs granted to employees before January 1, 2017 (“Pre-2017 Awards”) included both service-based and performance conditions to vest in the underlying common stock. The performance condition related to Pre-2017 Awards was satisfied on the effectiveness of the registration statement for our IPO, which occurred in March 2017. Total unrecognized compensation cost related to Pre-2017 Awards was $17.0 million as of March 31, 2020 and is expected to be recognized over a weighted-average period of 0.6 years.

All RSUs and RSAs granted after December 31, 2016 vest on the satisfaction of only a service-based condition (“Post-2017 Awards”). Total unrecognized compensation cost related to Post-2017 Awards was $1.5 billion as of March 31, 2020 and is expected to be recognized over a weighted-average period of 2.8 years. 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. In limited instances, we have issued Post-2017 Awards with vesting periods in excess of four years. The service condition for Post-2017 Awards granted after February 2018 is generally satisfied in equal monthly or quarterly installments over four years.

Additionally, we had 7.6 million and 9.4 million RSUs that were vested but have not yet settled as of March 31, 2020 and December 31, 2019, respectively. These RSUs are primarily related to the CEO award.

Stock Options

The following table summarizes the stock option award activity under the Stock Plans during the three months ended March 31, 2020:

 

 

 

Class A

Number

of Shares

 

 

Class B

Number

of Shares

 

 

Weighted-

Average

Exercise

Price

 

 

Weighted-

Average

Remaining

Contractual

Term

(in years)

 

 

Aggregate

Intrinsic

Value(1)

 

 

 

(in thousands, except per share data)

 

Outstanding at December 31, 2019

 

 

8,712

 

 

 

1,550

 

 

$

9.00

 

 

 

5.59

 

 

$

75,460

 

Granted

 

 

 

 

 

 

 

$

 

 

 

 

 

$

 

Exercised

 

 

(396

)

 

 

(2

)

 

$

7.86

 

 

 

 

 

$

 

Forfeited

 

 

(71

)

 

 

 

 

$

12.79

 

 

 

 

 

$

 

Outstanding at March 31, 2020

 

 

8,245

 

 

 

1,548

 

 

$

9.02

 

 

 

5.26

 

 

$

41,095

 

 

(1)

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the closing market price of our Class A common stock as of December 31, 2019 and March 31, 2020, respectively.

 

Total unrecognized compensation cost related to unvested stock options was $13.2 million as of March 31, 2020 and is expected to be recognized over a weighted-average period of 2.0 years.

Stock-Based Compensation Expense by Function

Total stock-based compensation expense by function was as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

(in thousands)

 

Cost of revenue

 

$

1,782

 

 

$

1,849

 

Research and development

 

 

118,317

 

 

 

112,242

 

Sales and marketing

 

 

24,806

 

 

 

17,760

 

General and administrative

 

 

27,144

 

 

 

30,705

 

Total

 

$

172,049

 

 

$

162,556

 

 

 

14


 

5. Business Acquisitions and Divestitures

2019 Acquisitions and Divestiture

AI Factory, Inc.

In December 2019, we acquired the remaining ownership interest in AI Factory, Inc. (“AI Factory”), a content and technology company. Prior to the acquisition, we owned a minority interest in the company. The purpose of the acquisition was to enhance the functionality of our platform.

The acquisition date fair value of AI Factory was $128.1 million, which primarily represents current and future cash consideration payments to sellers, as well as the $13.5 million fair value of our original minority interest. We recognized the change in pre-acquisition fair value of our original minority interest as a gain in other income (expense), net on the consolidated statement of operations.

The allocation of acquisition date fair value is as follows:

 

 

 

Total

 

 

 

(in thousands)

 

Technology

 

$

16,000

 

Goodwill

 

 

110,734

 

Other assets acquired and liabilities assumed, net

 

 

1,353

 

Total

 

$

128,087

 

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.

Placed, LLC

In June 2019, we divested our membership interest in Placed, LLC (“Placed”) to Foursquare Labs, Inc. (“Foursquare”). The total cash consideration received was $77.8 million, which includes amounts paid for severance and equity compensation. The remaining $66.9 million represents purchase consideration and we recognized a net gain on divestiture of $39.9 million, which is included in other income (expense), net, on our consolidated statements of operations. The operating results of Placed were not material to our consolidated revenue or consolidated operating loss for all periods presented. We determined that Placed did not meet the criteria to be classified as discontinued operations.

Placed assets and liabilities on completion of the divestiture were as follows:

 

 

Total

 

 

(in thousands)

 

Trademarks, net

$

1,052

 

Technology, net

 

14,193

 

Customer relationships, net

 

5,246

 

Goodwill

 

2,682

 

Other assets and liabilities, net

 

3,827

 

Total

$

27,000

 

 

Other Acquisitions

In the fourth quarter of 2019, we acquired a business to enhance our existing platform, technology, and workforce. The purchase consideration was $34.0 million of which $23.5 million was allocated to goodwill and the remainder primarily to identifiable intangible assets. The goodwill amount represents synergies related to our existing platform expected to be realized from this business combination and assembled workforce. The associated goodwill and intangible assets are deductible for tax purposes.

 

15


 

6. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the three months ended March 31, 2020 were as follows:

 

 

Goodwill

 

 

(in thousands)

 

Balance as of December 31, 2019

$

761,153

 

Foreign currency translation

 

(4,764

)

Balance as of March 31, 2020

$

756,389

 

 

Intangible assets consisted of the following:

 

 

March 31, 2020

 

 

Weighted-

Average

Remaining

Useful Life -

Years

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

 

(in thousands, except years)

 

Domain names

 

2.4

 

 

$

414

 

 

$

220

 

 

$

194

 

Acquired developed technology

 

3.4

 

 

 

157,400

 

 

 

85,579

 

 

 

71,821

 

Patents

 

5.7

 

 

 

19,360

 

 

 

7,475

 

 

 

11,885

 

 

 

 

 

 

$

177,174