SNAPCHAT INC filed this 10-Q on 05/11/17
Snap Inc (Form: 10-Q, Received: 05/11/2017 06:07:52)

 

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, 2017

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)

 

63 Market Street, Venice, California 90291

(Address of principal executive offices, including zip code)

(310) 399-3339

(Registrant's telephone, including area code)

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes       No  

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer (Do not check if a smaller reporting company)

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

 

682,135,965 shares outstanding as of April 30, 2017

Class B common stock, $0.00001 par value

 

281,101,797 shares outstanding as of April 30, 2017

Class C common stock, $0.00001 par value

 

215,887,848 shares outstanding as of April 30, 2017

 

 

 

 

 


SNAP INC.

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 (unaudited)

 

5

 

 

Consolidated Balance Sheets

 

5

 

 

Consolidated Statements of Operations

 

6

 

 

Consolidated Statements of Comprehensive Income (Loss)

 

7

 

 

Consolidated Statements of Cash Flows

 

8

 

 

Notes to Consolidated Financial Statements

 

9

Item 2.

 

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

 

21

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

34

Item 4.

 

Controls and Procedures

 

35

 

 

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

36

Item 1A.

 

Risk Factors

 

36

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

62

Item 3.

 

Defaults Upon Senior Securities

 

63

Item 4.

 

Mine Safety Disclosures

 

63

Item 5.

 

Other Information

 

63

Item 6.

 

Exhibits

 

64

Signatures

 

 

 

65

Exhibit Index

 

66

 

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 FORWAR D-LOOKING STATEMENTS

The following discussion 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 Quarterly Report on Form 10-Q, including statements regarding our future results of operations or financial condition, business strategy and plans, 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,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would” or the negative of these words or other similar terms or expressions.

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, and financial needs. These forward-looking statements are subject to known and unknown risks, uncertainties, and assumptions, including risks described in “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q regarding, 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 attract and retain users;

 

our ability to attract and retain advertisers;

 

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

 

our ability to successfully expand in our existing markets and penetrate new markets;

 

our ability to effectively manage our growth and future expenses;

 

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

 

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

 

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

 

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

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

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. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans,

3


intentions, or expectations disclosed in our forward-looking statemen ts, 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, mergers, dispositions, joint ventures, or investments.

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 measure average Daily Active Users for a particular quarter by calculating the average Daily Active Users for that quarter. We also break out Daily Active Users by geography because certain markets have a greater revenue opportunity and lower bandwidth costs. We define average revenue per user, or ARPU, as quarterly revenue divided by the average Daily Active Users. 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 revenue by geography 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 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. Our user metrics are also affected by technology on certain mobile devices that automatically runs in the background of our Snapchat application when another phone function is used, and this activity can cause our system to miscount the user metrics associated with such account. Changes in our products, mobile operating systems, or metric tracking system, or the introduction of new products, may impact our ability to accurately determine Daily Active Users or other metrics and we may not determine such inaccuracies promptly. We believe that we don’t capture all data regarding all our Daily Active Users. For example, technical issues may not record data from every user’s application. While we believe this underreporting is generally immaterial, we are unable to precisely determine the level of underreporting and for some periods the underreporting may be material. We continually seek to address these technical issues and improve our accuracy, but given the complexity of the systems involved and the rapidly changing nature of mobile devices and systems, we expect underreporting to continue. We do not adjust our reported metrics to reflect this underreporting.

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 Daily 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. For example, before June 2015, we used a third party that counted a Daily Active User when the application was opened or a notification was received via the application on any device. We now use an analytics platform that we developed and operate and we count a Daily Active User only when a user opens the application and only once per user per day. We believe this methodology more accurately measures our user engagement. Additionally, to align our pre-June 2015 Daily Active Users with this new methodology, we reduced our pre-June 2015 Daily Active Users by 4.8%, the amount by which we estimated the data generated by the third party was overstated. As a result, our metrics may not be comparable to prior periods.

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 Daily Active Users or other metrics may not be comparable to those in prior periods. Our measures of Daily Active Users 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 - FINANC IAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

Snap Inc.

Consolidated Balance Sheets

(In thousands, except per share amounts)

 

March 31,

2017

 

 

December 31,

2016

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

1,427,114

 

 

$

150,121

 

Marketable securities

 

1,815,442

 

 

 

837,247

 

Accounts receivable, net of allowance

 

147,677

 

 

 

162,659

 

Prepaid expenses and other current assets

 

72,973

 

 

 

29,958

 

Total current assets

 

3,463,206

 

 

 

1,179,985

 

Property and equipment, net

 

116,132

 

 

 

100,585

 

Intangible assets, net

 

79,781

 

 

 

75,982

 

Goodwill

 

332,205

 

 

 

319,137

 

Other assets

 

50,453

 

 

 

47,103

 

Total assets

$

4,041,777

 

 

$

1,722,792

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

$

13,849

 

 

$

8,419

 

Accrued expenses and other current liabilities

 

228,436

 

 

 

148,325

 

Total current liabilities

 

242,285

 

 

 

156,744

 

Other liabilities

 

63,974

 

 

 

47,134

 

Total liabilities

 

306,259

 

 

 

203,878

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Convertible voting preferred stock, Series A, A-1, and B, $0.00001 par value. No shares and 146,962 shares authorized, issued, and outstanding at March 31, 2017 and December 31, 2016, respectively. Liquidation preference of $95,175 at December 31, 2016.

 

 

 

 

1

 

Convertible non-voting preferred stock, Series C, $0.00001 par value. No shares and 16,000 shares authorized, issued, and outstanding at March 31, 2017 and December 31, 2016, respectively. Liquidation preference of $54,543 at December 31, 2016.

 

 

 

 

 

Convertible non-voting preferred stock, Series D, E, and F, $0.00001 par value. No shares and 83,851 shares authorized, issued, and outstanding at March 31, 2017 and December 31, 2016, respectively.

 

 

 

 

2

 

Series FP convertible voting preferred stock, $0.00001 par value. No shares and 260,888 shares authorized at March 31, 2017 and December 31, 2016, respectively. No shares and 215,888 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively.

 

 

 

 

2

 

Class A non-voting common stock, $0.00001 par value. 3,000,000 shares authorized, 681,994 shares issued and outstanding at March 31, 2017, and 1,500,000 shares authorized, 504,902 shares issued and outstanding at December 31, 2016.

 

7

 

 

 

5

 

Class B voting common stock, $0.00001 par value. 700,000 shares authorized, 280,968 shares issued and outstanding at March 31, 2017, and 1,500,000 shares authorized, 31,469 shares issued and outstanding at December 31, 2016.

 

3

 

 

 

 

Class C voting common stock, $0.00001 par value. 260,888 shares authorized, 215,888 shares issued and outstanding at March 31, 2017, and 260,888 shares authorized and no shares issued and outstanding at December 31, 2016.

 

2

 

 

 

 

Additional paid-in capital

 

7,157,585

 

 

 

2,728,823

 

Accumulated other comprehensive income (loss)

 

(1,635

)

 

 

(2,057

)

Accumulated deficit

 

(3,420,444

)

 

 

(1,207,862

)

Total stockholders’ equity

 

3,735,518

 

 

 

1,518,914

 

Total liabilities and stockholders’ equity

$

4,041,777

 

 

$

1,722,792

 

 

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,

 

 

2017

 

 

2016

 

Revenue

$

149,648

 

 

$

38,798

 

Costs and expenses:

 

 

 

 

 

 

 

Cost of revenue

 

163,358

 

 

 

75,773

 

Research and development

 

805,848

 

 

 

28,098

 

Sales and marketing

 

219,733

 

 

 

14,737

 

General and administrative

 

1,174,476

 

 

 

24,011

 

Total costs and expenses

 

2,363,415

 

 

 

142,619

 

Loss from operations

 

(2,213,767

)

 

 

(103,821

)

Interest income

 

2,424

 

 

 

359

 

Interest expense

 

(695

)

 

 

 

Other income (expense), net

 

187

 

 

 

(993

)

Loss before income taxes

 

(2,211,851

)

 

 

(104,455

)

Income tax benefit (expense)

 

3,014

 

 

 

(121

)

Net loss

$

(2,208,837

)

 

$

(104,576

)

Net loss per share attributable to Class A, Class B, and Class C common stockholders (Note 2):

 

 

 

 

 

 

 

Basic

$

(2.31

)

 

$

(0.14

)

Diluted

$

(2.31

)

 

$

(0.14

)

 

See Notes to Consolidated Financial Statements.

6


Snap Inc.

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

 

 

Three Months Ended March 31,

 

 

2017

 

 

2016

 

Net loss

$

(2,208,837

)

 

$

(104,576

)

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

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

 

(124

)

 

 

88

 

Foreign currency translation

 

546

 

 

 

(24

)

Total other comprehensive income (loss), net of tax

 

422

 

 

 

64

 

Total comprehensive income (loss)

$

(2,208,415

)

 

$

(104,512

)

 

See Notes to Consolidated Financial Statements.

7


Snap Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

Three Months Ended March 31,

 

 

2017

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

$

(2,208,837

)

 

$

(104,576

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

12,450

 

 

 

5,049

 

Stock-based compensation

 

1,992,121

 

 

 

5,538

 

Deferred income taxes

 

(1,488

)

 

 

 

Other

 

1,892

 

 

 

961

 

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

 

 

 

 

 

 

 

Accounts receivable, net of allowance

 

13,444

 

 

 

(7,161

)

Prepaid expenses and other current assets

 

(43,436

)

 

 

(5,848

)

Other assets

 

2,715

 

 

 

(1,572

)

Accounts payable

 

5,619

 

 

 

47

 

Accrued expenses and other current liabilities

 

69,204

 

 

 

13,997

 

Other liabilities

 

1,319

 

 

 

1,024

 

Net cash used in operating activities

 

(154,997

)

 

 

(92,541

)

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

(17,993

)

 

 

(12,452

)

Purchases of intangible assets

 

 

 

 

(562

)

Non-marketable investments

 

(625

)

 

 

(2,173

)

Cash paid for acquisitions, net of cash acquired

 

(18,013

)

 

 

(50,936

)

Issuance of notes receivable from officers/stockholders

 

 

 

 

(15,000

)

Purchases of marketable securities

 

(1,423,214

)

 

 

(140,045

)

Maturities of marketable securities

 

445,047

 

 

 

 

Change in restricted cash

 

 

 

 

(4,300

)

Net cash used in investing activities

 

(1,014,798

)

 

 

(225,468

)

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from the exercise of stock options

 

594

 

 

 

 

Stock repurchases from employees for minimum tax withholdings

 

(206,579

)

 

 

 

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

 

2,657,797

 

 

 

 

Proceeds from issuances of preferred stock, net of issuance costs

 

 

 

 

192,186

 

Payments of initial public offering issuance costs

 

(5,024

)

 

 

 

Net cash provided by financing activities

 

2,446,788

 

 

 

192,186

 

Change in cash and cash equivalents

 

1,276,993

 

 

 

(125,823

)

Cash and cash equivalents, beginning of period

 

150,121

 

 

 

640,810

 

Cash and cash equivalents, end of period

$

1,427,114

 

 

$

514,987

 

Supplemental disclosures

 

 

 

 

 

 

 

Cash paid for income taxes

$

3,545

 

 

$

4

 

Supplemental disclosures of non-cash activities

 

 

 

 

 

 

 

Issuance of Class B common stock related to acquisitions

$

 

 

$

13,097

 

Purchase consideration liabilities related to acquisitions

$

1,901

 

 

$

6,028

 

Construction in progress related to financing lease obligations

$

257

 

 

$

404

 

Net change in accounts payable and accrued expenses and other current liabilities related to property and equipment additions

$

(4,355

)

 

$

1,921

 

 

See Notes to Consolidated Financial Statements.

 

 

8


Snap Inc.

Notes to Consolidated Financial Statements

 

1. 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 Venice, 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 prospectus dated March 1, 2017, as filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended (File No. 333-215866) (“Prospectus”).

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, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017.

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

Initial Public Offering

In March 2017, we completed our initial public offering (“IPO”) in which we issued and sold 160.3 million shares of Class A common stock, inclusive of the over-allotment, at a public offering price of $17.00 per share and excluding shares sold in the IPO by certain of our existing stockholders. We received net proceeds of $2.6 billion after deducting underwriting discounts and commissions of $68.1 million and other offering expenses of $14.7 million. On the closing of the IPO, all shares of our then-outstanding convertible preferred stock other than Series FP preferred stock automatically converted into an aggregate of 246.8 million shares of Class B common stock and all outstanding shares of Series FP preferred stock automatically converted into 215.9 million shares of Class C common stock. Following the IPO, we have three classes of authorized common stock – Class A common stock, Class B common stock, and Class C common stock.

Restricted stock units (“RSUs”) granted to employees before January 1, 2017 (“Pre-2017 RSUs”) included both service-based and performance conditions to vest in the underlying common stock. The performance condition related to these awards was satisfied on the effectiveness of the registration statement for our IPO, which occurred in March 2017. On the effectiveness of the registration statement for our IPO, we recognized $1.3 billion of stock-based compensation expense for Pre-2017 RSUs. To meet the related tax withholding requirements, we withheld 12.1 million of the 26.7 million shares of common stock issued. Based on the public offering price of $17.00 per share, the tax withholding obligation for these vested Pre-2017 RSUs was $206.6 million.

In addition, on the closing of the IPO, our Chief Executive Officer (“CEO”) received an RSU award (“CEO award”) for 37.4 million shares of Series FP preferred stock, which automatically converted into an equivalent number of shares of Class C common stock on the closing of the IPO. The CEO award represented 3.0% of all outstanding shares on the closing of the IPO, including shares sold by us in the IPO and vested stock options and RSUs, net of shares withheld to satisfy tax withholding obligations, on the closing of the IPO. The CEO award vested immediately on the closing of the IPO, and such shares will be delivered to the CEO in equal quarterly installments over three years beginning in the third full calendar quarter following the IPO. There is no continuing service requirement for our CEO. The stock-based compensation expense recognized related to the CEO award was $636.6 million, which is based on the vesting of 37.4 million shares of Class C common stock on the closing of the IPO, at the public offering price of $17.00 per share.

9


Snap Inc.

Notes to Consolidated Financial Statements (Continued)

 

The future tax benefits on settlement of the above RSUs is not expected to be material as currently we have established valuation allowances to reduce our net deferred tax assets to the amount that is more likely than not to be realized . The majority of the f uture tax benefits that arise on settlement of the above RSUs are in jurisdictions for which our net defe rred tax assets have a full valuation allowance.

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, 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 January 2017, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business . The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for interim and annual periods beginning after December 15, 2017 and should be applied prospectively on or after the effective date, with early adoption permitted. We are in the process of evaluating the impact of this accounting standards update.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires restricted cash to be presented with cash and cash equivalents on the statement of cash flows and disclosure of how the statement of cash flows reconciles to the balance sheet if restricted cash is shown separately from cash and cash equivalents on the balance sheet. ASU 2016-18 is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. We are in the process of evaluating the impact of this accounting standards update on our consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory , which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-16 is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. We adopted ASU 2016-16 on January 1, 2017 and the adoption did not have a material impact on our consolidated financial statements due to a valuation allowance on our net deferred tax assets.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments . ASU 2016-15 provides guidance for targeted changes with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. ASU 2016-15 is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. We are in the process of evaluating the impact of this accounting standards update on our consolidated statements of cash flows.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) . ASU 2016-02 requires lessees to recognize lease assets and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted. We are in the process of evaluating the impact of this accounting standards update on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09,  Revenue from Contracts with Customers (Topic 606).  Topic 606 supersedes the revenue recognition requirements in ASU Topic 605,  Revenue Recognition,  and requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. Topic 606 is effective for fiscal years beginning

10


Snap Inc.

Notes to Consolidated Financial Statements (Continued)

 

after December 15, 2017, including interim periods within that reporting period, with early adoption permitted for annual reporting periods beginning after December 15, 2016. The standard permits the use of either the retro spective or modified retrospective (cumulative effect) transition method.

The most significant aspect of our evaluation of Topic 606 related to ASU No. 2016-08,  Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net).  This implementation guidance discusses principal versus agent considerations and gross versus net revenue reporting, including specific indicators to assist in the determination of whether we control a specified good or service before it is transferred to the customer. Through our evaluation, we have concluded Snap-sold revenue will be reported on a gross basis and partner-sold revenue will be reported on a net basis, which is consistent with our current revenue recognition policies. We concluded that we control the Snap-sold advertising campaign before it is transferred to the customer because we provide the advertising campaign on Snapchat and have discretion in establishing the price of the advertisements. We concluded that the partner controls significant aspects of the partner-sold advertising campaign before it is transferred to the customer and the partner has discretion in establishing price with the advertiser.

We do not expect the new standard to have a material impact on our consolidated financial statements. We expect to adopt Topic 606 during the first quarter of 2018. We are still evaluating the use of either the retrospective or modified retrospective transition method.

2. Net Loss per Share

We compute net loss per share using the two-class method required for multiple classes of common stock and participating securities. Our participating securities include any shares issued on the early exercise of stock options subject to repurchase because holders of such shares have non-forfeitable dividend rights in the event a dividend is paid on common stock. Before the IPO, our participating securities also included Series D, E, F, and FP preferred stock and Series A, A-1, B, and C convertible preferred stock. The rights, including the liquidation and dividend rights, of the Class A common stock and Class B common stock, and the Series D, E, F, and FP preferred stock were substantially identical, other than voting rights. Accordingly, the Class A common stock, Class B common stock, and the Series D, E, F, and FP shared equally in our net losses. The holders of early exercised shares subject to repurchase and the holders of Series A, A-1, B, and C convertible preferred stock did not have a contractual obligation to share in our losses, and as a result our net losses were not allocated to these participating securities.

In connection with our IPO, our Series D, E, and F preferred stock converted on a one-to-one basis into Class B common stock, and our Series FP preferred stock converted on a one-to-one basis into Class C common stock. The liquidation and dividend rights of the aforementioned preferred series are substantially identical to the rights of the common classes into which they converted. Accordingly, we have presented the Series D, E, and F preferred stock outstanding before the IPO together with the Class B common stock, and the Series FP preferred stock outstanding before the IPO together with the Class C common stock for purposes of calculating net loss per share. The prior period presentation has been adjusted to conform to our current period presentation.

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

Basic net loss per share is computed by dividing net loss attributable to each class of stockholders by the weighted-average number of shares of stock outstanding during the period. Vested RSUs that have not been settled, including the vested CEO award, 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. For the three months ended March 31, 2017 and 2016 our potential dilutive shares relating to stock options, RSUs, and common stock subject to repurchase, and, for the 2016 period, shares of convertible Series A, A-1, B, and C preferred stock 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.

11


Snap Inc.

Notes to Consolidated Financial Statements (Continued)

 

The numerators and denominators of the basic and diluted net loss per share computatio ns for our common stock are calculated as follows for the three months ended March 31, 2017 and 2016:

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

 

 

(in thousands, except per share data)

 

 

 

Class A Common (1)

 

 

Class B Common (2)

 

 

Class C Common (3)

 

 

Class A Common

 

 

Class B Common (2)

 

 

Class C Common (3)

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(1,309,062

)

 

$

(376,386

)

 

$

(523,389

)

 

$

(63,861

)

 

$

(10,625

)

 

$

(30,090

)

Net loss attributable to common stockholders

 

$

(1,309,062

)

 

$

(376,386

)

 

$

(523,389

)

 

$

(63,861

)

 

$

(10,625

)

 

$

(30,090

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares - Basic

 

 

565,980

 

 

 

162,733

 

 

 

226,290

 

 

 

462,170

 

 

 

76,893

 

 

 

217,767

 

Diluted shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares - Diluted

 

 

565,980

 

 

 

162,733

 

 

 

226,290

 

 

 

462,170

 

 

 

76,893

 

 

 

217,767

 

Net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(2.31

)

 

$

(2.31

)

 

$

(2.31

)

 

$

(0.14

)

 

$

(0.14

)

 

$

(0.14

)

Diluted

 

$

(2.31

)

 

$

(2.31

)

 

$

(2.31

)

 

$

(0.14

)

 

$

(0.14

)

 

$

(0.14

)

 

(1)

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

(2)

Included in the Class B common stock, for all periods presented, is Series D, E, and F preferred stock, which automatically converted to Class B common stock on the closing of the IPO. Series A, A-1, B, and C preferred stock are included in Class B common stock on the automatic conversion of such shares to 163.0 million shares of Class B common stock on the closing of the IPO.

(3)

Included in the Class C common stock, for all periods presented, is Series FP preferred stock which automatically converted to Class C common stock on the closing of the IPO. Additionally, 37.4 million shares of Class C common stock related to the CEO award are included in Class C common stock on the closing of the IPO.

 

The following potentially dilutive shares were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented:

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

 

 

(in thousands)

 

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

 

 

 

 

 

146,962

 

Convertible non-voting preferred stock, Series C

 

 

 

 

 

16,000

 

Stock options

 

 

40,554

 

 

 

43,895

 

Unvested RSUs not subject to a performance condition

 

 

175,298

 

 

 

329

 

Shares subject to repurchase

 

 

38

 

 

 

2,967

 

 

3. 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, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards, and other forms of stock awards to employees, directors, and consultants, including employees and consultants of our affiliates. We do not expect to grant any additional awards under the 2014 Plan or 2012 Plan as of the effective date of the 2017 Plan, other than awards for up to 2,500,000 shares of Class A common stock to our employees and consultants in France under the 2014 Plan. Outstanding awards under the 2014 Plan and

12


Snap Inc.

Notes to Consolidated Financial Statements (Continued)

 

2012 Plan continue to be subject to the te rms and conditions of the 2014 Plan and 2012 Plan, respectively. Shares available for grant under the 2014 Plan and 2012 Plan, which were reserved but not issued or subject to outstanding awards under the 2014 Plan or 2012 Plan, respectively, as of the eff ective date of the 2017 Plan, were added to the reserves of the 2017 Plan.

We have initially reserved 87,270,108 shares of our Class A common stock for future issuance under the 2017 Plan. An additional number of shares of Class A common stock will be added to the 2017 Plan equal to (i) 96,993,064 shares of Class A common stock reserved for future issuance pursuant to outstanding stock options and unvested RSUs under the 2014 Plan, (ii) 37,228,865 shares of Class A common stock issuable on conversion of Class B common stock underlying stock options and unvested RSUs outstanding the 2012 Plan, (iii) 17,858,235 shares of Class A common stock that were reserved for issuance under the 2014 Plan as of the date the 2017 Plan became effective, (iv) 11,004,580 shares of Class A common stock issuable on conversion Class B common stock that were reserved for issuance under the 2012 Plan as of the date the 2017 Plan became effective, and (v) a maximum of 86,737,997 shares of Class A common stock that will be added pursuant to the following sentence. With respect to each share that returns to the 2017 Plan pursuant to (i) and (ii) of the prior sentence that was associated with an award that was outstanding under the 2014 Plan and 2012 Plan as of October 31, 2016, an additional share of Class A common stock will be added to the share reserve of the 2017 Plan, up to a maximum of 86,737,997 shares . The number of shares reserved for issuance under the 2017 Plan will increase automatically on the first day of January of each of 2018 through 2027 by the lesser of (i) 5% of the total number of shares of our capital stock outstanding on December 31 st of the immediately preceding calendar year and (ii) a number determined by our board of directors. The maximum term for stock options granted under the 2017 Plan may not exceed ten years from the date of grant. The 2017 Plan will terminate ten years from the date our board of directors approved the plan, unless it is terminated earlier by our board of directors.

The following table summarizes the RSU award activity under the Stock Plans during the three months ended March 31, 2017:

 

 

 

Class A

Outstanding

RSUs

 

 

Class B

Outstanding

RSUs

 

 

Weighted-

Average

Grant Date

Fair Value

per RSU

 

 

 

(in thousands, except per share data)

 

Unvested at December 31, 2016

 

 

152,114

 

 

 

28,581

 

 

$

15.50

 

Granted

 

 

27,255

 

 

 

 

 

$

15.75

 

Vested

 

 

(18,850

)

 

 

(12,101

)

 

$

14.87

 

Forfeited

 

 

(1,589

)

 

 

(112

)

 

$

15.57

 

Unvested at March 31, 2017

 

 

158,930

 

 

 

16,368

 

 

$

15.65

 

Total unrecognized compensation cost related to Pre-2017 RSUs was $1.3 billion as of March 31, 2017 and is expected to be recognized over a weighted-average period of 3.1 years.

All RSUs granted after December 31, 2016 vest on the satisfaction of only a service-based condition (“Post-2017 RSUs”). Total unrecognized compensation cost related to Post-2017 RSUs was $382.1 million as of March 31, 2017 and is expected to be recognized over a weighted-average period of 5.6 years. The service condition 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 RSUs with vesting periods in excess of four years.

13


Snap Inc.

Notes to Consolidated Financial Statements (Continued)

 

The table below presents stock option awards that entitle the holder to an additional share of Class A common stock on exercise. The total stock options granted and underlying common stock fair value do not give effect to the additional Class A common stock. The following table summarizes the stock option award activity under the Stock Plans during the three months ended March 31, 2017:

 

 

 

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, 2016

 

 

1,266

 

 

 

21,186

 

 

$

2.26

 

 

 

6.97

 

 

$

682,565

 

Granted

 

 

 

 

 

 

 

$

 

 

 

 

 

$

 

Exercised

 

 

 

 

 

(2,175

)

 

$

0.27

 

 

 

 

 

$

 

Forfeited

 

 

 

 

 

 

 

$

 

 

 

 

 

$

 

Outstanding at March 31, 2017

 

 

1,266

 

 

 

19,011

 

 

$

2.47

 

 

 

6.78

 

 

$

863,537

 

 

(1)

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the assessed fair value of our common stock as of December 31, 2016 or the closing market price of our Class A common stock as of March 31, 2017.

 

Total unrecognized compensation cost related to stock options was $42.9 million as of March 31, 2017 and is expected to be recognized over a weighted-average period of 2.4 years.

Stock-Based Compensation Expense by Function

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

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

 

 

(in thousands)

 

Cost of revenue

 

$

19,708

 

 

$

154

 

Research and development

 

 

718,080

 

 

 

2,648

 

Sales and marketing

 

 

159,726

 

 

 

775

 

General and administrative

 

 

1,094,607

 

 

 

1,961

 

Total

 

$

1,992,121

 

 

$

5,538

 

 

2017 Employee Stock Purchase Plan

In January 2017, our board of directors adopted the 2017 Employee Stock Purchase Plan (“2017 ESPP”). Our stockholders approved the 2017 ESPP in February 2017. The 2017 ESPP became effective in connection with the IPO. A total of 16,484,690 shares of Class A common stock were initially reserved for issuance under the 2017 ESPP. No shares of our Class A common stock have been purchased under the 2017 ESPP. The number of shares of our Class A common stock reserved for issuance will automatically increase on January 1st of each calendar year, beginning on January 1, 2018 through January 1, 2027, by the lesser of (1) 1.0% of the total number of shares of our common stock outstanding on the last day of the calendar month before the date of the automatic increase, and (2) 15,000,000 shares; provided that before the date of any such increase, our board of directors may determine that such increase will be less than the amount set forth in clauses (1) and (2).

4. Business Acquisitions

In March 2017, we acquired all outstanding shares of a company that operates a cloud-hosted platform for building content online. The company was acquired to enhance the functionality of our platform. The total purchase consideration was $20.1 million, which included $18.2 million in cash and $1.9 million recorded in other liabilities on the consolidated balance sheet. In addition, we provided for $20.0 million in the form of RSUs to certain continuing employees of the company in exchange for future service.

14


Snap Inc.

Notes to Consolidated Financial Statements (Continued)

 

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

 

 

 

Total

 

 

 

(in thousands)

 

Technology

 

$

8,500

 

Customer relationships

 

 

500

 

Goodwill

 

 

12,600

 

Net deferred tax liability

 

 

(1,710

)

Other assets acquired and liabilities assumed, net

 

 

235

 

Total

 

$

20,125

 

 

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.

5. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the three months ended March 31, 2017 are as follows:

 

 

 

Goodwill

 

 

 

(in thousands)

 

Balance as of December 31, 2016

 

$

319,137

 

Goodwill acquired

 

 

12,600

 

Foreign currency translation

 

 

468

 

Balance as of March 31, 2017

 

$

332,205

 

 

Intangible assets consisted of the following:

 

 

 

March 31, 2017

 

 

 

Weighted-

Average

Remaining

Useful Life -

Years

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

 

 

(in thousands except years)

 

Domain names

 

 

2.6

 

 

$

5,011

 

 

$

2,418

 

 

$

2,593

 

Trademarks

 

 

2.3

 

 

 

3,072

 

 

 

1,962

 

 

 

1,110

 

Non-compete agreements

 

 

0.0

 

 

 

243

 

 

 

243

 

 

 

 

Acquired developed technology

 

 

4.2

 

 

 

91,759

 

 

 

24,775

 

 

 

66,984

 

Customer relationships

 

 

1.1

 

 

 

4,268

 

 

 

3,070

 

 

 

1,198

 

Patents

 

 

9.0

 

 

 

9,450

 

 

 

1,554

 

 

 

7,896

 

 

 

 

 

 

 

$

113,803

 

 

$

34,022

 

 

$

79,781

 

 

 

 

December 31, 2016

 

 

 

Weighted-

Average

Remaining

Useful Life -

Years

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

 

 

(in thousands except years)

 

Domain names

 

 

3.0

 

 

$

5,000

 

 

$

2,157

 

 

$

2,843

 

Trademarks

 

 

2.6

 

 

 

3,072

 

 

 

1,829

 

 

 

1,243

 

Non-compete agreements

 

 

0.3

 

 

 

243

 

 

 

226

 

 

 

17

 

Acquired developed technology

 

 

4.1

 

 

 

83,137

 

 

 

20,569

 

 

 

62,568

 

Customer relationships

 

 

1.0

 

 

 

3,752

 

 

 

2,569

 

 

 

1,183

 

Patents

 

 

9.2

 

 

 

9,450

 

 

 

1,322

 

 

 

8,128

 

 

 

 

 

 

 

$

104,654

 

 

$

28,672

 

 

$

75,982

 

15


Snap Inc.

Notes to Consolidated Financial Statements (Continued)

 

 

Amortization of intangible assets for the three months ended March 31, 2017 and 2016 was $5.4 million and $3.2 million, respectively.

As of March 31, 2017, the estimated intangible asset amortization expense for the next five years and thereafter is as follows:

 

 

 

Estimated

Amortization

 

 

 

(in thousands)

 

Remainder of 2017

 

$

15,878

 

2018

 

 

20,404

 

2019

 

 

17,377

 

2020

 

 

12,152

 

2021

 

 

6,539

 

Thereafter

 

 

7,431

 

Total

 

$

79,781

 

 

6. Commitments and Contingencies

Commitments

Leases

We entered into various non-cancelable lease agreements for certain of our offices with original lease periods expiring between 2017 and 2027. Certain of the arrangements have free rent periods or escalating rent payment provisions. We recognize rent expense under such arrangements on a straight-line basis.

Our future minimum lease payments required under these non-cancelable operating lease obligations as of March 31, 2017, are as follows:

 

 

Operating Leases

 

 

(in thousands)

 

Remainder of 2017

$

24,582

 

2018

 

43,828

 

2019

 

53,977

 

2020

 

54,970

 

2021

 

54,438

 

Thereafter

 

179,959

 

Total minimum lease payments

$

411,754

 

 

Operating lease expenses for the three months ended March 31, 2017 and 2016 were $12.9 million and $5.0 million, respectively.

16


Snap Inc.

Notes to Consolidated Financial Statements (Continued)

 

We have several lease agreements where we are deemed the owner under build-to-suit lease accounting. The fair value of the leased property and correspondi ng financing obligations are included in property and equipment, net and other liabilities, respectively, on our consolidated balance sheet as of March 31, 2017. Our future minimum lease payments required under non-cancelable financing lease obligations, w hich exclusively relate to our build-to-suit leases, as of March 31, 2017, are as follows:

 

 

Financing Leases

 

 

(in thousands)

 

Remainder of 2017

$

3,505

 

2018

 

4,726

 

2019

 

4,796

 

2020

 

4,947

 

2021

 

5,092

 

Thereafter

 

25,953

 

Total minimum lease payments

$

49,019

 

 

We recognize an increase in the fair value of the asset as additional building costs are incurred during the construction period and a corresponding increase in the lease financing obligation for any construction costs to be reimbursed by the landlord. As of March 31, 2017, $15.4 million of lease financing obligations is included in other liabilities on our consolidated balance sheet.

Contractual Commitments

We have non-cancelable contractual agreements related to the hosting of our data storage processing, storage, and other computing services.

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, though 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. (“AWS”) that was amended in March 2016, and again in February 2017. Such agreement will continue indefinitely until terminated by either party. Under the February 2017 addendum to the agreement, we committed to spend $1.0 billion between January 2017 and December 2021 on AWS services ($50.0 million in 2017, $125.0 million in 2018, $200.0 million in 2019, $275.0 million in 2020, and $350.0 million in 2021). 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 addendum term, although it will not count towards meeting the future minimum purchase commitments under the addendum.

We also have various other non-cancelable contractual commitments related to purchase agreements. The future minimum contractual commitment including commitments less than one year, as of March 31, 2017 for each of the next five years are as follows:

 

 

Minimum Commitment

 

 

(in thousands)

 

Remainder of 2017

$

423,519

 

2018

 

537,248

 

2019

 

602,491

 

2020

 

675,000

 

2021

 

750,000

 

Thereafter

 

33,333

 

Total minimum commitments

$

3,021,591

 

 

17


Snap Inc.

Notes to Consolidated Financial Statements (Continued)

 

Contingencies

We record a loss contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We also disclose material contingencies when we believe a loss is not probable but reasonably possible. Accounting for contingencies requires us to use judgment related to both the likelihood of a loss and the estimate of the amount or range of loss. Many legal and tax contingencies can take years to be resolved.

Pending Matters

In September 2014, two individuals filed a lawsuit against us and our two founders in the Superior Court of California for Los Angeles County. The complaint alleges two causes of action—common-law right of publicity and statutory right of publicity—based on allegations that the defendants improperly used the plaintiffs’ images in promoting Snapchat for Android. The complaint seeks unspecified compensatory and punitive damages, attorneys’ fees, and costs. The matter is currently in active discovery. We believe that the lawsuit is without merit and intend to continue to vigorously defend ourselves in this matter. Based on the preliminary nature of the proceedings in this case, the outcome of this legal proceeding remains uncertain.

In April 2016, an individual filed a lawsuit against us and another individual after he was injured in a car accident. The plaintiff alleges that we are liable because the other individual was supposedly using our “speed filter” at the time of the collision. In January 2017, the court dismissed the claim against us. This matter is currently on appeal.

The outcomes of our legal proceedings are inherently unpredictable, subject to significant uncertainties, and could be material to our financial condition, results of operations, and cash flows for a particular period. For the pending matters described above, it is not possible to estimate the reasonably possible loss or range of loss.

We are subject to various other legal proceedings and claims in the ordinary course of business, including certain patent and privacy matters. Although occasional adverse decisions or settlements may occur, we do not believe that the final disposition of any of our other pending matters will seriously harm our business, financial condition, results of operations, and cash flows.

Indemnifications

In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, investors, directors, officers, employees, and other parties with respect to certain matters. Indemnification may include losses from our breach of such agreements, services we provide, or third party intellectual property infringement claims. These indemnifications may survive termination of the underlying agreement and the maximum potential amount of future indemnification payments may not be subject to a cap. We have not incurred material costs to defend lawsuits or settle claims related to these indemnifications as of March 31, 2017. We believe the fair value of these liabilities is immaterial and accordingly have no liabilities recorded for these agreements at March 31, 2017.

18


Snap Inc.

Notes to Consolidated Financial Statements (Continued)

 

7. Fair Value Measurements

We determine the fair value of our marketable securities using quoted market prices. The following table sets forth our financial assets as of March 31, 2017 and December 31, 2016 that are measured at fair value on a recurring basis during the period:

 

 

Fair Value

 

 

March 31,

2017

 

 

December 31,

2016

 

 

(in thousands)

 

Cash and cash equivalents

 

 

 

 

 

 

 

Cash

$

157,191

 

 

$

150,121

 

U.S. government securities

 

834,482

 

 

 

U.S. government agency securities

 

435,441

 

 

 

Total cash and cash equivalents

$

1,427,114

 

 

$

150,121

 

Marketable securities

 

 

 

 

 

 

 

U.S. government securities

$

1,280,278

 

 

$

505,333

 

U.S. government agency securities

 

535,164

 

 

 

331,914

 

Total marketable securities

$

1,815,442

 

 

$

837,247

 

 

Gross unrealized gains and losses for cash equivalents and marketable securities as of March 31, 2017 and December 31, 2016 were not material. The amortized cost of U.S. government securities with maturities less than one year was $1.3 billion and $502.4 million as of March 31, 2017 and December 31, 2016, respectively. The amortized cost of U.S. government securities with maturities between one and five years was zero and $3.0 million as of March 31, 2017 and December 31, 2016, respectively. The amortized cost of U.S. government agency securities with maturities of less than a year was $504.4 million and $284.7 million as of March 31, 2017 and December 31, 2016, respectively. The amortized cost of U.S. government agency securities with maturities between one and five years was $30.7 million and $47.2 million as of March 31, 2017 and December 31, 2016, respectively.

8. Income Taxes

Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items arising in that quarter. Our effective tax rate differs from the U.S. statutory tax rate primarily due to valuation allowances on our deferred tax assets as it is more likely than not that some or all of our deferred tax assets will not be realized.

 

Income tax benefit was $3.0 million for the three months ended March 31, 2017, as compared to $0.1 million of tax expense for the three months ended March 31, 2016. The effective income tax rate was 0.1% and (0.1)% for the three months ended March 31, 2017 and 2016, respectively . The tax benefit on a pre-tax book loss for the three months ended March 31, 2017 resulted in a positive effective tax rate, while the tax expense on a pre-tax book loss in the comparative period resulted in a negative tax rate. The income tax benefit in the current period was primarily from the partial release of a valuation allowance against our net deferred tax assets. The valuation allowance release was the result of net deferred tax liabilities originating from acquisitions that were an available source of income to realize a portion of our deferred tax assets.   

19


Snap Inc.

Notes to Consolidated Financial Statements (Continued)

 

9. Accumulated Other Comprehensive Income (Loss)

The table below presents the changes in accumulated other comprehensive income (loss) (“AOCI”) by component and the reclassifications out of AOCI:

 

 

Changes in Accumulated Other Comprehensive Income (Loss) by Component

 

 

Marketable

Securities

 

 

Foreign Currency

Translation

 

 

Total

 

 

(in thousands)

 

Balance at December 31, 2016

$

44

 

 

$

(2,101

)

 

$

(2,057

)

OCI before reclassifications (1)

 

(124

)

 

 

546

 

 

 

422

 

Amounts reclassified from AOCI (2)

 

 

 

 

 

 

 

 

Net current period OCI

 

(124

)

 

 

546

 

 

 

422

 

Balance at March 31, 2017

$

(80

)

 

$

(1,555

)

 

$

(1,635

)

 

(1)

The associated income tax effects for gains / losses on marketable securities were not material. 

(2)

Realized gains and losses on marketable securities are reclassified from AOCI into other income (expense), net in the consolidated statements of operations. 

 

10. Geographic Information

Revenue by geography is based on the billing address of the advertiser. The following tables list revenue and property and equipment, net by geographic area:

 

 

Three Months Ended March 31,