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Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on May 18, 2012 (Prospectus).
The condensed consolidated balance sheet as of December 31, 2011, included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by GAAP.
The condensed consolidated financial statements include the accounts of Facebook, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2012.
We have reclassified certain prior period expense amounts from marketing and sales to general and administrative within our condensed consolidated statements of operations to conform to our current period presentation. These reclassifications did not affect revenue, total costs and expenses, (loss) income from operations, or net (loss) income.
There have been no changes to our significant accounting policies described in the Prospectus that have had a material impact on our condensed consolidated financial statements and related notes.
Initial Public Offering and Share-based Compensation
In May 2012, we completed our initial public offering (IPO) in which we issued and sold 180 million shares of Class A common stock at a public offering price of $38.00 per share. We received net proceeds of $6.8 billion after deducting underwriting discounts and commissions of $75 million and other offering expenses of approximately $6 million. Upon the closing of the IPO, all shares of our then-outstanding convertible preferred stock automatically converted into an aggregate of 545 million shares of Class B common stock and an aggregate of 336 million shares of Class B common stock converted into Class A common stock.
Restricted stock units (RSUs) granted prior to January 1, 2011 (Pre-2011 RSUs) vest upon the satisfaction of both a service condition and a liquidity condition. The service condition for the majority of these awards is satisfied over four years. The liquidity condition is satisfied upon the occurrence of a qualifying event, defined as a change of control transaction or six months following the completion of our IPO, which occurred in May 2012. The vesting condition that will be satisfied six months following our IPO does not affect the expense attribution period for the RSUs for which the service condition has been met as of the date of our IPO. This six-month period is not a substantive service condition and, accordingly, beginning on the effectiveness of our IPO in May 2012, we recognized a cumulative share-based compensation expense for the portion of the RSUs that had met the service condition. In the three and six months ended June 30, 2012, the share-based compensation expense related to our Pre-2011 RSUs recognized was $986 million. As of June 30, 2012, we have approximately $205 million of additional future period share-based compensation expense related to our Pre-2011 RSUs to be recognized over a weighted-average period of approximately two years.
RSUs granted on or after January 1, 2011 (Post-2011 RSUs) are not subject to a liquidity condition in order to vest, and compensation expense related to these grants is based on the grant date fair value of the RSUs and is recognized on a straight-line basis over the applicable service period. The majority of Post-2011 RSUs are earned over a service period of four to five years. In the three and six months ended June 30, 2012, we recognized $113 million and $210 million, respectively, and in both the three and six months ended June 30, 2011, we recognized $58 million of share-based compensation expense related to the Post-2011 RSUs. As of June 30, 2012 we anticipate $1,959 million of future period expense related to such RSUs will be recognized over a weighted-average period of approximately two years.
As of June 30, 2012, there was $2,245 million of unrecognized share-based compensation expense, of which $2,164 million relates to RSUs, and $81 million relates to restricted shares and stock options. This unrecognized compensation expense is expected to be recognized over a weighted-average period of approximately two years.
We estimate that an aggregate of approximately 273 million shares underlying Pre-2011 RSUs will vest and settle between October 15, 2012 and November 14, 2012. These shares have not been included in our shares outstanding in our condensed consolidated balance sheet as of June 30, 2012. RSU holders generally will recognize taxable income based upon the value of the shares on the date they are settled and we are required to withhold taxes on such value at applicable minimum statutory rates. We currently expect that the average of these withholding rates will be approximately 45%. We are unable to quantify the obligations as of June 30, 2012 and we will remain unable to quantify this amount until the date of the settlement of the RSUs, as the withholding obligations will be based on the closing price of the shares at the time of settlement.
Use of Estimates
Conformity with GAAP requires the use of estimates and judgments that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. These estimates form the basis for judgments we make about the carrying values of our assets and liabilities, which are not readily apparent from other sources. We base our estimates and judgments on historical information and on various other assumptions that we believe are reasonable under the circumstances. GAAP requires us to make estimates and judgments in several areas, including, but not limited to, those related to revenue recognition, collectability of accounts receivable, contingent liabilities, fair value of share-based awards, fair value of financial instruments, fair value of acquired intangible assets and goodwill, useful lives of intangible assets and property and equipment, and income taxes. These estimates are based on management’s knowledge about current events and expectations about actions we may undertake in the future. Actual results could differ materially from those estimates.
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Note 3. Property and Equipment
Property and equipment consist of the following (in millions):
June 30, 2012 |
December 31, 2011 |
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Network equipment |
$ | 1,479 | $ | 1,016 | ||||
Land |
34 | 34 | ||||||
Buildings |
449 | 355 | ||||||
Leasehold improvements |
142 | 120 | ||||||
Computer software, office equipment and other |
88 | 73 | ||||||
Construction in progress |
542 | 327 | ||||||
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Total |
2,734 | 1,925 | ||||||
Less accumulated depreciation and amortization |
(629 | ) | (450 | ) | ||||
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Property and equipment, net |
$ | 2,105 | $ | 1,475 | ||||
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Construction in progress includes costs primarily related to the construction of data centers and equipment located in our new data centers in Oregon, North Carolina and Sweden.
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Note 4. Goodwill and Other Intangible Assets
Goodwill and other intangible assets consist of the following (in millions):
June 30, 2012 |
December 31, 2011 |
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Acquired patents |
$ | 684 | $ | 51 | ||||
Acquired non-compete agreements |
21 | 18 | ||||||
Acquired technology and other |
49 | 43 | ||||||
Accumulated amortization |
(45 | ) | (32 | ) | ||||
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Net acquired intangible assets |
709 | 80 | ||||||
Goodwill |
100 | 82 | ||||||
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Goodwill and other intangible assets |
$ | 809 | $ | 162 | ||||
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Acquired patents have estimated useful lives ranging from three to 18 years at acquisition. The average term of acquired non-compete agreements is generally two years. Acquired technology and other have estimated useful lives of two to ten years. Amortization expense of intangible assets for the three and six months ended June 30, 2012 was $8 million and $13 million, respectively, and for the three and six months ended June 30, 2011 was $5 million and $10 million, respectively.
During the six months ended June 30, 2012, we completed business acquisitions for total consideration of $24 million. These acquisitions were not material to our condensed consolidated financial statements individually or in the aggregate.
The following table presents the aggregated estimated fair value of the assets acquired for acquisition completed during the six months ended June 30, 2012 (in millions):
Goodwill |
$ | 18 | ||
Acquired technology and other |
6 | |||
Acquired non-compete agreements |
3 | |||
Deferred tax liabilities |
(3 | ) | ||
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Total |
$ | 24 | ||
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Pro forma results of operations related to our acquisitions during the six months ended June 30, 2012 have not been presented because they are not material to our condensed consolidated statements of operations, either individually or in the aggregate. For acquisitions completed during the six months ended June 30, 2012, acquired technology has a weighted-average useful life of three years and the term of the non-compete agreements is two years.
During the six months ended June 30, 2012, we acquired $633 million of patents and other intellectual property rights. We completed the largest of these acquisitions in June 2012 under an agreement with Microsoft Corporation pursuant to which we were assigned Microsoft’s rights to acquire approximately 615 U.S. patents and patent applications and their foreign counterparts, consisting of approximately 170 foreign patents and patent applications, that were subject to an agreement between AOL Inc. and Microsoft entered into on April 5, 2012. We paid $550 million in cash in exchange for these patents and patent applications. As part of this transaction, we established a deferred tax liability of $49 million to reflect the difference between the future tax basis and book basis in the acquired patents and patent applications, which also increased the capitalized patent cost by this amount. As part of this transaction, we obtained a license to the other AOL patents and patent applications being purchased by Microsoft and granted Microsoft a license to the AOL patents and patent applications that we acquired. The acquisitions of these patents, patent applications and other intellectual property rights were accounted for as asset acquisitions. Patents acquired during the six months ended June 30, 2012 have estimated useful lives ranging from three to 17 years at acquisition.
Estimated amortization expense for the unamortized acquired intangible assets for the next five years and thereafter is as follows (in millions):
The remainder of 2012 |
$ | 53 | ||
2013 |
95 | |||
2014 |
89 | |||
2015 |
84 | |||
2016 |
75 | |||
2017 |
66 | |||
Thereafter |
247 | |||
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$ | 709 | |||
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Note 5. Fair Value Measurements
Assets measured at fair value on a recurring basis are summarized below (in millions):
Fair Value Measurement
at Reporting Date Using |
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Description |
June 30, 2012 | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
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Cash equivalents: |
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Money market funds |
$ | 944 | $ | 944 | $ | 0 | $ | 0 | ||||||||
U.S. government securities |
517 | 517 | 0 | 0 | ||||||||||||
U.S. government agency securities |
69 | 69 | 0 | 0 | ||||||||||||
Marketable securities: |
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U.S. government securities |
5,557 | 5,557 | 0 | 0 | ||||||||||||
U.S. government agency securities |
2,533 | 2,533 | 0 | 0 | ||||||||||||
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Total cash equivalents and marketable securities |
$ | 9,620 | $ | 9,620 | $ | 0 | $ | 0 | ||||||||
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Fair Value Measurement
at Reporting Date Using |
||||||||||||||||
Description |
December 31, 2011 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
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Cash equivalents: |
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Money market funds |
$ | 892 | $ | 892 | $ | 0 | $ | 0 | ||||||||
U.S. government securities |
60 | 60 | 0 | 0 | ||||||||||||
U.S. government agency securities |
50 | 50 | 0 | 0 | ||||||||||||
Marketable securities: |
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U.S. government securities |
1,415 | 1,415 | 0 | 0 | ||||||||||||
U.S. government agency securities |
981 | 981 | 0 | 0 | ||||||||||||
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Total cash equivalents and marketable securities |
$ | 3,398 | $ | 3,398 | $ | 0 | $ | 0 | ||||||||
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Gross unrealized gains or losses for cash equivalents and marketable securities as of June 30, 2012 and December 31, 2011 were not material.
The following table classifies our marketable securities by contractual maturities as of June 30, 2012 (in millions):
Fair Value | ||||
Due in one year |
$ | 5,369 | ||
Due in one to two years |
2,721 | |||
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$ | 8,090 | |||
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Note 6. Commitments and Contingencies
Leases
We have entered into various capital lease arrangements to obtain property and equipment for our operations. Additionally, on occasion we have purchased property and equipment for which we have subsequently obtained capital financing under sale-leaseback transactions. These agreements are typically for three years except for building leases which are for 15 years, with interest rates ranging from 1% to 13%. The leases are secured by the underlying leased buildings and equipment. We have also entered into various non-cancelable operating lease agreements for certain of our offices, equipment, land and data centers with original lease periods expiring between 2012 and 2027. We are committed to pay a portion of the related actual operating expenses under certain of these lease agreements. Certain of these arrangements have free rent periods and/or escalating rent payment provisions, and we recognize rent expense under such arrangements on a straight-line basis.
Operating lease expense totaled $50 million and $101 million for the three and six months ended June 30, 2012, and $61 million and $119 million for the three and six months ended June 30, 2011.
Other Agreements
In April 2012, we entered into an agreement to acquire Instagram, Inc., which has built a mobile phone-based photo-sharing service, for 22,999,412 shares of our common stock and $300 million in cash. The value of the equity component of the final purchase price will be determined for accounting purposes based on the fair value of our common stock on the closing date. Following the closing of this acquisition, we plan to maintain Instagram’s products as independent mobile applications to enhance our photos product offerings and to enable users to increase their levels of mobile engagement and photo sharing. This acquisition is subject to customary closing conditions, including the expiration or early termination of all applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended (HSR), and is expected to close in 2012. We have agreed to pay Instagram a $200 million termination fee if governmental authorities permanently enjoin or otherwise prevent the completion of the merger or if either party terminates the agreement after December 10, 2012.
Contingencies
Legal Matters
On March 12, 2012, Yahoo filed a lawsuit against us in the U.S. District Court for the Northern District of California, claiming that we infringe ten of Yahoo’s patents that Yahoo claimed relate to “advertising,” “social networking,” “privacy,” “customization,” and “messaging,” and on April 27, 2012 Yahoo added two patents to the lawsuit that Yahoo claims relate to “advertising.” Yahoo sought unspecified damages, a damage multiplier for alleged willful infringement, and an injunction. On April 3, 2012, we filed our answer with respect to this complaint and asserted counterclaims that Yahoo’s products infringe ten of our patents. On July 6, 2012, the parties entered into a settlement agreement resolving all claims made in the litigation. On July 9, 2012, the parties filed a stipulated dismissal of the litigation with the U.S. District Court for the Northern District of California and this litigation was dismissed on July 10, 2012. We have no payment obligations under this settlement agreement.
Beginning on May 22, 2012, multiple putative class actions, derivative actions, and individual actions were filed in state and federal courts in the United States and in other jurisdictions against us, our directors, and/or certain of our officers alleging violation of securities laws or breach of fiduciary duties in connection with our IPO and seeking unspecified damages. We believe these lawsuits are without merit, and we are vigorously defending these lawsuits. In addition, following our IPO, the events surrounding our IPO became the subject of government inquiries, and we have received requests for information in connection with certain of those inquiries.
We are also party to various legal proceedings and claims which arise in the ordinary course of business.
In the opinion of management, there was not at least a reasonable possibility we may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies relating to the matters set forth above. However, the outcome of litigation is inherently uncertain. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against us in the same reporting period for amounts in excess of management’s expectations, our condensed consolidated financial statements of a particular reporting period could be materially adversely affected.
Credit Facility
In February 2012, we entered into an agreement for an unsecured five-year revolving credit facility that allows us to borrow up to $5,000 million for general corporate purposes, with interest payable on the borrowed amounts set at LIBOR plus 1.0%. Under the terms of the agreement, we are obligated to pay a commitment fee of 0.10% per annum on the daily undrawn balance.
Concurrent with our entering into the revolving credit facility, we also entered into a bridge credit facility agreement that allows us to borrow up to $3,000 million to fund tax withholding and remittance obligations related to the settlement of RSUs in connection with our IPO, with interest payable on the borrowed amounts set at LIBOR plus 1.0% and an additional 0.25% payable on drawn balances outstanding from and after the 180th day of borrowing. Any amounts outstanding under this facility will be due one year after the date we draw on the facility but no later than June 30, 2014. During the term of this bridge facility, the lenders’ commitments are subject to reduction and amounts borrowed thereunder are subject to repayment in the event we raise capital through certain asset sales, debt issuances, or equity issuances. Under the terms of the agreement, we are obligated to pay a commitment fee of 0.10% per annum on the daily undrawn balance from and after the 90th day following the date we entered into the bridge facility.
No amounts were drawn down under these credit and bridge credit facility agreements as of June 30, 2012.
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Note 7. Stockholders’ Equity
Share-based Compensation Plans
We maintain three share-based employee compensation plans: the 2012 Equity Incentive Plan, the 2005 Stock Plan and the 2005 Officers’ Stock Plan (Stock Plans). In January 2012, our board of directors approved our 2012 Equity Incentive Plan (2012 Plan), and in April 2012 our stockholders adopted the 2012 Plan, effective on May 17, 2012, which serves as the successor to our 2005 Stock Plan and provides for the issuance of incentive and nonstatutory stock options, restricted stock awards, stock appreciation rights, restricted stock units, performance shares and stock bonuses to qualified employees, directors and consultants. No new awards will be issued under the 2005 Stock Plan as of the effective date of the 2012 Plan. Outstanding awards under the 2005 Stock Plan continue to be subject to the terms and conditions of the 2005 Stock Plan. Shares available for grant under the 2005 Stock Plan, which were reserved but not issued or subject to outstanding awards under the 2005 Stock Plan as of the effective date, were added to the reserves of the 2012 Plan.
We have initially reserved 25,000,000 shares of our Class A common stock for issuance under our 2012 Plan. The number of shares reserved for issuance under our 2012 Plan will increase automatically on the first day of January of each of 2013 through 2022. The maximum term for stock options granted under the 2012 Plan may not exceed ten years from the date of grant. Our 2012 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 2005 Officers’ Stock Plan provides for up to 120,000,000 shares of incentive and nonstatutory stock options to certain of our employees or officers. The 2005 Officers’ Stock Plan will terminate ten years after its adoption unless terminated earlier by our compensation committee. Stock options become vested and exercisable at such times and under such conditions as determined by our compensation committee on the date of grant. In November 2005, we issued a nonstatutory stock option to our CEO to purchase 120,000,000 shares of our Class B common stock under the 2005 Officers’ Stock Plan. As of June 30, 2012, the option had been partially exercised in respect of 60,000,000 shares with the remainder remaining outstanding and fully vested, and no options were available for future issuance under the 2005 Officers’ Stock Plan.
The following table summarizes the stock option and RSU award activity under the Stock Plans during the six months ended June 30, 2012:
Shares Subject to Options Outstanding | Outstanding RSUs | |||||||||||||||||||||||||||
Shares Available for Grant |
Number of Shares |
Weighted Average Exercise Price |
Weighted- Average Remaining Contractual Term |
Aggregate Intrinsic Value(1) |
Outstanding RSUs |
Weighted Average Grant Date Fair Value |
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(in thousands) | (in thousands) | (in years) | (in millions) | (in thousands) | ||||||||||||||||||||||||
Balance as of December 31, 2011 |
52,318 | 258,539 | $ | 0.47 | 4.38 | $ | 7,360 | 378,772 | $ | 6.83 | ||||||||||||||||||
RSUs granted |
(28,603 | ) | 0 | 28,603 | 36.04 | |||||||||||||||||||||||
Stock options exercised |
0 | (84,078 | ) | 0.11 | 0 | |||||||||||||||||||||||
Stock options forfeited/cancelled |
584 | (584 | ) | 0.62 | 0 | |||||||||||||||||||||||
RSUs forfeited and cancelled |
4,385 | 0 | (4,385 | ) | 14.86 | |||||||||||||||||||||||
2012 Equity Incentive Plan shares authorized |
25,000 | |||||||||||||||||||||||||||
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Balance as of June 30, 2012 |
53,684 | 173,877 | $ | 0.65 | 4.08 | $ | 5,294 | 402,990 | $ | 8.81 | ||||||||||||||||||
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(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, 2011 and the closing market price of our common stock as of June 30, 2012. |
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Note 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. In each quarter we update our estimate of the annual effective tax rate, and if our estimated annual tax rate changes, we make a cumulative adjustment in that quarter. Our quarterly tax provision, and our quarterly estimate of our annual effective tax rate, are subject to significant volatility due to several factors, including our ability to accurately predict our pre-tax income and loss in multiple jurisdictions, including the portions of our share-based compensation that will not generate tax benefits, and the effects of acquisitions and the integration of those acquisitions. In addition, our effective tax rate can be more or less volatile based on the amount of pre-tax income. For example, the impact of non-deductible share based compensation expenses on our effective tax rate is significantly greater when our pre-tax income is lower.
Our effective tax rate has exceeded the U.S. statutory rate primarily because of losses arising outside the United States in jurisdictions where we do not receive a tax benefit and the impact of non-deductible share-based compensation. These losses were primarily due to the initial start-up costs incurred by our foreign subsidiaries to operate in certain foreign markets, including the costs incurred by those subsidiaries to license, develop, and use our intellectual property. Our effective tax rate in the future will depend on the portion of our profits earned within and outside the United States, which will also be affected by our methodologies for valuing our intellectual property and intercompany transactions.
Our effective tax rate in the three and six months ended June 30, 2012 exceeded our effective tax rate in 2011 because the amount of losses arising outside the United States in jurisdictions where we do not receive a tax benefit and the amount of non-deductible share-based compensation are proportionately larger relative to pre-tax income in 2012 than in 2011. Our effective tax rate in 2012 was also higher due to the expiration of the federal tax credit for research and development activities.
Our income tax refundable was $567 million as of June 30, 2012, which is an increase of $567 million from December 31, 2011. This balance reflects the expected refund of estimated income tax payments made in 2012 and the expected refund from income tax loss carrybacks to 2010 and 2011. Our net deferred tax assets were $396 million as of June 30, 2012, which is an increase of $336 million from December 31, 2011. This increase is primarily due to the recognition of tax benefits related to share-based compensation.
We are subject to taxation in the United States and various other state and foreign jurisdictions. The material jurisdictions in which we are subject to potential examination include the United States and Ireland. We are under examination by the Internal Revenue Service (IRS) for our 2008 and 2009 tax years. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these examinations and we do not anticipate a significant impact to our gross unrecognized tax benefits within the next 12 months related to these years. Our 2010 and 2011 tax years remain subject to examination by the IRS and all tax years starting in 2008 remain subject to examination in Ireland. We remain subject to possible examinations or are undergoing audits in various other jurisdictions that are not material to our financial statements.
Although the timing of the resolution, settlement, and closure of any audits is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. However, given the number of years remaining that are subject to examination, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.
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Note 9. Geographical Information
Revenue by geography is based on the billing address of the advertiser or Platform developer. The following tables set forth revenue and long-lived assets by geographic area (in millions):
Three Months Ended June 30, |
Six Months Ended June 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Revenue: |
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United States |
$ | 588 | $ | 515 | $ | 1,124 | $ | 942 | ||||||||
Rest of the world (1) |
596 | 380 | 1,118 | 684 | ||||||||||||
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Total revenue |
$ | 1,184 | $ | 895 | $ | 2,242 | $ | 1,626 | ||||||||
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(1) |
No individual country exceeded 10% of our total revenue for any period presented |
June 30, 2012 | December 31, 2011 | |||||||
Long-lived assets: |
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United States |
$ | 1,978 | $ | 1,444 | ||||
Rest of the world(1) |
127 | 31 | ||||||
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Total long-lived assets |
$ | 2,105 | $ | 1,475 | ||||
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(1) |
No individual country exceeded 10% of our total long-lived assets for any period presented |
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Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on May 18, 2012 (Prospectus).
The condensed consolidated balance sheet as of December 31, 2011, included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by GAAP.
The condensed consolidated financial statements include the accounts of Facebook, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2012.
We have reclassified certain prior period expense amounts from marketing and sales to general and administrative within our condensed consolidated statements of operations to conform to our current period presentation. These reclassifications did not affect revenue, total costs and expenses, (loss) income from operations, or net (loss) income.
There have been no changes to our significant accounting policies described in the Prospectus that have had a material impact on our condensed consolidated financial statements and related notes.
Use of Estimates
Conformity with GAAP requires the use of estimates and judgments that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. These estimates form the basis for judgments we make about the carrying values of our assets and liabilities, which are not readily apparent from other sources. We base our estimates and judgments on historical information and on various other assumptions that we believe are reasonable under the circumstances. GAAP requires us to make estimates and judgments in several areas, including, but not limited to, those related to revenue recognition, collectability of accounts receivable, contingent liabilities, fair value of share-based awards, fair value of financial instruments, fair value of acquired intangible assets and goodwill, useful lives of intangible assets and property and equipment, and income taxes. These estimates are based on management’s knowledge about current events and expectations about actions we may undertake in the future. Actual results could differ materially from those estimates.
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Property and equipment consist of the following (in millions):
June 30, 2012 |
December 31, 2011 |
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Network equipment |
$ | 1,479 | $ | 1,016 | ||||
Land |
34 | 34 | ||||||
Buildings |
449 | 355 | ||||||
Leasehold improvements |
142 | 120 | ||||||
Computer software, office equipment and other |
88 | 73 | ||||||
Construction in progress |
542 | 327 | ||||||
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Total |
2,734 | 1,925 | ||||||
Less accumulated depreciation and amortization |
(629 | ) | (450 | ) | ||||
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Property and equipment, net |
$ | 2,105 | $ | 1,475 | ||||
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Goodwill and other intangible assets consist of the following (in millions):
June 30, 2012 |
December 31, 2011 |
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Acquired patents |
$ | 684 | $ | 51 | ||||
Acquired non-compete agreements |
21 | 18 | ||||||
Acquired technology and other |
49 | 43 | ||||||
Accumulated amortization |
(45 | ) | (32 | ) | ||||
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Net acquired intangible assets |
709 | 80 | ||||||
Goodwill |
100 | 82 | ||||||
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Goodwill and other intangible assets |
$ | 809 | $ | 162 | ||||
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The following table presents the aggregated estimated fair value of the assets acquired for acquisition completed during the six months ended June 30, 2012 (in millions):
Goodwill |
$ | 18 | ||
Acquired technology and other |
6 | |||
Acquired non-compete agreements |
3 | |||
Deferred tax liabilities |
(3 | ) | ||
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Total |
$ | 24 | ||
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Estimated amortization expense for the unamortized acquired intangible assets for the next five years and thereafter is as follows (in millions):
The remainder of 2012 |
$ | 53 | ||
2013 |
95 | |||
2014 |
89 | |||
2015 |
84 | |||
2016 |
75 | |||
2017 |
66 | |||
Thereafter |
247 | |||
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$ | 709 | |||
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Assets measured at fair value on a recurring basis are summarized below (in millions):
Fair Value Measurement
at Reporting Date Using |
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Description |
June 30, 2012 | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
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Cash equivalents: |
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Money market funds |
$ | 944 | $ | 944 | $ | 0 | $ | 0 | ||||||||
U.S. government securities |
517 | 517 | 0 | 0 | ||||||||||||
U.S. government agency securities |
69 | 69 | 0 | 0 | ||||||||||||
Marketable securities: |
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U.S. government securities |
5,557 | 5,557 | 0 | 0 | ||||||||||||
U.S. government agency securities |
2,533 | 2,533 | 0 | 0 | ||||||||||||
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Total cash equivalents and marketable securities |
$ | 9,620 | $ | 9,620 | $ | 0 | $ | 0 | ||||||||
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Fair Value Measurement
at Reporting Date Using |
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Description |
December 31, 2011 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
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Cash equivalents: |
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Money market funds |
$ | 892 | $ | 892 | $ | 0 | $ | 0 | ||||||||
U.S. government securities |
60 | 60 | 0 | 0 | ||||||||||||
U.S. government agency securities |
50 | 50 | 0 | 0 | ||||||||||||
Marketable securities: |
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U.S. government securities |
1,415 | 1,415 | 0 | 0 | ||||||||||||
U.S. government agency securities |
981 | 981 | 0 | 0 | ||||||||||||
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Total cash equivalents and marketable securities |
$ | 3,398 | $ | 3,398 | $ | 0 | $ | 0 | ||||||||
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The following table classifies our marketable securities by contractual maturities as of June 30, 2012 (in millions):
Fair Value | ||||
Due in one year |
$ | 5,369 | ||
Due in one to two years |
2,721 | |||
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$ | 8,090 | |||
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The following table summarizes the stock option and RSU award activity under the Stock Plans during the six months ended June 30, 2012:
Shares Subject to Options Outstanding | Outstanding RSUs | |||||||||||||||||||||||||||
Shares Available for Grant |
Number of Shares |
Weighted Average Exercise Price |
Weighted- Average Remaining Contractual Term |
Aggregate Intrinsic Value(1) |
Outstanding RSUs |
Weighted Average Grant Date Fair Value |
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(in thousands) | (in thousands) | (in years) | (in millions) | (in thousands) | ||||||||||||||||||||||||
Balance as of December 31, 2011 |
52,318 | 258,539 | $ | 0.47 | 4.38 | $ | 7,360 | 378,772 | $ | 6.83 | ||||||||||||||||||
RSUs granted |
(28,603 | ) | 0 | 28,603 | 36.04 | |||||||||||||||||||||||
Stock options exercised |
0 | (84,078 | ) | 0.11 | 0 | |||||||||||||||||||||||
Stock options forfeited/cancelled |
584 | (584 | ) | 0.62 | 0 | |||||||||||||||||||||||
RSUs forfeited and cancelled |
4,385 | 0 | (4,385 | ) | 14.86 | |||||||||||||||||||||||
2012 Equity Incentive Plan shares authorized |
25,000 | |||||||||||||||||||||||||||
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Balance as of June 30, 2012 |
53,684 | 173,877 | $ | 0.65 | 4.08 | $ | 5,294 | 402,990 | $ | 8.81 | ||||||||||||||||||
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(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, 2011 and the closing market price of our common stock as of June 30, 2012. |
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The following tables set forth revenue and long-lived assets by geographic area (in millions):
Three Months Ended June 30, |
Six Months Ended June 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Revenue: |
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United States |
$ | 588 | $ | 515 | $ | 1,124 | $ | 942 | ||||||||
Rest of the world (1) |
596 | 380 | 1,118 | 684 | ||||||||||||
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Total revenue |
$ | 1,184 | $ | 895 | $ | 2,242 | $ | 1,626 | ||||||||
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(1) |
No individual country exceeded 10% of our total revenue for any period presented |
June 30, 2012 | December 31, 2011 | |||||||
Long-lived assets: |
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United States |
$ | 1,978 | $ | 1,444 | ||||
Rest of the world(1) |
127 | 31 | ||||||
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Total long-lived assets |
$ | 2,105 | $ | 1,475 | ||||
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(1) |
No individual country exceeded 10% of our total long-lived assets for any period presented |
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