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 June 30, 2020

or

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

For the transition period from            to            

Commission File Number: 001-35551

____________________________________________ 

Facebook, Inc.

(Exact name of registrant as specified in its charter)

____________________________________________ 

Delaware	20-1665019
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

1601 Willow Road, Menlo Park, California 94025

(Address of principal executive offices and Zip Code)

(650) 543-4800

(Registrant's telephone number, including area code)

 ____________________________________________

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, par value $0.000006	FB	The Nasdaq Stock Market LLC

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

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

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.			☐

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

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

Class		Number of Shares Outstanding
Class A Common Stock	$0.000006 par value	2,404,282,110	shares outstanding as of July 23, 2020
Class B Common Stock	$0.000006 par value	444,533,708	shares outstanding as of July 23, 2020

FACEBOOK, INC.

TABLE OF CONTENTS

		Page
Note About Forward-Looking Statements		3
Limitations of Key Metrics and Other Data		4
PART I—FINANCIAL INFORMATION		7
Item 1.	Financial Statements (unaudited)	7
	Condensed Consolidated Balance Sheets—June 30, 2020 and December 31, 2019	7
	Condensed Consolidated Statements of Income—for the three and six months ended June 30, 2020 and 2019	8
	Condensed Consolidated Statements of Comprehensive Income—for the three and six months ended June 30, 2020 and 2019	9
	Condensed Consolidated Statements of Stockholders' Equity—for the three and six months ended June 30, 2020 and 2019	10
	Condensed Consolidated Statements of Cash Flows—for the six months ended June 30, 2020 and 2019	11
	Notes to Condensed Consolidated Financial Statements	13
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.	Controls and Procedures	47
PART II—OTHER INFORMATION		48
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	80
Item 6.	Exhibits	81
SIGNATURES		82

2

NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A, "Risk Factors" in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

Unless expressly indicated or the context requires otherwise, the terms "Facebook," "company," "we," "us," and "our" in this document refer to Facebook, Inc., a Delaware corporation, and, where appropriate, its wholly owned subsidiaries. The term "Facebook" may also refer to our products, regardless of the manner in which they are accessed. The term "Family" refers to our Facebook, Instagram, Messenger, and WhatsApp products. For references to accessing Facebook or our other products on the "web" or via a "website," such terms refer to accessing such products on personal computers. For references to accessing Facebook or our other products on "mobile," such term refers to accessing such products via a mobile application or via a mobile-optimized version of our websites such as m.facebook.com, whether on a mobile phone or tablet.

3

LIMITATIONS OF KEY METRICS AND OTHER DATA

The numbers for our key metrics are calculated using internal company data based on the activity of user accounts. We have historically reported the numbers of our daily active users (DAUs), monthly active users (MAUs), and average revenue per user (ARPU) (collectively, our "Facebook metrics") based on user activity only on Facebook and Messenger and not on our other products. Beginning with our Annual Report on Form 10-K for the year ended December 31, 2019, we also report our estimates of the numbers of our daily active people (DAP), monthly active people (MAP), and average revenue per person (ARPP) (collectively, our "Family metrics") based on the activity of users who visited at least one of Facebook, Instagram, Messenger, and WhatsApp (collectively, our "Family" of products) during the applicable period of measurement. We believe our Family metrics better reflect the size of our community and the fact that many people are using more than one of our products. As a result, over time we intend to report our Family metrics as our key metrics in place of DAUs, MAUs, and ARPU in our periodic reports filed with the Securities and Exchange Commission.

While these numbers are 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 usage of our products across large online and mobile populations around the world. The methodologies used to measure these metrics require significant judgment and are also susceptible to algorithm or other technical errors. In addition, we are continually seeking to improve our estimates of our user base, and such estimates may change due to improvements or changes in our methodology. We regularly review our processes for calculating these metrics, and from time to time we discover inaccuracies in our metrics or make adjustments to improve their accuracy, which can result in adjustments to our historical metrics. Our ability to recalculate our historical metrics may be impacted by data limitations or other factors that require us to apply different methodologies for such adjustments. We generally do not intend to update previously disclosed Family metrics for any such inaccuracies or adjustments that are within the error margins disclosed below.

In addition, our Facebook metrics and Family metrics estimates will differ from estimates published by third parties due to differences in methodology.

Facebook Metrics

We regularly evaluate our Facebook metrics to estimate the number of "duplicate" and "false" accounts among our MAUs. A duplicate account is one that a user maintains in addition to his or her principal account. We divide "false" accounts into two categories: (1) user-misclassified accounts, where users have created personal profiles for a business, organization, or non-human entity such as a pet (such entities are permitted on Facebook using a Page rather than a personal profile under our terms of service); and (2) violating accounts, which represent user profiles that we believe are intended to be used for purposes that violate our terms of service, such as bots and spam. The estimates of duplicate and false accounts are based on an internal review of a limited sample of accounts, and we apply significant judgment in making this determination. For example, to identify duplicate accounts we use data signals such as identical IP addresses and similar user names, and to identify false accounts we look for names that appear to be fake or other behavior that appears inauthentic to the reviewers. Any loss of access to data signals we use in this process, whether as a result of our own product decisions, actions by third-party browser or mobile platforms, regulatory or legislative requirements, limitations while our personnel work remotely during the COVID-19 pandemic, or other factors, also may impact the stability or accuracy of our estimates of duplicate and false accounts. Our estimates also may change as our methodologies evolve, including through the application of new data signals or technologies or product changes that may allow us to identify previously undetected duplicate or false accounts and may improve our ability to evaluate a broader population of our users. Duplicate and false accounts are very difficult to measure at our scale, and it is possible that the actual number of duplicate and false accounts may vary significantly from our estimates.

In the fourth quarter of 2019, we estimated that duplicate accounts may have represented approximately 11% of our worldwide MAUs. We believe the percentage of duplicate accounts is meaningfully higher in developing markets such as the Philippines and Vietnam, as compared to more developed markets. In the fourth quarter of 2019, we estimated that false accounts may have represented approximately 5% of our worldwide MAUs. Our estimation of false accounts can vary as a result of episodic spikes in the creation of such accounts, which we have seen originate more frequently in specific countries such as Indonesia and Vietnam. From time to time, we disable certain user accounts, make product changes, or take other actions to reduce the number of duplicate or false accounts among our users, which may also reduce our DAU and MAU estimates in a particular period. We intend to disclose our estimates of the number of duplicate and false accounts among our MAUs on an annual basis.

4

The numbers of DAUs and MAUs discussed in this Quarterly Report on Form 10-Q, as well as ARPU, do not include users on Instagram, WhatsApp, or our other products, unless they would otherwise qualify as DAUs or MAUs, respectively, based on their other activities on Facebook.

Family Metrics

Many people in our community have user accounts on more than one of our products, and some people have multiple user accounts within an individual product. Accordingly, for our Family metrics, we do not seek to count the total number of user accounts across our products because we believe that would not reflect the actual size of our community. Rather, our Family metrics represent our estimates of the number of unique people using at least one of Facebook, Instagram, Messenger, and WhatsApp. We do not require people to use a common identifier or link their accounts to use multiple products in our Family, and therefore must seek to attribute multiple user accounts within and across products to individual people. To calculate these metrics, we rely upon complex techniques, algorithms and machine learning models that seek to count the individual people behind user accounts, including by matching multiple user accounts within an individual product and across multiple products when we believe they are attributable to a single person, and counting such group of accounts as one person. These techniques and models require significant judgment, are subject to data and other limitations discussed below, and inherently are subject to statistical variances and uncertainties. We estimate the potential error in our Family metrics primarily based on user survey data, which itself is subject to error as well. While we expect the error margin for our Family metrics to vary from period to period, we estimate that such margin generally will be approximately 3% of our worldwide MAP. At our scale, it is very difficult to attribute multiple user accounts within and across products to individual people, and it is possible that the actual numbers of unique people using our products may vary significantly from our estimates, potentially beyond our estimated error margins. As a result, it is also possible that our Family metrics may indicate changes or trends in user numbers that do not match actual changes or trends.

To calculate our estimates of Family DAP and MAP, we currently use a series of machine learning models that are developed based on internal reviews of limited samples of user accounts and calibrated against user survey data. We apply significant judgment in designing these models and calculating these estimates. For example, to match user accounts within individual products and across multiple products, we use data signals such as similar device information, IP addresses, and user names. We also calibrate our models against data from periodic user surveys of varying sizes and frequency across our products, which are inherently subject to error. The timing and results of such user surveys have in the past contributed, and may in the future contribute, to changes in our reported Family metrics from period to period. In addition, our data limitations may affect our understanding of certain details of our business and increase the risk of error for our Family metrics estimates. Our techniques and models rely on a variety of data signals from different products, and we rely on more limited data signals for some products compared to others. For example, as a result of limited visibility into encrypted products, we have fewer data signals from WhatsApp user accounts and primarily rely on phone numbers and device information to match WhatsApp user accounts with accounts on our other products. Similarly, although Messenger Kids users are included in our Family metrics, we do not seek to match their accounts with accounts on our other applications for purposes of calculating DAP and MAP. Any loss of access to data signals we use in our process for calculating Family metrics, whether as a result of our own product decisions, actions by third-party browser or mobile platforms, regulatory or legislative requirements, limitations while our personnel work remotely during the COVID-19 pandemic, or other factors, also may impact the stability or accuracy of our reported Family metrics. Our estimates of Family metrics also may change as our methodologies evolve, including through the application of new data signals or technologies, product changes, or other improvements in our user surveys, algorithms, or machine learning that may improve our ability to match accounts within and across our products or otherwise evaluate the broad population of our users. In addition, such evolution may allow us to identify previously undetected violating accounts (as defined below).

We regularly evaluate our Family metrics to estimate the percentage of our MAP consisting solely of "violating" accounts. We define "violating" accounts as accounts which we believe are intended to be used for purposes that violate our terms of service, including bots and spam. In the fourth quarter of 2019, we estimated that approximately 3% of our worldwide MAP consisted solely of violating accounts. Such estimation is based on an internal review of a limited sample of accounts, and we apply significant judgment in making this determination. For example, we look for account information and behaviors associated with Facebook and Instagram accounts that appear to be inauthentic to the reviewers, but we have limited visibility into WhatsApp user activity due to encryption. In addition, if we believe an individual person has one or more violating accounts, we do not include such person in our violating accounts estimation as long as we believe they have one account that does not constitute a violating account. From time to time, we disable certain user accounts, make product changes, or take other actions to reduce

5

the number of violating accounts among our users, which may also reduce our DAP and MAP estimates in a particular period. We intend to disclose our estimates of the percentage of our MAP consisting solely of violating accounts on an annual basis. Violating accounts are very difficult to measure at our scale, and it is possible that the actual number of violating accounts may vary significantly from our estimates.

The numbers of Family DAP and MAP discussed in this Quarterly Report on Form 10-Q, as well as ARPP, do not include users on our other products, unless they would otherwise qualify as DAP or MAP, respectively, based on their other activities on our Family products.

User Geography

Our data regarding the geographic location of our users is estimated based on a number of factors, such as the user's IP address and self-disclosed location. These factors may not always accurately reflect the user's actual location. For example, a user may appear to be accessing Facebook from the location of the proxy server that the user connects to rather than from the user's actual location. The methodologies used to measure our metrics are also susceptible to algorithm or other technical errors, and our estimates for revenue by user location and revenue by user device are also affected by these factors.

6

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

FACEBOOK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except for number of shares and par value)

(Unaudited)

	June 30, 2020			December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	21,045		$	19,079
Marketable securities	37,195			35,776
Accounts receivable, net of allowances of $365 and $206 as of June 30, 2020 and December 31, 2019, respectively	7,483			9,518
Prepaid expenses and other current assets	2,407			1,852
Total current assets	68,130			66,225
Property and equipment, net	39,006			35,323
Operating lease right-of-use assets, net	9,429			9,460
Intangible assets, net	859			894
Goodwill	19,029			18,715
Other assets	3,238			2,759
Total assets	$	139,691		$	133,376
Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	920		$	1,363
Partners payable	729			886
Operating lease liabilities, current	899			800
Accrued expenses and other current liabilities	8,496			11,735
Deferred revenue and deposits	264			269
Total current liabilities	11,308			15,053
Operating lease liabilities, non-current	9,633			9,524
Other liabilities	8,303			7,745
Total liabilities	29,244			32,322
Commitments and contingencies
Stockholders' equity:
Common stock, $0.000006 par value; 5,000 million Class A shares authorized, 2,406 million and 2,407 million shares issued and outstanding, as of June 30, 2020 and December 31, 2019, respectively; 4,141 million Class B shares authorized, 444 million and 445 million shares issued and outstanding, as of June 30, 2020 and December 31, 2019, respectively	—			—
Additional paid-in capital	47,805			45,851
Accumulated other comprehensive loss	(142		)	(489		)
Retained earnings	62,784			55,692
Total stockholders' equity	110,447			101,054
Total liabilities and stockholders' equity	$	139,691		$	133,376

See Accompanying Notes to Condensed Consolidated Financial Statements.

7

FACEBOOK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per share amounts)

(Unaudited)

 

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Revenue	$	18,687	$	16,886	$	36,423	$	31,963
Costs and expenses:
Cost of revenue	3,829		3,307		7,288		6,123
Research and development	4,462		3,315		8,477		6,175
Marketing and sales	2,840		2,414		5,627		4,434
General and administrative	1,593		3,224		3,175		7,288
Total costs and expenses	12,724		12,260		24,567		24,020
Income from operations	5,963		4,626		11,856		7,943
Interest and other income, net	168		206		136		371
Income before provision for income taxes	6,131		4,832		11,992		8,314
Provision for income taxes	953		2,216		1,911		3,269
Net income	$	5,178	$	2,616	$	10,081	$	5,045
Earnings per share attributable to Class A and Class B common stockholders:
Basic	$	1.82	$	0.92	$	3.54	$	1.77
Diluted	$	1.80	$	0.91	$	3.51	$	1.76
Weighted-average shares used to compute earnings per share attributable to Class A and Class B common stockholders:
Basic	2,850		2,855		2,851		2,855
Diluted	2,879		2,875		2,876		2,873
Share-based compensation expense included in costs and expenses:
Cost of revenue	$	117	$	109	$	211	$	196
Research and development	1,261		927		2,260		1,650
Marketing and sales	187		160		336		273
General and administrative	130		107		223		194
Total share-based compensation expense	$	1,695	$	1,303	$	3,030	$	2,313

See Accompanying Notes to Condensed Consolidated Financial Statements.

8

FACEBOOK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

 

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020			2019
Net income	$	5,178	$	2,616	$	10,081		$	5,045
Other comprehensive income (loss):
Change in foreign currency translation adjustment, net of tax	247		90		(129		)	(85		)
Change in unrealized gain/loss on available-for-sale investments and other, net of tax	155		208		476			362
Comprehensive income	$	5,580	$	2,914	$	10,428		$	5,322

See Accompanying Notes to Condensed Consolidated Financial Statements.

9

FACEBOOK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In millions)

(Unaudited) 

	Three Months Ended June 30, 2020																Three Months Ended June 30, 2019
	Class A and Class B Common Stock				Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Retained Earnings			Total Stockholders' Equity			Class A and Class B Common Stock				Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Retained Earnings			Total Stockholders' Equity
	Shares		Par  Value														Shares		Par  Value
Balances at beginning of period	2,851		$	—	$	46,688		$	(544	)	$	59,160		$	105,304		2,856		$	—	$	43,533		$	(781	)	$	43,764		$	86,516
Issuance of common stock	10		—		—			—			—			—			8		—		4			—			—			4
Shares withheld related to net share settlement and other	(4	)	—		(578		)	—			(175		)	(753		)	(4	)	—		(563		)	—			(287		)	(850		)
Share-based compensation	—		—		1,695			—			—			1,695			—		—		1,303			—			—			1,303
Share repurchases	(7	)	—		—			—			(1,379		)	(1,379		)	(6	)	—		—			—			(1,125		)	(1,125		)
Other comprehensive income	—		—		—			402			—			402			—		—		—			298			—			298
Net income	—		—		—			—			5,178			5,178			—		—		—			—			2,616			2,616
Balances at end of period	2,850		$	—	$	47,805		$	(142	)	$	62,784		$	110,447		2,854		$	—	$	44,277		$	(483	)	$	44,968		$	88,762
	Six Months Ended June 30, 2020																Six Months Ended June 30, 2019
	Class A and Class B Common Stock				Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Retained Earnings			Total Stockholders' Equity			Class A and Class B Common Stock				Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Retained Earnings			Total Stockholders' Equity
	Shares		Par  Value														Shares		Par  Value
Balances at beginning of period	2,852		$	—	$	45,851		$	(489	)	$	55,692		$	101,054		2,854		$	—	$	42,906		$	(760	)	$	41,981		$	84,127
Issuance of common stock	18		—		—			—			—			—			16		—		9			—			—			9
Shares withheld related to net share settlement and other	(7	)	—		(1,076		)	—			(368		)	(1,444		)	(7	)	—		(951		)	—			(411		)	(1,362		)
Share-based compensation	—		—		3,030			—			—			3,030			—		—		2,313			—			—			2,313
Share repurchases	(13	)	—		—			—			(2,621		)	(2,621		)	(9	)	—		—			—			(1,647		)	(1,647		)
Other comprehensive income	—		—		—			347			—			347			—		—		—			277			—			277
Net income	—		—		—			—			10,081			10,081			—		—		—			—			5,045			5,045
Balances at end of period	2,850		$	—	$	47,805		$	(142	)	$	62,784		$	110,447		2,854		$	—	$	44,277		$	(483	)	$	44,968		$	88,762

See Accompanying Notes to Condensed Consolidated Financial Statements.

10

FACEBOOK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

	Six Months Ended June 30,
	2020			2019
Cash flows from operating activities
Net income	$	10,081		$	5,045
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	3,301			2,857
Share-based compensation	3,030			2,313
Deferred income taxes	690			184
Other	49			14
Changes in assets and liabilities:
Accounts receivable	1,924			64
Prepaid expenses and other current assets	(353		)	(168		)
Other assets	(15		)	65
Accounts payable	(100		)	(87		)
Partners payable	(158		)	20
Accrued expenses and other current liabilities	(3,016		)	5,982
Deferred revenue and deposits	(1		)	51
Other liabilities	(554		)	1,584
Net cash provided by operating activities	14,878			17,924
Cash flows from investing activities
Purchases of property and equipment, net	(6,813		)	(7,470		)
Purchases of marketable securities	(14,063		)	(11,755		)
Sales of marketable securities	5,381			4,456
Maturities of marketable securities	7,868			4,105
Acquisitions of businesses, net of cash acquired, and purchases of intangible assets	(372		)	(53		)
Other investing activities, net	(288		)	(61		)
Net cash used in investing activities	(8,287		)	(10,778		)
Cash flows from financing activities
Taxes paid related to net share settlement of equity awards	(1,444		)	(1,119		)
Repurchases of Class A common stock	(2,618		)	(1,758		)
Principal payments on finance leases	(209		)	(267		)
Net change in overdraft in cash pooling entities	(17		)	(119		)
Other financing activities, net	114			9
Net cash used in financing activities	(4,174		)	(3,254		)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	(127		)	(18		)
Net increase in cash, cash equivalents, and restricted cash	2,290			3,874
Cash, cash equivalents, and restricted cash at beginning of the period	19,279			10,124
Cash, cash equivalents, and restricted cash at end of the period	$	21,569		$	13,998
Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets
Cash and cash equivalents	$	21,045		$	13,877
Restricted cash, included in prepaid expenses and other current assets	308			9
Restricted cash, included in other assets	216			112
Total cash, cash equivalents, and restricted cash	$	21,569		$	13,998

See Accompanying Notes to Condensed Consolidated Financial Statements.

11

FACEBOOK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

	Six Months Ended June 30,
	2020		2019
Supplemental cash flow data
Cash paid for income taxes, net	$	1,250	$	1,696
Non-cash investing activities:
Acquisition of businesses and other investments in accrued expenses and other liabilities	$	316	$	—
Property and equipment in accounts payable and accrued liabilities	$	1,592	$	1,667

See Accompanying Notes to Condensed Consolidated Financial Statements.

12

FACEBOOK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 Annual Report on Form 10-K for the year ended December 31, 2019.

The condensed consolidated balance sheet as of December 31, 2019 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., subsidiaries where we have controlling financial interests, and any variable interest entities for which we are deemed to be the primary beneficiary. All intercompany balances and transactions have been eliminated.

The accompanying condensed consolidated financial statements reflect all normal recurring adjustments that are necessary to present fairly the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full year ending December 31, 2020.

Reclassifications

Certain prior year amounts on the condensed consolidated statements of cash flow have been reclassified to conform to the current year presentation. A reclassification was made to net the changes in operating lease right-of use assets with operating lease liabilities. This net change was not material and was included within the changes in other liabilities in cash flows from operating activities on the condensed consolidated statement of cash flow for the six months ended June 30, 2019. This change does not affect previously reported cash flows from operating activities in the condensed consolidated statements of cash flows. This reclassification had no effect on our other condensed consolidated financial statements for the periods ended June 30, 2020 and 2019.

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 income taxes, loss contingencies, fair value of acquired intangible assets and goodwill, collectibility of accounts receivable, fair value of financial instruments, credit losses of available-for-sale (AFS) debt securities, leases, useful lives of intangible assets and property and equipment, and revenue recognition. 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.

The COVID-19 pandemic has created and may continue to create significant uncertainty in macroeconomic conditions, which may cause further business slowdowns or shutdowns, depress demand for our advertising business, and adversely impact our results of operations. During the three and six months ended June 30, 2020, we faced increasing uncertainties around our estimates of revenue collectibility and accounts receivable credit losses. We expect uncertainties around our key accounting estimates to continue to evolve depending on the duration and degree of impact associated with the COVID-19 pandemic. Our estimates may change as new events occur and additional information emerges, and such changes are recognized or disclosed in our condensed consolidated financial statements.

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Recently Adopted Accounting Pronouncements

Fair Value Measurements

On January 1, 2020, we adopted Accounting Standards Update No. 2018-13, Changes to Disclosure Requirements for Fair Value Measurements (Topic 820), which improved the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard removes, modifies, and adds certain disclosure requirements. The adoption of this new standard did not have a material impact on our condensed consolidated financial statements.

Credit Losses

On January 1, 2020, we adopted Accounting Standards Update No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, using the modified retrospective transition method. Upon adoption, we changed our impairment model to utilize a forward-looking current expected credit losses (CECL) model in place of the incurred loss methodology for financial instruments measured at amortized cost, including our accounts receivable. In addition, we modified our impairment model to the CECL model for AFS debt securities and discontinued using the concept of "other than temporary" impairment on AFS debt securities. CECL estimates on accounts receivable are recorded as general and administrative expenses on our condensed consolidated statements of income. CECL estimates on AFS debt securities are recognized in interest and other income (expense), net on our condensed consolidated statements of income. The cumulative effect adjustment from adoption was immaterial to our condensed consolidated financial statements. We continue to monitor the financial implications of the COVID-19 pandemic on expected credit losses.

Significant Accounting Policies

There have been no material changes to our significant accounting policies from our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, except for the policies noted below which changed as a result of the adoption of Topic 326.

Cash and Cash Equivalents and Marketable Securities

Cash and cash equivalents consist of cash on deposit with banks and highly liquid investments with maturities of 90 days or less from the date of purchase.

We hold investments in marketable securities, consisting of U.S. government securities, U.S. government agency securities, and investment grade corporate debt securities. We classify our marketable securities as AFS investments in our current assets because they represent investments of cash available for current operations. Our AFS investments are carried at estimated fair value with any unrealized gains and losses, net of taxes, included in accumulated other comprehensive income (loss) in stockholders' equity. AFS debt securities with an amortized cost basis in excess of estimated fair value are assessed to determine what amount of that difference, if any, is caused by expected credit losses. Expected credit losses on AFS debt securities are recognized in interest and other income (expense), net on our condensed consolidated statements of income, and any remaining unrealized losses, net of taxes, are included in accumulated other comprehensive income (loss) in stockholders' equity. The amount of credit losses recorded for the three and six months ended June 30, 2020 was not material. We have not recorded any impairment charge for unrealized losses in the periods presented. We determine realized gains or losses on sale of marketable securities on a specific identification method, and record such gains or losses as interest and other income (expense), net.

Accounts Receivable and Allowances

Accounts receivable are recorded and carried at the original invoiced amount less an allowance for any potential uncollectible amounts. We make estimates of expected credit losses for the allowance for doubtful accounts and allowance for unbilled receivables based upon our assessment of various factors, including historical experience, the age of the accounts receivable balances, credit quality of our customers, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect our ability to collect from customers. Estimated credit loss allowance is recorded as general and administrative expenses on our condensed consolidated statements of income. As of June 30, 2020, we reported $7.48 billion of accounts receivable, net of an allowance of $365 million.

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Credit Risk and Concentration

Our financial instruments that are potentially subject to concentrations of credit risk consist primarily of cash, cash equivalents, restricted cash, marketable securities, and accounts receivable. The majority of cash equivalents consists of money market funds that primarily invest in U.S. government and agency securities. Marketable securities consist of investments in U.S. government securities, U.S. government agency securities, and investment grade corporate debt securities. Our investment portfolio in corporate debt securities is highly liquid and diversified among individual issuers.

AFS debt securities with an amortized cost basis in excess of estimated fair value are assessed using the CECL model to determine what amount of that difference, if any, is caused by expected credit losses. Expected credit losses on AFS debt securities are recognized in interest and other income (expense), net on our condensed consolidated statements of income and were not material for the three and six months ended June 30, 2020.

Accounts receivable are typically unsecured and are derived from revenue earned from customers across different industries and countries. We generated 42% of our revenue for the three and six months ended June 30, 2020 and 2019 from marketers and developers based in the United States, with the majority of revenue outside of the United States coming from customers located in western Europe, China, Canada, Vietnam, Japan, Australia and Brazil.

We perform ongoing credit evaluations of our customers and generally do not require collateral. We maintain an allowance for estimated credit losses. Bad debt expense was immaterial during the three and six months ended June 30, 2020 and 2019. In the event that accounts receivable collection cycles deteriorate, our operating results and financial position could be adversely affected.

Accounting Pronouncements Not Yet Adopted

In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes. This guidance will be effective for us in the first quarter of 2021 on a prospective basis, with early adoption permitted. We will adopt the new standard effective January 1, 2021 and do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

In January 2020, the FASB issued Accounting Standards Update No. 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) (ASU 2020-01), which clarifies the interaction of the accounting for equity securities under Topic 321, the accounting for equity method investments in Topic 323, and the accounting for certain forward contracts and purchased options in Topic 815. This guidance will be effective for us in the first quarter of 2021 on a prospective basis, with early adoption permitted. We are currently evaluating the impact of the new guidance, but based upon our current portfolio of investments, we do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

Note 2. Revenue

Revenue disaggregated by revenue source consists of the following (in millions):

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Advertising	$	18,321	$	16,624	$	35,760	$	31,536
Other revenue	366		262		663		427
Total revenue	$	18,687	$	16,886	$	36,423	$	31,963

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Revenue disaggregated by geography, based on the addresses of our customers, consists of the following (in millions):

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
United States and Canada(1)	$	8,292	$	7,632	$	16,304	$	14,409
Europe(2)	4,249		4,097		8,398		7,721
Asia-Pacific	4,611		3,628		8,582		6,965
Rest of World(2)	1,535		1,529		3,139		2,868
Total revenue	$	18,687	$	16,886	$	36,423	$	31,963

____________________________________

(1) United States revenue was $7.83 billion and $7.14 billion for the three months ended June 30, 2020 and 2019, respectively, and $15.38 billion and $13.51 billion for the six months ended June 30, 2020 and 2019, respectively.

(2) Europe includes Russia and Turkey, and Rest of World includes Africa, Latin America, and the Middle East.

Deferred revenue and deposits consists of the following (in millions):

	June 30, 2020		December 31, 2019
Deferred revenue	$	222	$	234
Deposits	42		35
Total deferred revenue and deposits	$	264	$	269

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Note 3. Earnings per Share

We compute earnings per share (EPS) of Class A and Class B common stock using the two-class method.

Basic EPS is computed by dividing net income by the weighted-average number of shares of our Class A and Class B common stock outstanding.

For the calculation of diluted EPS, net income for basic EPS is adjusted by the effect of dilutive securities under our equity compensation plans. In addition, the computation of the diluted EPS of Class A common stock assumes the conversion of our Class B common stock to Class A common stock, while the diluted EPS of Class B common stock does not assume the conversion of those shares to Class A common stock. Diluted EPS attributable to common stockholders is computed by dividing the resulting net income by the weighted-average number of fully diluted common shares outstanding.

Restricted stock units (RSUs) with anti-dilutive effect were excluded from the EPS calculation and they were not material for the three and six months ended June 30, 2020 and 2019.

Basic and diluted EPS are the same for each class of common stock because they are entitled to the same liquidation and dividend rights.

The numerators and denominators of the basic and diluted EPS computations for our common stock are calculated as follows (in millions, except per share amounts): 

	Three Months Ended June 30,										Six Months Ended June 30,
	2020					2019					2020					2019
	Class A		Class B			Class A		Class B			Class A		Class B			Class A		Class B
Basic EPS:
Numerator
Net income	$	4,371	$	807		$	2,204	$	412		$	8,509	$	1,572		$	4,241	$	804
Denominator
Weighted-average shares outstanding	2,406		444			2,405		450			2,407		444			2,400		455
Basic EPS	$	1.82	$	1.82		$	0.92	$	0.92		$	3.54	$	3.54		$	1.77	$	1.77
Diluted EPS:
Numerator
Net income	$	4,371	$	807		$	2,204	$	412		$	8,509	$	1,572		$	4,241	$	804
Reallocation of net income as a result of conversion of Class B to Class A common stock	807		—			412		—			1,572		—			804		—
Reallocation of net income to Class B common stock	—		(8		)	—		(2		)	—		(13		)	—		(3		)
Net income for diluted EPS	$	5,178	$	799		$	2,616	$	410		$	10,081	$	1,559		$	5,045	$	801
Denominator
Number of shares used for basic EPS computation	2,406		444			2,405		450			2,407		444			2,400		455
Conversion of Class B to Class A common stock	444		—			450		—			444		—			455		—
Weighted-average effect of dilutive RSUs and employee stock options	29		—			20		—			25		—			18		1
Number of shares used for diluted EPS computation	2,879		444			2,875		450			2,876		444			2,873		456
Diluted EPS	$	1.80	$	1.80		$	0.91	$	0.91		$	3.51	$	3.51		$	1.76	$	1.76

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Note 4. Cash and Cash Equivalents, and Marketable Securities

The following table sets forth the cash and cash equivalents and marketable securities (in millions):

	June 30, 2020		December 31, 2019
Cash and cash equivalents:
Cash	$	5,938	$	4,735
Money market funds	14,734		12,787
U.S. government securities	178		815
U.S. government agency securities	—		444
Certificate of deposits and time deposits	195		217
Corporate debt securities	—		81
Total cash and cash equivalents	21,045		19,079
Marketable securities:
U.S. government securities	19,263		18,679
U.S. government agency securities	7,517		6,712
Corporate debt securities	10,415		10,385
Total marketable securities	37,195		35,776
Total cash and cash equivalents and marketable securities	$	58,240	$	54,855

The gross unrealized gains on our marketable securities were $781 million and $205 million as of June 30, 2020 and December 31, 2019, respectively. The gross unrealized losses on our marketable securities were not material as of June 30, 2020 and December 31, 2019. The allowance for credit losses was not material as of June 30, 2020.

The following table classifies our marketable securities by contractual maturities (in millions):

	June 30, 2020
Due in one year	$	12,178
Due after one year to five years	25,017
Total	$	37,195

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Note 5. Fair Value Measurement

The following table summarizes our cash equivalents and marketable securities measured at fair value and the classification by level of input within the fair value hierarchy (in millions): 

			Fair Value Measurement at Reporting Date Using
Description	June 30, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash equivalents:
Money market funds	$	14,734	$	14,734	$	—	$	—
U.S. government securities	178		178		—		—
Certificate of deposits and time deposits	195		—		195		—
Marketable securities:
U.S. government securities	19,263		19,263		—		—
U.S. government agency securities	7,517		7,517		—		—
Corporate debt securities	10,415		—		10,415		—
Total cash equivalents and marketable securities	$	52,302	$	41,692	$	10,610	$	—

			Fair Value Measurement at Reporting Date Using
Description	December 31, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash equivalents:
Money market funds	$	12,787	$	12,787	$	—	$	—
U.S. government securities	815		815		—		—
U.S. government agency securities	444		444		—		—
Certificate of deposits and time deposits	217		—		217		—
Corporate debt securities	81		—		81		—
Marketable securities:
U.S. government securities	18,679		18,679		—		—
U.S. government agency securities	6,712		6,712