TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| Delaware | 20-1665019 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
543-4800
Large accelerated filer | ¨ | Accelerated filer |
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| Non-accelerated filer | x | Smaller reporting company |
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Class | Number of Shares Outstanding | |
| Class A Common Stock $0.000006 par value | ||
| Class B Common Stock $0.000006 par value | ||
Item 2. Item 3. Item 2. Assets Current assets: Cash and cash equivalents Marketable securities Accounts receivable, net of allowances for doubtful accounts of $17 as of June 30, 2012 and December 31, 2011 Income tax refundable Prepaid expenses and other current assets Total current assets Property and equipment, net Goodwill and intangible assets, net Other assets Total assets Liabilities and stockholders’ equity Current liabilities: Accounts payable Platform partners payable Accrued expenses and other current liabilities Deferred revenue and deposits Current portion of capital lease obligations Total current liabilities Capital lease obligations, less current portion Other liabilities Total liabilities Stockholders’ equity: Convertible preferred stock, $0.000006 par value, issuable in series; no shares and 569 million shares authorized as of June 30, 2012 and December 31, 2011, respectively, no shares and 543 million shares issued and outstanding as of June 30, 2012 and December 31, 2011, respectively Common stock, $0.000006 par value; 5,000 million and 4,141 million Class A shares authorized as of June 30, 2012 and December 31, 2011, respectively, 641 million and 117 million shares issued and outstanding as of June 30, 2012 and December 31, 2011, respectively, including 1 million outstanding shares subject to repurchase as of June 30, 2012 and December 31, 2011; 4,141 million Class B shares authorized, 1,501 million and 1,213 million shares issued and outstanding as of June 30, 2012 and December 31, 2011, respectively, including 2 million outstanding shares subject to repurchase, as of June 30, 2012 and December 31, 2011 Additional paid-in capital Accumulated other comprehensive loss Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity See Accompanying Notes to Condensed Consolidated Financial Statements. Revenue Costs and expenses: Cost of revenue Marketing and sales Research and development General and administrative Total costs and expenses (Loss) income from operations Interest and other income (expense), net: Interest expense Other income (expense), net (Loss) income before benefit from (provision for) income taxes Benefit from (provision for) income taxes Net (loss) income Less: Net income attributable to participating securities Net (loss) income attributable to Class A and Class B common stockholders (Loss) earnings per share attributable to Class A and Class B common stockholders: Basic Diluted Weighted average shares used to compute (loss) earnings per share attributable to Class A and Class B common stockholders: Basic Diluted Share-based compensation expense included in costs and expenses: Cost of revenue Marketing and sales Research and development General and administrative Total share-based compensation expense Net (loss) income Other comprehensive (loss) income: Foreign currency translation adjustment Change in unrealized gain (loss) on available-for-sale investments, net of tax Comprehensive (loss) income Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Loss on write-off of equipment Share-based compensation Deferred income taxes Tax benefit from share-based award activity Excess tax benefit from share-based award activity Changes in assets and liabilities Accounts receivable Income tax refundable Prepaid expenses and other current assets Other assets Accounts payable Platform partners payable Accrued expenses and other current liabilities Deferred revenue and deposits Other liabilities Net cash provided by operating activities Cash flows from investing activities Purchases of property and equipment Purchases of marketable securities Sales of marketable securities Maturities of marketable securities Investments in non-marketable equity securities Acquisitions of businesses, net of cash acquired, and purchases of intangible and other assets Change in restricted cash and deposits Net cash used in investing activities Cash flows from financing activities Net proceeds from issuance of common stock Proceeds from exercise of stock options Repayment of long term debt Proceeds from sale and lease-back transactions Principal payments on capital lease obligations Excess tax benefit from share-based award activity Net cash provided by financing activities Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental cash flow data Cash paid during the period for: Interest Income taxes Non-cash investing and financing activities: Net change in accounts payable and accrued expenses and other current liabilities related to property and equipment additions Property and equipment acquired under capital leases Fair value of shares issued related to acquisitions of businesses and other assets See Accompanying Notes to Condensed Consolidated Financial Statements. 2013 Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU 2013-02) which is effective prospectively for public companies for reporting periods beginning after December 15, 2012. This new accounting standard improves the reporting of reclassifications out of accumulated other comprehensive income (AOCI) by requiring an entity to report the effect of significant reclassifications out of AOCI on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. We adopted this new guidance on January 1, 2013 and the adoption did not have a material effect on our condensed consolidated financial statements. Basic EPS: Numerator Net (loss) income Less: Net income attributable to participating securities Net (loss) income attributable to common stockholders Denominator Weighted average shares outstanding Less: Shares subject to repurchase Number of shares used for basic EPS computation Basic EPS Diluted EPS: Numerator Net (loss) income attributable to common stockholders Reallocation of net income attributable to participating securities Reallocation of net (loss) income as a result of conversion of Class B to Class A common stock Reallocation of net income to Class B common stock Net (loss) income attributable to common stockholders for diluted EPS Denominator Number of shares used for basic EPS computation Conversion of Class B to Class A common stock Weighted average effect of dilutive securities: Employee stock options RSUs Shares subject to repurchase Warrants Number of shares used for diluted EPS computation Diluted EPS Network equipment Land Buildings Leasehold improvements Computer software, office equipment and other Construction in progress Total Less accumulated depreciation and amortization Property and equipment, net Acquired patents Acquired non-compete agreements Acquired technology and other Accumulated amortization Net acquired intangible assets Goodwill Goodwill and other intangible assets Goodwill Acquired technology and other Acquired non-compete agreements Deferred tax liabilities Total The remainder of 2012 2013 2014 2015 2016 2017 Thereafter Description Cash equivalents: Money market funds U.S. government securities U.S. government agency securities Marketable securities: U.S. government securities U.S. government agency securities Total cash equivalents and marketable securities Description Cash equivalents: Money market funds U.S. government securities U.S. government agency securities Marketable securities: U.S. government securities U.S. government agency securities Total cash equivalents and marketable securities Due in one year Due in one to two years We respectively. Balance as of December 31, 2011 RSUs granted Stock options exercised Stock options forfeited/cancelled RSUs forfeited and cancelled 2012 Equity Incentive Plan shares authorized Balance as of June 30, 2012 $269 million and $580 million for the three and six months ended June 30, 2013, respectively, and $2.35 billion and $2.98 billion for the three and six months ended June 30, 2012, respectively. Revenue: United States Rest of the world (1) Total revenue No individual country, other than disclosed above, exceeded 10% of our total revenue for any period presented Long-lived assets: United States Rest of the world(1) Total long-lived assets No individual country, other than disclosed above, exceeded 10% of our total long-lived assets for any period presented Metrics and Other Data" in this Quarterly Report on Form 10-Q. marketers: We define a daily active user as a registered Facebook user who logged in and visited Facebook through our website or a mobile device, or took an action to share content or activity with his or her Facebook friends or connections via a third-party website that is integrated with Facebook, on a given day. We view DAUs, and DAUs as a percentage of MAUs, as measures of user engagement. Worldwide DAUs increased Worldwide mobile MAUs increased While most of our mobile users also access Facebook through personal computers, we anticipate that the rate of growth in mobile usage will exceed the growth in usage through personal computers for the foreseeable future and that the usage through personal computers may be flat or continue to decline in certain markets, including key developed markets such as the United States, in part due to our focus on developing mobile products to encourage mobile usage of Facebook. General and administrative.Our general and administrative expenses consist primarily of salaries, benefits, and share-based compensation for our executives as well as our legal, finance, human resources, corporate communications and policy, and other administrative employees. In addition, general and administrative expenses include outside consulting fees, legal and accounting services, and facilities and other supporting overhead costs. General and administrative expenses also include legal expenses: Revenue Costs and expenses Cost of revenue Marketing and sales Research and development General and administrative Total costs and expenses (Loss) income from operations Net (loss) income Share-based compensation expense included in costs and expenses: Cost of revenue Marketing and sales Research and development General and administrative Total share-based compensation expense Revenue Costs and expenses Cost of revenue Marketing and sales Research and development General and administrative Total costs and expenses (Loss) income from operations Net (loss) income revenue): Cost of revenue Marketing and sales Research and development General and administrative Total share-based compensation expense 2012 Revenue: Advertising Payments and other fees Total revenue periods in 2012. The most important factor driving advertising revenue growth in these periods was an increase in revenue from ads 2013 periods. Cost of revenue Percentage of revenue Marketing and sales Percentage of revenue Research and development Percentage of revenue marketers. General and administrative Percentage of revenue Interest expense Other income (expense), net Total interest and other income (expense), net Interest expense increased by $ Benefit from (provision for) income taxes Effective tax rate for income taxes fiscal year ended December 31, 2012. refund of $ assets and had lower capital expenditures in the first billion. our IPO. 2013 Annual Report on Form 10-K for the fiscal year ended We recognized foreign currency losses of requirements. Changes in U.S. interest rates affect the interest earned on our cash and cash equivalents and marketable securities and the market value of those securities. A hypothetical 100 basis point increase in interest rates would result in a decrease of approximately Paul D. Ceglia filed suit against us and Mark Zuckerberg on or about June 30, 2010, in the Supreme Court of the State of New York for the County of Allegheny, claiming substantial ownership of our company based on a purported contract between Mr. Ceglia and Mr. Zuckerberg allegedly entered into in April 2003. We removed the case to the U.S. District Court for the Western District of New York, where the case is now pending. In his first amended complaint, filed on April 11, 2011, Mr. Ceglia revised his claims to include an alleged partnership with Mr. Zuckerberg, he revised his claims for relief to seek a substantial share of Mr. users increasingly engage with we fail to introduce new we are unable to continue to develop products for mobile devices that users find engaging, that work with a variety of mobile operating systems and networks, and that achieve a high level of market acceptance; there are changes in user sentiment about the quality or usefulness of our products or concerns related to privacy and sharing, safety, security, or other factors; we are unable to manage and prioritize information to ensure users are presented with content that is interesting, useful, and relevant to them; users adopt new technologies where Facebook may not be featured or otherwise available; technical or other problems prevent us from delivering our products in a rapid and reliable manner or otherwise affect the user we adopt policies or procedures related to areas such as sharing or user data that are perceived negatively by our users or the general public; we fail to provide adequate customer service to users, developers, or we, our Platform developers, or other companies in our industry are the subject of adverse media reports or other negative publicity; or decreases in user engagement, including time spent on Facebook; increased user access to and engagement with Facebook through our mobile products or other new devices in the future, where we have product changes or inventory management decisions we may make that reduce the size, frequency, or relative prominence of ads our inability to decisions by loss of advertising market share to our adverse legal developments relating to advertising, including legislative and regulatory developments and developments in litigation; decisions by marketers to reduce their advertising as a result of adverse media reports or other negative publicity involving us, content on Facebook, our Platform developers, or other companies in our industry; our inability to create new products that sustain or increase the value of our the degree to which users opt out of social changes in the way online advertising is priced; the impact of new technologies that could block or obscure the display of our the impact of macroeconomic conditions optimizing advertising campaigns. the popularity, usefulness, ease of use, performance, and reliability of our products compared to our competitors; the size and composition of our user base; the engagement of our users with our products; the timing and market acceptance of products, including developments and enhancements to our or our our ability to monetize our products, including our the frequency, size, quality, and relative prominence of the ads customer service and support efforts; marketing and selling our ability to establish and maintain changes mandated by legislation, regulatory authorities, or litigation, including settlements and consent decrees, some of which may have a disproportionate effect on us; acquisitions or consolidation within our industry, which may result in more formidable competitors; our ability to attract, retain, and motivate talented employees, particularly software engineers; our ability to cost-effectively manage and grow our operations; and our reputation and brand strength relative to our competitors. operations may be materially and adversely affected. our ability to maintain and grow our user base and user engagement; our ability to attract and retain fluctuations in spending by our the number and quality of ads shown to users; the pricing of our ads and other products; the rate of growth in mobile usage compared to usage through personal computers, and our ability to monetize through our mobile products; our ability to maintain or increase the diversification and growth of revenue sources beyond the development and introduction of new products or services by us or our competitors; increases in marketing, sales, and other operating expenses that we may incur to grow and expand our operations and to remain competitive; our ability to maintain gross margins and operating margins; costs related to the acquisitions of businesses, talent, technologies or intellectual property, including potentially significant amortization costs; system failures which could prevent us from serving ads for any period of time, or breaches of security or inaccessibility of Facebook due to third-party actions; share-based compensation adverse litigation judgments, settlements, or other litigation-related costs; changes in the legislative or regulatory environment, including with respect to privacy, or enforcement by government regulators, including fines, orders, or consent decrees; the overall tax rate for our business, which may be affected by the financial results of our international subsidiaries; fluctuations in the market values of our portfolio investments and in interest rates; changes in U.S. generally accepted accounting principles; and changes in global business or macroeconomic conditions. liquidity. Additionally, we may issue equity securities to pay for acquisitions or to retain the employees of the acquired company, which could increase our expenses, adversely affect our financial results and result in dilution to our stockholders. The incurrence of indebtedness would result in increased fixed obligations and could also include covenants or other restrictions that would impede our ability to manage our operations. users, and our results of operations. increased costs and diversion of management time and effort and other resources to deal with bad transactions or customer disputes; potential fraudulent or otherwise illegal activity by users, developers, employees, or third parties; restrictions on the investment of consumer funds used to transact Payments; and additional disclosure and reporting requirements. political, social, or economic instability; risks related to the legal and regulatory environment in foreign jurisdictions, including with respect to privacy and tax matters, and unexpected changes in laws, regulatory requirements, and enforcement; potential damage to our brand and reputation due to compliance with local laws, including potential censorship or requirements to provide user information to local authorities; fluctuations in currency exchange rates; higher levels of credit risk and payment fraud; enhanced difficulties of integrating any foreign acquisitions; burdens of complying with a variety of foreign laws; reduced protection for intellectual property rights in some countries; difficulties in staffing and managing global operations and the increased travel, infrastructure, and legal compliance costs associated with multiple international locations; compliance with the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and similar laws in other jurisdictions; and compliance with statutory equity requirements and management of tax consequences. require repayment of any outstanding lease obligations or amounts drawn on our credit facilities; terminate our leasing arrangements and credit facilities; terminate our access to the leased data centers we utilize; stop delivery of ordered equipment; sell or require us to return our leased equipment; or require us to pay significant damages. actual or anticipated fluctuations in our revenue and other operating results; the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections; actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors; additional shares of our common stock being sold into the market by us or our existing stockholders or the anticipation of such investor sentiment with respect to our competitors, our business partners, and our industry in general; announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments; announcements by us or estimates by third parties of actual or anticipated changes in the size of our user base, the level of user engagement or the effectiveness of our ad products; changes in operating performance and stock market valuations of technology companies in our industry, including our Platform developers and competitors; price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole; media coverage of our business and financial performance; lawsuits threatened or filed against us; developments in new legislation and pending lawsuits or regulatory actions, including interim or final rulings by judicial or regulatory bodies; and other events or factors, including those resulting from war or incidents of terrorism, or responses to these events. securities until at least September 2013. until the first date on which the outstanding shares of our Class B common stock represent less than 35% of the combined voting power of our common stock, any transaction that would result in a change in control of our company requires the approval of a majority of our outstanding Class B common stock voting as a separate class; we have a dual class common stock structure, which provides Mr. Zuckerberg with the ability to control the outcome of matters requiring stockholder approval, even if he owns significantly less than a majority of the shares of our outstanding Class A and Class B common stock; when the outstanding shares of our Class B common stock represent less than a majority of the combined voting power of common stock, certain amendments to our restated certificate of incorporation or bylaws will require the approval of two-thirds of the combined vote of our then-outstanding shares of Class A and Class B common stock; when the outstanding shares of our Class B common stock represent less than a majority of the combined voting power of our common stock, vacancies on our board of directors will be able to be filled only by our board of directors and not by stockholders; when the outstanding shares of our Class B common stock represent less than a majority of the combined voting power of our common stock, our board of directors will be classified into three classes of directors with staggered three-year terms and directors will only be able to be removed from office for cause; when the outstanding shares of our Class B common stock represent less than a majority of the combined voting power of our common stock, our stockholders will only be able to take action at a meeting of stockholders and not by written consent; only our chairman, our chief executive officer, our president, or a majority of our board of directors are authorized to call a special meeting of stockholders; advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders; our restated certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established, and shares of which may be issued, without stockholder approval; and certain litigation against us can only be brought in Delaware. this transaction. Filed Herewith Number Exhibit Description Form File No. Exhibit Filing Date 2012 Date: July /s/ DAVID A. EBERSMAN Date: July /s/ Page No. 3 4Item 1. Item 1.4 4 5 6 7 8 19 Item 4. Item 4.34 Item 1. Item 1A. Item 1. 35Item 1A.35 56Item 6. Item 6.5759“believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,”"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.II, Item 1A. “Risk Factors”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.“Facebook,” “company,” “we,” “us,”"Facebook," "company," "we," "us," and “our”"our" in this document refer to Facebook, Inc., a Delaware corporation, and, where appropriate, its wholly owned subsidiaries. The term “Facebook”"Facebook" may also refer to our products, regardless of the manner in which they are accessed.Item 1. Financial Statements Item 1. Financial Statements June 30,
2013 December 31,
2012Assets Current assets: Cash and cash equivalents $ 3,001 $ 2,384 Marketable securities 7,251 7,242 Accounts receivable, net of allowances for doubtful accounts of $26 and $22 as of June 30, 2013 and December 31, 2012, respectively 775 719 Income tax refundable 7 451 Prepaid expenses and other current assets 387 471 Total current assets 11,421 11,267 Property and equipment, net 2,577 2,391 Goodwill and intangible assets, net 1,631 1,388 Other assets 95 57 Total assets $ 15,724 $ 15,103 Liabilities and stockholders' equity Current liabilities: Accounts payable $ 55 $ 65 Platform partners payable 172 169 Accrued expenses and other current liabilities 505 423 Deferred revenue and deposits 32 30 Current portion of capital lease obligations 316 365 Total current liabilities 1,080 1,052 Capital lease obligations, less current portion 351 491 Long-term debt 1,500 1,500 Other liabilities 444 305 Total liabilities 3,375 3,348 Stockholders' equity: Common stock, $0.000006 par value; 5,000 million Class A shares authorized, 1,813 million and 1,671 million shares issued and outstanding, including 6 million and 2 million outstanding shares subject to repurchase as of June 30, 2013 and December 31, 2012, respectively; 4,141 million Class B shares authorized, 618 million and 701 million shares issued and outstanding, including 9 million and 11 million outstanding shares subject to repurchase as of June 30, 2013 and December 31, 2012, respectively — — Additional paid-in capital 10,167 10,094 Accumulated other comprehensive (loss) income (29 ) 2 Retained earnings 2,211 1,659 Total stockholders' equity 12,349 11,755 Total liabilities and stockholders' equity $ 15,724 $ 15,103 (Unaudited) June 30,
2012 December 31,
2011 $ 2,098 $ 1,512 8,090 2,396 578 547 567 0 634 149 11,967 4,604 2,105 1,475 809 162 47 90 $ 14,928 $ 6,331 $ 43 $ 63 153 171 441 296 85 90 312 279 1,034 899 394 398 191 135 1,619 1,432 0 615 0 0 11,684 2,684 (29 ) (6 ) 1,654 1,606 13,309 4,899 $ 14,928 $ 6,331 (Unaudited) Three Months Ended
June 30, Six Months Ended
June 30, 2012 2011 2012 2011 $ 1,184 $ 895 $ 2,242 $ 1,626 367 210 644 377 392 96 535 158 705 99 858 156 463 83 567 140 1,927 488 2,604 831 (743 ) 407 (362 ) 795 (10 ) (9 ) (24 ) (17 ) (12 ) 1 3 19 (765 ) 399 (383 ) 797 608 (159 ) 431 (326 ) $ (157 ) $ 240 $ 48 $ 471 0 81 21 160 $ (157 ) $ 159 $ 27 $ 311 ($ 0.08 ) $ 0.12 $ 0.02 $ 0.25 ($ 0.08 ) $ 0.11 $ 0.02 $ 0.22 1,879 1,292 1,613 1,267 1,879 1,510 1,792 1,499 $ 66 $ 3 $ 71 $ 3 232 11 251 11 545 35 605 39 263 15 282 18 $ 1,106 $ 64 $ 1,209 $ 71 Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012 Revenue $ 1,813 $ 1,184 $ 3,271 $ 2,242 Costs and expenses: Cost of revenue 465 367 878 644 Research and development 344 705 637 858 Marketing and sales 269 392 472 535 General and administrative 173 463 349 567 Total costs and expenses 1,251 1,927 2,336 2,604 Income (loss) from operations 562 (743 ) 935 (362 ) Interest and other (expense) income, net: Interest expense (14 ) (10 ) (29 ) (24 ) Other (expense) income, net (3 ) (12 ) (8 ) 3 Income (loss) before (provision for) benefit from income taxes 545 (765 ) 898 (383 ) (Provision for) benefit from income taxes (212 ) 608 (346 ) 431 Net income (loss) $ 333 $ (157 ) $ 552 $ 48 Less: Net income attributable to participating securities 2 — 3 21 Net income (loss) attributable to Class A and Class B common stockholders $ 331 $ (157 ) $ 549 $ 27 Earnings (loss) per share attributable to Class A and Class B common stockholders: Basic $ 0.14 $ (0.08 ) $ 0.23 $ 0.02 Diluted $ 0.13 $ (0.08 ) $ 0.22 $ 0.02 Weighted average shares used to compute earnings (loss) per share attributable to Class A and Class B common stockholders: Basic 2,407 1,879 2,397 1,613 Diluted 2,502 1,879 2,499 1,792 Share-based compensation expense included in costs and expenses: Cost of revenue $ 11 $ 66 $ 19 $ 71 Research and development 151 545 268 605 Marketing and sales 33 232 57 251 General and administrative 29 263 50 282 Total share-based compensation expense $ 224 $ 1,106 $ 394 $ 1,209 (Unaudited) Three Months Ended
June 30, Six Months Ended
June 30, 2012 2011 2012 2011 $ (157 ) $ 240 $ 48 $ 471 (21 ) 0 (22 ) 1 (1 ) 0 (1 ) 0 $ (179 ) $ 240 $ 25 $ 472 Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012 Net income (loss) $ 333 $ (157 ) $ 552 $ 48 Other comprehensive income (loss): Change in foreign currency translation adjustment (13 ) (21 ) (31 ) (22 ) Unrealized loss on available-for-sale investments, net of tax (3 ) (1 ) (3 ) (1 ) Unrealized gain on derivative, net of tax 2 — 3 — Comprehensive income (loss) $ 319 $ (179 ) $ 521 $ 25 Six Months Ended June 30, 2013 2012 Cash flows from operating activities Net income $ 552 $ 48 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 463 249 Lease abandonment expense 65 3 Loss on disposal or write-off of equipment 20 4 Share-based compensation 394 1,209 Deferred income taxes 19 (374 ) Tax benefit from share-based award activity 148 381 Excess tax benefit from share-based award activity (155 ) (381 ) Changes in assets and liabilities: Accounts receivable (62 ) (40 ) Income tax refundable 444 (567 ) Prepaid expenses and other current assets (16 ) (7 ) Other assets (44 ) (9 ) Accounts payable 2 (8 ) Platform partners payable 3 (15 ) Accrued expenses and other current liabilities 9 186 Deferred revenue and deposits 2 (5 ) Other liabilities 197 7 Net cash provided by operating activities 2,041 681 Cash flows from investing activities Purchases of property and equipment (595 ) (866 ) Purchases of marketable securities (3,460 ) (6,957 ) Sales of marketable securities 1,275 128 Maturities of marketable securities 2,174 1,106 Investments in non-marketable equity securities (1 ) (3 ) Acquisitions of businesses, net of cash acquired, and purchases of intangible assets (221 ) (575 ) Change in restricted cash and deposits 4 (3 ) Net cash used in investing activities (824 ) (7,170 ) Cash flows from financing activities �� Net proceeds from issuance of common stock — 6,761 Taxes paid related to net share settlement of equity awards (558 ) — Proceeds from exercise of stock options 10 9 Proceeds from sale and lease-back transactions — 82 Principal payments on capital lease obligations (200 ) (143 ) Excess tax benefit from share-based award activity 155 381 Net cash (used in) provided by financing activities (593 ) 7,090 Effect of exchange rate changes on cash and cash equivalents (7 ) (15 ) Net increase in cash and cash equivalents 617 586 Cash and cash equivalents at beginning of period 2,384 1,512 Cash and cash equivalents at end of period $ 3,001 $ 2,098 (Unaudited) Six Months Ended
June 30, 2012 2011 $ 48 $ 471 249 123 4 6 1,209 71 (374 ) (14 ) 381 355 (381 ) (355 ) (41 ) (28 ) (567 ) 0 (7 ) (226 ) (43 ) (6 ) (8 ) 7 (15 ) 38 226 (21 ) (5 ) 20 7 33 683 474 (866 ) (285 ) (6,957 ) (1,892 ) 128 0 1,106 0 (3 ) (1 ) (575 ) (4 ) (3 ) (3 ) (7,170 ) (2,185 ) $ 6,761 $ 998 9 24 0 (250 ) 82 8 (143 ) (82 ) 381 355 7,090 1,053 (17 ) 4 586 (654 ) 1,512 1,785 $ 2,098 $ 1,131 $ 19 $ 13 $ 182 $ 176 $ (59 ) $ 56 $ 90 $ 291 $ 25 $ 44 Six Months Ended June 30, 2013 2012 Supplemental cash flow data Cash paid during the period for: Interest $ 26 $ 19 Income taxes $ 18 $ 182 Cash received during the period for: Income taxes $ 419 $ — Non-cash investing and financing activities: Net change in accounts payable and accrued expenses and other current liabilities related to property and equipment additions $ (5 ) $ (59 ) Property and equipment acquired under capital leases $ 11 $ 90 Fair value of shares issued related to acquisitions of businesses and other assets $ 77 $ 25 Note 1. Summary of Significant Accounting PoliciesNote 1. Summary of Significant Accounting Policies (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 withAnnual Report on Form 10-K for the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on May 18,fiscal year ended December 31, 2012 (Prospectus).2011,2012 included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by GAAP. 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.Prospectusfiscal year ended December 31, 2012 that have had a material impact on our condensed consolidated financial statements and related notes.Initial Public Offering and Share-based CompensationIn 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.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’smanagement's knowledge about current events and expectations about actions we may undertake in the future. Actual results could differ materially from those estimates.Note 2. (Loss) Earnings per ShareIn February 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2013-02, Note 2. Acquisitions in millions Useful lives (in years) Amortizable intangible assets: Acquired technology $ 54 3 - 7 Tradename and other 26 2 - 10 Deferred tax liabilities (9 ) Net assets acquired $ 71 Goodwill 175 Total fair value consideration $ 246 Note 3. Earnings (Loss) per Share earnings per share (EPS) of Class A and Class B common stock using the two-class method required for participating securities. Prior to the date of the IPO,our initial public offering (IPO) in May 2012, we considered all series of our convertible preferred stock to be participating securities due to their non-cumulative dividend rights. Immediately after the completion of our IPO, in May 2012, all outstanding shares of convertible preferred stock converted to Class B common stock. Additionally, we consider restricted stock awards to be participating securities because holders of such shares have non-forfeitable dividend rights in the event of our declaration of a dividend for common shares. income attributable to common stockholders by the weighted-average number of shares of our Class A and Class B common stock outstanding, adjusted for outstanding shares that are subject to repurchase.Dilutive securities in our diluted EPS calculation for the three and six months ended June 30,do not include Pre-2011 RSUs. Vesting of these RSUs is dependentvest upon the satisfaction of both a service condition and a liquidity condition. The liquidity condition iswas satisfied upon the occurrence of a qualifying event, defined as a change of control transaction or six months following the completion of our IPO. Our IPO did not occur until May 2012. Therefore, prior to this date the holders of these RSUs had no rights in our undistributed earnings and accordingly, they are excluded from the effect of basic and dilutive securities in the three and six months ended June 30, 2011. However, subsequent to the completion of our IPO in May 2012, these RSUs arewere included in our basic and diluted EPS calculation for the six months ended June 30, 2012. Post-2011calculation. RSUs granted on orEPS. EPS for the three and six months ended June 30, 2013 and 2012.alsohave excluded 0.450 million and 23 million Post-2011 RSUs from the EPS calculation for the three and six months ended June 30, 2011, 8.12013, respectively, and 8 million and 0.7 million Post-2011 RSUs for the six months ended June 30, 2012 and 2011, respectively, because the impact would be antidilutive. anti-dilutive. No dilutive securities have been included in the diluted EPS calculation for the three months ended June 30, 2012 due to our reporting of a net loss for the quarter.arewere calculated as follows (in millions, except per share amounts): Three Months Ended June 30, Six Months Ended June 30, 2012 2011 2012 2011 Class A Class B Class A Class B Class A Class B Class A Class B $ (31 ) $ (126 ) $ 20 $ 220 $ 7 $ 41 $ 39 $ 432 0 0 7 74 3 18 13 147 $ (31 ) $ (126 ) $ 13 $ 146 $ 4 $ 23 $ 26 $ 285 377 1,505 110 1,188 247 1,369 105 1,167 1 2 1 5 1 2 0 5 376 1,503 109 1,183 246 1,367 105 1,162 $ (0.08 ) $ (0.08 ) $ 0.12 $ 0.12 $ 0.02 $ 0.02 $ 0.25 $ 0.25 $ (31 ) $ (126 ) $ 13 $ 146 $ 4 $ 23 $ 26 $ 285 0 0 8 0 1 0 16 0 (126 ) 0 146 0 23 0 285 0 0 0 0 9 0 1 0 19 $ (157 ) $ (126 ) $ 167 $ 155 $ 28 $ 24 $ 327 $ 304 376 1,503 109 1,183 246 1,367 105 1,162 1,503 0 1,183 0 1,367 0 1,162 0 0 0 206 206 155 155 223 223 0 0 6 6 22 22 2 2 0 0 4 4 2 2 4 4 0 0 2 2 0 0 3 3 1,879 1,503 1,510 1,401 1,792 1,546 1,499 1,394 $ (0.08 ) $ (0.08 ) $ 0.11 $ 0.11 $ 0.02 $ 0.02 $ 0.22 $ 0.22 Note 3. Property and EquipmentProperty and equipment consist of the following (in millions): June 30,
2012 December 31,
2011 $ 1,479 $ 1,016 34 34 449 355 142 120 88 73 542 327 2,734 1,925 (629 ) (450 ) $ 2,105 $ 1,475 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.Note 4. Goodwill and Other Intangible AssetsGoodwill and other intangible assets consist of the following (in millions): June 30,
2012 December 31,
2011 $ 684 $ 51 21 18 49 43 (45 ) (32 ) 709 80 100 82 $ 809 $ 162 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. Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012 Class A Class B Class A Class B Class A Class B Class A Class B Basic EPS: Numerator Net income (loss) $ 245 $ 88 $ (31 ) $ (126 ) $ 400 $ 152 $ 7 $ 41 Less: Net income attributable to participating securities 2 — — — 2 1 3 18 Net income (loss) attributable to common stockholders $ 243 $ 88 $ (31 ) $ (126 ) $ 398 $ 151 $ 4 $ 23 Denominator Weighted average shares outstanding 1,779 644 377 1,505 1,744 668 247 1,369 Less: Shares subject to repurchase 7 9 1 2 5 10 1 2 Number of shares used for basic EPS computation 1,772 635 376 1,503 1,739 658 246 1,367 Basic EPS $ 0.14 $ 0.14 $ (0.08 ) $ (0.08 ) $ 0.23 $ 0.23 $ 0.02 $ 0.02 Diluted EPS: Numerator Net income (loss) attributable to common stockholders $ 243 $ 88 $ (31 ) $ (126 ) $ 398 $ 151 $ 4 $ 23 Reallocation of net income attributable to participating securities 2 — — — 3 — 1 — Reallocation of net income (loss) as a result of conversion of Class B to Class A common stock 88 — (126 ) — 151 — 23 — Reallocation of net income to Class B common stock — 10 — — — 17 — 1 Net income (loss) attributable to common stockholders for diluted EPS $ 333 $ 98 $ (157 ) $ (126 ) $ 552 $ 168 $ 28 $ 24 Denominator Number of shares used for basic EPS computation 1,772 635 376 1,503 1,739 658 246 1,367 Conversion of Class B to Class A common stock 635 — 1,503 — 658 — 1,367 — Weighted average effect of dilutive securities: Employee stock options 73 73 — — 75 75 155 155 RSUs 19 19 — — 22 22 22 22 Shares subject to repurchase 3 3 — — 5 5 2 2 Number of shares used for diluted EPS computation 2,502 730 1,879 1,503 2,499 760 1,792 1,546 Diluted EPS $ 0.13 $ 0.13 $ (0.08 ) $ (0.08 ) $ 0.22 $ 0.22 $ 0.02 $ 0.02 Note 4. Cash, Cash Equivalents and Marketable Securities presentssets forth the aggregated estimatedcash, cash equivalents and marketable securities for the periods presented (in millions): June 30, 2013 December 31, 2012 Cash and cash equivalents: Cash $ 1,020 $ 1,513 Cash equivalents: Money market funds 1,981 871 Total cash and cash equivalents 3,001 2,384 Marketable securities: U.S. government securities 4,801 5,165 U.S. government agency securities 2,450 2,077 Total marketable securities 7,251 7,242 Total cash, cash equivalents and marketable securities $ 10,252 $ 9,626 June 30, 2013 Due in one year $ 3,244 Due in one to two years 4,007 Total $ 7,251 Note 5. Fair Value Measurements Description June 30, 2013 Cash equivalents: Money market funds $ 1,981 $ 1,981 $ — $ — Marketable securities: U.S. government securities 4,801 4,801 — — U.S. government agency securities 2,450 2,450 — — Total cash equivalents and marketable securities $ 9,232 $ 9,232 $ — $ — Other assets: Derivative financial instrument $ 1 $ — $ 1 $ — Other current liabilities: Contingent consideration liability $ 4 $ — $ — $ 4 Description December 31, 2012 Cash equivalents: Money market funds $ 871 $ 871 $ — $ — Marketable securities: U.S. government securities 5,165 5,165 — — U.S. government agency securities 2,077 2,077 — — Total cash equivalents and marketable securities $ 8,113 $ 8,113 $ — $ — Other current liabilities: Contingent consideration liability $ 4 $ — $ — $ 4 Other liabilities: Derivative financial instrument $ 4 $ — $ 4 $ — assets acquired forcontingent consideration liability subsequent to the acquisition completed during the six months ended June 30, 2012 (in millions): $ 18 6 3 (3 ) $ 24 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 ordate, such as changes in the aggregate. For acquisitions completed during the six months ended June 30, 2012, acquired technology has a weighted-average useful life of three yearsprobability assessment 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 acquisitionsour stock prices, are recognized 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 basisearnings in the acquired patents and patent applications, which also increasedperiod when the capitalized patent cost by this amount. As part of this transaction, we obtained a license tochange in 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): $ 53 95 89 84 75 66 247 $ 709 Note 6. Property and Equipment Note 5. Fair Value MeasurementsProperty and equipment consisted of the following (in millions):Assets measured June 30, 2013 December 31, 2012 Network equipment $ 2,117 $ 1,912 Land 41 36 Buildings 966 594 Leasehold improvements 194 194 Computer software, office equipment and other 98 93 Construction in progress 175 444 Total 3,591 3,273 Less: Accumulated depreciation (1,014 ) (882 ) Property and equipment, net $ 2,577 $ 2,391 Note 7. Goodwill and Intangible Assets Balance as of December 31, 2012 $ 587 Goodwill acquired 175 Balance as of June 30, 2013 $ 762 June 30, 2013 December 31, 2012 Useful lives from date of acquisitions (in years) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Amortizable intangible assets: Acquired patents 3 - 18 $ 738 $ (97 ) $ 641 $ 684 $ (53 ) $ 631 Acquired technology 2 - 10 187 (46 ) 141 133 (32 ) 101 Tradename and other 2 - 10 123 (36 ) 87 94 (25 ) 69 Total $ 1,048 $ (179 ) $ 869 $ 911 $ (110 ) $ 801 The remainder of 2013 $ 75 2014 141 2015 131 2016 118 2017 102 2018 70 Thereafter 232 $ 869 Note 8. Long-term Debt a recurring basis are summarized below (in millions): Fair Value Measurement at
Reporting Date Using June 30, 2012 Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) $ 944 $ 944 $ 0 $ 0 517 517 0 0 69 69 0 0 5,557 5,557 0 0 2,533 2,533 0 0 $ 9,620 $ 9,620 $ 0 $ 0 Fair Value Measurement at
Reporting Date Using December 31,
2011 Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) $ 892 $ 892 $ 0 $ 0 60 60 0 0 50 50 0 0 1,415 1,415 0 0 981 981 0 0 $ 3,398 $ 3,398 $ 0 $ 0 Gross unrealizedour condensed consolidated balance sheet. For the for cash equivalentson this derivative other than those related to the periodic settlement of a portion of the interest rate swap.marketable securities as of June 30, 2012 and December 31, 2011 were notlosses in AOCI that will be reclassified to earnings during the next 12 months to be material.The following table classifies our marketable securities by contractual maturities as of June 30, 2012 (in millions): Fair Value $ 5,369 2,721 $ 8,090 Note 9. Commitments and Contingencies Note 6. Commitments and ContingenciesLeases 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 a building leaseslease which areis 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 20122013 and 2027.2027. 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.totaled $50was $32 million and $101$73 million for the three and six months ended June 30, 2013, respectively, and $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 AgreementsIn 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.Legal MattersOn 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.areintend to continue to vigorously defending these lawsuits.defend them. On October 4, 2012, on our motion, the vast majority of the cases in the United States, along with multiple cases filed against The NASDAQ OMX Group, Inc. and The Nasdaq Stock Market LLC (collectively referred to herein as NASDAQ) alleging technical and other trading-related errors by NASDAQ in connection with our IPO, were ordered centralized for coordinated or consolidated pre-trial proceedings in the United States District Court for the Southern District of New York. On February 13, 2013, the court granted our motion to dismiss four derivative actions against our directors and certain of our officers with leave to amend. In addition, followingSeptember 2013, the court is scheduled to hear argument on our IPO,motion to dismiss the consolidated securities class action, as well as our motion to dismiss, and the plaintiffs' motion to remand to state court, certain other derivative actions. In addition, the events surrounding our IPO becamehave become the subject of various government inquiries, and we have received requests for information in connectionare cooperating with certain of those inquiries.partycurrently parties to various legalmultiple other lawsuits related to our products, including patent infringement lawsuits as well as class action lawsuits brought by users and marketers, and we may in the future be subject to additional lawsuits and disputes. We are also involved in other claims, government investigations, and proceedings and claims which arisearising in the ordinary course of our business.management’smanagement's expectations, our condensed consolidated financial statements of a particular reporting period could be materially adversely affected.Credit FacilityIn 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.Note 7. Stockholders’ EquityNote 10. Stockholders' Equity Officers’Officers' Stock Plan (Stock(collectively, Stock Plans). In JanuaryOur 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,RSUs, performance shares and stock bonuses to qualified employees, directors and consultants. No new awards will be issuedThe maximum term for stock options granted under the 2005 Stock2012 Plan as ofmay not exceed ten years from the effective date of grant. Our 2012 Plan will terminate ten years from the date of approval unless it is terminated earlier by our compensation committee. We have initially reserved 25,000,000 shares of our Class A common stock for issuance under our 2012 Plan. Outstanding awards underPlan, which amount increases on the 2005 Stock Plan continuefirst day of January of each of 2013 through 2022 based on a formula or as determined by the board of directors. Our board of directors elected not to be subject toincrease the terms and conditionsnumber of the 2005 Stock Plan. Sharesshares reserved for issuance in 2013. In addition, 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 of our IPO, were added to the reserves of the 2012 Plan.We have initially reserved 25,000,000Plan and shares that are withheld in connection with the net settlement of our Class A common stock for issuance under our 2012 Plan. The numberRSUs are also added to the reserves 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. Plan.Officers’Officers' Stock Plan. As of June 30, 2012,2013, the option had been partially exercised in respect of and the remaining option to purchase 60,000,000 shares with the remainder remainingis outstanding and fully vested, and novested. No options were available for future issuance under the 2005 Officers’Officers' Stock Plan.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 (in thousands) (in thousands) (in years) (in millions) (in thousands) 52,318 258,539 $ 0.47 4.38 $ 7,360 378,772 $ 6.83 (28,603 ) 0 28,603 36.04 0 (84,078 ) 0.11 0 584 (584 ) 0.62 0 4,385 0 (4,385 ) 14.86 25,000 53,684 173,877 $ 0.65 4.08 $ 5,294 402,990 $ 8.81 Shares Subject to Options Outstanding (in thousands) (in years) (in millions) Balance as of December 31, 2012 122,821 $ 0.85 3.79 $ 3,166 Stock options exercised (21,419 ) 0.52 Balance as of June 30, 2013 101,402 $ 0.92 3.25 $ 2,427 Stock options vested and expected to vest as of June 30, 2013 101,374 $ 0.92 3.25 $ 2,427 Stock options exercisable as of June 30, 2013 94,613 $ 0.36 3.00 $ 2,318 (1) assessed fair value of our common stock as of December 31, 2011 and the closing market price of our Class A common stock as of $24.88 on June 30, 2012.2013.Note 8. Income TaxesThe aggregate intrinsic value of the options exercised was Unvested RSUs Number of Shares Weighted Average Grant Date Fair Value (in thousands) Unvested at December 31, 2012 113,044 $ 21.38 Granted 45,127 27.47 Vested (29,650 ) 16.05 Forfeited (6,389 ) 24.23 Unvested at June 30, 2013 122,132 $ 24.78 Note 11. Income Taxes pre-tax income and loss(loss) before provision for income taxes 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.income before provision for income taxes. For example, the impacteffect of non-deductible share based compensation expensesexpense on our effective tax rate is significantly greater when our pre-tax income before provision for income taxes is lower.benefit and the impact of non-deductible share-based compensation.benefit. 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 inthree and six months ended June 30, 2012 exceeded our effective tax rate in 2011 because2013, the amounteffect of the non-deductible share-based compensation expense and losses arising outside the United States in jurisdictions where we do not receive a tax benefit andwas largely offset by the amountrecognition of non-deductible share-based compensation are proportionately larger relative to pre-tax incomea non-recurring tax benefit that we recorded in 2012 than in 2011. Our effective tax rate in 2012 was also higher duethe first quarter of 2013 related to the expirationreinstatement of the federal tax credit foractivities.Our income tax refundable was $567 million as of June 30, 2012, which is an increase of $567 million from activities applicable to the year ended 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..20092010 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 20102011 and 2011subsequent 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.auditsaudit 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.Note 9. Geographical InformationNote 12. Geographical Information advertisermarketer 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, 2012 2011 2012 2011 $ 588 $ 515 $ 1,124 $ 942 596 380 1,118 684 $ 1,184 $ 895 $ 2,242 $ 1,626 Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012 Revenue: United States $ 818 $ 588 $ 1,498 $ 1,124 995 596 1,773 1,118 Total revenue $ 1,813 $ 1,184 $ 3,271 $ 2,242 (1) June 30, 2012 December 31, 2011 $ 1,978 $ 1,444 127 31 $ 2,105 $ 1,475 June 30,
2013 December 31,
2012Long-lived assets: United States $ 2,182 $ 2,110 Sweden 328 220 67 61 Total long-lived assets $ 2,577 $ 2,391 (1) Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsItem 2. Management's Discussion and Analysis of Financial Condition and Results of Operations prospectusAnnual Report on Form 10-K for the year ended December 31, 2012, as filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with the Securities and Exchange Commission on May 18, 2012 (Prospectus).Commission. In addition to historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in Part II.II, Item 1A. “Risk"Risk Factors.”" For a discussion of limitations in the measurement of certain of our user metrics, see the section entitled “—Limitations"Limitations of Key Metrics.” Facebook enables you to express yourself and connect with the world around you instantly and freely.advertisers:Advertisers.Marketers. We enable advertisersmarketers to engage with more than 950 millionone billion monthly active users (MAUs) on Facebook or subsets of our users based on information they have chosen to share with us such as their age, location, gender, or interests. We offer advertisersmarketers a unique combination of reach, relevance, social context, and engagement to enhance the value of their ads.2012,2013, we recorded revenue of $1,184$1,813 million incurred loss, income from operations of $743$562 million and net lossincome of $157 million.$333 million. In the first six months of 2012,2013, we recorded revenue of $2,242$3,271 million incurred loss, income from operations of $362$935 million and net income of $48 million. Total costs and expenses grew more than revenue, due in particular to significant increases in share-based compensation and related payroll tax expenses for restricted stock units (RSUs) during the second quarter and the first six months of 2012. During the second quarter and the first six months of 2012, we recognized $1,258$552 million and $1,362 million of share-based compensation and related payroll tax expenses, respectively. Of these amounts, $1,101 million was due to the recognition of share-based compensation and related payroll tax expenses related to RSUs granted prior to January 1, 2011 (Pre-2011 RSUs) triggered by the completion of our initial public offering (IPO) in May 2012..•Monthly Active Users (MAUs).We define a monthly active user as a registered Facebook user who logged in and visited Facebook through our website or a mobile device, or took an action to share content or activity with his or her Facebook friends or connections via a third-party website that is integrated with Facebook, in the last 30 days as of the date of measurement. MAUs are a measure of the size of our global active user community, which has grown substantially in the past several years. In June 2012, we discovered an error in the algorithm we used to estimate the geographic location of our users that affected our attribution of certain user locations for the first quarter of 2012. While this issue did not affect our overall worldwide MAU number, it did affect our attribution of users to different geographic regions. The first quarter of 2012 user metrics below reflect the reclassification to more correctly attribute users by geographic region.
DAUs, and ARPU by geographic region, Europe includes all users in Russia and Turkey, Asia includes all users in Australia and New Zealand, and Rest of World includes all users in Africa, Latin America, and the Middle East.As of June 30, 2012, we had 955 million MAUs, an increase of 29% from June 30, 2011. Users in Brazil, India, and Indonesia represented key sources of growth in the second quarter of 2012 relative to the prior year. We had 54 million MAUs in Brazil as of June 30, 2012, an increase of 146% compared to the same period in 2011; we had 59 million MAUs in India as of June 30, 2012, an increase of 84% compared to the same period in 2011; and we had 55 million MAUs in Indonesia as of June 30, 2012, an increase of 24% compared to the same period in 2011. Additionally, we had 168 million MAUs in the United States as of June 30, 2012, an increase of 10% compared to the same period in 2011.
Note: For non-worldwide DAU user numbers presented for the periods marked March 31, 2012 and June 30, 2012, the figures represent an average of the first 25 days of the period and the last 27 days of the period, respectively, in order to avoid using data subject to the algorithm error described in the MAU section above. These average numbers do not meaningfully differ from the average numbers when calculated over a full month.32%27% to 552699 million on average during June 20122013 from 417552 million during June 2011.2012. We experienced growth in DAUs across major markets including Brazil, India, and the United States, and India.States. Overall growth in DAUs was driven largely by increased mobile usage of Facebook. Relative to March 31, 2012, DAUs increased from 526 million to 552 million, due to an increase in mobile users. During the second quarter of 2012,2013, the number of DAUs using personal computers was essentially flat, and declinedincreased modestly compared to the same period in 2012, but in certain key markets such as the United States and Europe,the number of DAUs using personal computers decreased, while mobile DAUs continued to increase.by 67% from 32551% to 819 million as of June 30, 2011 to 2013 from 543 million as of June 30, 2012.2012. In all regions, an increasing number of our MAUs are accessing Facebook through mobile devices, with users in the United States, India, Brazil, and BrazilIndonesia representing key sources of mobile growth over this period. Approximately 102the second quarter of 2013 as compared to the first quarter of 2013. There were 219 million mobile MAUs who accessed Facebook solely through mobile apps or our mobile website during the month ended June 30, 2012,2013, increasing 23%16% from 83189 million during the month ended March 31, 2012.2013. The remaining 441600 million mobile MAUs accessed Facebook from both personal computers and mobile devices during that month.
average revenue per user (ARPU)ARPU as our total revenue in a given geography during a given period,quarter, divided by the average of the number of MAUs in the geography at the beginning and end of the period.quarter. Our revenue and ARPU in marketsregions such as the United States & Canada and Europe are relatively higher due to the size and maturity of those advertising markets as well as our greater sales presence and the number of payment methods that we make available to advertisersmarketers and users.In June 2012, we discovered an error in the algorithm we used to estimate the geographic location of our users that affected our attribution of certain user locations for the first quarter of 2012. The first quarter of 2012 ARPU amount for the United States & Canada region below reflects an adjustment based on the reclassification to more correctly attribute users by geographic region.
advertisermarketer or developer.2012,2013, worldwide ARPU was $1.28,$1.60, an increase of 2%25% from the second quarter of 2011.2012. Over this period, ARPU increased by over 10%approximately 43% in the United States and Canada, Asia, and Rest of World and by 8%over 30% in United States & Canada, Asia and Europe. User growth was more rapid in geographies with relatively lower ARPU, such as Asia and Rest of World. These user growth dynamics resulted in worldwide ARPU increasing at a slower rate than the rate experienced in any geographic region. We expect that user growth in the future will continue to be higher in those regions where ARPU is relatively lower, such as Asia and Rest of World, such that worldwide ARPU may continue to increase at a slower rate relative to ARPU in any geographic region, or potentially decrease even if ARPU increases in each geographic region.Limitations of Key MetricsThe numbers of our MAUs and DAUs and ARPU are calculated using internal company data based on the activity of user accounts. 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. For example, there may be individuals who maintain one or more Facebook accounts in violation of our terms of service, despite our efforts to detect and suppress such behavior. We estimate that “duplicate” accounts (an account that a user maintains in addition to his or her principal account) may have represented approximately 4.8% of our worldwide MAUs as of June 30, 2012. We also seek to identify “false” accounts, which we divide 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) undesirable accounts, which represent user profiles that we determine are intended to be used for purposes that violate our terms of service, such as spamming. As of June 30, 2012, we estimate user-misclassified accounts may have represented approximately 2.4% of our worldwide MAUs and undesirable accounts may have represented approximately 1.5% of our worldwide MAUs. We believe the percentage of accounts that are duplicate or false is meaningfully lower in developed markets such as the United States or Australia and higher in developing markets such as Indonesia and Turkey. However, these estimates are based on an internal review of a limited sample of accounts and we apply significant judgment in making this determination, such as identifying names that appear to be fake or other behavior that appears inauthentic to the reviewers. As such, our estimation of duplicate or false accounts may not accurately represent the actual number of such accounts. We are continually seeking to improve our ability to identify duplicate or false accounts and estimate the total number of such accounts, and such estimates may be affected by improvements or changes in our methodology.Our metrics are also affected by applications on certain mobile devices that automatically contact our servers for regular updates with no user action involved, and this activity can cause our system to count the user associated with such a device as an active user on the day such contact occurs. For example, we estimate that less than 5% of our estimated worldwide DAUs as of December 31, 2011 and 2010 resulted from this type of automatic mobile activity, and that this type of activity had a substantially smaller effect on our estimate of worldwide MAUs and mobile MAUs. The impact of this automatic activity on our metrics varies by geography because mobile usage varies in different regions of the world. In addition, 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 mobile-only 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 user metrics may also be susceptible to algorithm or other technical errors. For example, in early June 2012, we discovered an error in the algorithm we used to estimate the geographic location of our users that affected our attribution of certain user locations for the period ended March 31, 2012. While this issue did not affect our overall worldwide MAU number, it did affect our attribution of users to different geographic regions. We estimate that the number of MAUs as of March 31, 2012 for the United States and Canada region was overstated as a result of the error by approximately 3% and these overstatements were offset by understatements in other regions. In addition, our estimates for revenue by user location are also affected by these factors. We regularly review and may adjust our processes for calculating these metrics to improve their accuracy. In addition, our MAU and DAU estimates will differ from estimates published by third parties due to differences in methodology. For example, some third parties do not count mobile users.websites. Advertiserswebsites or mobile apps. Marketers pay for ad products which include Sponsored Stories in News Feed, either directly or through their relationships with advertising agencies, based on the number of impressions deliveredclicks made by our users, the number of actions taken by our users or the number of clicks made by our users.impressions delivered. We recognize revenue from the delivery of click-based ads or Sponsored Stories in the period in which a user clicks on the content.content, and action-based ads in the period in which a user takes the action the marketer contracted for. We recognize revenue from the display of impression-based ads or Sponsored Stories in the contracted period in which the impressions are delivered. Impressions are considered delivered when an ad or Sponsored Story is displayed to users. AnThe number of ads we show is subject to methodological changes as we continue to evolve our ads business and the structure of our ads products. Whether we count the initial display only or every display of an ad as an impression is dependent on where the ad is displayed. For example, an individual Sponsored Storyad in News Feed that is purchased on an impression basis may be displayed to users more than once during a day,day; however, only the initial display of the Sponsored Storyad is considered an impression, regardless of how many times the ad is actually displayed within the News Feed.Feed to a particular user.To date, games from Zynga have generated the majority of our payments and other fees revenue. In addition, we generateOur other fees revenue in connection with arrangements relatedconsists primarily of user Promoted Posts, our ad serving and measurement products and, to business development transactions and fees from various mobile providers; in recent periods, other feesa lesser extent, Facebook Gifts revenue. Such revenue has been immaterial.immaterial in recent periods.advertiser-facingmarketer-facing marketing and promotional expenditures.Research and development.Research and development expenses consist primarily of salaries, benefits, and share-based compensation for employees on our engineering and technical teams who are responsible for building new products as well as improving existing products. We expense substantially all of our research and development costs as they are incurred.settlements.We have reclassified certain prior period expense amounts from marketingsettlements and sales to general and administrative withinamortization of patents we acquired.to conform to our current period presentation. These reclassifications did not affect revenue, totaldata: Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012 (in millions) Revenue $ 1,813 $ 1,184 $ 3,271 $ 2,242 Costs and expenses: Cost of revenue 465 367 878 644 Research and development 344 705 637 858 Marketing and sales 269 392 472 535 General and administrative 173 463 349 567 Total costs and expenses 1,251 1,927 2,336 2,604 Income (loss) from operations 562 (743 ) 935 (362 ) Interest and other expense, net (17 ) (22 ) (37 ) (21 ) Income (loss) before (provision for) benefit from income taxes 545 (765 ) 898 (383 ) (Provision for) benefit from income taxes (212 ) 608 (346 ) 431 Net income (loss) $ 333 $ (157 ) $ 552 $ 48 expenses, (loss) income from operations, or net (loss) income.Results of Operations Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012 (in millions) Share-based compensation expense included in costs and expenses: Cost of revenue $ 11 $ 66 $ 19 $ 71 Research and development 151 545 268 605 Marketing and sales 33 232 57 251 General and administrative 29 263 50 282 Total share-based compensation expense $ 224 $ 1,106 $ 394 $ 1,209 summarizesset forth our historical condensed consolidated statements of operations data (in millions, except per share amounts): Three Months
Ended June 30, Six Months Ended
June 30, 2012 2011 2012 2011 $ 1,184 $ 895 $ 2,242 $ 1,626 367 210 644 377 392 96 535 158 705 99 858 156 463 83 567 140 1,927 488 2,604 831 (743 ) 407 (362 ) 795 $ (157 ) $ 240 $ 48 $ 471 66 3 71 3 232 11 251 11 545 35 605 39 263 15 282 18 $ 1,106 $ 64 $ 1,209 $ 71 The following table summarizes our historical condensed consolidated statements of operations data as (as a percentage of revenue for the periods shown: Three Months
Ended June 30, Six Months
Ended June 30, 2012 2011 2012 2011 100 % 100 % 100 % 100 % 31 23 29 23 33 11 24 10 60 11 38 10 39 9 25 9 163 55 116 51 (63 ) 45 (16 ) 49 (13 %) 27 % 2 % 29 % Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012 Revenue 100 % 100 % 100 % 100 % Costs and expenses: Cost of revenue 26 % 31 % 27 % 29 % Research and development 19 % 60 % 19 % 38 % Marketing and sales 15 % 33 % 14 % 24 % General and administrative 10 % 39 % 11 % 25 % Total costs and expenses 69 % 163 % 71 % 116 % Income (loss) from operations 31 % (63 )% 29 % (16 )% Interest and other expense, net (1 )% (2 )% (1 )% (1 )% Income (loss) before (provision for) benefit from income taxes 30 % (65 )% 27 % (17 )% (Provision for) benefit from income taxes (12 )% 51 % (11 )% 19 % Net income (loss) 18 % (13 )% 17 % 2 % (as (as a percentage of total revenue): 6 % — % 3 % — % 20 1 11 1 46 4 27 2 22 2 13 1 93 % 7 % 54 % 4 % Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012 Cost of revenue 1 % 6 % 1 % 3 % Research and development 8 46 8 27 Marketing and sales 2 20 2 11 General and administrative 2 22 2 13 Total share-based compensation expense 12 % 93 % 12 % 54 % 20122013 and 2011 Three Months Ended June 30, Six Months Ended June 30, 2012 2011 %
change 2012 2011 %
change (in millions, except for percentages) $ 992 $ 776 28 % $ 1,864 $ 1,413 32 % 192 119 61 % 378 213 77 % $ 1,184 $ 895 32 % $ 2,242 $ 1,626 38 % Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012 (in millions, except for percentages) Revenue: Advertising $ 1,599 $ 992 61 % $ 2,844 $ 1,864 53 % Payments and other fees 214 192 11 % 427 378 13 % Total revenue $ 1,813 $ 1,184 53 % $ 3,271 $ 2,242 46 % 20122013 increased $289$629 million, or 32%53%, and $616$1,029 million, or 38%46%, respectively, as compared to the same periods in 2011.2012. The increase wasincreases were due primarily to a 28% and 32% increaseincreases in advertising revenue.duringincreased $607 million, or 61%, and $980 million, or 53%, in the second quarter and the first six months of 2012,2013, respectively, as compared to the same periods in 2011.2012. Advertising revenue grew primarily due to an 18%a 43% and 26%41% increase in the number of ads delivered during the second quarter and the first six months of 2012,2013, respectively, and to a lesser extent, due to a 9%13% and 4%8% increase in the average price per ad inas compared to those same periods.delivered was driven primarily by userin News Feed on both mobile devices and personal computers. News Feed ads are displayed more prominently, have significantly higher levels of engagement and a higher price per ad relative to our other ad placements. For the to a lesser extent, the net effect of product changes that increased the average number of ads per page relative to last year. MAUs grew 29% from June 30, 2011 to June 30, 2012advertisingaverage DAUs grew 32% from June 2011 to June 2012 . Thevolume trends in these periods included: (i) an increase in the number of ads was lower thanmarketers actively advertising on Facebook which we believe increased demand for our increaseads; (ii) 27% growth in users, driven primarily by the increaseaverage DAUs and 21% growth in user engagement on mobile devices, whereMAUs from June 30, 2012 to June 30, 2013, which increased the number of ads shown per user is substantially lower. Inwe delivered; and (iii) other product changes, including our decision in the United States where smartphone use continuesfourth quarter of 2012 to grow,lower our market reserve price, i.e. the overallminimum price threshold accepted in our ads auction. We believe the reserve price change significantly increased the number of ads delivered decreased 2% year-over-year despite a 10% increase in DAUs and despite an increase in ads per page resulting from product changes, as DAUs on personal computers in the United States declined. We expect that the trend of ads not growing at the same pace as user growth will continue as web usage grows more slowly than mobile usage and declines in certain markets where smartphone adoption is occurring most rapidly.Growth inreduced the average price per ad, for the second quarter and the first six months of 2012 compared to the same periods in 2011 was driven primarily by an increase in price per adoverall had a modest positive effect on revenue in the United States, which benefited from growth in Sponsored Stories in News Feed across desktop and mobile devices during the second quarter of 2012. Sponsored Stories in News Feed, which currently represent a small percentage of our advertising revenue, have a significantly higher average price per ad due to factors which include the prominent position of the Sponsored Stories. The increase in price per ad in the United States was partially offset by an increased percentage of our worldwide ads being delivered in the Asia and Rest of World geographies where the average price per ad, while growing on a year-over-year basis, is relatively lower. The average price per ad was also affected by a decline in the average price per ad in Europe in the second quarter and the first six months of 2012 compared to the same periods in 2011 due in part, we believe, to continuing weak economic conditions in that region affecting advertiser demand.20122013 increased to $192$22 million, or 61%11%, and $378$49 million, or 77%13%, respectively as compared to the same periods in 2011. Payments revenue has been relatively flat over the last three sequential quarters, we believe due primarily to the fact that gaming in general has been growing faster on mobile devices where our Payments system is generally not utilized. Facebook Payments became mandatory for all game developers accepting payments on the Facebook Platform with limited exceptions on July 1, 2011. Accordingly, comparisons of Payments and other fees revenue to periods before this date may not be meaningful. Our Payments terms and conditions provide for a 30-day claim period subsequent to a Payments transaction during which the customer may dispute the virtual or digital goods transaction. To date, we have deferred recognition of Payments revenue until the expiration of this period as we were unable to make reasonable and reliable estimates of future refunds or chargebacks arising during this claim period, due to lack of historical transactional information. In the fourth quarter of 2012, we will have 24 months of historical transactional information which we currently anticipate will enable us to estimate future refunds and chargebacks. Accordingly, in the fourth quarter of 2012 we expect to record all Payments revenues at the time of the purchase of the related virtual or digital goods, net of estimated refunds or chargebacks. We anticipate that this change will result in a one-time increase in Payments revenue in the fourth quarter.Ten percent of our total revenue for both the second quarter and the first six months of 2012, and 12% of our total revenue for both the second quarter and the first six months of 2011 came from a single customer, Zynga. This revenue consisted of Payments processing fees related to Zynga’s sale of virtual goods and from direct advertising purchased by Zynga. Additionally, Zynga’s apps generate pages on which we display ads from other advertisers; for the second quarter and the first six months of 2012, we estimate that an additional approximately 4% of our total revenue was generated from the display of these ads. In May 2010, we entered into an addendum to our standard terms and conditions with Zynga pursuant to which it agreed to use Facebook Payments as the primary means of payment within Zynga games played on the Facebook Platform. Under this addendum, we retain a fee of up to 30% of the face value of user purchases in Zynga’s games on the Facebook Platform. This addendum expires in May 2015. Additionally, the addendum allows Facebook to display ads on Zynga.com, and in the second quarter of 2012 we began delivering ads on Zynga.com. The revenue associated with these ads was immaterial for the second quarter and the first six months of 2012.Cost of revenue Three Months Ended June 30, Six Months Ended June 30, 2012 2011 %
change 2012 2011 %
change (in millions, except for percentages) $ 367 $ 210 75 % $ 644 $ 377 71 % 31 % 23 % 29 % 23 % Cost of revenue in the second quarter of 2012 increased $157 million, or 75%, compared to the same period in 2011 and increased by $267 million, or 71% in the first six months of 2012 compared to the same period in 2011. The increases were primarily due to expenses related to expanding our data center operations, including $62 million and $121 million increases in depreciation in the second quarter and the first six months of 2012, respectively. Share-based compensation expense increased by $63 million and $68 million in the second quarter and the first six months of 2012, respectively, compared to the same periods in 2011 mainly due to recognitionexpense related to Pre-2011 RSUs triggered by the completion of our IPO in May 2012increased Payments revenue from games played on Facebook on personal computers, and to a lesser extent, RSUs granted on or after January 1, 2011 (Post-2011 RSUs). Increasesthe inclusion of other fees revenue in payroll2013 from user Promoted Posts, our ad serving and benefits expenses resulting from a 72% increase in employee headcount also contributed to increases in costmeasurement products, and Facebook Gifts. Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012 (in millions, except for percentages) Cost of revenue $ 465 $ 367 27 % $ 878 $ 644 36 % Percentage of revenue 26 % 31 % 27 % 29 % during the periods presented. These expenses supported our user growth, the increased usage of our products by users, developers, and advertisers, and the launch of new products.Marketing and sales Three Months Ended June 30, Six Months Ended June 30, 2012 2011 %
change 2012 2011 %
change (in millions, except for percentages) $ 392 $ 96 NM $ 535 $ 158 NM 33 % 11 % 24 % 10 % Marketing and sales expenses in the 20122013 increased $296$98 million, or 27%, and $377$234 million, or 36%, respectively, compared to the same periods in 2011.2012. The increases in both periods were primarily due to increased share-based compensation$57 million and $65 million of lease abandonment expense of $221 million and $240 millionrecognized in the second quarter and the first six months of 2012, respectively,2013 resulting from recognitionexiting certain leased data centers due to the migration of expenseoperations to our own data centers. In addition, operational expenses related to Pre-2011 RSUs triggered byexpanding our own data centers also contributed to the completionincreases in cost of our IPOrevenue, including $58 million and $145 million increases in May 2012 and, to a lesser extent, Post-2011 RSUs. The increases were also due to an increase in payroll and benefits expenses resulting from a 33% increase in employee headcount to support global sales, business development, and customer service, as well as an increase in our user-, developer-, and advertiser-facing marketing.Research and development Three Months Ended June 30, Six Months Ended June 30, 2012 2011 %
change 2012 2011 %
change (in millions, except for percentages) $ 705 $ 99 NM $ 858 $ 156 NM 60 % 11 % 38 % 10 % Research and development expenses indepreciation for the 2012 increased $6062013, respectively. These increases were partially offset by $55 million and $702$52 million decreases in share-based compensation expense for the second quarter and the first six months of 2013, respectively, compared to the same periods in 2011.2012 mainly due to the recognition of expense in those prior periods related to RSUs granted prior to January 1, 2011 (Pre-2011 RSUs) as a result of our IPO in May 2012. Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012 (in millions, except for percentages) Research and development $ 344 $ 705 (51 )% $ 637 $ 858 (26 )% Percentage of revenue 19 % 60 % 19 % 38 % increasesdecreases were primarily due to increased$394 million and $337 million decreases in share-based compensation expense of $510 million and $566 million infor the second quarter and the first six months of 2012,2013, respectively, resulting fromcompared to the same periods in 2012 mainly due to the recognition of expense in those prior periods related to Pre-2011 RSUs and, toas a lesser extent, Post-2011 RSUs. Payrollresult of our IPO in May 2012. These decreases were partially offset by increases in payroll and benefits expense also increased due toresulting from a 65%58% growth in employee headcount from June 30, 2012 to June 30, 2013 in engineering design, product management, and other technical functions. This investment supported our efforts to improve existing products and build new products for users, developers, and advertisers.GeneralMarketing and administrativesales Three Months Ended June 30, Six Months Ended June 30, 2012 2011 %
change 2012 2011 %
change (in millions, except for percentages) $ 463 $ 83 NM $ 567 $ 140 NM 39 % 9 % 25 % 9 % General Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012 (in millions, except for percentages) Marketing and sales $ 269 $ 392 (31)% $ 472 $ 535 (12)% Percentage of revenue 15 % 33 % 14 % 24 % administrativesales expenses in the second quarter and the first six months of 2012 increased $3802013 decreased $123 million, or 31%, and $427$63 million, or 12%, compared to the same periods in 2012. The decreases were primarily due to $199 million and $194 million decreases in share-based compensation expense for the second quarter and the first six months of 2013, respectively, compared to the same periods in 2011. The increases were primarily2012 mainly due to increased share-based compensationthe recognition of expense in those prior periods related to Pre-2011 RSUs as a result of $248our IPO in May 2012. These decreases were partially offset by $54 million and $264$73 million increases in our user-, developer-, and marketer-facing marketing expenses for the second quarter and the first six months of 2012,2013, respectively, resulting from recognition of expense related to Pre-2011 and to a lesser extent, Post-2011 RSUs. Payrollby increases in payroll and benefits expenses also increased due toresulting from a 58%18% increase in employee headcount in human resources, finance, corporate communicationsfrom June 30, 2012 to June 30, 2013 to support global sales, business development and policy, legal,customer service.other functions. Additionally, an accrual for a proposed legal settlement reachedadministrative Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012 (in millions, except for percentages) General and administrative $ 173 $ 463 (63 )% $ 349 $ 567 (38 )% Percentage of revenue 10 % 39 % 11 % 25 % quarter of 2012 as well as growth in legal fees, outside consulting fees and insurance contributed to the increases.Interest and other income (expense), net Three Months Ended June 30, Six Months Ended June 30, 2012 2011 %
change 2012 2011 %
change (in millions, except for percentages) $ (10 ) $ (9 ) 11 % $ (24 ) $ (17 ) 41 % (12 ) 1 NM 3 19 (84 %) $ (22 ) $ (8 ) 175 % $ (21 ) $ 2 NM Interest expense increased by $1 million and $7 million in the second quarter and the first six months of 2012,2013 decreased $290 million, or 63%, and $218 million, or 38%, respectively, compared to the same periods in 20112012. The decreases were primarily due to an increased volume of property$234 million and equipment financed by capital leases. Changes$232 million decreases in other income (expense), netshare-based compensation expense for the second quarter and the first six months of 20122013, respectively, compared to the same periods in 2011 were mostly2012 mainly due to the recognition of expense in those prior periods related to Pre-2011 RSUs as a result of our IPO in May 2012. The decreases were partially offset by increases in amortization of acquired patents. Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012 (in millions, except for percentages) Interest expense $ (14 ) $ (10 ) 40 % $ (29 ) $ (24 ) 21 % Other (expense) income, net (3 ) (12 ) (75 )% (8 ) 3 367 % Interest and other expense, net $ (17 ) $ (22 ) (23 )% $ (37 ) $ (21 ) 76 % lossesloss resulting from the periodic re-measurement of our foreign currency balances partiallyand an increase in interest income resulting from higher invested cash balances. Changes in other (expense) income, net in the first six months of 2013 compared to the same period in 2012 were primarily due to an increase in foreign exchange loss resulting from the periodic re-measurement of our foreign currency balances, offset by an increase in interest income driven by largerresulting from higher invested cash balances.Income Tax 4 million and $5 million in the second quarter and the first six months of 2013, respectively, primarily due to interest on the $1.5 billion term loan that was drawn down in the fourth quarter of 2012. Three Months Ended June 30, Six Months Ended June 30, 2012 2011 %
change 2012 2011 %
change (in millions, except for percentages) $ 608 $ (159 ) NM $ 431 $ (326 ) NM 79 % 40 % 113 % 41 % Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012 (in millions, except for percentages) (Provision for) benefit from income taxes $ (212 ) $ 608 NM $ (346 ) $ 431 NM Effective tax rate 39 % 79 % 39 % 113 % 2012 decreased $7672013 was $212 million and $757$346 million, respectively, resulting incompared to a benefit from income tax benefitstaxes of $608$608 million and $431$431 million in the second quarter and the first six months of 2012, respectively,respectively. The change in our provision for income taxes is primarily due to an increase in income before income taxes in the second quarter and the first six months of 2013.2011 primarily due2012. We also recorded a non-recurring tax benefit in the first quarter of 2013 related to the pre-tax losses generated inreinstatement of the second quarterfederal tax credit for research and development activities applicable to the first six months of 2012 and the associated tax benefits recorded for these losses.inhas exceeded the second quarterU.S. statutory rate primarily because of the impact of non-deductible share-based compensation expense and the first six months of 2012 increased primarily due to additional losses arising outside the United States in jurisdictions where we do not receive a tax benefit, the impact of certain non-deductible share-based compensation expense that was recognized during the periods, and the expiration of the federal tax credit for research and development activities.Our effective tax rate in the third quarter and full year of 2012 could exceed 100% depending on the amount and geographic mix of our income before provision for income taxes. If our effective tax rate exceeds 100%, we would have a net loss even though our income before provision for income taxes was positive for any period in which that occurs.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.benefit. 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.totaled $10.2were $10.3 billion as of June 30, 2012,2013, an increase of $6.3 billion$626 million from December 31, 2011. The most significant cash flow activities consisted of $6.8 billion from financing activities,2012, primarily due to net proceeds from our IPO, which was completed in May 2012, and $683 million$2.0 billion of cash generated from operations which included the receipt of an income tax refund of $419 million. This increase was offset by $866$595 million used for capital expenditurespurchases of property and $575equipment, $558 million used for acquisitiontax payments related to net share settlement of equity awards, and $221 million used for acquisitions of businesses and other assets. If we continue to net settle equity awards, we will use additional cash to pay our tax withholding obligations in connection with such settlements. We currently anticipate that our available funds, credit facilities, and cash flow from operations will be sufficient to meet our operational cash needs for the foreseeable future.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 HSR waiting periods, and is expected to close in 2012. 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.Pre-2011 RSUs vest upon the satisfaction of both a service condition and a liquidity condition. The liquidity condition will be satisfied in November 2012. Under settlement procedures applicable to these awards, we are permitted to deliver the underlying shares within 30 days before or after the date on which the liquidity condition is satisfied. As a result, we expect that a portion of these RSUs that are held by our directors and then current employees will be settled on a date that is between October 15, 2012 and November 13, 2012. In addition, a portion of these RSUs that are held by former employees will be settled on or about November 14, 2012. On the settlement dates, we plan to withhold and remit income taxes for certain RSU holders at applicable minimum statutory rates based on the then current value of the underlying shares. We currently expect that the average of these withholding tax rates will be approximately 45%. Assuming the price of our common stock at the time of settlement were equal to the closing price of our Class A common stock on June 30, 2012, and based on Pre-2011 RSUs outstanding as of June 30, 2012 for which the service condition will be satisfied as of the date of settlement, we estimate that this tax obligation would be approximately $3.7 billion in the aggregate. The amount of this obligation could be higher or lower, depending on the closing price of our shares at the time of settlement. To settle these RSUs, assuming an approximate 45% tax withholding rate, we anticipate that we will net settle the awards by delivering an aggregate of approximately 153 million shares of Class B common stock to RSU holders and withholding an aggregate of approximately 120 million shares of Class B common stock based on RSUs outstanding as of June 30, 2012 for which the service condition will be satisfied as of the date of settlement. In connection with these net settlements, we will withhold and remit the tax liabilities on behalf of the RSU holders to the relevant tax authorities in cash.To fund the withholding and remittance obligations, we may choose to borrow funds from our credit facilities, use a portion of our existing cash, or rely upon a combination of these sources. Alternatively, we may choose to sell equity securities on a date near or after the initial settlement date in an amount substantially equivalent to the number of shares of common stock that we withhold in connection with these net settlements.In February 2012, we entered into a new agreement for an unsecured five-year$5,000 million for general corporate purposes,$5 billion at London Interbank Offered Rate (LIBOR) plus 1.0%, as well as an annual commitment fee of 0.10% on the daily undrawn balance. As of June 30, 2013, no amounts were drawn down and we were in compliance with the covenants under this credit facility.. Under the terms of the new agreement, we are obligated to pay a, as well as an annual commitment fee of 0.10% per annum on the daily undrawn balance.Concurrent with our entering into the new revolving credit facility, we also entered into a bridge credit facility 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. We may make a single borrowing under this bridge facility beginning on the closing date of our IPO and ending on the date that is 240 days after that date. 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. We paid origination fees at closing and these fees are amortized over the remaining term of the facility, and we are obligated to pay an additional upfront fee of 0.20% of the aggregate amount of the borrowings requested on any applicable funding date. Under the terms of the agreement, we are obligated to pay a commitment fee of 0.10% per annumfromof the facility. We fully drew down the $1.5 billion facility which will become due and afterpayable in full on October 25, 2015. We have the 90th day followingoption to repay this facility at any time prior to such date. As of June 30, 2013, we were in compliance with the datecovenants in the Amended and Restated Term Loan.bridge facility. No amounts were drawn down under these creditone-month LIBOR rate on the corresponding notional amount of debt to a fixed interest rate of 1.46% to hedge our exposure to interest rate fluctuation. This interest rate swap has a maturity date of October 25, 2015.bridge credit facility agreement as2011.2012.As of June 30, 2012, $4082013$10.2$10.3 billion in cash and cash equivalents and marketable securities was held by our foreign subsidiaries. We have provided for the additional taxes that would be due if we repatriated these funds for use in our operations in the United States.20122013 primarily consisted of adjustments to net income, adjusted for certain non-cash items, such asincluding total depreciation and amortization of $463 million and share-based compensation expense of $1.2 billion$394 million, and total depreciation and amortization, partially offset by deferred income taxes anda reduction in income tax refundable.refundable of $444 million. The increase in cash flow from operating activities during the first six months of 20122013 compared to the same period in 20112012 was mainly due to increases in adjustments for non-cash items as described above, partially offset by an increase in net income, as adjusted for certain non-cash items, and the receipt of an income tax refundable and a decrease in net income.20122013 primarily resulted from $5.7 billion$595 million for the net purchase of marketable securities, capital expenditures of $866 million related to the purchase of servers, networking equipment, storage infrastructure, and the construction of data centers as well as $575$221 million for acquisitions of businesses and other assets, such as patents. The increasedecrease in cash used in investing activities during the first six months of 20122013 compared to the same period in 20112012 was mainly due to increases in the purchasedecreased net purchases of marketable securities capital expenditures and acquisitions offrom the same period in 2012 when we invested the proceeds from our IPO. In addition, we used less cash to acquire businesses and other assets.20122013 of approximately $1.6 billion to $1.8 billion, a portion of which we will finance through leasing arrangements. We also anticipate spending $300 million in cash as part of the purchase price for the acquisition of Instagram which is still subject to customary closing conditions. 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.In May 2012, we received $6.8 billion proceeds from our IPO, net of offering costs. Our financing activities havewas $593 million for the first six months of 2013 primarily consistedresulted from $558 million of tax payments related to the net share settlement of equity issuances, lease financing, and debt financing. Net cashawards. Because our RSUs granted on or after January 1, 2011 only began to settle in 2013, the total tax payments of $558 million included approximately $185 million related to RSUs that vested prior to 2013 but were not settled until the first quarter of 2013.$7.1$7.09 billion and $1.1 billion, for the first six months of 2012 and 2011, respectively and included excess tax benefits primarily related to $6.76 billion in net proceeds from stock award activities of $381 million and $355 million for the same periods, respectively. In the first six months of 2011, it also included $250 million of debt repayment. We had no outstanding debt during the same period in 2012.2012.Prospectus, except as noted in “Cash Used in Investing Activities” above.69 in the notes to the condensed consolidated financial statements included in Part I, Item 1 and “Legal Proceedings”"Legal Proceedings" contained in Part II, Item 1 of this Quarterly Report on Form 10-Q for additional information regarding contingencies.Recently Issued and Adopted Accounting PronouncementsComprehensive IncomeIn May 2011, the Financial Accounting Standards Board issued guidance that changed the requirement for presenting “Comprehensive Income” in the consolidated financial statements. The update requires an entity to present the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and should be applied retrospectively. We adopted this new guidance on January 1, 2012.paymentsPayments and other fees, income taxes and share-based compensation have the greatest potential impact on our condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.Prospectus.Annual Report on Form 10-K for the fiscal year ended December 31, 2012.Item 3. Quantitative and Qualitative Disclosures About Market RiskItem 3. Quantitative and Qualitative Disclosures About Market Risk risk,risks, including changes to interest rates, foreign currency exchange rates, interest rates, and inflation.International revenue as a percentage of revenue was 50% for both the second quarter and the first six months of 2012 and 42% for both the second quarter and the first six months of 2011. We recognized foreign currency losses of $13 million, $2 million and $3 million in the second quarter of 2012 and 2011 and the first six months of 2012, respectively, and foreign currency gain of $15 million in the first six months of 2011. At this time we dohave not entered into, but in the future we may enter into, derivatives or other financial instruments in an attempt to hedge our foreign currency exchange risk. It is difficult to predict the impacteffect hedging activities would have on our results of operations.treasury and U.S. government agency debt securities. Our investment policy and strategy are focused on preservation of capital and supporting our liquidity requirements, and compliance with the Investment Company Act of 1940.$63$15$55 million in the market value of our available-for-sale debt securities as of June 30, 20122013 and December 31, 2011,2012, respectively. Any realized gains or losses resulting from such interest rate changes would only occur if we sold the investments prior to maturity.Item 4. Controls and ProceduresItem 4. Controls and Procedures 13a- 15(e)13a-15(e) and 15d- 15(e)15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO and CFO have concluded that as of such date, our disclosure controls and procedures were effective.management’smanagement's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.Item 1. Legal Proceedings Item 1. Legal ProceedingsZuckerberg’sZuckerberg's ownership in us, and he included quotations from supposed emails that he claims to have exchanged with Mr. Zuckerberg in 2003 and 2004. On June 2, 2011, we filed a motion for expedited discovery based on evidence we submitted to the court showing that the alleged contract and emails upon which Mr. Ceglia bases his complaint are fraudulent. On July 1, 2011, the court granted our motion and ordered Mr. Ceglia to produce, among other things, all hard copy and electronic versions of the purported contract and emails. On January 10, 2012, the court granted our request for sanctions against Mr. Ceglia for his delay in compliance with that order. On March 26, 2012, we filed a motion to dismiss Mr. Ceglia’sCeglia's complaint and a motion for judgment on the pleadings. On March 26, 2013, the magistrate judge overseeing the matter issued a report recommending that the court grant our motion to dismiss and that it deny as moot our motion for judgment on the pleadings. We continue to believe that Mr. Ceglia is attempting to perpetrate a fraud on the court and we intend to continue to defend the case vigorously.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 claims relate to “advertising,” “social networking,” “privacy,” “customization,” and “messaging,” and on April 27, 2012 Yahoo added two patents to the lawsuit that Yahoo claimed 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.areintend to continue to vigorously defending these lawsuits.defend them. On October 4, 2012, on our motion, the vast majority of the cases in the United States, along with multiple cases filed against The NASDAQ OMX Group, Inc. and The Nasdaq Stock Market LLC (collectively referred to herein as NASDAQ) alleging technical and other trading-related errors by NASDAQ in connection with our IPO, were ordered centralized for coordinated or consolidated pre-trial proceedings in the United States District Court for the Southern District of New York. On February 13, 2013, the court granted our motion to dismiss four derivative actions against our directors and certain of our officers with leave to amend. In addition, followingSeptember 2013, the court is scheduled to hear argument on our IPO,motion to dismiss the consolidated securities class action, as well as our motion to dismiss, and the plaintiffs' motion to remand to state court, certain other derivative actions. In addition, the events surrounding our IPO becamehave become the subject of various government inquiries, and we have received requests for information in connectionare cooperating with certain of those inquiries. Any such inquiries could subject us to substantial costs, divert resources and the attention of management from our business, orand adversely affect our business.Webrought by both other companies and non-practicing entities as well as class action lawsuits brought by users and advertisers,marketers, and we may in the future be subject to additional lawsuits and disputes. We are also involved in other claims, government investigations, and proceedings arising from the ordinary course of our business. Although the results of these other lawsuits, claims, government investigations, and proceedings in which we are involved cannot be predicted with certainty, we do not believe that the final outcome of these other matters will have a material adverse effect on our business, financial condition, or results of operations.Item 1A. Risk Factors users’users' level of engagement are critical to our success. We had 955 million1.15 billion monthly active users (MAUs) as of June 30, 2012.2013. Our financial performance has been and will continue to be significantly determined by our success in adding, retaining, and engaging active users. We anticipate that our active user growth rate will decline over time as the size of our active user base increases, and as we achieve higher market penetration rates. To the extent our active user growth rate slows, our business performance will become increasingly dependent on our ability to increase levels of user engagement and monetization in current and new markets.monetization. If people do not perceive our products to be useful, reliable, and trustworthy, we may not be able to attract or retain users or otherwise maintain or increase the frequency and duration of their engagement. A number of other social networking companies that achieved early popularity have since seen their active user bases or levels of engagement decline, in some cases precipitously. There is no guarantee that we will not experience a similar erosion of our active user base or engagement levels. AOur user engagement patterns have changed over time and can be difficult to measure, particularly as users engage increasingly via mobile devices and as we introduce new and different services. Any decrease in user retention, growth, or engagement could render Facebook less attractive to users, developers and advertisers,marketers, which may have a material and adverse impact on our revenue, business, financial condition, and results of operations. Any number of factors could potentially negatively affect user retention, growth, and engagement, including if:competing products;and improved products that users find engaging or if we introduce new products or services that are not favorably received;we are unable to successfully balance our efforts to provideusers feel that their Facebook experience is diminished as a compelling user experience withresult of the decisions we make with respect to the frequency, prominence, and size of ads and other commercial content that we display;experience;advertisers; and future growth potential may be adversely affected.advertisers,marketers, or reduction in spending by advertisersmarketers with Facebook, could seriously harm our business.InFor the first six months of 20122013 and 2011 and the full 2011, 2010, and 2009 years,2012, advertising accounted for 83%, 87%, 85%, 95% and 98%83%, respectively, of our revenue. As is common in the industry, our advertisers typicallymarketers do not have long-term advertising commitments with us. Many of our advertisersmarketers spend only a relatively small portion of their overall advertising budget with us. In addition, advertisersmarketers may view some of our products such as Sponsored Stories and ads with social context, as experimental and unproven. AdvertisersMarketers will not continue to do business with us, or they will reduce the prices they are willing to pay to advertise with us, if we do not deliver ads and other commercial content in an effective manner, or if they do not believe that their investment in advertising with us will generate a competitive return relative to other alternatives. Our advertising revenue could be adversely affected by a number of other factors, including:generated only a small portion of our revenue, particularlyless monetization experience compared to the extent that mobile engagement is substituted for engagement with Facebookuse on personal computers where we currently have greater opportunities to monetize usage by displaying ads and other commercial content;and other commercial content displayed on Facebook;improveincrease marketer demand, the pricing of our ads, or both;and other commercial content;or our ability to further improve such tools;advertisersmarketers to use our free products, such as Facebook Pages, instead of advertising on Facebook;competitors;ads and other commercial content;adsads;otherwise limitreduce the potential audiencenumber of commercial content;times they click on our ads;adsads; and other commercial content; andandor conditions in the advertising industry, in general.and other commercial content, which may reduce the prices we receive for our ads, and other commercial content, or cause advertisersmarketers to stop advertising with us altogether, either of which would negatively affect our revenue and financial results. where our ability to monetize is unproven, as a substitute for use on personal computers may negatively affect our revenue and financial results.543819 million mobile MAUs who used Facebook mobile products in June 2012.2013. While most of our mobile users also access Facebook through personal computers, we anticipate that the rate of growth in mobile usage will exceed the growth in usage through personal computers for the foreseeable future and that the usage through personal computers may decline or continue to decline in certain markets, in part due to our focus on developing mobile products to encourage mobile usage of Facebook. For example, during the first and second quarters of 2013, the number of daily active users (DAUs) using personal computers was essentially flat, and declined modestly in certain key markets such as the United States and Europe during the second quarter of 2012declined when compared to the first quarter of 2012. We believe increased usage of Facebook on mobile devices has contributed to the recent trend of our DAUs increasing more rapidly than the increasesame periods in 2012, while the number of ads delivered. We have historically not shown adsmobile DAUs increased. While mobile advertising revenue continues to users accessing Facebook through mobile apps or our mobile website. In March 2012, we began to include Sponsored Stories in users’ mobile News Feeds; however, in the first half of 2012, we generated onlygrow, a small portionmajority of our overall advertising revenue is still generated from the use of Facebookadvertising on personal computers. In addition, we do not currently offer our Payments infrastructure to applications on mobile products, and our ability to increase mobile revenues is unproven.devices. If users increasingly access Facebook mobile products as a substitute for access through personal computers, and if we are unable to successfully implement monetization strategies for ourcontinue to grow mobile users,revenues, or if we incur excessive expenses in this effort, our financial performance and ability to grow revenue would be negatively affected.engagementmonetization on mobile devices depend upon effective operation with mobile operating systems, networks, and standards that we do not control.products’products' functionality, or give preferential treatment to competitive products, or prevent our ability to show ads could adversely affect Facebook usage and monetization on mobile devices. Additionally, in order to deliver high quality mobile products, it is important that our products work well with a range of mobile technologies, systems, networks, and standards that we do not control. We may not be successful in developing relationships with key participants in the mobile industry or in developing products that operate effectively with these technologies, systems, networks, or standards. In the event that it is more difficult for our users to access and use Facebook on their mobile devices, or if our users choose not to access or use Facebook on their mobile devices or use mobile products that do not offer access to Facebook, our user growth and user engagement could be harmed.We may not be successful in our efforts to grow usage of and engagement with the Facebook Platform.We have made and are continuing to make major investments to enable developers to build applications (apps) and websites that integrate with the Facebook Platform. Existing and prospective Platform developers may not be successful in building apps or websites that create and maintain user engagement. Additionally, developers may choose to build on other platforms, including mobile platforms controlled by third parties, rather than building on the Facebook Platform. We are continuously seeking to balance the distribution objectives of our Platform developers with our desire to provide an optimal user experience, and we may not be successful in achieving a balance that continues to attract and retain Platform developers. From time to time, we have taken actions to reduce the volume of communications from Platform developers to users on Facebook with the objective of enhancing the user experience, and such actions have reduced distribution from, user engagement with, and our monetization opportunities from, Facebook-integrated apps and websites. In some instances, these actions have adversely affected our relationships with Platform developers. If we are not successful in our efforts to grow our Platform or if we are unable to build and maintain good relations with Platform developers, our user growth and user engagement and our financial results may be adversely affected.We may not be successful in our efforts to further monetize the Facebook Platform.We currently monetize the Facebook Platform in several ways, including ads on pages generated by apps on Facebook, direct advertising on Facebook purchased by Platform developers to drive traffic to their apps and websites, and fees from our Platform developers’ use of our Payments infrastructure to sell virtual and digital goods to users. Apps built by developers of social games, particularly Zynga, are currently responsible for substantially all of our revenue derived from Payments. Our Payments revenue has been essentially flat since the third quarter of 2011, and Payments revenue may stay flat or decrease in future periods. In addition, a relatively small percentage of our users have transacted with Facebook Payments. For example, in the first half of 2012, approximately 15 million users purchased virtual goods using Facebook Payments. If the Platform apps that currently generate revenue fail to grow or maintain their users and engagement, if Platform developers do not continue to introduce new apps that attract users and create engagement, if Platform developers reduce their advertising on Facebook, if we fail to maintain good relationships with Platform developers or attract new developers, or if Platform apps outside of social games do not gain popularity and generate significant revenue, our financial performance and ability to grow revenue could be adversely affected.Additionally, we are actively supporting Platform developers’ efforts to develop their own mobile apps and websites that integrate with Facebook. Unlike apps that run within the Facebook website which enable us to show ads and offer Payments, we generally do not directly monetize from Platform developers’ integrating their own mobile apps and websites with Facebook. Therefore, our Platform developers efforts to prioritize Facebook integrations with their own mobile apps or websites may reduce or slow the growth of our user activity that generates advertising and Payments opportunities, which could negatively affect our revenue. Although we believe that there are significant long-term benefits to Facebook resulting from increased engagement on Facebook-integrated websites and mobile apps, these benefits may not offset the possible loss of revenue, in which case our business could be harmed. almost every aspect of our business, including from companies such asthat provide tools to facilitate the sharing of information, companies that enable marketers to display personalized advertising and companies that provide development platforms for applications developers. We compete with companies that offer full-featured products that replicate the range of communications and related capabilities we provide. These offerings include, for example, Google+, which Google Microsoft,has integrated with certain of its products, including search and Twitter, which offer a variety of Internet products, services, content, and online advertising offerings,Android, as well as from mobile companies and smaller Internet companies that offer products and services that may compete with specific Facebook features. We also face competition from traditional and online media businesses for advertising budgets. We compete broadly with Google’s social networking offerings, including Google+, and also with other, largely regional, social networks that have strong positions in particular countries, including Cyworld in Korea, Mixi in Japan, Orkut (owned by Google) in Brazilcountries. We also compete with companies that develop applications, particularly mobile applications, that provide social functionality, such as messaging, photo- and India,video-sharing, and vKontakte in Russia. We would alsomicro-blogging, and companies that provide web- and mobile-based information and entertainment products and services that are designed to engage users and capture time spent online and on mobile devices. In addition, we face competition from companies in China such as Renren, Sina,traditional and Tencent in the eventonline businesses that we are ableprovide media for marketers to access the market in China in the future. As we introduce new products, as our existing products evolve, reach their audiences and/or as other companies introduce new productsdevelop tools and services, such as mobile messagingsystems for managing and chat services, we may become subject to additional competition.andor better competitive positions in certain marketsproduct segments, geographic regions or user demographics than we do. These factors may allow our competitors to respond more effectively than us to new or emerging technologies and changes in market requirements. conditions. We believe that some of our users, particularly our younger users, are aware of and actively engaging with other products and services similar to, or as a substitute for, Facebook. For example, we believe that some of our users have reduced their engagement with Facebook in favor of increased engagement with other products and services such as Instagram. In the event that our users increasingly engage with other products and services, we may experience a decline in user engagement and our business could be harmed. market acceptance, may undertake more far-reaching and successful product development efforts or marketing campaigns, or may adopt more aggressive pricing policies. In addition, Platform partners may use information shared by our users through the Facebook Platform in order to develop products or features that compete with us. Certain competitors, including Google, could use strong or dominant positions in one or more markets to gain competitive advantage against us in areas where we operate including: by integrating competing social networking platforms or features into products they control such as search engines, web browsers, or mobile device operating systems; by making acquisitions; or by making access to Facebook more difficult. As a result, our competitors may acquire and engage users at the expense of the growth or engagement of our user base, which may negatively affect our business and financial results.competitors’competitors' products;ability to successfully monetize mobile usage;and other commercial content displayed by us or our competitors;efforts;developers’developers' interest in building on the Facebook Platform; compete, our user base and level of user engagement may decrease, which could make uswe may become less attractive to developers and advertisersmarketers, and materially and adversely affect our revenue and results of operations.Korea, and Syria.Korea. In addition, governments in other countries may seek to restrict access to Facebook if they consider us to be in violation of their laws. In the event that access to Facebook is restricted, in whole or in part, in one or more countries or our competitors are able to successfully penetrate geographic markets that we cannot access, our ability to retain or increase our user base and user engagement may be adversely affected, we may not be able to maintain or grow our revenue as anticipated, and our financial results could be adversely affected.advertisers,marketers, we may fail to attract or retain users or to generate sufficient revenue, operating margin, or other value to justify our investments, and our business may be adversely affected. In the future, we may invest in new products and initiatives to generate revenue, but there is no guarantee these approaches will be successful. For example, in 2012, we launched our Gifts product that enables users to send physical or digital gifts to friends. To date, we have not generated meaningful revenue from this product and we may not be successful in generating meaningful revenue in the future. If we are not successful with new approaches to monetization, we may not be able to maintain or grow our revenue as anticipated or recover any associated development costs, and our financial results could be adversely affected.advertisers.marketers. Our culture also prioritizes our user engagement over short-term financial results, and we frequently make product decisions that may reduce our short-term revenue or profitability if we believe that the decisions are consistent with our mission and benefit the aggregate user experience and will thereby improve our financial performance over the long term. These decisions may not produce the long-term benefits that we expect, in which case our user growth and engagement, our relationships with developers and advertisers,marketers, and our business and results of operations could be harmed.advertisersmarketers may be impaired, and our business and financial results may be harmed.advertisers.marketers. Many of our new users are referred by existing users, and therefore we strive to ensure that our users remain favorably inclined towards Facebook.users. Maintaining and enhancing our brand will depend largely on our ability to continue to provide useful, reliable, trustworthy, and innovative products, which we may not do successfully. We may introduce new products or terms of service that users do not like, which may negatively affect our brand. Additionally, the actions of our Platform developers may affect our brand if users do not have a positive experience using third-party apps and websites integrated with Facebook. We have in the past experienced, and we expect that in the future we will continue to experience, media, legislative, or regulatory scrutiny of our decisions regarding user privacy or other issues, which may adversely affect our reputation and brand. We also may fail to provide adequate customer service, which could erode confidence in our brand. Our brand may also be negatively affected by the actions of users that are deemed to be hostile or inappropriate to other users, or by users acting under false or inauthentic identities. Maintaining and enhancing our brand may require us to make substantial investments and these investments may not be successful. If we fail to successfully promote and maintain the Facebook brand or if we incur excessive expenses in this effort, our business and financial results may be adversely affected.users’users' information, or violation of our terms of service or policies, could harm our reputation and adversely affect our business.users’users' data. If any of these events occur, our users’users' information could be accessed or disclosed improperly. Our Data Use Policy governs the use of information that users have chosen to share using Facebook and how that information may be used by us and third parties. Some Platform developers may store information provided by our users through apps on the Facebook Platform or websites integrated with Facebook. If these third parties or Platform developers fail to adopt or adhere to adequate data security practices or fail to comply with our terms and policies, or in the event of a breach of their networks, our users’users' data may be improperly accessed or disclosed.which makes themand are difficult to predict.advertisersmarketers in a particular period;advertisersmarketers due to seasonality, such as historically strong spending in the fourth quarter of each year, or other factors;paymentsPayments and other fees revenue;current advertising and Payments;privacy;expense including approximately $986 million that we incurred in the second quarter of 2012 in connection with the vesting of restricted stock units (RSUs) granted prior to 2011 for which the service condition was satisfied;In the first six months of 2012 and the full 2011 year, we estimate that up to 14% and 19% of our revenue, respectively, was derived from Payments processing fees from Zynga, direct advertising from Zynga, revenue from third parties for ads shown on pages generated by Zynga apps, and Facebook ads and Sponsored Stories displayed on Zynga.com. If Zynga does not maintain its level of engagement with our users or if we are unable to successfully maintain our relationship with Zynga, our financial results could be harmed.In the first six months of 2012 and the full 2011 year, Zynga directly accounted for approximately 10% and 12%, respectively, of our revenue, which was comprised of revenue derived from Payments processing fees related to Zynga’s sales of virtual goods and from direct advertising purchased by Zynga. Additionally, Zynga’s apps generate pages on which we display ads from other advertisers; for the first six months of 2012 and the full 2011 year, we estimate that an additional approximately 4% and 7%, respectively, of our revenue was generated from the display of these ads. Zynga has recently launched games on its own website. While we began displaying ads and Sponsored Stories on Zynga.com in the second quarter of 2012, we do not currently generate meaningful revenue from these ads. We may fail to maintain good relations with Zynga or Zynga may decide to reduce or cease its investments in games on the Facebook Platform. In addition, if we are no longer able to display ads and Sponsored Stories on Zynga.com or if the use of Zynga games on our Platform declines for other reasons, our financial results may be adversely affected.willmay decline in the future.willmay decline over time. For example, our revenue grew 38%88% from the first six months of2010 to 2011 and 37% from 2011 to the same period in 2012, 88% from full 2010 year to full 2011 year and 154% from full 2009 year to full 2010 year.2012. Historically, our user growth has been a primary driver of growth in our revenue. WeWhile we have recently experienced increased revenue growth compared to prior periods, we expect that our user growth and revenue growth rates will decline over time as the size of our active user base increases and as we achieve higher market penetration rates. As our growth rates decline, investors’investors' perceptions of our business may be adversely affected and the trading price of our Class A common stock could decline.ForeignThe introduction of new products may subject us to additional laws and regulations. For example, depending on how our Gifts products evolve, we may be subject to laws and regulations governing returns, taxability of purchases, purchase of restricted products such as alcohol, product liability, and international import and export restrictions. In addition, foreign data protection, privacy, and other laws and regulations are often more restrictive than those in the United States. These U.S. federal and state and foreign laws and regulations, which can be enforced by private parties or government entities, are constantly evolving and can be subject to significant change. In addition, the application and interpretation of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which we operate. For example, thea revision to the 1995 European Union Data Protection DirectiveCommission is currently being considered by European legislative bodiesconsidering a data protection regulation that may include more stringent operational requirements for data processors that are more stringent than those currently in place in the European Union, and that may also include significant penalties for non-compliance. Similarly, there have been a number of recent legislative proposals in the United States, at both the federal and state level, that would impose new obligations in areas such as privacy and liability for copyright infringement by third parties. These existing and proposed laws and regulations can be costly to comply with and can delay or impede the development of new products, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to inquiries or investigations, claims or other remedies, including fines or demands that we modify or cease existing business practices.2011, we reached agreement with2012, the Federal Trade Commission (FTC) to resolve an investigation into various practices by entering intoapproved a 20-year settlement agreement with us that, among other things, requires us to establish and refine certain practices with respect to treatment of user data and privacy settings and also requires that we complete bi-annual independent privacy audits.assessments. As another example, in 2011 and 2012, the Irish Data Protection Commissioner (DPC) conducted an audit ofaudited the data, security, and privacy practices and policies of Facebook Ireland, which is the data controller for Facebook users outside the United States and Canada, and released a report of its conclusions in December 2011. The DPC conducted a second audit in July 2012 and we expect the DPC to release the report of its conclusions in the second half of 2012. The FTC and DPC have investigated and audited aspects of our products and practices, and weIreland. We expect to continue to be the subject of regulatory investigations and audits in the future by these and other regulators throughout the world.jurisdictions.jurisdictions and have acquired patents and patent applications from third parties. In addition, in the future we may acquire additional patents or patent portfolios, which could require significant cash expenditures. However, thirdThird parties may knowingly or unknowingly infringe our proprietary rights, third parties may challenge proprietary rights held by us, and pending and future trademark and patent applications may not be approved. In addition, effective intellectual property protection may not be available in every country in which we operate or intend to operate our business. In any or all of these cases, we may be required to expend significant time and expense in order to prevent infringement or to enforce our rights. Although we have taken measures to protect our proprietary rights, there can be no assurance that others will not offer products or concepts that are substantially similar to ours and compete with our business. In addition, we regularly contribute software source code under open source licenses and have made other technology we developed available under other open licenses, and we include open source software in our products. For example, we have contributed certain specifications and designs related to our data center equipment to the Open Compute Project Foundation, a non-profit entity that shares and develops such information with the technology community, under the Open Web Foundation License. As a result of our open source contributions and the use of open source in our products, we may license or be required to license or disclose code and/or innovations that turn out to be material to our business and may also be exposed to increased litigation risk. If the protection of our proprietary rights is inadequate to prevent unauthorized use or appropriation by third parties, the value of our brand and other intangible assets may be diminished and competitors may be able to more effectively mimic our service and methods of operations. Any of these events could have an adverse effect on our business and financial results.“non-practicing entities”"non-practicing entities" that own patents and other intellectual property rights oftenparty’sparty's rights, which may not be available on reasonable terms, or at all, and may significantly increase our operating costs and expenses. As a result, we may also be required to develop alternative non-infringing technology or practices or discontinue the practices. The development of alternative non-infringing technology or practices could require significant effort and expense or may not be feasible. Our business, financial condition, orand results of operations could be adversely affected as a result of an unfavorable resolution of the disputes and litigation referred to above.advertisers,marketers, many of which claim statutory damages, and we anticipate that we will continue to be a target for numerous lawsuits in the future. Because we have hundreds of millions ofover a billion users, the plaintiffs in class action cases filed against us typically claim enormous monetary damages even if the alleged per-user harm is small or non-existent. Any negative outcome from such lawsuits could result in payments of substantial monetary damages or fines, or changes to our products or business practices, and accordingly our business, financial condition, or results of operations could be materially and adversely affected. Although the results of such lawsuits and claims cannot be predicted with certainty, we do not believe that the final outcome of those matters relating to our products that we currently face will have a material adverse effect on our business, financial condition, or results of operations. In addition, following our initial public offering,IPO, we became the subject of shareholderstockholder class action suits. We believe these lawsuits are without merit and are vigorously defending these lawsuits.As a result of voting agreements with certain stockholders, together with the shares he holds, 2012.2013. Mr. Zuckerberg therefore has the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets. This concentrated control could delay, defer, or prevent a change of control, merger, consolidation, or sale of all or substantially all of our assets that our other stockholders support, or conversely this concentrated control could result in the consummation of such a transaction that our other stockholders do not support. This concentrated control could also discourage a potential investor from acquiring our Class A common stock due to the limited voting power of such stock relative to the Class B common stock and might harm the trading price of our Class A common stock. In addition, Mr. Zuckerberg has the ability to control the management and major strategic investments of our company as a result of his position as our CEO and his ability to control the election or replacement of our directors. In the event of his death, the shares of our capital stock that Mr. Zuckerberg owns will be transferred to the persons or entities that he designates. As a board member and officer, Mr. Zuckerberg owes a fiduciary duty to our stockholders and must act in good faith in a manner he reasonably believes to be in the best interests of our stockholders. As a stockholder, even a controlling stockholder, Mr. Zuckerberg is entitled to vote his shares, and shares over which he has voting control as a result of voting agreements, in his own interests, which may not always be in the interests of our stockholders generally.anticipate that we will expend substantial fundsplan to continue to make acquisitions, which could require significant management attention, disrupt our business, result in connection with the tax liabilities that arise upon the initial settlement of RSUsdilution to our stockholders, and the manner in which we fund that expenditure may have an adverse effect onadversely affect our financial condition.We anticipate that we will expend substantial funds to satisfy tax withholding and remittance obligations on dates occurring between October 15, 2012 and November 14, 2012, when we anticipate settling a portionresults.RSUs granted priorbusiness strategy, we have made and intend to January 1, 2011 (Pre-2011 RSUs)make acquisitions to add specialized employees, complementary companies, products, or technologies. Our ability to acquire and integrate larger or more complex companies, products, or technologies in a successful manner is unproven. On In the settlement dates, we plan to withhold and remit income taxes at applicable minimum statutory rates based on the then current value of the underlying shares. We currently expect that the average of these withholding tax rates will be approximately 45%. If the price of our common stock at the time of settlement were equal to $31.10, the closing price of our Class A common stock on June 30, 2012, we estimate that this tax obligation would be approximately $3.7 billion in the aggregate. The amount of this obligation could be higher or lower, depending on the closing price of our shares at the time of settlement. To settle these RSUs, assuming an approximate 45% tax withholding rate, we anticipate that we will net settle the awards by delivering an aggregate of approximately 153 million shares of Class B common stock to RSU holders and withholding an aggregate of approximately 120 million shares of Class B common stock, based on RSUs outstanding as of June 30, 2012 for which the service condition will be satisfied as of the date of settlement. In connection with these net settlements, we will withhold and remit the tax liabilities on behalf of the RSU holders in cash to the applicable tax authorities.To fund the withholding and remittance obligations,future, we may choose to borrow funds from our credit facilities, use a portion of our existing cash, or rely upon a combination of these sources. In the event that we elect to satisfy tax withholding and remittance obligations in whole or in part by drawing on our credit facilities, our interest expense and principal repayment requirements could increase significantly, which could have an adverse effect on our financial results. Alternatively, we may choose to sell equity securities on a date near or after the initial settlement date in an amount that is substantially equivalent to the number of shares of common stock that we withhold in connection with these net settlements, such that the newly issued shares should not be dilutive. In the event that we issue equity securities, we cannot assure you that we will be able to successfully match the proceeds to the amount of this tax liability. In addition, any such equity financing could result in a decline in our stock price.We cannot be certain that additional financing will be available on reasonable terms when required, or at all.From time to time,find other suitable acquisition candidates, and we may need additional financing, whether in connection with our RSU tax obligation or otherwise. Our abilitynot be able to obtain additional financing, if and when required, will depend on investor demand, our operating performance, the condition of the capital markets, and other factors. To the extent we draw on our credit facilities to fund the RSU tax obligation, we may need to raise additional funds and we cannot assure you that additional financing will be available to uscomplete acquisitions on favorable terms, when required, orif at all. IfAny future acquisitions we raise additional funds through the issuance of equity, equity-linkedcomplete could be viewed negatively by users, developers, marketers, or debt securities, those securities may have rights, preferences, or privileges senior to the rights of our Class A common stock,investors, and our existing stockholdersacquisitions may not achieve our goals. For example, in August 2012, we acquired Instagram, but we are still focused on user growth and the users' experience dilution.Our costs are growing quickly, which could harmand do not yet derive any direct revenue from Instagram. In addition, if we fail to successfully close or integrate any acquisitions, integrate the products or technologies associated with such acquisitions into our company, or identify and address liabilities associated with the acquired business or assets, our business, revenue, and profitability.Providing our products to our users is costlyoperating results could be adversely affected. Any integration process may require significant time and resources, and we expect our expenses to continue to increase in the future as we broaden our user base, as users increase the number of connections and amount of data they share with us, as we develop and implement new product features that require more computing infrastructure, and as we hire additional employees. Historically, our costs have increased each year due to these factors and we expect to continue to incur increasing costs, in particular for employees, servers, storage, power, and data centers, to support our anticipated future growth. We expect to continue to invest in our global infrastructure in order to provide our products rapidly and reliably to all users around the world, including in countries where we do not expect significant short-term monetization. Our expenses may continue to grow faster than our revenue over time. Our expenses may be greater than we anticipate, and our investments to make our business and our technical infrastructure more efficient may not be successful.able to manage the process successfully. We may not successfully evaluate or utilize the acquired products, technology, or personnel, or accurately forecast the financial impact of an acquisition transaction, including accounting charges. In addition, our ability to conduct due diligence with respect to acquisitions, and our ability to evaluate the results of such due diligence, is dependent upon the accuracy and completeness of statements and disclosures made or actions taken by the companies we acquire or their representatives. Despite our efforts, there could be significant liabilities or deficiencies associated with the business, assets, products, financial condition or accounting practices related to the assets or companies we acquire. In addition, we may increase marketing, sales, and other operating expenses in orderhave to grow and expand our operations andpay cash or incur debt to remain competitive. Increases in our costs maypay for acquisitions, which could adversely affect our businessfinancial results and profitability.ismay be subject to interruptions, delays, or failures resulting from earthquakes, adverse weather conditions, other natural disasters, power loss, terrorism, or other catastrophic events.recently began tocould experience unforeseen difficulties in building and operating key portions of our technical infrastructure. build key portions of our technical infrastructure and, because of our limited experience in this area,through which we could experience unforeseen difficulties.In 2011, we began servingserve our products, from data centers owned by Facebook using servers specifically designed for us. Weand we plan to continue to significantly expand the size of our infrastructure primarily through data centers that we design and own.other projects. The infrastructure expansion we are undertaking is complex, and unanticipated delays in the completion of these projects or availability of components may lead to increased project costs, operational inefficiencies, or interruptions in the delivery or degradation of the quality of our products. In addition, there may be issues related to this infrastructure that are not identified during the testing phases of design and implementation, which may only become evident after we have started to fully utilize the underlying equipment, that could further degrade the user experience or increase our costs.incorporateand internal systems rely on software that is highly technical and complex. In addition, our products and internal systems depend on the ability of our software to store, retrieve, process, and manage immense amounts of data. Our software has contained, and may now or in the future contain, undetected errors, bugs, or vulnerabilities. Some errors in our software code may only be discovered after the code has been released.released for external or internal use. Errors or other design defects within our software may result in a negative experience for users and marketers who use our products, delay product introductions or enhancements, orvulnerabilitiesdefects discovered in our code after releasesoftware could result in damage to our reputation, loss of users, loss of revenue, or liability for damages, any of which could adversely affect our business and financial results.offor our key metrics, our DAUs, MAUs, and DAUsmobile MAUs, and average revenue per user (ARPU), and certain other metrics such as mobile DAUs and mobile-only MAUs, are calculated using internal company data based on the activity of user accounts. 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. For example, there may be individuals who maintain one or more Facebook accounts in violation of our terms of service, despite our efforts to detect and suppress such behavior.service. We estimate, for example, that “duplicate”"duplicate" accounts (an account that a user maintains in addition to his or her principal account) may have represented approximately 4.8%5.0% of our worldwide MAUs as of June 30, 2012.December 31, 2012. We also seek to identify “false”"false" accounts, which we divide 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) undesirable accounts, which represent user profiles that we determine are intended to be used for purposes that violate our terms of service, such as spamming. As of June 30,December 31, 2012, for example, we estimate user-misclassified accounts may have represented approximately 2.4%1.3% of our worldwide MAUs and undesirable accounts may have represented approximately 1.5%0.9% of our worldwide MAUs. We believe the percentage of accounts that are duplicate or false is meaningfully lower in developed markets such as the United States or Australia and higher in developing markets such as Indonesia and Turkey. However, these estimates are based on an internal review of a limited sample of accounts and we apply significant judgment in making this determination, such as identifying names that appear to be fake or other behavior that appears inauthentic to the reviewers. As such, our estimation of duplicate or false accounts may not accurately represent the actual number of such accounts. We are continually seeking to improve our ability to identify duplicate or false accounts and estimate the total number of such accounts, and such estimates may be affected bychange due to improvements or changes in our methodology.Ourarethrough the second quarter of 2012 have also been affected by applications on certain mobile devices that automatically contact our servers for regular updates with no user action involved, and this activity can cause our system to count the user associated with such a device as an active user on the day such contact occurs. For example, we estimate that less than 5% of our estimated worldwide DAUs as of December 31, 2011 and 2010 resulted from this type of automatic mobile activity, and that this type of activity had a substantially smaller effect on our estimate of worldwide MAUs and mobile MAUs. The impact of this automatic activity on our metrics variesvaried by geography because mobile usage varies in different regions of the world. In addition, our data regarding the geographic location of our users is estimated based on a number of factors, such as the user’suser's IP address and self-disclosed location. These factors may not always accurately reflect the user’suser's actual location. For example, a mobile-only user may appear to be accessing Facebook from the location of the proxy server that the user connects to rather than from the user’suser's actual location. The methodologies used to measure user metrics may also be susceptible to algorithm or other technical errors. For example, in early June 2012, we discovered an error in the algorithm we use to estimate the geographic location of our users that affected our attribution of certain user locations for the period ended March 31, 2012. While this issue did not affect our overall worldwide MAUDAU and DAUMAU numbers, it did affect our attribution of users across different geographic regions. We estimate that the number of MAUs as of March 31, 2012 for the United States and& Canada region was overstated as a result of the error by approximately 3% and this overstatement was offset by understatements in other regions. In addition, ourOur estimates for revenue by user location and revenue by user device are also affected by these factors. We regularly review and may adjust our processes for calculating these metrics to improve their accuracy. In addition, our MAUDAU and DAUMAU estimates will differ from estimates published by third parties due to differences in methodology. For example, some third parties are not able to accurately measure mobile users or do not count mobile users.users for certain user groups or at all in their analyses. If advertisers,marketers, developers, or investors do not perceive our user metrics to be accurate representations of our user base, or if we discover material inaccuracies in our user metrics, our reputation may be harmed and advertisersmarketers and developers may be less willing to allocate their budgets or resources to Facebook, which could negatively affect our business and financial results.full-time employees increasing to 3,9765,299 as of June 30, 2013 from 3,976 as of June 30, 2012 from 2,661 as of June 30, 2011,, and we expect headcount growth to continue for the foreseeable future. The growth and expansion of our business and products create significant challenges for our management, operational, and financial resources, including managing multiple relations with users, advertisers,marketers, Platform developers, and other third parties. In the event of continued growth of our operations or in the number of our third-party relationships, our information technology systems or our internal controls and procedures may not be adequate to support our operations. In addition, some members of our management do not have significant experience managing a large global business operation, so our management may not be able to manage such growth effectively. To effectively manage our growth, we must continue to improve our operational,engineering and salestechnical personnel in 2012,2013, and we expect to face significant competition from other companies in hiring such personnel, particularly in the San Francisco Bay Area. As we mature, the incentives to attract, retain, and motivate employees provided by our equity awards or by future arrangements such as through cash bonuses, may not be as effective as in the past.past, and if we issue significant equity to attract additional employees, the ownership of our existing stockholders may be further diluted. Additionally, we have a number of current employees whose equity ownership in our company gives them a substantial amount of personal wealth. Likewise, we have a number of current employees whose equity awards are fully vested and are entitledwealth, which could affect their decisions about whether or not to receive substantial amounts of our capital stock.continue to work for us. As a result of these factors, it may be difficult for us to continue to retain and motivate these employees, and this wealth could affect their decisions about whether or not they continue to work for us.our employees. If we do not succeed in attracting, hiring, and integrating excellent personnel, or retaining and motivating existing personnel, we may be unable to grow effectively.infrastructure to the satisfaction of our usersinfrastructure. Any such failure may harm our reputation, and our ability to retain existing users and attract new users.plan to continue to make acquisitions, which could require significant management attention, disrupt our business, result in dilution to our stockholders, and adversely affect our financial results.As parthave a substantial amount of our business strategy, we have made and intend to make acquisitions to add specialized employees, complementary companies, products, or technologies. For example, in April 2012, we entered into an agreement to acquire Instagram, Inc., the closing of which is subject to closing conditions and regulatory clearance. Our ability to acquire and integrate larger or more complex companies, products, or technologies in a successful manner is unproven. In the future, we may not be able to find other suitable acquisition candidates, and we may not be able to complete acquisitions on favorable terms, if at all. Our previous and future acquisitions may not achieve our goals, and any future acquisitions we complete could be viewed negatively by users, developers, advertisers, or investors. In addition, if we fail to successfully close or integrate any acquisitions, or integrate the products or technologies associated with such acquisitions into our company, our revenue and operating results could be adversely affected. Any integration process may require significant time and resources, and we may not be able to manage the process successfully. We may not successfully evaluate or utilize the acquired products, technology, or personnel, or accurately forecast the financial impact of an acquisition transaction, including accounting charges. We may have to pay cash, incur debt, or issue equity securities to pay for any such acquisition, any ofindebtedness which could adversely affect our financial results. The sale of equity or issuance of debt to finance any such acquisitions could result in dilution to our stockholders. The incurrence of indebtedness would result in increased fixed obligationscondition and could also include covenants or other restrictions that would impede our ability to manageobtain additional capital on reasonable terms when required.operations.term loan facility. By drawing on our term loan facility, our interest expense and principal repayment requirements have increased significantly, which could have an adverse effect on our financial results.facilitiesfacility that we may draw upon to finance our operations or other corporate purposes, such as fundingand have a term loan facility, from which we drew $1.5 billion to fund a portion of our tax withholding and remittance obligations in connection with the settlement of RSUs. If we default on these leasing and credit obligations, our leasing partners and lenders may, among other things:In addition, our future income taxes could be adversely affected by earnings being lower than anticipated in jurisdictions that have lower statutory tax rates and higher than anticipated in jurisdictions that have higher statutory tax rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, or accounting principles. We are subject to regular review and audit by both U.S. federal and state and foreign tax authorities. AnyTax authorities may disagree with certain positions we have taken and any adverse outcome of such a review or audit could have a negative effect on our financial position and results of operations. In addition, the determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment by management, and there are many transactions where the ultimate tax determination is uncertain. Although we believe that our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.The enactment of legislation implementingIn addition, our future income taxes could be adversely affected by earnings being lower than anticipated in jurisdictions that have lower statutory tax rates and higher than anticipated in jurisdictions that have higher statutory tax rates, by changes in the U.S. taxationvaluation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, or accounting principles. For example, we have previously incurred losses in certain international business activitiessubsidiaries that resulted in an effective tax rate that is significantly higher than the statutory tax rate in the United States and this could continue to happen in the future.the adoption of other tax reform policiesrulings could materially affect our financial position and results of operations.Thehasand key members of Congress have made public statements indicating that it has made international tax reform is a priority, and key members of the U.S. Congress have conducted hearings and proposed a wide variety of potential changes.priority. Certain changes to U.S. tax laws, including limitations on the ability to defer U.S. taxation on earnings outside of the United States until those earnings are repatriated to the United States, could affect the tax treatment of our foreign earnings,earnings. In addition, other countries are considering changes to their tax regimes in an effort to raise additional tax proceeds from companies such as well as cash and cash equivalent balances we currently maintain outside of the United States.Facebook. Due to the large and expanding scale of our international business activities, any changes in the U.S. taxation of such activities may increase our worldwide effective tax rate and harm our financial position and results of operations.initial public offeringIPO in May 2012 at a price of $38.00 per share, our stock price has ranged from $25.52$17.55 to $45.00 through June 30, 2012.2013. In addition to the factors discussed in this Quarterly Report on Form 10-Q, the trading price of our Class A common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:sales, including if we issue shares to satisfy RSU-related tax obligations or if existing stockholders sell shares into the market when applicable “lock-up” periods end;initial public offering,IPO, the events surrounding the offering became the subject of securities litigation. We may experience more such litigation following future periods of volatility. Any securities litigation could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.Substantial blocksmay be soldare available for sale into the public market when “lock-up” or “market standoff” periods end. If there areand any substantial sales of shares of our common stock could cause the price of our Class A common stock couldto decline.2012,2013, there were 640,605,0431,812,924,128 shares of our Class A common stock and 1,500,952,264617,953,046 shares of our Class B common stock outstanding. Shares of our Class B common stock are convertible into an equivalent number of shares of our Class A common stock and generally convert into shares of our Class A common stock upon transfer.The 180,000,000 sharesClass A common stock sold in our IPOoutstanding shares are freely tradable in the public market. The remaining shares of our Class A common stock and Class B common stock, as well as the shares underlying outstanding RSUs and shares subject to employee stock options, will be eligibleavailable for sale ininto the public market, inexcept for 426 million outstanding shares and 60 million shares issuable upon the near future as set forth below:Date Available for Sale into Public MarketNumber of Shares of Common StockAugust 16, 2012271,123,815 shares held by the selling stockholders in our IPO other than Mr. ZuckerbergDate between October 15, 2012 and November 13, 2012approximately 133 million shares underlying net- settled Pre-2011 RSUs held by our directors and then current employees and approximately 55 million outstanding shares and approximately 55 million shares subject to stock options held by then current employees other than Mr. ZuckerbergNovember 14, 2012approximately 1,197 million outstanding shares and approximately 20 million shares underlying other net-settled Pre-2011 RSUsDecember 14, 2012149,432,006 shares held by the selling stockholders in our IPO other than Mr. ZuckerbergMay 18, 201347,315,862 shares held by Mail.ru Group Limited and DST Global Limited and their respective affiliatesIn addition, asexercise of June 30, 2012, options to purchase 45,693,252 shares of Class B common stock held by former employees were outstanding and fully vested and the Class B common stock underlying such options will be eligible for sale on November 14, 2012. Furthermore, the remaining 60,000,000 shares subject to the partially exercised stockan option held by Mark Zuckerberg. Mr. Zuckerberg will be eligible forhas informed us that he has no intention to conduct any sale on November 14, 2012. We expect an additional approximately 4 million shares of Class B common stock to be delivered upon the net settlement of RSUs between the date of the initial settlement of RSUs described above and December 31, 2012 will be eligible for sale in the public market immediately following settlement.Certain holders of our Class A common stock and Class B common stock have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or our stockholders. All of these shares are subject to market standoff or lock-up agreements restricting their sale for specified periods of time after our IPO. We also registered 1,182,700,275 additional shares of common stock that we have issued and may issue under our employee equity incentive plans on Form S-8, all of which will be freely tradeable in the public market upon issuance, subject to existing market standoff or lock-up agreements.Morgan Stanley & Co. LLC, the representative of the underwriters of our IPO, may, with our prior written consent, permit our executive officers, our directors, and the selling stockholders from our IPO to sell shares prior to the expiration of the restrictive provisions contained in the “lock-up” agreements with the underwriters. In addition, we may,transactions in our sole discretion, permit our employees and current stockholders who are subject to market standoff agreements or arrangements with us and who are not subject to a lock-up agreement with the underwriters to sell shares prior to the expiration of the restrictive provisions contained in those market standoff agreements or arrangements.The trading price of the shares of our Class A common stock could decline as a result of the sale of a substantial number of our shares of common stock in the public market or the perception in the market that the holders of a large number of shares intend to sell their shares.management’smanagement's attention. (Exchange Act), the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the NASDAQ Global Select Market, and other applicable securities rules and regulations. Compliance with these rules and regulations has increased and may/will continue to increase our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly, and increase demand on our systems and resources. As a result, management’smanagement's attention may be diverted from other business concerns, which could harm our business and operating results. Although we have hired additional employees to comply with these requirements, we may need to hire more employees in the future, which will increase our costs and expenses.Future transfers“controlled company”"controlled company" exemption to the corporate governance rules for NASDAQ-listed companies, which could make our Class A common stock less attractive to some investors or otherwise harm our stock price.“controlled company”"controlled company" under the corporate governance rules for NASDAQ-listed companies, we are not required to have a majority of our board of directors be independent, nor are we required to have a compensation committee or an independent nominating function. In light of our status as a controlled company, our board of directors determined not to have an independent nominating function and chose to have the full board of directors be directly responsible for nominating members of our board, and in the future we could elect not to have a majority of our board of directors be independent or not to have a compensation committee. Accordingly, should the interests of our controlling stockholder differ from those of other stockholders, the other stockholders may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance rules for NASDAQ-listed companies. Our status as a controlled company could make our Class A common stock less attractive to some investors or otherwise harm our stock price.Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. a) Sales of Unregistered Securities Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.a) Sales of Unregistered SecuritiesFrom April 1, 2012 throughOn May 17, 2012,10, 2013, we issued to our directors, officers, employees, consultants, and other service providers an aggregate of 62,250,459 shares of our Class B common stock at per share purchase prices ranging from $0.06 to $1.85 pursuant to exercises of options granted under our 2005 Stock Plan and our 2005 Officers’ Plan.On May 3, 2012, we granted to our officers and employees an aggregate of 25,182,485 RSUs to be settled in shares of our Class B common stock under our 2005 Stock Plan.On April 13, 2012, we issued 40,000 2,518,496shares of our Class A common stock as consideration to four individuals in connection with our purchase of certain assets from a company.On May 4, 2012, we issued 36,826 shares of our Class A common stock as consideration to eight individuals in connection with our acquisition of all the outstanding shares of a company.On May 18, 2012, we issued 1,099,986 shares of our Class A common stock as consideration to 2921 individuals and 12 entities in connection with our acquisition of all the outstanding shares of a company.of the Securities Act, or Rule 701 promulgated under Section 3(b)Regulation D of the Securities Act as transactions by an issuer not involving any public offering or pursuant to benefit plans and contracts relating to compensation as provided under Rule 701.offering. The recipients of the securities in each of these transactions represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were placed upon theany stock certificates or book-entry entitlements issued in these transactions.(b) Use of Proceedsb) Use of Proceeds Securities and Exchange CommissionSEC for our initial public offeringIPO pursuant to which we sold an aggregate of 180,000,000 shares of our Class A common stock at a price to the public of $38.00 per share. Morgan Stanley & Co. LLC, J.P. Morgan Securities LLC, Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Barclays Capital Inc., Allen & Company LLC, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC and Deutsche Bank Securities Inc. acted as book runners. The offering commenced as of May 18, 2012 and did not terminate before all of the securities registered in the registration statement were sold. On May 22, 2012, we closed the sale of such shares, resulting in net proceeds to us of $6.8 billion after deducting underwriting discounts and commissions of $75 million and other offering expenses of approximately $6 million. No payments were made by us to directors, officers or persons owning ten percent or more of our common stock or to their associates, or to our affiliates. We invested the funds received in short-term and long-term marketable securities, consisting of U.S. government and government agency securities. There has been no material change in the planned use of proceeds from our initial public offeringIPO as described in our final prospectus filed with the Securities and Exchange CommissionSEC on May 18, 2012 pursuant to Rule 424(b).c) Issuer Purchases of Equity SecuritiesNot applicable.c) Issuer Purchases of Equity Securities Exhibit Incorporated by Reference 3.1 Restated Certificate of Incorporation of the Registrant. X 3.2 Amended and Restated Bylaws of the Registrant. X 4.1 Amendment No. 1 to Sixth Amended and Restated Investors’ Rights Agreement, dated May 1, 2012, by and among Registrant and certain security holders of Registrant. S-1 333-179287 4.2A May 3,
2012 10.1 2012 Equity Incentive Plan. S-1 333-179287 10.4 April 23, 10.2 2012 Equity Incentive Plan forms of award agreements. X 10.3 Amendment No. 1 to Conversion Agreement, dated April 30, 2012, between Registrant and Mail.ru Group Limited (f/k/a Digital Sky Technologies Limited), DST Global Limited, DST Global II, L.P, DST Global III, L.P., DST USA Limited, and DST USA II Limited. S-1 333-179287 10.16A May 3,
2012 10.4† Amendment No. 2 to Developer Addendum, dated April 25, 2012, between Registrant and Zynga Inc. X 10.5 Amendment No. 1 to Developer Addendum No. 2, dated June 12, 2012, between Registrant and Zynga Inc. X Item 6. Exhibits Exhibit Incorporated by Reference Number Exhibit Description Form File No. Exhibit Filing Date Incorporated by Reference FiledHerewithNumberExhibit DescriptionFormFile No.ExhibitFiling Date 10.6Amendment No. 2 to Developer Addendum No. 2, dated July 3, 2012, between Registrant and Zynga Inc.X31.1 Certification of Mark Zuckerberg, Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 31.2 Certification of David A. Ebersman, Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 32.1# Certification of Mark Zuckerberg, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X 32.2# Certification of David A. Ebersman, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X 101.INS* XBRL Instance Document. X 101.SCH* XBRL Taxonomy Extension Schema Document. X 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document. X 101.DEF* XBRL Taxonomy Extension Definition Linkbase Document. X 101.LAB* XBRL Taxonomy Extension Labels Linkbase Document. X 101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document. X †Registrant has omitted portions of the referenced exhibit pursuant to a request for confidential treatment under Rule 406 promulgated under the Securities Act of 1933, as amended (Securities Act).#This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.*Pursuant to applicable securities laws and regulations, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act, are deemed not filed for purposes of section 18 of the Exchange Act and otherwise are not subject to liability under these sections.31st25th day of July 2012.2013. FACEBOOK, INC. 31, 2012 31, 2012 DAVID M. SPILLANE David M. Spillane59
