Group Assignment #1: Risk Factor Analysis – Facebook Only need to do question 4. PDF is 10K, need to read risk factors part. docx is other questions relate

Group Assignment #1: Risk Factor Analysis – Facebook Only need to do question 4. PDF is 10K, need to read risk factors part. docx is other questions related to Facebook.

Group Assignment #1: Risk Factor Analysis – Wells Fargo, Metropolitan Life, and Facebook

Overview

The primary source of risk information for external stakeholders of a publicly traded U.S. company is the “Risk Factors” section (1-A) of its annual financial report (“Form 10-K”) filed with the Securities and Exchange Commission (SEC). This disclosure on a company’s risks is required under Item 503(c) of Regulation S-K, which was crafted in 1964. The regulation provides five specific examples of such factors:

the company’s lack of operating history,
lack of profitable operations in recent periods,
financial position,
business or proposed business, and
lack of a market in the company’s securities

Other than these examples, the disclosure is principles based and not prescriptive. Over the years, “Risk Factors” disclosures have evolved to parallel the increasing complexity of the modern business environment. The SEC has voiced concerns about the true value of the disclosures to investors and whether the “spirit” of Item 503(c) is being complied with by filing companies. After all, assessing risk is a critical input into any assessment by investors or regulators. As you read the risk factor sections you should be forming an opinion if they are materially helpful or just ‘check-the-box’ exercises.

Assignment

Each group will be risk consultants hired by Carlton & Crim Asset Management (CCAM) company, which holds significant investments in all three companies. The goal is to develop recommendations to elevate the content and discussion of risk disclosures for the companies. Please leverage the questions below to formulate your recommendations.

The end user of your report and video will be the CCAM Chief Risk Officer (CRO), who has asked you for greater risk insight into CCAM’s investments as well as best practice risk disclosures that can be shared with the companies with which CCAM invests.

Please obtain the most recent 10-K’s for year end 2017 or if more current (latest available as of 02/08/19) for each company from their respective websites or SEC’s EDGAR website. Please read the descriptions of the firms as found in the statements and read the risk factor and related sections.

Questions to be answered in the report:

Which risk factors in the 10-K SEC filings have a high degree of specificity and which are ‘generic’ answers?
Analyze and explain commonalities and key differences between the three companies’ risk factor disclosures.
Highlight shared risk mitigation efforts and trends. Explain similarities and differences.
For FaceBook only, provide a ½ page risk analysis of the adequacy of the risk related disclosures.
Summarize in one page key recommendations from your analysis of the four questions above. This may include additional risk factors to be added/elevated within the annual report, modifying existing risk factors to be more relevant/concise/useful to CCAM as an institutional investor and/or potential risks descriptions and disclosures that can be reduced or removed from the annual report. UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
FORM 10-K
__________________________
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission File Number: 001-35551
__________________________
FACEBOOK, INC.
(Exact name of registrant as specified in its charter)
__________________________
Delaware
20-1665019
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
1601 Willow Road, Menlo Park, California 94025
(Address of principal executive offices and Zip Code)
(650) 543-4800
(Registrant’s telephone number, including area code)
__________________________
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock, $0.000006 par value
The Nasdaq Stock Market LLC
(Title of each class)
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x
No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes x
No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§
232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x
No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
Non-accelerated filer
¨
Smaller reporting company
¨
Emerging growth company
¨
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨
No x
The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of June 29, 2018 , the last business day of the registrant’s most recently
completed second fiscal quarter, was $486 billion based upon the closing price reported for such date on the Nasdaq Global Select Market.
On January 28, 2019 , the registrant had 2,385,533,940 shares of Class A common stock and 468,455,860 shares of Class B common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the 2019 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to
the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31,
2018 .
FACEBOOK, INC.
FORM 10-K
TABLE OF CONTENTS
Note About Forward-Looking Statements
3
Limitations of Key Metrics and Other Data
4
PART I
Item 1.
Business
5
Item 1A.
Risk Factors
8
Item 1B.
Unresolved Staff Comments
30
Item 2.
Properties
30
Item 3.
Legal Proceedings
30
Item 4.
Mine Safety Disclosures
30
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
31
Item 6.
Selected Financial Data
33
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
35
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
54
Item 8.
Financial Statements and Supplementary Data
55
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
84
Item 9A.
Controls and Procedures
84
Item 9B.
Other Information
84
Item 10.
Directors, Executive Officers and Corporate Governance
85
Item 11.
Executive Compensation
85
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
85
Item 13.
Certain Relationships and Related Transactions, and Director Independence
85
Item 14.
Principal Accounting Fees and Services
85
Exhibits, Financial Statement Schedules
86
PART II
PART III
PART IV
Item 15.
Signatures
2
NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All
statements contained in this Annual Report on Form 10-K other than statements of historical fact, including statements regarding our future results of operations
and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,”
“will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” and similar expressions are intended to identify forward-looking statements. We have based these
forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition,
results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are
subject to a number of risks, uncertainties and assumptions, including those described in Part I, Item 1A, “Risk Factors” in this Annual Report on Form 10-K.
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 Annual Report on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in
the forward-looking statements.
We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given
these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Unless expressly indicated or the context requires otherwise, the terms “Facebook,” “company,” “we,” “us,” and “our” in this document refer to Facebook,
Inc., a Delaware corporation, and, where appropriate, its wholly owned subsidiaries. The term “Facebook” may also refer to our products, regardless of the manner
in which they are accessed. For references to accessing Facebook on the “web” or via a “website,” such terms refer to accessing Facebook on personal computers.
For references to accessing Facebook on “mobile,” such term refers to accessing Facebook via a mobile application or via a mobile-optimized version of our
website such as m.facebook.com, whether on a mobile phone or tablet.
3
LIMITATIONS OF KEY METRICS AND OTHER DATA
The numbers for our key metrics, which include our daily active users (DAUs), monthly active users (MAUs), and average revenue per user (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. In addition, we are continually seeking to improve our estimates of our user base, and such estimates may change due to improvements or
changes in our methodology.
We regularly evaluate these metrics to estimate the number of “duplicate” and “false” accounts among our MAUs. A duplicate account is one that a user
maintains in addition to his or her principal account. We divide “false” accounts into two categories: (1) user-misclassified accounts, where users have created
personal profiles for a business, organization, or non-human entity such as a pet (such entities are permitted on Facebook using a Page rather than a personal profile
under our terms of service); and (2) 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. The estimates of duplicate and false accounts are based on an internal review of a limited sample of accounts, and we apply
significant judgment in making this determination. For example, to identify duplicate accounts we use data signals such as similar IP addresses or user names, and
to identify false accounts we look for names that appear to be fake or other behavior that appears inauthentic to the reviewers. Our estimates may change as our
methodologies evolve, including through the application of new data signals or technologies, which may allow us to identify previously undetected duplicate or
false accounts and may improve our ability to evaluate a broader population of our users. Duplicate and false accounts are very difficult to measure at our scale,
and it is possible that the actual number of duplicate and false accounts may vary significantly from our estimates.
In the fourth quarter of 2018, we estimate that duplicate accounts may have represented approximately 11% of our worldwide MAUs. We believe the
percentage of duplicate accounts is meaningfully higher in developing markets such as the Philippines and Vietnam, as compared to more developed markets. In
the fourth quarter of 2018, we estimate that false accounts may have represented approximately 5% of our worldwide MAUs. Our estimation of false accounts can
vary as a result of episodic spikes in the creation of such accounts, which we have seen originate more frequently in specific countries such as Indonesia and
Vietnam. From time to time, we may make product changes or take other actions to reduce the number of duplicate or false accounts among our users, which may
also reduce our DAU and MAU estimates in a particular period.
Our data limitations may affect our understanding of certain details of our business. For example, while user-provided data indicates a decline in usage
among younger users, this age data is unreliable because a disproportionate number of our younger users register with an inaccurate age. Accordingly, our
understanding of usage by age group may not be complete.
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 selfdisclosed location. These factors may not always accurately reflect the user’s actual location. For example, a user may appear to be accessing Facebook from the
location of the proxy server that the user connects to rather than from the user’s actual location. The methodologies used to measure user metrics may also be
susceptible to algorithm or other technical errors. Our estimates for revenue by user location and revenue by user device are also affected by these factors.
We regularly review our processes for calculating these metrics, and from time to time we may discover inaccuracies in our metrics or make adjustments to
improve their accuracy, including adjustments that may result in the recalculation of our historical metrics. We believe that any such inaccuracies or adjustments
are immaterial unless otherwise stated. We intend to disclose our estimates of the number of duplicate and false accounts among our MAUs on an annual basis. In
addition, our DAU and MAU estimates will differ from estimates published by third parties due to differences in methodology.
The numbers of DAUs and MAUs discussed in this Annual Report on Form 10-K, as well as ARPU, do not include Instagram, WhatsApp, or Oculus users
unless they would otherwise qualify as such users, respectively, based on their other activities on Facebook.
In addition, other user engagement metrics included herein do not include Instagram, WhatsApp, or Oculus unless otherwise specifically stated.
4
PART I
Item 1.
Business
Overview
Our mission is to give people the power to build community and bring the world closer together.
Our top priority is to build useful and engaging products that enable people to connect and share with friends and family through mobile devices, personal
computers, and other surfaces. We also help people discover and learn about what is going on in the world around them, enable people to share their opinions,
ideas, photos and videos, and other activities with audiences ranging from their closest friends to the public at large, and stay connected everywhere by accessing
our products, including:
•
Facebook. Facebook enables people to connect, share, discover, and communicate with each other on mobile devices and personal computers. There
are a number of different ways to engage with people on Facebook, including News Feed which displays an algorithmically-ranked series of stories
and advertisements individualized for each person.
•
Instagram. Instagram brings people closer to the people and things they love. It is a community for sharing photos, videos, and messages, and enables
people to discover interests that they care about.
•
Messenger. Messenger is a simple yet powerful messaging application for people to connect with friends, family, groups and businesses across
platforms and devices.
•
WhatsApp. WhatsApp is a simple, reliable and secure messaging application that is used by people and businesses around the world to communicate
in a private way.
•
Oculus. Our hardware, software, and developer ecosystem allows people around the world to come together and connect with each other through our
Oculus virtual reality (VR) products.
We generate substantially all of our revenue from selling advertising placements to marketers. Our ads enable marketers to reach people based on a variety
of factors including age, gender, location, interests, and behaviors. Marketers purchase ads that can appear in multiple places including on Facebook, Instagram,
Messenger, and third-party applications and websites.
We are also investing in other consumer hardware products and a number of longer-term initiatives, such as connectivity efforts, artificial intelligence (AI),
and augmented reality, to develop technologies that we believe will help us better serve our mission to give people the power to build community and bring the
world closer together.
Competition
Our business is characterized by innovation, rapid change, and disruptive technologies. We compete with companies that sell advertising, as well as with
companies that provide social, media, and communication products and services that are designed to engage users on the web, mobile devices and online generally.
We face significant competition in every aspect of our business, including from companies that facilitate communication and the sharing of content and
information, companies that enable marketers to display advertising, companies that distribute video and other forms of media content, and companies that provide
development platforms for applications developers. We compete to attract, engage, and retain people who use our products, to attract and retain marketers, and to
attract and retain developers to build compelling mobile and web applications that integrate with our products.
We also compete with the following:
•
Companies that offer products across broad platforms that replicate capabilities we provide. For example, among other areas, we compete with Apple
in messaging, Google and YouTube in advertising and video, Tencent in messaging and social media, and Amazon in advertising.
•
Companies that provide regional social networks, many of which have strong positions in particular countries.
•
Traditional, online, and mobile businesses that provide media for marketers to reach their audiences and/or develop tools and systems for managing
and optimizing advertising campaigns.
•
Companies that develop and deliver consumer hardware and virtual reality products and services.
As we introduce or acquire new products, as our existing products evolve, or as other companies introduce new products and services, we may become
subject to additional competition.
5
Technology
Our product development philosophy is centered on continuous innovation in creating and improving products that are social by design, which means that
our products are designed to place people and their social interactions at the core of the product experience. As our user base grows, as engagement with products
like video increases, and as we deepen our investment in new technologies like AI, our computing needs continue to expand. We make significant investments in
technology both to improve our existing products and services and to develop new ones, as well as for our marketers and developers. We are also investing in
protecting the security and integrity of our platform by investing in both people and technology to strengthen our systems against abuse.
Sales and Operations
The majority of our marketers use our self-service ad platform to launch and manage their advertising campaigns. We also have a global sales force that is
focused on attracting and retaining advertisers and providing support to them throughout the stages of the marketing cycle from pre-purchase decision-making to
real-time optimizations to post-campaign analytics. We work directly with these advertisers, as well as through advertising agencies and resellers. We operate more
than 60 offices around the globe, the majority of which have a sales presence. We also invest in and rely on self-service tools to provide direct customer support to
our users and partners.
Marketing
To date, our communities have grown organically with people inviting their friends to connect with them, supported by internal efforts to stimulate
awareness and interest. In addition, we have invested and will continue to invest in marketing our products and services to grow our brand and help build
community around the world.
Intellectual Property
To establish and protect our proprietary rights, we rely on a combination of patents, trademarks, copyrights, trade secrets, including know-how, license
agreements, confidentiality procedures, non-disclosure agreements with third parties, employee disclosure and invention assignment agreements, and other
contractual rights. In addition, to further protect our proprietary rights, from time to time we have purchased patents and patent applications from third pa…
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