FITBIT, INC., 10-Q filed on 8/6/2020
Quarterly Report
v3.20.2
Cover Page - shares
6 Months Ended
Jul. 04, 2020
Jul. 29, 2020
Entity Information [Line Items]    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Jul. 04, 2020  
Document Transition Report false  
Entity File Number 001-37444  
Entity Registrant Name FITBIT, INC.  
Entity Incorporation, State or Country Code DE  
Entity Tax Identification Number 20-8920744  
Entity Address, Address Line One 199 Fremont Street,  
Entity Address, Address Line Two 14th Floor  
Entity Address, City or Town San Francisco,  
Entity Address, State or Province CA  
Entity Address, Postal Zip Code 94105  
City Area Code 415  
Local Phone Number 513-1000  
Title of 12(b) Security Class A Common Stock, $0.0001 par value  
Trading Symbol FIT  
Security Exchange Name NYSE  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Central Index Key 0001447599  
Current Fiscal Year End Date --12-31  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q2  
Amendment Flag false  
Common Class A    
Entity Information [Line Items]    
Entity Common Stock, Shares Outstanding   242,126,620
Common Class B    
Entity Information [Line Items]    
Entity Common Stock, Shares Outstanding   27,600,601
v3.20.2
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Jul. 04, 2020
Dec. 31, 2019
Current assets:    
Cash and cash equivalents $ 343,476 $ 334,479
Marketable securities 104,755 184,023
Accounts receivable, net 215,394 435,269
Inventories 65,371 136,752
Income tax receivable 26,753 573
Prepaid expenses and other current assets 31,829 28,656
Total current assets 787,578 1,119,752
Property and equipment, net 78,552 82,756
Operating lease right-of-use assets 65,579 70,225
Goodwill 64,812 64,812
Intangible assets, net 9,668 16,746
Deferred tax assets 26,017 4,111
Other assets 10,269 9,684
Total assets 1,042,475 1,368,086
Current liabilities:    
Accounts payable 79,726 194,626
Accrued liabilities 358,288 513,530
Operating lease liabilities 21,687 23,511
Deferred revenue 32,589 32,307
Income taxes payable 1,448 636
Total current liabilities 493,738 764,610
Long-term deferred revenue 4,626 8,535
Long-term operating lease liabilities 61,410 67,902
Other liabilities 52,385 39,776
Total liabilities 612,159 880,823
Commitments and contingencies (Note 6)
Stockholders’ equity:    
Class A and Class B common stock 27 26
Additional paid-in capital 1,153,520 1,126,827
Accumulated other comprehensive income 350 188
Accumulated deficit (723,581) (639,778)
Total stockholders’ equity 430,316 487,263
Total liabilities and stockholders’ equity $ 1,042,475 $ 1,368,086
v3.20.2
Condensed Consolidated Statements of Operations - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 6 Months Ended
Jul. 04, 2020
Jun. 29, 2019
Jul. 04, 2020
Jun. 29, 2019
Income Statement [Abstract]        
Revenue $ 261,272 $ 313,556 $ 449,430 $ 585,446
Cost of revenue 168,230 205,342 301,466 387,779
Gross profit 93,042 108,214 147,964 197,667
Operating expenses:        
Research and development 83,733 70,919 165,322 147,958
Sales and marketing 65,470 83,060 122,431 151,676
General and administrative 35,049 24,865 77,090 51,557
Total operating expenses 184,252 178,844 364,843 351,191
Operating loss (91,210) (70,630) (216,879) (153,524)
Interest income, net 13 2,622 1,306 6,088
Other income, net 2,237 461 2,233 1,734
Loss before income taxes (88,960) (67,547) (213,340) (145,702)
Income tax expense (benefit) 15,137 971 (129,537) 2,281
Net loss $ (104,097) $ (68,518) $ (83,803) $ (147,983)
Net loss per share:        
Basic (in dollars per share) $ (0.39) $ (0.27) $ (0.31) $ (0.58)
Diluted (in dollars per share) $ (0.39) $ (0.27) $ (0.31) $ (0.58)
Shares used to compute net loss per share:        
Basic (in shares) 267,872 256,160 266,742 254,659
Diluted (in shares) 267,872 256,160 266,742 254,659
v3.20.2
Condensed Consolidated Statements of Comprehensive Loss - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jul. 04, 2020
Jun. 29, 2019
Jul. 04, 2020
Jun. 29, 2019
Statement of Comprehensive Income [Abstract]        
Net loss $ (104,097) $ (68,518) $ (83,803) $ (147,983)
Other comprehensive loss        
Change in unrealized gain on investments 117 167 162 329
Net change, net of tax 117 167 162 329
Comprehensive loss $ (103,980) $ (68,351) $ (83,641) $ (147,654)
v3.20.2
Condensed Consolidated Statements of Stockholders’ Equity - USD ($)
$ in Thousands
Total
Common Stock
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Beginning balance (in shares) at Dec. 31, 2018   252,362,841      
Beginning balance at Dec. 31, 2018 $ 735,938 $ 25 $ 1,055,046 $ (66) $ (319,067)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Issuance of common stock (in shares)   5,776,611      
Issuance of common stock 6,812   6,812    
Stock-based compensation expense 41,093   41,093    
Net loss (147,983)       (147,983)
Other comprehensive income 329     329  
Ending balance (in shares) at Jun. 29, 2019   258,139,452      
Ending balance at Jun. 29, 2019 625,544 $ 25 1,092,306 263 (467,050)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
APIC, Share-based Payment Arrangement, Restricted Stock Unit, Increase for Cost Recognition (10,645)   (10,645)    
Beginning balance (in shares) at Mar. 30, 2019   254,744,029      
Beginning balance at Mar. 30, 2019 671,813 $ 25 1,070,224 96 (398,532)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Issuance of common stock (in shares)   3,395,423      
Issuance of common stock 5,881   5,881    
Stock-based compensation expense 20,424   20,424    
Taxes related to net share settlement of restricted stock units (4,223)   (4,223)    
Net loss (68,518)       (68,518)
Other comprehensive income 167     167  
Ending balance (in shares) at Jun. 29, 2019   258,139,452      
Ending balance at Jun. 29, 2019 625,544 $ 25 1,092,306 263 (467,050)
Beginning balance (in shares) at Dec. 31, 2019   264,883,426      
Beginning balance at Dec. 31, 2019 487,263 $ 26 1,126,827 188 (639,778)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Issuance of common stock (in shares)   4,700,954      
Issuance of common stock 1,003   1,002    
Stock-based compensation expense 37,920   37,920    
Net loss (83,803)       (83,803)
Other comprehensive income 162     162  
Ending balance (in shares) at Jul. 04, 2020   269,584,380      
Ending balance at Jul. 04, 2020 430,316 $ 27 1,153,520 350 (723,581)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
APIC, Share-based Payment Arrangement, Restricted Stock Unit, Increase for Cost Recognition (12,229)   (12,229)    
Beginning balance (in shares) at Apr. 04, 2020   266,806,999      
Beginning balance at Apr. 04, 2020 521,055 $ 26 1,140,280 233 (619,484)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Issuance of common stock (in shares)   2,777,381      
Issuance of common stock 545 $ 1 544    
Stock-based compensation expense 19,057   19,057    
Taxes related to net share settlement of restricted stock units (6,361)   (6,361)    
Net loss (104,097)       (104,097)
Other comprehensive income 117     117  
Ending balance (in shares) at Jul. 04, 2020   269,584,380      
Ending balance at Jul. 04, 2020 $ 430,316 $ 27 $ 1,153,520 $ 350 $ (723,581)
v3.20.2
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
6 Months Ended
Jul. 04, 2020
Jun. 29, 2019
Cash Flows from Operating Activities    
Net loss $ (83,803) $ (147,983)
Adjustments to reconcile net loss to net cash used in operating activities:    
Provision for doubtful accounts 6,045 48
Provision for excess and obsolete inventory 13,260 4,122
Depreciation 21,042 30,106
Non-cash lease expense 8,477 11,615
Accelerated depreciation of property and equipment 626 170
Amortization of intangible assets 7,078 4,121
Stock-based compensation 39,497 41,091
Deferred income taxes (21,819) 134
Other 324 162
Changes in operating assets and liabilities, net of acquisition:    
Accounts receivable 213,830 155,561
Inventories 56,544 (41,183)
Prepaid expenses and other assets (5,753) 14,416
Income taxes receivable (26,180) (409)
Accounts payable (123,657) (100,517)
Accrued liabilities and other liabilities (141,269) (97,964)
Lease liabilities (10,900) (13,577)
Deferred revenue (3,627) (3,475)
Income taxes payable 813 (514)
Net cash used in operating activities (49,472) (144,076)
Cash Flows from Investing Activities    
Purchase of property and equipment (8,550) (10,827)
Purchases of marketable securities (59,735) (220,495)
Maturities of marketable securities 139,365 239,429
Net cash provided by investing activities 71,080 10,123
Cash Flows from Financing Activities    
Payment of financing lease liability (1,384) (937)
Proceeds from issuance of common stock 1,002 6,812
Taxes paid related to net share settlement of restricted stock units (12,229) (10,649)
Net cash used in financing activities (12,611) (4,774)
Net increase (decrease) in cash and cash equivalents 8,997 (138,727)
Cash and cash equivalents at beginning of period 334,479 473,956
Cash and cash equivalents at end of period 343,476 335,229
Proceeds from Sale of Debt Securities, Available-for-sale $ 0 $ 2,016
v3.20.2
Basis of Presentation and Summary of Significant Accounting Policies
6 Months Ended
Jul. 04, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Basis of Presentation and Summary of Significant Accounting Policies Basis of Presentation and Summary of Significant Accounting Policies
 
The accompanying condensed consolidated financial statements of Fitbit, Inc. (the “Company”) are unaudited. The condensed consolidated balance sheet at December 31, 2019 has been derived from the audited financial statements of the Company. The accompanying condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information, and in management’s opinion, includes all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement of the Company’s financial position, its results of operations, and cash flows for the interim periods presented. The results of operations for the three and six months ended July 4, 2020 are not necessarily indicative of the results to be expected for the full fiscal year or any other period.

The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2019, filed with the Securities and Exchange Commission (“SEC”) on February 27, 2020.

The Company’s fiscal year ends on December 31 of each year. The Company is on a 4-4-5 week quarterly calendar. There were 91 days in each of the three months ended July 4, 2020 and June 29, 2019.

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated.

Use of Estimates
 
The preparation of condensed consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the condensed consolidated financial statements and accompanying notes. The primary estimates and assumptions made by management are related to revenue recognition, reserves for sales returns and incentives, reserves for warranty, valuation of stock-based awards, fair value of derivative assets and liabilities, allowance for credit losses, inventory valuation, fair value of goodwill and acquired tangible and intangible assets and liabilities assumed during acquisitions, the recoverability of intangible assets and their useful lives, contingencies, and income taxes. Actual results could differ from those estimates, and such differences may be material to the condensed consolidated financial statements.

Google Acquisition

On November 1, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Google LLC, a Delaware limited liability company (“Google”), and Magnoliophyta Inc., a Delaware corporation and wholly owned subsidiary of Google (the “Merger Sub”). Pursuant to the terms of, and subject to the conditions specified in, the Merger Agreement, the Merger Sub will merge with and into the Company, and the Company will become a wholly owned subsidiary of Google (the “Merger”). If the Merger is completed, Google will acquire all the shares of the Company’s Class A common stock and Class B common stock (together, the “Shares”) for $7.35 per share in cash, without interest (the “Merger Consideration”). All Shares underlying vested stock options and vested stock-based awards will be converted into the right to receive the Merger Consideration (or, in the case of stock options, the difference between the Merger Consideration and the applicable per share exercise price), less any applicable tax withholdings. Unvested stock options and stock-based awards will generally be converted into cash-based awards with an equivalent value based on the Merger Consideration and vesting schedule. Completion of the Merger is subject to customary closing conditions, including approval by the expiration or termination of any waiting periods or receipt of any requisite consents under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, approval under the antitrust laws of the European Union and other jurisdictions agreed by the parties, and satisfaction of other closing conditions. On August 4, 2020, the European Commission announced it has initiated a Phase II review of the transaction. The duration of a Phase II review cannot be foreseen with certainty. While we still expect to secure the necessary regulatory approvals and to close the transaction in 2020, the time frame may extend beyond that. The Merger was approved by the Company’s stockholders on January 3, 2020.

Risks and Uncertainties for COVID-19

The recent outbreak of the novel coronavirus COVID-19, which was declared a global pandemic by the World Health Organization in March 2020, adversely impacted our business in the first half of 2020. The pandemic and associated containment measures have caused disruptions in the development, manufacture, shipment, and sales of our products. During
the first half of 2020, the Company’s operating results were negatively impacted by decreased retail activity and retail store closures due to COVID-19. Operating results were also impacted by additional reserves for product returns, rebates and promotions, and price protection on certain products, primarily as a result of declining demand due to COVID-19. Additionally, operating results were impacted by allowances for credit losses as a result of COVID-19 and its potential impact.

The current circumstances are dynamic and unprecedented, and the impacts of the COVID-19 pandemic on our business operations, including the duration and severity of the effect on overall consumer demand, are highly uncertain and cannot be predicted. However, these impacts have had, and we expect will continue to have, a significant adverse effect on our operations, revenue, liquidity, financial conditions, and financial results. For further information regarding the impact of COVID-19 on the Company, see Part I, Item 2, Management’s Discussion and Analysis, and Part II, Item 1A, Risk Factors in this Quarterly Report on Form 10-Q.

Significant Accounting Policies

There have been no significant changes in the Company’s accounting policies from those disclosed in its Annual Report on Form 10-K filed with the SEC on February 27, 2020.

Recent Accounting Pronouncements

Accounting Pronouncements Not Yet Adopted

In December 2019, the Financial Accounting Standards Board (the “FASB”) issued ASU 2019-12, Simplifying the Accounting for Income Taxes. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact this guidance may have on its consolidated financial statements and related disclosures.

Accounting Pronouncements Recently Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 provides for a new impairment model which requires measurement and recognition of expected credit losses for most financial assets and certain other instruments, including but not limited to accounts receivable and available-for-sale debt securities. In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments–Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. This ASU clarifies and corrects guidance related to Topic 326, Topic 815, and Topic 825. In May 2019, the FASB issued ASU 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief. This ASU provides an option to irrevocably elect to measure certain individual financial assets at fair value instead of amortized cost. The Company adopted Topic 326 utilizing the modified retrospective method. Prior periods were not retrospectively adjusted. The cumulative effect upon adoption on the opening accumulated deficit balance was zero.

In January 2017, the FASB issued ASU 2017-04, Intangibles–Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test. The second step measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under ASU 2017-04, a company will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. ASU 2017-04 became effective for the Company on January 1, 2020. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework–Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements on fair value measurements and became effective for the Company on January 1, 2020. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 clarifies the accounting for implementation costs in cloud computing arrangements and became effective for the Company on January 1, 2020. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
v3.20.2
Fair Value Measurements
6 Months Ended
Jul. 04, 2020
Fair Value Disclosures [Abstract]  
Fair Value Measurements Fair Value Measurements
 
The carrying values of the Company’s accounts receivable, accounts payable, and accrued liabilities approximated their fair values due to the short period of time to maturity or repayment.
 
The following tables set forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):
 
 
July 4, 2020
 Level 1Level 2Level 3Total
Assets:
Money market funds$241,249  $—  $—  $241,249  
U.S. government agencies—  24,083  —  24,083  
Corporate debt securities—  80,672  —  80,672  
Total$241,249  $104,755  $—  $346,004  
Liabilities:
Contingent consideration$—  $—  $1,889  $1,889  
Total$—  $—  $1,889  $1,889  

 
December 31, 2019
 Level 1Level 2Level 3Total
Assets:
Money market funds$107,708  $—  $—  $107,708  
U.S. government agencies—  77,364  —  77,364  
Corporate debt securities—  207,137  —  207,137  
Total$107,708  $284,501  $—  $392,209  
Liabilities:
Contingent consideration$—  $—  $1,889  $1,889  
Derivative liabilities—  748  —  748  
Total$—  $748  $1,889  $2,637  
 
The fair value of the Company’s Level 1 financial instruments is based on quoted market prices in active markets for identical instruments. The fair value of the Company’s Level 2 financial instruments is based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data.

In addition, Level 2 assets and liabilities include derivative financial instruments associated with hedging activity, which are further discussed in Note 3. Derivative financial instruments are initially measured at fair value on the contract date and are subsequently remeasured to fair value at each reporting date using inputs such as spot rates, forward rates, and discount rates. There is not an active market for each hedge contract, but the inputs used to calculate the value of the instruments are tied to active markets.

There were no Level 3 assets as of July 4, 2020 and December 31, 2019. The Company's Level 3 liabilities measured and recorded on a recurring basis as of July 4, 2020 and December 31, 2019 consist of contingent consideration related to an acquisition. Subsequent changes in the fair value of this obligation will be recorded within the Company’s consolidated statements of operations. The Company estimated the fair value of the acquisition-related contingent consideration using a probability-weighted discounted cash flow model. As the fair value measure is based on significant inputs that are not observable in the market, they are categorized as Level 3. There were no transfers between fair value measurement levels during the three and six months ended July 4, 2020 and June 29, 2019.
v3.20.2
Financial Instruments
6 Months Ended
Jul. 04, 2020
Investments, Debt and Equity Securities [Abstract]  
Financial Instruments Financial Instruments
Cash, Cash Equivalents and Marketable Securities

The Company’s marketable securities are classified as available-for-sale as of the balance sheet date and are reported at fair value with unrealized gains and losses reported, net of tax, as a separate component of accumulated other comprehensive income (loss) in stockholders’ equity. Because the Company views marketable securities as available to support current operations as needed, it has classified all available-for-sale securities as current assets. Realized gains or losses and other-than-temporary impairments, if any, on available-for-sale securities are reported in other income (expense), net, as incurred.

Investments are reviewed periodically to identify potential other-than-temporary impairments. No impairment loss has been recorded on the securities included in the tables below because the Company believes that the decrease in fair value of these securities is temporary and expects to recover up to, or beyond, the initial cost of investment for these securities.

The following table sets forth cash, cash equivalents, and marketable securities as of July 4, 2020 (in thousands):
Amortized CostGross Unrealized GainsGross Unrealized LossesFair ValueCash and Cash EquivalentsMarketable Securities
Cash$102,227  $—  $—  $102,227  $102,227  $—  
Money market funds241,249  —  —  241,249  241,249  —  
U.S. government agencies24,016  67  —  24,083  —  24,083  
Corporate debt securities80,454  220  (2) 80,672  —  80,672  
Total$447,946  $287  $(2) $448,231  $343,476  $104,755  

The following table sets forth cash, cash equivalents and marketable securities as of December 31, 2019 (in thousands):
Amortized CostGross Unrealized GainsGross Unrealized LossesFair ValueCash and Cash EquivalentsMarketable Securities
Cash$126,293  $—  $—  $126,293  $126,293  $—  
Money market funds107,708  —  —  107,708  107,708  —  
U.S. government agencies77,316  48  —  77,364  30,375  46,989  
Corporate debt securities207,063  85  (11) 207,137  70,103  137,034  
Total$518,380  $133  $(11) $518,502  $334,479  $184,023  

The gross unrealized gains or losses on marketable securities as of July 4, 2020 and December 31, 2019 were not material. There were no available-for-sale investments as of July 4, 2020 and December 31, 2019 that have been in a continuous unrealized loss position for greater than 12 months on a material basis.

The following table classifies marketable securities by contractual maturities (in thousands):
 
July 4, 2020
December 31, 2019
Due in one year$104,755  $173,827  
Due in one to two years—  10,196  
Total$104,755  $184,023  
Derivative Financial Instruments

The Company operates in foreign countries, which exposes it to market risk associated with foreign currency exchange rate fluctuations between the U.S. dollar and various foreign currencies. In order to manage this risk, the Company may hedge a portion of its foreign currency exposures related to outstanding monetary assets and liabilities as well as forecasted revenues and expenses, using foreign currency exchange forward or option contracts. In general, the market risk related to these contracts is offset by corresponding gains and losses on the hedged transactions. The Company does not enter into derivative contracts for trading or speculative purposes.
 
Balance Sheet Hedges

The Company may enter into foreign exchange contracts to hedge certain monetary assets and liabilities that are denominated in currencies other than the functional currency of its subsidiaries. These foreign exchange contracts are carried at fair value, do not qualify for hedge accounting treatment, and are not designated as hedging instruments. Changes in the value of the foreign exchange contracts are recognized in other income (expense), net, and offset the foreign currency gain or loss on the underlying net monetary assets or liabilities.

The Company had no outstanding balance sheet hedges as of July 4, 2020, and outstanding balance sheet hedges with a total notional amount of $83.4 million as of December 31, 2019.
 
Fair Value of Foreign Currency Derivatives

The foreign currency derivative contracts that were not settled at the end of the period are recorded at fair value, on a gross basis, in the condensed consolidated balance sheets. The following table presents the fair value of the Company’s foreign currency derivative contracts as of the periods presented (in thousands):
July 4, 2020
December 31, 2019
Balance Sheet LocationFair Value Derivative
Assets
Fair Value Derivative LiabilitiesFair Value Derivative
Assets
Fair Value Derivative Liabilities
Hedges not designatedPrepaid expenses and other current assets$—  $—  $—  $—  
Hedges not designatedAccrued liabilities—  —  —  748  
Total fair value of derivative instruments$—  $—  $—  $748  
Financial Statement Effect of Foreign Currency Derivative Contracts

The following table presents the pre-tax impact of the Company’s foreign currency derivative contracts on the condensed consolidated statements of operations for the periods presented (in thousands):
Three Months Ended
Six Months Ended
Income Statement Location
July 4, 2020
June 29, 2019
July 4, 2020
June 29, 2019
Foreign exchange balance sheet hedges:
Gain (loss) recognized in incomeOther income, net$—  $(115) $3,077  $(474) 

As of July 4, 2020, there were no net derivative gains related to the Company’s cash flow hedges to be reclassified from other comprehensive income (“OCI”) into revenue within the next 12 months.

Offsetting of Foreign Currency Derivative Contracts

The Company presents its derivative assets and derivative liabilities at gross fair values in the condensed consolidated balance sheets. The Company generally enters into master netting arrangements, which mitigate credit risk by permitting net settlement of transactions with the same counterparty. The Company is not required to pledge, and is not entitled to receive, cash collateral related to these derivative instruments.

The following tables set forth the available offsetting of net derivative assets under the master netting arrangements as of July 4, 2020 and December 31, 2019 (in thousands):

July 4, 2020
Gross Amounts Offset in the Condensed Consolidated Balance SheetsGross Amounts Not Offset in Condensed Consolidated Balance Sheets
Gross Amounts RecognizedGross Amounts OffsetNet Amounts PresentedFinancial InstrumentsCash Collateral ReceivedNet Amount
Foreign exchange contracts assets$—  $—  $—  $—  $—  $—  
Foreign exchange contracts liabilities—  —  —  —  —  —  
December 31, 2019
Gross Amounts Offset in the Condensed Consolidated Balance SheetsGross Amounts Not Offset in Condensed Consolidated Balance Sheets
Gross Amounts RecognizedGross Amounts OffsetNet Amounts PresentedFinancial InstrumentsCash Collateral ReceivedNet Amount
Foreign exchange contracts assets$—  $—  $—  $—  $—  $—  
Foreign exchange contracts liabilities748  —  748  —  —  748  
v3.20.2
Balance Sheet Components
6 Months Ended
Jul. 04, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Balance Sheet Components Balance Sheet Components
Deferred Revenue

Deferred revenue relates to performance obligations for which payments have been received by the customer prior to revenue recognition. Deferred revenue primarily consists of deferred software, or amounts allocated to mobile dashboard and on-line apps and unspecified upgrade rights. Deferred revenue also includes deferred subscription-based services. The deferred software and deferred subscription-based service performance obligations are anticipated to be recognized over the useful life or service periods of one to eighteen months.
Changes in the total short-term and long-term deferred revenue balances were as follows (in thousands):
Three Months Ended
Six Months Ended
July 4, 2020
July 4, 2020
Beginning balances$38,642  $40,842  
Deferral of revenue12,166  24,264  
Recognition of deferred revenue(13,593) (27,891) 
Ending balances$37,215  $37,215  


Revenue Returns Reserve
 
Revenue returns reserve activities were as follows (in thousands):
Three Months Ended
Six Months Ended
July 4, 2020
June 29, 2019
July 4, 2020
June 29, 2019
Beginning balances$77,241  $75,998  $101,326  $104,001  
Increases (1)
32,601  45,866  65,705  77,125  
Returns taken (27,991) (46,820) (85,180) (106,082) 
Ending balances$81,851  $75,044  $81,851  $75,044  

(1)Increases in the revenue returns reserve include provisions for open box returns and stock rotations.


        Inventories
 
Inventories consisted of the following (in thousands)
  
July 4, 2020
December 31, 2019
 
Components$656  $5,397  
Finished goods64,715  131,355  
Total inventories$65,371  $136,752  
 

Prepaid Expenses and Other Current Assets
 
Prepaid expenses and other current assets consisted of the following (in thousands):
  
July 4, 2020
December 31, 2019
Prepaid expenses $10,990  $11,219  
Tariff receivable6,032  —  
Prepaid marketing3,344  3,347  
Other11,463  14,090  
Total prepaid expenses and other current assets$31,829  $28,656  
Property and Equipment, Net
 
Property and equipment, net, consisted of the following (in thousands):
 
  
July 4, 2020
December 31, 2019
Tooling and manufacturing equipment$116,368  $103,177  
Furniture and office equipment20,755  19,922  
Purchased and internally-developed software29,454  27,424  
Leasehold improvements60,178  59,926  
Total property and equipment226,755  210,449  
Less: Accumulated depreciation and amortization(148,203) (127,693) 
Property and equipment, net$78,552  $82,756  
 
Total depreciation expense related to property and equipment, net was $10.5 million and $16.7 million for the three months ended July 4, 2020 and June 29, 2019, respectively, and $21.0 million and $30.1 million for the six months ended July 4, 2020 and June 29, 2019, respectively.


Goodwill and Intangible Assets, Net

The carrying amount of goodwill was $64.8 million as of July 4, 2020 and December 31, 2019.

The carrying amounts of the intangible assets as of July 4, 2020 and December 31, 2019 were as follows (in thousands):
 
July 4, 2020
December 31, 2019
  GrossAccumulated AmortizationNetGrossAccumulated AmortizationNet
    
Developed technology$37,813  $(28,145) $9,668  $37,813  $(23,910) $13,903  
Customer relationships3,918  (3,918) —  3,790  (991) 2,799  
Trademarks and other1,150  (1,150) —  1,278  (1,234) 44  
Total intangible assets, net$42,881  $(33,213) $9,668  $42,881  $(26,135) $16,746  

Total amortization expense related to intangible assets was $3.0 million and $2.0 million for the three months ended July 4, 2020 and June 29, 2019, respectively, and $7.1 million and $4.1 million for the six months ended July 4, 2020 and June 29, 2019, respectively.

The estimated future amortization expense of acquired finite-lived intangible assets to be charged to cost of revenue and operating expenses after July 4, 2020 is as follows (in thousands):
  Cost of RevenueOperating ExpensesTotal
   
Remaining 2020$2,518  $252  $2,770  
20215,037  56  5,093  
20221,488  56  1,544  
2023—  56  56  
2024—  56  56  
Thereafter—  149  149  
Total finite-lived intangible assets, net$9,043  $625  $9,668  
Accrued Liabilities
 
Accrued liabilities consisted of the following (in thousands):
 
July 4, 2020
December 31, 2019
Accrued sales incentives$86,856  $156,839  
Sales returns reserve81,851  101,326  
Product warranty44,934  52,403  
Employee-related liabilities43,854  37,355  
Accrued co-op advertising and marketing development funds20,291  40,689  
Accrued manufacturing expense and freight18,579  35,112  
Accrued research and development16,015  19,232  
Accrued sales and marketing11,401  26,781  
Accrued legal settlements and fees10,866  8,854  
Sales taxes and VAT payable8,621  19,603  
Inventory received but not billed5,376  1,669  
Finance lease liabilities—  1,384  
Derivative liabilities—  748  
Other9,644  11,535  
Accrued liabilities$358,288  $513,530  

Product warranty reserve activities were as follows (in thousands):
Three Months EndedSix Months Ended
 
July 4, 2020
June 29, 2019
July 4, 2020
June 29, 2019
Beginning balances$48,851  $48,034  $52,403  $45,605  
Charged to cost of revenue 7,356  8,990  14,330  17,228  
Changes related to pre-existing warranties(1,782) (2,074) (754) 2,673  
Settlement of claims (9,491) (9,690) (21,045) (20,246) 
Ending balances$44,934  $45,260  $44,934  $45,260  
v3.20.2
Leases
6 Months Ended
Jul. 04, 2020
Leases [Abstract]  
Leases LeasesThe Company leases its principal facilities located in San Francisco, California. The Company also leases office space in various locations. Both the Company’s principal facilities and leases in various locations have expiration dates between 2020 and 2024. The lease agreements often include leasehold improvement incentives, escalating lease payments, renewal provisions and other provisions which require the Company to pay taxes, insurance, maintenance costs or defined rent increases. The Company’s leases are primarily accounted for as operating leases. Operating lease ROU assets and short-term and long-term operating lease liabilities are included on the face of the condensed consolidated balance sheet. Finance lease ROU assets are presented within other assets, and finance lease liabilities are presented within accrued liabilities. The Company has no leases that have not yet commenced as of July 4, 2020.
Total lease cost consists of the following (in thousands):
Three Months EndedSix Months Ended
July 4, 2020June 29, 2019July 4, 2020June 29, 2019
Finance lease costs:
Amortization of ROU assets$109  $1,078  $278  $1,651  
Interest on lease liabilities—  —  —  —  
Operating lease costs(1)
6,505  3,410  13,148  10,984  
Variable lease costs1,765  1,330  2,656  2,645  
Sublease income(369) (1,665) (967) (3,631) 
Total lease costs$8,010  $4,153  $15,115  $11,649  
(1) includes short-term leases, which are immaterial.

Supplemental cash flow information related to leases was as follows (in thousands):
Three Months EndedSix Months Ended
July 4, 2020June 29, 2019July 4, 2020June 29, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Financing cash flows from finance leases$1,384  $340  $1,384  $937  
Operating cash flows from finance leases—  —  —  —  
Operating cash flows from operating leases6,390  8,526  12,929  14,038  
ROU assets obtained in exchange for lease obligations:
Finance lease liabilities$—  $—  $1,384  $—  
Operating lease liabilities—  —  4,497  288  

Supplemental balance sheet information related to leases was as follows (in thousands):
July 4, 2020
December 31, 2019
Finance leases:
Other assets$—  $1,384  
Accrued liabilities$—  $1,384  
Operating leases:
Operating lease ROU assets$65,579  $70,225  
Operating lease liabilities$21,687  $23,511  
Long-term operating lease liabilities61,410  67,902  
Total operating lease liabilities$83,097  $91,413  
Weighted-average lease terms and discount rates are as follows:
July 4, 2020
December 31, 2019
Weighted-average remaining lease terms (in years):
Finance leases—  0.5
Operating leases3.84.2
Weighted-average discount rates:
Finance leases— %— %
Operating leases5.5 %5.5 %

Maturities of lease liabilities as of July 4, 2020 were as follow (in thousands):
Operating Leases
Remaining 2020$24,938  
202125,165  
202224,276  
202321,588  
20242,204  
Thereafter—  
Total minimum lease payments$98,171  
Less: amount representing interest(15,074) 
Total lease liabilities$83,097  
Leases LeasesThe Company leases its principal facilities located in San Francisco, California. The Company also leases office space in various locations. Both the Company’s principal facilities and leases in various locations have expiration dates between 2020 and 2024. The lease agreements often include leasehold improvement incentives, escalating lease payments, renewal provisions and other provisions which require the Company to pay taxes, insurance, maintenance costs or defined rent increases. The Company’s leases are primarily accounted for as operating leases. Operating lease ROU assets and short-term and long-term operating lease liabilities are included on the face of the condensed consolidated balance sheet. Finance lease ROU assets are presented within other assets, and finance lease liabilities are presented within accrued liabilities. The Company has no leases that have not yet commenced as of July 4, 2020.
Total lease cost consists of the following (in thousands):
Three Months EndedSix Months Ended
July 4, 2020June 29, 2019July 4, 2020June 29, 2019
Finance lease costs:
Amortization of ROU assets$109  $1,078  $278  $1,651  
Interest on lease liabilities—  —  —  —  
Operating lease costs(1)
6,505  3,410  13,148  10,984  
Variable lease costs1,765  1,330  2,656  2,645  
Sublease income(369) (1,665) (967) (3,631) 
Total lease costs$8,010  $4,153  $15,115  $11,649  
(1) includes short-term leases, which are immaterial.

Supplemental cash flow information related to leases was as follows (in thousands):
Three Months EndedSix Months Ended
July 4, 2020June 29, 2019July 4, 2020June 29, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Financing cash flows from finance leases$1,384  $340  $1,384  $937  
Operating cash flows from finance leases—  —  —  —  
Operating cash flows from operating leases6,390  8,526  12,929  14,038  
ROU assets obtained in exchange for lease obligations:
Finance lease liabilities$—  $—  $1,384  $—  
Operating lease liabilities—  —  4,497  288  

Supplemental balance sheet information related to leases was as follows (in thousands):
July 4, 2020
December 31, 2019
Finance leases:
Other assets$—  $1,384  
Accrued liabilities$—  $1,384  
Operating leases:
Operating lease ROU assets$65,579  $70,225  
Operating lease liabilities$21,687  $23,511  
Long-term operating lease liabilities61,410  67,902  
Total operating lease liabilities$83,097  $91,413  
Weighted-average lease terms and discount rates are as follows:
July 4, 2020
December 31, 2019
Weighted-average remaining lease terms (in years):
Finance leases—  0.5
Operating leases3.8