FITBIT, INC., 10-Q filed on 11/7/2019
Quarterly Report
v3.19.3
Cover Page - shares
9 Months Ended
Sep. 28, 2019
Oct. 23, 2019
Entity Information [Line Items]    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Sep. 28, 2019  
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, $0.0001 par value  
Trading Symbol FIT  
Security Exchange Name NYSE  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Central Index Key 0001447599  
Current Fiscal Year End Date --12-31  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q3  
Amendment Flag false  
Common Class A    
Entity Information [Line Items]    
Entity Common Stock, Shares Outstanding   228,860,902
Common Class B    
Entity Information [Line Items]    
Entity Common Stock, Shares Outstanding   31,267,322
v3.19.3
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Sep. 28, 2019
Dec. 31, 2018
Current assets:    
Cash and cash equivalents $ 287,431 $ 473,956
Marketable securities 214,817 249,493
Accounts receivable, net 345,562 414,209
Inventories 245,096 124,871
Income tax receivable 965 6,957
Prepaid expenses and other current assets 33,376 42,325
Total current assets 1,127,247 1,311,811
Property and equipment, net 88,232 106,286
Operating lease right-of-use assets 71,529  
Goodwill 60,979 60,979
Intangible assets, net 17,519 23,620
Deferred tax assets 3,925 4,489
Other assets 7,170 8,362
Total assets 1,376,601 1,515,547
Current liabilities:    
Accounts payable 263,181 251,657
Accrued liabilities 365,812 437,234
Operating lease liabilities 23,313  
Deferred revenue 28,076 29,400
Income taxes payable 986 1,092
Total current liabilities 681,368 719,383
Long-term deferred revenue 6,174 7,436
Long-term operating lease liabilities 70,202  
Other liabilities 29,883 52,790
Total liabilities 787,627 779,609
Commitments and contingencies
Stockholders’ equity:    
Class A and Class B common stock 26 25
Additional paid-in capital 1,107,659 1,055,046
Accumulated other comprehensive income (loss) 232 (66)
Accumulated deficit (518,943) (319,067)
Total stockholders’ equity 588,974 735,938
Total liabilities and stockholders’ equity $ 1,376,601 $ 1,515,547
v3.19.3
Condensed Consolidated Statements of Operations - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 9 Months Ended
Sep. 28, 2019
Sep. 29, 2018
Sep. 28, 2019
Sep. 29, 2018
Income Statement [Abstract]        
Revenue $ 347,200 $ 393,575 $ 932,646 $ 940,784
Cost of revenue 239,248 240,061 627,027 554,132
Gross profit 107,952 153,514 305,619 386,652
Operating expenses:        
Research and development 65,693 79,840 213,651 256,223
Sales and marketing 71,296 66,676 222,972 239,573
General and administrative 23,083 24,812 74,640 91,111
Total operating expenses 160,072 171,328 511,263 586,907
Operating loss (52,120) (17,814) (205,644) (200,255)
Interest income, net 2,388 2,072 8,476 5,599
Other income (expense), net (492) (5,141) 1,242 (2,366)
Loss before income taxes (50,224) (20,883) (195,926) (197,022)
Income tax expense (benefit) 1,669 (18,827) 3,950 4,179
Net loss $ (51,893) $ (2,056) $ (199,876) $ (201,201)
Net loss per share:        
Basic (in dollars per share) $ (0.20) $ (0.01) $ (0.78) $ (0.83)
Diluted (in dollars per share) $ (0.20) $ (0.01) $ (0.78) $ (0.83)
Shares used to compute net loss per share:        
Basic (in shares) 258,753 245,838 256,046 242,746
Diluted (in shares) 258,753 245,838 256,046 242,746
v3.19.3
Condensed Consolidated Statements of Comprehensive Loss - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 28, 2019
Sep. 29, 2018
Sep. 28, 2019
Sep. 29, 2018
Statement of Comprehensive Income [Abstract]        
Net loss $ (51,893) $ (2,056) $ (199,876) $ (201,201)
Cash flow hedges:        
Change in unrealized gain (loss) on cash flow hedges, net of tax benefit of $0, $43, $0 and $709, respectively (66) 868 (66) 6,780
Less: reclassification for realized net loss included in net loss, net of tax benefit of $0, $(115), $0 and $(244), respectively 0 (2,334) 0 (3,362)
Net change, net of tax (66) (1,466) (66) 3,418
Available-for-sale investments:        
Change in unrealized gain (loss) on investments 35 120 364 (88)
Less reclassification for realized net gain included in net loss 0 0 0 12
Net change, net of tax 35 120 364 (76)
Comprehensive loss $ (51,924) $ (3,402) $ (199,578) $ (197,859)
v3.19.3
Condensed Consolidated Statements of Comprehensive Loss (Parenthetical) - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 28, 2019
Sep. 29, 2018
Sep. 28, 2019
Sep. 29, 2018
Statement of Comprehensive Income [Abstract]        
Change in unrealized gain (loss) on cash flow hedges, tax $ 0 $ 43 $ 0 $ 709
Reclassification for realized net gains included in net income, tax $ 0 $ (115) $ 0 $ (244)
v3.19.3
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, 2017   238,756,522      
Beginning balance at Dec. 31, 2017 $ 823,963 $ 24 $ 956,060 $ (9) $ (132,112)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Issuance of common stock (in shares)   8,854,756      
Issuance of common stock 11,646 $ 1 11,645    
Stock-based compensation expense 73,783   73,783    
Taxes related to net share settlement of restricted stock units (15,685)   (15,685)    
Net loss (201,201)       (201,201)
Other comprehensive loss 3,342     3,342  
Ending balance (in shares) at Sep. 29, 2018   247,611,278      
Ending balance at Sep. 29, 2018 694,721 $ 25 1,025,803 3,333 (334,440)
Beginning balance (in shares) at Jun. 30, 2018   245,041,726      
Beginning balance at Jun. 30, 2018 678,959 $ 25 1,006,639 4,679 (332,384)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Issuance of common stock (in shares)   2,569,552      
Issuance of common stock 908 $ 0 908    
Stock-based compensation expense 23,954   23,954    
Taxes related to net share settlement of restricted stock units (5,698)   (5,698)    
Net loss (2,056)       (2,056)
Other comprehensive loss (1,346)     (1,346)  
Ending balance (in shares) at Sep. 29, 2018   247,611,278      
Ending balance at Sep. 29, 2018 694,721 $ 25 1,025,803 3,333 (334,440)
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)   7,522,885      
Issuance of common stock 7,045 $ 1 7,044    
Stock-based compensation expense 59,064   59,064    
Taxes related to net share settlement of restricted stock units (13,495)   (13,495)    
Net loss (199,876)       (199,876)
Other comprehensive loss 298     298  
Ending balance (in shares) at Sep. 28, 2019   259,885,726      
Ending balance at Sep. 28, 2019 588,974 $ 26 1,107,659 232 (518,943)
Beginning balance (in shares) at Jun. 29, 2019   258,139,452      
Beginning balance at Jun. 29, 2019 625,544 $ 25 1,092,306 263 (467,050)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Issuance of common stock (in shares)   1,746,274      
Issuance of common stock 233   232    
Stock-based compensation expense 17,971   17,971    
Taxes related to net share settlement of restricted stock units (2,850)   (2,850)    
Net loss (51,893)        
Other comprehensive loss (31)     (31)  
Ending balance (in shares) at Sep. 28, 2019   259,885,726      
Ending balance at Sep. 28, 2019 $ 588,974 $ 26 $ 1,107,659 $ 232 $ (518,943)
v3.19.3
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
9 Months Ended
Sep. 28, 2019
Sep. 29, 2018
Cash Flows from Operating Activities    
Net loss $ (199,876) $ (201,201)
Adjustments to reconcile net loss to net cash used in operating activities:    
Provision for doubtful accounts 29 37
Provision for inventory obsolescence 5,163 9,019
Depreciation 43,215 35,388
Non-cash lease expense 17,961 0
Write-off of property and equipment 169 7,513
Amortization of intangible assets 6,100 5,866
Stock-based compensation 59,175 73,613
Deferred income taxes 618 (1,690)
Impairment of equity investment 0 6,000
Other (50) (693)
Changes in operating assets and liabilities, net of acquisition:    
Accounts receivable 68,617 80,227
Inventories (125,500) (80,064)
Prepaid expenses and other assets 11,872 123,356
Fitbit Force recall reserve 242 (395)
Accounts payable 11,826 16,357
Accrued liabilities and other liabilities (61,005) (67,813)
Lease liabilities (20,975) 0
Deferred revenue (2,586) (9,649)
Income taxes payable (107) 5,653
Net cash provided by (used in) operating activities (185,112) 1,524
Cash Flows from Investing Activities    
Purchase of property and equipment (26,277) (40,174)
Purchases of marketable securities (287,969) (284,986)
Sales of marketable securities 2,016 93,020
Maturities of marketable securities 322,132 309,323
Acquisition, net of cash acquired (2,625) (13,646)
Net cash provided by investing activities 7,277 63,537
Cash Flows from Financing Activities    
Repayment of debt 0 (747)
Payment of financing lease liability (2,239) 0
Proceeds from issuance of common stock 7,044 11,641
Taxes paid related to net share settlement of restricted stock units (13,495) (15,684)
Net cash used in financing activities (8,690) (4,790)
Net increase (decrease) in cash and cash equivalents (186,525) 60,271
Cash and cash equivalents at beginning of period 473,956 341,966
Cash and cash equivalents at end of period $ 287,431 $ 402,237
v3.19.3
Basis of Presentation and Summary of Significant Accounting Policies
9 Months Ended
Sep. 28, 2019
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, 2018 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 nine months ended September 28, 2019 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, 2018, filed with the Securities and Exchange Commission (“SEC”) on March 1, 2019.

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 September 28, 2019 and September 29, 2018, respectively.

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 doubtful accounts, 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, income taxes, and impairment of an equity investment. Actual results could differ from those estimates, and such differences may be material to the condensed consolidated financial statements.

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, except for the policies in relation to the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), discussed below in the section titled “Accounting Pronouncements Recently Adopted.”
    
Leases

The Company determines if an arrangement is a lease at inception. Operating lease right-of-use assets (“ROU assets”) and short-term and long-term 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.

ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease component. For lease agreements with terms less than 12 months, the Company has elected the short-term lease measurement and recognition exemption, and it recognizes such lease payments on a straight-line basis over the lease term.



Recent Accounting Pronouncements

Accounting Pronouncements Not Yet Adopted

In June 2016, the Financial Accounting Standards Board (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 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. ASU 2016-13 and ASU 2019-05 will become effective for the Company on January 1, 2020 and early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

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 will be applied prospectively and is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect adoption of this guidance will have a material impact on its 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 will become effective for the Company on January 1, 2020 and early adoption is permitted. The Company is currently evaluating the impact of this guidance on its 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 will become effective for the Company on January 1, 2020 and early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

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. The applicable provisions of this ASU will become effective for the Company on January 1, 2020. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

Accounting Pronouncements Recently Adopted

In February 2016, the FASB issued ASU 2016-02, Leases and subsequent amendments to the initial guidance; ASU 2017-13, ASU 2018-10 and ASU 2018-11 (collectively, “Topic 842”). Topic 842 requires lessees to recognize ROU assets and lease liabilities for operating leases, initially measured at the present value of the lease payments, on the balance sheet. The Company adopted the standard effective January 1, 2019 using a modified retrospective approach. Prior periods were not retrospectively adjusted. The cumulative effect upon adoption on the opening accumulated deficit balance was zero. The Company elected the available practical expedients, which allowed for carryforward of historical assessments of whether contracts contain or are leases, historical lease classification, and remaining lease terms.

The standard had a material impact on the Company’s condensed consolidated balance sheets but did not have an impact on its condensed consolidated statements of operations. The most significant impact was the recognition of ROU assets and short-term and long-term lease liabilities for operating leases. The balances of operating lease ROU assets, operating lease liabilities, and long-term operating lease liabilities as of September 28, 2019 were $71.5 million, $23.3 million, and $70.2 million, respectively. The impact to other financial statement line items was immaterial. Adoption of the standard had no impact to net cash from or used in operating, investing, or financing activities in the Company’s consolidated statement of cash flows. Refer to Note 5 for further information on leases.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 amends the hedge accounting rules to simplify the application of hedge accounting standard and better portray the economic results of risk management activities in the financial statements. The standard expands the ability to hedge non-financial and financial risk components, reduces complexity in fair value hedges of interest rate risk, eliminates the requirement to separately measure and report hedge ineffectiveness, as well as eases certain hedge effectiveness assessment requirements. ASU 2017-12 became effective for the Company on January 1, 2019 with early adoption permitted. The Company early adopted this new standard in the first quarter of 2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 became effective for the Company on January 1, 2019. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
v3.19.3
Fair Value Measurements
9 Months Ended
Sep. 28, 2019
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):
 
 
September 28, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Money market funds
$
95,079

 
$

 
$

 
$
95,079

U.S. government agencies

 
83,246

 

 
83,246

Corporate debt securities

 
222,823

 

 
222,823

Derivative assets

 
775

 

 
775

Total
$
95,079

 
$
306,844

 
$

 
$
401,923

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
9

 
$

 
$
9

Total
$

 
$
9

 
$

 
$
9


 
December 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Money market funds
$
273,546

 
$

 
$

 
$
273,546

U.S. government agencies

 
72,840

 

 
72,840

Corporate debt securities

 
228,953

 

 
228,953

Derivative assets

 
623

 

 
623

Total
$
273,546

 
$
302,416

 
$

 
$
575,962

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
549

 
$

 
$
549

Stock warrant liability

 

 
410

 
410

Total
$

 
$
549

 
$
410

 
$
959


 
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 September 28, 2019 and December 31, 2018. There were no Level 3 liabilities as of September 28, 2019 and there were Level 3 liabilities as of December 31, 2018. There were no transfers between fair value measurement levels during the three and nine months ended September 28, 2019 and September 29, 2018.
v3.19.3
Financial Instruments
9 Months Ended
Sep. 28, 2019
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 September 28, 2019 (in thousands):
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Marketable Securities
 
 
 
 
 
 
 
 
 
 
 
 
Cash
$
101,100

 
$

 
$

 
$
101,100

 
$
101,100

 
$

Money market funds
95,079

 

 

 
95,079

 
95,079

 

U.S. government agencies
83,190

 
61

 
(5
)
 
83,246

 
18,232

 
65,014

Corporate debt securities
222,712

 
124

 
(13
)
 
222,823

 
73,020

 
149,803

Total
$
502,081

 
$
185

 
$
(18
)
 
$
502,248

 
$
287,431

 
$
214,817


The following table sets forth cash, cash equivalents and marketable securities as of December 31, 2018 (in thousands):
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Marketable Securities
 
 
 
 
 
 
 
 
 
 
 
 
Cash
$
148,110

 
$

 
$

 
$
148,110

 
$
148,110

 
$

Money market funds
273,546

 

 

 
273,546

 
273,546

 

U.S. government agencies
72,884

 
1

 
(45
)
 
72,840

 
9,738

 
63,102

Corporate debt securities
229,040

 

 
(87
)
 
228,953

 
42,562

 
186,391

Total
$
723,580

 
$
1

 
$
(132
)
 
$
723,449

 
$
473,956

 
$
249,493



The gross unrealized gains or losses on marketable securities as of September 28, 2019 and December 31, 2018 were not material. There were no available-for-sale investments as of September 28, 2019 and December 31, 2018 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):
 
September 28, 2019
 
December 31, 2018
 
 
 
 
Due in one year
$
205,923

 
$
249,493

Due in one to two years
8,894

 

Total
$
214,817

 
$
249,493



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.
 
Cash Flow Hedges
 
The Company at times enters into foreign currency derivative contracts designated as cash flow hedges to hedge certain forecasted revenue and expense transactions denominated in currencies other than the U.S. dollar. The Company’s cash flow hedges consist of forward contracts with maturities of 12 months or less.

The Company periodically assesses the effectiveness of its cash flow hedges. Effectiveness represents a derivative instrument’s ability to generate offsetting changes in cash flows related to the hedged risk. The Company records the gains or losses, net of tax, related to its cash flow hedges as a component of accumulated other comprehensive income (loss) in stockholders’ equity and subsequently reclassifies the gains or losses into revenue when the underlying hedged transactions are recognized. If the hedged transaction becomes probable of not occurring, the corresponding amounts in accumulated other comprehensive income (loss) would immediately be reclassified to other income (expense), net. Cash flows related to the Company’s cash flow hedging program are recognized as cash flows from operating activities in its statements of cash flows.

The Company had no outstanding contracts that were designated as cash flow hedges for forecasted revenue as of September 28, 2019 and December 31, 2018, respectively.

Balance Sheet Hedges

The Company enters 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 outstanding balance sheet hedges with a total notional amount of $118.6 million and $101.4 million as of September 28, 2019 and December 31, 2018, respectively.
 
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):
 
 
 
September 28, 2019
 
December 31, 2018
 
Balance Sheet Location
 
Fair Value Derivative
Assets
 
Fair Value Derivative Liabilities
 
Fair Value Derivative
Assets
 
Fair Value Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
Hedges not designated
Prepaid expenses and other current assets
 
$
775

 
$

 
$
623

 
$

Hedges not designated
Accrued liabilities
 

 
9

 

 
549

Total fair value of derivative instruments
 
 
$
775

 
$
9

 
$
623

 
$
549



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 other comprehensive income (“OCI”) and the condensed consolidated statements of operations for the periods presented (in thousands):
 
 
 
Three Months Ended
 
Nine Months Ended
 
Income Statement Location
 
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
 
 
 
 
 
 
 
 
 
 
Foreign exchange cash flow hedges:
 
 
 
 
 
 
 
 
 
Gain recognized in OCI – effective portion
 
 
$

 
$
911

 
$

 
$
7,489

Gain reclassified from OCI into income – effective portion
Revenue
 

 
2,449

 

 
3,606

 
 
 
 
 
 
 
 
 
 
Foreign exchange balance sheet hedges:
 
 
 
 
 
 
 
 
 
Gain recognized in income
Other income, net
 
$
2,041

 
$
1,035

 
$
1,567

 
$
3,335



As of September 28, 2019, there were no net derivative gains related to the Company’s cash flow hedges to be reclassified from OCI into revenue within the next 12 months.

Effect of Derivative Contracts on Condensed Consolidated Statements of Operations

The following table provides the location in the condensed consolidated statements of operations and amount of the recognized gains or losses to the Company’s derivative instruments designated as hedging instruments (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
 
 
 
 
 
 
 
 
 
Total amounts presented in the condensed consolidated statement of operations in which the effects of cash flow hedges are recorded in revenue
 
$
347,200

 
$
393,575

 
$
932,646

 
$
940,784

Total amounts presented in the condensed consolidated statement of operations in which the effects of cash flow hedges are recorded in operating expenses
 
160,072

 
171,328

 
511,263

 
586,907

Gains on foreign exchange contracts designated as cash flow hedges reclassified from OCI into revenue
 

 
2,449

 

 
3,606








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 September 28, 2019 and December 31, 2018 (in thousands):

 
September 28, 2019
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Gross Amounts Not Offset in Condensed Consolidated Balance Sheets
 
Gross Amounts Recognized
 
Gross Amounts Offset
 
Net Amounts Presented
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts assets
$
775

 
$

 
$
775

 
$
9

 
$

 
$
766

Foreign exchange contracts liabilities
9

 

 
9

 
9

 

 

 
 
December 31, 2018
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Gross Amounts Not Offset in Condensed Consolidated Balance Sheets
 
Gross Amounts Recognized
 
Gross Amounts Offset
 
Net Amounts Presented
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts assets
$
623

 
$

 
$
623

 
$
549

 
$

 
$
74

Foreign exchange contracts liabilities
549

 

 
549

 
549

 

 


v3.19.3
Balance Sheet Components
9 Months Ended
Sep. 28, 2019
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 twelve to seventeen months.

Changes in the total short-term and long-term deferred revenue balances were as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2019
 
September 28, 2019
 
 
 
 
Beginning balances
$
33,361

 
$
36,836

Deferral of revenue
10,515

 
27,325

Recognition of deferred revenue
(9,626
)
 
(29,911
)
Ending balances
$
34,250

 
$
34,250






Revenue Returns Reserve
 
Revenue returns reserve activities were as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
 
 
 
 
 
 
 
 
Beginning balances
$
75,044

 
$
74,996

 
$
104,001

 
$
109,872

Increases (1)
41,945

 
43,383

 
119,070

 
106,385

Returns taken
(42,845
)
 
(39,862
)
 
(148,927
)
 
(137,740
)
Ending balances
$
74,144

 
$
78,517

 
$
74,144

 
$
78,517


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

Inventories
 
Inventories consisted of the following (in thousands):
  
September 28, 2019
 
December 31, 2018
 
 
 
 
Components
$
6,504

 
$
8,866

Finished goods
238,592

 
116,005

Total inventories
$
245,096

 
$
124,871


 
Prepaid Expenses and Other Current Assets
 
Prepaid expenses and other current assets consisted of the following (in thousands):
  
September 28, 2019
 
December 31, 2018
 
 
 
 
Prepaid expenses
$
10,841

 
$
18,100

Point-of-purchase (“POP”) displays, net
3,467

 
5,143

Prepaid marketing
2,941

 
3,258

Derivative asset
775

 
623

Other
15,352

 
15,201

Total prepaid expenses and other current assets
$
33,376

 
$
42,325



Property and Equipment, Net
 
Property and equipment, net, consisted of the following (in thousands):
 
 
 
 
  
September 28, 2019
 
December 31, 2018
 
 
 
 
Tooling and manufacturing equipment
$
98,773

 
$
80,685

Furniture and office equipment
20,015

 
22,738

Purchased and internally-developed software
26,634

 
21,741

Leasehold improvements
59,741

 
67,715

Total property and equipment
205,163

 
192,879

Less: Accumulated depreciation and amortization
(116,931
)
 
(86,593
)
Property and equipment, net
$
88,232

 
$
106,286


 
Total depreciation expense related to property and equipment, net was $13.1 million and $11.8 million for the three months ended September 28, 2019 and September 29, 2018, respectively, and $43.2 million and $35.4 million for the nine months ended September 28, 2019 and September 29, 2018, respectively.




Goodwill and Intangible Assets

The carrying amount of goodwill was $61.0 million as of September 28, 2019 and December 31, 2018.

The carrying amounts of the intangible assets as of September 28, 2019 and December 31, 2018 were as follows (in thousands):
 
September 28, 2019
 
December 31, 2018
  
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
 
 
 
 
 
 
 
 
 
 
 
 
Developed technology
$
35,988

 
$
(21,506
)
 
$
14,482

 
$
35,988

 
$
(15,983
)
 
$
20,005

Customer relationships
3,790

 
(857
)
 
2,933

 
3,790

 
(451
)
 
3,339

Trademarks and other
1,278

 
(1,174
)
 
104

 
1,278

 
(1,002
)
 
276

Total intangible assets, net
$
41,056

 
$
(23,537
)
 
$
17,519

 
$
41,056

 
$
(17,436
)
 
$
23,620



Total amortization expense related to intangible assets was $2.0 million and $2.1 million for the three months ended September 28, 2019 and September 29, 2018, respectively, and $6.1 million and $5.9 million for the nine months ended September 28, 2019 and September 29, 2018, respectively.

The estimated future amortization expense of acquired finite-lived intangible assets to be charged to cost of revenue and operating expenses after September 28, 2019 is as follows (in thousands):
  
Cost of Revenue
 
Operating Expenses
 
Total
 
 
 
 
 
 
Remaining 2019
$
2,392

 
$
207

 
$
2,599

2020
6,192

 
643

 
6,835

2021
4,504

 
597

 
5,101

2022
955

 
597

 
1,552

2023

 
597

 
597

Thereafter

 
835

 
835

Total finite-lived intangible assets, net
$
14,043

 
$
3,476

 
$
17,519



Accrued Liabilities
 
Accrued liabilities consisted of the following (in thousands):
 
September 28, 2019
 
December 31, 2018
 
 
Accrued sales incentives
$
92,087

 
$
126,400

Accrued revenue reserve from returns
74,144

 
104,001

Product warranty
44,904

 
45,605

Accrued manufacturing expense and freight
36,952

 
21,357

Accrued sales and marketing
29,725

 
18,171

Accrued co-op advertising and marketing development funds
27,783

 
30,435

Accrued research and development
16,521

 
8,783

Sales taxes and VAT payable
14,108

 
20,121

Employee-related liabilities
13,513

 
33,916

Inventory received but not billed
4,397

 
6,373

Accrued legal settlements and fees
3,375

 
2,821

Finance lease liabilities
464

 

Derivative liabilities
9

 
549

Other
7,830

 
18,702

Accrued liabilities
$
365,812

 
$
437,234



Product warranty reserve activities were as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
 
 
 
 
 
 
 
 
Beginning balances
$
45,260

 
$
50,468

 
$
45,605

 
$
87,882

Charged to cost of revenue
11,019

 
9,245

 
28,247

 
(1,722
)
Changes related to pre-existing warranties
2,201

 
(1,354
)
 
4,874

 
(9,226
)
Settlement of claims
(13,576
)
 
(10,504
)
 
(33,822
)
 
(29,079
)
Ending balances
$
44,904

 
$
47,855

 
$
44,904

 
$
47,855



Accumulated Other Comprehensive Income (Loss)

The components and activity of accumulated other comprehensive income (“AOCI”), net of tax, were as follows (in thousands):

 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Currency Translation Adjustments
 
Unrealized Gains (Losses) on Available-for-Sale Investments
 
Total
 
 
 
 
 
 
 
 
Balance at December 31, 2018
$
66

 
$

 
$
(132
)
 
$
(66
)
Other comprehensive income (loss) before reclassifications
(66
)
 

 
364

 
298

Other comprehensive income (loss)
(66
)
 

 
364

 
298

Balance at September 28, 2019
$

 
$

 
$
232

 
$
232


v3.19.3
Leases
9 Months Ended
Sep. 28, 2019
Leases [Abstract]  
Leases  Leases

The Company leases its principal facilities located in San Francisco, California. The Company also leases office space in various locations with expiration dates between 2019 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. In June 2019, the lessors of certain of the Company’s San Francisco offices exercised their right to recapture a portion of the office space, which resulted in a reduction of ROU assets of $18.0 million and a reduction of lease liabilities of $22.5 million for a net benefit to operating lease costs of $4.3 million. In addition, the Company accelerated depreciation of leasehold improvements related to the recaptured office space of $5.2 million. The Company has no leases that have not yet commenced as of September 28, 2019.

Total lease cost consists of the following (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2019
 
September 28, 2019
 
 
 
 
Finance lease costs:
 
 
 
Amortization of ROU assets
$
989

 
$
2,640

Interest on lease liabilities

 

Operating lease costs(1)
5,850

 
16,834

Variable lease costs
1,463

 
4,108

Sublease income
(479
)
 
(4,110
)
Total lease costs
$
7,823

 
$
19,472

(1) includes short-term leases, which are immaterial.

Supplemental cash flow information related to leases was as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2019
 
September 28, 2019
 
 
 
 
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
Financing cash flows from finance leases
$
1,302

 
$
2,239

Operating cash flows from finance leases

 

Operating cash flows from operating leases
6,737

 
20,775

 
 
 
 
ROU assets obtained in exchange for lease obligations:
 
 
 
Finance lease liabilities
$

 

Operating lease liabilities

 
$
288



Supplemental balance sheet information related to leases was as follows (in thousands):
 
September 28, 2019
 
 
Finance leases:
 
Other assets
$

 
 
Accrued liabilities
$
464

 
 
Operating leases:
 
Operating lease ROU assets
$
71,529

 
 
Operating lease liabilities
$
23,313

Long-term operating lease liabilities
70,202

Total operating lease liabilities
$
93,515



Weighted-average lease terms and discount rates are as follows:
 
September 28, 2019
 
 
Weighted-average remaining lease terms (in years):
 
Finance leases
0.3
Operating leases
4.4
 
 
Weighted-average discount rates:
 
Finance leases
—%
Operating leases
5.5%


Maturities of lease liabilities as of September 28, 2019 were as follow (in thousands):
 
 
 
 
 
Finance Leases
 
Operating Leases
Remaining 2019
$
464

 
$
8,808

2020

 
23,862

2021

 
22,459

2022

 
21,931

2023

 
20,149

Thereafter

 
8,321

Total minimum lease payments
$
464

 
$
105,530

Less: amount representing interest

 
(12,015
)
Total lease liabilities
$
464

 
$
93,515


Leases Leases

The Company leases its principal facilities located in San Francisco, California. The Company also leases office space in various locations with expiration dates between 2019 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. In June 2019, the lessors of certain of the Company’s San Francisco offices exercised their right to recapture a portion of the office space, which resulted in a reduction of ROU assets of $18.0 million and a reduction of lease liabilities of $22.5 million for a net benefit to operating lease costs of $4.3 million. In addition, the Company accelerated depreciation of leasehold improvements related to the recaptured office space of $5.2 million. The Company has no leases that have not yet commenced as of September 28, 2019.

Total lease cost consists of the following (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2019
 
September 28, 2019
 
 
 
 
Finance lease costs:
 
 
 
Amortization of ROU assets
$
989

 
$
2,640

Interest on lease liabilities

 

Operating lease costs(1)
5,850

 
16,834

Variable lease costs
1,463

 
4,108

Sublease income
(479
)
 
(4,110
)
Total lease costs
$
7,823

 
$
19,472

(1) includes short-term leases, which are immaterial.

Supplemental cash flow information related to leases was as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2019
 
September 28, 2019
 
 
 
 
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
Financing cash flows from finance leases
$
1,302

 
$
2,239

Operating cash flows from finance leases

 

Operating cash flows from operating leases
6,737

 
20,775

 
 
 
 
ROU assets obtained in exchange for lease obligations:
 
 
 
Finance lease liabilities
$

 

Operating lease liabilities

 
$
288



Supplemental balance sheet information related to leases was as follows (in thousands):
 
September 28, 2019
 
 
Finance leases:
 
Other assets
$

 
 
Accrued liabilities
$
464

 
 
Operating leases:
 
Operating lease ROU assets
$
71,529

 
 
Operating lease liabilities
$
23,313

Long-term operating lease liabilities
70,202

Total operating lease liabilities
$
93,515



Weighted-average lease terms and discount rates are as follows:
 
September 28, 2019
 
 
Weighted-average remaining lease terms (in years):
 
Finance leases
0.3
Operating leases
4.4
 
 
Weighted-average discount rates:
 
Finance leases
—%
Operating leases
5.5%


Maturities of lease liabilities as of September 28, 2019 were as follow (in thousands):
 
 
 
 
 
Finance Leases
 
Operating Leases
Remaining 2019
$
464

 
$
8,808

2020

 
23,862

2021

 
22,459

2022

 
21,931

2023

 
20,149

Thereafter

 
8,321

Total minimum lease payments
$
464

 
$
105,530

Less: amount representing interest

 
(12,015
)
Total lease liabilities
$
464

 
$
93,515


v3.19.3
Commitments and Contingencies
9 Months Ended
Sep. 28, 2019
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies Commitments and Contingencies
 
Purchase Commitments

The aggregate amount of open purchase orders as of September 28, 2019 was approximately $319.0 million. Of the aggregate amount, $185.0 million related to the Company’s migration to a third-party hosting provider, of which $12.9 million was accrued for as of September 28, 2019. The Company cannot determine the aggregate amount of such purchase orders that represent contractual obligations because purchase orders may represent authorizations to purchase rather than binding agreements. The Company’s purchase orders are based on its current needs and are fulfilled by its suppliers, contract manufacturers, and logistics providers within short periods of time.

During the normal course of business, the Company and its contract manufacturers procure components based upon a forecasted production plan. If the Company cancels all or part of the orders, or materially reduces forecasted orders, it may be liable to its suppliers and contract manufacturers for the cost of the excess components purchased by its contract manufacturers. As of September 28, 2019, $19.1 million was accrued for such liabilities to contract manufacturers.

Letters of Credit

As of September 28, 2019 and December 31, 2018, the Company had outstanding letters of credit of $25.3 million and $36.6 million, respectively, issued to cover the security deposit on the lease of its office headquarters in San Francisco, California, and other facility leases.

Legal Proceedings

Jawbone. Aliphcom, Inc. d/b/a Jawbone (“Jawbone”) and the Company each initiated civil lawsuits against each other in 2015. These included a complaint filed by Jawbone in California state court alleging the misappropriation of certain trade secrets by six former Jawbone employees who had joined Fitbit and who were also named as defendants. On December 8, 2017, the parties
announced the global settlement of all of the outstanding civil litigation on confidential terms, and all of the cases were dismissed with prejudice.
On August 12, 2016, the Company was notified by Jawbone that Jawbone had received a confidential subpoena from the U.S. Attorney’s Office for the Northern District of California requesting certain of the Company’s confidential business information that appeared to be related to Jawbone’s allegations of trade secret misappropriation. On February 17, 2017 and February 1, 2018, the Company received subpoenas for documents from the same office. The Company is cooperating with the U.S. Attorney’s Office. On June 14, 2018, the six former Jawbone employees who were named as individual defendants in the state trade secret case were charged in a federal indictment with being in possession of certain Jawbone trade secrets.
Sleep Tracking. On May 8, 2015, a purported class action lawsuit was filed against the Company in the U.S. District Court for the Northern District of California, alleging that the sleep tracking function available in certain trackers does not perform as advertised. Plaintiffs sought class certification, restitution, unspecified compensatory and punitive damages, and reasonable costs and expenses including attorneys’ fees. On January 31, 2017, plaintiffs filed a motion for class certification. Plaintiffs’ motion for class certification was granted on November 20, 2017. On April 20, 2017, the Company filed a motion for summary judgment, which the court denied on December 8, 2017. The parties subsequently agreed to a settlement, and on August 1, 2018, the plaintiffs filed a motion for preliminary approval of the class action settlement. At the hearing on September 13, 2018, the court denied preliminary settlement approval without prejudice and ordered revised settlement papers be filed. On November 29, 2018, the court granted preliminary settlement approval and the final approval hearing was scheduled for August 1, 2019. On May 10, 2019, the plaintiffs filed a request for attorneys’ fees. The Company opposed that request. At the final approval hearing, the court indicated that it wanted to see a larger claims rate and asked the parties to submit a re-notice plan. On the fees request, the court offered plaintiffs the option of either having a court-appointed accountant review all of the challenged fees and expenses, or to accept a 90% reduction on those. On August 18, 2019, the plaintiffs filed their fee election, opting for the 90% reduction of challenged fees and expenses. The re-notice plan was approved on October 16, 2019, and new notices have been sent out. The claims deadline is now December 22, 2019. The court has not yet ruled on plaintiff’s fee request.

Heart Rate Tracking. On January 6, 2016 and February 16, 2016, two purported class action lawsuits were filed against the Company in the U.S. District Court for the Northern District of California alleging that the PurePulse® heart rate tracking technology does not consistently and accurately record users’ heart rates. Plaintiffs allege common law claims, as well as violations of various states’ false advertising, unfair competition, and consumer protection statutes, and seek class certification, injunctive and declaratory relief, restitution, unspecified compensatory damages, exemplary damages, punitive damages, statutory penalties and damages, and reasonable costs and expenses including attorneys’ fees. On April 15, 2016, the plaintiffs filed a consolidated master class action complaint, and on May 19, 2016, they filed an amended consolidated master class action complaint. On January 9, 2017, the Company filed a motion to compel arbitration. On October 11, 2017, the court granted the motion to compel arbitration. Plaintiffs filed a motion for reconsideration, and that motion was denied on January 24, 2018.
On February 20, 2018, a second amended consolidated master class action complaint was filed on behalf of plaintiff Rob Dunn, the only plaintiff not ordered to arbitration, as a purported class action. The complaint alleges the same common law claims as the prior class actions, as well as violations of false advertising, unfair competition, and consumer protection statutes of California and Arizona. The complaint seeks class certification, injunctive and declaratory relief, restitution, unspecified compensatory damages, exemplary damages, punitive damages, statutory penalties and damages, and reasonable costs and expenses including attorneys’ fees. On March 13, 2018, the Company filed a motion to dismiss for failure to state a claim and separately moved to strike the class allegations. The court dismissed the claims for revocation of acceptance, violation of California’s Song-Beverly Consumer Warranty Act, and unjust enrichment, but allowed the remaining claims pending amendment to the complaint with further details. Plaintiff filed a third amended complaint on June 19, 2018. The court granted the Company’s motion to strike and ordered the plaintiff to amend to make clear that he is seeking to represent a class of opt-outs only, but added that plaintiff may amend in the event the Company’s arbitration agreement is found to be unenforceable.

On April 3, 2018, the Company received an arbitration demand from Kate McLellan, one of the original plaintiffs who was compelled to arbitration.

On July 19, 2019, the parties entered into a settlement of the lawsuit and the arbitration on confidential terms, which are not material to the Company.

Securities Litigation I. In 2016, a putative class action was filed in federal court against the Company, certain of its officers and directors, and the underwriters of the Company’s initial public offering alleging violations of the federal securities laws based on alleged materially false and misleading statements about the Company’s PurePulse® heart rate tracking technology. A second
putative class action was filed in California state court involving the same statements. The parties agreed to settle the federal and state class actions for $33.3 million, which the Company accrued for as of December 31, 2017. Following court approval of the settlement, the federal and state class action cases were dismissed with prejudice in May 2018.

During 2016 and 2017, a total of seven derivative lawsuits were filed in various federal courts and in the Delaware Court of Chancery naming the Company as nominal plaintiff and certain of the Company’s officers and directors as defendants. The federal cases are all stayed. The three cases filed in the Delaware Court of Chancery were consolidated and a second amended complaint was filed in which plaintiffs allege breach of fiduciary duty and insider trading against certain defendants who sold shares in the Company’s initial public offering and/or a secondary offering. On April 26, 2017, the Company filed a motion to dismiss the Delaware cases for failure to state a claim. On December 14, 2018, the court denied the motion to dismiss. The Company filed a motion for interlocutory appeal, which was denied on January 14, 2019. The Company then filed a Notice of Appeal in the Delaware Supreme Court, which was denied on January 30, 2019.
The Company believes that the allegations in the derivative lawsuits are without merit and intends to vigorously defend against the claims. Because the Company is in the early stages of these litigation matters, the Company is unable to estimate a reasonably possible loss or range of loss, if any, that may result from these matters.
Securities Litigation II. On November 1, 2018, a putative securities class action was filed in the U.S. District Court for the Northern District of California naming the Company and certain of its officers as defendants. The complaint alleges violations of Sections 10(b) and 20 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) arising out of alleged materially false and misleading statements about the Company’s guidance for the fourth quarter of 2016 and full fiscal year 2016 that was provided during the third and fourth quarters of 2016. On November 15, 2018, a second putative securities class action was filed in the same court alleging similar claims against the same defendants. On April 25, 2019, the two actions were consolidated, and a consolidated amended class action complaint was filed on June 24, 2019. The consolidated complaint also alleges violations of Sections 10(b) and 20 of the Exchange Act against the Company and certain officers relating to the Company’s 2016 guidance, on behalf of a putative class of stockholders who purchased Fitbit stock from August 2, 2016 through January 30, 2017. Plaintiffs seek class certification, unspecified compensatory damages, and reasonable costs and expenses including attorneys’ fees. On August 23, 2019, the Company filed a motion to dismiss. The hearing is scheduled for January 8, 2020.
The Company believes that the plaintiffs’ allegations are without merit and intends to vigorously defend against the claims. Because the Company is in the early stages of this litigation matter, the Company is unable to estimate a reasonably possible loss or range of loss, if any, that may result from this matter.
Philips. On December 4, 2017, Koninklijke Philips N.V. filed a patent infringement suit in Germany in the Regional Court of Mannheim alleging infringement by certain of Fitbit’s products of the German part of EP 1 247 229 B1 (EP229). In October 2018, the case was stayed, pending an appeal of a January 2014 decision by the European Patent Office (EPO) to revoke EP229. On May 31, 2019, the EPO Board of Appeal dismissed the appeal, affirming the decision to revoke EP229. Koninklijke Philips N.V. appealed the EPO Board of Appeal decision on July 30, 2019. On May 30, 2018, Koninklijke Philips N.V. filed a patent infringement suit in the Regional Court of Mannheim alleging infringement by certain of Fitbit’s products of the German part of EP 1 076 806 B1 (EP806). In October 2018, the case was stayed, pending the decision in a parallel nullity proceeding challenging the validity of EP806. On July 22, 2019, Philips North America filed a patent infringement suit in U.S. District Court for the District of Massachusetts alleging infringement of U.S. Patent No. 6,013,007, U.S. Patent No. 7,088,233, U.S. Patent No. 8,277,377, and U.S. Patent No. 6,976,958 by certain of Fitbit’s products. The Company’s response to the complaint is due November 22, 2019.
The Company believes that the allegations are without merit and intends to vigorously defend against the claims. Because the Company is in the early stages of these litigation matters, the Company is unable to estimate a reasonably possible loss or range of loss, if any, that may result from these matters.

Wynit. In September 2017, Wynit Distribution LLC (“Wynit”) filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. Wynit was previously the Company’s largest customer. The Company ceased to recognize revenue from Wynit, which totaled $8.1 million during the third quarter of 2017. Additionally, the Company recorded a charge of $35.8 million during the third quarter of 2017 comprised of cost of revenue of $5.5 million associated with shipments to Wynit in the third quarter of 2017 and bad debt expense of $30.3 million associated with all of Wynit’s outstanding accounts receivables. The Company maintains credit insurance that covers a portion of the exposure related to its customer receivables. The Company recorded an insurance receivable based on an analysis of its insurance policies, including their exclusions, an assessment of the nature of the claim, and information from its insurance carrier. As of September 30, 2017, the Company had recorded an insurance receivable of $26.8
million, included in prepaid expenses and other current assets, associated with the amount it had concluded was probable related to the claim. The $26.8 million insurance receivable allowed the Company to recover $22.7 million of bad debt expense and $4.1 million of cost of revenue, resulting in a net charge of $9.0 million in the consolidated statement of operations comprised of net bad debt expense of $7.6 million and net cost of revenue of $1.4 million. The Company received $21.4 million of the insurance receivable during the fourth quarter of 2017 and the remaining $5.4 million in January 2018.

During the nine months ended September 29, 2018, the Company released $12.4 million in product return and rebate reserves related to Wynit, as it believed the possibility of future claims associated with these reserves was remote. This reserve release resulted in a $12.4 million increase in revenue during the nine months ended September 29, 2018.

On September 4, 2019, plaintiff Nauni Manty, as the chapter 7 trustee of the bankruptcy estate of Wynit Distribution, LLC, et al, filed a complaint in U.S. Bankruptcy Court in the District of Minnesota. The complaint seeks: (1) avoidance and recovery under 11 U.S.C. §§ 547, 550, and 551 against Fitbit; and (2) avoidance and preservation under 11 U.S.C. §§ 547, 551 of a second lien granted to Fitbit on substantially all the debtors’ assets.

The Company believes that the allegations are without merit and intends to vigorously defend against the claims. Because the Company is in the early stages of these litigation matters, the Company is unable to estimate a reasonably possible loss or range of loss, if any, that may result from these matters.

Other. The Company is and, from time to time, may in the future become, involved in other legal proceedings in the ordinary course of business. The Company currently believes that the outcome of any of these existing legal proceedings, including the aforementioned cases, either individually or in the aggregate, will not have a material impact on the operating results, financial condition or cash flows of the Company. With respect to existing legal proceedings, the Company has either determined that the existence of a material loss is not reasonably possible or that it is unable to estimate a reasonably possible loss or range of loss. The Company may incur substantial legal fees, which are expensed as incurred, in defending against these legal proceedings.
Indemnification
In the ordinary course of business, the Company enters into commercial agreements that may include indemnification provisions. Pursuant to such agreements, the Company may indemnify, hold harmless and defend an indemnified party for losses suffered or incurred by the indemnified party. Some of the provisions will limit losses to those arising from third-party actions. In some cases, the indemnification will continue after the termination of the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions is not determinable. To date, the Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. The Company has also entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers to the fullest extent permitted by Delaware corporate law. The Company also currently has directors’ and officers’ insurance.
v3.19.3
Stockholders' Equity
9 Months Ended
Sep. 28, 2019
Share-based Payment Arrangement [Abstract]  
Stockholders' Equity Stockholders’ Equity
 
Equity Incentive Plans

In May 2015, the Company’s board of directors and stockholders adopted and approved the 2015 Equity Incentive Plan (the “2015 Plan”). The 2015 Plan became effective on June 16, 2015 and serves as the successor to the Amended and Restated 2007 Stock Plan (the “2007 Plan”). The Company ceased granting awards under the 2007 Plan upon the effectiveness of the 2015 Plan. However, any outstanding stock options and restricted stock units (“RSUs”) granted under the 2007 Plan remain subject to the terms of the 2007 Plan. As of September 28, 2019, 26.7 million shares of Class A common stock were reserved and available for future issuance under the 2015 Plan.

Stock Options
 
Stock option activity under the equity incentive plans was as follows (in thousands, except per share amounts):
 
Stock Options Outstanding
 
Number of
Shares Subject
to
Stock Options
 
Weighted–
Average
Exercise
Price
 
Aggregate
Intrinsic
Value (1)
Balance—December 31, 2018
16,263

 
$
3.00

 
 
Granted

 

 
 
Exercised
(817
)
 
$
1.53

 
 
Forfeited or canceled
(62
)
 
$
5.74

 
 
Balance—September 28, 2019
15,384

 
$
3.07

 
$
21,357

 
 
 
 
 
 
Stock options vested and expected to vest—September 28, 2019
15,384

 
$
3.07

 
$
21,357

Stock options exercisable—September 28, 2019
15,158

 
$
3.00

 
$
21,357


 
(1) The aggregate intrinsic values of stock options outstanding, exercisable, vested and expected to vest as of September 28, 2019 were calculated as the difference between the exercise price of the stock options and the fair value of the Class A common stock of $3.90 as of September 28, 2019.

 Restricted Stock Units
 
RSU activity under the equity incentive plans was as follows (in thousands, except per share amounts):