FITBIT INC, 10-K filed on 3/1/2018
Annual Report
Document and Entity Information (USD $)
In Billions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Jun. 30, 2017
Feb. 20, 2018
Common Class A [Member]
Feb. 20, 2018
Common Class B [Member]
Entity Information [Line Items]
 
 
 
 
Entity Registrant Name
FITBIT INC 
 
 
 
Entity Central Index Key
0001447599 
 
 
 
Current Fiscal Year End Date
--12-31 
 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
 
Document Type
10-K 
 
 
 
Document Period End Date
Dec. 31, 2017 
 
 
 
Document Fiscal Year Focus
2017 
 
 
 
Document Fiscal Period Focus
FY 
 
 
 
Amendment Flag
false 
 
 
 
Entity Common Stock, Shares Outstanding
 
 
208,207,282 
31,289,730 
Entity Well-known Seasoned Issuer
Yes 
 
 
 
Entity Voluntary Filers
No 
 
 
 
Entity Current Reporting Status
Yes 
 
 
 
Entity Public Float
 
$ 1.0 
 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and cash equivalents
$ 341,966 
$ 301,320 
Marketable securities
337,334 
404,693 
Accounts receivable, net
406,019 
477,825 
Inventories
123,895 
230,387 
Income tax receivable
77,882 
481 
Prepaid expenses and other current assets
97,269 
65,865 
Total current assets
1,384,365 
1,480,571 
Property and equipment, net
104,908 
76,553 
Goodwill
51,036 
51,036 
Intangible assets, net
22,356 
27,521 
Deferred tax assets
3,990 
175,797 
Other assets
15,420 
10,448 
Total assets
1,582,075 
1,821,926 
Current liabilities:
 
 
Accounts payable
212,731 
313,773 
Accrued liabilities
452,137 
390,561 
Deferred revenue
35,504 
42,612 
Income taxes payable
928 
9,394 
Total current liabilities
701,300 
756,340 
Long-term deferred revenue
6,928 
7,292 
Other liabilities
49,884 
59,762 
Total liabilities
758,112 
823,394 
Commitments and contingencies (Note 7)
   
   
Stockholders’ equity:
 
 
Preferred stock, $0.0001 par value, 10,000,000 shares authorized
Additional paid-in capital
956,060 
859,345 
Accumulated other comprehensive loss
(9)
(978)
Retained earnings (accumulated deficit)
(132,112)
140,142 
Total stockholders’ equity
823,963 
998,532 
Total liabilities and stockholders’ equity
1,582,075 
1,821,926 
Common Class A [Member]
 
 
Stockholders’ equity:
 
 
Common stock
21 
18 
Common Class B [Member]
 
 
Stockholders’ equity:
 
 
Common stock
$ 3 
$ 5 
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2017
Dec. 31, 2016
Preferred stock, par value (in dollars per share)
$ 0.0001 
$ 0.0001 
Preferred stock, authorized (in shares)
10,000,000 
10,000,000 
Common Class A [Member]
 
 
Common stock, par value (in dollars per share)
$ 0.0001 
$ 0.0001 
Common stock authorized (in shares)
600,000,000 
600,000,000 
Common stock issued (in shares)
207,453,624 
177,200,000 
Common stock outstanding (in shares)
207,453,624 
177,212,531 
Common Class B [Member]
 
 
Common stock, par value (in dollars per share)
$ 0.0001 
$ 0.0001 
Common stock authorized (in shares)
350,000,000 
350,000,000 
Common stock issued (in shares)
31,300,000 
48,450,746 
Common stock outstanding (in shares)
31,302,898 
48,450,746 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Income Statement [Abstract]
 
 
 
Revenue
$ 1,615,519 
$ 2,169,461 
$ 1,857,998 
Cost of revenue
924,618 
1,323,577 
956,935 
Gross profit
690,901 
845,884 
901,063 
Operating expenses:
 
 
 
Research and development
343,012 
320,191 
150,035 
Sales and marketing
415,042 
491,255 
332,741 
General and administrative
133,934 
146,903 
77,793 
Change in contingent consideration
(7,704)
Total operating expenses
891,988 
958,349 
552,865 
Operating income (loss)
(201,087)
(112,465)
348,198 
Interest income (expense), net
3,647 
3,156 
(1,019)
Other income (expense), net
2,796 
14 
(59,230)
Income (loss) before income taxes
(194,644)
(109,295)
287,949 
Income tax expense (benefit)
82,548 
(6,518)
112,272 
Net income (loss)
(277,192)
(102,777)
175,677 
Less: noncumulative dividends to preferred stockholders
(2,526)
Less: undistributed earnings to participating securities
(59,133)
Net income (loss) attributable to common stockholders—basic
(277,192)
(102,777)
114,018 
Add: adjustments for undistributed earnings to participating securities
8,821 
Net income (loss) attributable to common stockholders—diluted
$ (277,192)
$ (102,777)
$ 122,839 
Net income (loss) per share attributable to common stockholders:
 
 
 
Basic (in dollars per share)
$ (1.19)
$ (0.47)
$ 0.88 
Diluted (in dollars per share)
$ (1.19)
$ (0.47)
$ 0.75 
Shares used to compute net income (loss) per share attributable to common stockholders:
 
 
 
Basic (in shares)
232,032 
220,405 
129,886 
Diluted (in shares)
232,032 
220,405 
164,213 
Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Statement of Comprehensive Income [Abstract]
 
 
 
Net income (loss)
$ (277,192)
$ (102,777)
$ 175,677 
Cash flow hedges:
 
 
 
Change in unrealized gain on cash flow hedges, net of tax expense (benefit) of ($1), ($1,251), and $1,509, respectively
(19,422)
9,422 
1,276 
Less reclassification for realized net gains included in net income (loss), net of tax expense of $74, $509, and $759, respectively
19,965 
(10,650)
(525)
Net change, net of tax
543 
(1,228)
751 
Available-for-sale investments:
 
 
 
Change in unrealized loss on investments
125 
(126)
(63)
Less reclassification for realized net gains included in net income (loss)
(13)
(6)
Net change, net of tax
112 
(132)
(55)
Change in foreign currency translation adjustment, net of tax
314 
(309)
(42)
Comprehensive income (loss)
$ (276,223)
$ (104,446)
$ 176,331 
Consolidated Statements of Comprehensive Income (Loss) (Parenthetical) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Statement of Comprehensive Income [Abstract]
 
 
 
Change in unrealized gain on cash flow hedges, tax
$ (1)
$ (1,251)
$ 1,509 
Reclassification for realized net gains included in net income, tax
$ 74 
$ 509 
$ 759 
Consolidated Statements of Stockholders' Equity (Deficit) Statement (USD $)
In Thousands, unless otherwise specified
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Retained Earnings (Accumulated Deficit) [Member]
Beginning balance at Dec. 31, 2014
$ 75,262 
$ 4 
$ 7,979 
$ 37 
$ 67,242 
Beginning balance at Dec. 31, 2014
67,814 
 
 
 
 
Beginning balance (in shares) at Dec. 31, 2014
139,851,483 
 
 
 
 
Beginning balance (in shares) at Dec. 31, 2014
 
40,875,583 
 
 
 
Increase (Decrease) in Temporary Equity [Roll Forward]
 
 
 
 
 
Issuance of redeemable convertible preferred stock upon net exercise of redeemable convertible preferred stock warrants (unaudited) (in shares)
1,485,583 
 
 
 
 
Issuance of redeemable convertible preferred stock upon exercise of redeemable convertible preferred stock warrants
56,678 
 
 
 
 
Conversion of redeemable convertible preferred stock to common stock upon public offering (unaudited) (in shares)
(141,337,066)
 
 
 
 
Conversion of redeemable convertible preferred stock to common stock upon initial public offering
(124,492)
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
Issuance of common stock upon public offering, net of offering costs (in shares)
 
25,387,500 
 
 
 
Issuance of common stock upon public offerings, net of offering costs
499,105 
499,102 
 
 
Conversion of redeemable convertible preferred stock to common stock upon public offering (in shares)
 
141,337,066 
 
 
 
Conversion of redeemable convertible preferred stock to common stock upon initial public offering
124,492 
14 
124,478 
 
 
Reclassification of redeemable convertible preferred stock warrant liability into additional paid in capital upon initial public offering
15,774 
 
15,774 
 
 
Issuance of common stock upon exercise of stock options (in shares)
 
5,396,591 
 
 
 
Issuance of common stock upon exercise of stock options
4,018 
 
4,018 
 
 
Issuance of common stock in connection with acquisition (in shares)
 
1,059,688 
 
 
 
Issuance of common stock in connection with acquisition
13,317 
 
13,317 
 
 
Issuance of common stock subject to vesting in connection with acquisition (in shares)
 
308,216 
 
 
 
Issuance of common stock upon net exercise of common stock warrants (in shares)
 
416,929 
 
 
 
Stock-based compensation expense
41,052 
 
41,052 
 
 
Cumulative effect adjustment related to recognition of previously unrecognized excess tax benefits from adoption of ASU 2016-09
32,100 
 
32,100 
 
 
Net income (loss)
175,677 
 
 
 
175,677 
Other comprehensive Income (loss)
654 
 
 
654 
 
Ending balance at Dec. 31, 2015
981,451 
21 
737,820 
691 
242,919 
Ending balance at Dec. 31, 2015
 
 
 
 
Ending balance (in shares) at Dec. 31, 2015
 
 
 
 
Ending balance (in shares) at Dec. 31, 2015
 
214,781,573 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
Issuance of common stock upon exercise of stock options (in shares)
 
10,881,704 
 
 
 
Issuance of common stock upon exercise of stock options
25,814 
25,812 
 
 
Stock-based compensation expense
79,107 
 
79,107 
 
 
Taxes related to net share settlement of restricted stock units
(4,939)
 
(4,939)
 
 
Cumulative effect adjustment related to recognition of previously unrecognized excess tax benefits from adoption of ASU 2016-09
21,545 
 
21,545 
 
 
Net income (loss)
(102,777)
 
 
 
(102,777)
Other comprehensive Income (loss)
(1,669)
 
 
(1,669)
 
Ending balance at Dec. 31, 2016
998,532 
23 
859,345 
(978)
140,142 
Ending balance at Dec. 31, 2016
 
 
 
 
Ending balance (in shares) at Dec. 31, 2016
 
 
 
 
Ending balance (in shares) at Dec. 31, 2016
 
225,663,277 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
Issuance of common stock upon exercise of stock options (in shares)
 
13,093,245 
 
 
 
Issuance of common stock upon exercise of stock options
19,011 
19,010 
 
 
Stock-based compensation expense
92,081 
 
92,081 
 
 
Taxes related to net share settlement of restricted stock units
(14,376)
 
(14,376)
 
 
Cumulative effect adjustment related to recognition of previously unrecognized excess tax benefits from adoption of ASU 2016-09
4,938 
 
 
4,938 
Net income (loss)
(277,192)
 
 
 
 
Other comprehensive Income (loss)
969 
 
 
969 
 
Ending balance at Dec. 31, 2017
823,963 
24 
956,060 
(9)
(132,112)
Ending balance at Dec. 31, 2017
$ 0 
 
 
 
 
Ending balance (in shares) at Dec. 31, 2017
 
 
 
 
Ending balance (in shares) at Dec. 31, 2017
 
238,756,522 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Cash Flows from Operating Activities
 
 
 
Net income (loss)
$ (277,192)
$ (102,777)
$ 175,677 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Provision for doubtful accounts
7,893 
339 
1,115 
Provision for excess and obsolete inventory
14,833 
4,993 
5,060 
Depreciation
39,971 
36,046 
19,405 
Amortization of intangible assets
5,700 
2,100 
1,702 
Accelerated depreciation of property and equipment
5,250 
19,805 
1,206 
Amortization of issuance costs and discount on debt
951 
466 
961 
Stock-based compensation
91,581 
79,432 
41,024 
Deferred income taxes
173,906 
(100,434)
(42,538)
Revaluation of redeemable convertible preferred stock warrant liability
56,655 
Change in contingent consideration
(7,704)
Other
216 
(423)
(263)
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable
63,784 
(8,701)
(231,100)
Inventories
92,129 
(61,975)
(68,108)
Prepaid expenses and other assets
(113,111)
(37,876)
(29,215)
Fitbit Force recall reserve
(789)
(3,869)
(17,354)
Accounts payable
(86,115)
45,654 
56,759 
Accrued liabilities and other liabilities
56,172 
213,361 
138,748 
Deferred revenue
(7,472)
5,456 
34,891 
Income taxes payable
(3,488)
47,136 
4,336 
Net cash provided by operating activities
64,241 
138,720 
141,257 
Cash Flows from Investing Activities
 
 
 
Purchase of property and equipment
(89,160)
(78,640)
(30,566)
Purchase of marketable securities
(597,933)
(638,055)
(230,935)
Sales of marketable securities
42,406 
46,511 
58,011 
Maturities of marketable securities
622,525 
315,774 
44,500 
Acquisitions, net of cash acquired
(556)
(38,256)
(11,037)
Equity investment
(6,000)
Net cash used in investing activities
(28,718)
(392,666)
(170,027)
Cash Flows from Financing Activities
 
 
 
Payment of offering costs
(1,236)
(5,089)
Proceeds from issuance of common stock
19,011 
25,969 
4,018 
Taxes paid related to net share settlement of restricted stock units
(14,376)
(4,939)
Proceeds from public offerings, net of underwriting discounts and commissions
505,275 
Proceeds from issuance of debt and revolving credit facility
160,000 
Repayment of debt
(294,503)
Payment of issuance costs
(748)
Net cash provided by financing activities
4,635 
19,794 
368,953 
Net increase (decrease) in cash and cash equivalents
40,158 
(234,152)
340,183 
Effect of exchange rates on cash and cash equivalents
488 
(374)
37 
Cash and cash equivalents at beginning of period
301,320 
535,846 
195,626 
Cash and cash equivalents at end of period
341,966 
301,320 
535,846 
Supplemental Disclosure
 
 
 
Cash paid for interest
1,019 
624 
1,157 
Cash paid for income taxes
382 
34,014 
150,923 
Supplemental Disclosure of Non-Cash Investing and Financing Activity
 
 
 
Purchase of property and equipment included in accounts payable and accrued liabilities
4,197 
19,778 
10,534 
Conversion of redeemable convertible preferred stock into Class B common stock
124,492 
Reclassification of redeemable convertible preferred stock warrant liability to additional paid in capital
15,774 
Issuance of redeemable convertible preferred stock upon net exercise of redeemable convertible preferred stock warrants
56,678 
Deferred offering costs included in accounts payable and accruals
1,080 
Issuance of common stock in connection with acquisitions
13,317 
Contingent consideration related to acquisitions
$ 0 
$ 0 
$ (7,704)
Business Overview and Basis of Presentation
Business Overview and Basis of Presentation
Business Overview and Basis of Presentation
 
Description of Business

Fitbit, Inc. (the “Company”) is a technology company focused on driving health solutions and positively impacting health outcomes. The Fitbit platform combines wearable devices with software and services to give its users tools to help them reach their health and fitness goals. The Company’s wearable devices, which include health and fitness trackers and smartwatches, enable its users to view data about their daily activity, exercise and sleep in real-time. The Company’s software and services, which include an online dashboard and mobile app, provide its users with data analytics, motivational and social tools, and virtual coaching through customized fitness plans and interactive workouts, drive engagement and can be leveraged to provide personalized insights. The Company sells devices through diversified sales channels that include distributors, retailers, a corporate wellness offering, and Fitbit.com. The Company has established wholly-owned subsidiaries globally and its corporate headquarters are located in San Francisco, California.
 
Basis of Presentation and Principles of Consolidation
 
The consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated.

The Company’s fiscal year ends on December 31 of each year. In the first quarter of 2016, the Company adopted a 4-4-5 week quarterly calendar, which, for the 2016 fiscal year, was comprised of four fiscal quarters ending on April 2, 2016, July 2, 2016, October 1, 2016, and December 31, 2016.
 
Use of Estimates
 
The preparation of 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 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 options, 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 number of reportable segments, 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 consolidated financial statements.
 
Comprehensive Income (Loss)
 
Comprehensive income (loss) consists of two components, net income (loss) and other comprehensive income (loss), net of tax. Other comprehensive income refers to revenue, expenses, and gains and losses that are recorded as an element of stockholders’ equity but are excluded from net income (loss). The Company’s other comprehensive income (loss) consists of net unrealized gains and losses on derivative instruments accounted for as cash flow hedges, foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, and unrealized gains and losses on available-for-sale securities.

Out-of-Period Adjustments

During the preparation of the consolidated financial statements as of and for the year ended December 31, 2017, the Company identified errors within the Company’s consolidated balance sheet for the year ended December 31, 2016, which financial statements were revised to correct the errors. The Company determined that within the consolidated balance sheet previously disclosed as of December 31, 2016, deferred revenue was overstated by $7.3 million and other liabilities was understated by the same amount, and deferred tax assets and income taxes payable were understated by $1.7 million. The Company evaluated the error and concluded that it was not material to the financial statements previously issued.

Customer Bankruptcy

In September 2017, Wynit Distribution (“Wynit”) filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. Wynit was the Company’s largest customer, historically representing 11% of total revenue during the six months ended July 1, 2017 and 19% of total accounts receivables as of July 1, 2017. In connection with Wynit’s bankruptcy filing, the Company believed that the collectability of the product shipments to Wynit during the third quarter of 2017 was not reasonably assured. However, as of July 1, 2017, collectability of accounts receivables from Wynit was reasonably assured. 

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 ended September 30, 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.

Non-Monetary Transaction

The Company entered into an agreement with a third party during 2016 to exchange inventory for advertising credits and cash. The Company recorded the transaction based on the estimated fair value of the products exchanged. For the year ended December 31, 2016, the Company recorded $15.0 million of revenue and $7.0 million of associated cost of goods sold upon exchange of the products for advertising credits of $13.0 million and cash of $2.0 million. The $13.0 million of unused advertising credits remaining as of December 31, 2016 were recorded in prepaid expenses and other current assets, and other assets. Such credits are expected to be used over the contractual period of four years, and will be expensed as advertising services are received. During the year ended December 31, 2017, $0.8 million of credits were utilized. The Company’s prepaid and other assets related to unused advertising credits as of December 31, 2017 and December 31, 2016 were $12.2 million and $13.0 million, respectively.
Significant Accounting Policies
Significant Accounting Policies
Significant Accounting Policies
 
Cash, Cash Equivalents and Marketable Securities
 
Cash and cash equivalents include all cash balances and highly liquid investments with original maturities of three months or less from the date of purchase. Cash equivalents and marketable securities consist of money market funds, U.S. government and agency securities, commercial paper, and corporate notes and bonds.
 
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 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 expense, net as incurred. Realized gains and losses on the sale of securities are determined by specific identification of each security’s cost basis. Investments are reviewed periodically to identify possible other-than-temporary impairments. No impairment loss has been recorded on the securities as the Company believes that any 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.
 
Fair Value of Financial Instruments
 
Assets and liabilities recorded at fair value on a recurring basis are categorized based upon the level of judgment associated with inputs used to measure their fair values. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the reporting date.
 
The Company estimates fair value by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
 
Level 1—Quoted prices in active markets for identical assets or liabilities;
 
Level 2—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 for substantially the full term of the assets or liabilities; and
 
Level 3—Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
 
Foreign Currencies

The Company and all of its wholly-owned subsidiaries use the U.S. dollar as their functional currency.

The Company’s subsidiaries that use the U.S. dollar as their functional currency remeasure local currency denominated monetary assets and liabilities at exchange rates in effect at the end of each period, and inventories, property, plant and equipment and other nonmonetary assets and liabilities at historical rates. Gains and losses from these remeasurements have been included in the Company’s operating results within other income (expense), net. Local currency transactions of these international operations are remeasured into U.S. dollars at the rates of exchange in effect at the date of the transaction. Foreign currency transaction gains (losses) were $2.6 million, $11.7 million, and $(1.3) million for 2017, 2016, and 2015, respectively.
 
Derivative Instruments
 
The Company accounts for its derivative instruments as either assets or liabilities and carries them at fair value. Derivatives held by the Company that are not designated as hedges are adjusted to fair value through earnings at each reporting date. In addition, the Company enters into derivatives that are accounted for as cash flow hedges. The Company records the gains or losses, net of tax, related to the effective portion of its cash flow hedges as a component of accumulated other comprehensive income in stockholders’ equity and subsequently reclassifies the gains or losses into revenue and operating expenses when the underlying hedged transactions are recognized. The Company periodically assesses the effectiveness of its cash flow hedges. The fair value of derivative assets and liabilities are included in prepaid expenses and other current assets and accrued liabilities on the consolidated balance sheets.

Concentration of Credit Risk
 
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, marketable securities, accounts receivables, derivative instruments and cost method investments. Cash and cash equivalents are deposited with high quality financial institutions and may, at times, exceed federally insured limits. Management believes that the financial institutions that hold the Company’s deposits are financially credit worthy and, accordingly, minimal credit risk exists with respect to those balances. Generally, these deposits may be redeemed upon demand and, therefore, bear minimal interest rate risk.
 
The Company’s accounts receivable is derived from customers located principally in the United States. The Company maintains credit insurance for the majority of its customer balances, performs ongoing credit evaluations of its customers, and maintains allowances for potential credit losses on customers’ accounts when deemed necessary. Credit losses historically have not been significant. The Company continuously monitors customer payments and maintains an allowance for doubtful accounts based on its assessment of various factors including historical experience, age of the receivable balances, and other current economic conditions or other factors that may affect customers’ ability to pay.
 
The Company’s derivative instruments expose it to credit risk to the extent that its counterparties may be unable to meet the terms of the agreements. The Company seeks to mitigate this risk by limiting counterparties to major financial institutions and by spreading the risk across several major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored on an ongoing basis.
 
Supplier Concentration
 
The Company relies on third parties for the supply and manufacture of its products, as well as third-party logistics providers. In instances where these parties fail to perform their obligations, the Company may be unable to find alternative suppliers or satisfactorily deliver its products to its customers on time, if at all.
 
Inventories
 
Inventories consist of finished goods and component parts, which are purchased from contract manufacturers and component suppliers. Inventories are stated at the lower of cost or net realizable value. The Company assesses the valuation of inventory and periodically writes down the value for estimated excess and obsolete inventory based upon estimates of future demand and market conditions.
 
Property and Equipment, Net
 
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets. Cost of maintenance and repairs that do not improve or extend the lives of the respective assets are expensed as incurred.
 
The useful lives of the property and equipment are as follows:
Tooling and manufacturing equipment
  
One to three years
Furniture and office equipment
  
Three years
Purchased software
  
Three years
Capitalized internally-developed software
  
Two to eight years
Leasehold improvements
  
Shorter of remaining lease term or ten years

 
Internally-Developed Software Costs
 
The Company capitalizes eligible costs to acquire, develop, or modify internal-use software that are incurred subsequent to the preliminary project stage. Capitalized internally-developed software costs, net, were $11.2 million as of December 31, 2017 and $6.3 million as of December 31, 2016.
 
Research and Development
 
Research and development expenses consist primarily of personnel-related expenses, consulting and contractor expenses, tooling and prototype materials, and allocated overhead costs. Substantially all of the Company’s research and development expenses are related to developing new products and services and improving existing products and services. To date, research and development expenses have been expensed as incurred, because the release of products and services for sale has been short and development costs qualifying for capitalization have been insignificant.
 
Business Combinations, Goodwill, and Intangible Assets
 
The Company allocates the fair value of purchase consideration to tangible assets, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is allocated to goodwill. The allocation of the purchase consideration requires management to make significant estimates and assumptions, especially with respect to intangible assets. These estimates can include, but are not limited to, future expected cash flows from acquired customers, acquired technology, and trade names from a market participant perspective, useful lives, and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which is up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
 
The Company assesses goodwill for impairment at least annually during the fourth quarter and whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. Consistent with the determination that the Company has one operating segment, the Company has determined that there is one reporting unit and tests goodwill for impairment at the entity level. Goodwill is tested using the two-step process in accordance with ASC 350, Intangibles—Goodwill and Other. In the first step, the carrying amount of the reporting unit is compared to the fair value based on the fair value of the Company’s common stock. If the fair value of the reporting unit exceeds the carrying value, goodwill is not considered impaired and no further testing is required. If the carrying value of the reporting unit exceeds the fair value, goodwill is potentially impaired and the second step of the impairment test must be performed. In the second step, the implied fair value of the goodwill, as defined by ASC 350, is compared to its carrying amount to determine the amount of impairment loss, if any. The Company tested goodwill for impairment as of October 31, 2017 and 2016, and the fair value of the reporting unit exceeded the carrying value. The Company considered other factors in the performance of the annual goodwill impairment test in the fourth quarter of 2017, including assumptions about expected future revenue forecasts, changes in the overall economy, trends in its stock price, and other operating conditions.  It is reasonably possible that the Company could perform significantly below its expectations or a deterioration of market and economic conditions could occur. This would adversely impact the Company's ability to meet its projected results, which could cause its goodwill to become impaired. If the Company determines that its goodwill is impaired, it would be required to record a non-cash charge that could have a material adverse effect on its results of operations and financial position.
 
Acquired finite-lived intangible assets are amortized over their estimated useful lives. The Company evaluates the recoverability of intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review indicates that the carrying amount of intangible assets is not recoverable, the carrying amount of such assets is reduced to fair value. The Company has not recorded any such impairment charge during the years presented.
 
Impairment of Long-Lived Assets
 
The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amounts to the expected future undiscounted cash flows attributable to these assets. If it is determined that an asset is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the assets exceeds the expected discounted future cash flows arising from those assets.
 
Revenue Recognition
 
The Company derives substantially all of its revenue from sales of its wearable devices, which includes both connected health and fitness devices and accessories and smartwatches. The Company also generates a small portion of revenue from its subscription-based services. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is reasonably assured. The Company considers delivery of its products to have occurred once title and risk of loss has been transferred. For customers where transfer of risk of loss is at the customer’s destination, the Company uses estimates to defer sales at the end of the reporting period based on historical experience of average transit time. The Company recognizes revenue, net of estimated sales returns, sales incentives, discounts, and sales tax. The Company generally recognizes revenue for products sold through retailers and distributors on a sell-in basis.
 
The Company enters into multiple element arrangements that include hardware, software, and services. The first deliverable is the hardware and firmware essential to the functionality of the connected health and fitness device or smartwatch delivered at the time of sale. The second deliverable is the software services included with the products, which are provided free of charge and enable users to sync, view, and access real-time data on the Company’s online dashboard and mobile apps. The third deliverable is the embedded right included with the purchase of the device to receive, on a when-and-if-available basis, future unspecified firmware upgrades and features relating to the product’s essential firmware. Commencing in the first quarter of 2015, the Company began accounting for the embedded right as a separate unit of accounting, which is when it believes, through public announcements, it had created an implied obligation to, from time to time, provide future unspecified firmware upgrades and features to the firmware to improve and add new functionality to the health and fitness devices. In addition, the Company occasionally offers a fourth deliverable in bundled arrangements that allows access to subscription-based services related to the Company’s Fitbit Coach offering.
 
The Company allocates revenue to all deliverables based on their relative selling prices. The Company uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence (“VSOE”) of fair value, (ii) third-party evidence (“TPE”), and (iii) best estimate of the selling price (“BESP”). The Company’s process for determining its BESP considers multiple factors including consumer behaviors and the Company’s internal pricing model and may vary depending upon the facts and circumstances related to each deliverable. BESP for the health and fitness devices and smartwatches and unspecified upgrade rights reflect the Company’s best estimate of the selling prices if they were sold regularly on a stand-alone basis and comprise the majority of the arrangement consideration. BESP for upgrade rights currently ranges from $1 to $3. TPE for the online dashboard and mobile apps is currently estimated at $0.99. VSOE for access to Fitbit Coach subscription-based services is based on the price charged when sold separately.
 
Amounts allocated to the delivered wearable devices are recognized at the time of delivery, provided the other conditions for revenue recognition have been met. Amounts allocated to the online dashboard and mobile apps and unspecified upgrade rights are deferred and recognized on a straight-line basis over the estimated usage period.
 
The Company offers its users the ability to purchase subscription-based services, through which the users receive incremental features, including access to a digital personal trainer, in-depth analytics regarding the user’s personal metrics, or video-based customized workouts. Amounts paid for subscriptions are deferred and recognized ratably over the service period which is typically one year. Revenue from subscription-based services was less than 1% of revenue for all periods presented.
 
In addition, the Company offers access to software and services to certain customers in the corporate wellness program, which includes distribution capabilities, a real-time dashboard, and support services. The Company is currently unable to establish VSOE or TPE for the corporate wellness software and services. BESP for the corporate wellness software and services is determined based on the Company’s internal pricing model for anticipated renewals for existing customers and pricing for new customers. Revenue allocated to the corporate wellness software and services is deferred and recognized on a straight-line basis over the estimated access period of one year, which is the typical service period. Revenue for corporate wellness software and services was less than 1% of revenue for all periods presented.
 
The Company accounts for shipping and handling fees billed to customers as revenue. Sales taxes and value added taxes (“VAT”) collected from customers are remitted to governmental authorities are not included in revenue, and are reflected as a liability on the consolidated balance sheets.
 
Rights of Return, Stock Rotation Rights, and Price Protection
 
The Company offers limited rights of return, stock rotation rights, and price protection under various policies and programs with its retailer and distributor customers and end-users. Below is a summary of the general provisions of such policies and programs:

Retailers and distributors are generally allowed to return products that were originally sold through to an end-user under provisions of their contracts, called “open-box” returns, and such returns may be made at any time after the original sale.
All purchases through Fitbit.com are covered by a 45-day right of return.
Certain distributors are allowed stock rotation rights which are limited rights of return of products purchased during a prior period, generally one quarter.
Certain distributors and retailers are allowed return rights for defective products.
Certain distributors are offered price protection that allows for the right to a partial credit for unsold inventory held by the distributor if the Company reduces the selling price of a product.

The Company estimates reserves for these policies and programs based on historical experience, and records the reserves as a reduction of revenue and accounts receivable. Through December 31, 2017, actual returns have primarily been open-box returns. In addition, through 2017, the Company has had limited price protection claims. On a quarterly basis, the amount of revenue that is reserved for future returns is calculated based on historical trends and data specific to each reporting period. The historical trends consider product life cycles, new product introductions, market acceptance of products, product sell-through, the type of customer, seasonality, and other factors. Return rates can fluctuate over time, but have been sufficiently predictable to allow the Company to estimate expected future product returns. The Company reviews the actual returns evidenced in prior quarters as a percent of related revenue to determine the historical rate of returns. The Company then applies the historical rate of returns to the current period revenue as a basis for estimating future returns. When necessary, the Company also provides a specific reserve for products in the distribution channel in excess of estimated requirements. This estimate can be affected by the amount of a particular product in the channel, the rate of sell-through, product plans, and other factors. The Company also considers whether there are circumstances which may result in anticipated returns higher than the historical return rate from direct customers and records an additional specific reserve as necessary. The estimates and assumptions used to reserve for rights of return, stock rotation rights, and price protection have been accurate in all material respects and have not materially changed in the past.
 
Sales Incentives
 
The Company offers sales incentives through various programs, consisting primarily of cooperative advertising and marketing development fund programs. The Company records advertising and marketing development fund programs with customers as a reduction to revenue unless it receives an identifiable benefit in exchange for credits claimed by the customer and can reasonably estimate the fair value of the identifiable benefit received, in which case the Company records it as a marketing expense. The Company recognizes a liability and reduces revenue for rebates or other incentives based on the estimated amount of rebates or credits that will be claimed by customers.
 
Cost of Revenue
 
Cost of revenue consists of product costs, including costs of contract manufacturers for production, shipping and handling costs, packaging, warranty replacement costs, fulfillment costs, manufacturing and tooling equipment depreciation, warehousing costs, excess and obsolete inventory write-downs, costs related to the Fitbit Force product recall, and certain allocated costs related to management, facilities, and personnel-related expenses and other expenses associated with supply chain logistics.
 
Advertising Costs and Point of Purchase (“POP”) Displays
 
Costs related to advertising and promotions, excluding cooperative advertising costs, are expensed to sales and marketing as incurred. Advertising and promotion expenses, including expenses for POP displays, for 2017, 2016, and 2015 were $226.3 million, $316.8 million, and $237.0 million, respectively. Co-op advertising costs are recorded as a reduction to revenue, and for 2017, 2016, and 2015 were $45.0 million, $52.9 million, and $38.3 million, respectively.
 
The Company provides retailers with POP displays, generally free of charge, in order to facilitate the marketing of the Company’s products within retail stores. Any amounts capitalized related to the costs of the POP displays are recorded as prepaid expenses and other current assets on the consolidated balance sheets and recognized as expense over the expected period of the benefit provided by these assets, which is generally 12 months. The related expenses are included in sales and marketing expenses on the consolidated statements of operations.
 
Product Warranty
 
The Company offers a standard product warranty that its products will operate under normal use for a period of one-year from the date of original purchase, except in the European Union and certain Asia Pacific countries where the Company provides a two-year warranty. The Company has the obligation, at its option, to either repair or replace a defective product. At the time revenue is recognized, an estimate of future warranty costs is recorded as a component of cost of revenues. The estimate of future warranty costs is based on historical and projected warranty claim rates, historical and projected cost-per-claim and knowledge of specific product failures, if any, that are outside of the Company’s typical experience. The Company regularly review these estimates to assess the appropriateness of its recorded warranty liabilities and adjust the amounts as necessary. Factors that affect the warranty obligation include product failure rates, service delivery costs incurred in correcting the product failures, and warranty policies. The Company’s products are manufactured by contract manufacturers, and in certain cases, the Company may have recourse against such contract manufacturers. Should actual product failure rates, use of materials or other costs differ from the Company’s estimates, additional warranty liabilities could be incurred, which could materially affect its results of operations. The estimates and assumptions used to reserve for product warranty have been accurate in all material respects and have not materially changed in the past.
 
Fitbit Force Product Recall
 
The Company established reserves for the Fitbit Force recall when circumstances giving rise to the recall became known. It considered various factors in estimating the product recall exposure. These include estimates for:
 
refunds and product returns from retailer and distributor customers and end-users, which were charged to revenue and cost of revenue on the consolidated statements of operations;
logistics and handling fees for managing product returns and processing refunds, obsolescence of on-hand inventory, cancellation charges for existing purchase commitments and rework of component inventory by the Company’s contract manufacturers, accelerated depreciation of tooling and manufacturing equipment, which were charged to cost of revenue on the consolidated statements of operations; and
legal fees and settlement costs, which were charged to general and administrative expenses on the consolidated statements of operations.

These factors above are updated and reevaluated each period and the related reserves are adjusted when factors indicate that the recall reserves are either insufficient to cover or exceed the estimated product recall expenses.
 
Stock-Based Compensation
 
Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is generally the vesting period of the respective award. Determining the fair value of stock-based awards at the grant date requires judgment. The fair value of restricted stock units, or RSUs, is the fair value of the Company’s common stock on the grant date. The Company uses the Black-Scholes option-pricing model to determine the fair value of stock options, warrants and shares issued under the 2015 Employee Stock Purchase Plan (the “2015 ESPP”).
 
The Company recognizes tax benefits related to stock-based compensation to the extent that the total reduction to its income tax liability from stock-based compensation is greater than the amount of the deferred tax assets previously recorded in anticipation of these benefits.

Segment Information
 
The Company operates as one operating segment as it only reports financial information on an aggregate and consolidated basis to its Chief Executive Officer, who is the Company’s chief operating decision maker.
 
Income Taxes
 
The Company utilizes the asset and liability method of accounting for income taxes, which requires the recognition of deferred tax assets and liabilities for expected future consequences of temporary differences between the financial reporting and income tax bases of assets and liabilities using enacted tax rates. The Company makes estimates, assumptions, and judgments to determine our expense (benefit) for income taxes and also for deferred tax assets and liabilities and any valuation allowances recorded against its deferred tax assets. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes that recovery is not likely, the Company establishes a valuation allowance.
 
The calculation of the Company’s income tax expense involves the use of estimates, assumptions, and judgments while taking into account current tax laws, its interpretation of current tax laws, and possible outcomes of future tax audits. The Company has established reserves to address potential exposures related to tax positions that could be challenged by tax authorities. Although the Company believes its estimates, assumptions, and judgments to be reasonable, any changes in tax law or its interpretation of tax laws and the resolutions of potential tax audits could significantly impact the amounts provided for income taxes in its consolidated financial statements.

The U.S. Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) was enacted on December 22, 2017, and includes several key tax provisions that affected the Company, including a reduction of the statutory corporate tax rate from 35% to 21% effective for tax years beginning after December 31, 2017, elimination of the carryback of net operating losses generated after December 31, 2017, and changes to how the United States imposes income tax on multinational corporations, among others. The 2017 Tax Act requires complex computations to be performed that were not previously required in U.S. tax law, and preparation and analysis of information not previously required or regularly produced, which require significant judgment in interpreting accounting guidance for such items that is currently uncertain. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. The Company has provided its best estimate of the impact of the 2017 Tax Act in its year-end income tax provision in accordance with its understanding of the 2017 Tax Act and guidance available as of the date of issuance of these consolidated financial statements. As the Company completes its analysis of the 2017 Tax Act, any subsequent adjustments to provisional amounts that it has recorded may or may not impact its provision for income taxes in the period in which the adjustments are made due to a full valuation allowance on its U.S. deferred tax assets. The Company expects to complete its analysis within the measurement period in accordance with SAB 118.

The calculation of the Company’s deferred tax asset balance involves the use of estimates, assumptions, and judgments while taking into account estimates of the amounts and type of future taxable income. Actual future operating results and the underlying amount and type of income could differ materially from its estimates, assumptions, and judgments, thereby impacting its financial position and operating results.
 
The Company includes interest and penalties related to unrecognized tax benefits within income tax expense. Interest and penalties related to unrecognized tax benefits have been recognized in the appropriate periods presented.
 
Net Income (Loss) per Share Attributable to Common Stockholders
 
Basic and diluted net income (loss) per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities. The Company considers its redeemable convertible preferred stock to be participating securities. The holders of the redeemable convertible preferred stock did not have a contractual obligation to share in losses. In accordance with the two-class method, earnings allocated to these participating securities and the related number of outstanding shares of the participating securities, which include contractual participation rights in undistributed earnings, have been excluded from the computation of basic and diluted net income per share attributable to common stockholders. For the calculation of diluted net income per share, net income attributable to common stockholders for basic net income per share is adjusted by the effect of dilutive securities. Diluted net income per share attributable to common stockholders is computed by dividing the net income attributable to common stockholders by the weighted-average number of common shares outstanding, including all potentially dilutive common shares, if the effect of such shares is dilutive.
 
In connection with the Company’s Initial Public Offering (“IPO”) in 2015, the Company established two classes of authorized common stock: Class A common stock and Class B common stock. As a result, all then-outstanding shares of common stock were converted into shares of Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to ten votes per share. Each share of Class B common stock is convertible at any time at the option of the stockholder into one share of Class A common stock, generally automatically converts into Class A common stock upon a transfer, and has no expiration date. The Company applies the two-class method of calculating earnings per share, but as the dividend rights of both classes are identical, basic and diluted earnings per share are the same for both classes.
 
As the Company was in a net loss position in 2017 and 2016, basic net loss per share attributable to common stockholders was the same as diluted net loss per share attributable to common stockholders as the inclusion of all potential shares of common stock outstanding would have been anti-dilutive.
 
Recent Accounting Pronouncements
 
Accounting Pronouncements Not Yet Adopted
 
In May 2014, the Financial Accounting Standards Board (the “FASB”), issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which affects any entity that either enters into contracts with customers to transfer goods and services or enters into contracts for the transfer of nonfinancial assets. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under the currently effective guidance. These judgments may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In April 2016, the FASB issued ASU 2016-10, which clarifies guidance on identifying performance obligations and licensing implementation. The Company will adopt ASU 2014-09 effective January 1, 2018, utilizing the modified retrospective transition method. Upon adoption, the Company will recognize the cumulative effect of adopting this guidance as an adjustment to its opening accumulated deficit balance. The Company expects this adjustment to be immaterial to its consolidated financial statements. Prior periods will not be retrospectively adjusted. The Company has assessed the impact of the guidance, which includes evaluating customer contracts across the organization, developing policies, processes and tools to report financial results, and implementing and evaluating the Company’s internal control over financial reporting that will be necessary under the new standard. The new standard may, in certain circumstances, impact the timing of when revenue is recognized for products shipped, and the timing and classification of certain sales incentives, which are expected to generally be recognized earlier than historical guidance. In addition, the Company has determined that the presentation of certain reserve balances currently shown net within accounts receivable will be presented as refund liabilities within current liabilities upon adoption. The Company has also determined that the impact of accounting for costs incurred to obtain a contract is immaterial. The Company believes the new guidance is materially consistent with its historical revenue recognition policy. Overall, the Company does not currently expect the adoption to have a material impact on its consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The Company will adopt ASU 2016-01 in its first quarter of 2018. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to recognize right-of-use assets and lease liabilities for operating leases, initially measured at the present value of the lease payments, on the balance sheet. ASU 2016-02 will become effective for the Company on January 1, 2019, and requires adoption using a modified retrospective approach. The Company is currently evaluating the impact of this guidance on its consolidated financial statements. The Company anticipates that the adoption will have a material impact on its consolidated balance sheets, as it will now include a right of use asset and a lease liability for the obligation to make lease payments related to substantially all operating lease arrangements; however, the Company does not expect the adoption to have a material impact on its consolidated statements of operations.

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. ASU 2016-13 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 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). ASU 2016-15 provides guidance intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 provides guidance in a number of situation including, among others, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, distributions received from equity method investees, and classifying cash receipts and payments that have aspects of more than one class of cash flows. ASU 2016-15 will become effective for the Company on January 1, 2018 and early adoption is permitted. The Company does not currently expect the adoption of this guidance to have a material impact on its consolidated financial statements.

    In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The purpose of ASU 2017-01 is to change the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. ASU 2017-01 will become effective for the Company on January 1, 2018. The Company does not expect the adoption of this guidance to have a material impact 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 is currently evaluating the impact of this guidance on its consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 was issued to clarify and reduce both (i) diversity in practice and (ii) cost and complexity when applying the guidance in Topic 718 to a change to the terms and conditions of a share-based payment award. ASU 2017-09 will become effective for the Company on January 1, 2018 with early adoption permitted. The amendments to ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. The Company does not currently expect the adoption of this guidance to have a material impact on its consolidated financial statements.

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 guidance and better portray the economic results of risk management activities in the financial statements. The guidance 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 will become effective for the Company on January 1, 2019 with early adoption permitted. The Company plans to early adopt this new guidance in the first quarter of 2018 and does not expect the adoption will have a material impact on its consolidated financial statements.

Accounting Pronouncements Recently Adopted

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Upon adoption, ASU 2016-09 requires that excess tax benefits for share-based payments be recorded as a reduction of income tax expense and reflected within operating cash flows, rather than being recorded within equity and reflected within financing cash flows. ASU 2016-09 also permits the repurchase of more of an employee’s shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on the Company’s cash flows statement, and provides an accounting policy election to account for forfeitures as they occur. ASU 2016-09 became effective for the Company on January 1, 2017. The adoption of ASU 2016-09 resulted in a cumulative effect adjustment of $4.9 million to increase retained earnings as of January 1, 2017, related to the recognition of previously unrecognized excess tax benefits using the modified retrospective method. The Company elected to apply the change in presentation of excess tax benefits in the consolidated statement of cash flows retrospectively, which resulted in an increase in net cash provided by operations and a decrease in net cash provided by financing activities of $29.2 million for 2016 and $32.1 million for 2015.  The Company also elected to make an accounting policy change to recognize forfeitures starting on January 1, 2017 on a prospective basis.
Fair Value Measurements
Fair Value Measurements
Fair Value Measurements
 
Fair Value Measurement of Financial Assets and Liabilities

The carrying values of the Company’s accounts receivable and accounts payable, 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):
 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Money market funds
$
193,066

 
$

 
$

 
$
193,066

U.S. government agencies

 
79,624

 

 
79,624

Corporate debt securities

 
291,582

 

 
291,582

Total
$
193,066

 
$
371,206

 
$

 
$
564,272

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
2,138

 
$

 
$
2,138

Stock warrant liability

 

 
208

 
208

 
$

 
$
2,138

 
$
208

 
$
2,346

 
 
December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Money market funds
$
50,125

 
$

 
$

 
$
50,125

U.S. government agencies

 
86,526

 

 
86,526

Corporate debt securities

 
390,286

 

 
390,286

Derivative assets

 
10,625

 

 
10,625

Total
$
50,125

 
$
487,437

 
$

 
$
537,562

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
3,780

 
$

 
$
3,780


 
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 4. 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 was no activity relating to Level 3 financial assets or liabilities during 2017 and 2016, and there were no Level 3 financial assets or liabilities as of December 31, 2017 and 2016. There have been no transfers between fair value measurement levels during 2017, 2016 and 2015.

In 2017, the Company acquired an equity ownership interest in a privately-held company in exchange for $6.0 million in cash. This investment is accounted for using the cost method of accounting since the Company is unable to exercise any significant influence. This investment has been recorded at historical cost, classified within “other assets” on the Company’s consolidated balance sheet as of December 31, 2017, and is reviewed for events or changes in circumstances that may have a significant adverse effect on its carrying value. There have been no changes in circumstances or identified events that may have a significant adverse effect on its carrying value.
Financial Instruments
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 the cash, cash equivalents, and marketable securities as of December 31, 2017 (in thousands):
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
Cash and
Cash
Equivalents
 
Marketable
Securities
Cash
$
115,028

 
$

 
$

 
$
115,028

 
$
115,028

 
$

Money market funds
193,066

 

 

 
193,066

 
193,066

 

U.S. government agencies
79,722

 
1

 
(99
)
 
79,624

 
6,595

 
73,029

Corporate debt securities
291,738

 
15

 
(171
)
 
291,582

 
27,277

 
264,305

Total
$
679,554

 
$
16

 
$
(270
)
 
$
679,300

 
$
341,966

 
$
337,334


The following table sets forth the cash, cash equivalents, and marketable securities as of December 31, 2016 (in thousands):
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
Cash and
Cash
Equivalents
 
Marketable
Securities
Cash
$
179,076

 
$

 
$

 
$
179,076

 
$
179,076

 
$

Money market funds
50,125

 

 

 
50,125

 
50,125

 

U.S. government agencies
86,533

 
8

 
(15
)
 
86,526

 

 
86,526

Corporate debt securities
390,466

 
24

 
(204
)
 
390,286

 
72,119

 
318,167

Total
$
706,200

 
$
32

 
$
(219
)
 
$
706,013

 
$
301,320

 
$
404,693


 
The gross unrealized gains or losses on marketable securities as of December 31, 2017 and December 31, 2016 were not material. There were no available-for-sale investments as of December 31, 2017 and December 31, 2016 that have been in a continuous unrealized loss position for greater than twelve months on a material basis.

The following table classifies marketable securities by contractual maturities (in thousands):
 
December 31, 2017
 
December 31, 2016
 
 
Due in one year
$
319,112

 
$
355,152

Due in one to two years
18,222

 
49,541

Total
$
337,334

 
$
404,693



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 has entered 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 the effective portion of 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 and operating expenses when the underlying hedged transactions are recognized. The Company records the gains or losses related to the ineffective and excluded time value portion of the cash flow hedges, if any, immediately in other income (expense), net. 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 in cash flow hedges for forecasted revenue and expense transactions as of December 31, 2017, and $20.0 million and $20.9 million of cash flow hedges for forecasted revenue and expense transactions, respectively, as of December 31, 2016.
 
Balance Sheet Hedges
 
The Company enters into foreign exchange contracts to hedge 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 expense, net and offset the foreign currency gain or loss on the underlying net monetary assets or liabilities.
 
The net notional amount of foreign currency contracts open in U.S. dollar equivalents was $141.2 million and $177.0 million as of December 31, 2017 and December 31, 2016, 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 consolidated balance sheets. The following table presents the fair value of the Company’s foreign currency derivative contracts as of the dates presented (in thousands):
 
 
 
December 31, 2017
 
December 31, 2016
 
Balance Sheet Location
 
Fair
Value
Derivative
Assets
 
Fair
Value
Derivative
Liabilities
 
Fair
Value
Derivative
Assets
 
Fair
Value
Derivative
Liabilities
Cash flow designated hedges
Prepaid expense and other current assets
 
$

 
$

 
$
813

 
$

Cash flow designated hedges
Accrued liabilities
 

 

 

 
1,428

Hedges not designated
Prepaid expense and other current assets
 

 

 
9,812

 

Hedges not designated
Accrued liabilities
 

 
2,138

 

 
2,352

Total fair value of derivative instruments
 
 
$

 
$
2,138

 
$
10,625

 
$
3,780


 
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 consolidated statement of operations for the periods presented (in thousands): 
 
 
 
Year Ended
December 31,
 
Income Statement Location
 
2017
 
2016
 
2015
Foreign exchange cash flow hedges:
 
 
 
 
 
 
 
Gain (loss) recognized in OCI—effective portion
 
 
$
(19,436
)
 
$
8,171

 
$
2,785

Gain (loss) reclassified from OCI into income—effective portion
Revenue
 
(18,532
)
 
10,153

 
2,183

Gain (loss) reclassified from OCI into income—effective portion
Operating expenses
 
(1,405
)
 
17

 
(899
)
Gain (loss) recognized in income—ineffective portion
Other income (expense), net
 
21

 
(1,026
)
 
202

Gain (loss) recognized in income—excluded time value portion
Other income (expense), net
 
1,771

 

 

Foreign exchange balance sheet hedges:
 
 
 
 
 
 
 
Gain (loss) recognized in income
Other income (expense), net
 
$
(10,516
)
 
$
10,916

 
$
5,861


 
As of December 31, 2017, all net derivative gains related to the Company’s cash flow hedges will be reclassified from OCI into net income (loss) 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 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 table sets forth the available offsetting of net derivative assets and net derivative liabilities under the master netting arrangements as of December 31, 2017 and December 31, 2016 (in thousands):
 
December 31, 2017
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Gross Amounts Not Offset in Consolidated Balance Sheets
 
Gross Amount Recognized
 
Gross Amount Offset
 
Net Amount Presented
Financial Instruments
 
Cash Collateral Received
 
Net Amount
Foreign exchange contracts assets
$

 
$

 
$

 
$

 
$

 
$

Foreign exchange contracts liabilities
2,138

 

 
2,138

 

 

 
2,138


 
December 31, 2016
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Gross Amounts Not Offset in Consolidated Balance Sheets
 
Gross Amounts Recognized
 
Gross Amounts Offset
 
Net Amount Presented
Financial
Instruments
 
Cash Collateral
 Received
 
Net
Amount
Foreign exchange contracts assets
$
10,625

 
$

 
$
10,625

 
$
3,780

 
$

 
$
6,845

Foreign exchange contracts liabilities
3,780

 

 
3,780

 
3,780

 

 

Balance Sheet Components
Balance Sheet Components
Balance Sheet Components
 
Allowance for Doubtful Accounts and Revenue Returns Reserve
 
Changes in the allowance for doubtful accounts and revenue returns reserve were as follows (in thousands):
 
Allowance for
Doubtful
Accounts
 
Revenue Returns
Reserve(1)
Balance at December 31, 2014
838

 
26,559

Increases
1,115

 
169,677

Write-offs/returns taken
(128
)
 
(122,191
)
Balance at December 31, 2015
1,825

 
74,045

Increases
339

 
275,815

Write-offs/returns taken
(1,882
)
 
(251,009
)
Balance at December 31, 2016
282

 
98,851

Increases(2)
30,551

 
229,610

Write-offs/returns taken(2)
(21,604
)
 
(218,589
)
Balance at December 31, 2017
$
9,229

 
$
109,872



(1) Increases in the revenue returns reserve include provisions for open box returns and stock rotations.
(2) Change primarily related to the Wynit bankruptcy. See Note 1 for additional information.

Inventories
 
Inventories consisted of the following (in thousands):
 
December 31,
 
2017
 
2016
Components
$
3,825

 
$
1,035

Finished goods
120,070

 
229,352

Total inventories
$
123,895

 
$
230,387


 

Prepaid Expenses and Other Current Assets
 
Prepaid expenses and other current assets consisted of the following (in thousands):
 
December 31,
 
2017
 
2016
POP displays, net
$
14,750

 
$
22,804

Prepaid expenses
24,204

 
17,161

Derivative assets

 
10,625

Prepaid marketing
6,074

 
5,764

Insurance receivable
37,300

 

Other
14,941

 
9,511

Total prepaid expenses and other current assets
$
97,269

 
$
65,865


 
Property and Equipment, Net
 
Property and equipment, net, consisted of the following (in thousands):
 
December 31,
 
2017
 
2016
Tooling and manufacturing equipment
$
66,854

 
$
60,944

Furniture and office equipment
20,942

 
14,424

Purchased and internally-developed software
18,112

 
12,032

Leasehold improvements
58,431

 
28,489

Total property and equipment
164,339

 
115,889

Less: Accumulated depreciation and amortization
(59,431
)
 
(39,336
)
Property and equipment, net
$
104,908

 
$
76,553



Total depreciation and amortization expense related to property and equipment, net was $40.0 million and $36.0 million for 2017 and 2016, respectively.


Goodwill and Intangible Assets
 
The changes in the carrying amount of goodwill were as follows (in thousands). See Note 12 for additional information.
 
Goodwill
Balance at December 31, 2015
$
22,157

Goodwill acquired
28,879

Balance at December 31, 2016
$
51,036

Goodwill acquired

Balance at December 31, 2017
$
51,036


 
The carrying amounts of the intangible assets as of December 31, 2017 and December 31, 2016 were as follows (in thousands, except useful life). See Note 12 for additional information. During 2017, the development was completed for certain technology that was in-process at the time of its acquisition. Accordingly, $3.9 million of in-process research and development recorded in the initial purchase price allocation has been reclassified to developed technology as of December 31, 2017.
 
December 31, 2017
 
December 31, 2016
 
Weighted Average Remaining Useful Life
(years)
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Developed technology
$
30,588

 
$
(8,738
)
 
$
21,850

 
$
26,092

 
$
(3,247
)
 
$
22,845

 
4.0
Trademarks and other
1,278

 
(772
)
 
506

 
1,278

 
(542
)
 
736

 
0.9
Total finite-lived intangible assets subject to amortization, net
31,866

 
(9,510
)
 
22,356

 
27,370

 
(3,789
)
 
23,581

 
 
In-process research and development

 

 

 
3,940

 

 
3,940

 
 
Total intangible assets, net
$
31,866

 
$
(9,510
)
 
$
22,356

 
$
31,310

 
$
(3,789
)
 
$
27,521

 
 
 
Total amortization expense related to intangible assets was $5.7 million and $2.1 million for 2017 and 2016, respectively.
 
The estimated future amortization expense of acquired finite-lived intangible assets to be charged to cost of revenue and operating expenses after 2017, is as follows (in thousands):
 
Cost of
Revenue
 
Operating
Expenses
 
Total
2018
$
6,120

 
$
230

 
$
6,350

2019
5,340

 
230

 
5,570

2020
4,560

 
46

 
4,606

2021
4,560

 

 
4,560

2022
1,270

 

 
1,270

Total intangible assets, net
$
21,850

 
$
506

 
$
22,356


 
Accrued Liabilities
 
Accrued liabilities consisted of the following (in thousands):
 
December 31,
 
2017
 
2016
Product warranty
$
87,882

 
$
99,923

Accrued manufacturing expense and freight
41,901

 
75,579

Accrued sales incentives
111,592

 
74,181

Accrued sales and marketing
44,401

 
41,948

Accrued research and development
8,983

 
5,989

Accrued co-op advertising and marketing development funds
30,408

 
40,002

Employee-related liabilities
33,266

 
13,934

Sales taxes and VAT payable
21,340

 
8,891

Inventory received but not billed
10,526

 
7,363

Accrued legal settlements and fees
36,693

 
3,963

Derivative liabilities
2,138

 
3,780

Other
23,007

 
15,008

Accrued liabilities
$
452,137

 
$
390,561



Product warranty reserve activities were as follows (in thousands):
 
 
 
Reserve For
Product
Warranty (1)
Balance at December 31, 2014
$
20,098

Charged to cost of revenue
84,184

Changes in estimate related to pre-existing warranties
(8,968
)
Settlement of claims
(55,102
)
Balance at December 31, 2015
$
40,212

Charged to cost of revenue
185,434

Changes in estimate related to pre-existing warranties
4,072

Settlement of claims
(129,795
)
Balance at December 31, 2016
$
99,923

Charged to cost of revenue
53,840

Changes in estimate related to pre-existing warranties
11,788

Settlement of claims
(77,669
)
Balance at December 31, 2017
$
87,882

(1)
Does not include reserves established as a result of the recall of the Fitbit Force. See the section titled “—Fitbit Force Recall Reserve” for additional information regarding such reserves.

The Company corrected the allocation of customer support costs and freight and fulfillment to the amounts in “Charged to cost of revenue” and “Settlement of claims” for the year ended December 31, 2016, which resulted in an increase in “Charged to cost of revenue” and “Settlement of claims” of $50.7 million. These costs are included in the warranty reserve beginning and ending balances. The Company does not consider this correction to be material and there was no impact to its consolidated balance sheets, statement of operations, and statement of cash flows.

During 2017 and 2016, changes related to pre-existing warranties resulted primarily from an increase in the estimated cost of replacement units. During 2015, changes in estimate related to pre-existing warranties resulted from a reduction in the estimated number of units to be replaced and in the estimated cost of replacement units based on additional historical experience.
 
Fitbit Force Recall Reserve
 
In March 2014, the Company announced a recall for one of its products, the Fitbit Force (“Fitbit Force Recall”). The product recall, which is regulated by the U.S. Consumer Product Safety Commission, covered all Fitbit Force units sold since the product was first introduced in October 2013. The product recall program has no expiration date.
 
As a result of the Fitbit Force recall, the Company established reserves that include cost estimates for customer refunds, logistics and handling fees for managing product returns and processing refunds, obsolescence of on-hand inventory, cancellation charges for existing purchase commitments and rework of component inventory with the contract manufacturer, accelerated depreciation of tooling and manufacturing equipment, and legal settlement costs.
 
Fitbit Force recall reserve activities were as follows (in thousands):
 
 
 
Reserve For
Fitbit Force
Recall
Balance at December 31, 2014
$
22,476

Charged to cost of revenue
(5,755
)
Charged to general and administrative
(1,174
)
Settlement of claims
(10,425
)
Balance at December 31, 2015
5,122

Settlement of claims
(3,869
)
Balance at December 31, 2016
1,253

Settlement of claims
(789
)
Balance at December 31, 2017
$
464



During 2015, a benefit to cost of revenue of $5.8 million was recognized due to a change in estimate of costs to fulfill Fitbit Force returns. In addition, a benefit to legal expenses of $4.4 million was recognized in general and administrative costs, of which $1.2 million was previously included in the Fitbit Force recall reserve due to the settlement of Fitbit Force legal liabilities.

Restructuring

In January 2017, the Company announced cost-efficiency measures to be implemented in 2017 that include realigning sales and marketing spend and improved optimization of research and development investments. In addition, the Company announced a reorganization, including a reduction in workforce. This reorganization impacted approximately 110 employees, or approximately 6% of the Company’s global workforce. The Company recorded $6.4 million in total restructuring expenses, substantially all of which were severance and related costs, in the first quarter of 2017. The Company completed the reorganization in the fourth quarter of 2017.

The restructuring reserve activities were as follows (in thousands):
 
Restructuring Reserve
Balance at December 31, 2016
$

Restructuring charges
6,375

Cash paid
(4,983
)
Other - noncash
(1,392
)
Balance at December 31, 2017
$



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 on Cash Flow Hedges
 
Currency Translation Adjustments
 
Unrealized Gains (Losses) on Available-for-Sale Investments
 
Total
Balance at December 31, 2015
$
751

 
$
(5
)
 
$
(55
)
 
$
691

Other comprehensive income (loss) before reclassifications
9,422

 
(309
)
 
(126
)
 
8,987

Amounts reclassified from AOCI
(10,650
)
 

 
(6
)
 
(10,656
)
Other comprehensive income (loss)
(1,228
)
 
(309
)
 
(132
)
 
(1,669
)
Balance at December 31, 2016
(477
)
 
(314
)
 
(187
)
 
(978
)
Other comprehensive income (loss) before reclassifications
(19,422
)
 
314

 
125

 
(18,983
)
Amounts reclassified from AOCI
19,965

 

 
(13
)
 
19,952

Other comprehensive income (loss)
543

 
314

 
112

 
969

Balance at December 31, 2017
$
66

 
$

 
$
(75
)
 
$
(9
)
Long-Term Debt
Long-Term Debt
Debt
 
2015 Credit Agreement
 
In December 2015, the Company entered into a second amended and restated credit agreement (the “Senior Facility”) with Silicon Valley Bank (“SVB”), as administrative agent, collateral agent, and lender, SunTrust Bank as syndication agent, SunTrust Robinson Humphrey, Inc. and several other lenders to replace the existing asset-based credit facility and cash flow facility. The Senior Facility allowed the Company to borrow up to $250.0 million, including up to $50.0 million for the issuance of letters of credit and up to $25.0 million for swing line loans, subject to certain financial covenants and ratios. The Company has the option to repay its borrowings under the Senior Facility without penalty prior to maturity. The Senior Facility requires the Company to comply with certain financial and non-financial covenants. The Senior Facility contains customary covenants that restrict the Company’s ability to, among other things, incur additional indebtedness, sell certain assets, guarantee certain obligations of third parties, declare dividends or make certain distributions, and undergo a merger or consolidation or certain other transactions. Obligations under the Senior Facility are collateralized by substantially all of the Company’s assets, excluding its intellectual property.

In May 2017, the Company entered into a first amendment to the Senior Facility (the “First Amendment”), pursuant to which the aggregate amount the Company can borrow under the Senior Facility was reduced from $250.0 million to $100.0 million, with up to $50.0 million available for the issuance of letters of credit and up to $25.0 million available for swing line loans. In addition, pursuant to the First Amendment, the applicable margin in respect of the interest rates under the Senior Facility was amended to be based on the Company’s level of liquidity (defined as the sum of the Company’s aggregate cash holdings and the amount available under its revolving commitments) and range from, with respect to Alternate Base Rate loans, 0.5% to 1.0%, and, with respect to LIBOR loans, 1.5% to 2.0%. Among other changes, the First Amendment also removed the fixed charge coverage ratio covenant and the consolidated leverage ratio covenant, and added a general liquidity covenant requiring the Company to maintain liquidity of at least $200.0 million in unrestricted cash, of which $100.0 million in cash or cash equivalents must be held in accounts subject to control agreements with, and maintained by, SVB or its affiliates.
 
The Company was in compliance with the financial covenants under the Senior Facility as of December 31, 2017. As of December 31, 2017, the Company had no outstanding borrowings under the Senior Facility and had outstanding letters of credit totaling $36.9 million, issued to cover various security deposits on its facility leases.

Capitalized issuance costs are amortized to interest expense over the term of the related financing arrangement on a straight-line basis. Interest expense related to issuance costs for 2017, 2016, and 2015 was $1.1 million, $0.5 million, and $1.0 million, respectively. As of December 31, 2017, capitalized issuance costs were $0.6 million.
 
Letters of Credit
 
As of December 31, 2017 and 2016, the Company had outstanding letters of credit of $36.9 million and $38.0 million, respectively, issued to cover the security deposit on the lease of its office headquarters in San Francisco, California, and other facility leases.
Commitments and Contingencies
Commitments and Contingencies
Commitments and Contingencies
 
Leases
 
The Company’s principal facility is located in San Francisco, California. The Company also leases office space in various locations with expiration dates between 2018 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. All of Company’s leases are accounted for as operating leases.
 
Rent expense is recorded over the lease terms on a straight-line basis. Rent expense was $40.0 million, $29.9 million, and $8.4 million for 2017, 2016, and 2015, respectively.

Future minimum payments under the leases as of December 31, 2017 were as follows (in thousands):
 
 
Year ending December 31,
Amounts
2018
$
40,856

2019
46,713

2020
42,942

2021
41,331

2022
41,477

Thereafter
58,879

Total
$
272,198


 
Purchase Commitments
 
The aggregate amount of open purchase orders as of December 31, 2017 was approximately $157.7 million. 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 reduce 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 December 31, 2017, $21.8 million was accrued for such liabilities to contract manufacturers.
 
Legal Proceedings 

Jawbone. On May 27, 2015, Aliphcom, Inc. d/b/a Jawbone (“Jawbone”), filed a lawsuit in the Superior Court of California in the County of San Francisco against the Company and certain of its employees who were formerly employed by Jawbone, alleging trade secret misappropriation and unfair and unlawful business practices against all defendants, and alleging breach of contract and breach of implied covenant of good faith and fair dealing against the employee defendants. The complaint sought unspecified damages, including punitive damages and injunctive relief. On June 23, 2016, Jawbone filed a Second Amended Complaint, adding an additional employee defendant and related allegations. The trial was currently scheduled for April 30, 2018.

On June 10, 2015, Jawbone and BodyMedia, Inc., a wholly-owned subsidiary of Jawbone (“BodyMedia”), filed a lawsuit against the Company in the U.S. District Court for the Northern District of California alleging that the Company infringes certain U.S. patents. The complaint sought unspecified compensatory damages and attorneys’ fees from the Company and to permanently enjoin the Company from making, manufacturing, using, selling, importing, or offering the Company’s products for sale. The lawsuit was stayed pending resolution the investigation in the U.S. International Trade Commission (the “ITC”).
 
On July 7, 2015, Jawbone and BodyMedia filed a complaint with the ITC requesting an investigation into purported violations of the Tariff Act of 1930 by the Company and Flextronics International Ltd. and Flextronics Sales and Marketing (A-P) Ltd. The complaint makes the same patent infringement and trade secret misappropriation claims as the two earlier cases. The complaint seeks a limited exclusion order and a cease and desist order halting the importation and sale of the infringing products. The ITC instituted the investigation on August 17, 2015. As a result of motions, all of the patent infringement claims were dismissed from the case. A trial on the trade secrets allegations took place from May 9 to 17, 2016. On August 23, 2016, the administrative law judge concluded that the Company did not misappropriate any Jawbone trade secrets. On October 20, 2016, the ITC terminated the investigation in the ITC. Jawbone appealed the dismissal of the patent infringement claims to the Federal Circuit. Oral argument was scheduled for November 9, 2017.
 
On September 3, 2015, the Company filed a complaint for patent infringement against Jawbone in the U.S. District Court for the District of Delaware, asserting that Jawbone’s activity trackers infringe certain U.S. patents. This case was transferred to the U.S. District Court for the Northern District of California. The trial was scheduled for July 13, 2020. On September 8, 2015, the Company filed a complaint for patent infringement against Jawbone in the U.S. District Court for the Northern District of California, asserting that Jawbone’s activity trackers infringe certain U.S. patents. No trial date was set. On October 29, 2015, the Company filed a complaint for patent infringement against Jawbone in the U.S. District Court for the District of Delaware, asserting that Jawbone’s activity trackers infringe certain U.S. patents. That case was also transferred to the U.S. District Court for the Northern District of California. No trial date was set.

On November 2, 2015, the Company filed a complaint with the ITC requesting an investigation into violations of the Tariff Act of 1930 by Jawbone and Body Media. The complaint asserted that Jawbone’s products infringe certain U.S. patents. The complaint sought a limited exclusion order and a cease and desist order halting the importation and sale of infringing products. The ITC instituted the investigation on December 1, 2015. On December 23, 2016, the Company filed a motion to terminate the investigation, and the ITC terminated the investigation on February 1, 2017.

On December 8, 2017, the parties announced the global settlement of all of the outstanding civil litigation on confidential terms. Each of the pending cases has been 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, the Company received a subpoena for documents from the same office. On February 1, 2018, the Company received a second subpoena for documents. The Company is cooperating with the U.S. Attorney’s Office.

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 seek class certification, restitution, an award of unspecified compensatory and punitive damages, an award of reasonable costs and expenses, including attorneys’ fees, and other further relief as the Court may deem just and proper. 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. The Company’s motion for summary judgment was denied on December 8, 2017. Trial has been scheduled for April 30, 2018.

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.

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 and unfair competition statutes, and seek class certification, injunctive and declaratory relief, restitution, an award of unspecified compensatory damages, exemplary damages, punitive damages, and statutory penalties and damages, an award of reasonable costs and expenses, including attorneys’ fees, and other further relief as the Court may deem just and proper. On April 15, 2016, the plaintiffs filed a Consolidated Master Class Action Complaint and, on May 19, 2016, 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.

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.

Securities Litigation. On January 11, 2016, a putative securities class action was filed in the U.S. District Court for the Northern District of California naming as defendants the Company, certain of its officers and directors, and the underwriters of the Company’s IPO. On May 10, 2016, the Court appointed the Fitbit Investor Group (consisting of five individual investors) as lead plaintiff, and an Amended Complaint was filed on July 1, 2016. Plaintiffs allege violations of the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended, based on alleged materially false and misleading statements about the Company’s products between October 27, 2014 and November 23, 2015. Plaintiffs seek to represent a class of persons who purchased or otherwise acquired the Company’s securities (i) on the open market between June 18, 2015 and May 19, 2016; and/or (ii) pursuant to or traceable to the IPO. Plaintiffs seek class certification, an award of unspecified compensatory damages, an award of reasonable costs and expenses, including attorneys’ fees, and other further relief as the Court may deem just and proper. On July 29, 2016, the Company filed a motion to dismiss. The court denied the motion on October 26, 2016. On April 26, 2017, the Company filed a motion for summary judgment, which is still pending.

On April 28, 2016, a putative class action lawsuit alleging violations of the Securities Act was filed in the Superior Court of California, County of San Mateo, naming as defendants the Company, certain of its officers and directors, the underwriters of the IPO, and a number of its investors. Plaintiffs allege that the IPO registration statement contained material misstatements about the Company’s products. Plaintiffs seek to represent a class of persons who purchased the Company’s common stock in and/or traceable to the IPO and/or the November 2015 follow-on public offering (the “Secondary Offering”). Plaintiffs seek class certification, an award of unspecified compensatory damages, an award of reasonable costs and expenses, including attorneys’ fees, and other further relief as the Court may deem just and proper. On May 17, 2016, a similar class action lawsuit was filed in the Superior Court of California, County of San Francisco. The cases have now been consolidated in the County of San Francisco. On April 7, 2017, the Court granted a motion to dismiss the Section 11 claim based on the Secondary Offering and stayed the cases.

On January 8, 2018, the plaintiffs in the federal and class action cases filed their motion for preliminary approval of settlement of the putative federal and state class actions for $33.3 million. The settlement remains subject to further court approval. On January 19, 2018, the court entered an order preliminarily approving the proposed settlement. A hearing is currently scheduled for April 20, 2018 to determine whether the settlement is fair, reasonable, and accurate. Refer to Note 14. Subsequent Events for more information.

On November 11, 2016, a derivative lawsuit was filed in the U.S. District Court for the Northern District of California derivatively on behalf of the Company naming as defendants certain of its officers and directors and as a nominal plaintiff the Company. Plaintiffs alleges breach of fiduciary duty, unjust enrichment, section 14(a), and misappropriation based on the same set of alleged facts in the federal and state securities class action litigation. On February 2, 2017, a second derivative lawsuit was filed in the U.S. District Court for the District of Delaware on the same allegations and also including claims for abuse of control, gross mismanagement, and waste. On June 27, 2017, another derivative law suit was filed in the U.S. District Court for the Northern District of California on the same allegations. The Courts have ordered a stay in all three cases.

On June 1, 2017 and June 9, 2017, two additional derivative lawsuits were filed in the Delaware Court of Chancery. Plaintiffs allege breach of fiduciary duty and insider trading against certain defendants who sold shares in the IPO and/or the Secondary Offering. On August 3, 2017, another derivative lawsuit was filed in the Delaware Court of Chancery on the same allegations. There is temporary stay in all three cases.

On October 31, 2017, a seventh derivative lawsuit was filed in the Superior Court of California, Country of San Francisco, on the same allegations. We have not yet been served in that case.

On June 27, 2017, an individual investor lawsuit alleging violations of the Securities Act and state law claims for statutory fraud and unfair business practice was filed in the Superior Court of California, County of Alameda, naming as defendants the Company and certain of its officers. The allegations are based on the same set of alleged facts in the federal and state securities class action litigation.

The Company believes that the plaintiffs’ allegations in the derivative actions and individual action 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.

Indemnifications
 
In the ordinary course of business, the Company enters into 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.
Stockholders' Equity
Stockholders' Equity
Stockholders’ Equity
 
Initial public offering and follow-on offering

In June 2015, the Company completed its IPO of Class A common stock, in which the Company issued and sold 22.4 million shares and certain of its stockholders sold 19.7 million shares, for which the Company did not receive any proceeds, including 5.5 million shares pursuant to the underwriters’ option to purchase additional shares. The shares were sold at an initial public offering price of $20.00 per share for net proceeds of $420.9 million to the Company, after deducting underwriting discounts and commissions of $26.9 million. Offering costs incurred by the Company were approximately $5.0 million.

In November 2015, the Company completed a follow-on offering of Class A common stock, in which the Company sold 3.0 million shares and certain of its stockholders sold 16.6 million shares, for which the Company did not receive any proceeds, including 2.6 million shares pursuant to the underwriters’ option to purchase additional shares. The shares were sold at a public offering price of $29.00 per share for net proceeds of $84.4 million to the Company, after deducting underwriting discounts and commissions of $2.6 million. Offering costs incurred by the Company were approximately $1.2 million.

Redeemable convertible preferred stock and redeemable convertible preferred stock warrants

In connection with the Company’s IPO, the then-outstanding 141.3 million shares of redeemable convertible preferred stock were converted into Class B common stock upon the closing of the IPO. In addition, the then-outstanding 0.4 million redeemable convertible preferred stock warrants automatically converted to Class B common stock warrants upon the closing of the IPO. These remaining outstanding Class B common stock warrants were exercised subsequent to the IPO during 2015.

Preferred Stock
 
Upon completion of its IPO on June 22, 2015, the Company filed a Restated Certificate of Incorporation, which authorized the issuance of preferred stock with rights and preferences, including voting rights, designated from time to time by the board of directors. As of December 31, 2017, there were 10 million shares of preferred stock authorized with a par value of $0.0001 per share, and no shares of preferred stock issued or outstanding.
 
Common Stock
 
In connection with the IPO in 2015, the Company established two classes of authorized common stock, Class A common stock and Class B common stock. All shares of common stock outstanding immediately prior to the IPO were converted into an equivalent amount of shares of Class B common stock. As of December 31, 2017, the Company had 600 million shares of Class A common stock authorized with a par value of $0.0001 per share and 350 million shares of Class B common stock authorized with a par value of $0.0001 per share. As of December 31, 2017, the Company 207.5 million shares of Class A common stock were issued and outstanding and 31.3 million shares of Class B common stock were issued and outstanding. As of December 31, 2016, 177.2 million shares of Class A common stock were issued and outstanding and 48.5 million shares of Class B common stock were issued and outstanding.
 
Holders of Class A common stock are entitled to one vote for each share of Class A common stock held on all matters submitted to a vote of stockholders and holders of Class B common stock are entitled to ten votes for each share of Class B common stock held on all matters submitted to a vote of stockholders. Except with respect to voting, the rights of the holders of Class A and Class B common stock are identical. Shares of Class B common stock are voluntarily convertible into shares of Class A common stock at the option of the holder and generally automatically convert into shares of our Class A common stock upon a transfer.

Stock Option Exchange
 
On April 13, 2017, the Company filed its definitive proxy statement, submitting to stockholders a proposal for a stock option exchange program (the “Program”). The Program would allow the Company employees, including its executive officers other than its President, Chief Executive Officer, and Chairman, Chief Technology Officer, and Chief Financial Officer (“Eligible Employees”), to exchange out-of-the-money or “underwater” options to purchase shares of the Company’s Class A common stock or Class B common stock currently held by such Eligible Employees for a lesser number of restricted stock units (“RSUs”) that may be settled for shares of its Class A common stock, (“New RSUs”), under the Company’s 2015 Equity Incentive Plan (the “2015 Plan”). Each New RSU represents an unfunded right to receive one share of the Company’s Class A common stock on a date in the future, which generally is the date on which the New RSU will vest. Eligible Employees participating in the Program would receive one New RSU for every two “out-of-the-money” options that they exchange. The New RSUs would generally vest over the remaining vesting period of the exchanged option (subject to a one-year minimum vesting period). None of the members of the Company’s board of directors were eligible to participate in the Program. On May 25, 2017, the Company’s stockholders approved the Program at the 2017 annual meeting of stockholders. The Company subsequently commenced the Program by filing a tender offer statement on Schedule TO with the Securities and Exchange Commission on June 21, 2017. The Program expired on July 19, 2017. A total of 3.7 million “underwater” stock options were tendered by the Eligible Employees, representing approximately 85% of the stock options eligible for exchange. On July 20, 2017, the Company granted an aggregate of 1.8 million New RSUs under the 2015 Equity Incentive Plan (the “2015 Plan”) in exchange for the “underwater” stock options tendered. The completion of the Program resulted in total incremental unrecognized stock-based compensation expense of $8.5 million, to be recognized over the greater of one year or the remaining vesting service period of the tendered stock options.

2007 Equity Incentive Plan
 
The Amended and Restated 2007 Stock Plan (the “2007 Plan”) provided for the grant of incentive and non-statutory stock options and RSUs to employees, directors, and consultants under terms and provisions established by the board of directors. Stock options granted under the 2007 Plan are generally subject to a four-year vesting period, with 25% vesting after a one-year period and monthly vesting thereafter. Stock options expire after ten years. RSUs granted under the 2007 Plan are generally subject to a three- or four-year vesting period with annual vesting.
 
The 2015 Plan became effective in June 2015. As a result, the Company will not grant any additional stock options under the 2007 Plan and the 2007 Plan has been terminated. Any outstanding stock options and RSUs granted under the 2007 Plan will remain outstanding, subject to the terms of the 2007 Plan and applicable award agreements, until such shares are issued under those awards, by exercise of stock options or settlement of RSUs, or until the awards terminate or expire by their terms.
 
2015 Equity Incentive Plan
 
In May 2015, the Company’s board of directors and stockholders adopted and approved the 2015 Plan. The 2015 Plan became effective in June 2015 and serves as the successor to the 2007 Plan. The remaining shares available for issuance under the 2007 Plan became reserved for issuance under the 2015 Plan. The number of shares reserved for issuance under the 2015 Plan will increase automatically on the first day of January of each year starting in 2016 through 2025 by the number of shares of Class A common stock equal to 5% of the total outstanding shares of common stock as of the immediately preceding December 31. The share reserve may also increase to the extent that outstanding awards expire or terminate un-exercised. As of December 31, 2017, 12.5 million shares were available for grant under the 2015 Plan.
 
The 2015 Plan authorizes the award of stock options, restricted stock awards, stock appreciation rights, RSUs, performance awards, and stock bonuses to employees, directors, consultants, independent contractors, and advisors. In general, stock options and RSUs will vest over a three- or four-year period, and have a maximum term of ten years. The exercise price of a stock option will be not less than 100% of the fair market value of the shares on the date of grant.
 
2015 Employee Stock Purchase Plan
 
In May 2015, the Company’s board of directors adopted the 2015 ESPP, which became effective in June 2015. The number of shares reserved for issuance under the 2015 Plan will increase automatically on the first day of January of each year starting in 2016 through 2025 by the number of shares of Class A common stock equal to 1% of the total outstanding shares of common stock as of the immediately preceding December 31. The 2015 ESPP allows eligible employees to purchase shares of the Company’s Class A common stock at a discount through payroll deductions of up to 15% of eligible compensation, subject to any plan limitations. Except for the initial offering period, the 2015 ESPP provides for 6-month offering periods beginning in May and November of each year. The initial offering period began June 17, 2015, and ended in May 2016. As of December 31, 2017, 4.5 million shares were available for grant under the 2015 Employee Stock Purchase Plan.
 
On each purchase date, eligible employees will purchase Class A common stock at a price per share equal to 85% of the lesser of the fair market value of the Company’s Class A common stock (i) on the first trading day of the applicable offering period and (ii) the last trading day of each purchase period in the applicable offering period.
 
Stock Options
 
Activity under the 2007 Plan and 2015 Plan is as follows (in thousands except per share amounts):
 
Stock Options Outstanding
 
Number of
Shares Subject
to
Stock Options
 
Weighted–
Average
Exercise
Price
 
Weighted–
Average Remaining Contractual Term
(in years)
 
Aggregate
Intrinsic
Value
Balance—December 31, 2016
34,454

 
$
3.85

 
 
 
 
Granted
1,150

 
$
5.63

 
 
 
 
Exercised
(7,164
)
 
$
1.22

 
 
 

Canceled
(7,054
)
 
$
9.35

 
 
 
 
Balance—December 31, 2017
21,386

 
$
3.01

 
5.7
 
$
64,582

Stock options exercisable—December 31, 2017
16,827

 
$
2.52

 
5.3
 
$
57,472

Stock options vested and expected to vest—December 31, 2017
21,386

 
$
3.01

 
5.7
 
$
64,582


 
The aggregate intrinsic values of stock options outstanding, exercisable, vested and expected to vest were calculated as the difference between the exercise price of the stock options and the fair value of the Class A common stock of $5.71 as of December 31, 2017.

Restricted Stock Units
 
RSU activity under the equity incentive plans is as follows:
 
RSUs
Outstanding
 
Weighted-
Average
Grant Date
Fair Value
 
(in thousands)
 
 
Unvested balance—December 31, 2016
11,578

 
$
16.85

Granted
18,912

 
6.47

Vested
(6,191
)
 
12.57

Forfeited or canceled
(5,111
)
 
12.61

Unvested balance—December 31, 2017
19,188

 
9.13


 
Warrants
 
On July 10, 2017, the Company issued a warrant to a third party vendor to purchase 0.5 million shares of Class A common stock. The warrant is exercisable based on service and performance-based conditions and has an exercise price of $5.23 per share and a contractual term of tenyears. As of December 31, 2017, 0.1 million shares have vested.

Stock-Based Compensation Expense
 
Total stock-based compensation recognized was as follows (in thousands):
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
 
 
 
 
 
Cost of revenue
$
5,312

 
$
4,797

 
$
4,739

Research and development
54,123

 
47,207

 
18,251

Sales and marketing
14,959

 
11,575

 
7,419

General and administrative
17,187

 
15,853

 
10,615

Total stock-based compensation expense
$
91,581

 
$
79,432

 
$
41,024


 
The weighted-average grant date fair value of stock options granted during 2017, 2016, and 2015 was $5.63, $14.06, and $10.67 per share, respectively. The total grant date fair value of stock options that vested during 2017, 2016, and 2015 was $20.2 million, $32.9 million, and $18.6 million, respectively. As of December 31, 2017, the total unrecognized compensation expense related to unvested stock options was $11.3 million, which the Company expects to recognize over an estimated weighted average period of 1.4 years. As of December 31, 2017, the total unrecognized compensation expense related to unvested RSUs was $159.0 million, which the Company expects to recognize over an estimated weighted average period of 2.2 years.
 
Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is generally the vesting period of the respective award. The fair value of RSUs is the fair value of the Company’s Class A common stock on the grant date. In determining the fair value of the stock options, warrants and the equity awards issued under the 2015 ESPP, the Company uses the Black-Scholes option-pricing model and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment.
 
Fair Value of Common Stock—The fair value of the shares of common stock underlying stock options had historically been established by the Company’s board of directors. Following the completion of the IPO, the Company began using the market closing price for the Company’s Class A common stock as reported on the New York Stock Exchange.
 
Expected Term—The Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time stock-based awards have been exercisable. As a result, for stock options, the Company used the simplified method to calculate the expected term, which is equal to the average of the stock-based award’s weighted average vesting period and its contractual term. The expected term of the 2015 ESPP is based on the contractual term.
 
Volatility—The Company estimates the expected volatility of the common stock underlying its stock options at the grant date by taking the average historical volatility of the common stock of a group of comparable publicly traded companies over a period equal to the expected life of the stock options.
 
Risk-Free Rate—The risk-free interest rate is estimated average interest rate based on U.S. Treasury zero-coupon notes with terms consistent with the expected term of the awards.
 
Dividend Yield—The Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable future. Consequently, it used an expected dividend yield of zero.
 
The assumptions used in calculating the fair value of the stock-based awards represent management judgment. As a result, if factors change and different assumptions are used, the stock-based compensation expense could be materially different in the future. The fair value of the stock option awards, warrants and awards issued under the 2015 ESPP granted to employees was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions:
 
Year Ended December 31,
 
2017
 
2016
 
2015
Employee stock options
 
 
 
 
 
Expected term (in years)
6.25
 
6.25
 
6.25
Volatility
32.2%
 
40.7%
 
52.1% - 56.9%
Risk-free interest rate
2.1%
 
1.6%
 
1.5% - 1.9%
Dividend yield
—%
 
—%
 
—%
 
 
 
 
 
 
Warrants
 
 
 
 
 
Expected term (in years)
9.5
 
 
Volatility
32.0%
 
—%
 
—%
Risk-free interest rate
2.1%
 
—%
 
—%
Dividend yield
—%
 
—%
 
—%
 
 
 
 
 
 
Employee stock purchase plan
 
 
 
 
 
Expected term (in years)
0.5
 
0.5
 
0.5 – 0.9
Volatility
27.7% - 31.3%
 
30.1% - 39.0%
 
27.7% - 35.0%
Risk-free interest rate
1.0% - 1.4%
 
0.4% - 0.6%
 
0.3%
Dividend yield
—%
 
—%
 
—%
Income Taxes
Income Taxes
Income Taxes
 
The following table presents domestic and foreign components of income (loss) before income taxes for the periods presented (in thousands):
 
Year Ended December 31,
 
2017
 
2016
 
2015
United States
$
(158,187
)
 
$
5,577

 
$
286,380

Foreign
(36,457
)
 
(114,872
)
 
1,569

Total
$
(194,644