FITBIT INC, 10-K filed on 3/1/2019
Annual Report
v3.10.0.1
Document and Entity Information - USD ($)
$ in Billions
12 Months Ended
Dec. 31, 2018
Feb. 20, 2019
Jun. 30, 2018
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, 2018    
Document Fiscal Year Focus 2018    
Document Fiscal Period Focus FY    
Amendment Flag false    
Entity Small Business false    
Entity Emerging Growth Company false    
Entity Shell Company false    
Entity Well-known Seasoned Issuer Yes    
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Public Float     $ 1.4
Common Class A [Member]      
Entity Information [Line Items]      
Entity Common Stock, Shares Outstanding   221,444,789  
Common Class B [Member]      
Entity Information [Line Items]      
Entity Common Stock, Shares Outstanding   31,281,638  
v3.10.0.1
Consolidated Balance Sheets - USD ($)
$ in Thousands
Dec. 31, 2018
Dec. 31, 2017
Current assets:    
Cash and cash equivalents $ 473,956 $ 341,966
Marketable securities 249,493 337,334
Accounts receivable, net 414,209 406,019
Inventories 124,871 123,895
Income tax receivable 6,957 77,882
Prepaid expenses and other current assets 42,325 97,269
Total current assets 1,311,811 1,384,365
Property and equipment, net 106,286 104,908
Goodwill 60,979 51,036
Intangible assets, net 23,620 22,356
Deferred tax assets 4,489 3,990
Other assets 8,362 15,420
Total assets 1,515,547 1,582,075
Current liabilities:    
Accounts payable 251,657 212,731
Accrued liabilities 437,234 452,137
Deferred revenue 29,400 35,504
Income taxes payable 1,092 928
Total current liabilities 719,383 701,300
Long-term deferred revenue 7,436 6,928
Other liabilities 52,790 49,884
Total liabilities 779,609 758,112
Commitments and contingencies (Note 7)
Stockholders’ equity:    
Preferred stock, $0.0001 par value, 10,000,000 shares authorized 0 0
Additional paid-in capital 1,055,046 956,060
Accumulated other comprehensive loss (66) (9)
Accumulated deficit (319,067) (132,112)
Total stockholders’ equity 735,938 823,963
Total liabilities and stockholders’ equity 1,515,547 1,582,075
Class A common stock, $0.0001 par value, 600,000,000 shares authorized; 221,081,203 and 207,453,624 shares issued and outstanding as of December 31, 2018 and 2017, respectively [Member]    
Stockholders’ equity:    
Common stock 22 21
Class B common stock, $0.0001 par value, 350,000,000 shares authorized; 31,281,638 and 31,302,898 shares issued and outstanding as of December 31, 2018 and 2017, respectively [Member]    
Stockholders’ equity:    
Common stock $ 3 $ 3
v3.10.0.1
Consolidated Balance Sheets (Parenthetical) - $ / shares
Dec. 31, 2018
Dec. 31, 2017
Preferred stock, par value (in dollars per share) $ 0.0001 $ 0.0001
Preferred stock, authorized (in shares) 10,000,000 10,000,000
Class A common stock, $0.0001 par value, 600,000,000 shares authorized; 221,081,203 and 207,453,624 shares issued and outstanding as of December 31, 2018 and 2017, respectively [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) 221,081,203 207,453,624
Common stock outstanding (in shares) 221,081,203 207,453,624
Class B common stock, $0.0001 par value, 350,000,000 shares authorized; 31,281,638 and 31,302,898 shares issued and outstanding as of December 31, 2018 and 2017, respectively [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) 31,281,638 31,302,898
Common stock outstanding (in shares) 31,281,638 31,302,898
v3.10.0.1
Consolidated Statements of Operations - USD ($)
shares in Thousands, $ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Income Statement [Abstract]      
Revenue $ 1,511,983 $ 1,615,519 $ 2,169,461
Cost of revenue 908,404 924,618 1,323,577
Gross profit 603,579 690,901 845,884
Operating expenses:      
Research and development 332,169 343,012 320,191
Sales and marketing 344,091 415,042 491,255
General and administrative 116,627 133,934 146,903
Total operating expenses 792,887 891,988 958,349
Operating loss (189,308) (201,087) (112,465)
Interest income, net 7,808 3,647 3,156
Other income (expense), net (2,642) 2,796 14
Loss before income taxes (184,142) (194,644) (109,295)
Income tax expense (benefit) 1,687 82,548 (6,518)
Net loss $ (185,829) $ (277,192) $ (102,777)
Net loss per share attributable to common stockholders:      
Basic (in dollars per share) $ (0.76) $ (1.19) $ (0.47)
Diluted (in dollars per share) $ (0.76) $ (1.19) $ (0.47)
Shares used to compute net loss per share attributable to common stockholders:      
Basic (in shares) 244,603 232,032 220,405
Diluted (in shares) 244,603 232,032 220,405
v3.10.0.1
Consolidated Statements of Comprehensive Loss - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Statement of Comprehensive Income [Abstract]      
Net loss $ (185,829) $ (277,192) $ (102,777)
Cash flow hedges:      
Change in unrealized gain (loss) on cash flow hedges, net of tax expense (benefit) of $819, ($1) and ($1,251), respectively 7,587 (19,422) 9,422
Less reclassification for realized net (gain) loss included in net loss, net of tax expense of ($819), $74 and $509, respectively (7,587) 19,965 (10,650)
Net change, net of tax 0 543 (1,228)
Available-for-sale investments:      
Change in unrealized gain (loss) on investments (68) 125 (126)
Less reclassification for realized net (gain) loss included in net loss 11 (13) (6)
Net change, net of tax (57) 112 (132)
Change in foreign currency translation adjustment, net of tax 0 314 (309)
Comprehensive loss $ (185,886) $ (276,223) $ (104,446)
v3.10.0.1
Consolidated Statements of Comprehensive Loss (Parenthetical) - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Statement of Comprehensive Income [Abstract]      
Change in unrealized gain on cash flow hedges, tax $ 819 $ (1) $ (1,251)
Reclassification for realized net gains included in net income, tax $ (819) $ 74 $ 509
v3.10.0.1
Consolidated Statements of Stockholders' Equity (Deficit) Statement - USD ($)
shares in Thousands, $ in Thousands
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Retained Earnings (Accumulated Deficit) [Member]
Beginning balance (in shares) at Dec. 31, 2015   214,781,573      
Beginning balance at Dec. 31, 2015 $ 981,451 $ 21 $ 737,820 $ 691 $ 242,919
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 $ 2 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 loss (102,777)       (102,777)
Other comprehensive Income (loss) (1,669)     (1,669)  
Ending balance (in shares) at Dec. 31, 2016   225,663,277      
Ending balance at Dec. 31, 2016 998,532 $ 23 859,345 (978) 140,142
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 $ 1 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 | Accounting Standards Update 2016-09 [Member] 4,938       4,938
Net loss (277,192)       (277,192)
Other comprehensive Income (loss) 969     969  
Ending balance (in shares) at Dec. 31, 2017   238,756,522      
Ending balance at Dec. 31, 2017 823,963 $ 24 956,060 (9) (132,112)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Issuance of common stock upon exercise of stock options (in shares)   13,606,319      
Issuance of common stock upon exercise of stock options 21,470 $ 1 21,469    
Stock-based compensation expense 96,953   96,953    
Taxes related to net share settlement of restricted stock units (19,436)   (19,436)    
Net loss (185,829)       (185,829)
Other comprehensive Income (loss) (57)     (57)  
Ending balance (in shares) at Dec. 31, 2018   252,362,841      
Ending balance at Dec. 31, 2018 $ 735,938 $ 25 $ 1,055,046 $ (66) $ (319,067)
v3.10.0.1
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Cash Flows from Operating Activities      
Net loss $ (185,829) $ (277,192) $ (102,777)
Adjustments to reconcile net loss to net cash provided by operating activities:      
Provision for doubtful accounts 56 7,893 339
Provision for excess and obsolete inventory 11,828 14,833 4,993
Depreciation 48,889 39,971 36,046
Amortization of intangible assets 7,926 5,722 2,087
Accelerated depreciation of property and equipment 7,731 5,250 19,805
Amortization of issuance costs and discount on debt 785 951 466
Stock-based compensation 97,009 91,581 79,432
Deferred income taxes (2,548) 173,906 (100,434)
Impairment of equity investment 6,000 0 0
Other (1,395) 216 (423)
Changes in operating assets and liabilities, net of acquisitions:      
Accounts receivable (8,036) 63,784 (8,701)
Inventories (12,860) 92,129 (61,975)
Prepaid expenses and other assets 125,914 (113,111) (37,876)
Fitbit force recall reserve (445) (789) (3,869)
Accounts payable 35,207 (86,115) 45,654
Accrued liabilities and other liabilities (11,978) 56,172 213,361
Deferred revenue (5,622) (7,472) 5,456
Income taxes payable 575 (3,488) 47,136
Net cash provided by operating activities 113,207 64,241 138,720
Cash Flows from Investing Activities      
Purchase of property and equipment (52,880) (89,160) (78,640)
Purchase of marketable securities (353,948) (597,933) (638,055)
Sales of marketable securities 9,983 42,406 46,511
Maturities of marketable securities 433,594 622,525 315,774
Acquisitions, net of cash acquired (19,253) (556) (38,256)
Equity investment 0 (6,000) 0
Net cash provided by (used in) investing activities 17,496 (28,718) (392,666)
Cash Flows from Financing Activities      
Repayment of debt 747 0 0
Payment of offering costs 0 0 (1,236)
Proceeds from issuance of common stock 21,470 19,011 25,969
Taxes paid related to net share settlement of restricted stock units (19,436) (14,376) (4,939)
Net cash provided by financing activities 1,287 4,635 19,794
Net increase (decrease) in cash and cash equivalents 131,990 40,158 (234,152)
Effect of exchange rate changes on cash and cash equivalents 0 488 (374)
Cash and cash equivalents at beginning of period 341,966 301,320 535,846
Cash and cash equivalents at end of period 473,956 341,966 301,320
Supplemental Disclosure      
Cash paid for interest 631 1,019 624
Cash paid (received) for income taxes, net of $72 million income tax refund in 2018 (69,868) 382 34,014
Supplemental Disclosure of Non-Cash Investing and Financing Activity      
Purchase of property and equipment included in accounts payable and accrued liabilities 6,615 4,197 19,778
Property acquired under capital leases $ 2,700 $ 0 $ 0
v3.10.0.1
Business Overview and Basis of Presentation
12 Months Ended
Dec. 31, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
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 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, Fitbit Health Solutions, 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. The Company operates on a 4-4-5 week quarterly calendar.
 
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-based awards, fair value of derivative assets and liabilities, allowance for doubtful accounts, inventory valuation, fair value of goodwill and acquired tangible and intangible assets and liabilities assumed during acquisitions, the number of reportable segments, the recoverability of intangible assets and their useful lives, contingencies, income taxes, recoverability of unused advertising credits, and impairment of an equity investment. Actual results could differ from those estimates, and such differences may be material to the consolidated financial statements.
 
Comprehensive Loss
 
Comprehensive loss consists of two components, net loss and other comprehensive loss, net of tax. Other comprehensive loss refers to revenue, expenses, and gains and losses that are recorded as an element of stockholders’ equity but are excluded from net loss. The Company’s other comprehensive 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.

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.

During 2018, the Company released $12.4 million in product return and rebate reserves related to Wynit, as it believes the possibility of future claims associated with these reserves is remote. This reserve release resulted in a $12.4 million increase in revenue during the year ended December 31, 2018.

Non-Monetary Transaction

The Company entered into an agreement with a third party during 2016 to exchange inventory for advertising credits and cash, which was amended in October 2018 to extend the contractual period from four to six years. 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 six years, and will be expensed as advertising services are received. During the year ended December 31, 2018 and 2017, $2.3 million and $0.8 million, respectively, of credits were utilized. The Company’s prepaid and other assets related to unused advertising credits as of December 31, 2018 and December 31, 2017 were $9.9 million and $12.2 million, respectively.
v3.10.0.1
Significant Accounting Policies
12 Months Ended
Dec. 31, 2018
Accounting Policies [Abstract]  
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 (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 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 were $4.6 million, $2.6 million, and $11.7 million for 2018, 2017, and 2016, 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 (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 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, and derivative instruments. Cash is deposited with high quality financial institutions and may, at times, exceed federally insured limits. The Company’s Investment Policy requires that cash equivalents and marketable securities are invested only in investment grade securities and limits the amount of credit exposure to any single issuance, issuer, or type of investment. 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, not yet placed in service were $2.6 million as of December 31, 2018 and $11.2 million as of December 31, 2017.
 
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 immaterial.
 
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, 2018 and 2017, 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 2018, 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. The Company has not recorded any such impairment charge during the years presented.
 
Revenue Recognition

The Company recognizes revenue upon transfer of control of promised goods or services to customers at transaction price, an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. Transaction price is calculated as selling price net of variable consideration which may include estimates for future returns and sales incentives related to current period product revenue.

Products and Services

The Company derives substantially all of its revenue from sales of its wearable devices, which includes trackers, smartwatches and accessories. The Company also generates a small portion of revenue from its subscription-based services. The Company considers delivery of its products to have occurred once control has transferred and delivery of services to have occurred as control is transferred. The Company recognizes revenue, net of estimated sales returns, sales incentives, discounts, and sales tax.

Arrangements with Multiple Performance Obligations

The Company enters into contracts that have multiple performance obligations that include hardware, software, and services. The first performance obligation is the hardware and firmware essential to the functionality of the tracker or smartwatch delivered at the time of sale. The second performance obligation 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 performance obligation 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. In addition, the Company occasionally offers a fourth performance obligation in bundled arrangements that allows access to subscription-based services related to the Company’s Fitbit Coach offering.

The Company allocates revenue to all performance obligations based on their relative standalone selling prices (“SSP”). The Company’s process for determining its SSP considers multiple factors including consumer behaviors, the Company’s internal pricing model, and cost-plus margin and may vary depending upon the facts and circumstances related to each deliverable. SSP for the trackers and smartwatches 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. SSP for upgrade rights currently ranges from $1.00 to $3.00. SSP for the online dashboard and mobile apps is currently estimated at $0.99. SSP 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 subscription-based software and services to certain customers in Fitness Health Solutions, which includes a real-time dashboard, and the ability to create corporate challenges. SSP for the Fitness Health Solutions subscription 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 Fitness Health Solutions subscription 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 Fitness Health Solutions software and services was less than 1% of revenue for all periods presented.

The Company applies a practical expedient to expense costs to obtain a contract with a customer as incurred when the amortization period would be one year or less. The Company applies a practical expedient to not consider the effect of a significant financing component as it expects that the period between transfer of control and payment from customer to be one year or less.

The Company accounts for shipping and handling fees billed to customers as revenue. Sales taxes and value added taxes (“VAT”) collected from customers which 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 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 an accrued liability. Through December 31, 2018, actual returns have primarily been open-box returns. 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 pricing promotions to retailers and distributors. The Company records advertising with customers as a reduction to revenue unless it receives a distinct benefit in exchange for credits claimed by the customer and can reasonably estimate the fair value of the distinct 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.

Refer to Note 11, “Significant Customer Information and Other Information,” for disaggregated revenue by geographic region, based on ship-to destinations.
 
Cost of Revenue
 
Cost of revenue consists of product costs, including costs of contract manufacturers for production, shipping and handling costs, warranty replacement costs, packaging, fulfillment costs, manufacturing and tooling equipment depreciation, warehousing costs, hosting costs, write-downs of excess and obsolete inventory, amortization of developed technology intangible assets acquired, and certain allocated costs related to management, facilities, and personnel-related expenses and other expenses associated with supply chain logistics. Personnel-related expenses include salaries, bonuses, benefits, and stock-based compensation.
 
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 2018, 2017, and 2016 were $161.5 million, $226.3 million and $316.8 million, respectively. Co-op advertising costs are recorded as a reduction to revenue, and for 2018, 2017, and 2016 were $80.3 million, $45.0 million and $52.9 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.
 
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, without market conditions is the fair value of the Company’s common stock on the grant date. The Company estimates the fair value of RSUs subject to market conditions using a Monte Carlo simulation model. 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 its 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 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 from 2016 through 2018, 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 February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-02, Leases (Topic 842) and subsequent amendments to the initial guidance; ASU 2017-13, ASU 2018-10 and ASU 2018-11 (collectively, Topic 842). Topic 842 requires lessees to recognize right-of-use assets and lease liabilities for operating leases, initially measured at the present value of the lease payments, on the balance sheet. Topic 842 will become effective for the Company on January 1, 2019, and requires adoption using a modified retrospective approach. The Company has assessed the impact of the guidance, which includes evaluating contracts, developing policies, processes and information technology tools to report financial results, and implementing and evaluating the Company’s internal controls over financial reporting that will be necessary under the new standard. The Company will adopt Topic 842 utilizing the modified retrospective transition method through a cumulative-effect adjustment on January 1, 2019, and will not restate comparative periods. Upon adoption, the Company elected the transition package of practical expedients permitted within the new standard, which allows the carryforward of the assessment of whether contracts contain or are leases, historical lease classification, and remaining lease terms. Based on the Company’s lease portfolio, it anticipates recording right-of-use assets between a range of approximately $95.0 million to $115.0 million and aggregate current and non-current liabilities between a range of approximately $125.0 million to $145.0 million on its consolidated balance sheet. However, the Company does not expect the adoption to have a material impact on its consolidated statement of operations or consolidated statement of cash flows.

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 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 February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. Under existing U.S. GAAP, the effects of changes in tax rates and laws on deferred tax balances are recorded as a component of income tax expense in the period in which the law was enacted. When deferred tax balances related to items originally recorded in accumulated other comprehensive income are adjusted, certain tax effects become stranded in accumulated other comprehensive income. The amendments in ASU No. 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”). The amendments in ASU No. 2018-02 also require certain disclosures about stranded tax effects. The guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The Company does not expect the impact of adoption to have a material impact on its consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 will become effective for the Company on January 1, 2019 and early adoption is permitted. The Company does not expect adoption of this guidance will have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements on fair value measurements and will become effective for the Company on January 1, 2020 and early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 clarifies the accounting for implementation costs in cloud computing arrangements and will become effective for the Company on January 1, 2020 and early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

Accounting Pronouncements Recently Adopted

In May 2014, 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. 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.

The Company adopted ASU 2014-09 effective January 1, 2018, utilizing the modified retrospective transition method. Prior periods were not retrospectively adjusted. Upon adoption, the Company recognized an immaterial cumulative effect of adopting this guidance as an adjustment to its opening accumulated deficit balance. The new standard impacted the timing of when revenue is recognized for certain products shipped, and the timing and classification of certain sales incentives, which are generally recognized earlier than historical guidance. The Company believes the new guidance is materially consistent with its historical revenue recognition policy. In addition, ASU 2014-09 requires the presentation of sales returns reserve as a current liability. The Company’s sales return reserve was $104.0 million as of December 31, 2018, presented within “Accrued liabilities” and was $109.9 million as of December 31, 2017, presented within “Accounts receivable, net.”

The impact to revenue, accounts receivable, deferred revenue, and accrued liabilities as a result of applying ASU 2014-09 for the year ended or as of December 31, 2018 was as follows (in thousands):
 
Year Ended December 31, 2018
 
Under ASC 605
 
Impact
 
Under ASC 606
 
 
 
 
 
 
Revenue
$
1,511,999

 
$
(16
)
 
$
1,511,983

Accounts receivable, net
310,208

 
104,001

 
414,209

Deferred revenue
37,635

 
(799
)
 
36,836

Accrued liabilities
333,201

 
104,033

 
437,234

Accumulated deficit
(319,052
)
 
(15
)
 
(319,067
)


The impact to other financial statement line items was immaterial. Adoption of the standard had no impact to net cash from or used in operating, investing, or financing activities in the Company’s consolidated statement of cash flows.

In January 2016, the FASB issued ASU 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 has elected to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The adoption of this standard did not have a material impact on the Company’s 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 situations 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 became effective for the Company on January 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes: Intra-Entity Transfers Other than Inventory (Topic 740), which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The Company adopted ASU No. 2016-16 on January 1, 2018, and the adoption of the guidance did not 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 became effective for the Company on January 1, 2018. The adoption of this standard did not have a material impact on the Company’s 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 became effective for the Company on January 1, 2018. The adoption of this standard did not have a material impact on the Company’s 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 standard and better portray the economic results of risk management activities in the financial statements. The standard expands the ability to hedge non-financial and financial risk components, reduces complexity in fair value hedges of interest rate risk, eliminates the requirement to separately measure and report hedge ineffectiveness, as well as eases certain hedge effectiveness assessment requirements. The Company early adopted this new standard in the first quarter of 2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
v3.10.0.1
Fair Value Measurements
12 Months Ended
Dec. 31, 2018
Fair Value Disclosures [Abstract]  
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, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Money market funds
$
273,546

 
$

 
$

 
$
273,546

U.S. government agencies

 
72,840

 

 
72,840

Corporate debt securities

 
228,953

 

 
228,953

Derivative assets

 
623

 

 
623

Total
$
273,546

 
$
302,416

 
$

 
$
575,962

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
549

 
$

 
$
549

Stock warrant liability

 

 
410

 
410

Total
$

 
$
549

 
$
410

 
$
959

 
 
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

Total
$

 
$
2,138

 
$
208

 
$
2,346


 
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 were no Level 3 financial assets during 2018 and 2017. There were Level 3 financial liabilities as of December 31, 2018 and December 31, 2017. There have been no transfers between fair value measurement levels during 2018, 2017 and 2016.

In 2017, the Company acquired an equity ownership interest in a privately-held company in exchange for $6.0 million in cash. The Company does not have a controlling interest or the ability to exercise significant influence over the investee, and this investment does not have a readily determinable fair value. Upon adoption of ASU 2016-01 on January 1, 2018, the Company elected to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Such changes in the basis of the equity investment are recognized in “Other income (expense), net” in the Company’s consolidated statement of operations. In 2018, the Company identified events and circumstances that indicated that there was a decline in the fair value of this investment. As a result, the Company performed an assessment of the financial condition, financial forecast, near-term financing prospects, and other factors of the issuer, and concluded that this equity investment was fully impaired and recorded an impairment loss of $6.0 million. This equity investment was classified within “Other assets” on the Company’s consolidated balance sheets as of December 31, 2017.
v3.10.0.1
Financial Instruments
12 Months Ended
Dec. 31, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Financial Instruments
Financial Instruments
 
Cash, Cash Equivalents, and Marketable Securities
 
The Company’s marketable securities are classified as available-for-sale as of the balance sheet date and are reported at fair value with unrealized gains and losses reported, net of tax, as a separate component of accumulated other comprehensive income (loss) in stockholders’ equity. Because the Company views marketable securities as available to support current operations as needed, it has classified all available-for-sale securities as current assets. Realized gains or losses and other-than-temporary impairments, if any, on available-for-sale securities are reported in other income (expense), net, as incurred.

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

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

 
$

 
$

 
$
148,110

 
$
148,110

 
$

Money market funds
273,546

 

 

 
273,546

 
273,546

 

U.S. government agencies
72,884

 
1

 
(45
)
 
72,840

 
9,738

 
63,102

Corporate debt securities
229,040

 

 
(87
)
 
228,953

 
42,562

 
186,391

Total
$
723,580

 
$
1

 
$
(132
)
 
$
723,449

 
$
473,956

 
$
249,493


The 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 gross unrealized gains or losses on marketable securities as of December 31, 2018 and December 31, 2017 were not material. There were no available-for-sale investments as of December 31, 2018 and December 31, 2017 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, 2018
 
December 31, 2017
 
 
Due in one year
$
249,493

 
$
319,112

Due in one to two years

 
18,222

Total
$
249,493

 
$
337,334



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 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. 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. Prior to the adoption of ASU 2017-12, the Company recorded the gains or losses related to the ineffective portion of its cash flow hedges, if any, immediately in other income (expense), net. For the period ended December 31, 2017, the ineffective portion of the Company’s cash flow hedges were not material. For the period ended December 31, 2018, there was no ineffective impact from the Company’s cash flow hedges.
 
The Company had no outstanding contracts that were designated in cash flow hedges for forecasted revenue as of December 31, 2018 and December 31, 2017.
 
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 Company had outstanding balance sheet hedges with a total notional amount of $101.4 million and $141.2 million as of December 31, 2018 and December 31, 2017, 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, 2018
 
December 31, 2017
 
Balance Sheet Location
 
Fair
Value
Derivative
Assets
 
Fair
Value
Derivative
Liabilities
 
Fair
Value
Derivative
Assets
 
Fair
Value
Derivative
Liabilities
Hedges not designated
Prepaid expense and other current assets
 
$
623

 
$

 
$

 
$

Hedges not designated
Accrued liabilities
 

 
549

 

 
2,138

Total fair value of derivative instruments
 
 
$
623

 
$
549

 
$

 
$
2,138


 
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
 
2018
 
2017
 
2016
Foreign exchange cash flow hedges:
 
 
 
 
 
 
 
Gain (loss) recognized in OCI—effective portion
 
 
$
8,405

 
$
(19,436
)
 
$
8,171

Gain (loss) reclassified from OCI into income—effective portion
Revenue
 
8,405

 
(18,532
)
 
10,153

Gain (loss) reclassified from OCI into income—effective portion
Operating expenses
 

 
(1,405
)
 
17

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

 
21

 
(1,026
)
Gain 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
 
$
6,240

 
$
(10,516
)
 
$
10,916


 
As of December 31, 2018, all net derivative gains related to the Company’s cash flow hedges have been reclassified from OCI into net income.
 
Effect of Derivative Contracts on Consolidated Statements of Operations

The following table provides the location in the consolidated statements of operations and amount of the recognized gains or losses to the Company’s derivative instruments designated as hedging instruments (in thousands):
 
Year Ended December 31,
 
2018
 
2017
 
2016
 
 
 
 
 
 
Total amounts presented in the consolidated statement of operations in which the effects of cash flow hedges are recorded in revenue
$
1,511,983

 
$
1,615,519

 
$
2,169,461

Total amounts presented in the consolidated statement of operations in which the effects of cash flow hedges are recorded in operating expenses
792,887

 
891,988

 
958,349

Gain (loss) on foreign exchange contracts designated as cash flow hedges reclassified from OCI into revenue
8,405

 
(18,532
)
 
10,153

Gain (loss) on foreign exchange contracts designated as cash flow hedges reclassified from OCI into operating expenses

 
(1,405
)
 
17



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, 2018 and December 31, 2017 (in thousands):
 
December 31, 2018
 
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
$
623

 
$

 
$
623

 
$
549

 
$

 
$
74

Foreign exchange contracts liabilities
549

 

 
549

 
549

 

 


 
December 31, 2017
 
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
$

 
$

 
$

 
$

 
$

 
$

Foreign exchange contracts liabilities
2,138

 

 
2,138

 

 

 
2,138

v3.10.0.1
Balance Sheet Components
12 Months Ended
Dec. 31, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Balance Sheet Components
Balance Sheet Components
 
Deferred Revenue

Deferred revenue relates to performance obligations for which payments have been received by the customer prior to revenue recognition. Deferred revenue primarily consists of deferred software, or amounts allocated to mobile dashboard and on-line apps and unspecified upgrade rights. Deferred revenue also includes deferred subscription-based services. The deferred software and deferred subscription-based service performance obligations are anticipated to be recognized over the useful life or service periods of twelve to seventeen months.

Changes in the total short-term and long-term deferred revenue balance were as follows (in thousands):
 
December 31,
 
2018
 
2017
 
2016
Beginning balances
$
42,432

 
$
49,904

 
$
44,448

Deferral of revenue
40,003

 
46,193

 
61,226

Recognition of deferred revenue
(45,599
)
 
(53,665
)
 
(55,770
)
Ending balances
$
36,836

 
$
42,432

 
$
49,904



Revenue Returns Reserve
 
Changes in the revenue returns reserve were as follows (in thousands):
 
December 31,
 
2018
 
2017
 
2016
Beginning balances
$
109,872

 
$
98,851

 
$
74,045

Increases (1)
170,957

 
229,610

 
275,815

Returns taken
(176,828
)
 
(218,589
)
 
(251,009
)
Ending balances
$
104,001

 
$
109,872

 
$
98,851


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


Allowance for Doubtful Accounts
 
Changes in the allowance for doubtful accounts were as follows (in thousands):
 
December 31,
 
2018
 
2017(1)
 
2016
Beginning balances
$
9,229

 
$
282

 
$
1,825

Increases
56

 
30,551

 
339

Write-offs
(5,543
)
 
(21,604
)
 
(1,882
)
Ending balances
$
3,742

 
$
9,229

 
$
282


(1) Write-offs in 2017 was primarily related to the Wynit bankruptcy described in Note 1.

Inventories
 
Inventories consisted of the following (in thousands):
 
December 31,
 
2018
 
2017
Components
$
8,866

 
$
3,825

Finished goods
116,005

 
120,070

Total inventories
$
124,871

 
$
123,895


 
Prepaid Expenses and Other Current Assets
 
Prepaid expenses and other current assets consisted of the following (in thousands):
 
December 31,
 
2018
 
2017
Prepaid expenses
$
18,100

 
$
24,204

Point-of-purchase displays, net
5,143

 
14,750

Prepaid marketing
3,258

 
6,074

Derivative assets
623

 

Insurance receivable

 
37,300

Other
15,201

 
14,941

Total prepaid expenses and other current assets
$
42,325

 
$
97,269


 
Property and Equipment, Net
 
Property and equipment, net, consisted of the following (in thousands):
 
December 31,
 
2018
 
2017
Tooling and manufacturing equipment
$
80,685

 
$
66,854

Furniture and office equipment
22,738

 
20,942

Purchased and internally-developed software
21,741

 
18,112

Leasehold improvements
67,715

 
58,431

Total property and equipment
192,879

 
164,339

Less: Accumulated depreciation and amortization
(86,593
)
 
(59,431
)
Property and equipment, net
$
106,286

 
$
104,908



Total depreciation and amortization expense related to property and equipment, net was $48.9 million, $40.0 million and $36.0 million for 2018, 2017 and 2016, respectively.

Goodwill and Intangible Assets
 
The changes in the carrying amount of goodwill were as follows (in thousands):
 
Goodwill
Balance at December 31, 2016
$
51,036

Goodwill acquired

Balance at December 31, 2017
51,036

Goodwill acquired
9,943

Balance at December 31, 2018
$
60,979


 
The carrying amounts of the intangible assets as of December 31, 2018 and December 31, 2017 were as follows (in thousands):
 
December 31, 2018
 
December 31, 2017
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
 
 
 
 
 
 
 
 
 
 
 
 
Developed technology
$
35,988

 
$
(15,983
)
 
$
20,005

 
$
30,588

 
$
(8,738
)
 
$
21,850

Customer relationships
3,790

 
(451
)
 
3,339

 

 

 

Trademarks and other
1,278

 
(1,002
)
 
276

 
1,278

 
(772
)
 
506

Total intangible assets, net
$
41,056

 
$
(17,436
)
 
$
23,620

 
$
31,866

 
$
(9,510
)
 
$
22,356

 
The increase in the carrying amount of goodwill and intangible assets during the year ended December 31, 2018 was attributable to an acquisition in February 2018 described in Note 12, “Acquisitions.”

Total amortization expense related to intangible assets was $7.9 million$5.7 million and $2.1 million for 2018, 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 2018, is as follows (in thousands):
 
Cost of
Revenue
 
Operating
Expenses
 
Total
2019
$
6,634

 
$
827

 
$
7,461

2020
5,854

 
643

 
6,497

2021
5,854

 
597

 
6,451

2022
1,180

 
597

 
1,777

2023

 
597

 
597

Thereafter

 
837

 
837

Total intangible assets, net
$
19,522

 
$
4,098

 
$
23,620


 
Accrued Liabilities
 
Accrued liabilities consisted of the following (in thousands):
 
December 31,
 
2018
 
2017
Accrued sales incentives
$
126,400

 
$
111,592

Sales returns reserve (1)
104,001

 

Product warranty
45,605

 
87,882

Employee-related liabilities
33,916

 
33,266

Accrued co-op advertising and marketing development funds
30,435

 
30,408

Accrued manufacturing expense and freight
21,357

 
41,901

Sales taxes and VAT payable
20,121

 
21,340

Accrued sales and marketing
18,171

 
44,401

Accrued research and development
8,783

 
8,983

Inventory received but not billed
6,373

 
10,526

Accrued legal settlements and fees
2,821

 
36,693

Derivative liabilities
549

 
2,138

Other
18,702

 
23,007

Accrued liabilities
$
437,234

 
$
452,137


(1) The adoption of ASU 2014-09 on January 1, 2018 requires the presentation of sales returns reserve as a current liability. This reserve was reported within “Accounts receivables, net” prior to the adoption of this new standard.


Product warranty reserve activities were as follows (in thousands):
 
December 31,
 
2018
 
2017
 
2016
Beginning balances
$
87,882

 
$
99,923

 
$
40,212

Charged to cost of revenue
15,720

 
53,840

 
185,434

Changes in estimate related to pre-existing warranties (1)
(20,545
)
 
11,788

 
4,072

Settlement of claims
(37,452
)
 
(77,669
)
 
(129,795
)
Ending balances
$
45,605

 
$
87,882

 
$
99,923


(1) During 2018, the change related to pre-existing warranties resulted primarily from improved product quality and a decrease in the estimated cost of replacement units. During 2017 and 2016, changes related to pre-existing warranties resulted primarily from an increase in the estimated cost of replacement units.
 
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.

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 (Losses) on Cash Flow Hedges
 
Currency Translation Adjustments
 
Unrealized Gains (Losses) on Available-for-Sale Investments
 
Total
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
543

 
314

 
112

 
969

Balance at December 31, 2017
66

 

 
(75
)
 
(9
)
Other comprehensive income (loss) before reclassifications
7,587

 

 
(68
)
 
7,519

Amounts reclassified from AOCI
(7,587
)
 

 
11

 
(7,576
)
Other comprehensive loss

 

 
(57
)
 
(57
)
Balance at December 31, 2018
$
66

 
$

 
$
(132
)
 
$
(66
)
v3.10.0.1
Long-Term Debt
12 Months Ended
Dec. 31, 2018
Debt Disclosure [Abstract]  
Long-Term Debt
Long-Term 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.
 
On November 21, 2018, the Company voluntarily terminated the Senior Facility. As of the date of termination, the Company did not have any outstanding borrowings under the Senior Facility but did have outstanding letters of credit totaling $36.6 million, issued to cover various security deposits on its facility leases. In connection with this termination, all outstanding letters of credit issued under the Senior Facility are being held with SVB on an unsecured basis. The Company did not incur any early termination penalties in connection with the termination of the Senior Facility.

Capitalized issuance costs were amortized to interest expense over the term of the related financing arrangement on a straight-line basis. As a result of the voluntary termination of the Senior Facility, the Company wrote-off the remaining capitalized issuance costs of $0.5 million in 2018. Interest expense related to issuance costs for 2018, 2017 and 2016 was $0.6 million, $1.1 million and $0.5 million, respectively.
 
Letters of Credit
 
As of December 31, 2018 and 2017, the Company had outstanding letters of credit of $36.6 million and $36.9 million, respectively, issued to cover the security deposit on the lease of its office headquarters in San Francisco, California, and other facility leases.
v3.10.0.1
Commitments and Contingencies
12 Months Ended
Dec. 31, 2018
Commitments and Contingencies Disclosure [Abstract]  
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 2019 and 2024. The lease agreements often include leasehold improvement incentives, escalating lease payments, renewal provisions and other provisions which require the Company to pay taxes, insurance, maintenance costs or defined rent increases. The Company’s leases are primarily accounted for as operating leases. In June 2018, the Company notified the lessor of its intent to sublease a portion of one of its San Francisco offices. Under the terms of the lease, the lessor has the right to recapture this space. The lessor elected to exercise their recapture right effective August 1, 2018, which resulted in a reduction of approximately $81.4 million in the Company’s future lease obligations associated with this lease.
 
Future minimum payments under the leases as of December 31, 2018 were as follows (in thousands):
 
 
 
 
Year ending December 31,
Capital Leases
 
Operating Leases
2019
$
2,700

 
$
27,473

2020

 
27,655

2021

 
26,931

2022

 
26,801

2023