FITBIT, INC., 10-K filed on 2/27/2020
Annual Report
v3.19.3.a.u2
Cover page - USD ($)
$ in Millions
12 Months Ended
Dec. 31, 2019
Feb. 20, 2020
Feb. 14, 2020
Jun. 28, 2019
Entity Information [Line Items]        
Document Type 10-K      
Document Annual Report true      
Document Transition Report false      
Document Period End Date Dec. 31, 2019      
Entity File Number 001-37444      
Entity Registrant Name FITBIT, INC.      
Entity Incorporation, State or Country Code DE      
Entity Tax Identification Number 20-8920744      
Entity Address, Address Line One 199 Fremont Street      
Entity Address, Address Line Two 14th Floor      
Entity Address, City or Town San Francisco      
Entity Address, State or Province CA      
Entity Address, Postal Zip Code 94105      
City Area Code 415      
Local Phone Number 513-1000      
Title of 12(b) Security Class A Common Stock, $0.0001 par value      
Trading Symbol FIT      
Security Exchange Name NYSE      
Entity Voluntary Filers No      
Entity Interactive Data Current Yes      
Entity Well-known Seasoned Issuer Yes      
Entity Current Reporting Status Yes      
Entity Filer Category Large Accelerated Filer      
Entity Small Business false      
Entity Emerging Growth Company false      
Entity Shell Company false      
Entity Public Float       $ 1,000
Amendment Flag false      
Document Fiscal Year Focus 2019      
Document Fiscal Period Focus FY      
Entity Central Index Key 0001447599      
Current Fiscal Year End Date --12-31      
Common Class A [Member]        
Entity Information [Line Items]        
Entity Common Stock, Shares Outstanding   235,956,941    
Common Class B [Member]        
Entity Information [Line Items]        
Entity Common Stock, Shares Outstanding     29,318,245  
v3.19.3.a.u2
Consolidated Balance Sheets - USD ($)
$ in Thousands
Dec. 31, 2019
Dec. 31, 2018
Current assets:    
Cash and cash equivalents $ 334,479 $ 473,956
Marketable securities 184,023 249,493
Accounts receivable, net 435,269 414,209
Inventories 136,752 124,871
Income tax receivable 573 6,957
Prepaid expenses and other current assets 28,656 42,325
Total current assets 1,119,752 1,311,811
Property and equipment, net 82,756 106,286
Operating lease right-of-use assets 70,225  
Goodwill 64,812 60,979
Intangible assets, net 16,746 23,620
Deferred tax assets 4,111 4,489
Other assets 9,684 8,362
Total assets 1,368,086 1,515,547
Current liabilities:    
Accounts payable 194,626 251,657
Accrued liabilities 513,530 437,234
Operating lease liabilities 23,511  
Deferred revenue 32,307 29,400
Income taxes payable 636 1,092
Total current liabilities 764,610 719,383
Long-term deferred revenue 8,535 7,436
Long-term operating lease liabilities 67,902  
Other liabilities 39,776 52,790
Total liabilities 880,823 779,609
Commitments and contingencies (Note 7)
Stockholders’ equity:    
Preferred stock, $0.0001 par value, 10,000,000 shares authorized 0 0
Additional paid-in capital 1,126,827 1,055,046
Accumulated other comprehensive income (loss) 188 (66)
Accumulated deficit (639,778) (319,067)
Total stockholders’ equity 487,263 735,938
Total liabilities and stockholders’ equity $ 1,368,086 $ 1,515,547
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]    
Stockholders’ equity:    
Common stock $ 23 $ 22
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, Shares, Issued 235,565,181 221,081,203
Common stock outstanding (in shares) 235,565,181 221,081,203
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
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, Shares, Issued 29,318,245 31,281,638
Common stock outstanding (in shares) 29,318,245 31,281,638
v3.19.3.a.u2
Consolidated Balance Sheets (Parenthetical) - $ / shares
Dec. 31, 2019
Dec. 31, 2018
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) 235,565,181 221,081,203
Common stock outstanding (in shares) 235,565,181 221,081,203
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) 29,318,245 31,281,638
Common stock outstanding (in shares) 29,318,245 31,281,638
v3.19.3.a.u2
Consolidated Statements of Operations - USD ($)
shares in Thousands, $ in Thousands
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Income Statement [Abstract]      
Revenue from Contract with Customer, Including Assessed Tax $ 1,434,788 $ 1,511,983 $ 1,615,519
Cost of revenue 1,007,116 908,404 924,618
Gross profit 427,672 603,579 690,901
Operating expenses:      
Research and development 300,354 332,169 343,012
Sales and marketing 329,800 344,091 415,042
General and administrative 118,231 116,627 133,934
Total operating expenses 748,385 792,887 891,988
Operating loss (320,713) (189,308) (201,087)
Interest income, net 10,291 7,808 3,647
Other income (expense), net 1,357 (2,642) 2,796
Loss before income taxes (309,065) (184,142) (194,644)
Provision for income taxes 11,646 1,687 82,548
Net loss $ (320,711) $ (185,829) $ (277,192)
Net loss per share attributable to common stockholders:      
Basic (in dollars per share) $ (1.25) $ (0.76) $ (1.19)
Diluted (in dollars per share) $ (1.25) $ (0.76) $ (1.19)
Shares used to compute net loss per share attributable to common stockholders:      
Basic (in shares) 257,500 244,603 232,032
Diluted (in shares) 257,500 244,603 232,032
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Consolidated Statements of Comprehensive Loss - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Statement of Comprehensive Income [Abstract]      
Net Income (Loss) Attributable to Parent $ (320,711) $ (185,829) $ (277,192)
Cash flow hedges:      
unrealized gain (loss) on cash flow hedges, net of tax expense (benefit) of (66) 7,587 (19,422)
reclassification for realized net loss (gain) included in net loss, net of tax expense (benefit) of 0 (7,587) 19,965
Net change, net of tax (66) 0 543
Available-for-sale investments:      
Change in unrealized gain (loss) on investments 320 (68) 125
Less reclassification for realized net (gain) loss included in net loss 0 11 (13)
Net change, net of tax 320 (57) 112
Change in foreign currency translation adjustment, net of tax 0 0 314
Comprehensive loss (320,457) (185,886) (276,223)
Change in unrealized gain on cash flow hedges, tax 0 819 (1)
Reclassification for realized net gains included in net income, tax $ 0 $ 74 $ (819)
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Consolidated Statements of Comprehensive Loss (Parenthetical) - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Statement of Comprehensive Income [Abstract]      
Change in unrealized gain on cash flow hedges, tax $ 0 $ 819 $ (1)
Reclassification for realized net gains included in net income, tax $ 0 $ 74 $ (819)
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Consolidated Statements of Stockholders' Equity Statement - USD ($)
$ 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, 2016   225,663,277      
Beginning 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 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)    
Net Income (Loss) Attributable to Parent (277,192)       (277,192)
Other comprehensive income 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 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 Income (Loss) Attributable to Parent (185,829)       (185,829)
Other comprehensive income (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)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Issuance of common stock upon exercise of stock options (in shares)   12,520,585      
Issuance of common stock 13,019 $ 1 13,018    
Stock-based compensation expense 76,934   76,934    
Taxes related to net share settlement of restricted stock units (18,171)   (18,171)    
Net Income (Loss) Attributable to Parent (320,711)       (320,711)
Other comprehensive income 254     254  
Ending balance (in shares) at Dec. 31, 2019   264,883,426      
Ending balance at Dec. 31, 2019 $ 487,263 $ 26 $ 1,126,827 $ 188 $ (639,778)
v3.19.3.a.u2
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Cash Flows from Operating Activities      
Net Income (Loss) Attributable to Parent $ (320,711) $ (185,829) $ (277,192)
Adjustments to reconcile net loss to net cash provided by operating activities:      
Provision for doubtful accounts 297 56 7,893
Provision for excess and obsolete inventory 6,011 11,828 14,833
Depreciation 54,139 48,889 39,971
Non-cash lease expense 19,170 0 0
Amortization of intangible assets 8,699 7,926 5,722
Accelerated depreciation of property and equipment 206 7,731 5,250
Amortization of issuance costs and discount on debt 0 785 951
Stock-based compensation 77,739 97,009 91,581
Deferred income taxes 384 (2,548) 173,906
Impairment of equity investment 0 6,000 0
Other 515 (1,395) 216
Changes in operating assets and liabilities, net of acquisitions:      
Accounts receivable (21,313) (8,036) 63,784
Inventories (18,471) (12,860) 92,129
Prepaid expenses and other assets 15,141 125,914 (113,111)
Fitbit Force recall reserve (1) (445) (789)
Accounts payable (52,560) 35,207 (86,115)
Accrued liabilities and other liabilities 93,262 (11,978) 56,172
Increase (Decrease) in Lease Liabilities (22,889) 0 0
Deferred revenue 4,006 (5,622) (7,472)
Income taxes payable (456) 575 (3,488)
Net cash provided by (used in) operating activities (156,832) 113,207 64,241
Cash Flows from Investing Activities      
Purchase of property and equipment (36,531) (52,880) (89,160)
Purchase of marketable securities (347,579) (353,948) (597,933)
Sales of marketable securities 9,124 9,983 42,406
Maturities of marketable securities 405,596 433,594 622,525
Acquisitions, net of cash acquired (4,849) (19,253) (556)
Equity investment 0 0 (6,000)
Net cash provided by (used in) investing activities 25,761 17,496 (28,718)
Cash Flows from Financing Activities      
Repayment of debt (550) (747) 0
Finance Lease, Principal Payments (2,703) 0 0
Proceeds from issuance of common stock 13,018 21,470 19,011
Taxes paid related to net share settlement of restricted stock units (18,171) (19,436) (14,376)
Net cash provided by (used in) financing activities (8,406) 1,287 4,635
Net increase (decrease) in cash and cash equivalents (139,477) 131,990 40,158
Effect of exchange rate changes on cash and cash equivalents 0 0 488
Cash and cash equivalents at beginning of period 473,956 341,966 301,320
Cash and cash equivalents at end of period 334,479 473,956 341,966
Supplemental Disclosure      
Cash paid for interest 669 631 1,019
Cash paid (received) for income taxes, net of $72 million income tax refund in 2018 (4,181) (69,868) 382
Supplemental Disclosure of Non-Cash Investing and Financing Activity      
Purchase of property and equipment included in accounts payable and accrued liabilities 5,720 6,615 4,197
Property acquired under capital leases 0 2,700 0
Contingent consideration related to acquisitions $ 1,889 $ 0 $ 0
v3.19.3.a.u2
Business Overview and Basis of Presentation
12 Months Ended
Dec. 31, 2019
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 user 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 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.
Google Acquisition

On November 1, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Google LLC, a Delaware limited liability company (“Google”) and Magnoliophyta Inc., a Delaware corporation and wholly owned subsidiary of Google (the “Merger Sub”). Pursuant to the terms of, and subject to the conditions specified in, the Merger Agreement, the Merger Sub will merge with and into the Company, and the Company will become a wholly owned subsidiary of Google (the “Merger”). If the Merger is completed, Google will acquire all the shares of the Company’s Class A common stock and Class B common stock (together, the “Shares”) for $7.35 per share in cash, without interest (the “Merger Consideration”). All Shares underlying vested stock options and vested stock-based awards will be converted into the right to receive the Merger Consideration (or, in the case of stock options, the difference between the Merger Consideration and the applicable per share exercise price), less any applicable tax withholdings. Unvested stock options and stock-based awards will generally be converted into cash-based awards with an equivalent value based on the Merger Consideration and vesting schedule. The Merger is expected to close in 2020, subject to customary closing conditions, including approval by the expiration or termination of any waiting periods or receipt of any requisite consents under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and approval under the antitrust laws of the European Union and other jurisdictions agreed by the parties and satisfaction of other closing conditions. The Merger was approved by our stockholders on January 3, 2020.

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 the first quarter of 2018.

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

See to Note 7, "Commitments and Contingencies," for information regarding legal proceedings related to Wynit.

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 years ended December 31, 2019 and 2018, $1.9 million and $2.3 million, respectively, of credits were utilized. The Company’s prepaid and other assets related to unused advertising credits as of December 31, 2019 and December 31, 2018 were $7.9 million and $9.9 million, respectively.
v3.19.3.a.u2
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. The Company views marketable securities as available to support current operations as needed, and 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, right-of-use assets, 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 $(3.6) million, $4.6 million, and $2.6 million for 2019, 2018, and 2017, 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 primarily 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 $4.0 million as of December 31, 2019 and $2.6 million as of December 31, 2018.
 
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.
 
Leases

The Company determines if an arrangement is a lease at inception. Operating lease right-of-use assets (“ROU assets”) and short-term and long-term lease liabilities are included on the face of the consolidated balance sheet. Finance lease ROU assets are presented within other assets, and finance lease liabilities are presented within accrued liabilities.

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

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, 2019 and 2018, 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 2019, 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.

The Company adopted ASU 2014-09 (Topic 606) 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 ASU 2014-09 guidance is materially consistent with its historical revenue recognition policy.

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 transfer of control of its products to have occurred once control has transferred and delivery of services to have occurred. 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 Premium and Fitbit Coach offerings.

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 customized programs, advanced sleep features, personal insights, 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 2% 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 2% 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, 2019, 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. For recently introduced devices, historical trends of similar Fitbit products are used. 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 related to products in the distribution channel. This estimate is based on the projected amount of rebates or credits that will be claimed by customers and can be affected by the amount of a particular product in the channel, the rate of sell-through, product promotion plans, and other factors.
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 2019, 2018, and 2017 were $170.4 million, $161.5 million and $226.3 million, respectively. Co-op advertising costs are recorded as a reduction to revenue, and for 2019, 2018 and 2017 were $89.8 million, $80.3 million and $45.0 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 related to the costs of the POP displays are expensed as incurred, and included in sales and marketing expenses on the consolidated statements of operations. Prior to 2019, POP displays were recorded as prepaid expenses and other current assets on the consolidated balance sheet and recognized as expense over the expected period of the benefit provided by these assets, which was generally 12 months.
 
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 rates from similar products 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 ("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 2017 through 2019, 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 June 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 provides for a new impairment model which requires measurement and recognition of expected credit losses for most financial assets and certain other instruments, including but not limited to accounts receivable and available-for-sale debt securities. In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. This ASU clarifies and corrects guidance related to Topic 326, Topic 815, and Topic 825. In May 2019, the FASB issued ASU 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief. This ASU provides an option to irrevocably elect to measure certain individual financial assets at fair value instead of amortized cost. The Company will adopt Topic 326 utilizing the modified retrospective method through a cumulative-effect adjustment on January 1, 2020, and will not restate comparative periods. The Company does not expect the adoption 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. The Company does not expect the adoption to 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 February 2016, the FASB issued ASU 2016-02, Leases and subsequent amendments to the initial guidance; ASU 2017-13, ASU 2018-10 and ASU 2018-11 (collectively, “Topic 842”). Topic 842 requires lessees to recognize ROU assets and lease liabilities for operating leases, initially measured at the present value of the lease payments, on the balance sheet. The Company adopted the standard effective January 1, 2019 using a modified retrospective approach. Prior periods were not retrospectively adjusted. The cumulative effect upon adoption on the opening accumulated deficit balance was zero. The Company elected the available practical expedients, which allowed for carryforward of historical assessments of whether contracts contain or are leases, historical lease classification, and remaining lease terms.

The standard had a material impact on the Company’s consolidated balance sheets but did not have an impact on its consolidated statements of operations. The most significant impact was the recognition of ROU assets and short-term and long-term lease liabilities for operating leases. The balances of operating lease ROU assets, operating lease liabilities, and long-term operating lease liabilities as of December 31, 2019 were $70.2 million, $23.5 million, and $67.9 million, respectively. The impact to other financial statement line items was immaterial. Adoption of the standard had no impact to net cash from or used in operating, investing, or financing activities in the Company’s consolidated statement of cash flows. Refer to Note 6 for further information on leases.

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

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 became effective for the Company on January 1, 2019. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
v3.19.3.a.u2
Fair Value Measurements
12 Months Ended
Dec. 31, 2019
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, 2019
 Level 1Level 2Level 3Total
Assets:
Money market funds$107,708  $—  $—  $107,708  
U.S. government agencies—  77,364  —  77,364  
Corporate debt securities—  207,137  —  207,137  
Total$107,708  $284,501  $—  $392,209  
Liabilities:
Contingent consideration$—  $—  $1,889  $1,889  
Derivative liabilities—  748  —  748  
Total$—  $748  $1,889  $2,637  
 
 December 31, 2018
 Level 1Level 2Level 3Total
Assets:
Money market funds$273,546  $—  $—  $273,546  
U.S. government agencies—  72,840  —  72,840  
Corporate debt securities—  228,953  —  228,953  
Derivative assets—  623  —  623  
Total$273,546  $302,416  $—  $575,962  
Liabilities:
Derivative liabilities$—  $549  $—  $549  
Stock warrant liability—  —  410  410  
Total$—  $549  $410  $959  
 
The fair value of the Company’s Level 1 financial instruments is based on quoted market prices in active markets for identical instruments. The fair value of the Company’s Level 2 financial instruments is based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data.

In addition, Level 2 assets and liabilities include derivative financial instruments associated with hedging activity, which are further discussed in Note 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 2019 and 2018. The Company's Level 3 liabilities measured and recorded on a recurring basis as of December 31, 2019 consist of contingent consideration related to an acquisition. Subsequent changes in the fair value of this obligation will be recorded within the Company’s consolidated statements of operations. The Company estimated the fair value of the acquisition-related contingent consideration using a probability-weighted discounted cash flow model. As the fair value measure is based on significant inputs that are not observable in the market, they are categorized as Level 3. There were Level 3 financial liabilities as of December 31, 2018. There have been no transfers between fair value measurement levels during 2019, 2018 and 2017.
v3.19.3.a.u2
Financial Instruments
12 Months Ended
Dec. 31, 2019
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, 2019 (in thousands):
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair ValueCash and
Cash
Equivalents
Marketable
Securities
Cash$126,293  $—  $—  $126,293  $126,293  $—  
Money market funds107,708  —  —  107,708  107,708  —  
U.S. government agencies77,316  48  —  77,364  30,375  46,989  
Corporate debt securities207,063  85  (11) 207,137  70,103  137,034  
Total$518,380  $133  $(11) $518,502  $334,479  $184,023  

The 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 ValueCash and
Cash
Equivalents
Marketable
Securities
Cash$148,110  $—  $—  $148,110  $148,110  $—  
Money market funds273,546  —  —  273,546  273,546  —  
U.S. government agencies72,884   (45) 72,840  9,738  63,102  
Corporate debt securities229,040  —  (87) 228,953  42,562  186,391  
Total$723,580  $ $(132) $723,449  $473,956  $249,493  
 
The gross unrealized gains or losses on marketable securities as of December 31, 2019 and December 31, 2018 were not material. There were no available-for-sale investments as of December 31, 2019 and December 31, 2018 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, 2019December 31, 2018
 
Due in one year$173,827  $249,493  
Due in one to two years10,196  —  
Total$184,023  $249,493  
Derivative Financial Instruments

The Company operates in foreign countries, which exposes it to market risk associated with foreign currency exchange rate fluctuations between the U.S. dollar and various foreign currencies. In order to manage this risk, the Company may hedge a portion of its foreign currency exposures related to outstanding monetary assets and liabilities as well as forecasted revenues and expenses, using foreign currency exchange forward or option contracts. In general, the market risk related to these contracts is offset by corresponding gains and losses on the hedged transactions. The Company does not enter into derivative contracts for trading or speculative purposes.
 
Cash Flow Hedges
 
The Company 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 periods ended December 31, 2018 and December 31, 2019, 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, 2019 and December 31, 2018.
 
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 $83.4 million and $101.4 million as of December 31, 2019 and December 31, 2018, respectively.
 
Fair Value of Foreign Currency Derivatives
 
The foreign currency derivative contracts that were not settled at the end of the period are recorded at fair value, on a gross basis, in the 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, 2019December 31, 2018
 Balance Sheet LocationFair
Value
Derivative
Assets
Fair
Value
Derivative
Liabilities
Fair
Value
Derivative
Assets
Fair
Value
Derivative
Liabilities
Hedges not designatedPrepaid expense and other current assets$—  $—  $623  $—  
Hedges not designatedAccrued liabilities—  748  —  549  
Total fair value of derivative instruments$—  $748  $623  $549  
 
Financial Statement Effect of Foreign Currency Derivative Contracts
 
The following table presents the pre-tax impact of the Company’s foreign currency derivative contracts on other comprehensive income (“OCI”) and the consolidated statement of operations for the periods presented (in thousands): 
  Year Ended
December 31,
 Income Statement Location201920182017
Foreign exchange cash flow hedges:
Gain (loss) recognized in OCI—effective portion$—  $8,405  $(19,436) 
Gain (loss) reclassified from OCI into income—effective portionRevenue—  8,405  (18,532) 
Gain (loss) reclassified from OCI into income—effective portionOperating expenses—  —  (1,405) 
Gain (loss) recognized in income—ineffective portionOther income (expense), net—  —  21  
Gain recognized in income—excluded time value portionOther income (expense), net—  —  1,771  
Foreign exchange balance sheet hedges:
Gain (loss) recognized in incomeOther income (expense), net$(2,122) $6,240  $(10,516) 
 
As of December 31, 2019, 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,
201920182017
Total amounts presented in the consolidated statement of operations in which the effects of cash flow hedges are recorded in revenue $1,434,788  $1,511,983  $1,615,519  
Total amounts presented in the consolidated statement of operations in which the effects of cash flow hedges are recorded in operating expenses748,385  792,887  891,988  
Gain (loss) on foreign exchange contracts designated as cash flow hedges reclassified from OCI into revenue—  8,405  (18,532) 
Loss on foreign exchange contracts designated as cash flow hedges reclassified from OCI into operating expenses—  —  (1,405) 

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, 2019 and December 31, 2018 (in thousands):
December 31, 2019
 Gross Amounts Offset in the Consolidated Balance SheetsGross Amounts Not Offset in Consolidated Balance Sheets
 Gross Amount RecognizedGross Amount OffsetNet Amount PresentedFinancial InstrumentsCash Collateral ReceivedNet Amount
Foreign exchange contracts assets$—  $—  $—  $—  $—  $—  
Foreign exchange contracts liabilities748  —  748  —  —  748  
December 31, 2018
 Gross Amounts Offset in the Consolidated Balance SheetsGross Amounts Not Offset in Consolidated Balance Sheets
 Gross Amounts RecognizedGross Amounts OffsetNet Amount PresentedFinancial
Instruments
Cash Collateral
Received
Net
Amount
Foreign exchange contracts assets$623  $—  $623  $549  $—  $74  
Foreign exchange contracts liabilities549  —  549  549  —  —  
v3.19.3.a.u2
Balance Sheet Components
12 Months Ended
Dec. 31, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Balance Sheet Components Balance Sheet Components
 
Deferred Revenue

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

Changes in the total short-term and long-term deferred revenue balance were as follows (in thousands):
 December 31,
 201920182017
Beginning balances$36,836  $42,432  $49,904  
Deferral of revenue45,040  40,003  46,193  
Recognition of deferred revenue(41,034) (45,599) (53,665) 
Ending balances$40,842  $36,836  $42,432  

Revenue Returns Reserve
 
Changes in the revenue returns reserve were as follows (in thousands):
 December 31,
 201920182017
Beginning balances$104,001  $109,872  $98,851  
Increases (1)
178,962  170,957  229,610  
Returns taken (181,637) (176,828) (218,589) 
Ending balances$101,326  $104,001  $109,872  
(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,
 20192018
2017(1)
Beginning balances$3,742  $9,229  $282  
Increases297  56  30,551  
Write-offs (291) (5,543) (21,604) 
Ending balances$3,748  $3,742  $9,229  
(1) Write-offs in 2017 was primarily related to the Wynit bankruptcy described in Note 7.
Inventories
 
Inventories consisted of the following (in thousands):
 December 31,
 20192018
Components$5,397  $8,866  
Finished goods131,355  116,005  
Total inventories$136,752  $124,871  
 
Prepaid Expenses and Other Current Assets
 
Prepaid expenses and other current assets consisted of the following (in thousands):
 December 31,
 20192018
Prepaid expenses$11,219  $18,100  
Prepaid marketing3,347  3,258  
Point-of-purchase displays, net—  5,143  
Derivative assets—  623  
Other14,090  15,201  
Total prepaid expenses and other current assets$28,656  $42,325  
 
Property and Equipment, Net
 
Property and equipment, net, consisted of the following (in thousands):
December 31,
20192018
Tooling and manufacturing equipment$103,177  $80,685  
Furniture and office equipment19,922  22,738  
Purchased and internally-developed software27,424  21,741  
Leasehold improvements59,926  67,715  
Total property and equipment210,449  192,879  
Less: Accumulated depreciation and amortization(127,693) (86,593) 
Property and equipment, net$82,756  $106,286  

Total depreciation and amortization expense related to property and equipment, net was $54.1 million, $48.9 million and $40.0 million for 2019, 2018 and 2017, respectively.

Goodwill and Intangible Assets
 
The changes in the carrying amount of goodwill were as follows (in thousands):
 Goodwill
Balance at December 31, 2017$51,036  
Goodwill acquired9,943  
Balance at December 31, 201860,979  
Goodwill acquired3,833  
Balance at December 31, 2019$64,812  
 
The carrying amounts of the intangible assets as of December 31, 2019 and December 31, 2018 were as follows (in thousands):
 December 31, 2019December 31, 2018
 GrossAccumulated AmortizationNetGrossAccumulated AmortizationNet
    
Developed technology$37,813  $(23,910) $13,903  $35,988  $(15,983) $20,005  
Customer relationships3,790  (991) 2,799  3,790  (451) 3,339  
Trademarks and other1,278  (1,234) 44  1,278  (1,002) 276  
Total intangible assets, net$42,881  $(26,135) $16,746  $41,056  $(17,436) $23,620  
 
The increase in the carrying amount of goodwill and intangible assets during the year ended December 31, 2019 was attributable to an acquisition in October 2019 described in Note 12, “Acquisitions.”

Total amortization expense related to intangible assets was $8.7 million, $7.9 million, and $5.7 million for 2019, 2018 and 2017, respectively. The estimated future amortization expense of acquired finite-lived intangible assets to be charged to cost of revenue and operating expenses after 2019, is as follows (in thousands):
Cost of
Revenue
Operating
Expenses
Total
2020$6,325  $1,269  $7,594  
20215,037  597  5,634  
20221,488  597  2,085  
2023—  597  597  
2024—  597  597  
Thereafter—  239  239  
Total intangible assets, net$12,850  $3,896  $16,746  
 
Accrued Liabilities
 
Accrued liabilities consisted of the following (in thousands):
 December 31,
 20192018
Accrued sales incentives$156,839  $126,400  
Sales returns reserve (1)
101,326  104,001  
Product warranty52,403  45,605  
Accrued co-op advertising and marketing development funds40,689  30,435  
Employee-related liabilities37,355  33,916  
Accrued manufacturing expense and freight35,112  21,357  
Accrued sales and marketing26,781  18,171  
Sales taxes and VAT payable19,603  20,121  
Accrued research and development19,232  8,783  
Accrued legal settlements and fees8,854  2,821  
Inventory received but not billed1,669  6,373  
Finance lease liabilities1,384  —  
Derivative liabilities748  549  
Other11,535