FITBIT, INC., 10-Q filed on 11/4/2020
Quarterly Report
v3.20.2
Cover Page - shares
9 Months Ended
Oct. 03, 2020
Oct. 28, 2020
Entity Information [Line Items]    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Oct. 03, 2020  
Document Transition Report false  
Entity File Number 001-37444  
Entity Registrant Name FITBIT, INC.  
Entity Incorporation, State or Country Code DE  
Entity Tax Identification Number 20-8920744  
Entity Address, Address Line One 199 Fremont Street,  
Entity Address, Address Line Two 14th Floor  
Entity Address, City or Town San Francisco,  
Entity Address, State or Province CA  
Entity Address, Postal Zip Code 94105  
City Area Code 415  
Local Phone Number 513-1000  
Title of 12(b) Security Class A Common Stock, $0.0001 par value  
Trading Symbol FIT  
Security Exchange Name NYSE  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Central Index Key 0001447599  
Current Fiscal Year End Date --12-31  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q3  
Amendment Flag false  
Common Class A    
Entity Information [Line Items]    
Entity Common Stock, Shares Outstanding   244,867,751
Common Class B    
Entity Information [Line Items]    
Entity Common Stock, Shares Outstanding   27,600,601
v3.20.2
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Oct. 03, 2020
Dec. 31, 2019
Current assets:    
Cash and cash equivalents $ 373,384 $ 334,479
Marketable securities 43,051 184,023
Accounts receivable, net 358,451 435,269
Inventories 98,996 136,752
Income tax receivable 40,252 573
Prepaid expenses and other current assets 35,013 28,656
Total current assets 949,147 1,119,752
Property and equipment, net 74,684 82,756
Operating lease right-of-use assets 62,144 70,225
Goodwill 64,812 64,812
Intangible assets, net 8,395 16,746
Deferred tax assets 15,330 4,111
Other assets 12,334 9,684
Total assets 1,186,846 1,368,086
Current liabilities:    
Accounts payable 174,603 194,626
Accrued liabilities 431,215 513,530
Operating lease liabilities 22,390 23,511
Deferred revenue 49,317 32,307
Income taxes payable 2,439 636
Total current liabilities 679,964 764,610
Long-term deferred revenue 5,327 8,535
Long-term operating lease liabilities 56,703 67,902
Other liabilities 55,960 39,776
Total liabilities 797,954 880,823
Commitments and contingencies (Note 6)
Stockholders’ equity:    
Class A and Class B common stock 27 26
Additional paid-in capital 1,166,720 1,126,827
Accumulated other comprehensive income 178 188
Accumulated deficit (778,033) (639,778)
Total stockholders’ equity 388,892 487,263
Total liabilities and stockholders’ equity $ 1,186,846 $ 1,368,086
v3.20.2
Condensed Consolidated Statements of Operations - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 9 Months Ended
Oct. 03, 2020
Sep. 28, 2019
Oct. 03, 2020
Sep. 28, 2019
Income Statement [Abstract]        
Revenue $ 363,932 $ 347,200 $ 813,362 $ 932,646
Cost of revenue 228,120 239,248 529,586 627,027
Gross profit 135,812 107,952 283,776 305,619
Operating expenses:        
Research and development 90,771 65,693 256,093 213,651
Sales and marketing 60,726 71,296 183,157 222,972
General and administrative 35,493 23,083 112,583 74,640
Total operating expenses 186,990 160,072 551,833 511,263
Operating loss (51,178) (52,120) (268,057) (205,644)
Interest income (expense), net (268) 2,388 1,038 8,476
Other income (expense), net 965 (492) 3,198 1,242
Loss before income taxes (50,481) (50,224) (263,821) (195,926)
Income tax expense (benefit) 3,971 1,669 (125,566) 3,950
Net loss $ (54,452) $ (51,893) $ (138,255) $ (199,876)
Net loss per share:        
Basic (in dollars per share) $ (0.20) $ (0.20) $ (0.52) $ (0.78)
Diluted (in dollars per share) $ (0.20) $ (0.20) $ (0.52) $ (0.78)
Shares used to compute net loss per share:        
Basic (in shares) 270,443 258,753 267,958 256,046
Diluted (in shares) 270,443 258,753 267,958 256,046
v3.20.2
Condensed Consolidated Statements of Comprehensive Loss - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Oct. 03, 2020
Sep. 28, 2019
Oct. 03, 2020
Sep. 28, 2019
Statement of Comprehensive Income [Abstract]        
Net loss $ (54,452) $ (51,893) $ (138,255) $ (199,876)
Cash flow hedges:        
Change in unrealized loss on cash flow hedges, net of $0 tax benefit 0 (66) 0 (66)
Net change, net of tax 0 (66) 0 (66)
Available-for-sale investments:        
Change in unrealized gain (loss) on investments (172) 35 (10) 364
Net change, net of tax (172) 35 (10) 364
Comprehensive loss $ (54,624) $ (51,924) $ (138,265) $ (199,578)
v3.20.2
Condensed Consolidated Statements of Comprehensive Loss (Parenthetical) - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Oct. 03, 2020
Sep. 28, 2019
Oct. 03, 2020
Sep. 28, 2019
Statement of Comprehensive Income [Abstract]        
Change in unrealized loss on cash flow hedges, tax $ 0 $ 0 $ 0 $ 0
v3.20.2
Condensed Consolidated Statements of Stockholders’ Equity - USD ($)
$ in Thousands
Total
Common Stock
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Beginning balance (in shares) at Dec. 31, 2018   252,362,841      
Beginning balance at Dec. 31, 2018 $ 735,938 $ 25 $ 1,055,046 $ (66) $ (319,067)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Issuance of common stock (in shares)   7,522,885      
Issuance of common stock 7,045   7,044    
Stock-based compensation expense 59,064   59,064    
Taxes related to net share settlement of restricted stock units (13,495)   (13,495)    
Net loss (199,876)       (199,876)
Other comprehensive income 298     298  
Ending balance (in shares) at Sep. 28, 2019   259,885,726      
Ending balance at Sep. 28, 2019 588,974 $ 26 1,107,659 232 (518,943)
Beginning balance (in shares) at Jun. 29, 2019   258,139,452      
Beginning balance at Jun. 29, 2019 625,544 $ 25 1,092,306 263 (467,050)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Issuance of common stock (in shares)   1,746,274      
Issuance of common stock 233 $ 1 232    
Stock-based compensation expense 17,971   17,971    
Taxes related to net share settlement of restricted stock units (2,850)   (2,850)    
Net loss (51,893)       (51,893)
Other comprehensive income (31)     (31)  
Ending balance (in shares) at Sep. 28, 2019   259,885,726      
Ending balance at Sep. 28, 2019 588,974 $ 26 1,107,659 232 (518,943)
Beginning balance (in shares) at Dec. 31, 2019   264,883,426      
Beginning balance at Dec. 31, 2019 487,263 $ 26 1,126,827 188 (639,778)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Issuance of common stock (in shares)   7,347,108      
Issuance of common stock 2,991 $ 1 2,990    
Stock-based compensation expense 55,719   55,719    
Taxes related to net share settlement of restricted stock units (18,816)   (18,816)    
Net loss (138,255)       (138,255)
Other comprehensive income (10)     (10)  
Ending balance (in shares) at Oct. 03, 2020   272,230,534      
Ending balance at Oct. 03, 2020 388,892 $ 27 1,166,720 178 (778,033)
Beginning balance (in shares) at Jul. 04, 2020   269,584,380      
Beginning balance at Jul. 04, 2020 430,316 $ 27 1,153,520 350 (723,581)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Issuance of common stock (in shares)   2,646,154      
Issuance of common stock 1,988 $ 0 1,988    
Stock-based compensation expense 17,799   17,799    
Taxes related to net share settlement of restricted stock units (6,587)   (6,587)    
Net loss (54,452)       (54,452)
Other comprehensive income (172)     (172)  
Ending balance (in shares) at Oct. 03, 2020   272,230,534      
Ending balance at Oct. 03, 2020 $ 388,892 $ 27 $ 1,166,720 $ 178 $ (778,033)
v3.20.2
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
9 Months Ended
Oct. 03, 2020
Sep. 28, 2019
Cash Flows from Operating Activities    
Net loss $ (138,255) $ (199,876)
Adjustments to reconcile net loss to net cash used in operating activities:    
Provision for doubtful accounts 461 29
Provision for excess and obsolete inventory 14,189 5,163
Depreciation 33,332 43,215
Non-cash lease expense 11,082 17,961
Accelerated depreciation of property and equipment 726 169
Amortization of intangible assets 8,351 6,100
Stock-based compensation 57,877 59,175
Deferred income taxes (11,289) 618
Other 585 (50)
Changes in operating assets and liabilities, net of acquisition:    
Accounts receivable 76,356 68,617
Inventories 21,410 (125,500)
Prepaid expenses and other assets (9,136) 5,880
Income taxes receivable (39,679) 5,992
Accounts payable (23,028) 11,826
Accrued liabilities and other liabilities (66,763) (60,763)
Lease liabilities (14,432) (20,975)
Deferred revenue 13,802 (2,586)
Income taxes payable 1,803 (107)
Net cash used in operating activities (62,608) (185,112)
Cash Flows from Investing Activities    
Purchase of property and equipment (22,419) (26,277)
Purchases of marketable securities (59,735) (287,969)
Sales of marketable securities 0 2,016
Maturities of marketable securities 200,877 322,132
Acquisition, net of cash acquired 0 (2,625)
Net cash provided by investing activities 118,723 7,277
Cash Flows from Financing Activities    
Payment of financing lease liability (1,384) (2,239)
Proceeds from issuance of common stock 2,990 7,044
Taxes paid related to net share settlement of restricted stock units (18,816) (13,495)
Net cash used in financing activities (17,210) (8,690)
Net increase (decrease) in cash and cash equivalents 38,905 (186,525)
Cash and cash equivalents at beginning of period 334,479 473,956
Cash and cash equivalents at end of period $ 373,384 $ 287,431
v3.20.2
Basis of Presentation and Summary of Significant Accounting Policies
9 Months Ended
Oct. 03, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Basis of Presentation and Summary of Significant Accounting Policies Basis of Presentation and Summary of Significant Accounting Policies
 
The accompanying condensed consolidated financial statements of Fitbit, Inc. (the “Company”) are unaudited. The condensed consolidated balance sheet at December 31, 2019 has been derived from the audited financial statements of the Company. The accompanying condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information, and in management’s opinion, includes all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement of the Company’s financial position, its results of operations, and cash flows for the interim periods presented. The results of operations for the three and nine months ended October 3, 2020 are not necessarily indicative of the results to be expected for the full fiscal year or any other period.

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

The Company’s fiscal year ends on December 31 of each year. The Company is on a 4-4-5 week quarterly calendar. There were 91 days in each of the three months ended October 3, 2020 and September 28, 2019.

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

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

Google Acquisition

On November 1, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Google LLC, a Delaware limited liability company (“Google”), and Magnoliophyta Inc., a Delaware corporation and wholly owned subsidiary of Google (the “Merger Sub”). Pursuant to the terms of, and subject to the conditions specified in, the Merger Agreement, the Merger Sub will merge with and into the Company, and the Company will become a wholly owned subsidiary of Google (the “Merger”). If the Merger is completed, Google will acquire all the shares of the Company’s Class A common stock and Class B common stock (together, the “Shares”) for $7.35 per share in cash, without interest (the “Merger Consideration”). All Shares underlying vested stock options and vested stock-based awards will be converted into the right to receive the Merger Consideration (or, in the case of stock options, the difference between the Merger Consideration and the applicable per share exercise price), less any applicable tax withholdings. Unvested stock options and stock-based awards will generally be converted into cash-based awards with an equivalent value based on the Merger Consideration and vesting schedule. Completion of the Merger is subject to customary closing conditions, including approval by the expiration or termination of any waiting periods or receipt of any requisite consents under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, approval under the antitrust laws of the European Union and other jurisdictions agreed by the parties, and satisfaction of other closing conditions. On August 4, 2020, the European Commission announced it had initiated a Phase II review of the transaction. On October 16, 2020, the European Commission extended the deadline for its Phase II investigation to January 8, 2021. The duration of a Phase II review cannot be foreseen with certainty. While the Company still expects to secure the necessary regulatory approvals and to close the transaction in 2020, the time frame may extend beyond that. The Merger was approved by the Company’s stockholders on January 3, 2020.
Risks and Uncertainties for COVID-19

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

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

Significant Accounting Policies

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

Recent Accounting Pronouncements

Accounting Pronouncements Not Yet Adopted

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

Accounting Pronouncements Recently Adopted

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

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

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework–Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements on fair value measurements and became effective for the Company on January 1, 2020. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 clarifies the accounting for implementation costs in cloud computing arrangements and became effective for the Company on January 1, 2020. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
v3.20.2
Fair Value Measurements
9 Months Ended
Oct. 03, 2020
Fair Value Disclosures [Abstract]  
Fair Value Measurements Fair Value Measurements
 
The carrying values of the Company’s accounts receivable, accounts payable, and accrued liabilities approximated their fair values due to the short period of time to maturity or repayment.
 
The following tables set forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):
 
 
October 3, 2020
 Level 1Level 2Level 3Total
Assets:
Money market funds$189,887 $— $— $189,887 
U.S. government agencies— 36,337 — 36,337 
Corporate debt securities— 61,980 — 61,980 
Total$189,887 $98,317 $— $288,204 
Liabilities:
Contingent consideration$— $— $1,523 $1,523 
Total$— $— $1,523 $1,523 

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

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

There were no Level 3 assets as of October 3, 2020 and December 31, 2019. The Company's Level 3 liabilities measured and recorded on a recurring basis as of October 3, 2020 and December 31, 2019 consist of contingent consideration related to an acquisition. Subsequent changes in the fair value of this obligation will be recorded within the Company’s consolidated statements of operations. The Company estimated the fair value of the acquisition-related contingent consideration using a probability-weighted discounted cash flow model. As the fair value measure is based on significant inputs that are not
observable in the market, they are categorized as Level 3. There were no transfers between fair value measurement levels during the three and nine months ended October 3, 2020 and September 28, 2019.
v3.20.2
Financial Instruments
9 Months Ended
Oct. 03, 2020
Investments, Debt and Equity Securities [Abstract]  
Financial Instruments Financial Instruments
Cash, Cash Equivalents and Marketable Securities

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

For debt securities in an unrealized loss position, the Company determines whether a credit loss exists. The estimate of credit loss is determined by considering available information relevant to the collectability of the security and information about past events, current conditions, and reasonable and supportable forecasts. The allowance for credit loss is recorded as a charge to other income (expense), net, not to exceed the amount of the unrealized loss. Any excess unrealized loss greater than the credit loss at a security level is recognized in accumulated other comprehensive income (loss). During the three and nine months ended October 3, 2020, no allowance for credit losses on marketable securities was recorded.

The following table sets forth cash, cash equivalents, and marketable securities as of October 3, 2020 (in thousands):
Amortized CostGross Unrealized GainsGross Unrealized LossesFair ValueCash and Cash EquivalentsMarketable Securities
Cash$128,230 $— $— $128,230 $128,230 $— 
Money market funds189,887 — — 189,887 189,887 — 
U.S. government agencies36,320 17 — 36,337 27,312 9,025 
Corporate debt securities61,885 96 — 61,981 27,955 34,026 
Total$416,322 $113 $— $416,435 $373,384 $43,051 

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

The gross unrealized gains or losses on marketable securities as of October 3, 2020 and December 31, 2019 were not material. There were no available-for-sale investments as of October 3, 2020 and December 31, 2019 that have been in a continuous unrealized loss position for greater than 12 months on a material basis.

The following table classifies marketable securities by contractual maturities (in thousands):
 
October 3, 2020
December 31, 2019
Due in one year$43,051 $173,827 
Due in one to two years— 10,196 
Total$43,051 $184,023 
Derivative Financial Instruments

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

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

The Company had no outstanding balance sheet hedges as of October 3, 2020, and outstanding balance sheet hedges with a total notional amount of $83.4 million as of December 31, 2019.
 
Fair Value of Foreign Currency Derivatives

The foreign currency derivative contracts that were not settled at the end of the period are recorded at fair value, on a gross basis, in the condensed consolidated balance sheets. The following table presents the fair value of the Company’s foreign currency derivative contracts as of the periods presented (in thousands):
October 3, 2020
December 31, 2019
Balance Sheet LocationFair Value Derivative
Assets
Fair Value Derivative LiabilitiesFair Value Derivative
Assets
Fair Value Derivative Liabilities
Hedges not designatedAccrued liabilities— — — 748 
Total fair value of derivative instruments$— $— $— $748 

Financial Statement Effect of Foreign Currency Derivative Contracts

The following table presents the pre-tax impact of the Company’s foreign currency derivative contracts on the condensed consolidated statements of operations for the periods presented (in thousands):
Three Months Ended
Nine Months Ended
Income Statement Location
October 3, 2020
September 28, 2019
October 3, 2020
September 28, 2019
Foreign exchange balance sheet hedges:
Gain (loss) recognized in incomeOther income, net$— $2,041 $3,077 $1,567 

As of October 3, 2020, there were no net derivative gains related to the Company’s cash flow hedges to be reclassified from other comprehensive income (“OCI”) into revenue within the next 12 months.

Offsetting of Foreign Currency Derivative Contracts

The Company presents its derivative assets and derivative liabilities at gross fair values in the condensed consolidated balance sheets. The Company generally enters into master netting arrangements, which mitigate credit risk by permitting net settlement of transactions with the same counterparty. The Company is not required to pledge, and is not entitled to receive, cash collateral related to these derivative instruments.
The following tables set forth the available offsetting of net derivative assets under the master netting arrangements as of December 31, 2019 (in thousands):
December 31, 2019
Gross Amounts Offset in the Condensed Consolidated Balance SheetsGross Amounts Not Offset in Condensed Consolidated Balance Sheets
Gross Amounts RecognizedGross Amounts OffsetNet Amounts PresentedFinancial InstrumentsCash Collateral ReceivedNet Amount
Foreign exchange contracts liabilities748 — 748 — — 748 
There were no net derivative assets as of October 3, 2020.
v3.20.2
Balance Sheet Components
9 Months Ended
Oct. 03, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Balance Sheet Components Balance Sheet Components
Deferred Revenue

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

Changes in the total short-term and long-term deferred revenue balances were as follows (in thousands):
Three Months Ended
Nine Months Ended
October 3, 2020
October 3, 2020
Beginning balances$37,215 $40,842 
Deferral of revenue37,708 61,972 
Recognition of deferred revenue(20,279)(48,170)
Ending balances$54,644 $54,644 


Revenue Returns Reserve
 
Revenue returns reserve activities were as follows (in thousands):
Three Months Ended
Nine Months Ended
October 3, 2020
September 28, 2019
October 3, 2020
September 28, 2019
Beginning balances$81,851 $75,044 $101,326 $104,001 
Increases (1)
37,422 41,945 103,127 119,070 
Returns taken (25,976)(42,845)(111,156)(148,927)
Ending balances$93,297 $74,144 $93,297 $74,144 

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


    
Inventories
 
Inventories consisted of the following (in thousands)
  
October 3, 2020
December 31, 2019
 
Components$471 $5,397 
Finished goods98,525 131,355 
Total inventories$98,996 $136,752 
 

Prepaid Expenses and Other Current Assets
 
Prepaid expenses and other current assets consisted of the following (in thousands):
  
October 3, 2020
December 31, 2019
Prepaid expenses $18,910 $11,219 
Prepaid marketing2,937 3,347 
Tariff receivable2,730 — 
Other10,436 14,090 
Total prepaid expenses and other current assets$35,013 $28,656 

Property and Equipment, Net
 
Property and equipment, net, consisted of the following (in thousands):
 
  
October 3, 2020
December 31, 2019
Tooling and manufacturing equipment$120,895 $103,177 
Furniture and office equipment20,511 19,922 
Purchased and internally-developed software30,528 27,424 
Leasehold improvements60,941 59,926 
Total property and equipment232,875 210,449 
Less: Accumulated depreciation and amortization(158,191)(127,693)
Property and equipment, net$74,684 $82,756 
 
Total depreciation expense related to property and equipment, net was $12.3 million and $13.1 million for the three months ended October 3, 2020 and September 28, 2019, respectively, and $33.3 million and $43.2 million for the nine months ended October 3, 2020 and September 28, 2019, respectively.


Goodwill and Intangible Assets, Net

The carrying amount of goodwill was $64.8 million as of October 3, 2020 and December 31, 2019.

The carrying amounts of the intangible assets as of October 3, 2020 and December 31, 2019 were as follows (in thousands):
 
October 3, 2020
December 31, 2019
  GrossAccumulated AmortizationNetGrossAccumulated AmortizationNet
    
Developed technology$37,813 $(29,418)$8,395 $37,813 $(23,910)$13,903 
Customer relationships3,918 (3,918)— 3,790 (991)2,799 
Trademarks and other1,150 (1,150)— 1,278 (1,234)44 
Total intangible assets, net$42,881 $(34,486)$8,395 $42,881 $(26,135)$16,746 
Total amortization expense related to intangible assets was $1.3 million and $2.0 million for the three months ended October 3, 2020 and September 28, 2019, respectively, and $8.4 million and $6.1 million for the nine months ended October 3, 2020 and September 28, 2019, respectively.

The estimated future amortization expense of acquired finite-lived intangible assets to be charged to cost of revenue and operating expenses after October 3, 2020 is as follows (in thousands):
  Cost of RevenueOperating ExpensesTotal
   
Remaining 2020$1,259 $14 $1,273 
20215,037 206 5,243 
20221,488 131 1,619 
2023— 56 56 
2024— 56 56 
Thereafter 148 148 
Total finite-lived intangible assets, net$7,784 $611 $8,395 

Accrued Liabilities
 
Accrued liabilities consisted of the following (in thousands):
 
October 3, 2020
December 31, 2019
Sales returns reserve$93,297 $101,326 
Accrued sales incentives82,740 156,839 
Employee-related liabilities73,272 37,355 
Product warranty39,023 52,403 
Inventory received but not billed30,940 1,669 
Accrued manufacturing expense and freight23,313 35,112 
Accrued co-op advertising and marketing development funds22,888 40,689 
Accrued research and development20,832 19,232 
Accrued sales and marketing14,186 26,781 
Sales taxes and VAT payable10,364 19,603 
Accrued legal settlements and fees8,725 8,854 
Finance lease liabilities2,338 1,384 
Derivative liabilities— 748 
Other accrued liabilities9,297 11,535 
Accrued liabilities$431,215 $513,530 

Product warranty reserve activities were as follows (in thousands):
Three Months EndedNine Months Ended
 
October 3, 2020
September 28, 2019
October 3, 2020
September 28, 2019
Beginning balances$44,934 $45,260 $52,403 $45,605 
Charged to cost of revenue 10,521 11,019 24,851 28,247 
Changes related to pre-existing warranties(4,801)2,201 (5,555)4,874 
Settlement of claims (11,631)(13,576)(32,676)(33,822)
Ending balances$39,023 $44,904 $39,023 $44,904 
v3.20.2
Leases
9 Months Ended
Oct. 03, 2020
Leases [Abstract]  
Leases Leases
The Company leases its principal facilities located in San Francisco, California. The Company also leases office space in various locations. Both the Company’s principal facilities and leases in various locations have expiration dates between 2020 and 2024. The lease agreements often include leasehold improvement incentives, escalating lease payments, renewal provisions and other provisions which require the Company to pay taxes, insurance, maintenance costs or defined rent increases. The Company’s leases are primarily accounted for as operating leases. Operating lease ROU assets and short-term and long-term operating lease liabilities are included on the face of the condensed consolidated balance sheet. Finance lease ROU assets are presented within other assets, and finance lease liabilities are presented within accrued liabilities. The Company has no leases that have not yet commenced as of October 3, 2020.


Total lease cost consists of the following (in thousands):
Three Months EndedNine Months Ended
October 3, 2020September 28, 2019October 3, 2020September 28, 2019
Finance lease costs:
Amortization of ROU assets$390 $989 $668 $2,640 
Interest on lease liabilities— — — — 
Operating lease costs(1)
6,031 5,850 19,179 16,834 
Variable lease costs3,110 1,463 5,766 4,108 
Sublease income(146)(479)(1,113)(4,110)
Total lease costs$9,385 $7,823 $24,500 $19,472 
(1) includes short-term leases, which are immaterial.

Supplemental cash flow information related to leases was as follows (in thousands):
Three Months EndedNine Months Ended
October 3, 2020September 28, 2019October 3, 2020September 28, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Financing cash flows from finance leases$— $1,302 $1,384 $2,239 
Operating cash flows from finance leases— — — — 
Operating cash flows from operating leases6,168 6,737 19,097 20,775 
ROU assets obtained in exchange for lease obligations:
Finance lease liabilities$2,338 $— $3,722 $— 
Operating lease liabilities— — 4,497 288 
Supplemental balance sheet information related to leases was as follows (in thousands):
October 3, 2020
December 31, 2019
Finance leases:
Other assets$1,948 $1,384 
Accrued liabilities$2,338 $1,384 
Operating leases:
Operating lease ROU assets$62,144 $70,225 
Operating lease liabilities$22,390 $23,511 
Long-term operating lease liabilities56,703 67,902 
Total operating lease liabilities$79,093 $91,413 

Weighted-average lease terms and discount rates are as follows:
October 3, 2020
December 31, 2019
Weighted-average remaining lease terms (in years):
Finance leases1.30.5
Operating leases3.64.2
Weighted-average discount rates:
Finance leases— %— %
Operating leases5.5 %5.5 %

Maturities of lease liabilities as of October 3, 2020 were as follow (in thousands):
Finance LeasesOperating Leases
Remaining 2020$2,338 $24,956 
2021— 25,106 
2022— 23,385 
2023— 17,970 
2024— 405 
Thereafter— — 
Total minimum lease payments$2,338 $91,822 
Less: amount representing interest— (12,729)
Total lease liabilities$2,338 $79,093 
Leases Leases
The Company leases its principal facilities located in San Francisco, California. The Company also leases office space in various locations. Both the Company’s principal facilities and leases in various locations have expiration dates between 2020 and 2024. The lease agreements often include leasehold improvement incentives, escalating lease payments, renewal provisions and other provisions which require the Company to pay taxes, insurance, maintenance costs or defined rent increases. The Company’s leases are primarily accounted for as operating leases. Operating lease ROU assets and short-term and long-term operating lease liabilities are included on the face of the condensed consolidated balance sheet. Finance lease ROU assets are presented within other assets, and finance lease liabilities are presented within accrued liabilities. The Company has no leases that have not yet commenced as of October 3, 2020.


Total lease cost consists of the following (in thousands):
Three Months EndedNine Months Ended
October 3, 2020September 28, 2019October 3, 2020September 28, 2019
Finance lease costs:
Amortization of ROU assets$390 $989 $668 $2,640 
Interest on lease liabilities— — — — 
Operating lease costs(1)
6,031 5,850 19,179 16,834 
Variable lease costs3,110 1,463 5,766 4,108 
Sublease income(146)(479)(1,113)(4,110)
Total lease costs$9,385 $7,823 $24,500 $19,472 
(1) includes short-term leases, which are immaterial.

Supplemental cash flow information related to leases was as follows (in thousands):
Three Months EndedNine Months Ended
October 3, 2020September 28, 2019October 3, 2020September 28, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Financing cash flows from finance leases$— $1,302 $1,384 $2,239 
Operating cash flows from finance leases— — — — 
Operating cash flows from operating leases6,168 6,737 19,097 20,775 
ROU assets obtained in exchange for lease obligations:
Finance lease liabilities$2,338 $— $3,722 $— 
Operating lease liabilities— — 4,497 288 
Supplemental balance sheet information related to leases was as follows (in thousands):
October 3, 2020
December 31, 2019
Finance leases:
Other assets$1,948 $1,384 
Accrued liabilities$2,338 $1,384 
Operating leases:
Operating lease ROU assets$62,144 $70,225 
Operating lease liabilities$22,390 $23,511 
Long-term operating lease liabilities56,703 67,902 
Total operating lease liabilities$79,093 $91,413 

Weighted-average lease terms and discount rates are as follows:
October 3, 2020
December 31, 2019
Weighted-average remaining lease terms (in years):
Finance leases1.30.5
Operating leases3.64.2
Weighted-average discount rates:
Finance leases— %— %
Operating leases5.5 %5.5 %

Maturities of lease liabilities as of October 3, 2020 were as follow (in thousands):
Finance LeasesOperating Leases
Remaining 2020$2,338 $24,956 
2021— 25,106 
2022— 23,385 
2023— 17,970 
2024— 405 
Thereafter— — 
Total minimum lease payments$2,338 $91,822 
Less: amount representing interest— (12,729)
Total lease liabilities$2,338 $79,093 
v3.20.2
Commitments and Contingencies
9 Months Ended
Oct. 03, 2020
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies Commitments and Contingencies
 
Purchase Commitments
The aggregate amount of open purchase orders as of October 3, 2020 was approximately $430.5 million. Of the aggregate amount, $156.9 million related to the Company’s migration to a third-party hosting provider, of which $17.3 million was accrued for as of October 3, 2020. The Company cannot determine the aggregate amount of such purchase orders that represent contractual obligations because purchase orders may represent authorizations to purchase rather than binding agreements. The Company’s purchase orders are based on its current needs and are fulfilled by its suppliers, contract manufacturers, and logistics providers within short periods of time.
During the normal course of business, the Company and its contract manufacturers procure components based upon a forecasted production plan. If the Company cancels all or part of the orders, or materially reduces forecasted orders, it may be liable to its suppliers and contract manufacturers for the cost of the excess components purchased by its contract manufacturers. As of October 3, 2020, $7.9 million was accrued for such liabilities to contract manufacturers.

Letters of Credit

As of October 3, 2020 and December 31, 2019, the Company had outstanding letters of credit of $24.8 million and $24.6 million, respectively, issued to cover the security deposit on the lease of its office headquarters in San Francisco, California, and other facility leases.

Legal Proceedings

Jawbone. Aliphcom, Inc. d/b/a Jawbone (“Jawbone”) and the Company each initiated civil lawsuits against each other in 2015. These included a complaint filed by Jawbone in California state court alleging the misappropriation of certain trade secrets by six former Jawbone employees who had joined Fitbit and who were also named as defendants. On December 8, 2017, the parties announced the global settlement of all of the outstanding civil litigation on confidential terms, and all of the cases were dismissed with prejudice.
In February 2017 and February 2018, the Company received subpoenas from the U.S. Attorney’s Office for the Northern District of California requesting documents regarding certain of the Company’s confidential business information that appeared to be related to Jawbone’s allegations of trade secret misappropriation, and the Company produced documents in response. On June 14, 2018, the six former Jawbone employees who were named as individual defendants in the state trade secret case were charged in a federal indictment with being in possession of certain Jawbone trade secrets. Charges were dismissed against one individual in December 2019. On February 3, 2020, a jury returned a not-guilty verdict on all counts in favor of the first individual to be tried. On February 14, 2020, the government dropped all charges against the remaining individuals.
Sleep Tracking. On May 8, 2015, a purported class action lawsuit was filed against the Company in the U.S. District Court for the Northern District of California, alleging that the sleep tracking function available in certain trackers does not perform as advertised. Plaintiffs sought class certification, restitution, unspecified compensatory and punitive damages, and reasonable costs and expenses including attorneys’ fees. On January 31, 2017, plaintiffs filed a motion for class certification. Plaintiffs’ motion for class certification was granted on November 20, 2017. On April 20, 2017, the Company filed a motion for summary judgment, which the court denied on December 8, 2017.

The parties subsequently agreed to a settlement, and on August 1, 2018, the plaintiffs filed a motion for preliminary approval of the class action settlement. At the hearing on September 13, 2018, the court denied preliminary settlement approval without prejudice and ordered revised settlement papers be filed. On November 29, 2018, the court granted preliminary settlement approval and the final approval hearing was scheduled for August 1, 2019. On May 10, 2019, the plaintiffs filed a request for attorneys’ fees and expenses. The Company opposed that request. At the hearing on August 1, 2019, the court asked the parties to submit a re-notice plan in order to achieve a higher claims rate. On the fee request, the court offered the plaintiffs alternative conditions, and on August 18, 2019, the plaintiffs filed their fee election, opting for a 90% reduction of challenged fees and expenses. The re-notice plan was approved on October 16, 2019, and the re-notice resulted in approximately 80,000 more claims, for a total of approximately 141,000 claims. The court granted final approval of the settlement on February 6, 2020, in an amount that is not material to the Company.

On March 20, 2020, the court ruled on plaintiffs’ request for attorneys’ fees and costs and awarded $6.9 million in attorneys’ fees and $0.2 million in costs. On April 20, 2020, the Company filed a notice of appeal. On August 14, 2020, the parties agreed to settle the attorneys’ fees issue for $5.6 million and on August 24, 2020, the appeal was dismissed.

Securities Litigation I. In 2016, putative class actions were filed in federal and California state court against the Company and other defendants alleging violations of the federal securities laws based on alleged materially false and misleading statements about the Company’s PurePulse® heart rate tracking technology. The parties agreed to settle the lawsuits for $33.3 million, which the Company accrued for as of December 31, 2017. Following court approval of the settlement, the federal and state class action cases were dismissed with prejudice in May 2018.

During 2016 and 2017, seven derivative lawsuits were filed in various federal courts and in the Delaware Court of Chancery naming the Company as nominal plaintiff and certain of the Company’s officers and directors as defendants. The federal cases are all stayed. The three cases filed in the Delaware Court of Chancery were consolidated and a second amended
complaint was filed in which plaintiffs allege breach of fiduciary duty and insider trading against certain defendants who sold shares in the Company’s initial public offering and/or a secondary offering. On April 26, 2017, the Company filed a motion to dismiss the Delaware cases for failure to state a claim. On December 14, 2018, the court denied the motion to dismiss. The Company filed a motion for interlocutory appeal, which was denied on January 14, 2019. The Company then filed a Notice of Appeal in the Delaware Supreme Court, which was denied on January 30, 2019. On February 10, 2020, the parties agreed to a settlement of all of the derivative lawsuits, and final court approval of the settlement was received on October 27, 2020.

Securities Litigation II. On November 1, 2018, a putative securities class action was filed in the U.S. District Court for the Northern District of California naming the Company and certain of its officers as defendants. The complaint alleges violations of Sections 10(b) and 20 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) arising out of alleged materially false and misleading statements about the Company’s guidance for the fourth quarter of 2016 and full fiscal year 2016 that was provided during the third and fourth quarters of 2016. On November 15, 2018, a second putative securities class action was filed in the same court alleging similar claims against the same defendants. On April 25, 2019, the two actions were consolidated, and a consolidated amended class action complaint was filed on June 24, 2019. The consolidated complaint also alleges violations of Sections 10(b) and 20 of the Exchange Act against the Company and certain officers relating to the Company’s 2016 guidance, on behalf of a putative class of stockholders who purchased Fitbit stock from August 2, 2016 through January 30, 2017. Plaintiffs seek class certification, unspecified compensatory damages, and reasonable costs and expenses including attorneys’ fees. On August 23, 2019, the Company filed a motion to dismiss. On March 23, 2020, the court granted the motion to dismiss with leave to amend. On April 28, 2020, the court entered judgment after plaintiffs indicated that they did not intend to file an amended complaint. Plaintiffs filed a notice of appeal of the judgment to the United States Court of Appeals for the Ninth Circuit on May 27, 2020. Plaintiffs filed their opening brief on September 25, 2020, and the Company’s opposition brief is due on November 25, 2020.
Koninklijke Philips and Philips North America Patent Litigation. On December 4, 2017, Koninklijke Philips N.V. filed suit in Germany in the Regional Court of Mannheim alleging infringement of its European patent (“EP”) by certain of Fitbit’s products of the German part of EP 1 247 229 B1 (“EP229”). In October 2018, the case was stayed pending an appeal of a January 2014 decision by the European Patent Office (“EPO”) to revoke EP229. On May 31, 2019, the EPO Board of Appeal dismissed the appeal, affirming the decision to revoke EP229. Koninklijke Philips appealed the EPO Board of Appeal decision on July 30, 2019.
On May 30, 2018, Koninklijke Philips filed a second patent infringement suit in the Regional Court of Mannheim alleging infringement by certain of Fitbit’s products of the German part of EP 1 076 806 B1 (“EP806”). In October 2018, the case was stayed pending the decision in a parallel nullity proceeding challenging the validity of EP806. A hearing in the nullity proceeding is scheduled for November 11, 2020.
On July 22, 2019, Philips North America LLC filed a patent infringement suit in U.S. District Court for the District of Massachusetts alleging infringement of U.S. Patent Nos. 6,013,007, 7,088,233, 8,277,377, and 6,976,958 by certain of Fitbit’s products. On November 13, 2019, the Company filed a motion to dismiss. On November 27, 2019, Philips filed an amended complaint. On December 10, 2019, the Company filed a motion to dismiss the amended complaint. A hearing on the motion to dismiss was held on August 20, 2020, but the Court has not yet issued an order. In addition, the Court held a claim construction hearing on August 5, 2020, but has not yet issued an order. On September 3, 2020, Philips filed an amended complaint, withdrawing all allegations of infringement of U.S. Patent No. 6,976,958.
On December 10, 2019, Philips North America and Koninklijke Philips filed a complaint for patent infringement in the International Trade Commission (“ITC”) naming Fitbit, Garmin International, Inc., Garmin USA, Inc., Garmin Ltd., d/b/a Garmin Switzerland GmbH, Ingram Micro Inc., Maintek Computer (Suzhou) Co., Ltd., and Inventec Appliances (Pudong) as proposed respondents. The complaint asserts that all proposed respondents’ accused products infringe U.S. Patent Nos. 7,845,228 (the “’228 patent”), 9,820,698 (the “’698 Patent”), and 9,717,464 (the “’464 patent”) (collectively, the “ITC Patents”), and requests that the ITC institute an investigation and thereafter issue a limited exclusion order and cease and desist orders. On January 10, 2020, the ITC instituted the investigation, titled “In the Matter of Certain Wearable Monitoring Devices, Systems, and Components Thereof.” On October 1, 2020, the ITC Administrative Law Judge (“ALJ”) granted summary determination that Fitbit’s accused products do not infringe the ’464 and ’698 Patents. The ALJ also denied the parties’ respective motions for summary determination of non-infringement and infringement of the ’228 Patent, and determined that Philips satisfied the economic prong of the domestic industry requirement for the ’228 patent. The ITC held an evidentiary hearing regarding the ’228 patent (and the ’464 patent with respect to certain remaining allegations against Garmin) on October 21, 2020 through October 23, 2020. The initial determination is due by February 4, 2021, and the target date for completion of the investigation is June 4, 2021.
On April 2, 2020, the Company filed a complaint for declaratory judgment against Koninklijke Philips in the U.S. District Court for the Northern District of California requesting that the court declare that Fitbit’s products do not infringe the ITC Patents. On July 9, 2020, the court ordered that the case be transferred to the U.S. District Court for the District of Massachusetts following a motion filed by Koninklijke Philips. On October 15, 2020, the court stayed the action pending the ITC investigation between the parties.
On April 8, 2020, the Company filed a lawsuit against Philips North America and Koninklijke Philips in the U.S. District Court for the Northern District of California alleging infringement of U.S. Patent Nos. 7,145,462 and 8,868,377 by certain of Philips’ products. On August 26, 2020, the court ordered that the case be transferred to the U.S. District Court for the District of Massachusetts following a motion filed by Philips. On September 11, 2020, Philips filed a motion to dismiss certain of the claims in the Company’s complaint.
The Company believes that the plaintiffs’ allegations are without merit and intends to vigorously defend against the claims.
Wynit. In September 2017, Wynit Distribution LLC (“Wynit”) filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. Wynit was previously the Company’s largest customer. The Company ceased to recognize revenue from Wynit, which totaled $8.1 million during the third quarter of 2017. Additionally, the Company recorded a charge of $35.8 million during the third quarter of 2017 comprised of cost of revenue of $5.5 million associated with shipments to Wynit in the third quarter of 2017 and bad debt expense of $30.3 million associated with all of Wynit’s outstanding accounts receivables. The Company maintains credit insurance that covers a portion of the exposure related to its customer receivables. The Company recorded an insurance receivable based on an analysis of its insurance policies, including their exclusions, an assessment of the nature of the claim, and information from its insurance carrier. As of September 30, 2017, the Company had recorded an insurance receivable of $26.8 million, included in prepaid expenses and other current assets, associated with the amount it had concluded was probable related to the claim. The $26.8 million insurance receivable allowed the Company to recover $22.7 million of bad debt expense and $4.1 million of cost of revenue, resulting in a net charge of $9.0 million in the consolidated statement of operations comprised of net bad debt expense of $7.6 million and net cost of revenue of $1.4 million. The Company received $21.4 million of the insurance receivable during the fourth quarter of 2017 and the remaining $5.4 million in 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.

On September 4, 2019, plaintiff Nauni Manty, as the chapter 7 trustee of the bankruptcy estate of Wynit Distribution, LLC, et al, filed a complaint in U.S. Bankruptcy Court in the District of Minnesota. The complaint sought: (1) avoidance and recovery under 11 U.S.C. §§ 547, 550, and 551 against Fitbit; and (2) avoidance and preservation under 11 U.S.C. §§ 547, 551 of a second lien granted to Fitbit on substantially all the debtors’ assets. On March 30, 2020, the bankruptcy court approved a settlement of the trustee’s claims in an amount that is not material to the Company, and the case has been dismissed.

Other. The Company is and, from time to time, may in the future become, involved in other legal proceedings in the ordinary course of business. The Company currently believes that the outcome of any of these existing legal proceedings, including the aforementioned cases, either individually or in the aggregate, will not have a material impact on the operating results, financial condition or cash flows of the Company. With respect to existing legal proceedings, the Company has either determined that the existence of a material loss is not reasonably possible or that it is unable to estimate a reasonably possible loss or range of loss. The Company may incur substantial legal fees, which are expensed as incurred, in defending against these legal proceedings.
Indemnification
In the ordinary course of business, the Company enters into commercial agreements that may include indemnification provisions. Pursuant to such agreements, the Company may indemnify, hold harmless and defend an indemnified party for losses suffered or incurred by the indemnified party. Some of the provisions will limit losses to those arising from third-party actions. In some cases, the indemnification will continue after the termination of the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions is not determinable. To date, the Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. The Company has also entered into indemnification agreements with its directors and officers that may require the Company to
indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers to the fullest extent permitted by Delaware corporate law. The Company also currently has directors’ and officers’ insurance.
v3.20.2
Stockholders' Equity
9 Months Ended
Oct. 03, 2020
Share-based Payment Arrangement [Abstract]  
Stockholders' Equity Stockholders’ Equity
 
Equity Incentive Plans

In May 2015, the Company’s board of directors and stockholders adopted and approved the 2015 Equity Incentive Plan (the “2015 Plan”). The 2015 Plan became effective on June 16, 2015 and serves as the successor to the Amended and Restated 2007 Stock Plan (the “2007 Plan”). The Company ceased granting awards under the 2007 Plan upon the effectiveness of the 2015 Plan. However, any outstanding stock options and restricted stock units (“RSUs”) granted under the 2007 Plan remain subject to the terms of the 2007 Plan. As of October 3, 2020, 33.7 million shares of Class A common stock were reserved and available for future issuance under the 2015 Plan.

Stock Options
 
Stock option activity under the equity incentive plans was as follows (in thousands, except per share amounts):
 Stock Options Outstanding
 Number of
Shares Subject
to
Stock Options
Weighted–
Average
Exercise
Price
Aggregate
Intrinsic
Value (1)
Balance—December 31, 2019
12,871 $3.51 
Granted — 
Exercised (1,469)$2.04 
Forfeited or canceled (147)$6.96 
Balance—October 3, 2020
11,255 $3.66 $40,248 
Stock options vested and expected to vest—October 3, 2020
11,255 $3.66 $40,248 
Stock options exercisable—October 3, 2020
11,255 $3.66 $40,248 
 
(1) The aggregate intrinsic values of stock options outstanding, exercisable, vested and expected to vest as of October 3, 2020 were calculated as the difference between the exercise price of the stock options and the fair value of the Class A common stock of $6.92 as of October 3, 2020.

 Restricted Stock Units
 
RSU activity under the equity incentive plans was as follows (in thousands, except per share amounts):
RSUs
Outstanding
Weighted-
Average
Grant Date
Fair Value
Unvested balance—December 31, 2019
18,932 $5.68 
Granted9,904 $6.41 
Vested(8,808)$6.16 
Forfeited or canceled(944)$5.90 
Unvested balance—October 3, 2020
19,084 $5.83 
 
Stock-Based Compensation Expense
 
Total stock-based compensation expense recognized was as follows (in thousands):
 
 Three Months Ended
Nine Months Ended
 
October 3, 2020
September 28, 2019
October 3, 2020
September 28, 2019
Cost of revenue$1,846 $1,446 $6,059 $4,397 
Research and development10,633 10,557 33,194 34,437 
Sales and marketing2,701 2,587 8,376 8,900 
General and administrative3,197 3,494 10,248 11,441 
Total stock-based compensation expense$18,377 $18,084 $57,877 $59,175 

As of October 3, 2020, the total unrecognized stock-based compensation expense related to unvested stock options and RSUs was $97.4 million, which the Company expects to recognize over an estimated weighted average period of 1.8 years.
v3.20.2
Income Taxes
9 Months Ended
Oct. 03, 2020
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
  
The Company is subject to income tax in the United States as well as other tax jurisdictions in which it conducts business. Earnings from non-U.S. activities are subject to local country income tax.

For the three and nine months ended October 3, 2020, the Company recorded an expense for income taxes of $4.0 million and a benefit for income taxes of $125.6 million, respectively, for an effective tax rate of (7.9)% and 47.6%, respectively. The effective tax rate for the three and nine months ended October 3, 2020 was different than the statutory federal tax rate primarily due to the impact of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which enables the Company to carry back current year, 2018 and 2019 net operating losses into prior taxable periods. As a result, the Company released valuation allowance on deferred tax assets related to those net operating losses that can be carried back and benefited in the prior years at the U.S. tax rate of 35%. The tax expense for the three months ended October 3, 2020 was primarily from a true-up to the tax benefit recorded through the second quarter of 2020 due to changes in the mix of income/losses between the Company’s jurisdictions in the third quarter of 2020.

For the three and nine months ended September 28, 2019, the Company recorded an expense for income taxes of $1.7 million and $4.0 million, respectively, for an effective tax rate of (3.3)% and (2.0)%, respectively. The effective tax rate for the three and nine months ended September 28, 2019 was different than the statutory federal tax rate primarily due to the impact of a full valuation allowance on the Company’s U.S. and certain of its foreign deferred tax assets, the mix of income/ losses between the Company’s foreign jurisdictions, and pretax losses in jurisdictions for which no tax benefit will be recognized.

On March 27, 2020, the CARES Act was signed into law. The CARES Act includes, among other items, provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property.

The CARES Act allows losses incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding tax years and to offset 100% of regular taxable income in such years.

Accounting for income taxes for interim periods generally requires the provision for income taxes to be determined by applying an estimate of the annual effective tax rate for the full fiscal year to income or loss before income taxes, excluding unusual or infrequently occurring discrete items (“Ordinary” income), for the reporting period. The Company anticipates that some of the net operating losses generated in 2020 can be carried back to prior taxable years, and recognizes the benefit in its annual effective tax rate. The Company has also recorded the tax benefit of carrying back 2018 and 2019 net operating losses as a discrete tax benefit. The Company will continue to evaluate the potential impact of the CARES Act.

The U.S. Treasury Department has adopted regulations requiring related parties in an intercompany cost-sharing arrangement to share expenses related to share-based compensation in proportion to the economic activity of the related parties. On June 7, 2019, the U.S. Court of Appeals for the Ninth Circuit issued an opinion in Altera Corp. v. Commissioner upholding these regulations, which reversed the prior decision of the U.S. Tax Court. On November 12, 2019, the Ninth Circuit Court of
Appeals denied the plaintiff’s request for an en banc rehearing. The plaintiff filed a petition for a writ of certiorari in the U.S. Supreme Court on February 10, 2020. On June 22, 2020, the U.S. Supreme Court declined to issue a writ of certiorari in the Altera v. Commissioner case. The actions of the U.S. Supreme Court did not have a material impact on the Company’s consolidated financial statements.

The Company accounts for deferred taxes under ASC Topic 740, “Income Taxes,” which involves weighing positive and negative evidence concerning the realizability of the Company’s deferred tax assets in each jurisdiction. In evaluating its ability to realize the net deferred tax assets, the Company considered all available positive and negative evidence, including its past operating results and the forecast of future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. As of October 3, 2020, the Company maintains a valuation allowance against all of its U.S. deferred tax assets and against certain of its foreign deferred tax assets. The Company will continue to assess the realizability of its deferred tax assets in each of the applicable jurisdictions going forward.

As of October 3, 2020, the total amount of gross unrecognized tax benefits was $83.1 million, of which $46.3 million would affect the effective tax rate if recognized. The Company did not have any tax positions as of October 3, 2020 which it is reasonably possible that the total amount of gross unrecognized tax benefits will increase or decrease within the following 12 months.

The material jurisdictions in which the Company is subject to potential examination include the United States and Ireland. The Company believes that adequate amounts have been reserved for these jurisdictions. For the United States, the Company is currently under examination by the Internal Revenue Service ("IRS") for fiscal 2015 to 2019. For state and non-U.S. tax returns, the Company is generally no longer subject to tax examinations for years prior to 2014.
v3.20.2
Net Loss per Share
9 Months Ended
Oct. 03, 2020
Earnings Per Share [Abstract]  
Net Loss per Share Net Loss per Share
 
The following table sets forth the computation of the Company’s basic and diluted net loss per share (in thousands, except per share amounts):
 Three Months Ended
Nine Months Ended
 
October 3, 2020
September 28, 2019
October 3, 2020
September 28, 2019
Numerator:
Net loss$(54,452)$(51,893)$(138,255)$(199,876)
Denominator:
Weighted-average shares of common stock—basic for Class A and Class B270,443 258,753 267,958 256,046 
Effect of dilutive securities— — — — 
Weighted-average shares of common stock—diluted for Class A and Class B270,443 258,753 267,958 256,046 
Net loss per share:
Basic$(0.20)$(0.20)$(0.52)$(0.78)
Diluted$(0.20)$(0.20)$(0.52)$(0.78)
The following potentially dilutive common shares were excluded from the computation of diluted net loss per share for the periods presented because including them would have been anti-dilutive (in thousands):
 
 Three Months Ended
Nine Months Ended
 
October 3, 2020
September 28, 2019
October 3, 2020
September 28, 2019
 
Stock options to purchase common stock11,255 15,384 11,255 15,584 
RSUs19,084 18,279 19,084 20,998 
Warrant230 230 230 230 
Diluted impact of Employee Stock Purchase Plan— 1,412 — 1,351 
Total30,569 $35,305 30,569 38,163 
v3.20.2
Significant Customer Information and Other Information
9 Months Ended
Oct. 03, 2020
Risks and Uncertainties [Abstract]  
Significant Customer Information and Other Information Significant Customer Information and Other Information
 
Retailer and Distributor Concentration
 
Retailers and distributors that accounted for equal to or greater than 10% of total revenue for the three and nine months ended October 3, 2020 and September 28, 2019 were as follows:
 Three Months Ended
Nine Months Ended
 
October 3, 2020
September 28, 2019
October 3, 2020
September 28, 2019
C11 %*12 %*
G— %12 %— *
D— %11 %— *
* Represents less than 10%.

Retailers and distributors that accounted for equal to or greater than 10% of accounts receivable at October 3, 2020 and December 31, 2019 were as follows:
 
October 3, 2020
December 31, 2019
C13 %18 %
D— 11 
E— 10 
 
    * Represents less than 10%.

Geographic and Other Information
 
Revenue by geographic region, based on ship-to destinations, was as follows (in thousands):
 
 Three Months Ended
Nine Months Ended
 
October 3, 2020
September 28, 2019
October 3, 2020
September 28, 2019
United States$195,001 $206,654 $461,769 $522,607 
Americas excluding United States25,960 16,722 47,158 51,227 
Europe, Middle East, and Africa102,401 82,951 231,782 257,612 
Asia Pacific40,570 40,873 72,653 101,200 
Total$363,932 $347,200 $813,362 $932,646 

As of October 3, 2020 and December 31, 2019, long-lived assets, which represent property and equipment, located outside the United States were $27.5 million and $27.9 million, respectively.
v3.20.2
Basis of Presentation and Summary of Significant Accounting Policies (Policies)
9 Months Ended
Oct. 03, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Basis of Presentation and Summary of Significant Accounting Policies Basis of Presentation and Summary of Significant Accounting Policies
 
The accompanying condensed consolidated financial statements of Fitbit, Inc. (the “Company”) are unaudited. The condensed consolidated balance sheet at December 31, 2019 has been derived from the audited financial statements of the Company. The accompanying condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information, and in management’s opinion, includes all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement of the Company’s financial position, its results of operations, and cash flows for the interim periods presented. The results of operations for the three and nine months ended October 3, 2020 are not necessarily indicative of the results to be expected for the full fiscal year or any other period.

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

The Company’s fiscal year ends on December 31 of each year. The Company is on a 4-4-5 week quarterly calendar. There were 91 days in each of the three months ended October 3, 2020 and September 28, 2019.
Principles of Consolidation The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated.
Use of Estimates
Use of Estimates
 
The preparation of condensed consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the condensed consolidated financial statements and accompanying notes. The primary estimates and assumptions made by management are related to revenue recognition, reserves for sales returns and incentives, reserves for warranty, valuation of stock-based awards, fair value of derivative assets and liabilities, allowance for credit losses, inventory valuation, fair value of goodwill and acquired tangible and intangible assets and liabilities assumed during acquisitions, the recoverability of intangible assets and their useful lives, contingencies, and income taxes. Actual results could differ from those estimates, and such differences may be material to the condensed consolidated financial statements.
Recent Accounting Pronouncements
Recent Accounting Pronouncements

Accounting Pronouncements Not Yet Adopted

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

Accounting Pronouncements Recently Adopted

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

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

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework–Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements on fair value measurements and became effective for the Company on January 1, 2020. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 clarifies the accounting for implementation costs in cloud computing arrangements and became effective for the Company on January 1, 2020. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
v3.20.2
Fair Value Measurements (Tables)
9 Months Ended
Oct. 03, 2020
Fair Value Disclosures [Abstract]  
Schedule of fair value of assets and liabilities measured on recurring basis
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):
 
 
October 3, 2020
 Level 1Level 2Level 3Total
Assets:
Money market funds$189,887 $— $— $189,887 
U.S. government agencies— 36,337 — 36,337 
Corporate debt securities— 61,980 — 61,980 
Total$189,887 $98,317 $— $288,204 
Liabilities:
Contingent consideration$— $— $1,523 $1,523 
Total$— $— $1,523 $1,523 

 
December 31, 2019
 Level 1Level 2Level 3Total
Assets:
Money market funds$107,708 $— $— $107,708 
U.S. government agencies— 77,364 —