FITBIT INC, 10-Q filed on 5/3/2019
Quarterly Report
v3.19.1
Document and Entity Information - shares
3 Months Ended
Mar. 30, 2019
Apr. 26, 2019
Entity Information [Line Items]    
Entity Registrant Name FITBIT INC  
Entity Central Index Key 0001447599  
Current Fiscal Year End Date --12-31  
Entity Filer Category Large Accelerated Filer  
Document Type 10-Q  
Document Period End Date Mar. 30, 2019  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q1  
Amendment Flag false  
Common Class A [Member]    
Entity Information [Line Items]    
Entity Common Stock, Shares Outstanding   223,736,591
Common Class B [Member]    
Entity Information [Line Items]    
Entity Common Stock, Shares Outstanding   31,267,322
v3.19.1
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Mar. 30, 2019
Dec. 31, 2018
Current assets:    
Cash and cash equivalents $ 410,813 $ 473,956
Marketable securities 233,383 249,493
Accounts receivable, net 250,582 414,209
Inventories 174,478 124,871
Income tax receivable 6,917 6,957
Prepaid expenses and other current assets 26,481 42,325
Total current assets 1,102,654 1,311,811
Property and equipment, net 95,275 106,286
Operating lease right-of-use assets 99,144  
Goodwill 60,979 60,979
Intangible assets, net 21,559 23,620
Deferred tax assets 4,436 4,489
Other assets 10,423 8,362
Total assets 1,394,470 1,515,547
Current liabilities:    
Accounts payable 165,551 251,657
Accrued liabilities 363,751 437,234
Operating lease liabilities 30,209  
Deferred revenue 28,655 29,400
Income taxes payable 1,349 1,092
Total current liabilities 589,515 719,383
Long-term deferred revenue 5,922 7,436
Long-term operating lease liabilities 98,219  
Other liabilities 29,001 52,790
Total liabilities 722,657 779,609
Commitments and contingencies (Note 6)
Stockholders’ equity:    
Class A and Class B common stock 25 25
Additional paid-in capital 1,070,224 1,055,046
Accumulated other comprehensive income (loss) 96 (66)
Accumulated deficit (398,532) (319,067)
Total stockholders’ equity 671,813 735,938
Total liabilities and stockholders’ equity $ 1,394,470 $ 1,515,547
v3.19.1
Condensed Consolidated Statements of Operations - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended
Mar. 30, 2019
Mar. 31, 2018
Income Statement [Abstract]    
Revenue $ 271,890 $ 247,865
Cost of revenue 182,437 133,742
Gross profit 89,453 114,123
Operating expenses:    
Research and development 77,039 89,336
Sales and marketing 68,616 72,052
General and administrative 26,692 36,088
Total operating expenses 172,347 197,476
Operating loss (82,894) (83,353)
Interest income, net 3,466 1,350
Other income, net 1,273 517
Loss before income taxes (78,155) (81,486)
Income tax expense (benefit) 1,310 (609)
Net loss $ (79,465) $ (80,877)
Net loss per share:    
Basic (in dollars per share) $ (0.31) $ (0.34)
Diluted (in dollars per share) $ (0.31) $ (0.34)
Shares used to compute net loss per share:    
Basic (in shares) 253,124 239,431
Diluted (in shares) 253,124 239,431
v3.19.1
Condensed Consolidated Statements of Comprehensive Loss - USD ($)
$ in Thousands
3 Months Ended
Mar. 30, 2019
Mar. 31, 2018
Statement of Comprehensive Income [Abstract]    
Net loss $ (79,465) $ (80,877)
Cash flow hedges:    
Change in unrealized gain (loss) on cash flow hedges, net of tax benefit (expense) of $43, $192, $709 and $(7), respectively 0 664
Less: reclassification for realized net gains included in net loss, net of tax expense (benefit) of $(115), $-, $(244) and $7, respectively 0 0
Net change, net of tax 0 664
Available-for-sale investments:    
Change in unrealized gain (loss) on available-for-sale investments, net of tax 162 (326)
Less reclassification for realized net gain 0 0
Other comprehensive income 162 338
Net change, net of tax   (326)
Comprehensive loss $ (79,303) $ (80,539)
v3.19.1
Condensed Consolidated Statements of Comprehensive Loss (Parenthetical) - USD ($)
$ in Thousands
3 Months Ended
Mar. 30, 2019
Mar. 31, 2018
Statement of Comprehensive Income [Abstract]    
Change in unrealized gain (loss) on cash flow hedges, tax $ 0 $ 0
Reclassification for realized net gains included in net income, tax $ 0 $ 0
v3.19.1
Condensed Consolidated Statements of Stockholders’ Equity Condensed Consolidated Statements of Stockholders’ Equity - USD ($)
$ in Thousands
Total
Common Stock [Member]
Additional paid-in capital [Member]
Accumulated other comprehensive income (loss) [Member]
Accumulated deficit [Member]
Beginning balance (in shares) at Dec. 31, 2017   238,756,522      
Beginning balance at Dec. 31, 2017 $ 823,963 $ 24 $ 956,060 $ (9) $ (132,112)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Issuance of common stock 987   987    
Issuance of common stock (in shares)   2,233,091      
Stock-based compensation expense 24,148   24,148    
Taxes related to net share settlement of restricted stock units 5,173   5,173    
Net income (loss) (80,877)       (80,877)
Other comprehensive income 338     338  
Ending balance (in shares) at Mar. 31, 2018   240,989,613      
Ending balance at Mar. 31, 2018 762,259 $ 24 976,022 329 (214,116)
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 931   931    
Issuance of common stock (in shares)   2,381,188      
Stock-based compensation expense 20,669   20,669    
Taxes related to net share settlement of restricted stock units 6,422   6,422    
Net income (loss) (79,465)       (79,465)
Other comprehensive income 162     162  
Ending balance (in shares) at Mar. 30, 2019   254,744,029      
Ending balance at Mar. 30, 2019 $ 671,813 $ 25 $ 1,070,224 $ 96 $ (398,532)
v3.19.1
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
3 Months Ended
Mar. 30, 2019
Mar. 31, 2018
Cash Flows from Operating Activities    
Net loss $ (79,465) $ (80,877)
Adjustments to reconcile net loss to net cash provided by operating activities:    
Provision for doubtful accounts 32 0
Provision for inventory obsolescence 1,478 6,337
Depreciation 13,373 10,456
Non-cash lease expense 7,713 0
Write-off of property and equipment 0 7,259
Amortization of intangible assets 2,060 1,748
Stock-based compensation 20,544 23,641
Deferred income taxes (20) (1,799)
Other (50) (275)
Changes in operating assets and liabilities, net of acquisition:    
Accounts receivable 163,592 191,982
Inventories (50,958) (27,307)
Prepaid expenses and other assets 12,594 39,610
Fitbit Force recall reserve 46 (132)
Accounts payable (81,656) (84,155)
Accrued liabilities and other liabilities (69,962) (70,147)
Lease liabilities (4,972) 0
Deferred revenue (2,259) (6,010)
Income taxes payable 257 (173)
Net cash provided by (used in) operating activities (67,653) 10,158
Cash Flows from Investing Activities    
Purchase of property and equipment (6,096) (12,616)
Purchases of marketable securities (111,615) (141,404)
Sales of marketable securities 0 50,795
Maturities of marketable securities 128,309 148,041
Acquisition, net of cash acquired 0 (13,646)
Net cash provided by investing activities 10,598 31,170
Cash Flows from Financing Activities    
Repayment of debt 0 (747)
Payment of financing lease liability (597) 0
Proceeds from issuance of common stock 931 992
Taxes paid related to net share settlement of restricted stock units (6,422) (5,179)
Net cash used in financing activities (6,088) (4,934)
Net increase (decrease) in cash and cash equivalents (63,143) 36,394
Cash and cash equivalents at beginning of period 473,956 341,966
Cash and cash equivalents at end of period $ 410,813 $ 378,360
v3.19.1
Basis of Presentation and Summary of Significant Accounting Policies
3 Months Ended
Mar. 30, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Summary of Significant Accounting Policies
 
The accompanying condensed consolidated financial statements of Fitbit, Inc. (the “Company”) are unaudited. The condensed consolidated balance sheet at December 31, 2018 has been derived from the audited financial statements of the Company. The accompanying condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information, and in management’s opinion, includes all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement of the Company’s financial position, its results of operations, and cash flows for the interim periods presented. The results of operations for the three months ended March 30, 2019 are not necessarily indicative of the results to be expected for the full fiscal year or any other period.

The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on March 1, 2019.

The Company’s fiscal year ends on December 31 of each year. The Company is on a 4-4-5 week quarterly calendar. There were 89 and 90 days in each of the three months ended March 30, 2019 and March 31, 2018, respectively.

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

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

Significant Accounting Policies

There have been no significant changes in the Company’s accounting policies from those disclosed in its Annual Report on Form 10-K, except for the policies described below in relation to the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), discussed below in the section titled “Accounting Pronouncements Recently Adopted.”
    
Leases

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

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

Customer Bankruptcy

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 ended September 30, 2017 comprised of cost of revenue of $5.5 million associated with shipments to Wynit in the third quarter of 2017 and bad debt expense of $30.3 million associated with all of Wynit’s outstanding accounts receivables. The Company maintains credit insurance that covers a portion of the exposure related to its customer receivables. The Company recorded an insurance receivable based on an analysis of its insurance policies, including their exclusions, an assessment of the nature of the claim, and information from its insurance carrier. As of September 30, 2017, the Company had recorded an insurance receivable of $26.8 million, included in prepaid expenses and other current assets, associated with the amount it had concluded was probable related to the claim. The $26.8 million insurance receivable allowed the Company to recover $22.7 million of bad debt expense and $4.1 million of cost of revenue, resulting in a net charge of $9.0 million in the consolidated statement of operations comprised of net bad debt expense of $7.6 million and net cost of revenue of $1.4 million. The Company received $21.4 million of the insurance receivable during the fourth quarter of 2017 and the remaining $5.4 million in January 2018.

During the three months ended March 31, 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 three months ended March 31, 2018.

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. ASU 2016-13 will become effective for the Company on January 1, 2020 and early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test. The second step measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under ASU 2017-04, a company will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. ASU 2017-04 will be applied prospectively and is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In 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 condensed consolidated balance sheets but did not have an impact on its condensed consolidated statements of operations. The most significant impact was the recognition of ROU assets and short-term and long-term lease liabilities for operating leases. The balances of operating lease ROU assets, operating lease liabilities, and long-term operating lease liabilities as of March 30, 2019 were $99.1 million, $30.2 million, and $98.2 million, respectively. The impact to other financial statement line items was immaterial. Adoption of the standard had no impact to net cash from or used in operating, investing, or financing activities in the Company’s consolidated statement of cash flows. Refer to Note 5 for further information on leases.

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

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 became effective for the Company on January 1, 2019. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
v3.19.1
Fair Value Measurements
3 Months Ended
Mar. 30, 2019
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements
 
The carrying values of the Company’s accounts receivable, accounts payable, and accrued liabilities approximated their fair values due to the short period of time to maturity or repayment.
 
The following tables set forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):
 
 
March 30, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Money market funds
$
225,733

 
$

 
$

 
$
225,733

U.S. government agencies

 
80,808

 

 
80,808

Corporate debt securities

 
224,092

 

 
224,092

Derivative assets

 
464

 

 
464

Total
$
225,733

 
$
305,364

 
$

 
$
531,097

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
28

 
$

 
$
28

Total
$

 
$
28

 
$

 
$
28


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

 
$

 
$

 
$
273,546

U.S. government agencies

 
72,840

 

 
72,840

Corporate debt securities

 
228,953

 

 
228,953

Derivative assets

 
623

 

 
623

Total
273,546

 
302,416

 

 
575,962

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
549

 
$

 
$
549

Stock warrant liability

 

 
410

 
410

Total
$

 
$
549

 
$
410

 
$
959


 
The fair value of the Company’s Level 1 financial instruments is based on quoted market prices in active markets for identical instruments. The fair value of the Company’s Level 2 financial instruments is based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data.

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

There were no Level 3 assets as of March 30, 2019 and December 31, 2018. There were no Level 3 liabilities as of March 30, 2019 and there were Level 3 liabilities as of December 31, 2018. There were no transfers between fair value measurement levels during the three months ended March 30, 2019 and March 31, 2018.
v3.19.1
Financial Instruments
3 Months Ended
Mar. 30, 2019
Investments, Debt and Equity Securities [Abstract]  
Financial Instruments
Financial Instruments

Cash, Cash Equivalents and Marketable Securities

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

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

The following table sets forth cash, cash equivalents and marketable securities as of March 30, 2019 (in thousands):
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Marketable Securities
 
 
 
 
 
 
 
 
 
 
 
 
Cash
$
113,563

 
$

 
$

 
$
113,563

 
$
113,563

 
$

Money market funds
225,733

 

 

 
225,733

 
225,733

 

U.S. government agencies
80,796

 
20

 
(8
)
 
80,808

 
8,888

 
71,920

Corporate debt securities
224,068

 
32

 
(8
)
 
224,092

 
62,629

 
161,463

Total
$
644,160

 
$
52

 
$
(16
)
 
$
644,196

 
$
410,813

 
$
233,383


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

 
$

 
$

 
$
148,110

 
$
148,110

 
$

Money market funds
273,546

 

 

 
273,546

 
273,546

 

U.S. government agencies
72,884

 
1

 
(45
)
 
72,840

 
9,738

 
63,102

Corporate debt securities
229,040

 

 
(87
)
 
228,953

 
42,562

 
186,391

Total
$
723,580

 
$
1

 
$
(132
)
 
$
723,449

 
$
473,956

 
$
249,493



The gross unrealized gains or losses on marketable securities as of March 30, 2019 and December 31, 2018 were not material. There were no available-for-sale investments as of March 30, 2019 and December 31, 2018 that have been in a continuous unrealized loss position for greater than 12 months on a material basis.

The following table classifies marketable securities by contractual maturities (in thousands):
 
March 30, 2019
 
December 31, 2018
 
 
 
 
Due in one year
$
230,382

 
$
249,493

Due in one to two years
3,001

 

Total
$
233,383

 
$
249,493



Derivative Financial Instruments

The Company operates in foreign countries, which exposes it to market risk associated with foreign currency exchange rate fluctuations between the U.S. dollar and various foreign currencies. In order to manage this risk, the Company may hedge a portion of its foreign currency exposures related to outstanding monetary assets and liabilities as well as forecasted revenues and expenses, using foreign currency exchange forward or option contracts. In general, the market risk related to these contracts is offset by corresponding gains and losses on the hedged transactions. The Company does not enter into derivative contracts for trading or speculative purposes.
 
Cash Flow Hedges
 
The Company at times enters into foreign currency derivative contracts designated as cash flow hedges to hedge certain forecasted revenue and expense transactions denominated in currencies other than the U.S. dollar. The Company’s cash flow hedges consist of forward contracts with maturities of 12 months or less.

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

The Company had no outstanding contracts that were designated as cash flow hedges for forecasted revenue as of March 30, 2019 and December 31, 2018, respectively.

Balance Sheet Hedges

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

The Company had outstanding balance sheet hedges with a total notional amount of $67.2 million and $101.4 million as of March 30, 2019 and December 31, 2018, respectively.
 
Fair Value of Foreign Currency Derivatives

The foreign currency derivative contracts that were not settled at the end of the period are recorded at fair value, on a gross basis, in the condensed consolidated balance sheets. The following table presents the fair value of the Company’s foreign currency derivative contracts as of the periods presented (in thousands):
 
 
 
March 30, 2019
 
December 31, 2018
 
Balance Sheet Location
 
Fair Value Derivative
Assets
 
Fair Value Derivative Liabilities
 
Fair Value Derivative
Assets
 
Fair Value Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
Hedges not designated
Prepaid expenses and other current assets
 
464

 

 
623

 

Hedges not designated
Accrued liabilities
 

 
28

 

 
549

Total fair value of derivative instruments
 
 
$
464

 
$
28

 
$
623

 
$
549



Financial Statement Effect of Foreign Currency Derivative Contracts

The following table presents the pre-tax impact of the Company’s foreign currency derivative contracts on other comprehensive income (“OCI”) and the condensed consolidated statements of operations for the periods presented (in thousands):
 
 
 
Three Months Ended
 
Income Statement Location
 
March 30, 2019
 
March 31, 2018
 
 
 
 
 
 
Foreign exchange cash flow hedges:
 
 
 
 
 
Gain (loss) recognized in OCI – effective portion
 
 
$

 
$
664

Gain (loss) reclassified from OCI into income – effective portion
Revenue
 

 

 
 
 
 
 
 
Foreign exchange balance sheet hedges:
 
 
 
 
 
Gain (loss) recognized in income
Other income, net
 
(359
)
 
(2,493
)


As of March 30, 2019, there were no net derivative gains related to the Company’s cash flow hedges to be reclassified from OCI into revenue within the next 12 months.

Effect of Derivative Contracts on Condensed Consolidated Statements of Operations

The following table provides the location in the condensed consolidated statements of operations and amount of the recognized gains or losses to the Company’s derivative instruments designated as hedging instruments (in thousands):
 
 
Three Months Ended
 
 
March 30, 2019
 
March 31, 2018
 
 
 
 
 
Total amounts presented in the condensed consolidated statement of operations in which the effects of cash flow hedges are recorded in revenue
 
$
271,890

 
$
247,865

Total amounts presented in the condensed consolidated statement of operations in which the effects of cash flow hedges are recorded in operating expenses
 
172,347

 
197,476



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 March 30, 2019 and December 31, 2018 (in thousands):

 
March 30, 2019
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Gross Amounts Not Offset in Condensed Consolidated Balance Sheets
 
Gross Amounts Recognized
 
Gross Amounts Offset
 
Net Amounts Presented
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts assets
$
464

 
$

 
$
464

 
$
28

 
$

 
$
436

Foreign exchange contracts liabilities
28

 

 
28

 
28

 

 

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

 
$

 
$
623

 
$
549

 
$

 
$
74

Foreign exchange contracts liabilities
549

 

 
549

 
549

 

 

v3.19.1
Balance Sheet Components
3 Months Ended
Mar. 30, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Balance Sheet Components
Balance Sheet Components

Deferred Revenue

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

Changes in the total short-term and long-term deferred revenue balances were as follows (in thousands):
 
Three Months Ended
 
March 30, 2019
 
 
Beginning balances
$
36,836

Deferral of revenue
7,659

Recognition of deferred revenue
(9,917
)
Ending balances
$
34,578



Revenue Returns Reserve
 
Revenue returns reserve activities were as follows (in thousands):
 
Three Months Ended
 
March 30, 2019
 
March 31, 2018
 
 
 
 
Beginning balances
$
104,001

 
$
109,872

Increases (1)
31,259

 
26,073

Returns taken
(59,262
)
 
(53,333
)
Ending balances
$
75,998

 
$
82,612


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

Inventories
 
Inventories consisted of the following (in thousands):
 
 
 
 
  
March 30, 2019
 
December 31, 2018
 
 
 
 
Components
$
19,010

 
$
8,866

Finished goods
155,468

 
116,005

Total inventories
$
174,478

 
$
124,871


 
Prepaid Expenses and Other Current Assets
 
Prepaid expenses and other current assets consisted of the following (in thousands):
 
 
 
 
  
March 30, 2019
 
December 31, 2018
 
 
 
 
Point-of-purchase (“POP”) displays, net
$
4,262

 
$
5,143

Prepaid marketing
2,673

 
3,258

Derivative asset
464

 
623

Prepaid expenses
11,136

 
18,100

Other
7,946

 
15,201

Total prepaid expenses and other current assets
$
26,481

 
$
42,325



Property and Equipment, Net
 
Property and equipment, net, consisted of the following (in thousands):
 
 
 
 
  
March 30, 2019
 
December 31, 2018
 
 
 
 
Tooling and manufacturing equipment
$
80,200

 
$
80,685

Furniture and office equipment
22,454

 
22,738

Purchased and internally-developed software
24,200

 
21,741

Leasehold improvements
64,591

 
67,715

Total property and equipment
191,445

 
192,879

Less: Accumulated depreciation and amortization
(96,170
)
 
(86,593
)
Property and equipment, net
$
95,275

 
$
106,286


 
Total depreciation and amortization expense related to property and equipment, net was $13.4 million and $10.5 million for the three months ended March 30, 2019 and March 31, 2018, respectively.

Goodwill and Intangible Assets

The carrying amount of goodwill was $61.0 million as of March 30, 2019 and December 31, 2018.

The carrying amounts of the intangible assets as of March 30, 2019 and December 31, 2018 were as follows (in thousands, except useful life):
 
March 30, 2019
 
December 31, 2018
  
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
 
 
 
 
 
 
 
 
 
 
 
 
Developed technology
$
35,988

 
$
(17,852
)
 
$
18,136

 
$
35,988

 
$
(15,983
)
 
$
20,005

Customer relationships
3,790

 
(586
)
 
3,204

 
3,790

 
(451
)
 
3,339

Trademarks and other
1,278

 
(1,059
)
 
219

 
1,278

 
(1,002
)
 
276

Total intangible assets, net
$
41,056

 
$
(19,497
)
 
$
21,559

 
$
41,056

 
$
(17,436
)
 
$
23,620



Total amortization expense related to intangible assets was $2.1 million and $1.7 million for the three months ended March 30, 2019 and March 31, 2018, respectively.

The estimated future amortization expense of acquired finite-lived intangible assets to be charged to cost of revenue and operating expenses after March 30, 2019 is as follows (in thousands):
  
Cost of Revenue
 
Operating Expenses
 
Total
 
 
 
 
 
 
Remaining 2019
$
4,781

 
$
620

 
$
5,401

2020
5,854

 
643

 
6,497

2021
5,854

 
597

 
6,451

2022
1,180

 
597

 
1,777

2023

 
597

 
597

Thereafter

 
836

 
836

Total finite-lived intangible assets, net
$
17,669

 
$
3,890

 
$
21,559



Accrued Liabilities
 
Accrued liabilities consisted of the following (in thousands):
 
March 30, 2019
 
December 31, 2018
 
 
Accrued sales incentives
$
101,352

 
$
126,400

Accrued revenue reserve from returns
75,998

 
104,001

Product warranty
48,034

 
45,605

Finance lease liabilities
2,102

 

Sales taxes and VAT payable
12,873

 
20,121

Accrued manufacturing expense and freight
30,288

 
21,357

Accrued co-op advertising and marketing development funds
27,605

 
30,435

Employee-related liabilities
19,196

 
33,916

Accrued sales and marketing
15,573

 
18,171

Accrued research and development
12,655

 
8,783

Inventory received but not billed
4,091

 
6,373

Accrued legal settlements and fees
2,912

 
2,821

Derivative liabilities
28

 
549

Other
11,044

 
18,702

Accrued liabilities
$
363,751

 
$
437,234



Product warranty reserve activities were as follows (in thousands):
 
Three Months Ended
 
March 30, 2019
 
March 31, 2018
 
 
 
 
Beginning balances
$
45,605

 
$
87,882

Charged to cost of revenue
8,238

 
(2,481
)
Changes related to pre-existing warranties
4,747

 
(3,402
)
Settlement of claims
(10,556
)
 
(10,024
)
Ending balances
$
48,034

 
$
71,975

 

Accumulated Other Comprehensive Income (Loss)

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

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

 
$

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

 

 
162

 
162

Amounts reclassified from AOCI

 

 

 

Other comprehensive income (loss)

 

 
162

 
162

Balance at March 30, 2019
$
66

 
$

 
$
30

 
$
96

v3.19.1
Leases
3 Months Ended
Mar. 30, 2019
Leases [Abstract]  
Leases
 Leases

The Company leases its principal facilities located in San Francisco, California. The Company also leases office space in various locations with expiration dates between 2019 and 2024. The lease agreements often include leasehold improvement incentives, escalating lease payments, renewal provisions and other provisions which require the Company to pay taxes, insurance, maintenance costs or defined rent increases. The Company’s leases are primarily accounted for as operating leases. Operating lease ROU assets and short-term and long-term operating lease liabilities are included on the face of the condensed consolidated balance sheet. Finance lease ROU assets are presented within other assets, and finance lease liabilities are presented within accrued liabilities. The Company has no leases that have not yet commenced as of March 30, 2019.

Total lease cost consists of the following (in thousands):
 
Three Months Ended
 
March 30, 2019
 
 
Finance lease costs:
 
Amortization of ROU assets
$
573

Interest on lease liabilities

Operating lease costs(1)
7,574

Variable lease costs
1,315

Sublease income
(1,966
)
Total lease costs
$
7,496

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

Supplemental cash flow information related to leases was as follows (in thousands):
 
Three Months Ended
 
March 30, 2019
 
 
Cash paid for amounts included in the measurement of lease liabilities:
 
Financing cash flows from finance leases
$
597

Operating cash flows from finance leases

Operating cash flows from operating leases
5,512

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

Operating lease liabilities
288



Supplemental balance sheet information related to leases was as follows (in thousands):
 
March 30, 2019
 
 
Finance leases:
 
Other assets
$
2,127

 
 
Accrued liabilities
$
2,102

 
 
Operating leases:
 
Operating lease ROU assets
$
99,144

 
 
Operating lease liabilities
$
30,209

Long-term operating lease liabilities
98,219

Total operating lease liabilities
$
128,428



Weighted-average lease terms and discount rates are as follows:
 
March 30, 2019
 
 
Weighted-average remaining lease terms (in years):
 
Finance leases
0.8
Operating leases
4.9
 
 
Weighted-average discount rates:
 
Finance leases
—%
Operating leases
5.5%


Maturities of lease liabilities as of March 30, 2019 were as follow (in thousands):
 
 
 
 
 
Finance Leases
 
Operating Leases
Remaining 2019
$
2,102

 
$
28,140

2020

 
29,017

2021

 
27,216

2022

 
26,819

2023

 
25,159

Thereafter

 
8,700

Total minimum lease payments
$
2,102

 
$
145,051

Less: amount representing interest

 
(16,623
)
Total lease liabilities
$
2,102

 
$
128,428

Leases
Leases

The Company leases its principal facilities located in San Francisco, California. The Company also leases office space in various locations with expiration dates between 2019 and 2024. The lease agreements often include leasehold improvement incentives, escalating lease payments, renewal provisions and other provisions which require the Company to pay taxes, insurance, maintenance costs or defined rent increases. The Company’s leases are primarily accounted for as operating leases. Operating lease ROU assets and short-term and long-term operating lease liabilities are included on the face of the condensed consolidated balance sheet. Finance lease ROU assets are presented within other assets, and finance lease liabilities are presented within accrued liabilities. The Company has no leases that have not yet commenced as of March 30, 2019.

Total lease cost consists of the following (in thousands):
 
Three Months Ended
 
March 30, 2019
 
 
Finance lease costs:
 
Amortization of ROU assets
$
573

Interest on lease liabilities

Operating lease costs(1)
7,574

Variable lease costs
1,315

Sublease income
(1,966
)
Total lease costs
$
7,496

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

Supplemental cash flow information related to leases was as follows (in thousands):
 
Three Months Ended
 
March 30, 2019
 
 
Cash paid for amounts included in the measurement of lease liabilities:
 
Financing cash flows from finance leases
$
597

Operating cash flows from finance leases

Operating cash flows from operating leases
5,512

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

Operating lease liabilities
288



Supplemental balance sheet information related to leases was as follows (in thousands):
 
March 30, 2019
 
 
Finance leases:
 
Other assets
$
2,127

 
 
Accrued liabilities
$
2,102

 
 
Operating leases:
 
Operating lease ROU assets
$
99,144

 
 
Operating lease liabilities
$
30,209

Long-term operating lease liabilities
98,219

Total operating lease liabilities
$
128,428



Weighted-average lease terms and discount rates are as follows:
 
March 30, 2019
 
 
Weighted-average remaining lease terms (in years):
 
Finance leases
0.8
Operating leases
4.9
 
 
Weighted-average discount rates:
 
Finance leases
—%
Operating leases
5.5%


Maturities of lease liabilities as of March 30, 2019 were as follow (in thousands):
 
 
 
 
 
Finance Leases
 
Operating Leases
Remaining 2019
$
2,102

 
$
28,140

2020

 
29,017

2021

 
27,216

2022

 
26,819

2023

 
25,159

Thereafter

 
8,700

Total minimum lease payments
$
2,102

 
$
145,051

Less: amount representing interest

 
(16,623
)
Total lease liabilities
$
2,102

 
$
128,428

v3.19.1
Commitments and Contingencies
3 Months Ended
Mar. 30, 2019
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies
Commitments and Contingencies
 
Purchase Commitments

The aggregate amount of open purchase orders as of March 30, 2019 was approximately $605.8 million, of which $185.0 million related to the Company’s migration to a third-party hosting provider and $5.9 million was accrued for as of March 30, 2019. The Company cannot determine the aggregate amount of such purchase orders that represent contractual obligations because purchase orders may represent authorizations to purchase rather than binding agreements. The Company’s purchase orders are based on its current needs and are fulfilled by its suppliers, contract manufacturers, and logistics providers within short periods of time.

During the normal course of business, the Company and its contract manufacturers procure components based upon a forecasted production plan. If the Company cancels all or part of the orders, or materially reduces forecasted orders, it may be liable to its suppliers and contract manufacturers for the cost of the excess components purchased by its contract manufacturers. As of March 30, 2019, $12.7 million was accrued for such liabilities to contract manufacturers.

Letters of Credit

 As of March 30, 2019 and December 31, 2018, the Company had outstanding letters of credit of $36.6 million and $36.9 million, respectively, issued to cover the security deposit on the lease of its office headquarters in San Francisco, California, and other facility leases.

Legal Proceedings

Jawbone. Aliphcom, Inc. d/b/a Jawbone (“Jawbone”) and the Company each initiated civil lawsuits against each other in 2015. These included a complaint filed by Jawbone in California state court alleging the misappropriation of certain trade secrets by six former Jawbone employees who had joined Fitbit and who were also named as defendants. On December 8, 2017, the parties announced the global settlement of all of the outstanding civil litigation on confidential terms, and all of the cases were dismissed with prejudice.
On August 12, 2016, the Company was notified by Jawbone that Jawbone had received a confidential subpoena from the U.S. Attorney’s Office for the Northern District of California requesting certain of the Company’s confidential business information that appeared to be related to Jawbone’s allegations of trade secret misappropriation. On February 17, 2017, the Company received a subpoena for documents from the same office. On February 1, 2018, the Company received a second subpoena for documents. The Company is cooperating with the U.S. Attorney’s Office. On June 14, 2018, the six former Jawbone employees who were named as individual defendants in the state trade secret case were charged in a federal indictment with being in possession of certain Jawbone trade secrets.
Sleep Tracking. On May 8, 2015, a purported class action lawsuit was filed against the Company in the U.S. District Court for the Northern District of California, alleging that the sleep tracking function available in certain trackers does not perform as advertised. Plaintiffs seek class certification, restitution, unspecified compensatory and punitive damages, reasonable costs and expenses including attorneys’ fees, and other further relief as the court may deem just and proper. On January 31, 2017, plaintiffs filed a motion for class certification. Plaintiffs’ motion for class certification was granted on November 20, 2017. On April 20, 2017, the Company filed a motion for summary judgment. The Company’s motion for summary judgment was denied on December 8, 2017. During the three months ended June 30, 2018, the parties 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 by October 26, 2018. On November 29, 2018, the court granted preliminary settlement approval. The final approval hearing is scheduled for July 11, 2019.

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

In response to an April 3, 2018 arbitration demand from Kate McLellan, one of the original plaintiffs who was compelled to arbitration, the Company attempted to resolve the individual claim with Ms. McLellan. At a May 31, 2018 hearing, the court expressed concern that the Company was “picking off” Ms. McLellan, thereby undermining the arbitration option and the court’s prior order compelling arbitration, and it ordered additional briefing. On July 24, 2018, the court awarded the plaintiffs their attorneys’ fees on the motion practice, but denied plaintiffs’ request that the arbitration right should be waived as a sanction. The Company is moving forward in private arbitration with Ms. McLellan.

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

Securities Litigation I. In 2016, a putative class action was filed in federal court against the Company, certain of its officers and directors, and the underwriters of the Company’s initial public offering (“IPO”) alleging violations of the federal securities laws based on alleged materially false and misleading statements about the Company’s PurePulse® heart rate tracking technology. A putative class action was also filed in California state court involving the same statements. The parties agreed to settle the putative federal and state class actions for $33.3 million, which the Company accrued for as of December 31, 2017. On January 19, 2018, the court entered an order preliminarily approving the proposed settlement, and on April 20, 2018, the court approved the final settlement. The federal and state class action cases have been dismissed with prejudice.

In the fourth quarter of 2016 and each quarter of 2017, a total of seven derivative lawsuits were filed in various federal courts and in the Delaware Court of Chancery naming the Company as nominal plaintiff and certain of the Company’s officers and directors as defendants. The federal cases are all stayed. The three cases filed in the Delaware Court of Chancery were consolidated and a second amended complaint was filed in which plaintiffs allege breach of fiduciary duty and insider trading against certain defendants who sold shares in the Company’s initial public offering and/or a secondary offering. On April 26, 2017, the Company filed a motion to dismiss the Delaware cases for failure to state a claim. On December 14, 2018, the court denied the motion to dismiss. The Company filed a motion for interlocutory appeal, which was denied on January 14, 2019. The Company then filed a Notice of Appeal in the Delaware Supreme Court, which was denied on January 30, 2019.
The Company believes that the allegations in the derivative lawsuits are without merit and intends to vigorously defend against the claims. Because the Company is in the early stages of these litigation matters, the Company is unable to estimate a reasonably possible loss or range of loss, if any, that may result from these matters.
Securities Litigation II. On November 1, 2018, a putative securities class action was filed in the U.S. District Court for the Northern District of California naming the Company and certain of its officers as defendants. The complaint alleges violations of Sections 10(b) and 20 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) arising out of alleged materially false and misleading statements about the Company’s guidance for fiscal 2017 provided during the fourth quarter of 2016, as well as its updated guidance for the fourth quarter of 2016. Plaintiffs seek class certification, unspecified compensatory damages, reasonable costs and expenses including attorneys’ fees, and other relief as the court may deem just and proper.
The Company believes that the plaintiffs’ allegations are without merit and intends to vigorously defend against the claims. Because the Company is in the early stages of this litigation matter, the Company is unable to estimate a reasonably possible loss or range of loss, if any, that may result from this matter.
Other. The Company is and, from time to time, may in the future become, involved in other legal proceedings in the ordinary course of business. The Company currently believes that the outcome of any of these existing legal proceedings, including the aforementioned cases, either individually or in the aggregate, will not have a material impact on the operating results, financial condition or cash flows of the Company. With respect to existing legal proceedings, the Company has either determined that the existence of a material loss is not reasonably possible or that it is unable to estimate a reasonably possible loss or range of loss. The Company may incur substantial legal fees, which are expensed as incurred, in defending against these legal proceedings.
Indemnification
In the ordinary course of business, the Company enters into commercial agreements that may include indemnification provisions. Pursuant to such agreements, the Company may indemnify, hold harmless and defend an indemnified party for losses suffered or incurred by the indemnified party. Some of the provisions will limit losses to those arising from third-party actions. In some cases, the indemnification will continue after the termination of the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions is not determinable. To date, the Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. The Company has also entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers to the fullest extent permitted by Delaware corporate law. The Company also currently has directors’ and officers’ insurance.
v3.19.1
Stockholders' Equity
3 Months Ended
Mar. 30, 2019
Disclosure of Compensation Related Costs, Share-based Payments [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, and any outstanding stock options and RSUs granted under the 2007 Plan would remain subject to the terms of the 2007 Plan. As of March 30, 2019, 24.4 million shares of Class A common stock were reserved and available for future issuance under the 2015 Plan.

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

 
$
3.00

 
 
Granted

 

 
 
Exercised
(479
)
 
$
1.99

 
 
Forfeited or canceled
(10
)
 
$
3.03

 
 
Balance—March 30, 2019
15,774

 
$
3.03

 
$
50,435

 
 
 
 
 
 
Stock options vested and expected to vest—March 30, 2019
15,774

 
$
3.03

 
$
50,435

Stock options exercisable—March 30, 2019
15,181

 
$
2.88

 
$
50,010


 
(1) The aggregate intrinsic values of stock options outstanding, exercisable, vested and expected to vest as of March 30, 2019 were calculated as the difference between the exercise price of the stock options and the fair value of the Class A common stock of $5.92 as of March 30, 2019.

 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, 2018
18,376

 
$
6.69

Granted
10,021

 
$
5.83

Vested
(2,983
)
 
$
7.38

Forfeited or canceled
(1,412
)
 
$
6.69

Unvested balance—March 30, 2019
24,002

 
$
6.25


 
In March 2019, the Company issued 0.5 million shares of market-based awards that vest based upon the achievement of a specified stock price. Market conditions were factored into the grant date fair value using a Monte Carlo valuation model, which utilized multiple input variables to determine the probability of the Company achieving the specified stock price targets. Stock-based compensation expense related to these awards will be recognized over the requisite service period regardless of whether the market condition is satisfied, provided that the requisite service period has been completed.

Employee Stock Purchase Plan

In May 2015, the Company’s board of directors adopted the 2015 Employee Stock Purchase Plan (the “2015 ESPP”), which became effective on June 17, 2015. The 2015 ESPP allows eligible employees to purchase shares of the Company’s Class A common stock through payroll deductions at a price per share equal to 85% of the lesser of the fair market value of the Company’s Class A common stock (i) on the first trading day of the applicable offering period and (ii) the last trading day of each purchase period in the applicable offering period. Except for the initial offering period, the 2015 ESPP provides for 6-month offering periods beginning in May and November of each year.

Stock-Based Compensation Expense
 
Total stock-based compensation expense recognized was as follows (in thousands):
 
Three Months Ended
 
March 30, 2019
 
March 31, 2018
Cost of revenue
$
1,430

 
$
1,098

Research and development
11,988

 
14,671

Sales and marketing
3,138

 
3,447

General and administrative
3,988

 
4,425

Total stock-based compensation expense
$
20,544

 
$
23,641


 
As of March 30, 2019, the total unrecognized stock-based compensation expense related to unvested stock options and RSUs was $138.8 million, which the Company expects to recognize over an estimated weighted average period of 2.2 years.
v3.19.1
Income Taxes
3 Months Ended
Mar. 30, 2019
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 months ended March 30, 2019, the Company recorded an expense for income taxes of $1.3 million for an effective tax rate of (1.7)%. The effective tax rate for the three months ended March 30, 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.

For the three months ended March 31, 2018, the Company recorded a benefit for income taxes of $0.6 million, for an effective tax rate of 0.8%. The effective tax rate for the three months ended March 31, 2018 was different than the statutory federal tax rate primarily due to the impact of a full valuation allowance on the Company’s U.S. deferred tax assets.

On December 22, 2017, the U.S. Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”) was signed into law and includes several key tax provisions that affect the Company, including a reduction of the statutory corporate tax rate from 35% to 21% effective for tax years beginning after December 31, 2017, elimination of the carryback of net operating losses generated after December 31, 2017, and changes to how the United States imposes income tax on multinational corporations, among others.

In December 2017, the SEC Staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), Income Tax Accounting Implications of the Tax Cuts and Jobs Act, which allowed the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. As of December 31, 2018, the Company had finalized all provisional amounts related to the 2017 Tax Act. Finalizing provisional adjustments related to the 2017 Tax Act did not have a material impact on the Company’s consolidated financial statements for the year ended December 31, 2018.

On July 24, 2018, the Ninth Circuit Court of Appeals (the “Court”) issued an opinion in Altera Corp. v. Commissioner requiring related parties in an intercompany cost sharing arrangement to share expenses related to share-based compensation. This opinion reversed the prior decision of the U.S. Tax Court. On August 7, 2018, the appellate court withdrew the opinion issued on July 24, 2018 to allow time for a reconstituted panel of judges to confer. We will continue to monitor the case.

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 March 30, 2019, the Company maintains a valuation allowance against all 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 March 30, 2019, the total amount of gross unrecognized tax benefits was $48.6 million, of which $25.0 million would affect the effective tax rate if recognized. The Company did not have any tax positions as of March 30, 2019 for which it is reasonably possible that the total amount of gross unrecognized tax benefits will increase or decrease within the following 12 months.
v3.19.1
Net Loss per Share
3 Months Ended
Mar. 30, 2019
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
 
March 30, 2019
 
March 31, 2018
Numerator:
 
 
 
Net loss
$
(79,465
)
 
$
(80,877
)
 
 
 
 
Denominator:
 
 
 
Weighted-average shares of common stock—basic for Class A and Class B
253,124

 
239,431

Effect of dilutive securities

 

Weighted-average shares of common stock—diluted for Class A and Class B
253,124

 
239,431

Net loss per share:
 
 
 
Basic
$
(0.31
)
 
$
(0.34
)
Diluted
$
(0.31
)
 
$
(0.34
)


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
 
March 30, 2019
 
March 31, 2018
 
 
 
 
Stock options to purchase common stock
15,774

 
17,469

RSUs
24,002

 
10,030

Warrant
230

 
216

Diluted impact of ESPP
1,287

 
84

Diluted common stock subject to vesting

 
162

Total
41,293

 
25,186

v3.19.1
Significant Customer Information and Other Information
3 Months Ended
Mar. 30, 2019
Risks and Uncertainties [Abstract]  
Significant Customer Information and Other Information
Significant Customer Information and Other Information
 
Retailer and Distributor Concentration
 
Retailers and distributors with revenue equal to or greater than 10% of total revenue for the three months ended March 30, 2019 and March 31, 2018 were as follows: