FITBIT, INC., 10-Q filed on 5/7/2020
Quarterly Report
v3.20.1
Cover Page - shares
3 Months Ended
Apr. 04, 2020
Apr. 29, 2020
Entity Information [Line Items]    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Apr. 04, 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, $0.0001 par value  
Trading Symbol FIT  
Security Exchange Name NYSE  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Central Index Key 0001447599  
Current Fiscal Year End Date --12-31  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q1  
Amendment Flag false  
Common Class A    
Entity Information [Line Items]    
Entity Common Stock, Shares Outstanding   237,659,049
Common Class B    
Entity Information [Line Items]    
Entity Common Stock, Shares Outstanding   29,316,945
v3.20.1
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Apr. 04, 2020
Dec. 31, 2019
Current assets:    
Cash and cash equivalents $ 251,997 $ 334,479
Marketable securities 175,699 184,023
Accounts receivable, net 182,284 435,269
Inventories 105,745 136,752
Income tax receivable 139,827 573
Prepaid expenses and other current assets 56,694 28,656
Total current assets 912,246 1,119,752
Property and equipment, net 76,218 82,756
Operating lease right-of-use assets 70,137 70,225
Goodwill 64,812 64,812
Intangible assets, net 12,717 16,746
Deferred tax assets 4,066 4,111
Other assets 9,458 9,684
Total assets 1,149,654 1,368,086
Current liabilities:    
Accounts payable 90,801 194,626
Accrued liabilities 376,530 513,530
Operating lease liabilities 21,832 23,511
Deferred revenue 32,466 32,307
Income taxes payable 1,700 636
Total current liabilities 523,329 764,610
Long-term deferred revenue 6,176 8,535
Long-term operating lease liabilities 66,234 67,902
Other liabilities 32,860 39,776
Total liabilities 628,599 880,823
Commitments and contingencies (Note 6)
Stockholders’ equity:    
Class A and Class B common stock 26 26
Additional paid-in capital 1,140,280 1,126,827
Accumulated other comprehensive income 233 188
Accumulated deficit (619,484) (639,778)
Total stockholders’ equity 521,055 487,263
Total liabilities and stockholders’ equity $ 1,149,654 $ 1,368,086
v3.20.1
Condensed Consolidated Statements of Operations - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended
Apr. 04, 2020
Mar. 30, 2019
Income Statement [Abstract]    
Revenue $ 188,158 $ 271,890
Cost of revenue 133,236 182,437
Gross profit 54,922 89,453
Operating expenses:    
Research and development 81,589 77,039
Sales and marketing 56,961 68,616
General and administrative 42,041 26,692
Total operating expenses 180,591 172,347
Operating loss (125,669) (82,894)
Interest income, net 1,293 3,466
Other income (expense), net (4) 1,273
Loss before income taxes (124,380) (78,155)
Income tax expense (benefit) (144,674) 1,310
Net income (loss) $ 20,294 $ (79,465)
Net income (loss) per share:    
Basic (in dollars per share) $ 0.08 $ (0.31)
Diluted (in dollars per share) $ 0.07 $ (0.31)
Shares used to compute net income (loss) per share:    
Basic (in shares) 265,661 253,124
Diluted (in shares) 276,946 253,124
v3.20.1
Condensed Consolidated Statements of Comprehensive Loss - USD ($)
$ in Thousands
3 Months Ended
Apr. 04, 2020
Mar. 30, 2019
Statement of Comprehensive Income [Abstract]    
Net income (loss) $ 20,294 $ (79,465)
Other comprehensive income (loss):    
Change in unrealized gain on investments 45 162
Net change, net of tax 45 162
Comprehensive income (loss) $ 20,339 $ (79,303)
v3.20.1
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)   2,381,188      
Issuance of common stock 931   931    
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)
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)   1,923,573      
Issuance of common stock 458   458    
Stock-based compensation expense 18,863   18,863    
Taxes related to net share settlement of restricted stock units 5,868   5,868    
Net income (loss) 20,294       20,294
Other comprehensive income 45     45  
Ending balance (in shares) at Apr. 04, 2020   266,806,999      
Ending balance at Apr. 04, 2020 $ 521,055 $ 26 $ 1,140,280 $ 233 $ (619,484)
v3.20.1
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
3 Months Ended
Apr. 04, 2020
Mar. 30, 2019
Cash Flows from Operating Activities    
Net income (loss) $ 20,294 $ (79,465)
Adjustments to reconcile net income (loss) to net cash used in operating activities:    
Provision for doubtful accounts 6,486 32
Provision for excess and obsolete inventory 9,845 1,478
Depreciation 10,589 13,373
Non-cash lease expense 1,524 7,713
Accelerated depreciation of property and equipment 13 0
Amortization of intangible assets 4,029 2,060
Stock-based compensation 19,727 20,544
Deferred income taxes 46 (20)
Other 5 (50)
Changes in operating assets and liabilities, net of acquisition:    
Accounts receivable 246,499 163,592
Inventories 20,301 (50,958)
Prepaid expenses and other assets (28,073) 12,554
Increase (Decrease) in Income Taxes Receivable (139,254) 40
Fitbit Force recall reserve (41) 46
Accounts payable (104,378) (81,656)
Accrued liabilities and other liabilities (143,692) (69,962)
Lease liabilities (4,756) (4,972)
Deferred revenue (2,200) (2,259)
Income taxes payable 1,064 257
Net cash used in operating activities (81,972) (67,653)
Cash Flows from Investing Activities    
Purchase of property and equipment (3,556) (6,096)
Purchases of marketable securities (59,735) (111,615)
Maturities of marketable securities 68,191 128,309
Net cash provided by investing activities 4,900 10,598
Cash Flows from Financing Activities    
Payment of financing lease liability 0 (597)
Proceeds from issuance of common stock 458 931
Taxes paid related to net share settlement of restricted stock units (5,868) (6,422)
Net cash used in financing activities (5,410) (6,088)
Net decrease in cash and cash equivalents (82,482) (63,143)
Cash and cash equivalents at beginning of period 334,479 473,956
Cash and cash equivalents at end of period $ 251,997 $ 410,813
v3.20.1
Basis of Presentation and Summary of Significant Accounting Policies
3 Months Ended
Apr. 04, 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 months ended April 4, 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 95 and 89 days in each of the three months ended April 4, 2020 and March 30, 2019, 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 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. The Merger is expected to close in 2020, subject to customary closing conditions, including approval by the expiration or termination of any waiting periods or receipt of any requisite consents under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, approval under the antitrust laws of the European Union and other jurisdictions agreed by the parties, and satisfaction of other closing conditions. The Merger was approved by the Company’s stockholders on January 3, 2020.

Risks and Uncertainties for COVID-19

The recent outbreak of the novel virus COVID-19, which was declared a global pandemic by the World Health Organization in March 2020, adversely impacted our business in the first quarter of 2020. The outbreak and associated containment measures have caused disruptions in the development, manufacture, shipment, and sales of our products. During the first quarter of 2020, the Company’s operating results began to be negatively impacted by decreased retail activity and retail store closures due to COVID-19, primarily in the Asia Pacific region. Operating results were also impacted by additional
reserves for product returns, rebates and promotions, and price protection on certain products, primarily based on increased channel inventory levels as a result of declining demand due to COVID-19. Additionally, operating results were impacted by allowances for credit losses as a result of COVID-19 and its potential impact.

The current circumstances are dynamic and unprecedented, and the impacts of the COVID-19 pandemic on our 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 we expect will continue to have, a significant adverse effect on our 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.
v3.20.1
Fair Value Measurements
3 Months Ended
Apr. 04, 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):
 
 
April 4, 2020
 Level 1Level 2Level 3Total
Assets:
Money market funds$89,166  $—  $—  $89,166  
U.S. government agencies—  63,854  —  63,854  
Corporate debt securities—  164,917  —  164,917  
Derivative assets—  36  —  36  
Total$89,166  $228,807  $—  $317,973  
Liabilities:
Contingent consideration$—  $—  $1,889  $1,889  
Derivative liabilities—  10  —  10  
Total$—  $10  $1,889  $1,899  

 
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 April 4, 2020 and December 31, 2019. The Company's Level 3 liabilities measured and recorded on a recurring basis as of April 4, 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 months ended April 4, 2020 and March 30, 2019.
v3.20.1
Financial Instruments
3 Months Ended
Apr. 04, 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 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 April 4, 2020 (in thousands):
Amortized CostGross Unrealized GainsGross Unrealized LossesFair ValueCash and Cash EquivalentsMarketable Securities
Cash$109,759  $—  $—  $109,759  $109,759  $—  
Money market funds89,166  —  —  89,166  89,166  —  
U.S. government agencies63,643  211  —  63,854  24,643  39,211  
Corporate debt securities164,960  33  (76) 164,917  28,429  136,488  
Total$427,528  $244  $(76) $427,696  $251,997  $175,699  

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 April 4, 2020 and December 31, 2019 were not material. There were no available-for-sale investments as of April 4, 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):
 
April 4, 2020
December 31, 2019
Due in one year$172,056  $173,827  
Due in one to two years3,643  10,196  
Total$175,699  $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.
 
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 April 4, 2020 and December 31, 2019, respectively.

Balance Sheet Hedges

The Company at times 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 $26 thousand and $83.4 million as of April 4, 2020 and December 31, 2019, 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):
April 4, 2020
December 31, 2019
Balance Sheet LocationFair Value Derivative
Assets
Fair Value Derivative LiabilitiesFair Value Derivative
Assets
Fair Value Derivative Liabilities
Hedges not designatedPrepaid expenses and other current assets$36  $—  $—  $—  
Hedges not designatedAccrued liabilities—  10  —  748  
Total fair value of derivative instruments$36  $10  $—  $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
Income Statement LocationApril 4, 2020
March 30, 2019
Foreign exchange balance sheet hedges:
Gain (loss) recognized in incomeOther income, net$3,077  $(359) 

As of April 4, 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 April 4, 2020 and December 31, 2019 (in thousands):

April 4, 2020
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 assets$36  $—  $36  $10  $—  $26  
Foreign exchange contracts liabilities10  —  10  10  —  —  
December 31, 2019
Gross Amounts Offset in the Condensed Consolidated Balance SheetsGross Amounts Not Offset in Condensed Consolidated Balance Sheets
Gross Amounts RecognizedGross Amounts OffsetNet Amounts PresentedFinancial InstrumentsCash Collateral ReceivedNet Amount
Foreign exchange contracts assets$—  $—  $—  $—  $—  $—  
Foreign exchange contracts liabilities748  —  748  —  —  748  
v3.20.1
Balance Sheet Components
3 Months Ended
Apr. 04, 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 twelve to seventeen months.
Changes in the total short-term and long-term deferred revenue balances were as follows (in thousands):
Three Months Ended
April 4, 2020
Beginning balances$40,842  
Deferral of revenue12,098  
Recognition of deferred revenue(14,298) 
Ending balances$38,642  


Revenue Returns Reserve
 
Revenue returns reserve activities were as follows (in thousands):
Three Months Ended
April 4, 2020
March 30, 2019
Beginning balances$101,326  $104,001  
Increases (1)
33,104  31,259  
Returns taken (57,189) (59,262) 
Ending balances$77,241  $75,998  

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


        Inventories
 
Inventories consisted of the following (in thousands)
    
April 4, 2020
December 31, 2019
   
Components$1,461  $5,397  
Finished goods104,284  131,355  
Total inventories$105,745  $136,752  
 

Prepaid Expenses and Other Current Assets
 
Prepaid expenses and other current assets consisted of the following (in thousands):
    
April 4, 2020
December 31, 2019
Tariff receivable$28,854  $—  
Prepaid expenses 10,616  11,219  
Prepaid marketing2,796  3,347  
Derivative asset36  —  
Other14,392  14,090  
Total prepaid expenses and other current assets$56,694  $28,656  
Property and Equipment, Net
 
Property and equipment, net, consisted of the following (in thousands):
 
    
April 4, 2020
December 31, 2019
Tooling and manufacturing equipment$105,753  $103,177  
Furniture and office equipment20,249  19,922  
Purchased and internally-developed software28,401  27,424  
Leasehold improvements60,087  59,926  
Total property and equipment214,490  210,449  
Less: Accumulated depreciation and amortization(138,272) (127,693) 
Property and equipment, net$76,218  $82,756  
 
Total depreciation expense related to property and equipment, net was $10.6 million and $13.4 million for the three months ended April 4, 2020 and March 30, 2019, respectively.


Goodwill and Intangible Assets, Net

The carrying amount of goodwill was $64.8 million as of April 4, 2020 and December 31, 2019.

The carrying amounts of the intangible assets as of April 4, 2020 and December 31, 2019 were as follows (in thousands):
 
April 4, 2020
December 31, 2019
    GrossAccumulated AmortizationNetGrossAccumulated AmortizationNet
    
Developed technology$37,813  $(26,450) $11,363  $37,813  $(23,910) $13,903  
Customer relationships3,918  (2,564) 1,354  3,790  (991) 2,799  
Trademarks and other1,150  (1,150) —  1,278  (1,234) 44  
Total intangible assets, net$42,881  $(30,164) $12,717  $42,881  $(26,135) $16,746  

Total amortization expense related to intangible assets was $4.0 million and $2.1 million for the three months ended April 4, 2020 and March 30, 2019, respectively.

The estimated future amortization expense of acquired finite-lived intangible assets to be charged to cost of revenue and operating expenses after April 4, 2020 is as follows (in thousands):
    Cost of RevenueOperating ExpensesTotal
   
Remaining 2020$4,199  $1,620  $5,819  
20215,037  56  5,093  
20221,488  56  1,544  
2023—  56  56  
2024—  56  56  
Thereafter—  149  149  
Total finite-lived intangible assets, net$10,724  $1,993  $12,717  
Accrued Liabilities
 
Accrued liabilities consisted of the following (in thousands):
 
April 4, 2020
December 31, 2019
Accrued sales incentives$117,428  $156,839  
Sales returns reserve77,241  101,326  
Product warranty48,851  52,403  
Employee-related liabilities23,282  37,355  
Accrued manufacturing expense and freight18,972  35,112  
Accrued research and development18,470  19,232  
Accrued co-op advertising and marketing development funds17,880  40,689  
Accrued legal settlements and fees14,041  8,854  
Accrued sales and marketing11,640  26,781  
Sales taxes and VAT payable10,218  19,603  
Inventory received but not billed5,493  1,669  
Finance lease liabilities1,384  1,384  
Derivative liabilities10  748  
Other11,620  11,535  
Accrued liabilities$376,530  $513,530  

Product warranty reserve activities were as follows (in thousands):
Three Months Ended
 
April 4, 2020
March 30, 2019
Beginning balances$52,403  $45,605  
Charged to cost of revenue 6,974  8,238  
Changes related to pre-existing warranties1,027  4,747  
Settlement of claims (11,553) (10,556) 
Ending balances$48,851  $48,034  
v3.20.1
Leases
3 Months Ended
Apr. 04, 2020
Leases [Abstract]  
Leases LeasesThe 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 April 4, 2020.
Total lease cost consists of the following (in thousands):
Three Months Ended
April 4, 2020March 30, 2019
Finance lease costs:
Amortization of ROU assets$169  $573  
Interest on lease liabilities—  —  
Operating lease costs(1)
6,643  7,574  
Variable lease costs891  1,315  
Sublease income(598) (1,966) 
Total lease costs$7,105  $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
April 4, 2020March 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 leases6,539  5,512  
ROU assets obtained in exchange for lease obligations:
Finance lease liabilities$1,384  $—  
Operating lease liabilities4,497  288  

Supplemental balance sheet information related to leases was as follows (in thousands):
April 4, 2020
December 31, 2019
Finance leases:
Other assets$1,215  $1,384  
Accrued liabilities$1,384  $1,384  
Operating leases:
Operating lease ROU assets$70,137  $70,225  
Operating lease liabilities$21,832  $23,511  
Long-term operating lease liabilities66,234  67,902  
Total operating lease liabilities$88,066  $91,413  
Weighted-average lease terms and discount rates are as follows:
April 4, 2020
December 31, 2019
Weighted-average remaining lease terms (in years):
Finance leases0.30.5
Operating leases4.04.2
Weighted-average discount rates:
Finance leases— %— %
Operating leases5.5 %5.5 %

Maturities of lease liabilities as of April 4, 2020 were as follow (in thousands):
Finance LeasesOperating Leases
Remaining 2020$1,384  $25,262  
2021—  24,894  
2022—  24,390  
2023—  21,769  
2024—  9,525  
Thereafter—  —  
Total minimum lease payments$1,384  $105,840  
Less: amount representing interest—  (17,774) 
Total lease liabilities$1,384  $88,066  
Leases LeasesThe 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 April 4, 2020.
Total lease cost consists of the following (in thousands):
Three Months Ended
April 4, 2020March 30, 2019
Finance lease costs:
Amortization of ROU assets$169  $573  
Interest on lease liabilities—  —  
Operating lease costs(1)
6,643  7,574  
Variable lease costs891  1,315  
Sublease income(598) (1,966) 
Total lease costs$7,105  $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
April 4, 2020March 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 leases6,539  5,512  
ROU assets obtained in exchange for lease obligations:
Finance lease liabilities$1,384  $—  
Operating lease liabilities4,497  288  

Supplemental balance sheet information related to leases was as follows (in thousands):
April 4, 2020
December 31, 2019
Finance leases:
Other assets$1,215  $1,384  
Accrued liabilities$1,384  $1,384  
Operating leases:
Operating lease ROU assets$70,137  $70,225  
Operating lease liabilities$21,832  $23,511  
Long-term operating lease liabilities66,234  67,902  
Total operating lease liabilities$88,066  $91,413  
Weighted-average lease terms and discount rates are as follows:
April 4, 2020
December 31, 2019
Weighted-average remaining lease terms (in years):
Finance leases0.30.5
Operating leases4.04.2
Weighted-average discount rates:
Finance leases— %— %
Operating leases5.5 %5.5 %

Maturities of lease liabilities as of April 4, 2020 were as follow (in thousands):
Finance LeasesOperating Leases
Remaining 2020$1,384  $25,262  
2021—  24,894  
2022—  24,390  
2023—  21,769  
2024—  9,525  
Thereafter—  —  
Total minimum lease payments$1,384  $105,840  
Less: amount representing interest—  (17,774) 
Total lease liabilities$1,384  $88,066  
v3.20.1
Commitments and Contingencies
3 Months Ended
Apr. 04, 2020
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies Commitments and Contingencies
 
Purchase Commitments

The aggregate amount of open purchase orders as of April 4, 2020 was approximately $443.4 million. Of the aggregate amount, $171.3 million related to the Company’s migration to a third-party hosting provider, of which $15.2 million was accrued for as of April 4, 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 April 4, 2020, $12.9 million was accrued for such liabilities to contract manufacturers.

Letters of Credit

As of April 4, 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.

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 tentative settlement of all of the derivative lawsuits, which is subject to approval by the court.

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.
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.

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. No hearing date has been scheduled.

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 infringe U.S. Patent Nos. 7,845,228, 9,820,698, and 9,717,464(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 January 21, 2020, the administrative law judge set key dates for the case, including an evidentiary hearing for October 5-9, 2020, the initial determination by January 14, 2021, and the target date for completion of the investigation as May 14, 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 March 20, 2020, Koninklijke Philips filed a patent infringement lawsuit in Germany in the District Court of Dusseldorf alleging infringement by certain of Fitbit’s products of the German part of EP 2 224 366 B1. The Company has not yet been served.

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.

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 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.

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’