S-1 1 d946612ds1.htm FORM S-1 Form S-1
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As filed with the Securities and Exchange Commission on July 24, 2015

Registration No. 333-            

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

VIZIO, Inc.

(Exact name of registrant as specified in its charter)

 

California

(prior to reincorporation)

Delaware

(after reincorporation)

 

3651

(Primary Standard Industrial

Classification Code Number)

 

36-4510309

(I.R.S. Employer

Identification No.)

(State or other jurisdiction of

incorporation or organization)

   

39 Tesla

Irvine, California 92618

(949) 428-2525

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

William W. Wang

Chairman and Chief Executive Officer

VIZIO, Inc.

39 Tesla

Irvine, California 92618

(949) 428-2525

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

R. Scott Shean, Esq.

B. Shayne Kennedy, Esq.

David C. Lee, Esq.

Latham & Watkins LLP

650 Town Center Drive, 20th Floor

Costa Mesa, California 92626-1925

(714) 755-8069

 

Jerry C. Huang, Esq.

Vice President and General Counsel

VIZIO, Inc.

39 Tesla

Irvine, California 92618

(949) 428-2525

 

Alan F. Denenberg, Esq.

Davis Polk & Wardwell LLP

1600 El Camino Real

Menlo Park, CA 94025-4119

(650) 752-2000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨   Accelerated filer  ¨   

Non-accelerated filer  x

(Do not check if a smaller reporting company)

  Smaller reporting company  ¨

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities to Be Registered   Proposed
Maximum
Aggregate Offering
Price(1)(2)
  Amount of
Registration
Fee

Class A Common Stock, par value $0.0001 per share

  $172,500,000   $20,045

 

 

 

(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

 

(2) Includes the offering price of shares that the underwriters have the option to purchase to cover over-allotments, if any.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 


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The information in this preliminary prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities, and neither we nor the selling stockholders are soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated July 24, 2015

PROSPECTUS

             Shares

 

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Class A Common Stock

$             per share

 

 

This is the initial public offering of shares of Class A common stock of VIZIO, Inc. We are selling              shares and the selling stockholders, which include certain of our executive officers and directors, identified in this prospectus are selling an additional              shares of Class A common stock. We will not receive any proceeds from the sale of shares of our Class A common stock by any of the selling stockholders.

We anticipate the initial public offering price of our Class A common stock will be between $             and $             per share. Currently, no public market exists for our Class A common stock. We intend to apply to list our Class A common stock on the              under the symbol “VZIO.”

We have two classes of authorized common stock, Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to 10 votes per share and is convertible into one share of Class A common stock. All outstanding shares of our Class B common stock are beneficially owned by William Wang, our founder, Chairman, Chief Executive Officer and principal stockholder. Upon completion of this offering, the shares beneficially owned by Mr. Wang will represent     % of the total voting power of our Class A and Class B common stock. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the                     .

Investing in our Class A common stock involves a high degree of risk. See “Risk Factors” beginning on page 17 of this prospectus.

 

 

 

     Per share      Total

Initial public offering price

   $                      $                

Underwriting discount(1)

   $      $

Proceeds to VIZIO, before expenses

   $      $

Proceeds to selling stockholders, before expenses

   $      $

 

 

  (1) We refer you to “Underwriting” beginning on page 153 for additional information regarding underwriter compensation.

The underwriters may also exercise their option to purchase up to an additional              shares of Class A common stock from us and the selling stockholders, at the initial public offering price, less the underwriting discount, for 30 days after the date of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The shares of Class A common stock will be ready for delivery on or about                     .

 

 

 

BofA Merrill Lynch    Deutsche Bank Securities    Citigroup

 

 

 

BMO Capital Markets   Piper Jaffray   Wells Fargo Securities

 

 

 

  Roth Capital Partners  

 

 

The date of this prospectus is                     , 2015.


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Table of Contents

TABLE OF CONTENTS

 

    

Page

 

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     17   

FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

     52   

USE OF PROCEEDS

     53   

DIVIDEND POLICY

     54   

CAPITALIZATION

     55   

DILUTION

     57   

SELECTED CONSOLIDATED FINANCIAL DATA

     60   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     62   

BUSINESS

     86   

MANAGEMENT

     111   

EXECUTIVE COMPENSATION

     120   

PRINCIPAL AND SELLING STOCKHOLDERS

     137   

RELATED PARTY TRANSACTIONS

     140   

DESCRIPTION OF CAPITAL STOCK

     143   

SHARES ELIGIBLE FOR FUTURE SALE

     147   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS

     149   

UNDERWRITING

     153   

LEGAL MATTERS

     161   

EXPERTS

     161   

WHERE YOU CAN FIND MORE INFORMATION

     161   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

Through and including                      (the 25th day after the date of this prospectus), all dealers effecting transactions in the Class A common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

Neither we, nor the selling stockholders, nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or any related free writing prospectus. Neither we, nor the underwriters nor the selling stockholders take responsibility for, nor can provide any assurance as to the reliability of, any other information that others may give you. We and the selling stockholders are offering to sell, and seeking offers to buy, our Class A common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus and any applicable free writing prospectus is accurate only as of its date, regardless of the time of delivery or of any sale of our Class A common stock. The information may have changed since that date.

For investors outside the United States: No action is being taken in any jurisdiction outside the United States to permit a public offering of our Class A common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to that jurisdiction.


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PROSPECTUS SUMMARY

The following summary highlights selected information contained elsewhere in this prospectus and does not contain all the information that may be important to you before investing in our Class A common stock. You should read the entire prospectus carefully, including the “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes appearing elsewhere in this prospectus before making an investment decision. Unless the context requires otherwise, the words “VIZIO,” “we,” the “Company,” “us,” and “our” refer to VIZIO, Inc. and its subsidiaries.

VIZIO, Inc.

Our Mission

VIZIO’s mission is to deliver the ultimate entertainment experience through our community of connected consumers, advertisers and media content providers.

Company Overview

VIZIO is transforming the way consumers discover and experience media content through our connected entertainment platform. Since our founding in 2002, we have sold over 65 million televisions and audio and other products and built an industry-leading brand. We have achieved significant U.S. market share of both Smart TVs, or Internet-connectable televisions, and sound bars. Our strong brand, technological leadership and go-to-market strategy have driven the broad adoption of our Smart TVs, creating a community of over 8 million VIZIO connected units, or VCUs. A VCU is a Smart TV that has been connected to the Internet and has transmitted data collected by our Inscape data services. Our Inscape data services capture real-time viewing behavior data from our VCUs and enable us to provide it to advertisers and media content providers. The scale of our VCU community, together with our engaged user base and our Inscape data services, position us at the nexus of the connected entertainment ecosystem.

As a leading connected entertainment platform, we focus on delivering cutting-edge technology and building a premium global brand. Since we are not vertically integrated, we are able to maintain flexibility and adapt to changes in market demand, product supply and pricing. Our strategic relationships with our manufacturers and retailers as well as our efficient operating model have been critical to the success of our business. We have leveraged our manufacturers’ purchasing power and expertise in supply chain management to drive cost reductions and rapidly scale our business. Our efficient operating model has enabled us to minimize overhead costs, more accurately forecast inventory levels and achieve high inventory turnover. As a result, we have been profitable for the last nine years and have grown our business with minimal external funding.

Our products are sold in over 8,000 retail stores across the United States. We held the #1 unit share position in the U.S. sound bar industry(1) and the #2 unit share position in the U.S. Smart high definition, or HDTV, industry in 2014.(2) For the years ended December 31, 2013 and 2014 and the six months ended June 30, 2015, we generated net sales of $3.0 billion, $3.1 billion and $1.3 billion and reported net income of $25.7 million, $45.0 million and $31.4 million, respectively. Substantially all of these amounts were generated from the sale of televisions and sound bars.

 

 

(1) The NPD Group/Retail Tracking Service, sound bar units sold in the U.S., January 2014—December 2014.

 

(2) The NPD Group/Retail Tracking Service, LCD TV units with Apps included and display resolution of 1336 x 768 and higher, total units sold in the U.S., January 2014—December 2014.


 


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Our Platform

The VIZIO platform combines our connected media entertainment products, discovery and engagement software and Inscape data services:

 

    Connected Entertainment Products. Our Smart TV and audio products combine best-in-class technology with beautifully simple design. Our award-winning products offer industry-leading picture and audio quality and are at the forefront of innovative technology. Our focus on connectivity has driven our consumers to connect their Smart TVs to the Internet at a high rate, with approximately 61% of our Smart TVs having been connected as of June 30, 2015.

 

    Discovery & Engagement Software: VIZIO Internet Apps Plus. Our discovery and engagement software, VIZIO Internet Apps Plus, connects consumers to a wide range of premium entertainment content and enhances the value of our products. We provide an intuitive and engaging interface that enables viewers to easily discover and engage with entertainment and other content on our Smart TVs from traditional and streaming content providers, such as Netflix, Hulu, YouTube and Amazon Instant Video. Since 2009, users have streamed more than 3 billion hours of content through our discovery and engagement software.

 

    Inscape Data Services. Our Inscape data services capture, in real time, up to 100 billion anonymized viewing data points each day from our over 8 million VCUs. Inscape collects, aggregates and stores data regarding most content displayed on VCU television screens, including content from cable and satellite providers, streaming devices and gaming consoles. Inscape provides highly specific viewing behavior data on a massive scale with great accuracy, which can be used to generate intelligent insights for advertisers and media content providers and to drive their delivery of more relevant, personalized content through our VCUs.

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Consumer Use and Engagement Model

We believe our business focus enables a self-reinforcing consumer use and engagement model that we expect to fuel our growth while driving revenue. Our connected entertainment products and discovery and engagement software increase usage of our platform, enabling Inscape to gather more anonymized data on viewing behaviors, which we can deliver to advertisers and media content providers. These companies in turn can deliver more relevant and personalized content for viewers, further enhancing the entertainment experience. We believe this self-reinforcing cycle will increase our brand awareness and enhance demand for our connected entertainment products.

 



 

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Our Market Position

Our strong market position is underscored by our growth and market share in Smart TVs and audio products. The scale of our connected platform is illustrated by the volume of content delivered through our products and the large amount of real-time data we collect from our VCUs about viewing behaviors and preferences.

 

LOGO

 

(1) The NPD Group/Retail Tracking Service, LCD TV units with apps included, total units sold in the U.S., January 2014—December 2014; The NPD Group/Retail Tracking Service, sound bar units sold in the U.S., January 2014—December 2014.
(2) Based on VIZIO internal data as of June 30, 2015.
(3) Based on VIZIO internal data as of July 15, 2015.

Our Market Opportunity

 

   

High-Definition Television. Currently, we compete primarily in the North American high-definition television market, which was estimated by IHS Technology as a $21.1 billion market as of 2014. To date, substantially all of our product sales have occurred in the United States, although we also have sold a relatively smaller number of products in Canada and Mexico. IHS Technology is projecting shipments of Smart TVs to experience steady growth in North America, increasing from 15.6 million units in 2014 to 20.5 million units in 2019, representing a 5.6% compound annual

 



 

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growth rate. Furthermore, according to IHS Technology, Smart TVs are expected to comprise an even greater percentage of North American annual television shipments, rising from 35.8% in 2014 to 49.1% in 2019. Moreover, while we have not historically focused on opportunities outside of North America, international revenue for high-definition television shipments totaled $77.1 billion in 2014, according to IHS Technology, and international markets represent a natural extension of our current market focus.

 

    Video on Demand, or VOD. According to Markets and Markets, the global VOD market is forecasted to grow from $25.3 billion in 2014 to $61.4 billion in 2019, representing a compound annual growth rate of 19.4%. We believe that our platform, which enables ease of discovery and access to digital content for television viewers, creates the opportunity to deliver and monetize additional services relating to this market.

 

    Audience & Advertisement Measurement. Advertisers and media content providers are looking for access to accurate, real-time data regarding consumer preferences and behaviors so they can better measure and increase their return on content creation and advertising spend. We believe total global market spend on audience and advertisement measurement services was approximately $1.9 billion in 2014, and represents an attractive market opportunity for our Inscape data services.

 

    Television/Digital Advertising. According to eMarketer, U.S. digital advertising spend has grown at a compound annual growth rate of 17.4% from 2012 to 2014, driven largely by the ability to accurately target relevant consumers and measure return on advertising spend. Television advertising spend in the United States, however, represents the largest advertising market with approximately $68.5 billion spent in 2014, according to eMarketer. We believe recent advancements in television data and analytics capabilities will bring the optimization benefits of digital advertising to television advertising, allowing us to attract digital advertisers and capitalize on digital growth trends through our Inscape data services.

 

    Mobile/Television Commerce. According to eMarketer, in 2014, U.S. consumers spent $58.1 billion on products and services using Internet-enabled mobile devices, such as tablets and smartphones. We believe that the Smart TV represents a future driver of retail mobile commerce sales as consumers will be able to simultaneously view complementary content and advertising on their tablet or smartphone and easily purchase goods and services seen on the television screen with those handheld devices. A Nielsen study found that roughly 40% of tablet and smartphone owners use their handheld device as a “second screen” daily. According to a recent Delivery Agent survey, 68% of respondents were interested or very interested in using their television to shop.

Powerful Trends Driving Our Market

Several powerful trends are driving the growth of the television and advertising markets:

 

    Advances in technology are enhancing the television viewing and audio playback experience. Revolutionary technological innovations, such as Ultra-High Definition, or UHD, High-Dynamic-Range, or HDR, and 3D vector-based audio reproduction offer major enhancements to the entertainment experience. UHD televisions deliver four times the picture resolution and, in combination with other new technologies like Full Array LED backlighting with Active LED Zones, can deliver higher contrast ratios, enhanced motion clarity and a more lifelike viewing experience when compared to current high-definition televisions. Furthermore, improvements in sound quality, wireless connectivity and design are driving consumer demand for audio products to pair with their televisions. We believe these factors represent major consumer upgrade catalysts and should accelerate the replacement cycle of prior generation televisions and audio products.

 



 

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    The television is finally connected to the Internet. The wide adoption of high-speed broadband Internet access has enabled a vast range of bandwidth-intensive video and Internet services to be delivered directly to the television. According to eMarketer, U.S. household broadband penetration was 74% in 2014. Broadband connectivity has driven demand for Smart TVs, which allow consumers to access and view content as a connected entertainment experience on the largest screens in their home.

 

    Consumers demand an intuitive, easy-to-use interactive entertainment experience. U.S. consumers spend an average of 31 hours per week watching television, according to eMarketer. This figure has remained stable over the past five years, despite recent growth in smartphone and tablet media consumption, which has been incremental to television consumption. We believe consumers want to search for and discover content, regardless of source, on their television through intuitive and easy-to-use interfaces as well as applications that offer optimized experiences, in the same manner they do on their smartphone or tablet. Consumers also desire seamless integration between the multiple screens they are using, such as using a mobile device to interact with their television for discovery, streaming or to view complementary content.

 

    Delivering personalized content to consumers requires next generation viewing data and analytics capabilities. Smart TVs enable content consumption from multiple sources, greatly increasing the volume of content available to consumers. In June 2014, the Consumer Electronics Association reported that, in the 12 months ended April 2014, 45% of U.S. television households were streaming content on their TVs, up from 28% in the 12 months ended April 2013. This trend has further increased the difficulty for content creators and distributors to collect and decipher viewing behaviors using traditional means such as consumer surveys and sampling. The collection and analysis of viewing behavior data is crucial to create and distribute content that further enhances consumers’ viewing experiences.

 

    Advertisers want to leverage viewing data to deliver more targeted ads. The Internet has enabled content providers, brands, advertisers and analytics providers to deploy more relevant, personalized advertising through computers and mobile devices based on user behavior. Smart TVs now enable advertisers to leverage real-time viewing behavior data to deliver more effective, targeted advertising campaigns. We believe the ability to collect and analyze real-time viewing data will enable measurable and increased return on marketing investment, enhance the value of television advertising, and drive increased television advertising spend.

Our Solution

The VIZIO connected platform delivers quality entertainment experiences and accurate viewing behavior data through:

 

    Leading product design with broad market appeal. We are an industry-leading technology innovator with broad market consumer brand appeal, delivering best-in-class products. We are also developing the next generation user experience for intuitive discovery and access to a wide variety of content. We relentlessly pursue our goal of delivering premium quality video and audio products in a way that helps accelerate broad adoption of new technologies, including UHD and HDR technology, and on a broad range of display sizes ranging from 24” to 120”.

 

    Intuitive, powerful and personal user interface. Our Smart TVs connect consumers with an intuitive yet powerful user interface, capable of facilitating discovery of and engagement with a wide variety of content as well as relevant, personal content recommendations based on their viewing behavior. Viewers can quickly and easily discover and engage with entertainment and other content from traditional and streaming content providers on our Smart TVs.

 



 

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    Real-time data on our consumers’ viewing behavior. Our Inscape data services and community of over 8 million VCUs enable us to capture up to 100 billion anonymized viewing data points each day. We believe this user base is large enough to reflect U.S. census demographics, which we believe enables us to offer higher quality, more accurate and timely viewing behavior data than previously available from other sources. This real-time data allows us to provide the media and advertising ecosystem with actionable viewership insights.

 

    Advertising and content optimization for the marketing and media ecosystem. We are developing strong partnerships with content and analytics providers, advertisers and brands to monetize our connected platform. VIZIO’s platform can provide these parties with anonymized, highly specific viewing data using our Inscape data services. We believe the monetization of our connected platform through these partnerships will represent a significant component of our solution set in the future.

Our Competitive Strengths—What Sets Us Apart

We believe that the following strengths are the keys to our success:

 

    Leading Consumer Brand. We have built a strong, recognized and trusted brand that symbolizes premium technology, quality and value. Since our founding in 2002, VIZIO has built a highly recognizable brand in the United States, with seven out of ten respondents recognizing VIZIO, and eight out of ten VIZIO owners recommending VIZIO to their friends and family, according to a 2015 survey commissioned by us and conducted by survey solutions company Toluna.

 

    Premium Product Design and Technology. We offer a selection of premium media entertainment products, including televisions, sound bars and other products designed to enhance the entertainment experience. Using consumer research and feedback, we focus on creating products that combine best-in-class video and audio performance with powerful user interface software that simplifies access to a wide variety of entertainment content. We have deployed new technologies that advance the picture and audio quality of our products, such as UHD, HDR, Ultra Color Spectrum, full-array LED backlight designs and new picture processing technologies that have been consistently recognized and awarded by industry press.

 

    Positioned at the Nexus of the Connected Entertainment Ecosystem. We are strategically positioned at the center of the connected entertainment ecosystem. Our Smart TVs can collect viewing behavior data from any connected media source, generating a broader data set than can be obtained from any single media source. We can provide this broader data set, at scale and with real-time delivery, to advertisers and media content providers, who in turn can create more relevant, personalized entertainment experiences and drive further engagement.

 

    Efficient Operating Model. We have been profitable for the last nine years and have grown our business with minimal external funding. We leverage the purchasing power and supply chain management expertise of our manufacturers to maintain a lean operating model, while scaling our business. Our strategic relationships with our manufacturers and retailers as well as our efficient operating model have been critical to the success of our business. Our efficient operating model has enabled us to minimize overhead costs, more accurately forecast inventory levels and achieve high inventory turnover.

 

    Proven Management Team. We have assembled a proven management team that is led by one of our founders, William Wang. Our current management team has been with VIZIO for an average of nine years and collectively has over 100 years of industry experience.

 



 

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Our Growth Strategy

We intend to continue to grow our business and expand into new markets. Key elements of our growth strategy include the following:

 

    Continue to Introduce Innovative Products and Functionality. We plan to increase our investment in research and development to expand and enhance the features and capabilities of our award-winning products, including our discovery and engagement software, 3D vector-based audio reproduction and Inscape data services.

 

    Continue to Monetize our Platform. With over 8 million VCUs, the size of our user base compares favorably to the television subscriber bases of AT&T U-Verse, Verizon FiOS and Cox Communications, providing us with an opportunity to create additional revenue streams in the form of paid advertising placements, software applications for content search, control and recommendations as well as insights into end consumer behavior. Additional monetization opportunities include developing enhanced capabilities such as intelligent search and discovery features, improving our ability to deliver relevant content as well as advanced viewership analytics.

 

    Expand into Markets Outside of North America. Leveraging our efficient operating model, we have begun to expand into international markets beginning with Canada and Mexico. We intend to expand into additional international markets based on the anticipated demand in these markets for our platform, including Inscape data services. We intend to expand into these markets by continuing to partner with our existing retailer partners and manufacturers, as well as expanding our on-line retail presence.

 

    Increase Penetration within U.S. Retailers. We believe that our distribution footprint covers a significant portion of the U.S. retail consumer electronics market. According to Gap Intelligence, as of June 30, 2015, VIZIO held the #1 or #2 HDTV shelf share at major consumer electronics retailers such as Wal-Mart, Best Buy, Costco, Sam’s Club and Target. However, we believe there is an opportunity to expand shelf space of our products with our existing retailers to take further market share from our competitors. In addition, we have not yet made a focused effort to penetrate regional independent retailers. We believe that these regional independent retailers represent a significant growth opportunity for us, and we plan to capitalize on the strength of our brand to increase our presence.

 

    Continue to Invest in Our Brand. In 2014, VIZIO had 35% U.S. unit share for Smart TVs(3) and was a unit share leader in the overall U.S. HDTV, market.(4) In sound bar audio systems, VIZIO was the #1 U.S. market leader in 2014 in units sold.(5) We will continue to invest in our brand to strengthen our foothold in the United States, while simultaneously leveraging our previous successes to expand our brand internationally.

Our Products

We offer a wide array of connected entertainment products including a portfolio of Smart TVs, sound bars and other accessories that address the full range of consumers, from college students to mainstream families to cinephiles. Our innovations center around identifying the feature sets that address the needs of each consumer

 

(3) The NPD Group/Retail Tracking Service, LCD TV units with Apps included, total units sold in the U.S.: January 2014—December 2014.

 

(4) The NPD Group/Retail Tracking Service, LCD TV units with display resolution of 1336 x 768 and higher, total units sold in the U.S.: January 2014—December 2014.

 

(5) The NPD Group/Retail Tracking Service, sound bar units sold in the U.S., January 2014—December 2014.

 



 

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segment, building technologies in partnership with other industry leaders, and integrating them into our product offerings, with a focus on leveraging our scale to drive down cost of goods in order to accelerate mass adoption of compelling new technologies.

 

    VIZIO Reference Series is our flagship collection of advanced Smart UHD displays with the latest innovations in picture and audio quality, created for buyers looking for the ultimate home cinema experience.

 

    VIZIO P-Series is our premium line of Smart UHD displays that offer best-in-class picture quality designed for tech-forward consumers and home theater enthusiasts.

 

    VIZIO M-Series is our step-up line of Smart UHD displays that combine high quality and innovation, ideal for families and young professionals.

 

    VIZIO E-Series is our lineup of displays designed for value-conscious first-time buyers, college students and baby boomers interested in new technologies that maximize the entertainment experience.

 

    VIZIO D-Series is our entry-level TV collection designed for those consumers looking for great picture quality with basic features.

 

    5.1 Sound Bars enable home theater enthusiasts to enjoy a true 5.1 surround sound experience at home with rear satellite speakers and a wireless subwoofer for best-in-class audio performance.

 

    3.1/2.1 Sound Bars deliver best-in-class audio performance with a wireless subwoofer and optional center channel for those seeking a powerful entertainment upgrade to their movie and music experience.

 

    3.0/2.0 Sound Bars offer multi-channel audio performance for buyers seeking a major upgrade to the internal TV audio for a more immersive entertainment experience.

 

    2.1/2.0 Sound Stands provide our consumers a simple, all-in-one and cost effective upgrade to TV audio with great sound performance and optional integrated subwoofer designed for compact spaces.

Risks Associated with Our Business

Our ability to successfully operate our business is subject to numerous risks, including those identified in the section titled “Risk Factors” immediately following this prospectus summary. Some of the principal risks relating to our business and our ability to execute our business strategy include:

 

    Decreases in average selling prices of our televisions and other products may reduce net sales, operating profit and net income, particularly if we are not able to reduce our expenses commensurately.

 

    We depend on sales of our televisions for substantially all of our net sales, and if the volume of these sales declines or otherwise is less than our expectations, we could lose market share or our net sales may not grow at the rate we expect and our operating results may suffer.

 

    If we fail to keep pace with technological advances in our industry, or if we pursue technologies that do not become commercially accepted, consumers may not buy our media entertainment products, and our net sales and profitability may decline.

 



 

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    Our success depends on our ability to continue to establish, promote and strengthen the VIZIO brand.

 

    A small number of customers account for a majority of our net sales, and if our relationship with any of them is harmed or terminated, or the level of business with them is significantly reduced, our results of operations could be materially adversely affected.

 

    We depend on a limited number of manufacturers for our products and their components. If we experience any delay, disruption or quality control problems with our manufacturers in their operations, we may be unable to keep up with customer and consumer demand, we could lose market share and net sales, and our reputation and business would be harmed.

 

    We compete in rapidly evolving and highly competitive markets and we expect intense competition to continue, which could result in a loss of our market share and a decrease in our net sales and profitability, and could adversely affect our growth prospects.

 

    Limited availability of raw materials, components and manufacturing equipment for our products, or increases in the cost of these items, could materially and adversely affect our business, results of operations or financial condition.

 

    The use of ACR technology to provide viewing behavior data to advertisers and media content providers represents an emerging industry. Our Inscape data services is in an early stage of development and its success depends on various factors including uncertain and evolving consumer expectations and legal requirements related to the collection, use, sharing and security of data collected or processed from or about consumers. Our failure to successfully monetize our Inscape data services could materially and adversely harm our growth prospects.

 

    Our business is seasonal, and if our product sales during the holiday season fall below our forecasts, our overall financial condition and results of operations could be adversely affected.

 

    After the offering, you will hold single-vote per share Class A common stock while the majority of VIZIO’s voting power will be held by the holders of 10-vote-per-share Class B common stock. Our Chairman of the Board and Chief Executive Officer, William Wang, will continue to have control over VIZIO after this offering, which will severely limit your ability to influence or direct the outcome of key corporate actions and transactions, including a change in control.

Controlled Company Status

Following this offering, because our principal stockholder will control more than 50% of the voting power of our common stock, we will be considered a “controlled company” under the             rules. As such, we are permitted, and have elected, to opt out of compliance with certain             corporate governance requirements. Accordingly, stockholders will not have the same protections afforded to stockholders of companies that are subject to all of the             corporate governance requirements. See “Risk Factors—We are a “controlled company” within the meaning of the              rules. As a result, we qualify for, and intend to continue to rely on, exemptions from certain corporate governance requirements that provide protection to stockholders of other companies.”

Corporate Information

We were formed as a California corporation in October 2002 and launched our principal operations in 2003. We plan to reincorporate in Delaware in connection with this offering. Our principal executive offices are

 



 

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located at 39 Tesla, Irvine, California 92618, and our telephone number is (949) 428-2525. Our website is located at www.VIZIO.com. The information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider information on our website to be part of this prospectus or in deciding to purchase our Class A common stock.

VIZIO® is a registered trademark in the United States and other countries. Our other trademarks and service marks include: the “V” logo, VIZIO Internet Apps, VIZIO Internet Apps Plus, Inscape, E-Series, M-Series, P-Series, Clear Action, Active Pixel Tuning, Ultra Color Spectrum and Active LED Zones. Certain of these trademarks or variants of these trademarks and associated domain names have been registered in other countries and regions. Unless otherwise indicated, all other trademarks, service marks and trade names or references thereto appearing in this prospectus are the property of their respective owners.

 



 

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The Offering

Class A common stock offered:

 

By us

            shares

 

By the selling stockholders

            shares

 

Total

            shares

 

Underwriters’ option to purchase additional shares

We have granted the underwriters an option to purchase up to an additional             shares of Class A common stock, and the selling stockholders have granted the underwriters an option to purchase an additional             shares of Class A common stock.

 

Class A common stock to be outstanding after the offering

            shares (or             shares if the underwriters exercise in full their option to purchase additional shares from us and the selling stockholders)

 

Class B common stock to be outstanding after the offering

            shares (or             shares if the underwriters exercise in full their option to purchase additional shares from the selling stockholders)

 

Use of proceeds

We estimate that the net proceeds from our sale of shares of Class A common stock in this offering at an assumed initial public offering price of $     per share, which is the midpoint of the price range set forth on the front cover of this prospectus, will be approximately $            , or $             million if the underwriters exercise their option to purchase additional shares from us in full, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to increase our capitalization and to create a public market for our Class A common stock. We intend to use these net proceeds for expansion of our business and operations, including internationally, our strategic global marketing and branding campaign, broadening the portfolio of products and services within the VIZIO platform, as well as working capital and general corporate purposes. We may also use a portion of the net proceeds to acquire or invest in complementary businesses, products or technologies or to enter into strategic relationships with third parties.

 

  We will not receive any proceeds from the sale of shares by the selling stockholders.

 

Principal stockholder; controlled company

Our common stock consists of two classes: Class A common stock and Class B common stock. Purchasers in this offering will acquire Class A common stock. The terms of our Class A and Class B

 



 

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common stock are identical, except with respect to voting and conversion rights. All of the Class B common stock is beneficially owned by William Wang, our founder, Chairman, Chief Executive Officer and principal stockholder. Immediately following completion of this offering, Mr. Wang will control approximately     % of the total voting power of our outstanding Class A and Class B common stock. As a result, Mr. Wang will be able to control the outcome of all matters submitted to a vote of our stockholders, including, for example, the election of directors, amendments to our certificate of incorporation and mergers or other business combinations. See “Description of Capital Stock.” In addition, we currently intend to avail ourselves of the controlled company exemption under the corporate governance rules of the             , and so you will not have the same protections afforded to stockholders of companies that are subject to such requirements.

 

Voting rights

On all matters to be voted upon by our common stockholders, holders of our Class A common stock are entitled to one vote per share, and holders of our Class B common stock are entitled to 10 votes per share. Shares of our Class A and Class B common stock vote together as a single class on all matters submitted to a vote of stockholders. As of the date hereof, voting power over all shares of our Class B common stock is held by William Wang.

 

Class B common stock conversion rights

Each share of Class B common stock will be convertible into one fully paid and nonassessable share of Class A common stock at the option of the holder at any time and will convert automatically upon any sale or other disposition of each such share of Class B common stock to any person other than the beneficial owner of Class B common stock on the effective date of our amended and restated certificate of incorporation or to certain permitted transferees. Additionally, each outstanding share of Class B common stock will convert automatically upon the record date for any meeting of our common stockholders if the aggregate number of shares of Class A common stock and Class B common stock beneficially owned by the beneficial owners of Class B common stock or their permitted transferees on such record date is less than 5% of the total number of shares of Class A common stock and Class B common stock outstanding on such record date.

 

Directed share program

At our request, the underwriters have reserved for sale, at the initial public offering price, up to     % of the Class A common stock offered hereby for sale to certain of our directors, officers, existing stockholders, employees, business associates and related persons. The number of shares of our Class A common stock available for sale to the general public will be reduced by the number of directed shares purchased by participants in the program. Any directed shares not purchased will be offered by the underwriters to the general public on the same terms as the other shares of our Class A common stock offered hereby.

 



 

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Risk factors

See “Risk Factors” and the other information included in this prospectus for a discussion of factors you should consider carefully before investing in shares of our Class A common stock.

 

Proposed             symbol

“VZIO”

The number of shares of Class A common stock and Class B common stock that will be outstanding after this offering is based on 20,206,610 shares of our common stock outstanding at June 30, 2015, after giving effect to (i) the conversion, on July 24, 2015, of all shares of our common stock into shares of Class A common stock or Class B common stock, (ii) the vesting of 555,000 shares of restricted Class A common stock effective upon the completion of this offering and (iii) the conversion of all our outstanding shares of Series A convertible preferred stock into an aggregate of 3,368,400 shares of Class A common stock, and excludes:

 

    2,475,240 shares of our Class A common stock issuable upon the exercise of options outstanding under our 2007 Incentive Award Plan, or the 2007 Plan, as of June 30, 2015 at a weighted average exercise price of $7.01 per share; and

 

    3,200,000 shares of our Class A common stock reserved for future issuances under our 2015 Incentive Award Plan, or the 2015 Plan (plus any shares which as of the effective date of the 2015 Plan are available for issuance under the 2007 Plan), which will become effective immediately prior to completion of this offering.

In addition, unless otherwise indicated, all information in this prospectus assumes:

 

    our reincorporation in Delaware from California;

 

    the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws, which will occur concurrently with the completion of this offering;

 

    the reclassification of (i) 10,862,225 outstanding shares of common stock beneficially owned by Mr. Wang into an equivalent number of shares of Class B common stock and (ii) all other outstanding shares of common stock into an equivalent number of Class A common stock, which occurred on July 24, 2015;

 

    the conversion of all outstanding shares of our Series A convertible preferred stock into 3,368,400 shares of Class A common stock in connection with the completion of this offering;

 

    no exercise of options outstanding as of the date of this prospectus; and

 

    no exercise of the underwriters’ option to purchase additional shares from us or the selling stockholders.

 



 

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Summary Consolidated Financial Data

The following table summarizes our consolidated financial data for the periods presented and should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Selected Consolidated Financial Data” and our consolidated financial statements and related notes appearing elsewhere in this prospectus. The summary consolidated statements of income data for the years ended December 31, 2012, 2013 and 2014 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of income data for the six months ended June 30, 2014 and 2015, and the consolidated balance sheet data as of June 30, 2015, are derived from our unaudited interim financial statements included elsewhere in this prospectus. We have prepared the unaudited interim financial statements on the same basis as the audited financial statements and have included, in our opinion, all normal recurring adjustments that we consider necessary for a fair presentation of the financial information set forth in those statements. The historical results presented below are not necessarily indicative of financial results to be achieved in future periods and the interim results are not necessarily indicative of results to be expected for the full year ending December 31, 2015, or any other period.

 

Consolidated Statements of Income Data:

  

Year Ended December 31,

   

Six Months Ended June 30,

 
(in thousands, except per share data)    2012     2013     2014     2014     2015  
                       (unaudited)  

Net sales

     $2,417,395        $2,983,361        $3,142,438        $1,255,622        $1,343,773   

Cost of goods sold

     2,289,399        2,835,083        2,954,745        1,163,368        1,246,634   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     127,996        148,278        187,693        92,254        97,139   

Selling, general and administrative

     68,006        72,241        78,979        37,434        38,315   

Marketing

     34,136        35,060        40,952        14,959        10,328   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     25,854        40,977        67,762        39,861        48,496   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income:

          

Interest income

     305        362        2,555        615        2,041   

Other income (loss), net

     1,131        (262     518        141        227   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net nonoperating income

     1,436        100        3,073        756        2,268   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     27,290        41,077        70,835        40,617        50,764   

Provision for income taxes

     10,635        15,340        25,872        15,355        19,413   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     $16,655        $25,737        $44,963        $25,262        $31,351   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Preferred stock dividend

     (7,391     (3,345     (4,170     —         (41

Accretion of preferred stock

     (120     (120     (120     (60     (60

Undistributed income attributable to preferred stockholders

     —         (1,089     (3,552     (4,362     (5,357
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common stockholders

     $9,144        $21,183        $37,121        $20,840        $25,893   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share(1):

          

Basic

     $0.57        $1.32        $2.30        $1.29        $1.59   

Diluted

     $0.54        $1.25        $2.17        $1.22        $1.49   

Weighted-average number of common shares:

          

Basic

     16,068        16,081        16,161        16,095        16,282   

Diluted

     17,052        16,977        17,140        17,077        17,358   

Pro Forma net income per common share (unaudited)(1):

          

Basic

         $2.24          $1.55   

Diluted

         $2.13          $1.47   

 



 

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Consolidated Statements of Income Data:

  

Year Ended December 31,

    

Six Months Ended June 30,

 
(in thousands, except per share data)    2012      2013      2014      2014      2015  
                          (unaudited)  

Weighted-average number of common shares used in computing pro forma net income per common share (unaudited):

              

Basic

           20,084            20,205   

Diluted

           21,064            21,282   

Other data (unaudited):

              

Total television units sold(2)

     5,541         6,253         7,078         3,069         3,333   

Adjusted EBITDA

     $31,434         $45,012         $71,213         $41,564         $50,439   

 

(1) See note 14 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the calculation of basic and diluted net income per common share and pro forma basic and diluted net income per common share.
(2) A television unit sold refers to a television unit sold to one of our customers in a given period.

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income before interest income and expense, taxes, depreciation and amortization, and stock-based compensation expense, and we consider it an important supplemental measure of our performance. We believe that Adjusted EBITDA provides useful information with respect to our ability to fund future capital expenditures and working capital requirements and evaluate overall operating performance. In addition, we utilize Adjusted EBITDA when interpreting operating trends and results of operations of the business.

Adjusted EBITDA is not prepared in accordance with U.S. generally accepted accounting principles, or GAAP, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. In addition, Adjusted EBITDA is not based on any comprehensive set of accounting rules or principles. As a non-GAAP measure, Adjusted EBITDA has limitations in that it does not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP. Some of these limitations are:

 

    Adjusted EBITDA does not reflect the amounts we paid in taxes or other components of our tax expense;

 

    Adjusted EBITDA does not reflect expenses related to depreciation and amortization of our long-lived assets;

 

    Adjusted EBITDA does not reflect the non-cash component of employee compensation; and

 

    other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including our financial results presented in accordance with GAAP. Adjusted EBITDA should not be viewed as a substitute for our financial statements prepared in accordance with GAAP.

 



 

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The following table presents a reconciliation of net income to adjusted EBITDA:

 

    

Year ended December 31,

   

Six Months Ended June 30,

 

(in thousands)

  

2012

   

2013

   

2014

   

2014

   

2015

 
                       (unaudited)  

Net income

     $16,655        $25,737        $44,963        $25,262        $31,351   

Provision for income taxes

     10,635        15,340        25,872        15,355        19,413   

Interest (income) expense, net

     (305     (362     (2,555     (615     (2,041

Stock-based compensation

     1,923        1,359        490        240        293   

Depreciation and amortization

     2,526        2,938        2,443        1,322        1,423   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

     $31,434        $45,012        $71,213        $41,564        $50,439   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Consolidated Balance Sheet Data:

(in thousands)

   June 30, 2015 (unaudited)  
  

Actual

    

Pro Forma(1)

    

Pro Forma
as Adjusted(2)(3)

 

Cash and cash equivalents and investments

     $275,561         $                     $               

Working capital

     93,215         18,215      

Total assets

     748,764         

Total liabilities

     640,118         715,118      

Convertible preferred stock

     2,013         —        

Total stockholders’ equity

     108,646         33,646      

 

(1) On a pro forma basis to give effect to (i) the conversion, on July 24, 2015, of all shares of our common stock into shares of Class A common stock or Class B common stock; (ii) the vesting of 555,000 shares of restricted Class A common stock upon the completion of this offering; (iii) the automatic conversion of all outstanding shares of our Series A convertible preferred stock into an aggregate 3,368,400 shares of Class A common stock upon the completion of this offering; and (iv) the $75.0 million cash dividend declared by our Board of Directors on July 20, 2015.

 

(2) On a pro forma as adjusted basis to give further effect to the sale by us of              shares of Class A common stock in this offering at an assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

(3) A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) each of pro forma as adjusted cash and cash equivalents, working capital, total assets and total stockholders’ equity by $             million, assuming the number of shares we are offering, as set forth on the cover page of this prospectus, remains the same, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) each of pro forma as adjusted cash and cash equivalents, working capital, total assets and total stockholders’ equity by approximately $             million, assuming the assumed initial public offering price per share remains the same. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price, number of shares offered and other terms of this offering determined at pricing.

 



 

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RISK FACTORS

An investment in our Class A common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and all the other information in this prospectus, before you decide to purchase any shares of our Class A common stock. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected and you may lose all or part of your investment.

Risks Relating to Our Industry and Business

Decreases in average selling prices of our televisions and other products may reduce net sales, operating profit and net income, particularly if we are not able to reduce our expenses commensurately.

The selling prices of televisions and other media entertainment products typically decline over time for a variety of reasons, including increased price competition, excess manufacturing capacity and the introduction of new products and technology. If we are unable to anticipate and counter declining selling prices during the lifecycle of our products, our net sales, gross margin and results of operations will be adversely affected.

We sell the vast majority of our products to various retailers that in turn sell our products to the end consumer. In most situations, these retailers offer several brands of similar products. The consumer’s decision on which brand to purchase can be impacted by a host of factors including price, and retailers will not purchase our products from us if they are unable to sell them to consumers at a profit. As a result, if we are unable to offer products to retailers at competitive prices, our results of operations will be adversely affected.

Media entertainment product companies, including us, are vulnerable to cyclical market conditions that can cause a decrease in product prices. Intense competition and expectations of growth in demand across the industry may cause media entertainment product companies or their suppliers to make additional investments in manufacturing capacity on similar schedules, resulting in a surge in production capacity. During these surges in capacity, retailers can exert strong downward pricing pressure, resulting in sharp declines in prices and significant fluctuations in gross margins. Furthermore, we may provide our customers price protection credits in the form of rebates for products that decrease in price during the product’s life cycle. While we seek to pass through our costs associated with price protection rebates to our manufacturers, we may not be able to do so in full or in part, which could have a material adverse effect on our gross margins.

In order to sell products that have a declining purchase price while maintaining our gross margins, we need to continually reduce product and sourcing costs. To manage sourcing costs, we must collaborate with our third-party manufacturers to engineer cost-effective designs for our products. In addition, we must rely on our third-party manufacturers to manage the prices paid for components used in our products, especially key components such as LCD panels. We must also manage our logistics and other costs to reduce overall product costs. Our cost reduction efforts may not allow us to keep pace with competitive pricing pressures or declining prices. We cannot guarantee that we will be able to achieve any or sufficient cost reductions to enable us to reduce the price of our products to remain competitive without margin declines, which could be significant.

We also need to continually introduce new products with higher gross margins in order to maintain our overall gross margin. Although we may be able to take advantage of the higher selling prices typically associated with new products and technologies when they are first introduced in the market, such prices decline over time, and in certain cases, very rapidly, as a result of market competition or otherwise. We may not be successful in improving or designing new products, or delivering our new or improved products to market in a timely manner.

If we are unable to effectively anticipate and counter declining prices during the lifecycle of our products, or if the prices of our products decrease faster than the speed at which we are able to reduce our manufacturing costs, our net sales, gross margins, and results of operations will be harmed.

 

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We depend on sales of our televisions for substantially all of our net sales, and if the volume of these sales declines or is otherwise less than our expectations, we could lose market share or our net sales may not grow at the rate we expect and our operating results may suffer.

Substantially all of our net sales have been derived from the sale of televisions. Televisions accounted for 95%, 96% and 94% of our net sales for the years ended December 31, 2012, 2013 and 2014, respectively, and 95% and 96% of net sales for the six months ended June 30, 2014 and 2015, respectively. A decline in the volume of sales, whether due to macroeconomic conditions, changes in consumer demand, changes in technology or consumer preferences, competition or otherwise, would harm our business and operating results more significantly than it would if our products were more diversified across a greater variety of products and services. Sales declines may also result in the loss of market share or require us to reduce the prices of our televisions, which could materially and adversely affect our operating results, including our margins.

Demand for our televisions is affected by numerous factors, including the general demand for televisions, price competition and the introduction of new technological innovations. For example, demand is, in part, affected by the rate of upgrade of new televisions. We derived a significant percentage of our past net sales as a result of consumers purchasing flat panel televisions to replace their existing cathode ray televisions, or CRT TVs, upgrading standard-definition televisions to high-definition televisions, upgrading analog receivers to digital receivers, and other upgrades to newer technologies. These upgrade cycles are now substantially complete, and we cannot guarantee that current or future technological upgrades, such as Internet connectable, or Smart TVs, and Ultra-High Definition, or UHD, televisions, will result in similar adoption rates, or that content providers will provide the content necessary for such technological upgrades to fulfill their full potential for end-users. For example, there was a significant amount of time between when high-definition televisions were available and high-definition content for such TVs was prevalent, and there has been minimal content available and provided for 3D televisions. Similarly, content that would take full advantage of our UHD televisions may not be available at a rate that drives significant consumer demand for UHD televisions. Furthermore, the rate of replacement with new televisions of older televisions may be affected by macroeconomic factors such as continuing uncertainty in the global economy, or a change in the prices of televisions. If consumers do not purchase new televisions, or purchase substitute or replacement televisions at a lower rate than during prior replacement cycles, this may harm our operating results.

While we are evaluating other products and services to add to and diversify our offerings, we may not be successful in identifying or executing on such opportunities, and we expect sales of televisions to continue to represent most of our overall net sales for the foreseeable future. Furthermore, our other new product offerings in the past, including sound bars, have been complementary to television purchases and sales of such products are correlated with television purchases. The success of our Inscape data services offerings, moreover, relies on continued sales of our Smart TVs. As a result, our future growth and financial performance will depend heavily on our ability to develop and sell additional and newer models of our televisions, particularly Smart TVs and UHD televisions. If we fail to deliver upgraded and new products that our customers and consumers want, our business and results of operations will be harmed.

If we fail to keep pace with technological advances in our industry, or if we pursue technologies that do not become commercially accepted, consumers may not buy our media entertainment products, and our net sales and profitability may decline.

The markets for the media entertainment products that we offer are characterized by rapidly changing technology, evolving technical standards, changes in consumer preferences, low margins, significant competition and the frequent introduction of new products and software. The development and commercialization of new technologies, and the introduction of new products and software, will often quickly make existing products and software obsolete, unprofitable or unmarketable. We derive a substantial portion of our net sales from sales of new products, and we expect a significant percentage of our future growth to depend in part on the continued development and sale of other new products or services, such as UHD televisions. Our failure to adequately

 

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anticipate changes in the industry and the market, and to develop attractive new products, software or services, may reduce our future growth and profitability. Moreover, the development process can be lengthy and costly, and requires us to collaborate with our third-party manufacturers, software developers and their suppliers as well as our customers well in advance of sales. Technology and standards may change while we are in the development stage, rendering our products obsolete or uncompetitive before their introduction. Our products, which typically contain both hardware and software, may contain undetected errors that may not be discovered until after their introduction and shipment. In addition, we may encounter difficulties incorporating technologies and software into our products in accordance with our customers’ and consumers’ expectations, which in turn may negatively affect our customer and consumer relationships, and our reputation, brand and net sales. If we fail to keep pace with rapid technological changes and changes in consumers’ needs or preferences, and to offer new products, software or software updates to new or existing products in response to such changes, our business, operating results, and financial condition may be adversely affected.

Our success depends on our ability to continue to establish, promote and strengthen the VIZIO brand.

Maintaining awareness of the VIZIO brand name in existing markets and developing and maintaining the VIZIO brand name in new markets are critical to achieving and maintaining widespread awareness of our television and other product and service offerings. The VIZIO name and brand image are integral to the growth of our business and expansion into new markets. Maintaining, promoting and positioning our brand will largely depend on the success of our marketing efforts and our ability to consistently provide high quality products. If we fail to achieve these objectives or if our public image or reputation were to be tarnished by negative publicity or perception, our brand, business and operating results could be adversely affected. We also believe that brand recognition will continue to be a key factor in maintaining and expanding our customer base and market position, strengthening our bargaining power with customers, manufacturers and third-party service providers and monetizing our Inscape data services. Maintaining and enhancing our brand requires us to make substantial investments, and these investments may not achieve the desired goals. Marketing expenses for the years ended December 31, 2013 and 2014 were $35.0 million and $41.0 million, respectively. If we are unable to continue to promote and strengthen the VIZIO brand, or if our brand fails to continue to be viewed favorably by our customers or by consumers, we may not be successful in attracting and acquiring new customers and consumers, which could have a material adverse effect on our results of operations and financial condition.

Additionally, we compete not only for customers and consumers, but also for favorable product selections and cooperative advertising support from our customers. Our customers are often the first points of contact with consumers. Moreover, these customers provide a significant amount of product advertising, which supplements our marketing spend or may decrease the amount that we are otherwise required to spend on marketing. If these customers reduce or cease advertising our products, we may need to increase our own sales and marketing expenses to create and maintain the same level of brand awareness among potential consumers.

Moreover, if we are not successful in maintaining and strengthening our reputation and relationships with our manufacturers, service providers or licensors in existing and new product and service categories, we may be unable to maintain existing offerings, source new products at competitive prices and with adequate levels of inventory or successfully monetize our Inscape data services. We may also be unsuccessful in negotiating or maintaining attractive incentives and payment terms with manufacturers and service providers, or royalties or revenue shares with licensors, any of which could materially adversely affect our business.

A small number of customers account for a substantial majority of our net sales, and if our relationships with any of these customers is harmed or terminated, or the level of business with them is significantly reduced, our results of operations would be materially adversely affected.

We depend on a small number of customers for a substantial majority of our business, and believe that in the future we will continue to generate a substantial majority of our net sales from a small number of customers. Our four largest customers, measured by net sales, accounted for 85%, 84%, and 80% of our net sales

 

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for the years ended December 31, 2012, 2013, and 2014, respectively, and 82% and 81% of our net sales for the six months ended June 30, 2014 and 2015, respectively. Moreover, Wal-Mart Stores, Inc., or Wal-Mart, accounted for 52%, 45%, and 40% of our net sales for the years ended December 2012, 2013 and 2014, respectively, and 38% and 34% of our net sales for the six months ended June 30, 2014 and 2015, respectively. Costco and Sam’s Club each accounted for more than 10% of net sales in each of the periods noted, and Best Buy also accounted for more than 10% of net sales in each period beginning in 2013. Further, for the year ended December 31, 2014, Wal-Mart and Sam’s Club comprised 40% and 12% of our net sales, respectively. Wal-Mart, Sam’s Club and certain other entities purchasing from us are affiliates under common control, and collectively they comprise 54% of our net sales for the year ended December 31, 2014. While Wal-Mart and Sam’s Club have historically submitted orders to us through separate purchasing departments, their affiliation enhances the risk of our customer concentration as, among other things, their purchasing departments could become centralized in the future.

We do not typically enter into binding long-term contracts with our customers. We generally sell our products on the basis of purchase orders, and our customers may cancel or defer orders with little or no notice and without significant or any penalties. Our ability to maintain close and satisfactory relationships with our customers is important to the ongoing success and profitability of our business. If any of our significant customers reduces, delays, or cancels its orders, or the financial condition of our key customers deteriorates, our business could be seriously harmed. If we were to lose one of our major customers, or if a major customer were to significantly reduce its volume of business with us or provide more or better shelf space to products of our competitors, our net sales and profitability could be materially reduced, which could have a significant adverse impact on our operating results, and our business could be harmed.

We depend on a limited number of manufacturers for our products and their components. If we experience any delay or disruption, or quality control problems with our manufacturers in their operations, we may be unable to keep up with customer and consumer demand, we could lose market share and net sales, and our reputation and business would be harmed.

We do not have internal manufacturing or testing facilities or capabilities, and all of our products are manufactured, assembled, tested and packaged by third-party manufacturers, who are original design manufacturers, or ODMs, and original equipment manufacturers, or OEMs. Our manufacturers are, in turn, responsible for procuring or manufacturing the components used in the manufacturing of our products from a limited number of suppliers. Our four largest manufacturers accounted for 94%, 97%, and 97% of our inventory purchases for the years ended December 31, 2012, 2013 and 2014, respectively, and 98% and 98% of our inventory purchases for the six months ended June 30, 2014 and 2015, respectively. Moreover, our manufacturer AmTRAN Technology Co., Ltd. and Q-Run Holdings Ltd., an affiliate of our manufacturer Hon Hai Precision Co., Ltd., are our related parties, holding 20.4% and 8.3% of our common stock on an as-converted basis as of June 30, 2015, respectively. These two manufacturers accounted for approximately 12% and 25% of our inventory purchases for the year ended December 31, 2014, respectively, and 8% and 23% for the six months ended June 30, 2015, respectively.

Our reliance on our manufacturers, and indirectly, on their limited number of suppliers, involves a number of risks, including risks related to:

 

    our manufacturers and their suppliers encountering financial or other business difficulties, changing their strategic objectives, or their perceiving us to no longer be an attractive customer;

 

    we have no long-term contracts with our manufacturers and as a result, our manufacturers could cease to provide products to us with little or no notice;

 

    our manufacturers, or their suppliers, may experience disruptions in their manufacturing operations due to equipment breakdowns, labor disputes or shortages, component or material shortages, cost increases or other similar problems;

 

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    production capacity constraints;

 

    increases in manufacturing costs and lead times;

 

    untimely delivery and failures to meet production deadlines;

 

    errors in complying with product specifications;

 

    product and component quality and reliability issues;

 

    failure of a key manufacturer, or a key supplier to a manufacturer, to remain in business and adjust to market conditions;

 

    failure of our manufacturers and their suppliers to obtain timely domestic or foreign regulatory approvals or certificates for our products;

 

    our ODMs could become our competitors by selling directly to retailers and discontinuing manufacturing or supplying us with their products;

 

    our inability to pass price declines in the sales of our products or price protection rebates we provide to our customers through to our manufacturers;

 

    failure of manufacturers to honor indemnities in their agreements with us;

 

    delays in, or the inability to execute on, a supplier roadmap for components and technologies; and

 

    natural disasters, fires, acts of terrorism or other catastrophic events which disrupt manufacturing operations or shipping routes.

We rely on our manufacturers to procure components of our products, particularly LCD panels and chipsets. There are a limited number of suppliers of LCD panels and chipsets, and we do not expect the number of suppliers to increase. In addition, some of our manufacturers’ suppliers are affiliates of certain of our competitors, which creates the risk that these suppliers may favor their affiliated companies over us or our manufacturers in allocating or pricing supplies, or may refuse to supply to our manufacturers at acceptable prices, or at all, components for use in our products. We run the risk that these or other suppliers may choose to withhold LCD panels from our manufacturers, and they may not cooperate with us (or our manufacturers), for competitive reasons in the future.

If component shortages or delays occur, the price of certain components may increase, and we may be exposed to quality issues or the components may not be available at all. Accordingly, our net sales and gross margin could suffer as we could lose time-sensitive sales, incur additional freight costs or be unable to pass on price increases to our customers. If we, or our manufacturers, cannot adequately address supply issues, we might have to re-design some products, which could result in further costs and delays.

In addition, if we experience a significant increase in demand for our products, our manufacturers might not have the capacity to, or might elect not to, meet our needs as they allocate production capacity to their other customers. Identifying a suitable manufacturer is an involved process that requires us to become satisfied with the manufacturer’s quality control, responsiveness and service, financial stability and labor and other ethical practices, and if we seek to source materials from new manufacturers there can be no assurance that we could do so in a manner that does not disrupt the manufacture and sale of our products.

If we fail to manage our relationship with our manufacturers effectively, or if they experience operational difficulties, our ability to ship products to our customers could be impaired and our competitive position and reputation could be harmed.

 

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We compete in rapidly evolving and highly competitive markets and we expect intense competition to continue, which could result in a loss of our market share and a decrease in our net sales and profitability, and could adversely affect our growth prospects.

We compete in rapidly evolving and highly competitive markets, and with existing competitors whose size and resources may allow them to compete more effectively than we can. We expect intense competition to continue as existing competitors introduce new and more competitive offerings alongside their existing products and services, and as new market entrants introduce new products and services into our markets. Many of our competitors have greater financial, distribution, marketing and other resources, longer operating histories, better brand recognition among some types of consumers, and greater economies of scale. In addition, these competitors have long-term relationships with many of our retailer customers.

We compete primarily with established, well-known television manufacturers, established media entertainment product companies, as well as more recent entrants to the branded television market. Our principal competitors include: Samsung, Sony, LG, Sharp, Toshiba, Panasonic and Funai.

Many of our existing and potential competitors enjoy substantial competitive advantages, such as:

 

    the ability to more easily undertake extensive marketing campaigns;

 

    the capacity to leverage their sales efforts and marketing expenditures across a broader portfolio of products and services;

 

    the ability to implement and sustain aggressive pricing policies;

 

    the ability to obtain favorable pricing or allocations of key components from manufacturers or suppliers, including LCD panels, which are supplied for our products to a significant extent by affiliates of our competitors;

 

    the ability to exert significant influence on sales channels;

 

    broader distribution and more established relationships with retailers;

 

    access to larger established retailer and consumer bases;

 

    access to greater resources to make acquisitions;

 

    the ability to rapidly develop and commercialize new technologies and services;

 

    the ability to bundle competitive offerings with other products and services; and

 

    the ability to cross-subsidize low-margin operations from their other higher-margin operations.

In addition, with our Inscape data services, we recently entered the market for viewing behavior data. The market for viewing behavior data and analysis is highly competitive and includes well-established companies such as A.C. Nielsen and Rentrak. Many of Inscape’s competitors have greater financial, marketing and other resources, longer operating histories, better brand recognition among advertisers, and greater economies of scale. In addition, these competitors have established long-term business relationships with many advertisers.

 

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We would be at a competitive disadvantage if our competitors bring their next generation products and services to market earlier than we do, if their products or services have lower prices, better features or are more technologically advanced than ours, or if any of our competitors’ products or services were to become preferred by customers or consumers. To the extent we are unable to effectively compete against our competitors for any of these reasons or otherwise, our net sales could decline, our margins could be negatively impacted, we could lose market share or we could fail to successfully monetize our Inscape data services, any of which would seriously harm our business and results of operations or growth prospects.

If we do not effectively maintain and further develop our product sales channels, including developing and supporting our retail sales channels, or if any of our retail customers experience financial difficulties or fails to promote our products, our business could be harmed.

We depend upon effective sales channels to reach the consumers who are the ultimate purchasers of our products. We primarily sell our products directly through a mix of retail channels, including big box retailers, wholesale clubs and, to a much smaller extent, independent regional retailers. We depend on our customers to provide adequate and attractive space for our products in their stores. We further depend on our customers to employ, educate and motivate their sales personnel to effectively sell our media entertainment products. Many of our customers limit the shelf space they provide to any single brand, which makes future market share gains by us more difficult. If our customers do not adequately display our products, choose to promote competitors’ products over ours (including through more prominent or higher-impact store displays or through in-store recommendations to consumers from their sales personnel), or do not effectively explain to consumers the advantages of our products, our net sales could decrease and our business could be harmed. Similarly, our business could be adversely affected if any of our large retail customers were to experience financial difficulties, or change the focus of their businesses in a way that deemphasized the sale of our products. We are also investing heavily in providing new customers with in-store product displays and expanding the footprint of our product displays in existing stores, and there can be no assurance that this investment will lead to increased sales.

We rely upon third parties for technology that is critical to our products and services, and if we are unable to continue to use this technology and future technology, our ability to sell competitive and technologically advanced products or to monetize our Inscape data services would be limited.

We did not develop most of the technology incorporated into and necessary for the operation and functionality of our products. We rely on non-exclusive license rights from third parties for these technologies. We also license technology on a non-exclusive basis that is necessary to comply with various data compression, broadcast and wireless standards. Because the intellectual property we license is available to our competitors from third parties, barriers to entry for our competitors are lower than if we owned exclusive rights to the technology we license and use or if we had separately developed patented technology. In some cases, the owners of the intellectual property that we license routinely license the same or similar intellectual property to our competitors, such as ATSC licensed by MPEG-LA and Dolby and the Automatic Content Recognition, or ACR, technology we use in our Inscape data services. If a competitor were to enter into an exclusive arrangement with any of our third-party technology providers, or we are unable to continue to license or replace technologies we use following the expiration of a license, our ability to develop and sell products or services containing that technology could be severely limited. Our ability to continue licensing technology from a licensor after the expiration of a license could also become more limited in the future for a variety of reasons, such as the licensor being acquired by one of our competitors. Our success will also depend in part on our continued ability to access these technologies on commercially reasonable terms.

Furthermore, our Inscape data services rely on ACR technology, which is a technology that is designed to recognize attributes of the content displayed on our Smart TVs and match those attributes to a database of existing content, such as movies, TV shows and games. We license ACR technology on a non-exclusive basis under a license that extends until 2017, at which point the license will renew automatically for successive one-year periods unless either we or the licensor gives at least 60 days’ notice. We cannot guarantee that we will be able to retain such license on commercially reasonable terms, or at all, after the expiration of its initial term.

 

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Moreover, we cannot guarantee that the licensor will continue to perform under the license or will continue to remain financially viable during the term of the license. While other companies license ACR technology, and we have taken steps to mitigate the risk of the loss of access to our license for ACR technology, if we were to lose such license, a suitable replacement may not be available to us on commercially reasonable terms, or at all, and implementing and integrating such alternative ACR technology could result in significant cost and delay in our ability to monetize our Inscape data services. If we are unable to secure the use of ACR technology, we would be unable to continue monetizing our Inscape data services and our growth strategy would be materially and adversely affected.

Limited availability of raw materials, components and manufacturing equipment for our products, or increases in the cost of these items, could materially and adversely affect our business, results of operations or financial condition.

We depend on our manufacturers obtaining adequate supplies of quality raw materials and components on a timely basis, and we have no long-term agreements with our manufacturers with fixed prices or quantities. As a result, it is important for them to control raw material and component costs and reduce the effects of fluctuations in price and availability. We do not have ultimate control over how or from whom our manufacturers, or their suppliers, source the raw materials or key components, such as glass substrates, liquid crystal material, driver integrated circuits, polarizers and color filters, used in our products and key components. Our manufacturers, or their suppliers, may establish a working relationship with a single materials supplier if they believe it is advantageous to do so due to performance, quality, support, delivery, capacity, price or other considerations. Our manufacturers, or their suppliers, may experience a shortage of, or a delay in receiving, certain components as a result of strong demand, capacity constraints, financial weakness of the manufacturer or their suppliers, inability of manufacturers or their suppliers to borrow funds in the credit markets, disputes with other manufacturers or suppliers (some of whom are also competitors) or disruptions in the operations of component suppliers, or problems faced during the transition to a new component supplier. Our results of operations would be adversely affected if our manufacturers, or their suppliers, were unable to obtain adequate supplies of high-quality raw materials or components in a timely manner or make alternative arrangements for such supplies in a timely manner.

Furthermore, we may be limited in our ability to pass on increases in the cost of raw materials and components to our customers. Our contracts with our customers provide that price and quantity terms are contained in purchase orders, which are generally agreed upon one month in advance of delivery. Except under certain special circumstances, the price terms in the purchase orders are not subject to change. If we become subject to any significant increase in the price our manufacturers charge us due to increases in the price of raw materials or components that were not anticipated, we may be unable to pass on such cost increases to our customers, particularly when we offer price protection, where we offer rebates to our customers so that they can decrease the retail price of products during the products’ life cycles to move such products off their shelves.

In addition, certain manufacturing equipment used by our manufacturers, and their suppliers, is only available from a limited number of vendors. From time to time, increased demand for such equipment may cause lead times to extend beyond those normally required. The unavailability of such equipment could hinder the manufacturing capacity of our manufacturers, which could in turn impair our ability to meet our customer orders. This could result in a loss of net sales and cause financial stress on our operations.

If we are unable to accurately predict our future customer demand and provide our manufacturers with an accurate forecast of our product requirements, we may experience delays in the manufacturing of the products we sell and the costs of our products may increase, which could adversely affect our operating results.

To ensure adequate inventory supply and meet the demands of our customers, we must forecast inventory needs and place orders with our manufacturers based on our estimates of future demand for particular products. Our ability to accurately forecast demand for our products could be affected by a multitude of factors,

 

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including the timing of product introductions by competitors, unanticipated changes in general market demand, macroeconomic conditions or consumer confidence. We provide our manufacturers with a rolling forecast of demand, which they use to determine material and component requirements. Lead times for ordering materials and components, especially key components such as LCD panels, vary significantly and depend on various factors, such as the specific component manufacturer, contract terms and demand and supply for a component at any given time. We rely on our manufacturers and their suppliers to manage these lead times. If our forecasts are less than our actual requirements, our manufacturers and their suppliers may be unable to manufacture our products or their components in sufficient quantity or in a timely manner, and we may be unable to meet customer demand for our products, or may be required to incur higher costs to secure the necessary production capacity and components. We could also overestimate future sales of our products and risk causing our manufacturers to carry excess product and component inventory, which could result in our providing increased price protection or other sales incentives, which could have a material and adverse effect on our net sales and gross margins. The cost of the components used in our products also tends to drop rapidly as volumes increase and technologies mature. Therefore, if our manufacturers or their suppliers are unable to promptly use the components purchased in anticipation of our forecasts, the cost of the products we sell may be higher than our competitors due to an over-supply of higher priced components.

Furthermore, a failure to deliver sufficient quantities of products to meet the demands of our customers may cause us to lose customers. At certain times in the past, we have been unable to supply the number of televisions demanded by certain of our customers. If this were to occur more frequently, our relationship with these customers may be materially affected, and they may decide to seek other sources of supply or cease doing business with us altogether.

The use of ACR technology to provide viewing behavior data to advertisers and media content providers represents an emerging industry. Our Inscape data services is in an early stage of development and its success depends on various factors. Our failure to successfully monetize our Inscape data services could materially and adversely harm our growth prospects.

We recently began offering to advertisers and media content providers our Inscape data services, which provide viewing behavior data collected using ACR technology from our Smart TVs. We are in the early stages of commercializing our Inscape data services and it has not yet resulted in meaningful revenue. Moreover, the utilization of viewing behavior data collected using ACR technology through Smart TVs to inform digital advertising and content delivery is an emerging industry, and future demand and market acceptance for this type of data is uncertain. If the market for the use of this data does not develop or develops more slowly than we expect, or if we are unable to successfully develop and monetize our Inscape data services offerings, our growth prospects could be materially and adversely harmed.

Inscape data services is a new and untested business for us, and we are still in the process of evaluating and developing partner relationships with advertisers and media content providers, as well as our business strategies and service offerings. In directing our focus into a new area of business, we face numerous risks and challenges, including facing new competitors and having the increased need to develop new strategic relationships. We cannot assure you that our strategy will result in increased net sales or net income. Furthermore, growth in our Inscape data services may require changes to our existing business model and cost structure, modifications to our infrastructure and exposure to new regulatory and legal risks, any of which may require expertise in areas in which we have little or no experience. These risks pose a material adverse risk to our growth prospects and in the future, may pose a material risk to our results of operations and financial condition. Moreover, we are continuing to invest substantial resources in the development of our Inscape data services offerings, and if these offerings are unsuccessful, we would not achieve a return on this investment.

Many factors may adversely affect the acceptance and growth of our Inscape data services, including:

 

   

changes in the economic prospects of advertisers, advertising and media agencies, broadcast, cable and local television networks, digital publishers and streaming companies, data analytics firms,

 

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advertising technology firms, or the industries or verticals we expect to primarily serve with our Inscape data services;

 

    the failure to add, or the loss of, brand advertisers, advertising and media agencies, broadcast, cable and local television networks, digital publishers and streaming companies, data analytics firms, and advertising technology firms running advertising campaigns using our Inscape data services;

 

    the timing and amount of sales and marketing expenses incurred to attract new brand advertisers, advertising and media agencies, broadcast, cable and local television networks, digital publishers and streaming companies, data analytics firms, and advertising technology firms to our Inscape data services;

 

    changes in the demand for viewing behavior data;

 

    developing and maintaining relationships and technology integrations with brand advertisers, advertising and media agencies, broadcast, cable and local television networks, digital publishers and streaming companies, data analytics firms and marketing technology firms;

 

    the failure of our network or software systems, or the networks or software systems of marketing technology companies;

 

    decisions by advertisers, media content providers, digital publishers or marketing technology companies to, or changes in their technology or rights that, restrict our ability to collect data or their refusal to implement mechanisms we request to ensure compliance with our legal obligations or technical requirements;

 

    changes by marketing technology companies that render inoperable the integrations we have with them;

 

    interruptions, failures or defects in our data collection, mining, analysis and storage systems;

 

    changes in device functionality and settings, and other changes in technologies, including those that make it easier for consumers to prevent the placement monitoring technology and impact our ability to reach them online or collect and use exposure data, and decisions by consumers to opt out of being monitored or to use such technology; and

 

    changes in or the introduction of new laws, rules, regulations and industry standards or increased enforcement of international laws, rules, regulations and industry standards impacting the collection, use, security or sharing of data or otherwise.

If we are unable to adequately address these factors, we may not be able to successfully develop our Inscape data services business and our anticipated future growth would be adversely impacted.

The success of our Inscape data services will depend on many factors, including our ability to provide viewing behavior data that advertisers and media content providers find useful and valuable, which in turn depends on factors such as the adoption rate of our Smart TVs, our ability to collect, measure, and report viewing behavior data from relevant content sources, our ability to build out and maintain a database of matching content, and consumers’ willingness to not opt out of our data service and maintain their Smart TVs’ connection to the Internet.

The success of our Inscape data services will depend on many factors, including our ability to provide viewing behavior data that advertisers and media content providers find useful and valuable. This ability, in turn, depends to a significant extent on the willingness of consumers to continue to purchase and use our Smart TVs and in our maintaining and continuing to grow our community of VIZIO connected units, or VCUs. A VCU represents one of our Smart TVs that has been connected to the Internet and has transmitted data collected by

 

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our Inscape data services. While we believe our current community of over 8 million VCUs enables the data we provide to reflect U.S. census demographics, a larger and broader user base may be necessary for us to sufficiently monetize some services we may offer in the future, such as delivering targeted audiences to advertisers.

Through our Inscape data services, we are capable of collecting meaningful viewing behavior data by matching attributes of content displayed on the screens of our ACR-capable, connected Smart TVs to a database of existing content, such as movies, TV shows and games. We currently rely on our third-party licensor of ACR technology to continue to develop and update this database, and to match the content in this database to content displayed on our VCUs. The process of developing this database is ongoing and incomplete, particularly with respect to content broadcast by local television stations. Delays in developing this database of content may decrease the value of our Inscape data services.

We currently do not collect, and might not in the future collect, viewing behavior data regarding content streamed through VIZIO Internet Apps Plus or content viewed on Smart TVs located outside of the United States. These potential limitations may impair our ability to monetize our Inscape data services.

Moreover, our Smart TV viewers can opt out of data collection at any time. Furthermore, some individuals may be reluctant or unwilling to connect to the Internet through our Smart TVs because they have concerns regarding the risks associated with data privacy and security. If the wider public perceives data privacy or security concerns with respect to our Smart TVs, this could negatively impact the growth potential for the net sales of our Smart TVs and our Inscape data services.

We are dependent on logistics services provided by our third-party logistics provider, and failure to properly manage this relationship, or the failure of our logistics provider to perform as expected, could adversely impact our results of operations.

We currently rely primarily on only one third-party logistics provider for our warehousing and transportation needs that are not already handled by our manufacturers. We have no assurance that business interruptions will not occur as a result of the failure by this provider to perform as expected or that this logistics provider will meet the needs of our business. Further, if we are unable to properly manage our relationship with our logistics provider, including by accurately forecasting our requirements, our net sales, results of operations and gross profits may be adversely affected. We cannot ensure that our logistics provider will continue to perform services to our satisfaction, in a manner satisfactory to our customers, manufacturers and their suppliers, or on commercially reasonable terms. Our manufacturers could become dissatisfied with our logistics provider or its cost levels and refuse to utilize this logistics provider. Our customers could become dissatisfied and cancel their orders, impose charges on us or decline to make future purchases from us if this logistics provider fails to deliver products on a timely basis and in compliance with customers’ shipping and packaging requirements, thereby increasing our costs and/or potentially causing our reputation and our brand to suffer. If our logistics provider is not able to provide the agreed services at the level of quality we require or becomes unable to handle our existing or higher volumes, we may not be able to replace such logistics provider on short notice, which may have a material adverse effect on our business.

Our logistics provider may also fail to perform as expected for reasons outside its control. For example, in the first quarter of 2015, there was a labor dispute which impacted the seaports in the western United States, which delayed many of our inbound supply shipments. This resulted in lower revenue, net sales and profitability for us in the first quarter of 2015.

In addition, because we currently rely primarily on only one third-party logistics provider for our warehousing and transportation needs, if we encounter problems with this logistics provider, we may not be able to quickly shift to a new provider of these services and our ability to meet customer expectations, manage inventory, complete sales and achieve objectives for operating efficiencies could be materially adversely affected.

 

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An economic downturn, or economic uncertainty in our key markets, could adversely affect consumer discretionary spending and demand for our products and our operating results.

The products we currently sell, predominately televisions and sound bars, are consumer discretionary items. As such, our results of operations tend to be sensitive to changes in conditions that impact the level of consumer spending for discretionary items, including general macroeconomic conditions, consumer confidence, employment levels, interest rates, tax rates, the availability and cost of consumer credit, consumer debt levels and fuel and energy costs. As global economic conditions continue to be volatile and economic uncertainty remains, consumer discretionary spending may also remain unpredictable and subject to reductions due to credit constraints and uncertainties. These factors may lead consumers to delay or reduce purchases of our products. Our sensitivity to economic cycles and any related fluctuation in consumer demand could adversely affect our business, financial condition and operating results.

In addition, unstable economic conditions may make it difficult for us to successfully monetize our Inscape data services offerings. Historically, economic downturns have resulted in overall reductions in advertising spending. If macroeconomic conditions deteriorate or are characterized by uncertainty or volatility, advertisers may curtail or freeze spending on advertising in general and on new and unproven technologies, such as viewership data collected using ACR technology, in particular. If these factors cause advertisers to limit or reduce their advertising budgets allocated to our Inscape data services, we may not be able to successfully monetize our Inscape data service offerings, which could have a material adverse effect on our growth prospects.

Our business is seasonal, and if our product sales during the holiday season fall below our forecasts, our overall financial condition and results of operations could be adversely affected.

Our business is subject to seasonal fluctuations in demand due to changes in buying patterns by our customers. Historically, we have experienced the highest levels of our sales in the fourth quarter of the year, coinciding with the holiday shopping season in the United States, including the Black Friday and Cyber Monday sales events, and, to a more limited extent, the third quarter due to pre-holiday inventory build-up and back-to-school promotions. For example, in both 2013 and 2014, our fourth quarter represented 34% of our respective annual net sales. Moreover, we often introduce our newest generation of product offerings just prior to this peak season, which may further concentrate sales in the fourth quarter. Additionally, there are other seasonal events, such as Superbowl Sunday in the first quarter, back-to-school promotions and pre-holiday inventory build-up in the third quarter, as well as customer reset periods in the spring and fall of each year, which impact our sales volume. During product reset periods, our customers, including Wal-Mart, Costco, Best Buy and Target, update their product assortments, driving sales of new product introductions, while simultaneously driving down prices for pre-existing products, as retailers seek to move older products off of their shelves to make room for new products.

Depending on how well we plan and execute our sales strategy during seasonal fluctuations in demand, our product sell-through and/or margins may be adversely impacted, particularly as we provide price protection for products in inventory at our customers. Further, given the strong seasonal nature of our product sales, appropriate forecasting is critical to our operations. We anticipate that this seasonal impact on our results will continue, and any shortfall in seasonal sales would cause our results of operations to suffer. Achieving sales targets in the fourth quarter is particularly important, as a failure to achieve sales targets during the holiday season cannot be recovered in subsequent periods of a given year.

In contrast to net sales, a substantial portion of our expenses are personnel related and include salaries, stock-based compensation, benefits and incentive-based compensation plan expenses, which are not seasonal in nature. Accordingly, in the event of net sales shortfalls, we are generally unable to mitigate the negative impact on margins in the short term.

 

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To remain competitive and stimulate customer and consumer demand, we must successfully manage constant product development and frequent product introductions and transitions.

We believe that we must continually develop and introduce new products, enhance our existing products and effectively stimulate customer and consumer demand for new products. Any failure to complete product transitions effectively could harm our brand and results of operations.

The success of new product introductions depends on a number of factors including, but not limited to, timely and successful development, market and consumer acceptance, the effective forecasting and management of product demand, purchase commitments and inventory levels, the management of manufacturing and supply costs, and the risk that new products may have quality or other defects in the early stages of introduction. If we do not successfully manage product transitions, especially during the holiday shopping season, our net sales and business may be harmed and we may not be able to grow our business.

The introduction of new products or product enhancements may shorten the life cycle of our existing products, or replace sales of some of our current products, thereby offsetting the benefit of a successful product introduction. We may need to offer our customers price protection or other benefits in order to complete the sell-thru of older models of our products to consumers. New product offerings may also cause customers or consumers to defer purchasing our existing products in anticipation of the new products and potentially lead to challenges in managing inventory of existing products. If we fail to effectively manage new product introductions, our net sales and profitability may be harmed.

If our products contain defects or errors, we could incur significant unexpected expenses, experience product returns and lost sales, suffer damage to our brand and reputation, and be subject to product liability or other claims.

Our products are complex and may contain defects, errors or failures, particularly when first introduced or when new models are released. Our products have a one- or two-year limited warranty against manufacturing defects and workmanship. While our warranty is limited to repairs and returns, warranty claims may result in significant costs and litigation, the occurrence of which could adversely affect our business and operating results. If our products contain defects or errors, we could experience decreased sales and increased product returns, and loss of our customers, consumers and market share. If defects are not discovered until after customers or consumers purchase our products, our customers and consumers could lose confidence in the quality of our products and our business could be harmed. Any negative publicity related to the perceived quality of our products could affect our brand image, decrease customer and consumer demand, and adversely affect our operating results and financial condition. In addition, although substantially all of our product warranty expenses are reimbursed by our manufactures under our standard product supply agreements, if our manufacturers fail to honor these obligations, or if the indemnities in our product supply agreements are insufficient or do not cover our losses, we could incur significant service, warranty and insurance costs to correct any defects, warranty claims or other problems, including costs related to product recalls.

Our recent growth rate in net sales and profitability in recent periods might not be indicative of future performance. You should not rely on the results of recent periods as an indication of future net sales or net income.

Although our net sales and net income have grown significantly since our inception in 2002, we may not have similar growth rates in future periods. Accordingly, you should not rely on the results of any prior quarterly or annual periods as indicative of our future net sales or net income growth or financial results. In future periods, our net sales could decline or grow more slowly than we expect. We also may incur significant losses in the future for a number of reasons, including due to other risks described in this prospectus, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors.

 

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We expect our quarterly financial results to fluctuate, which may lead to volatility in our stock price.

Our net sales and net income vary significantly from quarter to quarter due to a number of factors, including:

 

    changes in demand for the products we sell, including seasonal fluctuations reflecting traditional customer and consumer purchasing patterns;

 

    changes in the mix of products we sell;

 

    the anticipation of new products or updates that causes our customers and consumers to forego purchases of current products;

 

    the introduction of new technologies, products or service offerings by competitors;

 

    our ability to manage our product mix and consider allowances, including for price protection;

 

    our inability to reduce our fixed costs to compensate for any reduced net sales or decrease in average selling prices;

 

    changes in advertising and other marketing costs;

 

    aggressive pricing, marketing campaigns or other initiatives by our competitors;

 

    increases in the cost of the products we sell due to the rising costs of key components such as LCD panels, chipsets and raw materials, particularly in countries like China that account for a significant portion of the manufacturing capacity for our products;

 

    costs of expanding or enhancing our supply base;

 

    changes and uncertainty in the legislative, regulatory and industry environment for us, our customers or our manufacturers;

 

    investments in new product or service offerings, including the level of investment in our Inscape data services;

 

    changes in our capital expenditures as we acquire the hardware, equipment, technologies and other assets required to operate and scale our business; and

 

    costs related to acquisitions of other businesses or technologies.

As a result of the variability of these and other factors, our operating results in future quarters may be below the expectations of stock analysts and investors, which could cause our stock price to fall.

We may undertake acquisitions to expand our business, which may pose risks to our business and dilute the ownership of our stockholders or restrict our operations.

As part of our business and growth strategy, we have in the past acquired and made significant investments in, and may in the future acquire or make significant investments in, businesses, assets, technologies or services that we believe complement our business. For example in December 2014, we acquired Advanced Media Research Group, Inc., a software and application development company. Integrating any newly acquired businesses, assets, technologies or services may be expensive and time-consuming. We have limited experience acquiring and integrating businesses, and may not be successful in doing so. In addition, to finance any

 

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acquisitions, it may be necessary for us to raise additional funds through public or private financings. Additional funds may not be available on terms that are favorable to us, and in the case of equity or equity-linked financings, could result in dilution to our stockholders. Furthermore, funds obtained through debt financing could contain covenants that restrict how we operate our business or obtain other financing in the future.

If we are unable to integrate any newly acquired entities, assets or technologies effectively, our business and results of operations could suffer. The time and expense associated with finding and integrating suitable and compatible businesses, technologies or services, as well as negotiating acquisitions, could also disrupt our ongoing business and divert our management’s attention. Acquisitions by us could also result in large write-offs or assumptions of debt and contingent liabilities, any of which could substantially harm our business and results of operations.

If we are unable to provide a competitive entertainment offering through our Smart TV discovery and engagement software, our ability to attract and retain consumers would be harmed, as they increasingly look for new ways to access, discover and view digital content.

Our Smart TVs connect consumers with a user interface capable of facilitating discovery and engagement with a wide variety of content from traditional and streaming content providers, including Netflix, Hulu, YouTube and Amazon Instant Video. We face increased competition from a growing number of broadband-enabled devices from providers such as Roku, AppleTV, Amazon, and Google that provide broadband delivered digital content directly to a consumer’s television connected to their device. We also face competition from online content providers and other PC software providers who deliver digital content directly to a consumer’s personal computer, which in some cases may then be viewed on a consumer’s television. To compete effectively, we must be able to provide premium, high-definition content at comparable speeds and quality. We must also maintain arrangements with a competitive assortment of content providers. We do not currently have arrangements with all of the popular content providers, including some content providers that are available on competitive devices, such as ESPN and HBOGo. Furthermore, our arrangements with our current content providers typically involve no significant long-term commitments, and we cannot guarantee we will be able to continue our relationships with our current content providers in the future. If we are unable to provide a competitive entertainment offering through our Smart TV discovery and engagement software, our ability to attract and retain consumers would be harmed, as they increasingly look for new ways to access, discover and view digital content.

The success of our Inscape data services depends on developing and maintaining relationships and technology integrations with brand advertisers, advertising and media agencies, broadcast, cable and local television networks, digital publishers and streaming companies, data analytics firms and advertising technology firms, which enable us to deliver our Inscape data services at scale.

We are in the early stages of developing our Inscape data services, which is a complex process, involving cooperation among multiple participants in the television and digital advertising ecosystems. The success of our Inscape data services depends on developing and maintaining relationships and technology integrations with brand advertisers, advertising and media agencies, broadcast, cable and local television networks, digital publishers and streaming companies, data analytics firms and advertising technology firms, which enable us to deliver our Inscape data services at scale. The television and digital advertising industries continue to evolve and we will need to ensure we maintain and expand our existing relationships as well as develop relationships with additional constituents as they emerge. We cannot assure you that our relationships with these constituents will result in significant net sales, or that we will be able to maintain or expand these existing relationships or develop new relationships.

In particular, we have spent the last several years and significant resources building out technology integrations with marketing technology companies to facilitate the collection of data that ultimately will be used for the delivery of digital advertisements to television and online content audiences. We are, therefore, dependent on marketing technology companies to collect and make that data useful to our Inscape data service customers. If

 

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these marketing technology companies fail to properly collect user data from our products, or if we fail to maintain and expand our relationships with these marketing technology companies, the success of our Inscape data services offerings could be adversely affected. Additionally, television content providers, digital publishers and marketing technology companies may begin to develop products supplementing their current product offerings to compete with our data services offerings rather than continuing to facilitate the delivery of our products or continuing to purchase and incorporate our products into their own products. If television content providers, digital publishers and marketing technology companies elect to compete directly with our data services offerings, future demand for these services may decrease and we may not experience our anticipated growth.

Our future growth is dependent upon the growth and integration of the digital and television advertising industries.

Many advertisers continue to devote a substantial portion of their advertising budgets to traditional, offline advertising, such as offline television, radio and print. The future growth of our business and, in particular, our Inscape data services, will depend on the integration of television and digital advertising, and on advertisers increasing their spend on television and digital advertising, and we cannot be certain that they will do so. If advertisers do not perceive meaningful benefits from the integration of television and digital advertising, and in particular the benefit of viewing behavior data, including in terms of cost effectiveness, then the digital advertising market may develop more slowly than we expect, which could adversely affect our growth prospects. Furthermore, viewing behavior data does not yet make up a significant part of the television and digital advertising ecosystem, and we do not have control over most factors contributing to the development of the market.

We do not control our manufacturers, or require them to comply with a formal code of conduct, and actions that they might take could harm our reputation and sales.

We do not control our manufacturers, including their labor, environmental or other practices, or require them to comply with a formal code of conduct. A violation of labor, environmental or other laws by our manufacturers or their suppliers, or a failure of these parties to follow ethical business practices, could lead to negative publicity and harm our reputation, particularly since some of our most significant manufacturers are related parties, such as AmTRAN Technology Co., Ltd. and Hon Hai Precision Industry Co., Ltd., an affiliate of our stockholder Q-Run Holdings Ltd. In addition, we may choose to seek alternative manufacturers if these violations or failures were to occur. Identifying and qualifying new manufacturers can be time consuming and we might not be able to substitute suitable alternatives in a timely manner or at an acceptable cost. In the past, other consumer product companies have faced significant criticism for the actions of their manufacturers and suppliers, and we could face such criticism ourselves. Any of these events could adversely affect our brand, harm our reputation, reduce demand for our products and harm our ability to meet demand if we need to identify alternative manufacturers.

We rely primarily on third parties for the research and development behind the technologies underlying our products and services.

We rely primarily on third parties for the research and development of the technologies underlying our products and services. The success of our products and services is dependent on the research and development performed by these third parties. If our relationships with our third-party manufacturers and licensors is harmed or ends, we may need to incur additional research and development costs in order to remain competitive with our products and services. Furthermore, we cannot control the amount or type of research and development done by our third-party providers. If they choose to invest less in research and development, or to invest in areas so that they fail to keep pace with the technological changes in our industries, our products and services could be less competitive, whereby our business, operating results and financial condition could be adversely affected.

 

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Our success will depend in part on our continued ability to offer products utilizing a display technology that has broad market appeal.

Most of our net sales are currently derived from the sale of products utilizing LCD display technology, which is currently the most common flat panel display technology. We do not design or manufacture LCD display technology. Our ability to adopt or incorporate the latest LCD display technology into our televisions depends on continued advancement in the design and manufacture of LCD display technology by others. Furthermore, technologies other than LCD technology are also currently available or may become available, including Organic Light Emitting Diode, or OLED, and others. These new display technologies, which are at various stages of development and production, may gain wider market acceptance than LCD technology for use in televisions. We currently do not offer televisions using displays incorporating these alternative display technologies. If consumers prefer products manufactured by our competitors utilizing display technologies that we have not adopted, this could have a material adverse effect on our financial condition and results of operations.

We are subject to international business risks and uncertainties.

Our supply chain partners are based in, or have operations in countries outside of the United States including China, Taiwan, Japan and Mexico. Further, we are currently expanding our marketing operations internationally, which may lead to operations across many additional countries. For example, we have established sales channels through which we sell our products in Canada and Mexico. As a result, we expect our net sales from outside of the United States to increase in the future. Accordingly, we intend to expand our relationships in these countries and may establish additional relationships in other countries to grow our operations. Operating in foreign countries requires significant resources and management attention, and we have limited experience entering new geographic markets. We cannot guarantee that our international efforts will be successful.

Our Inscape data services currently focus on data generated from television content consumption in the United States. In order to expand these services internationally, we would be required to expend significant time and resources to be able to ensure that we can collect consumer and content data in other countries, and that we do so in compliance with laws in such countries. We cannot guarantee that we would be able to do so in a cost-effective manner, if at all.

We intend to run our operations in compliance with local regulations, such as tax, civil, environmental and other laws in each country where we may have presence or operations. However, there are inherent legal, financial and operational risks involved in conducting international operations, and we cannot be certain that these risks will not prevent us from being able to successfully develop and expand our international operations.

Our ability to capitalize on growth in new international markets, to maintain current relationships with our manufacturers and vendors and to conduct operations in our existing international markets is subject to risks associated with international operations, such as:

 

    inability to localize our products, including to adapt for local practices and translate into foreign languages;

 

    difficulties in staffing and managing foreign operations;

 

    burdens of complying with a wide variety of laws and regulations, including consumer data collection and use regulations;

 

    more stringent regulations relating to data security, particularly in Canada and the European Union;

 

    unexpected changes in regulatory requirements;

 

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    adverse tax effects and foreign exchange controls making it difficult to repatriate earnings and cash, or reinvest earnings from operations in one country to fund the capital needs of our operations in other countries;

 

    exposure to political or economic instability and general economic fluctuations in specific countries or markets;

 

    risks resulting from changes in currency exchange rates;

 

    changes in diplomatic and trade relationships;

 

    terrorist activities and natural disasters;

 

    trade restrictions;

 

    differing employment practices and laws and labor disruptions;

 

    the imposition of government controls;

 

    lesser degrees of intellectual property protection;

 

    tariffs and customs duties, or other barriers to some international markets, and the classifications of our goods by applicable governmental bodies;

 

    a legal system subject to undue influence or corruption; and

 

    a business culture in which illegal sales practices may be prevalent.

The occurrence of any of these risks could negatively affect our international business expansion and consequently our business, operating results and financial condition.

Some of our manufacturers of key components, including LCD panels, reside in China. The Chinese economy differs from the economies of most developed countries in many respects, including the amount of government involvement, the level of development, the growth rate, the control of foreign exchange and the allocation of resources. The Chinese government exercises significant control over China’s economic growth through the allocation of resources, control of the incurrence and payment of foreign currency-denominated obligations, setting of monetary policy and provision of preferential treatment to particular industries or companies. Changes in any of these policies, laws and regulations could adversely affect the overall economy in China or our Chinese manufacturers, which could harm our business through higher product costs, reduced availability or both.

Furthermore, the global nature of our business creates various domestic and local regulatory challenges and subjects us to risks associated with our international operations. The U.S. Foreign Corrupt Practices Act, or the FCPA, and similar anti-bribery and anticorruption laws in other jurisdictions, generally prohibit U.S.-based companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business, directing business to another, or securing an advantage. In addition, U.S. public companies are required to maintain records that accurately and fairly represent their transactions and have an adequate system of internal accounting controls. Under the FCPA, U.S. companies may be held liable for the corrupt actions taken by directors, officers, employees, agents, or other strategic or local partners or representatives and we cannot be assured that our employees or other agents will not engage in prohibited conduct and render us responsible under the FCPA. In addition, Chinese laws prohibit corruption, extortion, bribery, pay-offs and other fraudulent practices. Despite this, such practices occur from time-to-time in China. As such, if we or our intermediaries fail to comply with the requirements of the FCPA or Chinese law or similar

 

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legislation with respect to these practices, governmental authorities in the United States, China, and elsewhere could seek to impose substantial civil and/or criminal fines and penalties which could have a material adverse effect on our business, reputation, operating results and financial condition.

New regulations related to conflict minerals may cause us to incur additional expenses and could limit the supply and increase the costs of certain metals used in the manufacturing of our products.

As a public company, we will be subject to the requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, that will require us to diligence, disclose and report whether or not our products contain conflict minerals. The implementation of these requirements could adversely affect the sourcing, availability and pricing of the materials used in the manufacture of components used in our products. In addition, we will incur additional costs to comply with the disclosure requirements, including costs related to conducting diligence procedures to determine the sources of conflict minerals that may be used or necessary to the production of our products and, if applicable, potential changes to products, processes or sources of supply as a consequence of such verification activities. It is also possible that we may face reputational harm if we determine that certain of our products contain minerals not determined to be conflict-free or if we are unable to alter our products, processes or sources of supply to avoid such materials.

Our management team has limited experience managing a public company.

Most members of our management team have limited experience managing a publicly-traded company, interacting with public company investors, and complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to being a public company subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents will require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely affect our business, financial condition, and operating results.

We are subject to a variety of federal, state and foreign laws and regulatory regimes. Failure to comply with governmental laws and regulations could subject us to, among other things, mandatory product recalls, penalties and legal expenses that could have an adverse effect on our business.

Our business is subject to regulation by various federal and state governmental agencies. Such regulation includes the radio frequency emission regulatory activities of the Federal Communications Commission, the anti-trust regulatory activities of the Federal Trade Commission and Department of Justice, the consumer protection laws of the Federal Trade Commission, the import/export regulatory activities of the Department of Commerce, the product safety regulatory activities of the Consumer Products Safety Commission, the regulatory activities of the Occupational Safety and Health Administration, the environmental regulatory activities of the Environmental Protection Agency, the labor regulatory activities of the Equal Employment Opportunity Commission and tax and other regulations by a variety of regulatory authorities in each of the areas in which we conduct business. We are also subject to regulation in other countries where we conduct business. In certain jurisdictions, such regulatory requirements may be more stringent than in the United States. In addition, we are subject to a variety of federal and state employment and labors laws and regulations, including the Americans with Disabilities Act, the Federal Fair Labor Standards Act, the WARN Act and other regulations related to working conditions, wage-hour pay, over-time pay, employee benefits, anti-discrimination, and termination of employment. Noncompliance with applicable regulations or requirements could subject us to investigations, sanctions, mandatory product recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties, or injunctions.

We are subject to governmental export and import controls and economic sanctions laws that could subject us to liability and impair our ability to compete in international markets. The U.S. and various foreign governments have imposed controls, export license requirements and restrictions on the import or export of some

 

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technologies. Our products are subject to U.S. export controls, including the Commerce Department’s Export Administration Regulations and various economic and trade sanctions regulations established by the Treasury Department’s Office of Foreign Assets Controls, and exports of our products must be made in compliance with these laws. Furthermore, U.S. export control laws and economic sanctions prohibit the provision of products and services to countries, governments, and persons targeted by U.S. sanctions. Even though we attempt to ensure that our customers comply with applicable law to prevent our products from being provided to targets of U.S. sanctions, their actions are not within our complete control, and our products could be re-exported to those targets, or provided by our customers in contravention of our requirements or instructions. Any such provision could have negative consequences, including government investigations, penalties and reputational harm. Our failure to obtain required import or export approval for our products could harm our international and domestic sales and adversely affect our net sales.

Any government enforcement action could harm our business, financial condition and results of operations. If any governmental sanctions are imposed, or if we do not prevail in any possible governmental civil or criminal litigation matter in the future, our business, financial condition and results of operations could be materially adversely affected. In addition, responding to any action will likely result in a significant diversion of management’s attention and resources and an increase in professional fees.

We collect, process, store, use and to some extent disclose information collected from or about purchasers and users of our products, and from the devices themselves. The collection and use of personal information, and analysis and sharing of anonymous user data and unique identifiers to inform advertising or analyze viewing behaviors subject us to legislative and regulatory burdens, may expose us to liability, and our actual or perceived failure to adequately protect consumer data could harm our brand, our reputation in the marketplace and our business.

Unless a consumer chooses to disable the feature, many of our Smart TVs are programmed to collect specific viewing information, in association with non-personal information (which we define in our posted privacy policies as a data element or elements in a form that does not alone permit direct association with a specific person). We may make such (non-identifying) information available to third parties, for advertising and other business purposes. U.S. and foreign governments have enacted or are considering legislation related to digital advertising and we expect to see an increase in legislation and regulation related to digital advertising, the use of location or behavioral data to inform advertising, the collection and use of Internet user data and unique device identifiers, such as IP address, and other data protection and privacy regulation. Such laws and legislation could affect our costs of doing business, and may adversely affect the demand for, or effectiveness and value of, our Inscape data services solution.

Our customers may also object to or opt out of the collection and use of their data, which may harm our business. For example, other businesses have been criticized by privacy groups and governmental bodies for attempts to link personal identities and other information to data collected on the Internet regarding users’ browsing and other habits. We are aware of several ongoing lawsuits filed against companies in the electronics or digital advertising industries alleging various violations of consumer protection and computer crime laws, asserting various privacy-related theories. Any such proceedings brought against us could hurt our reputation, force us to spend significant amounts to defend ourselves, distract our management, increase our costs of doing business, lower demand for our services and ultimately result in the imposition of monetary liability or restrict our ability to conduct our Inscape data services.

In addition, we collect, process, store, use and may make available to third parties, such as warranty service providers, personal information (which we define in our posted privacy policies as data that can be used to identify or contact a person) and other data supplied by consumers when, for example, consumers register our products for warranty purposes. Possession and use of personal consumer information in conducting our business may subject us to legislative and regulatory burdens in the United States and foreign jurisdictions, as well as other obligations related to privacy that could require notifications of any data breaches and restrict our use of information collected from or about consumers or their devices, including applicable state laws such as consumer

 

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protection and breach notification laws. The personal information we collect and maintain also may expose us to liability, and our actual or perceived failure to adequately protect consumer data could harm our brand, our reputation in the marketplace and our business.

We may incur significant expenses to comply with privacy, consumer protection and security standards and protocols imposed by law, regulation, industry standards or contractual obligations. A wide variety of local, state, national and international laws and regulations apply to the collection, use, retention, protection, disclosure, transfer and other processing of data collected from or about consumers and devices, and the regulatory framework for privacy issues is evolving worldwide. Various government and consumer agencies and public advocacy groups have called for new regulation and changes in industry practices, including some directed at the digital advertising or connected devices industries in particular. Some of our competitors may have more access to lobbyists or governmental officials and may use such access to effect statutory or regulatory changes in a manner to commercially harm us while favoring their solutions. It is possible that new laws and regulations will be adopted in the United States and internationally, or existing laws and regulations may be interpreted in new ways, that would affect our business, particularly with regard to regulation of devices that connect to the Internet. The U.S. Federal Trade Commission and many state attorneys general are applying federal and state consumer protection laws to require that the online collection, use, and dissemination of data, and the presentation of website or other electronic content, comply with certain standards for notice, choice, security, and access. Courts may also adopt these developing standards. A number of states, including California, have enacted laws or are considering the enactment of laws governing the release of credit card or other information received from consumers. Individual lawmakers in the United States have sent letters to our competitors objecting to the means and methods of communicating with consumers about data collection and data sharing practices related to Smart TV products and services or expressed specific concerns about data security risks presented by Smart TVs.

Evolving definitions of what is considered “personal data” under EU laws, or personally identifying or identifiable information within the United States and elsewhere, especially relating to the classification of IP addresses, machine, device or other persistent identifiers, location data, behavioral data, and other such information, may cause us in the future to change our business practices, diminish the quality of our data and the value of our Inscape data services, and hamper our ability to expand our offerings into the EU or other jurisdictions outside of the United States. Furthermore, such laws may be inconsistent between countries and jurisdictions or conflict with other rules and regulations. Whether and how existing local and international privacy and consumer protection laws in various jurisdictions apply to the Internet and other online technologies is still uncertain and may take years to resolve. Privacy laws and regulations, if drafted or interpreted broadly, could be deemed to apply to the technologies we use to collect, analyze and share viewing behaviors or other data collected from our Smart TVs or consumers, and could restrict our information collection methods or decrease the amount and utility of the information that we would be permitted to collect and share. For example, our business, including our ability to operate and expand internationally, could be adversely affected if legislation or regulations are adopted, interpreted, or implemented in a manner that is inconsistent with our current business practices and that require changes to these practices, the design of our products and features or privacy practices. The costs of compliance with, and the other burdens imposed by, these and other laws or regulatory actions may prevent us from selling our products or services, or increase the costs of doing so, and may affect our ability to invest in or jointly develop products. In addition, a determination by a court or government agency that any of our practices, or those of our agents, do not meet these standards could result in liability, or result in negative publicity, and adversely affect our business.

Further, while we strive to publish and prominently display privacy policies that are accurate, comprehensive, and fully implemented, we cannot assure you that our privacy policies and other statements regarding our practices will be sufficient to protect us from liability or adverse publicity relating to the privacy and security of information about consumers or their devices. Any failure or perceived failure by us to comply with our privacy policies, our privacy-related obligations to consumers or other third parties, or our privacy-related legal obligations, including laws and regulations regulating privacy, data security, or consumer protection, or any compromise of security that results in the unauthorized release or transfer of personally

 

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identifiable information or other consumer data, may result in proceedings or actions against us, legal liability, governmental enforcement actions, and litigation. Any proceeding or action brought against us by a governmental entity or others relating to noncompliance with U.S. federal, state, or international laws, self-regulatory requirements, policies, or other legal obligations relating to privacy or data protection could hurt our reputation, force us to spend significant amounts in defense of these proceedings, distract our management, increase our costs of doing business, adversely affect the demand for our products, and ultimately result in the imposition of monetary liability. Furthermore, any such proceedings or actions, or public statements against us by consumer advocacy groups or others, could cause our customers to lose trust in us, which could have an adverse effect on our business.

Additionally, if third parties we work with, such as customers, advertisers, vendors or developers, violate our contractual limitations on data use or sharing, applicable laws or our policies, such violations may also put consumers’ information at risk and could in turn have an adverse effect on our business. If third parties improperly obtain and use the information from or about our consumers or their devices, we may be required to expend significant resources to resolve these problems.

We also are subject to certain contractual obligations to indemnify and hold harmless advertisers, digital publishers, marketing technology companies and other users or buyers of our data from the costs or consequences of noncompliance with privacy-related laws, regulations, self-regulatory requirements or other legal obligations, or inadvertent or unauthorized use or disclosure of data that we store or handle as part of providing our products.

A significant breach of the confidentiality of the information we hold or of the security of our computer systems could be detrimental to our business, financial condition and operating results.

We rely on others to operate complex computer systems that contain consumer data, which they are contractually required to maintain on a confidential basis. The information we collect through our Inscape data services does not include consumers’ names, addresses, phone numbers, social security numbers, credit card information or other contact or identity information that we consider to be personal information, but it does include device or other persistent identifiers, IP addresses and viewing behavior data. We also maintain a separate database of personal information that we collect in connection with consumers who register our products for warranty purposes or otherwise contact us, such as for customer service assistance. Like all services that connect with the Internet, our Inscape data service, and our website, may be subject to break-ins, attacks, attempts to overload our servers with denial-of-service or other attacks and similar disruptions from unauthorized use of our computer systems, any of which could lead to interruptions, delays, or shutdowns of our services, causing loss of critical data or the unauthorized disclosure or use of information about consumers or their devices or other sensitive or confidential information. Our databases and data centers maintained on our behalf may be subject to unauthorized access by third parties who bypass or disable physical and cyber security and associated measures. Such unauthorized third parties could attempt to gain entry to those databases and data centers for the purpose of stealing data or disrupting systems. We cannot be certain that current or future criminal capabilities, discovery of existing or new vulnerabilities in our and our service providers’ systems and attempts to exploit those vulnerabilities, physical systems or facility break-ins and data thefts or other developments will not compromise or breach the technology protecting the systems and information possessed by us and our service providers. In the event that our or our service providers’ protection efforts are unsuccessful and there is an unauthorized disclosure of confidential information or the breach of the security of such information, we could suffer substantial harm. A major breach of our or our service providers’ network security and systems could have serious negative consequences for our businesses and future prospects, including possible fines, penalties and damages, reduced consumer demand for our media entertainment products, and harm to our reputation and brand.

Further, a portion of our technology infrastructure is operated by third parties, including the vendor who converts our viewing behavior data into usable form, over which we have no direct control, and we are reliant in part on their security measures to protect our consumers’ information. If those third parties do not adequately protect our consumers’ information, it could result in decreased net sales and our reputation could suffer irreparable harm, causing consumers to reject our products in the future, our data providers not to share data with us, or advertisers or other downstream users of our viewing behavior data not to do business with us. Further, we

 

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could be forced to expend significant financial and operational resources in response to a security breach, including repairing system damage, increasing cyber security protection costs by deploying additional personnel and protection technologies, notifying affected individuals and providing them with identity-protection services, and litigating and resolving government investigations and legal claims, all of which could divert resources and the attention of our management and key personnel away from our business operations. In any event, an unauthorized disclosure of confidential information or a breach of the security of our systems or data could materially harm our business, financial condition and operating results.

Significant system disruptions, loss of data center capacity or interruption of telecommunication links could adversely affect our business, financial condition and operating results.

Our business is heavily dependent upon highly complex data processing capability. Protection of our data centers and the third-party data centers at which we collect and maintain data against damage or interruption from fire, flood, tornadoes, power loss, telecommunications or equipment failure or other disasters and events beyond our control is critical to our continued success. We also rely on bandwidth providers, Internet service providers and mobile networks to deliver data to us from Smart TVs. Any damage to, or failure of, the systems of the data centers that we utilize or the systems of our third-party providers could result in interruptions to the availability or functionality of our Inscape data services. If for any reason our arrangements with our third-party providers, including providers of our third-party data centers, are terminated, we could experience additional expense in arranging for new technology, services and support. In addition, the failure of the data centers that we utilize or any third-party providers to meet our capacity requirements could result in interruptions in the availability or functionality of our products or impede our ability to scale our operations. The online content available through our Smart TVs is dependent on links to telecommunication providers. We believe we and the third parties on which we rely have taken reasonable precautions to protect necessary data centers and telecommunication links from events that could interrupt our operations. Any damage to the data centers that we utilize or any failure of our telecommunications links that causes loss of data center capacity or otherwise causes interruptions in our operations, however, could materially adversely affect our ability to quickly and effectively respond to our customers’ requirements, which could result in loss of their confidence, adversely impact our ability to attract new customers and force us to expend significant resources to repair the damage. Such events could adversely affect our business, financial condition and operating results.

Compliance or the failure to comply with current and future environmental, product stewardship and producer responsibility laws or regulations could result in significant expense to us.

As a seller of consumer electronic products, we are subject to a variety of state, local and foreign environmental, product stewardship and manufacturer responsibility laws and regulations, primarily relating to the collection, reuse and recycling of electronic waste, including the televisions we sell, as well as regulations regarding the consumption of electricity and hazardous material content.

The cost of complying with recycling programs is difficult to predict because of the inability to reliably estimate the timing and quantity of our products, at various sizes, that will be recycled in any given jurisdiction. Most of the states with television recycling programs assess fees based upon weight of the units recycled, by market share or a combination of the two. Some states also impose a charge on us for the cost of recycling televisions manufactured by companies which are no longer in business, usually based upon our current market share. Such orphaned televisions are predominately based on older, heavier CRT technology. We expect our expenses for compliance with recycling programs to be between approximately $6 million and $10 million each year, and as our sales or market share increases, the future cost of complying with the existing recycling programs will increase. If more states adopt similar recycling plans, our costs of compliance will grow. Currently, we do not pass these costs on to our manufacturers and we may have a limited ability to pass these costs along to our customers. If states offer consumer incentives for the return of televisions to recycling facilities, which has occurred in the past, our costs could increase unexpectedly. If the costs of compliance with these recycling programs increase beyond our estimates, our margins would be reduced and our financial

 

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condition and results of operations would be harmed. We believe that we comply, and will be able to continue to comply, with such existing and emerging requirements, but if we fail to comply with any present and future regulations, we could become subject to additional fines and liabilities, or prohibitions on sales of our television products or could otherwise jeopardize our ability to conduct business in the jurisdiction in which we are not compliant, which in turn could have a material adverse effect on our business, financial condition and results of operations.

In addition, laws in some jurisdictions ban the use of certain hazardous materials such as lead, mercury and cadmium in the manufacture of electrical equipment, including our products. Similar laws and regulations have been passed, are pending, or may be enacted in China and other regions, and we are, or may in the future be, subject to these laws and regulations. Although we generally seek contractual provisions requiring our manufacturers to comply with such requirements, we cannot assure you that our manufacturers will consistently comply with these requirements. In addition, if there are changes to these or other laws (or their interpretation) or if new similar laws are passed in other jurisdictions, we may be required to re-engineer our products to use components compatible with these regulations. This re-engineering and component substitution could result in additional costs to us or disrupt our operations or logistics.

From time to time new environmental, product stewardship and producer responsibility regulations are enacted, or existing requirements are changed, and it is difficult to anticipate how such regulations and changes will be implemented and enforced. We continue to evaluate the necessary steps for compliance with regulations as they are enacted. We also expect that our products will be affected by new environmental laws and regulations on an ongoing basis. Although we cannot predict the future impact of such laws or regulations, they will likely result in additional costs and may increase penalties associated with violations or require us to change the content of our products or how they are manufactured. As a result, we may experience negative consequences from these emerging requirements including, but not limited to, supply shortages or delays, increased raw material and component costs, accelerated obsolescence of certain raw materials used in our components and products, and the need to modify or create new designs for our existing and future products, all of which could have a material adverse effect on our business and financial condition.

We are exposed to increased regulatory oversight and will incur increased costs as a result of being a public company.

As a public company, we are required to satisfy the listing requirements and rules of             and incur significant legal, accounting and other expenses that we did not incur as a private company. We will also incur costs associated with public company reporting requirements and corporate governance requirements, including additional directors’ and officers’ liability insurance and requirements under the Sarbanes-Oxley Act of 2002, or the SOX Act, as well as rules implemented by the SEC and             . These rules and regulations have increased, and will continue to increase, our legal and financial compliance costs, and have made, and will continue to make, certain activities more time consuming and costly. Further, we have incurred costs in connection with hiring additional accounting, financial and compliance staff with appropriate public company experience and technical accounting knowledge. Any of these expenses could harm our business, operating results and financial condition.

If we fail to maintain effective internal controls, we may not be able to report financial results accurately or on a timely basis, or to detect fraud, which could have a material adverse effect on our business or share price.

Effective internal controls are necessary for us to provide reasonable assurance with respect to our financial reports and to effectively prevent financial fraud. Pursuant to the SOX Act, we will be required to periodically evaluate the effectiveness of the design and operation of our internal controls. Internal controls over financial reporting may not prevent or detect misstatements because of inherent limitations, including the possibility of human error or collusion, the circumvention or overriding of controls, or fraud. If we fail to maintain an effective system of internal controls, our business and operating results could be harmed, and we could fail to meet our reporting obligations, which could have a material adverse effect on our business and our share price.

 

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As a public company, we will be required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act, or SOX Act, requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent auditors addressing these assessments beginning with our Annual Report for the year ending December 31, 2016. Both our independent auditors and we will be testing our internal controls pursuant to the requirements of Section 404 of the SOX Act and could, as part of that documentation and testing, identify areas for further attention or improvement. We are in the process of designing, implementing, and testing the internal control over financial reporting required to comply with this obligation, which process is time consuming, costly, and complicated. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the Securities and Exchange Commission, or other regulatory authorities, which could require additional financial and management resources.

If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our operating results could be adversely affected.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of net sales and expenses that are not readily apparent from other sources. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in our stock price. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, sales incentives, accounts receivable and allowance for doubtful accounts, stock-based compensation expense, excess and obsolete inventory write-downs, warranty reserves, long-lived assets and accounting for income taxes including deferred tax assets and liabilities.

We are highly dependent on our Chief Executive Officer.

Our future success depends in significant part on the continued service of our Chief Executive Officer, William Wang. Mr. Wang is critical to the strategic direction and overall management of our company as well as our research and development process. Mr. Wang is an at-will employee and upon completion of this offering, there will be no vesting restrictions on any of the stock of the Company that he owns. We do not carry key person life insurance on Mr. Wang. If we lose Mr. Wang’s services, we may not be able to find a suitable replacement or integrate a replacement in a timely manner or at all, which would seriously harm our business, financial condition and operating results. In addition, our continuing growth will, to a large extent, depend on the attention of Mr. Wang to our daily affairs.

Our financial and operating performance may be adversely affected by epidemics, adverse weather conditions, natural disasters and other catastrophes, and political instability.

Our headquarters is located in the Orange County area of California, an area susceptible to earthquakes. A major earthquake or other natural disaster, fire, act of terrorism or other catastrophic event in California or elsewhere that results in the destruction or disruption of any of our critical business operations or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our future operating results could be harmed.

 

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Our key manufacturing, supply, assembly and distribution partners have global operations, including in China, Taiwan, Mexico, and Japan as well as the United States. Political instability, adverse weather conditions, natural disasters and other catastrophes, and epidemics or outbreaks of disease in any of those countries could materially and adversely affect our business in the future, our financial condition and operating results. Any prolonged occurrence of these or other events or conditions in any of these locations may interrupt the business operations of our manufacturers as well as the manufacturers of key components, including LCD panels, resulting in a material adverse effect on our operations and financial results. For instance, health or other government regulations adopted in response to a natural disaster, epidemic or outbreak, or a severe disruption or increase in the pricing of basic food stuffs, may require closure of our manufacturers’ facilities and/or our customers’ facilities, leading to reduced production, delayed or cancelled orders, and decrease in demand for our products. These regulations also could result in severe travel restrictions and closures that would restrict our ability to ship our products.

Any material disruption of our information systems could adversely affect our operating results.

We are increasingly dependent on information systems to process transactions, respond to customer inquiries, provide technical support to consumers, manage our supply chain and inventory, ship goods on a timely basis and maintain cost-efficient operations, in particular for our Inscape data services. Any material disruption or slowdown of our systems, including a disruption or slowdown caused by our failure to successfully upgrade our systems, system failures, viruses, computer “hackers” or other causes, could cause delays in our supply chain or cause information, including data related to customer orders, to be lost or delayed, which could result in delays in the delivery of merchandise to customers or lost sales, especially if the disruption or slowdown occurs during the holiday season. Any of these events could reduce demand for our products or impair our ability to complete sales through our ecommerce channels and cause our net sales to decline. If our information systems are inadequate to handle our growth, we could lose customers or our business and operating results could be adversely affected.

As we expand our operations, we expect to utilize additional systems and service providers that may also be essential to managing our business, in particular for our Inscape data services. Although the systems and services that we require are typically available from a number of providers, it is time consuming and costly to qualify and implement these relationships. Therefore, our ability to manage our business would suffer if one or more of our providers suffer an interruption in their business, or experience delays, disruptions or quality control problems in their operations, or we have to change or add systems and services. Furthermore, we may not be able to control the quality of the systems and services we receive from third-party service providers, which could impair our ability to implement appropriate internal controls over financial reporting.

Risks Relating to Intellectual Property

Third parties may claim we are infringing, misappropriating or otherwise violating their intellectual property rights and we could be prevented from selling our products, or suffer significant litigation expense, even if these claims have no merit.

The media entertainment products industry, and especially the television industry, is characterized by the existence of a large number of patents and frequent claims and litigation regarding patent, trade secret and other intellectual property rights. There is no easy mechanism through which we can ascertain a list of all patent applications that have been filed in the United States or elsewhere and whether, if any applications are granted, such patents would have a material adverse effect on our business. Furthermore, the rapid technological changes that characterize our industry require that we quickly implement new processes and components with respect to our products. Often with respect to recently developed processes and components, a degree of uncertainty exists as to who may rightfully claim ownership rights in such processes and components. Uncertainty of this type increases the risk that claims alleging that such components or processes infringe, misappropriate or otherwise violate third-party rights may be brought against us. We may also be unaware of intellectual property rights of others that may cover some of our products.

 

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Leading companies in the television industry, some of which are our competitors, have extensive patent portfolios with respect to television technology. From time to time, third parties, including these leading companies, have asserted and currently are asserting patent, copyright, trademark and other intellectual property related claims against us and demand license or royalty payments or payment for damages, seek injunctive relief and pursue other remedies including, but not limited to, an order barring the import of our products. We expect to continue to receive such communications and be subject to such claims, and we review the merits of each claim as they are received.

The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Claims of intellectual property infringement, misappropriation or other violation against us or our manufacturers might require us to redesign our products, rebrand our services, enter into costly settlement or license agreements, pay costly damage awards, potentially including treble damages and attorneys’ fees, if we are found to have willfully infringed a party’s intellectual property, or require us to face a temporary or permanent injunction prohibiting us from marketing or selling our products or services. As a result of patent infringement claims, or to avoid potential claims, we may choose or be required to seek licenses from third parties. These licenses may not be available on acceptable terms, or at all. Even if we are able to obtain a license, the license would likely obligate us to pay license fees or royalties or both, which may be substantial, and the rights granted to us might be nonexclusive, which could result in our competitors gaining access to the same intellectual property rights.

Litigation against us, even if without merit, can be time consuming, could divert management attention and resources, require us or our manufacturers to incur significant legal expense, prevent us from using or selling the challenged technology, damage our reputation and brand, require us or our manufacturers to design around the challenged technology and cause the price of our stock to decline. In addition, these third-party claimants, some of which are potential competitors, may initiate litigation against the manufacturers of our products or key components, including LCD panels, or our customers, alleging infringement, misappropriation or other violation of their proprietary rights with respect to existing or future products. Also, third parties may make infringement claims against us that relate to technology developed and owned by one of our manufacturers for which our manufacturers may or may not indemnify us. Even if we are indemnified against such costs, the indemnifying party may be unable to uphold its contractual obligations and determining the scope of these obligations could require additional litigation. Moreover, our agreements with our customers generally contain intellectual property indemnification obligations and we may be responsible for indemnifying our customers against certain intellectual property claims or liability they may face relating to our products or offerings. Additionally, our customers may not purchase our offerings if they are concerned that they may infringe, misappropriate or otherwise violate third-party intellectual property rights.

The complexity of the technology involved and inherent uncertainty and cost of intellectual property litigation increases our risks. In the event of a meritorious or successful claim of infringement, and our failure or inability to license or independently develop or acquire access to alternative technology on a timely basis and on commercially reasonable terms, or substitute similar intellectual property from another source, we may be required to:

 

    discontinue making, using, selling or importing substantially all or some of our products as currently engineered;

 

    offer less competitive products with reduced or limited functionality;

 

    pay substantial monetary damages for the prior use of third-party intellectual property;

 

    change how our products are manufactured or the design of our products;

 

    shift significant liabilities to our manufacturers who may not be financially able to absorb them;

 

    enter into licensing arrangements with third parties on economically unfavorable or impractical terms and conditions; and/or

 

    pay higher prices for the products we sell.

 

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As a result of the occurrence of any of the foregoing, we may be unable to offer competitive products, suffer a material decrease or interruption in sales and our business, operating results and financial condition could be significantly harmed.

If we become subject to liability for content that we distribute through our products, our results of operations would be adversely affected.

As a distributor of content, we face potential liability for negligence, copyright, patent or trademark infringement, public performance royalties or other claims based on the nature and content of materials that we distribute. The Digital Millennium Copyright Act, or DMCA, is intended, in part, to limit the liability of eligible service providers for caching, hosting, or linking to, user content that include materials that infringe copyrights or other rights of others. We rely on the protections provided by the DMCA in conducting our business, and may be adversely impacted by future legislation and future judicial decisions altering these safe harbors or if international jurisdictions refuse to apply similar protections. If we become liable for these types of claims as a result of the content that is streamed through our technology, then our business may suffer. Litigation to defend these claims could be costly and the expenses and damages arising from any liability could harm our results of operations. We cannot assure that we are insured or indemnified to cover claims of these types or liability that may be imposed on us.

If we are unable to secure and protect our intellectual property rights, our ability to compete could be harmed.

For the intellectual property we own, we rely on a combination of copyright, trademark, patent and trade secret laws, nondisclosure agreements with employees, contractors and manufacturers and other contractual provisions to establish, maintain and protect our proprietary rights. Despite our efforts to protect our intellectual property, unauthorized parties may attempt to copy aspects of our product design or to obtain and use technology and other intellectual property that we regard as proprietary. For example, one of our primary intellectual property assets is the VIZIO name, trademark and logo. Accordingly, we may not be able to prevent third parties from misappropriation of our technology or adopting similar names, trademarks and logos, especially in international markets where intellectual property rights may be less protected. Policing the unauthorized use of our products is difficult and expensive. Pursuing infringers of our proprietary rights could result in significant litigation costs and diversion of resources, and any failure to pursue infringers could result in our competitors utilizing our technology and offering similar products, potentially resulting in loss of a competitive advantage and decreased sales. Furthermore, our competitors may independently develop similar technology or duplicate our intellectual property. Although we have obtained a number of patents through acquisitions, we cannot assure you that any of these patents will be upheld if challenged by another party. Additionally, with respect to any patent applications that we have filed, we cannot assure you that any patents will issue as a result of these applications. If we fail to protect our intellectual property, we may not receive any return on the resources expended to create or acquire the intellectual property or generate any competitive advantage based on it. Our inability to secure and protect our proprietary rights could significantly harm our brand and our business, operating results and financial condition.

We rely upon trade secrets and other unpatented proprietary know-how and expertise to maintain our competitive position in the television industry and any loss of our rights to, or unauthorized disclosure of, our trade secrets or other unpatented proprietary know-how or expertise could make us vulnerable to competition and may adversely affect our business.

We rely upon trade secrets, unpatented proprietary know-how, expertise and information, as well as continuing technological innovation in our business. The information we rely upon includes price forecasts, core technology and information about our customers, as well as consumer preference. We require of our employees and contractors to enter into a confidentiality provision which generally provides that all inventions, ideas, discoveries, improvements and copyrightable material made or conceived by the individual arising out of the employment or consulting relationship and all confidential information developed or made known to the individual during the term of the relationship is our exclusive property. Protecting our intellectual property is

 

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difficult especially after our employees or our contractors end their employment or engagement. We may have employees leave us and work for competitors. Attempts may be made to copy or reverse-engineer aspects of our products or to obtain and use information that we regard as proprietary. We cannot assure the enforceability of these types of agreements, or that they will not be breached. We also cannot be certain that we will have adequate remedies for any breach. The disclosure of our trade secrets or other know-how as a result of such a breach could adversely affect our business. In addition, our competitors may come to know about or determine our trade secrets and other proprietary information through a variety of methods.

Disputes may arise concerning the ownership of intellectual property or the applicability or enforceability of the relevant agreements, and there can be no assurance that any such disputes would be resolved in our favor. Further, others may acquire or independently develop similar technology, or if patents are not issued with respect to products arising from research, we may not be able to maintain information pertinent to such research as proprietary technology or trade secrets and that could have an adverse effect on our competitive position within the industry for televisions or the other products we sell.

Some of our consumer products contain “open source” software, and any failure to comply with the terms of one or more of these open source licenses could negatively affect our business.

Some of our products are, or may be distributed with, software licensed by its authors or other third parties under so-called “open source” licenses, including, for example, the GNU General Public License, or GPL, GNU Lesser General Public License, or LGPL, the Mozilla Public License, the BSD License and the Apache License.

Some of those licenses may require, as a condition of the license, that:

 

    we release the source code for our proprietary software, or modifications or derivative works we create based upon, incorporating, or using the open source software,

 

    we provide notices with our products, and/or

 

    we license the modifications or derivative works we create based upon, incorporating, or using the open source software under the terms of a particular open source license or other license granting third parties certain rights of further use, including that the licensee publicly release all or part of the source code to such software and/or make available any derivative works of the open source code on unfavorable terms or at no cost.

From time to time, companies that incorporate open source software into their products have faced claims challenging the ownership of open source software and/or compliance with open source license terms. Accordingly, we could be subject to suits and liability for copyright infringement claims and breach of contract by parties claiming ownership of what we believe to be open source software or noncompliance with open source licensing terms. While we monitor our use of open source software and try to ensure that none is used in a manner that would require us to disclose the source code or that would otherwise breach the terms of an open source agreement, such use could nevertheless occur and we may be required to release our proprietary source code, pay damages for breach of contract, re-engineer our applications, discontinue sales in the event re-engineering cannot be accomplished on a timely basis or take other remedial action that may divert resources away from our development efforts, any of which could adversely affect our business, financial condition or operating results. If an author or other third-party that distributes such open source software were to allege that we had not complied with the conditions of one or more of those open source licenses, we could be required to incur legal expenses in defending against such allegations, and if our defenses were not successful we could be enjoined from distribution of the products that contained the open source software and required to either make the source code for the open source software available, to grant third parties certain rights of further use of our software, or to remove the open source software from our products, which could disrupt our distribution and sale of some of our products, any of which could adversely affect our business, financial condition or operating results.

 

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Our proprietary rights may be difficult to enforce, which could enable others to copy or use aspects of our products without compensating us, thereby eroding our competitive advantages and harming our business.

Our success depends, in part, on our ability to protect proprietary methods and technologies that we develop under the intellectual property laws of the United States and other countries. If we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology, and our business might be adversely affected. We rely heavily on trade secrets and confidentiality to protect our intellectual property. There can be no assurance that we will be able to effectively maintain the secrecy and confidentiality of this intellectual property. To a lesser extent, we rely on trademark, copyright, trade secret and patent laws, confidentiality procedures and contractual provisions to protect our proprietary methods and technologies. While as of June 30, 2015, we owned 124 issued patents in the United States, Canada and Taiwan and had 48 pending patent applications in the United States, the claims eventually allowed on any of our patents may not be sufficiently broad to protect our technology or offerings and services. Any issued patents may be challenged or invalidated in litigation and/or in other adversarial proceedings such as opposition, inter partes review, post-grant review, reissue, reexamination or other post-issuance proceedings, or may be circumvented, and any rights granted under these patents may not actually provide adequate defensive protection or competitive advantages to us. Additionally, the process of obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Additional uncertainty may result from changes to intellectual property legislation enacted in the United States, including the Leahy-Smith America Invents Act, and other national governments and from interpretations of the intellectual property laws of the United States and other countries by applicable courts and agencies. Accordingly, despite our efforts, we may be unable to obtain adequate patent protection, or to prevent third parties from infringing upon or misappropriating our intellectual property.

Unauthorized parties may attempt to copy aspects of our technology or obtain and use information that we regard as proprietary (such as our viewing behavior data). Policing unauthorized use of our technology and proprietary information is difficult and we cannot assure you that any steps taken by us will prevent misappropriation of our technology and proprietary information. We generally seek to protect our proprietary information by entering into confidentiality and/or license agreements with our employees, consultants, vendors and advertisers. These agreements are designed to protect our proprietary information, however, we cannot be certain that such agreements have been entered into with all relevant parties, and we cannot be certain that our trade secrets and other proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. We also seek to preserve the integrity and confidentiality of our proprietary information by maintaining physical security of our premises and physical and electronic security of our information technology systems, but it is possible that these security measures could be breached. If any of our proprietary information were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent such competitor from using that technology or information to compete with us, which could harm our competitive position. In addition, the laws of some foreign countries may not be as protective of intellectual property rights as those of the United States, and mechanisms for enforcement of our proprietary rights in such countries may be inadequate. From time to time, legal action by us may be necessary to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of others, or defend against claims of infringement. Such litigation could result in substantial costs and the diversion of limited resources and could negatively affect our business, operating results and financial condition. If we are unable to protect our proprietary rights we may find ourselves at a competitive disadvantage to others who have not incurred the same level of expense, time and effort to create and protect their intellectual property.

 

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Risks Relating to this Offering and Ownership of our Class A Common Stock

There has been no public market for our Class A common stock prior to this offering, and an active trading market may not develop, which may affect the price of our Class A common stock and your ability to resell it.

There has been no public market for our Class A common stock prior to this offering, and an active public market for our Class A common stock may not develop or be sustained after the completion of this offering. We will negotiate and determine the initial public offering price with representatives of the underwriters and this price may not be indicative of prices that will prevail in the trading market. As a result, you may not be able to sell your shares of Class A common stock at or above the offering price. Following the completion of this offering, the market price for our Class A common stock is likely to be volatile, in part because our shares have not been previously traded publicly. In addition, the market price of our Class A common stock may fluctuate significantly in response to a number of factors, most of which we cannot predict or control, including:

 

    announcements or introductions of new products or technologies, commercial relationships, acquisitions, strategic partnerships, joint ventures, capital commitments or other events by us or our competitors;

 

    failure of any of our new products or services to achieve commercial success;

 

    developments by us or our competitors with respect to patents or other intellectual property rights;

 

    variations and actual or anticipated fluctuations in our net sales and other operating results, or the operating results of our competitors;

 

    fluctuations in stock market prices and trading volumes of securities of similar companies;

 

    changes in operating performance and stock market valuations of other media entertainment product companies, or those in our industry in particular;

 

    general market conditions and overall fluctuations in U.S. equity markets;

 

    the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

 

    changes in earnings estimates or recommendations by securities analysts, failure to obtain analyst coverage of our Class A common stock or our failure to achieve analyst earnings estimates;

 

    changes in accounting principles;

 

    sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;

 

    additions or departures of any of our key personnel;

 

    announcements related to litigation;

 

    changing legal or regulatory developments in the United States and other countries;

 

    failure of securities analysts to initiate or maintain coverage of us;

 

    discussion of us or our stock price by the financial press and in online investor communities;

 

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    changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

    lawsuits threatened or filed against us; and

 

    other events or factors, including those resulting from war, incidents of terrorism or responses to these events.

In addition, the stock market in general, and the              in particular, have experienced substantial price and volume volatility that is often seemingly unrelated to the operating performance of particular companies. These broad market fluctuations may cause the trading price of our Class A common stock to decline. In the past, securities class action litigation has often been brought against a company after a period of volatility in the market price of its common stock. We may become involved in this type of litigation in the future. Any securities litigation claims brought against us could result in substantial expenses and the diversion of our management’s attention from our business.

A large number of additional shares may be sold in the near future, which may cause the market price of our Class A common stock to decline significantly, even if our business is doing well.

Sales of a substantial amount of our Class A common stock in the market, or the perception that these sales may occur, could adversely affect the market price of our Class A common stock. After this offering, we will have outstanding shares of our Class A common stock. The total number of shares outstanding includes the             shares of Class A common stock we are selling in this offering, which may be resold immediately, and             shares of Class A common stock which will become available for sale 180 days after the date of this prospectus (subject to extension in certain circumstances) under the terms of a lock-up agreement entered into between the holders of those shares and the underwriters of this offering. However, the underwriters of this offering can waive this restriction and allow these stockholders to sell their shares at any time after this offering. As these lockup restrictions end, the market price of the Class A common stock could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them.

We also intend to register all Class A common stock that we may issue under our 2015 Plan. Effective upon the completion of this offering, an aggregate of 3,200,000 shares of our Class A common stock will be reserved for future issuance under this plan, plus any shares available for issuance under our prior equity incentive plan. Once we register these shares, which we plan to do shortly after the completion of this offering, they can be freely sold in the public market upon issuance and once vested and exercised, subject to the lock-up agreements referred to above. If a large number of these shares are sold in the public market, the sales could reduce our trading price.

Furthermore, William Wang or his family trusts hold              shares of Class B common stock as of the date of this offering. In the event Mr. Wang or his family trusts decide to convert any of their shares of Class B common stock into Class A common stock to sell in the public market,          additional shares of Class A common stock will be available for sale in the market, subject to the lock-up agreement described above.

After the offering, you will hold single-vote-per-share Class A common stock while the majority of VIZIO’s voting power will be held by the holders of 10-vote-per-share Class B common stock. Our Chairman of the Board and Chief Executive Officer, William Wang, will continue to have control over VIZIO after this offering, which will severely limit your ability to influence or direct the outcome of key corporate actions and transactions, including a change in control.

Following the offering, you and all other investors in this offering will hold Class A common stock, which entitles each holder of such stock to one vote per share. Mr. Wang will hold voting power over shares of Class B common stock that will entitle him to ten votes per share of such stock.

 

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Following the offering, Mr. Wang will have voting power over all of the outstanding shares of our Class B common stock, which will have approximately 94.9% of the voting power of all our shares based on our capitalization as of June 30, 2015. As a result, for the foreseeable future, Mr. Wang will be able to control matters requiring approval by our stockholders, including the election of directors, amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets, or other major transaction requiring stockholder approval. Mr. Wang may have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interest. The concentration of control will limit or preclude your ability to influence corporate matters for the foreseeable future and could have the effect of delaying, preventing or deterring a change in control of our company, could deprive you and other holders of Class A common stock of an opportunity to receive a premium for your Class A common stock as part of a sale of our company and could negatively affect the market price of our Class A common stock. In addition, this may prevent or discourage unsolicited acquisition proposals or offers for our capital stock that you may feel are in your best interest as one of our stockholders.

Some provisions of our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law inhibit potential acquisition bids and other actions that you may consider favorable.

Upon completion of this offering, our corporate documents and Delaware law will contain provisions that may enable our Board to resist a change in control of our company even if a change in control were to be considered favorable by you and other stockholders. These provisions include, among other things:

 

    the authorization of undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;

 

    advanced notice procedures required for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders; and

 

    a requirement that Board vacancies be filled by a majority of our directors then in office.

These provisions, the existence of Class B common stock with 10 votes per share and the fact that William Wang will hold voting power over all of the Class B common stock as of the date of this offering, and Mr. Wang’s overall voting power, could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to take certain corporate actions such as elect directors of your choosing.

In addition, we will be subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any broad range of business combinations with any stockholder who owns, or at any time in the last three years owned, 15% or more of our outstanding voting stock for a period of three years following the date on which the stockholder became an interested stockholder. This provision could have the effect of delaying or preventing a change of control, whether or not it is desired by or beneficial to our stockholders.

Furthermore, our amended and restated certificate of incorporation will provide that the Court of Chancery of the State of Delaware will be the exclusive forum for: any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation, or our bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, or other employees, which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results, and financial condition.

 

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New stockholders will incur substantial and immediate dilution as a result of this offering.

The price at which we are offering our Class A common stock is substantially higher than the book value per share of our outstanding Class A common stock. As a result, you will incur substantial and immediate dilution. At an assumed initial public offering price of $         per share, purchasers in this offering would experience immediate dilution of approximately $         per share, representing the difference between our historical net tangible book value per share of Class A common stock after giving effect to this offering and the assumed initial public offering price. In addition, you and other investors in this offering will have contributed     % of the aggregate price paid by all purchasers of our Class A common stock but will own only     % of our Class A common stock outstanding after this offering. In addition, we have issued options to acquire our Class A common stock at prices significantly below the assumed initial public offering price. To the extent such options are ultimately exercised, there will be further dilution to you and other investors in this offering.

We have broad discretion as to the use of proceeds from this offering and may not use the proceeds effectively.

We estimate the net proceeds to us of this offering to be approximately $         million. Our management will retain broad discretion as to the allocation of the proceeds and may spend these proceeds in ways in which our stockholders may not agree. The failure of our management to apply these funds effectively could result in unfavorable returns and uncertainty about our prospects, both of which could cause the price of our shares of Class A common stock to decline.

If securities analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our Class A common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We currently do not have and may never obtain research coverage by securities analysts. If no securities analysts commence coverage of our company, the trading price for our stock would be negatively impacted. In the event we obtain securities analyst coverage, if one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

We do not expect to pay any dividends on our Class A common stock for the foreseeable future.

We do not anticipate that we will pay any dividends to holders of our Class A common stock in the foreseeable future. Accordingly, investors must rely on sales of their Class A common stock as the only way to realize any gains on their investment. Investors seeking or expecting cash dividends should not purchase our Class A common stock.

We are a “controlled company” within the meaning of the          rules. As a result, we qualify for, and intend to continue to rely on, exemptions from certain corporate governance requirements that provide protection to stockholders of other companies.

After completion of this offering, William Wang, our Chairman and Chief Executive Officer, will continue to control a majority of the voting power of our outstanding common stock. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the             . Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:

 

    the requirement that a majority of our Board of Directors consist of “independent directors” as defined under the rules of the         ;

 

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    the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

    the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

    the requirement for an annual performance evaluation of the compensation and nominating and corporate governance committees.

Following this offering, we intend to continue to utilize certain of these exemptions. As a result, our nominating and corporate governance committee and compensation committee will not consist entirely of independent directors and such committees will not be subject to mandatory annual performance evaluations. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the .

In addition, the          has developed listing standards regarding compensation committee independence requirements and the role and disclosure of compensation consultants and other advisers to the compensation committee that, among other things, requires:

 

    compensation committees be composed of independent directors, as determined pursuant to new independence requirements;

 

    compensation committees be explicitly charged with hiring and overseeing compensation consultants, legal counsel and other committee advisors; and

 

    compensation committees be required to consider, when engaging compensation consultants, legal counsel or other advisors, certain independence factors, including factors that examine the relationship between the consultant or advisor’s employer and us.

As a controlled company, we will not be subject to these compensation committee independence requirements.

 

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FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements. Forward-looking statements include all statements that are not historical facts. In some cases, you can identify forward-looking statements by terminology such as “anticipates,” “believes,” “continue,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” “could,” “would,” “will” or the negative of these terms or other comparable terminology. In particular, statements regarding our plans, strategies, prospects and expectations regarding our business are forward-looking statements. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks, uncertainties and other factors include those we discuss in the section of this prospectus entitled “Risk Factors.” Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this prospectus. You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

We obtained some of the market, industry and competitive position data contained in this prospectus from independent industry publications or other publicly available information, studies and surveys, as well as independent sources listed in this prospectus, including the industry research firms The NPD Group, Inc., IHS Technology, eMarketer, Inc., Gap Intelligence and Markets and Markets, Inc. Other information contained in this prospectus is based on our own internal estimates and research, which are derived from our review of internal surveys and studies conducted by third parties, and our management’s knowledge and experience in the markets in which we operate. Our estimates have also been based on information obtained from our customers, suppliers and other contacts in the markets in which we operate.

Industry publications, studies and surveys generally state that they have been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe that each of these independent sources and publications is reliable, we have not independently verified market and industry data from third-party sources. While we believe our internal company research is reliable and the definitions of our market and industry are appropriate, neither this research nor these definitions have been verified by any independent source, and we cannot assure you as to the accuracy or completeness of this information. As a result, you should be aware that the market and industry data and the market share estimates set forth in this prospectus, and beliefs and estimates based thereon, may not be reliable.

 

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USE OF PROCEEDS

We estimate that the net proceeds from our sale of              shares of Class A common stock in this offering at an assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the front cover of this prospectus, will be approximately $            , or $             million if the underwriters exercise their option to purchase additional shares from us in full, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares of Class A common stock by the selling stockholders.

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) the net proceeds from this offering by approximately $             million, assuming that the number of shares we are offering, as set forth on the cover page of this prospectus, remains the same, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1,000,000 shares in the number of shares we are offering would increase (decrease) the net proceeds to us from this offering by approximately $             million, assuming that the assumed initial public offering price remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to increase our capitalization and to create a public market for our Class A common stock. We intend to use the net proceeds of this offering to expand our business and operations, including internationally, support our strategic global marketing and branding campaign, broaden the portfolio of products and services within in the VIZIO platform, as well as working capital and general corporate purposes. We may also use a portion of the net proceeds to acquire or invest in complementary businesses, products or technologies or to enter into strategic relationships with third parties. We have no present understandings, commitments or agreements to enter into any such acquisitions or investments.

The amount actually expended for the purposes listed above will depend upon a number of factors, including the growth of our sales and customer base, competitive developments, the actual cost of capital expenditures and our cash flow from operations and the growth of our business. Our management will have broad discretion over the uses of the net proceeds from this offering. Pending these uses, in accordance with our investment policy, we intend to invest the net proceeds from this offering in short-term investments.

 

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DIVIDEND POLICY

From January 1, 2013 through July 24, 2015, we declared the following cash dividends to owners of our common stock and Series A convertible preferred stock:

 

                     

Dividend Per Share

 

Date Declared

  

Record Date

  

Payment Date

  

Total

Dividend

    

Common Stock(1)

    

Series A
convertible
preferred stock(2)

 

12/03/13

   12/27/13    12/28/13      $20,000,000         $0.9930         $25.7374   

06/17/14

   07/15/14    07/16/14      $25,000,000         $1.2380         $31.4401   

04/28/15

   05/18/15    06/29/15      $101,000         $0.00         $0.7496   

07/14/15

   07/24/15    07/23/15      $22,000         $0.00         $0.1633   

07/20/15

   08/14/15         $75,000,000         $                     $               

 

(1) On July 24, 2015, all shares of our common stock were converted into shares of Class A common stock or Class B common stock.

 

(2) Each share of Series A convertible preferred stock will convert to 25 shares of Class A Common Stock upon completion of this offering.

Notwithstanding our historical practice of issuing such dividends, we currently intend to retain any future earnings to finance the operations, growth and development of our business. Accordingly, we do not anticipate that we will declare or pay any cash dividends on any of our common stock in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements, restrictions under any existing indebtedness and other factors our Board of Directors deems relevant.

 

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CAPITALIZATION

The following table presents a summary of our cash and cash equivalents and capitalization as of June 30, 2015:

 

    on an actual basis;

 

    on a pro forma basis to give effect to (i) the $75.0 million cash dividend declared by our Board of Directors on July 20, 2015, (ii) the effectiveness of our amended and restated certificate of incorporation in California reflecting the reclassification on July 24, 2015 of 10,862,225 outstanding shares of common stock beneficially owned by William Wang, our Chairman, Chief Executive Officer and principal stockholder, into an equivalent number of shares of Class B common stock and the reclassification of all other outstanding shares of common stock into an equivalent number of Class A common stock, (iii) the automatic conversion of all outstanding shares of our Series A convertible preferred stock into an aggregate of 3,368,400 shares of Class A common stock upon the completion of this offering, (iv) the vesting of 555,000 shares of restricted Class A common stock upon the completion of the offering and (v) our reincorporation in Delaware from California, which will occur prior to the completion of this offering; and

 

    on a pro forma as adjusted basis to give further effect to the sale by us of              shares of Class A common stock in this offering at an assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

This table should be read in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

    

June 30, 2015 (unaudited)

 
    

Actual

   

Pro
Forma

    

Pro Forma
As Adjusted(1)

 

(in thousands, except share data)

       

Cash and cash equivalents and investments

     $275,561        $                     $               
  

 

 

   

 

 

    

 

 

 

Total long-term debt

     —          
  

 

 

   

 

 

    

 

 

 

Stockholders’ equity:

       

Series A Convertible Preferred Stock, no par value; 250,000 shares authorized; 134,736 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     2,013        —        

Preferred Stock, $0.0001 par value;              shares authorized; no shares issued and outstanding, actual, pro forma and pro forma as adjusted

     —          —        

Common stock, no par value; 1,875,000,000 shares authorized; 16,838,210 shares issued and outstanding, actual; no shares issued and outstanding, pro forma and pro forma as adjusted

     11,263        

Class A common stock, $0.0001 par value; no shares authorized, issued or outstanding, actual; shares authorized, pro forma and pro forma as adjusted; 9,344,385 shares issued and outstanding, pro forma;              shares issued and outstanding, pro forma as adjusted

     —          

Class B common stock, $0.0001 par value; no shares authorized, issued or outstanding, actual; 10,862,225 shares authorized, pro forma and pro forma as adjusted; 10,862,225 shares issued and outstanding, pro forma; 10,862,225 shares issued and outstanding, pro forma as adjusted

     —         

Additional paid-in capital

     —          

Accumulated other comprehensive loss

     (2,179 )     

Retained earnings

     97,549        22,549      

Total stockholders’ equity

     108,646        33,646      
  

 

 

   

 

 

    

 

 

 

Total capitalization

     $108,646        $33,646      
  

 

 

   

 

 

    

 

 

 

 

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(1) Each $1.00 increase (decrease) in the assumed initial price to the public of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $            , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $            , assuming that the assumed initial price to the public remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares of Series A common stock from us is exercised in full, the pro forma as adjusted amount of each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization would increase by approximately $              million, after deducting estimated underwriting discounts and commissions, and we would have              shares of our Class A common stock and              shares of our Class B common stock issued and outstanding, pro forma as adjusted. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual initial public offering price, number of shares offered and other terms of this offering determined at pricing.

The table above is based on 20,206,610 shares of our common stock outstanding at June 30, 2015, after giving effect to (i) the conversion, on July 24, 2015, of all shares of our common stock into shares of Class A common stock or Class B common stock, (ii) the vesting of 555,000 shares of restricted Class A common stock effective upon the completion of this offering and (iii) the conversion of all our outstanding shares of Series A convertible preferred stock into an aggregate of 3,368,400 shares of Class A common stock, and excludes:

 

    2,475,240 shares of our Class A common stock issuable upon the exercise of options outstanding under our 2007 Plan, as of June 30, 2015 at a weighted average exercise price of $7.01 per share; and

 

    3,200,000 shares of our Class A common stock reserved for future issuances under our 2015 Plan, or the 2015 Plan (plus any shares which as of the effective date of the 2015 Plan are available for issuance under the 2007 Plan), which will become effective immediately prior to completion of this offering.

 

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DILUTION

If you invest in our Class A common stock, your ownership will be diluted to the extent of the difference between the offering price of our Class A common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering. Our pro forma net tangible book value as of June 30, 2015 was approximately $             million, or $             per share of common stock. Pro forma tangible net book value per share represents our total tangible assets less total liabilities divided by the number of shares of common stock outstanding as of June 30, 2015, after giving effect to (i) the reclassification of all outstanding shares of common stock beneficially owned by William Wang, our Chairman, Chief Executive Officer and principal stockholder, into an equivalent number of shares of Class B common stock and the reclassification of all other outstanding shares of common stock not beneficially owned by Mr. Wang into an equivalent number of Class A common stock and (ii) the conversion of our Series A convertible preferred stock into an aggregate of 3,368,400 shares of Class A common stock upon the closing of this offering.

Our pro forma as adjusted net tangible book value as of June 30, 2015 would have been $             million, or $             per share of common stock after giving effect to the sale of              shares of our Class A common stock in this offering at an assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. This represents an immediate increase in pro forma net tangible book value of $             per share of common stock to existing stockholders and an immediate dilution in pro forma net tangible book value of $             per share to investors purchasing Class A common stock in this offering.

The following table illustrates this per share dilution:

 

Assumed initial public offering price per share of Class A common stock

        $               
     

 

 

 

Pro forma net tangible book value per share of common stock as of June 30, 2015

     $                         

Increase in net tangible book value per share of common stock attributable to this offering

     
  

 

 

    

Pro forma as adjusted net tangible book value per share of common stock after this offering

        $               
     

 

 

 

Dilution per share of Class A common stock to new investors in this offering

        $               
     

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value by approximately $             million, or approximately $             per share, and the dilution per share to investors in this offering by approximately $             per share, assuming that the number of shares offered by us, as set forth on the front cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase of 1,000,000 shares in the number of shares offered by us would result in a pro forma as adjusted net tangible book value of approximately $             million, or approximately $             per share, and the dilution per share to investors in this offering would be approximately $             per share, assuming the assumed initial public offering price of $             per share, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Conversely, a decrease of 1,000,000 shares in the number of shares offered by us would result in a pro forma as adjusted net tangible book value of approximately $             million, or approximately $             per share, and the dilution per share to investors in this offering would be approximately $             per share, assuming the assumed initial public offering price of $             per share, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering.

 

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The following table summarizes, on the pro forma as adjusted basis described above as of June 30, 2015, the total number of shares of common stock purchased from us, the total consideration paid to us and the average price per share of common stock paid to us by existing stockholders and by new investors purchasing shares of Class A common stock in this offering, assuming an initial offering price of $             per share, the midpoint of the price range on the cover page of this prospectus, and before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

    Shares Purchased    

Total Consideration

   

Average
Price per
Share

   

Number

  

Percent

   

Amount

  

Percent

   

Existing stockholders

           

New investors

           
 

 

  

 

 

   

 

  

 

 

   

Total

       100 %        100 %  

The foregoing table does not reflect any sales by existing stockholders in this offering. Sales by the selling stockholders in this offering will cause the number of shares held by existing stockholders to be reduced to              shares, or     % of the total number of shares of our common stock outstanding after this offering, and will increase the number of shares held by new investors to              shares, or     % of the total number of shares of our common stock outstanding after this offering.

Each $1.00 increase (decrease) in the assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) total consideration paid by new investors by $             and increase (decrease) the percent of total consideration paid by new investors by     %, assuming the number of shares we are offering, as set forth on the cover page of this prospectus, remains the same, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase (decrease) of 1,000,000 in the number of shares offered by us would increase (decrease) total consideration paid by new investors by $            , assuming that the assumed initial price to the public remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their option to purchase additional shares of Class A common stock in full:

 

    our existing stockholders would own     % and our new investors would own     % of the total number of shares of our common stock outstanding after this offering; and

 

    our pro forma net tangible book value as of June 30, 2015 would have been $             million, or $             per share, and the pro forma as adjusted net tangible book value after this offering would have been $         million, or $             per share, causing dilution to new investors of $             per share.

The table above is based on 20,206,610 shares of our common stock outstanding at June 30, 2015, after giving effect to (i) the conversion, on July 24, 2015, of all shares of our common stock into shares of Class A common stock or Class B common stock, (ii) the vesting of 555,000 shares of restricted Class A common stock effective upon the completion of this offering and (iii) the conversion of all our outstanding shares of Series A convertible preferred stock into an aggregate of 3,368,400 shares of Class A common stock, and excludes:

 

    2,475,240 shares of our Class A common stock issuable upon the exercise of options outstanding under our 2007 Plan, as of June 30, 2015 at a weighted average exercise price of $7.01 per share; and

 

    3,200,000 shares of our Class A common stock reserved for future issuances under our 2015 Incentive Award Plan, or the 2015 Plan (plus any shares which as of the effective date of the 2015 Plan are available for issuance under the 2007 Plan), which will become effective immediately prior to completion of this offering.

 

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To the extent that any outstanding options are exercised, new options are issued under our stock-based compensation plans or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering.

For a more complete discussion of our stock option plans, please see “Equity Incentive Plans—2015 Plan” and “—2007 Plan.”

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The consolidated statements of income data for each of the fiscal years ended December 31, 2012, 2013 and 2014 and the consolidated balance sheet data as of December 31, 2013 and 2014 are derived from our audited consolidated financial statements that are included in this prospectus. The consolidated statements of income data for the years ended December 31, 2010 and 2011 and the consolidated balance sheet data as of December 31, 2010, 2011 and 2012 are derived from audited consolidated financial statements that are not included in this prospectus. The consolidated statements of income data for the six months ended June 30, 2014 and 2015 and the consolidated balance sheet data as of June 30, 2015 are derived from our unaudited consolidated financial statements that are included in this prospectus. We have prepared the unaudited consolidated financial statements on the same basis as the audited consolidated financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments, which we consider necessary for a fair presentation of the financial information set forth in those statements. The historical results presented below are not necessarily indicative of the results we will achieve in future periods and the interim results are not necessarily indicative of results to be expected for the full year ending December 31, 2015, or any other period.

You should read the following selected consolidated financial data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus. The selected financial data included in this section are not intended to replace the financial statements and the related notes included elsewhere in this prospectus.

 

Consolidated Statements of Income Data:

  Year ended December 31,    

Six months ended June 30,

 
(in thousands, except per share data)   2010     2011     2012     2013     2014     2014     2015  
                                  (unaudited)  

Net sales

    $2,938,729        $2,346,913        $2,417,395        $2,983,361        $3,142,438        $1,255,622        $1,343,773   

Cost of goods sold

    2,774,091        2,243,356        2,289,399        2,835,083        2,954,745        1,163,368        1,246,634   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    164,638        103,557        127,996        148,278        187,693        92,254        97,139   

Selling, general and administrative

    47,497        56,273        68,006        72,241        78,979        37,434        38,315   

Marketing

    47,239        24,355        34,136        35,060        40,952        14,959        10,328   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    69,902        22,929        25,854        40,977        67,762        39,861        48,496   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income:

             

Interest income

    416        502        305        362        2,555        615        2,041   

Other income (loss), net

    86        425        1,131        (262     518        141        227   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net nonoperating income

    502        927        1,436        100        3,073        756        2,268   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    70,404        23,856        27,290        41,077        70,835        40,617        50,764   

Provision for income taxes

    27,938        10,429        10,635        15,340        25,872        15,355        19,413   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    $42,466        $13,427        $16,655        $25,737        $44,963        $25,262        $31,351   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Preferred stock dividend

    (5,036     (778     (7,391     (3,345     (4,170     —          (41

Accretion of preferred stock

    (120     (120     (120     (120     (120     (60     (60

Undistributed income attributable to preferred stockholders

    (2,307     (1,528     —          (1,089     (3,552     (4,362     (5,357
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common stockholders

    $35,003        $11,001        $9,144        $21,183        $37,121        $20,840        $25,893   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share:(1)

             

Basic

    $2.18        $0.68        $0.57        $1.32        $2.30        $1.29        $1.59   

Diluted

    $2.04        $0.64        $0.54        $1.25        $2.17        $1.22        $1.49   

Weighted-average number of common shares:

             

Basic

    16,045        16,063        16,068        16,081        16,161        16,095        16,282   

Diluted

    17,124        17,113        17,052        16,977        17,140        17,077        17,358   

 

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Consolidated Statements of Income Data:

  Year ended December 31,    

Six months ended June 30,

 
(in thousands, except per share data)   2010     2011     2012     2013     2014     2014     2015  
                                  (unaudited)  

Pro Forma net income per common share (unaudited):(1)

             

Basic

            $2.24          $1.55   

Diluted

            $2.13          $1.47   

Weighted-average number of common shares used in computing pro forma net income per common share (unaudited):

             

Basic

            20,084          20,205   

Diluted

            21,064          21,282   

Other data (unaudited):

             

Total television units sold(2)

    6,993        5,349        5,541        6,253        7,078        3,069        3,333   

Adjusted EBITDA(3)

    $74,020        $27,276        $31,434        $45,012        $71,213        $41,564        $50,439   

 

(1) See note 14 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the calculation of basic and diluted net income per common share and pro forma basic and diluted net income per common share.
(2) A television unit sold refers to a television unit sold to one of our customers in a given period.
(3) See “Prospectus summary—Summary consolidated financial data—Adjusted EBITDA” for additional information and a reconciliation of net income to adjusted EBITDA.

 

Consolidated Balance Sheet Data:

   Year Ended December 31,     

June 30,

 
(in thousands)   

2010

    

2011

    

2012

    

2013

    

2014

    

2015

 
                                        (unaudited)  

Cash and cash equivalents and investments

     $128,924         $123,482         $171,577         $157,865         $221,649         $275,561   

Working capital

     74,585         74,177         41,075         44,312         65,496         93,215   

Total assets

     949,944         598,984         778,640         691,539         797,701         748,764   

Total liabilities

     883,623         522,938         728,757         634,505         719,591         640,118   

Convertible preferred stock

     2,000         2,000         2,000         2,000         2,054         2,013   

Total stockholders’ equity

     66,321         76,046         49,883         57,034         78,110         108,646   

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion and analysis of our consolidated results of operations and financial condition should be read in conjunction with our consolidated financial statements, related notes and other financial information appearing elsewhere in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements as a result of a variety of factors, including but not limited to, those discussed in “Risk factors,” “Forward Looking Statements and Industry Data” and elsewhere in this prospectus.

Overview

VIZIO is transforming the way consumers discover and experience media content through our connected entertainment platform. Since our founding in 2002, we have sold over 65 million televisions and audio and other products and built an industry-leading brand. We have achieved significant U.S. market share of both Smart TVs, or Internet-connectable televisions, and sound bars. Our strong brand, technological leadership and go-to-market strategy have driven the broad adoption of our Smart TVs, creating a community of over 8 million VIZIO connected units, or VCUs. A VCU is a Smart TV that has been connected to the Internet and has transmitted data collected by our Inscape data services. Our Inscape data services capture real-time viewing behavior data from our VCUs and enable us to provide it to advertisers and media content providers. The scale of our VCU community, together with our engaged user base and our Inscape data services, position us at the nexus of the connected entertainment ecosystem.

As a leading connected entertainment platform, we focus on delivering cutting-edge technology and building a premium global brand. Since we are not vertically integrated, we are able to maintain flexibility and adapt to changes in market demand, product supply and pricing. Our strategic relationships with our manufacturers and retailers as well as our efficient operating model have been critical to the success of our business. We have leveraged our manufacturers’ purchasing power and expertise in supply chain management to drive cost reductions and rapidly scale our business. This efficient operating model has enabled us to minimize overhead costs, more accurately forecast inventory levels and achieve high inventory turnover. As a result, we have been profitable for the last nine years and have grown our business with minimal external funding.

Our products are sold in over 8,000 retail stores across the United States. For the years ended December 31, 2013 and 2014 and the six months ended June 30, 2015, we generated net sales of $3.0 billion, $3.1 billion and $1.3 billion and reported net income of $25.7 million, $45.0 million and $31.4 million, respectively.

 

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LOGO

 

(1) IHS Technology, LCD and LED HDTV units shipped, January 2010—December 2010.
(2) The NPD Group / Retail Tracking Service, LCD TV units with apps included, total units sold in the U.S., January 2013—December 2013.
(3) The NPD Group / Retail Tracking Service, sound bar units sold in the U.S., January 2014—December 2014.
(4) The NPD Group / Retail Tracking Service, LCD TV Display Resolution 3840x2160, total units sold in the U.S.: January 2015—June 2015.

We have generated substantially all of our net sales to date from sales of televisions and sound bars to retail stores in the United States. We recently entered the Canadian and Mexican markets, but have not sold any products outside of North America. Our major customers include wholesale clubs such as Costco and Sam’s Club and mass market retailers such as Best Buy, Target and Wal-Mart. We also sell our products through online retailers, such as Amazon.com, Walmart.com, and our own website, VIZIO.com. For the years ended December 31, 2012, 2013 and 2014, we generated 85%, 84% and 80% of our net sales from four major customers. For the six month periods ended June 30, 2014 and 2015, we generated 82% and 81% of our net sales from four major customers. Costco, Sam’s Club and Wal-Mart each accounted for more than 10% of net sales in each of the periods noted, and Best Buy also accounted for more than 10% of net sales in each period beginning

 

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in 2013. For the year ended December 31, 2014, Wal-Mart and Sam’s Club comprised 40% and 12% of our net sales, respectively. Wal-Mart, Sam’s Club and certain other entities purchasing from us are affiliates under common control, and collectively they comprised 54% of our net sales for the year ended December 31, 2014. However, throughout our history and presently, we have dealt with separate purchasing departments at Wal-Mart and Sam’s Club, and have at times sold products to Sam’s Club without selling products to Wal-Mart.

We design our products primarily in California and outsource the manufacturing of our products to manufacturers in Asia and Mexico. We purchase substantially all of our products from large manufacturers including AmTRAN, Foxconn, TPV and Wistron. For the years ended December 31, 2012, 2013 and 2014, we purchased 94%, 97% and 97% of our products from these manufacturers and each accounted for more than 10% of total purchases in each of the periods noted. For the six month periods ended June 30, 2014 and 2015, we purchased 98% and 98% of our products from these same manufacturers. Moreover, our manufacturer AmTRAN Technology Co., Ltd. and Q-Run Holdings Ltd., an affiliate of our manufacturer Hon Hai Precision Co., Ltd., are our related parties, holding 20.4% and 8.3% of our common stock as of June 30, 2015, respectively. These two manufacturers accounted for approximately 12% and 25% of our inventory purchases for the year ended December 31, 2014, respectively, and 8% and 23% for the six months ended June 30, 2015, respectively. These manufacturers are responsible for procuring materials and components for our products.

Although we design our products in-house, we outsource the majority of our research and development as well as leverage the resources of our manufacturers’ research and development functions in the development of new product introductions. Additionally, we outsource fulfillment and delivery of our shipments to a third-party logistics provider. As of June 30, 2015, we had 407 employees. We believe that our business model fosters efficient operations with a low fixed cost structure, and coupled with careful management of marketing and advertising expenses, it has enabled us to manage our working capital effectively. For the past nine years, we have generated positive cash flows from operations, which have fueled our growth by allowing us to reinvest a significant portion of our profits into the business.

Key Business Metrics

In addition to the measures presented in our consolidated financial statements, we use the following key metrics to evaluate our business, measure our performance, develop financial forecasts and make strategic decisions.

 

Key business metrics:

  

Year Ended December 31,

   

Six Months Ended June 30,

 
(in thousands)   

2012

    

2013

    

2014

   

2014

   

2015

 
     (unaudited)  

Total television units sold

     5,541         6,253         7,078        3,069        3,333   

Adjusted EBITDA

   $ 31,434       $ 45,012       $ 71,213      $ 41,564      $ 50,439   

Total television units sold. A television unit sold refers to a television unit sold to one of our customers in a given period. We use total television units sold as a measure to (i) assess demand and in evaluating whether we are achieving customer expectations, (ii) help optimize our fulfillment operations and shipment allocations in order to assess operating efficiencies and (iii) help determine trends and end-user preferences in order to improve product design and customer satisfaction. Growth rates between television units sold and net sales are not necessarily correlated because our net sales are affected by other variables, such as the types of products sold during the period, the introduction of new products that have different prices and sales of our sound bars and accessories.

Adjusted EBITDA. Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income before interest income and expense, taxes, depreciation and amortization, and stock-based compensation expense. We consider Adjusted EBITDA to be an important supplemental measure of our performance. We believe that Adjusted EBITDA provides useful information to evaluate overall operating performance and helps us to manage our working capital requirements. In addition, we utilize Adjusted EBITDA when interpreting

 

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operating trends and results of our operations. However, Adjusted EBITDA should not be considered a substitute for cash flow from operating activities, or other measures prepared in accordance with U.S. GAAP or as a measure of our liquidity. See “Selected Consolidated Financial Data—Key Metrics—Reconciliation of Non-GAAP Financial Measures” for more additional information and a reconciliation of net income to Adjusted EBITDA.

Factors Affecting Performance

We believe that our future success will be dependent on many factors, including those discussed below. While these areas may represent opportunities for us, they also represent challenges and risks that we must successfully address in order to continue to grow our business and improve our results of operations.

 

    New product introductions. Consumer demand for new technology and product features, and our ability to anticipate these demands, is one of the main drivers for sales growth and market share expansion. To date, we have had several new product introductions that had a favorable impact on our net sales and operating results, such as our first E-series 60” television for the 2012 Black Friday period and the introduction of the Ultra High Definition, or UHD, P-series in September 2014. However, we cannot be assured that our new product introductions will have a favorable impact on our operating results, or that customers will choose our new products over those of our competitors. Additionally, new product introductions often occur around the customary product reset periods for our customers. Our mass retailer and wholesale club customers, including Wal-Mart, Costco, Best Buy and Target, have product reset periods when they update their product assortments, typically in the spring and fall of each year. Depending on how well we plan and execute on our new product introductions during these reset periods, our product sell-through and/or margins may be impacted, particularly as we provide price protection for products in inventory at our customers. All of these factors can impact customer demand which may in turn affect our performance and results of operations. In the future, we expect the introduction of new products to continue to affect our operating results.

 

    Seasonality. Historically, we have experienced the highest levels of our sales in the fourth quarter of the calendar year, coinciding with the holiday shopping season in the United States, including the Black Friday and Cyber Monday sales events, and, to a more limited extent, the third quarter due to pre-holiday inventory build-up and back-to-school promotions. For example, in both 2013 and 2014, our fourth quarter represented 34% of our net sales. We may also introduce our newest generation of product offerings just prior to this peak season, which may further concentrate sales in the fourth quarter. Additionally, there are other seasonal events, such as Superbowl Sunday in the first quarter, back-to-school promotions and pre-holiday inventory build-up in the third quarter, as well as customer reset periods in the spring and fall of each year, which impact our sales volume. Given the significant seasonality of our net sales, timely and effective product introductions and forecasting are critical to our operations, and fourth quarter sales are critical to our annual results.

 

    Brand expansion. We intend to continue to make investments across our business and in our brand to drive our business growth. We intend to invest significant resources in our sales, product marketing, advertising and brand expansion efforts to drive demand for our products. Such investments occur in advance of any sales benefits from these activities, and it may be difficult for us to determine if we are efficiently allocating our resources or obtaining an appropriate return on our investment in these areas.

 

   

Leveraging our Smart TV platform. We plan to invest in the expansion of our platform of Smart TVs and further develop other connected products that enhance our ability to generate additional net sales from Inscape data services. Furthermore, we intend to focus on building our relationships with advertisers, media content providers and data analytics companies which will subject us to new challenges including whether these parties will accept our Inscape data service offerings, long sales cycles and substantial upfront sales costs. We may also make acquisitions to further drive our

 

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growth. Although we believe that we have significant opportunities to establish supplemental revenue streams from these investments, we are still developing Inscape data service offerings and relationships and we cannot be assured that these investments will result in increased revenue or profitability.

 

    International expansion. Our products are currently sold in wholesale clubs, mass market retailers, regional retailers and other distribution channels across North America. Our long-term growth will depend in part on our continued ability to expand our product offerings and to develop sales from international markets, beginning with further penetration in Canada and Mexico, as well as expansion into Europe and Asia Pacific. We believe our global opportunity is significant and we intend to increase our international presence through investing in sales and marketing efforts, the formation of international strategic partnerships with our manufacturers and customers, the introduction of new products and the creation of an international sales channel. We expect that these efforts will result in increased costs as well as exposure to various risks including increased competition, more complex distribution logistics and greater complexities associated with compliance with foreign laws and regulations.

Components of Our Results of Operations and Financial Condition

Net Sales

Our net sales consist primarily of sales of our high-definition and UHD flat panel televisions and sound bars, and, to a much lesser extent, sound stands, cables, and accessories to wholesale clubs and large and mid-size mass retailers in the United States. Net sales are reported net of reserves for customer allowances, price protection, sales returns, and sales and marketing incentives. The prices charged for our televisions and other products are determined through negotiation with our customers and are fixed or determinable upon shipment. We recognize revenue from sales to our customers on a gross basis as we are the primary obligor under these arrangements, but net of any discounts, rebates, credits and reserves. See “Critical Accounting Policies — Revenue Recognition” below.

Cost of Goods Sold

Our cost of goods sold primarily represents the prices for finished goods that we negotiate and pay to our manufacturers and logistics providers for the televisions and other hardware products that are shipped to our customers. The costs for finished goods paid to our manufacturers include raw materials, manufacturing, overhead and labor costs, third-party logistics costs, customs and duties, license fees and royalties paid to third parties, recycling fees, insurance and other costs. Our cost of goods sold will vary with volume and is based on the cost of underlying product components and negotiated prices with our manufacturers. Shipping costs fluctuate with volume as well as with the method of shipping chosen in order to meet customer demand.

Cost of goods sold may be partially offset by payments we receive under certain manufacturer reimbursement and incentive arrangements in accordance with our standard product supply agreements. These arrangements can be conditioned on our purchase of the products but are typically not a part of minimum purchase commitments with the manufacturers. Accordingly, we treat these arrangements and related payments as reductions to the prices we pay to manufacturers for our products.

We continually negotiate to reduce the prices paid to our manufacturers in order to maintain consistent competitive pricing for our customers. We seek to accomplish this by encouraging our manufacturers to find alternative, less expensive sources of raw materials and components as well as eliminating excess costs throughout our supply chain.

Gross Profit

Our gross profit and gross profit as a percentage of net sales, or gross profit margin, have been, and may in the future be, influenced by several factors including sales volume, product prices, retailer margin and product

 

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mix, changes in product costs related to current and new product and components or panel supplier pricing. We expect gross profit margin to fluctuate over time based on how we manage and plan for products across the supply chain. Additionally, although we primarily procure and sell our products in U.S. dollars, our manufacturers incur many costs, including labor costs, in other currencies. To the extent that exchange rates move unfavorably for our manufacturers, they may seek to pass these additional costs on to us, which could have a material impact on our future prices, to the extent we can or choose to reflect these costs in increased prices, or our margins.

Operating Expenses

We classify our operating expenses into two categories:

 

    Selling, general and administrative. Selling, general and administrative expense consists of personnel related costs for our employees, including salaries and bonuses, fringe benefits, and stock-based compensation, as well as the cost of professional services, facilities, information technology, third-party research and development and other administrative expenses. We expect our selling, general and administrative expense to increase in absolute dollars following the completion of this offering due to the anticipated growth of our business and related infrastructure as well as accounting, insurance, investor relations and other costs associated with being a public company. Selling, general and administrative expense may fluctuate as a percentage of sales, particularly in the fourth quarter of the year when we have historically experienced higher selling, general and administrative expense corresponding with our highest levels of sales.

 

    Marketing. Marketing expense consists primarily of advertising and marketing promotions of our brand and products, including media advertisement costs, merchandising and display costs, trade show and event costs, and sponsorship costs. Over time, we expect our marketing expense to increase in absolute dollars as we continue to promote our products and grow our brand. Marketing expense may fluctuate as a percentage of sales, notably in the fourth quarter of the year when we have historically experienced higher marketing expense corresponding with our highest levels of sales.

Net Nonoperating Income

Net nonoperating income consists of interest income earned on our cash balances and investments, other than temporary impairment charges on cost basis investments and non-recurring transaction gains and losses. In accordance with our corporate investment policies, we currently do not invest in derivatives or speculative instruments.

Income Tax Expense

We are subject to income taxes in the United States and related state jurisdictions in which we do business. Our effective tax rate will generally approximate the U.S. statutory income tax rate of 35% plus the apportionment of state income taxes based on the portion of taxable income allocable to each state. We do not anticipate any changes in our deferred tax assets and liabilities or changes in tax laws that would require a valuation allowance. We regularly assess the likelihood of adverse outcomes resulting from the examination of our tax returns by the U.S. Internal Revenue Service, or IRS, and other tax authorities to determine the adequacy of our income tax reserves and expense. Should actual events or results differ from our current expectations, charges or credits to our income tax expense may become necessary. Any such adjustments could have a significant impact on our results of operations.

 

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Statements of Income

The following tables set forth the components of our consolidated statements of income for each of the periods presented on a dollar basis and as a percentage of net sales.

 

    

Year Ended December 31,

    

Six Months Ended June 30,

 
(in thousands)   

2012

    

2013

   

2014

    

2014

    

2015

 
                         (unaudited)  

Net sales

     $2,417,395         $2,983,361        $3,142,438         $1,255,622         $1,343,773   

Cost of goods sold

     2,289,399         2,835,083        2,954,745         1,163,368         1,246,634   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Gross profit

     127,996         148,278        187,693         92,254         97,139   

Selling, general and administrative

     68,006         72,241        78,979         37,434         38,315   

Marketing

     34,136         35,060        40,952         14,959         10,328   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Operating income

     25,854         40,977        67,762         39,861         48,496   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Other income:

             

Interest income

     305         362        2,555         615         2,041   

Other income (loss) net

     1,131         (262     518         141         227   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Net nonoperating income

     1,436         100        3,073         756         2,268   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Income before income taxes

     27,290         41,077        70,835         40,617         50,764   

Provision for income taxes

     10,635         15,340        25,872         15,355         19,413   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Net income

     $16,655         $25,737        $44,963         $25,262         $31,351   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

    

Year Ended December 31,

   

Six Months Ended June 30,

 

As a percentage of net sales

  

2012

   

2013

   

2014

   

2014

   

2015

 
                       (unaudited)  

Net sales

     100.0     100.0     100.0     100.0     100.0

Cost of goods sold

     94.7     95.0     94.0     92.7     92.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     5.3     5.0     6.0     7.3     7.2

Selling, general and administrative

     2.8     2.4     2.5     3.0     2.9

Marketing

     1.4     1.2     1.3     1.2     0.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1.1     1.4     2.2     3.1     3.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income:

          

Interest income

     0.0     0.0     0.1     0.0     0.2

Other income (loss) net

     0.0     0.0     0.0     0.0     0.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net nonoperating income

     0.1     0.0     0.1     0.1     0.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     1.1     1.4     2.3     3.2     3.8

Provision for income taxes

     0.4     0.5     0.8     1.2     1.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     0.7     0.9     1.4     2.0     2.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of the Six Months Ended June 30, 2014 and 2015

Net Sales

 

    

Six Months Ended June 30,

    

Change

 
(in thousands)   

2014

    

2015

    

$

    

%

 
     (unaudited)                

Net sales

   $ 1,255,622       $ 1,343,773       $ 88,151         7.0

Television units sold

     3,069         3,333         264         8.6

Net sales increased $88.2 million, or 7.0%, from $1.26 billion for the six months ended June 30, 2014 to $1.34 billion for the six months ended June 30, 2015. The increase in net sales was attributable to an increase in

 

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units sold in 2015, partially offset by a decrease in average selling price. Units sold increased 0.3 million units, or 8.6%, from 3.1 million units for the six months ended June 30, 2014 to 3.3 million units for the six months ended June 30, 2015. We calculate average selling price per unit, or ASP, as total net sales of televisions and non-television products and services, divided by television units sold. We believe this calculation is the most appropriate calculation of ASP for our business as television sales make up the substantial majority of our total net sales. Our ASP decreased slightly in 2015 in comparison to the same period in 2014, primarily attributable to the natural decline in sales prices of existing products offset in part by the introduction of our new M-series UHD televisions.

Cost of Goods Sold, Gross Profit and Gross Profit Margin

 

    

Six Months Ended June 30,

   

Change

 
(in thousands)   

2014

   

2015

   

$

    

%

 
     (unaudited)               

Cost of goods sold

     $1,163,368        $1,246,634        $83,266         7.2

Gross profit

     $92,254        $97,139        $4,885         5.3

Gross profit margin

     7.3     7.2     

Cost of goods sold increased $83.3 million, or 7.2%, from $1.16 billion for the six months ended June 30, 2014 to $1.25 billion for the six months ended June 30, 2015. The increase in cost of goods sold is consistent with the increase in unit sales described above. Gross profit margin remained consistent to prior year, at 7.3% in the six months ended June 30, 2014 compared to 7.2% in the six months ended June 30, 2015. In the first quarter of 2015, in preparation for the introduction of our new M-series UHD televisions, we accelerated the sell-through on certain end-of-life products with our customers, which resulted in an increase in price concessions, thereby reducing our gross profit margin in 2015. This reduction in gross profit margin was partially offset by a favorable change in product mix towards larger size televisions and Smart TVs which generally provide for higher gross profit margins.

Operating Expenses

 

    

Six Months Ended June 30,

    

Change

 
(in thousands)   

2014

    

2015

    

$

    

%

 
     (unaudited)                

Selling, general and administrative

     $37,434         $38,315         $881         2.4

Marketing

     14,959         10,328         (4,631      (31.0 %) 
  

 

 

    

 

 

    

 

 

    

Total operating expenses

     $52,393         $48,643         $(3,750      (7.2 %) 
  

 

 

    

 

 

    

 

 

    

Selling, general and administrative expenses increased $0.9 million, or 2.4% from $37.4 million for the six months ended June 30, 2014 to $38.3 million for the six months ended June 30, 2015. As a percentage of net sales, selling, general and administrative expenses decreased slightly from 3.0% in 2014 to 2.9% in 2015. The increase in absolute dollars in selling, general and administrative expense was primarily attributable to an increase in average compensation cost per employee due to annual compensation adjustments and bonuses.

Marketing expenses decreased $4.6 million, or 31.0%, from $15.0 million for the six months ended June 30, 2014 to $10.3 million for the six months ended June 30, 2015. As a percentage of net sales, marketing expenses decreased from 1.2% in 2014 to 0.8% in 2015. The decrease in absolute dollars in marketing expense was primarily attributable to a decrease in general marketing and advertising activities. For the six months ended June 30, 2014, there were several significant promotional and publicity events such as our sponsorship of the 2014 Rose Bowl and 2014 VIZIO BCS National Championship games in Pasadena, California, as well as 2014 Consumer Electronics Show compared to a lesser number of major sponsorship events in the six months ended June 30, 2015.

Net Nonoperating Income

 

    

Six Months Ended June 30,

    

Change

 
(in thousands)   

2014

    

2015

    

$

    

%

 
     (unaudited)                

Interest income

   $ 615       $ 2,041       $ 1,426         231.9

Other income (loss), net

     141         227         86         61.0
  

 

 

    

 

 

    

 

 

    

Net nonoperating income

   $ 756       $ 2,268       $ 1,512         200.0
  

 

 

    

 

 

    

 

 

    

 

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Interest income increased $1.4 million, or 231.9%, from $0.6 million for the six months ended June 30, 2014 to $2.0 million for the six months ended June 30, 2015, primarily due to an increase in our short-term investments. These short-term investments include certificates of deposits, corporate and municipal debt securities, U.S. Treasury securities and mutual funds. In 2015, our short-term investments provided us with higher rates of return, which contributed to the increase in interest income for the year.

Other income (loss), net increased $0.1 million, or 61.0%, from $0.1 million for the six months ended June 30, 2014 to $0.2 million for the six months ended June 30, 2015.

Income Tax Expense

 

    

Six Months Ended June 30,

   

Change

 
(in thousands)   

2014

   

2015

   

$

    

%

 
     (unaudited)               

Provision for income taxes

   $ 15,355      $ 19,413      $ 4,058         26.4

Effective tax rate

     37.8     38.2     

Income tax expense increased $4.1 million, or 26.4%, from $15.4 million for the six months ended June 30, 2014 to $19.4 million for the six months ended June 30, 2015. Our effective tax rate for the six months ended June 30, 2014 was 37.8% compared to 38.2% for same period in 2015.

Comparison of the Years Ended December 31, 2013 and 2014

Net Sales

 

    

Year Ended December 31,

    

Change 2014 vs. 2013

 
(in thousands)   

2013

    

2014

    

$

    

%

 

Net sales

     $2,983,361         $3,142,438         $159,077         5.3

Television units sold

     6,253         7,078         825         13.2

Net sales increased $159.1 million, or 5.3%, from $2.98 billion for the year ended December 31, 2013 to $3.14 billion for the year ended December 31, 2014. The increase in net sales was attributable to an increase in units sold in 2014, partially offset by decrease in ASP. Total television units sold increased 0.8 million units, or 13.2%, from 6.3 million units for the year ended December 31, 2013 to 7.1 million units for the year ended December 31, 2014. The increase in television units sold is mainly the result of expansion of our sales channels throughout North America, including Canada and Mexico, and into new regional retailers and distributors in the United States. In addition, we introduced our new P-series UHD televisions in September 2014. Our ASP decreased in 2014 compared to the same period in 2013. The decrease in our ASP is attributable to the natural decline in sales prices of existing products during 2014, partially offset by increased sales of our Smart TVs, including our new P-series UHD televisions, which had higher selling prices.

Cost of Goods Sold, Gross Profit and Gross Profit Margin

 

    

Year Ended December 31,

   

Change 2014 vs. 2013

 
(in thousands)   

2013

   

2014

   

$

    

%

 

Cost of goods sold

     $2,835,083        $2,954,745        $119,662         4.2

Gross profit

     $148,278        $187,693        $39,415         26.6

Gross profit margin

     5.0     6.0     

Cost of goods sold increased $119.6 million, or 4.2%, from $2.84 billion for the year ended December 31, 2013 to $2.95 billion for the year ended December 31, 2014. The increase in cost of goods sold is consistent with the increase in unit sales described above. Gross profit margin increased from 5.0% in the year ended December 31, 2013 to 6.0% in the year ended December 31, 2014. The increase in gross profit margin was primarily attributable to an increase in the number of Smart TVs sold during 2014 as compared to 2013. Our Smart TVs, which include our new P-series UHD televisions, generally have a higher gross profit margin and higher ASP. In 2013, 64% of total units sold were Smart TVs, compared to 73% of total units sold in 2014.

 

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Operating Expenses

 

    

Year Ended December 31,

    

Change 2014
vs. 2013

 
(in thousands)   

2013

    

2014

    

$

    

%

 

Selling, general and administrative

     $72,241         $78,979         $6,738         9.3

Marketing

     35,060         40,952         5,892         16.8
  

 

 

    

 

 

    

 

 

    

Total operating expenses

     $107,301         $119,931         $12,630         11.8
  

 

 

    

 

 

    

 

 

    

Selling, general and administrative expenses increased $6.7 million, or 9.3%, from $72.2 million for the year ended December 31, 2013 to $79.0 million for the year ended December 31, 2014. As a percentage of net sales, selling, general and administrative expenses increased from 2.4% in 2013 to 2.5% in 2014. The increase in absolute dollars in selling, general and administrative expense was primarily attributable to an increase in average compensation cost per employee. We employed 406 full-time employees at December 31, 2014 compared to 400 employees at December 31, 2013, while the average base compensation per employee increased between the two periods. The increase in employee compensation is due to annual compensation adjustments and bonuses.

Marketing expenses increased $5.9 million, or 16.8%, from $35.1 million for the year ended December 31, 2013 to $41.0 million for the year ended December 31, 2014. As a percentage of net sales, marketing expenses increased slightly from 1.2% in 2013 to 1.3% in 2014. The increase in absolute dollars in marketing expense was primarily attributable to an increase in media advertising related to the launch of a new advertising campaign, which included a series of television and print advertisements featuring our P-series UHD televisions.

Net Nonoperating Income

 

    

Year Ended
December 31,

    

Change 2014 vs. 2013

 
(in thousands)   

2013

    

2014

    

$

    

%

 

Interest income

     $362         $2,555         $2,193         605.8

Other income (loss), net

     (262      518         780         297.7
  

 

 

    

 

 

    

 

 

    

Net nonoperating income

     $100         $3,073         $2,973         2973.0
  

 

 

    

 

 

    

 

 

    

Interest income increased $2.2 million, or 605.8%, from $0.4 million for the year ended December 31, 2013 to $2.6 million for the year ended December 31, 2014, primarily due to an increase in our short-term investments. These short-term investments include certificates of deposits, corporate and municipal debt securities, U.S. Treasury securities and mutual funds. In 2014, our short-term investments also provided us with higher rates of return than in 2013, which contributed to the increase in interest income for the year.

Other income (loss), net increased $0.8 million, or 297.7%, from other loss of $0.3 million in 2013 to other income of $0.5 million for the year ended December 31, 2014. The fluctuation is primarily due to an other-than-temporary impairment loss of $0.8 million that we recorded on an investment during 2013.

Income Tax Expense

 

    

Year Ended December 31,

   

Change 2014 vs. 2013

 
(in thousands)   

2013

   

2014

   

$

    

%

 

Income tax expense

   $ 15,340      $ 25,872      $ 10,532         68.7

Effective tax rate

     37.3     36.5     

Income tax expense increased $10.5 million, or 68.7%, from $15.3 million for the year ended December 31, 2013 to $25.9 million for the year ended December 31, 2014. Our effective tax rate in 2014 was 36.5% compared to 37.3% in 2013, primarily attributable to changes in state apportionment related to California economic nexus that resulted in lowered state income tax expense.

 

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Comparison of the Years Ended December 31, 2012 and 2013

Net Sales

 

    

Year Ended December 31,

    

Change 2013 vs. 2012

 
(in thousands)   

2012

    

2013

    

$

    

%

 

Net sales

     $2,417,395         $2,983,361         $565,966         23.4

Television units sold

     5,541         6,253         712         12.8

Net sales increased $566.0 million, or 23.4%, from $2.42 billion for the year ended December 31, 2012 to $2.98 billion for the year ended December 31, 2013. The increase in net sales is attributable to an increase in units sold coupled with an increase in our ASP during the period. Units sold increased by 0.7 million units, or 12.8%, from 5.5 million units for the year ended December 31, 2012 to 6.3 million units for the year ended December 31, 2013. The increase in television units sold was due to the addition of certain new customers, principally Best Buy in December 2012. Our ASP increased in 2013 compared to the same period in 2012. The increase in our ASP is attributable to a change in product mix as we sold more of our larger televisions in 2013 compared to 2012, offset in part by the natural decline in sales prices of existing products.

Cost of Goods Sold, Gross Profit and Gross Profit Margin

 

    

Year Ended December 31,

   

Change 2013 vs. 2012

 
(in thousands)   

2012

   

2013

   

$

    

%

 

Cost of goods sold

     $2,289,399        $2,835,083        $545,684         23.8

Gross profit

     $127,996        $148,278        $20,282         15.8

Gross profit margin

     5.3     5.0     

Cost of goods sold increased $545.7 million, or 23.8%, from $2.29 billion for the year ended December 31, 2012 to $2.84 billion for the year ended December 31, 2013. The increase in cost of goods sold is consistent with the increase in unit sales described above. Gross profit margin decreased from 5.3% in the year ended December 31, 2012 to 5.0% in the year ended December 31, 2013. In the second half of 2012, with the introduction of our new 60” television, we benefited from higher profit margins on larger televisions. In the early part of 2013, we transitioned all of our televisions to our new LED panels in order to meet the growing customer demand for enhanced picture quality and efficient energy consumption. In connection with this transition, we accelerated the sell-through on certain end-of-life products with our customers, which resulted in an increase in price concessions, thereby reducing our gross profit margin in 2013.

Operating Expenses

 

     Year Ended December 31,     

Change 2013 vs. 2012

 
(in thousands)   

2012

    

2013

    

$

    

%

 

Selling, general and administrative

     $68,006         $72,241         $4,235         6.2

Marketing

     34,136         35,060         924         2.7
  

 

 

    

 

 

    

 

 

    

Total operating expenses

     $102,142         $107,301         $5,159         5.1
  

 

 

    

 

 

    

 

 

    

Selling, general and administrative expenses increased $4.2 million, or 6.2%, from $68.0 million for the year ended December 31, 2012 to $72.2 million for the year ended December 31, 2013. As a percentage of net sales, selling, general and administrative expenses decreased from 2.8% in 2012 to 2.4% in 2013. The increase in absolute dollars in selling, general and administrative expense is attributable to an increase in average compensation cost per employee as well as research and development expenses. The total number of full-time employees at December 31, 2013 was 400 compared to 408 full-time employees at December 31, 2012, while the average compensation per employee increased between the two periods due to annual compensation adjustments and bonuses.

 

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Marketing expenses increased $0.9 million, or 2.7%, from $34.1 million for the year ended December 31, 2012 to $35.1 million for the year ended December 31, 2013. As a percentage of net sales, marketing expenses decreased slightly from 1.4% in 2012 to 1.2% in 2013. The increase in absolute dollars in marketing expense was primarily attributable to an increase in television advertising, media and promotional events leading up to our sponsorship of the 2014 Rose Bowl and 2014 VIZIO BCS National Championship games in Pasadena, California.

Net Nonoperating Income

 

    

Year Ended December 31,

    

Change 2013 vs. 2012

 
(in thousands)   

2012

    

2013

    

$

    

%

 

Interest income

     $305         $362         $57         18.7

Other income (loss), net

     1,131         (262      (1,393      (123.2 %) 
  

 

 

    

 

 

    

 

 

    

Net nonoperating income

     $1,436         $100         $(1,336      (93.0 %) 
  

 

 

    

 

 

    

 

 

    

Interest income increased $0.1 million, or 18.7%, from $0.3 million for the year ended December 31, 2012 to $0.4 million for the year ended December 31, 2013, primarily due to an increase in our short-term investments. These short-term investments include certificates of deposits, corporate and municipal debt securities and mutual funds. In 2013, our short-term investments provided us with higher rates of return, which contributed to the increase in interest income for the year.

Other income (loss), net decreased $1.4 million, or 123.2%, from other income of $1.1 million for the year ended December 31, 2012 to other loss of $0.3 million for the year ended December 31, 2013. The fluctuation in this balance is primarily due to an other- than-temporary impairment loss of $0.8 million that we recorded on an investment during 2013 and a $0.4 million gain we recorded on the sale of an investment during 2012.

Income Tax Expense

 

    

Year Ended December 31,

   

Change 2013 vs. 2012

 
(in thousands)   

2012

   

2013

   

$

    

%

 

Income tax expense

   $ 10,635      $ 15,340      $ 4,705         44.2

Effective tax rate

     39.0     37.3     

Income tax expense increased $4.7 million, or 44.2%, from $10.6 million for the year ended December 31, 2012 to $15.3 million for the year ended December 31, 2013. Our effective tax rate in 2013 was 37.3% compared to 39.0% in 2012. In 2013, our income tax rate was favorably impacted by the retroactive extension of the federal research credit for 2012 reinstated by the American Taxpayer Relief Act of 2012, which was signed into law on January 2, 2013. Because a change in tax law is accounted for in the period of enactment, the retroactive effect of this change for 2012 resulted in a tax benefit that was recognized in the first quarter of 2013.

Backlog

We do not believe that our backlog of orders is meaningful as of any particular date or indicative of future sales, as our customers can change or cancel orders with little or no penalty and limited advance notice prior to shipment.

Unaudited Quarterly Statements of Income

The following table sets forth our unaudited quarterly consolidated statements of income for each of the ten quarterly periods ended June 30, 2015. These unaudited quarterly statements of income have been prepared on the same basis as our audited consolidated financial statements and, in our opinion, reflect all normal recurring adjustments necessary for the fair statement of the results of operations for these periods. You should

 

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read the following tables in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus. The statements of income for any quarter are not necessarily indicative of the results of operations for a full year or any future periods.

 

   

Three Months Ended

 
(in thousands)  

Mar. 31
2013

   

Jun. 30
2013

   

Sept. 30
2013

   

Dec. 31

2013

   

Mar. 31
2014

   

Jun. 30
2014

   

Sept. 30
2014

   

Dec. 31

2014

   

Mar. 31
2015

   

Jun. 30
2015

 

Net sales

    $605,623        $649,005        $703,439        $1,025,294        $633,893        $621,729        $822,692        $1,064,124        $509,292        $834,481   

Cost of goods sold

    577,594        613,954        668,832        974,703        589,147        574,221        775,437        1,015,940        474,719        771,915   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    28,029        35,051        34,607        50,591        44,746        47,508        47,255        48,184        34,573        62,566   

Selling, general and administrative

    15,613        16,934        19,886        19,808        17,729        19,705        18,975        22,570        18,959        19,356   

Marketing

    11,160        2,564        5,716        15,620        10,958        4,001        4,388        21,605        6,416        3,912   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    1,256        15,553        9,005        15,163        16,059        23,802        23,892        4,009        9,198        39,298   

Other income:

                   

Interest income

    48        49        82        183        266        349        1,103        837        455        1,586   

Other income (loss), net

    83        133        (560     82        83        58        (82     459        79        148   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net nonoperating income

    131        182        (478     265        349        407        1,021        1,296        534        1,734   

Income before income taxes

    1,387        15,735        8,527        15,428        16,408        24,209        24,913        5,305        9,732        41,032   

Provision for income taxes

    245        6,036        3,425        5,635        6,203        9,150        9,646        873        3,634        15,779   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    $1,142        $9,699        $5,102        $9,793        $10,205        $15,059        $15,267        $4,432        $6,098        $25,253   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table sets forth the components of our unaudited consolidated statements of income for each of the periods presented as a percentage of net sales:

 

    

Three Months Ended

 

As a Percent of Net Sales

  

Mar. 31
2013

   

Jun. 30
2013

   

Sept. 30
2013

   

Dec. 31
2013

   

Mar. 31
2014

   

Jun. 30
2014

   

Sept. 30
2014

   

Dec. 31
2014

   

Mar. 31
2015

   

Jun. 30
2015

 

Net sales

     100.0     100.0     100.0     100.0     100.0     100.0     100.0     100.0     100.0     100.0

Cost of goods sold

     95.4     94.6     95.1     95.1     92.9     92.4     94.3     95.5     93.2     92.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     4.6     5.4     4.9     4.9     7.1     7.6     5.7     4.5     6.8     7.5

Selling, general and administrative

     2.6     2.6     2.8     1.9     2.8     3.2     2.3     2.1     3.7     2.3

Marketing

     1.8     0.4     0.8     1.5     1.7     0.6     0.5     2.0     1.3     0.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     0.2     2.4     1.3     1.5     2.6     3.8     2.9     0.4     1.8     4.7

Other income:

                    

Interest income

     0.0     0.0     0.0     0.0     0.0     0.1     0.1     0.1     0.1     0.2

Other income (loss), net

     0.0     0.0     -0.1     0.0     0.0     0.0     0.0     0.0     0.0     0.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net nonoperating income

     0.0     0.0     -0.1     0.0     0.0     0.1     0.1     0.1     0.1     0.2

Income before income taxes

     0.2     2.4     1.2     1.5     2.6     3.9     3.0     0.5     1.9     4.9

Provision for income taxes

     0.0     0.9     0.5     0.5     1.0     1.5     1.2     0.1     0.7     1.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     0.2     1.5     0.7     1.0     1.6     2.4     1.8     0.4     1.2     3.0

Quarterly trends

Our business is subject to seasonal fluctuations in demand due to changes in buying patterns by our customers. Historically, we have experienced the highest levels of sales in the fourth quarter of the year, coinciding with the holiday shopping season in the United States, including the Black Friday and Cyber Monday sales events, and, to a more limited extent, the third quarter due to pre-holiday inventory build-up and back-to-school promotions. For example, in both 2013 and 2014, our fourth quarter represented 34% of our respective annual net sales. We often introduce our newest generation of product offerings just prior to this peak season,

 

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which may further concentrate sales in the fourth quarter. Additionally, there are other seasonal events, such as Superbowl Sunday in the first quarter, back-to-school promotions and pre-holiday inventory build-up in the third quarter, as well as customer reset periods in the spring and fall of each year, which impact our sales volume. We expect the historical seasonality trends to continue to have an impact on our results of operations and financial condition. Given the significant seasonality of our sales, timely and effective product introductions and forecasting are critical to our operations. The overall growth of our net sales over the periods presented may obscure the seasonality of our results and reduce the significance of quarter to quarter comparisons of our operating results.

In the first quarter of 2015, net sales were the lowest compared to the eight preceding quarters as a result of labor disputes between third-party dock workers and their employers on the west coast of the United States, which delayed inbound ocean freight shipments, causing a delay in fulfilling our customer orders. The labor disputes were resolved by those parties late in the first quarter, causing the delayed shipments to be fulfilled in the second quarter of 2015. This recovery is reflected in our net sales for the second quarter of 2015.

In the fourth quarter of 2014, our gross profit margin decreased compared to prior quarters due to the competitive pricing strategy we employed during that holiday season. The margin decline was temporary and recovered in the first quarter of 2015.

The following table sets forth the key business metrics for each of the periods presented:

 

   

Three Months Ended

 
(in thousands)  

Mar. 31

2013

   

Jun. 30

2013

   

Sept. 30

2013

   

Dec. 31

2013

   

Mar. 31

2014

   

Jun. 30

2014

   

Sept. 30

2014

   

Dec. 31

2014

   

Mar. 31

2015

   

Jun. 30

2015

 

Television units sold

    1,313        1,431        1,509        2,000        1,487        1,582        1,820        2,189        1,274        2,059   

Adjusted EBITDA

    $2,260        $16,729        $9,646        $16,377        $17,099        $24,465        $24,422        $5,227        $10,115        $40,324   

The following table represents a reconciliation from net income to adjusted EBITDA

 

   

Three Months Ended

 
(in thousands)  

Mar. 31

2013

   

Jun. 30

2013

   

Sept. 30

2013

   

Dec. 31

2013

   

Mar. 31

2014

   

Jun. 30

2014

   

Sept. 30

2014

   

Dec. 31

2014

   

Mar. 31

2015

   

Jun. 30

2015

 

Net income

    $1,142        $9,699        $5,102        $9,793        $10,205        $15,059        $15,267        $4,432        $6,098        $25,253   

Provision for income taxes

    245        6,036        3,425        5,635        6,203        9,150        9,646        873        3,634        15,779   

Interest (income) expense, net

    (48     (49     (82     (183     (266     (349     (1,103     (837     (455     (1,586

Stock-based compensation

    336        336        336        351        120        120        120        130        123        170   

Depreciation and amortization

    585        707        865        781        837        485        492        629        715        708   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

    $2,260        $16,729        $9,646        $16,377        $17,099        $24,465        $24,422        $5,227        $10,115        $40,324   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liquidity and Capital Resources

 

    

December 31,

    

June 30,

 
(in thousands)   

2013

    

2014

    

2015

 
    

 

    

 

    

(unaudited)

 

Cash

     $126,487         $97,497         $142,186   

Investments

     31,378         124,152         133,375   
  

 

 

    

 

 

    

 

 

 
     $157,865         $221,649         $275,561   
  

 

 

    

 

 

    

 

 

 

To date, our primary cash needs have been for working capital purposes and to a lesser extent, capital expenditures and cash dividends. We have historically funded our business through cash flows generated from operations. We have been profitable every year for the past nine years and have grown rapidly during this time. We have received minimal funding from external sources since our inception and we do not currently have any outstanding debt obligations.

 

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As we continue to grow our customer base and increase our net sales, there may be a need for higher levels of working capital. Historically, our primary source of liquidity has been our available cash and cash equivalents as well as available-for-sale investments and our cash flow from operations. As of December 31, 2013 and 2014 and June 30, 2015, we had cash and cash equivalents and investments of $157.9 million, $221.6 million and $275.6 million, respectively.

We license technologies that are generally standard to the industry, and require us to pay royalty fees. For the standards-based essential technologies that are required for our televisions and other consumer electronics products, licensors are typically required to license such technologies to us under fair, reasonable, and non-discriminatory terms under the law. We license intellectual property for our Inscape data services which we have the right to use on a non-exclusive basis until 2017 unless renewed, and are obligated to pay royalties to the licensor. In certain cases, we have negotiated with our manufacturers in our product supply agreement to receive funding from our manufacturers for these fees through either direct reimbursement from a manufacturer or payment of the net purchase price as these royalty payments become due. These contractual obligations become due over a period that does not exceed five years. We are also engaged in various claims and suits whereby the final outcome has not been determined at this time. In connection with these matters, we may have to, among other things, enter into a license agreement that requires us to make significant royalty payments in the future. Historically, we have been contractually indemnified and reimbursed by our manufacturers for most intellectual property royalty obligations and commitments. Based on current information, we do not believe that there are any claims or suits that would have a material adverse effect on our financial condition, results of operations, or liquidity.

On July 17, 2015, we entered into an amendment to our existing line of credit facility with Citibank, N.A. to provide up to $50 million of credit that is secured by, and the maximum amount available thereunder is subject to the amount of, certain eligible assets (including our cash and certain investments) held at Citibank, N.A. As of June 30, 2015, there is no amount outstanding under the line of credit facility. The line of credit facility is not subject to any commitment fee or unused facility fee. Amounts that may be borrowed under the line of credit facility will accrue interest at a rate equal to LIBOR plus 0.90% per annum with interest thereon being due and payable on the first day of each month occurring prior to the maturity date of the line of credit facility, which has been extended to August 31, 2017, and on the maturity date of the line of credit facility. Additionally, all outstanding principal is due at maturity. The line of credit facility contains certain customary events of default and the amount available under the line of credit facility may be adjusted based on the fair value of certain eligible assets held in a pledged account with Citibank, N.A.

We believe that our existing cash and cash equivalents, investments, funds anticipated to be generated from our operations and available borrowing on our line of credit will be sufficient to meet our working capital needs for at least the next 12 months. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of sales growth, the timing and extent of spending on various business initiatives, the expansion of our brand internationally, the timing of new product introductions, market acceptance of our products and overall economic conditions. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. In the event additional financing is required from outside sources, we may not be able to obtain such financing on terms acceptable to us or at all. To the extent that we issue equity or convertible debt securities in the future, there will be further dilution to investors participating in this offering. Further, any debt financing obtained by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions.

 

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The following table sets forth the major components of our consolidated statements of cash flows data for the periods presented:

 

    

Year Ended December 31,

   

Six Months Ended June 30,

 
(in thousands)    2012     2013     2014     2014     2015  
                       (unaudited)  

Net cash provided by operating activities

     $95,083        $9,050        $98,494        $65,237        $57,034   

Net cash (used in) provided by investing activities

     22,962        (17,808     (104,364     (52,596     (12,289

Net cash (used in) provided by financing activities

     (44,538     (19,873     (23,120     85        (56
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     $73,507        $(28,631     $(28,990     $12,726        $44,689   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from operating activities

Cash flows from operating activities consist of net income adjusted for certain non-cash items, including depreciation and amortization, deferred income taxes, stock-based compensation expense and other non-cash related matters as well as the effect of changes in working capital and other activities.

Our operating activities are attributable to our net income as well as how well we manage our working capital, which is dictated by the volume of product we purchase from our manufacturers and then sell to our customers along with the payment and collection terms that we negotiate with them. We purchase a majority of our product from significant manufacturers located in Asia that generally provide us 60 day payment terms for products purchased. In accordance with our product supply agreements, we have executed vendor-managed-inventory arrangements with our significant manufacturers for our televisions and other hardware products, which enable us to better manage our supply chain and maintain low inventory levels throughout the year. Generally, upon delivery of the products by our manufacturers to a third-party logistics or distribution center in the United States, the ownership of the products is transferred to us and is shipped out of the third-party logistics or distribution center to our customers shortly thereafter, thereby minimizing our inventory risk. These vendor-managed-inventory arrangements require our significant manufacturers to manufacture and deliver our products in accordance with advanced shipping notice provided by us, which is planned and forecasted closely along with our customer demand and sales forecast. Our most significant manufacturers make up more than 97% of our inventory purchases as of December 31, 2013 and 2014, and 96% and 98% of our accounts payable as of December 31, 2013 and 2014, respectively.

Our significant customers are major retailers in North America including Wal-Mart, Best Buy, Costco and Sam’s Club. These customers comprise most of our net sales for any given year. For the year ended December 31, 2014, Wal-Mart and Sam’s Club comprised 40% and 12% of our net sales, respectively. Wal-Mart, Sam’s Club and other entities purchasing from us are affiliates under common control, and collectively they comprised 54% of our net sales for the year ended December 31, 2014. However, throughout our history and presently, we have dealt with separate purchasing departments at Wal-Mart and Sam’s Club, and have at times sold products to Sam’s Club without selling products to Wal-Mart. We generally grant credit to our customers based on their financial viability and our historical collection experience with them. We typically require payment from them within 30 to 45 days upon delivery of the product. As a result of our payment terms between manufacturers and customers, we have historically generated positive cash flows from operating activities. Our business is seasonal with sales typically reaching their highest level in the fourth quarter of the year, coinciding with the holiday shopping season in the United States, including the Black Friday and Cyber Monday sales events, and, to a more limited extent, the third quarter due to pre-holiday inventory build-up and back-to-school promotions. Additionally, there are other seasonal events such as Superbowl Sunday and back-to-school promotions as well as the customer reset periods in the spring and fall of each year which impact our sales

 

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volume. Due to this seasonality, our inventory balances and turnover rates can fluctuate. Therefore, our accounts payable and cash balances are typically at their highest levels in the fourth quarter and at year-end. As sales begin to slow in subsequent quarters, inventory levels decrease and accounts payable and cash balances decrease as we pay our manufacturers.

For the six months ended June 30, 2015, net cash provided by operating activities was $57.0 million. Net income was $31.4 million and non-cash expenses, comprised of depreciation and amortization expense, stock-based compensation expense and deferred income taxes, was a $(5.8) million use of cash for the six months ended June 30, 2015. Changes in operating assets and liabilities represented a $31.4 million source of cash, primarily driven by changes in working capital including a decrease in accounts receivable and inventories, partially offset by decreases in accounts payable and accounts payable due to related parties. The decrease in our working capital accounts were attributable to the high sales volume experienced during the fourth quarter compared to the second quarter as a result of the seasonality trends discussed above.

For the six months ended June 30, 2014, net cash provided by operating activities was $65.2 million. Net income was $25.3 million and non-cash expenses, comprised of depreciation and amortization expense, stock-based compensation expense and deferred income taxes, was a $(11.7) million use of cash for the six months ended June 30, 2014. Changes in operating assets and liabilities represented a $51.7 million source of cash, primarily driven by changes in working capital including an increase in accounts payable and a decrease in accounts receivable, partially offset by a decrease in accounts payable due to related parties. The changes in our working capital accounts were attributable to the high sales volume experienced during the fourth quarter compared to the second quarter as a result of the seasonality trends discussed above.

For the year ended December 31, 2014, net cash provided by operating activities was $98.5 million. Net income was $45.0 million and non-cash expenses, comprised of depreciation and amortization expense, stock-based compensation expense, and deferred income taxes, was a $(22.8) million use of cash in 2014. The change in non-cash expenses was principally due to a $25.7 million increase in our net deferred tax assets resulting from a change in accounting method for tax purposes on our accrued rebates. Changes in operating assets and liabilities represented a $76.3 million source of cash, primarily driven by changes in working capital including an increase in accounts payable, partially offset by decrease in accounts payable due to related parties and an increase in accounts receivable. The increases in our net income and working capital accounts were attributable to an increase in sales volume especially during the fourth quarter as a result of the seasonality trends discussed above.

For the year ended December 31, 2013, net cash provided by operating activities was $9.1 million. Net income was $25.7 million and non-cash expenses, comprised of depreciation and amortization expense, stock-based compensation expense, other-than-temporary loss on investment, and deferred income taxes, was a $(9.6) million use of cash in 2013. The change in non-cash expenses was principally due to a $14.6 million increase in our net deferred tax assets resulting from a change in accounting method for tax purposes on our accrued rebates. Changes in operating assets and liabilities represented a $(7.1) million use of cash, primarily driven by changes in working capital including a decrease in accounts payable and increases in inventories, offset by a decrease in accounts receivable. The increases in our net income and working capital accounts was attributable to an increase in sales volume especially during the fourth quarter as a result of the seasonality trends discussed above as well as our ability to grow our market share in 2013.

For the year ended December 31, 2012, net cash provided by operating activities was $95.1 million. Net income was $16.7 million and non-cash expenses, comprised principally of depreciation and amortization expense, deferred income taxes and stock-based compensation expense, was a $(8.1) million use of cash in 2012. The change in non-cash expenses was principally due to a $12.1 million increase in our net deferred tax assets resulting from a change in accounting method for tax purposes on our accrued rebates. Changes in operating assets and liabilities represented $86.5 million source of cash, primarily driven by increases in accounts payable and accounts payable due to related party coupled with a decrease in inventory. These changes were partially offset by an increase in accounts receivable and other current assets as of December 31, 2012.

 

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Cash flows from investing activities

For the years ended December 31, 2012, 2013, and 2014 and the six months ended June 30, 2014 and 2015, our net cash (used in) provided by investing activities was $23.0 million, $(17.8) million, $(104.4) million, $(52.6) million and $(12.3) million, respectively. In each of these periods, our primary investing activities consisted of the purchase and sale of investments in accordance with our corporate investment policy discussed above, as well as the purchase of property and equipment to support our increased employee headcount and overall growth in our business. Our available-for-sale securities or investments purchased during the periods consist of corporate and municipal debt securities, U.S. Treasury securities and mutual funds.

We expect that we will make additional capital expenditures and investments in the future, including the further build-out of our corporate offices and IT infrastructure, all of which will be done to support the future growth of our business.

Cash flows from financing activities

Historically, we have had minimal financing activities as a result of our ability to finance our business growth through cash flows from operations.

For the years ended December 31, 2012, 2013, and 2014 and the six month periods ended June 30, 2014 and 2015, our net cash provided by (used in) financing activities was $(44.5) million, $(19.9) million, $(23.1) million, $0.1 million and $(0.1) million, respectively. In each of these years, our cash used in financing activities primarily consisted of dividends paid to our stockholders and proceeds from exercise of stock options.

From January 1, 2009 through July 24, 2015, we have paid or declared a total of $208.9 million in dividends to our stockholders. Although we have paid dividends to stockholders in the past, we intend to retain any future earnings to finance the operations, growth and development of our business as a public company. Therefore, we do not anticipate that we will declare or pay any cash dividends on any of our common stock in the foreseeable future. However, any future cash dividend payments will be at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements and other factors our Board of Directors deems relevant.

In addition to the payment of dividends in each year, we have also had proceeds from the exercise of stock options of $0.8 million, $0.1 million, $1.7 million, $0.1 million and $0.1 million for the years ended December 31, 2012, 2013, and 2014 and the six months ended June 30, 2014 and 2015, respectively. The only other material financing activities that we experienced since December 31, 2012 was the repurchase of common stock from a former employee that exercised stock options post-termination as of December 31, 2012.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets, or any obligation arising out of a material variable interest in an unconsolidated entity. We do not have any majority-owned subsidiaries that are not included in our consolidated financial statements. Additionally, we do not have an interest in, or relationships with, any special-purpose entities.

 

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Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2014.

 

(in thousands)   

Total

    

1 year (fiscal

2015)

    

2-3 years
(fiscal 2016
and 2017)

    

4-5 years
(fiscal 2018
and 2019)

    

More than 5
years (beyond
fiscal year
2019)

 

Royalty obligations(1)

     $37,680         $29,005         $8,645         $30         $—     

Operating lease(2)

     4,838         1,829         2,843         166         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

     $42,518         $30,834         $11,488         $196         $—     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The amounts in the table represent our minimum royalty obligations, but increased sales could result in increased royalty obligations. We license technologies that are generally standard to the industry, and licensors are typically required to license such technologies to us under fair, reasonable, and non-discriminatory terms. In certain cases, we have negotiated with our manufacturers to include contractual obligations in our product supply agreements to receive funding from our manufacturers for these fees through either direct reimbursement from a manufacturer or payment of the net purchase price as these royalty payments become due. These contractual obligations become due over a period that does not exceed five years.

 

(2) The amounts represent the contractual future annual minimum lease payments at December 31, 2014. We have operating leases for offices located in California, Arkansas, Minnesota, South Dakota, Washington, and Mexico. In certain cases, we have long-term operating leases that include options to renew that we anticipate exercising upon the expiration of the current term. These anticipated renewals are not included in the above schedule.

Certain product supply agreements include a purchase commitment for up to 13 weeks of inventory. We provide to manufacturers periodic forecasts at which time these manufacturers will consider the first 13 weeks of demand to be committed. Given the practice of providing frequent forecasts, any variance of the actual demand from the forecasted demand should be minimal, and we believe the risk to us is low. Accordingly, we have not included these items in the contractual obligation table above. In addition, we have agreed to pay certain of our officers bonuses in the aggregate amount of $1.0 million upon the completion of this offering in order to recognize, reinforce and encourage their efforts towards the completion of this offering. These amounts are not included in the table above.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates, assumptions and judgments that can significantly impact the amounts we report as assets, liabilities, net sales, costs and expenses and the related disclosures. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances. Our actual results could differ significantly from these estimates under different assumptions and conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance as these policies involve a greater degree of judgment and complexity.

Revenue Recognition

We recognize revenue from our product sales to customers when persuasive evidence of an arrangement exists, both title and risk of loss are passed to the customer upon delivery of the products, the sales price is fixed or determinable and collectability is reasonably assured.

We sell products to certain customers under terms that allow them to receive price protection on future price reductions and may provide for limited rights of return, discounts and advertising credits.

 

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We recognize revenue related to our product sales to our customers on a gross basis as we are the primary obligor and are responsible for negotiating the terms of sales transactions and ensuring that the product meets the customers’ expectations. We are also responsible for determining the product design and specifications, as well as negotiating all pricing arrangements including various rebates and incentives for our products. Furthermore, we are responsible for negotiating the credit terms and collecting the cash from our customers.

All of our products are directly shipped by vessel from manufacturers to third-party logistics and distribution centers in the United States. Generally, we ship the product to our customers with freight carriers contracted by us. Shipping terms on sales of products are generally FOB destination but may vary depending upon the related contractual arrangement with the customer. Amounts billed to customers for shipping and handling costs are included in net sales.

Sales Incentives

We periodically grant certain incentives such as sales rebates and price protection to our customers for products that we sell to them. We record an allowance for sales incentives and discounts based on historical experience and contractual terms at the time of the sale. We record estimated price protection and sales incentives at the time the related product sale is recognized. All revenue is recorded net of our estimates for returns, discounts and advertising credits. In certain instances, we negotiate with our manufacturers for the reimbursement of these incentives so that they are effectively absorbing these rebates and price protection allowances. We estimate amounts accrued as customer allowances based upon historical experience and management judgment. We accrue for these customer allowances when the related product sale is recognized. The customer allowances are presented in our consolidated financial statements as a reduction in accounts receivable and revenues.

Additionally, we maintain cooperative advertising arrangements with several of our customers which provide for television commercials, newspaper advertisements and banner advertisements on the customers’ websites. These advertisement arrangements are recorded as a reduction in accounts receivable and revenue depending on the nature of the agreement.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable consist of amounts due from sales arrangements executed in our normal business activities and are recorded at invoiced amounts. We maintain an allowance for uncollectible receivables. We determine the sufficiency of the accounts receivables allowance based upon historical experience and an evaluation of current industry trends and economic conditions. Additionally, we mitigate a portion of our credit risk through credit insurance for certain customers. If actual experience with these factors varies significantly from our estimates, we may be required to adjust our allowance for doubtful accounts. Historical variances of these amounts from our estimates have not resulted in material adjustments to our financial statements. In addition, as we increasingly extend credit terms to our customers, we expect our allowance for uncollectible receivables to increase.

Patent Litigation Matters

We operate in an industry where there may be certain claims made against us related to patent infringement matters. We accrue for these claims whenever we determine that an unfavorable outcome is probable and the liability is reasonably estimable. The amount of the accrual is estimated based on our review of each individual claim, including the type and facts of the claim and our assessment of the merits of the claim. Since these patent infringement matters can be very complex and require significant judgment, we often utilize external legal counsel and other subject matter experts to assist us in defending against such claims. These accruals are reviewed at least on a quarterly basis and adjusted to reflect the impact of recent negotiations, settlements, court rulings, advice from legal counsel and other subject matter experts and any other events pertaining to the case. Although we believe that we take considerable measures to mitigate our exposure in these matters, including indemnification agreements with our manufacturers, litigation is inherently unpredictable.

 

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However, we believe that we have valid defenses and adequate indemnifications with respect to our pending legal matters against us as well as adequate provisions for any probable and estimable losses. While the outcome of these proceedings and claims cannot be predicted with certainty, we do not believe that the outcome of any pending legal matter will have a material adverse effect on our consolidated financial statements.

Income Taxes

We use the asset and liability method when accounting for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Valuation allowances are provided against tax assets when it is determined that it is more likely than not that the assets will not be realized.

We make estimates, assumptions and judgments to determine our provision for income taxes and also for deferred tax assets and liabilities and any valuation allowances recorded against our deferred tax assets. Actual future operating results and the underlying amount and type of income could differ materially from our estimates, assumptions and judgments thereby impacting our consolidated financial position and results of operations.

Stock-Based Compensation

Our stock-based compensation expense has resulted from grants of employee stock options and restricted stock awards and is recognized in our consolidated financial statements based on the respective grant date fair values of the award.

Effective October 29, 2010, our Board of Directors granted a total of 555,000 restricted stock awards to our chief executive officer and chief operating officer. The restricted stock awards vest ratably over four years beginning in April 2010, contingent upon our initial public offering. Since the vesting of the restricted stock awards is contingent upon an initial public offering, we have deferred the recognition of compensation expense for these shares until such time that the contingencies are resolved. As of June 30, 2015, no stock-based compensation expense has been recognized related to these restricted stock awards because the initial public offering had not yet occurred. In the quarter that our initial public offering is completed, we will record stock-based compensation expense based on the grant date fair value of these awards. If our initial public offering had occurred on June 30, 2015, we would have recognized stock-based compensation expense of approximately $9.7 million associated with the restricted stock awards.

We estimate the value of stock option awards using the Black-Scholes-Merton option pricing model. Determining the fair value of stock-based awards at the grant date under this model requires judgment, including estimating our fair market value per share of common stock, volatility, expected term and risk-free rate. The assumptions used in calculating the fair value of stock-based awards represent our best estimates. These estimates involve inherent uncertainties and the application of management judgment. The assumptions we use in the valuation model are based on subjective future expectations combined with management judgment. If any of the assumptions used in the Black-Scholes-Merton model change significantly, stock-based compensation for future awards may differ materially from the awards granted previously.

The risk-free interest rate is based on the U.S. Treasury yield of those maturities that are consistent with the expected term of the stock option in effect on the grant date of the award. Dividend rates are based upon historical dividend trends and expected future dividends. As we do not have significant historical experience of similar awards, the average expected life of our stock options was determined according to the “SEC simplified method” as described in SEC Staff Accounting Bulletin No. 107, “Shared Based Payment,” which is the

 

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midpoint between the vesting date and the end of the contractual term. As we did not plan to pay cash dividends at the grant date of the award, a zero dividend rate is assumed in our calculation. Because our stock is not publicly traded and we have no historical data on the volatility of our stock, our expected volatility is estimated by analyzing the historical volatility of comparable public companies.

The amount of stock-based compensation we recognize during a period is based on the portion of the awards that are ultimately expected to vest. We estimate option forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. Quarterly changes in the estimated forfeiture rate can have a significant effect on reported stock-based compensation expense as the cumulative effect of adjusting the rate for all expense amortization is recognized in the period the forfeiture rate is changed.

The following table provides information on the assumptions used for stock options granted during the periods ended as follows:

 

    

Year ended December 31,

 

Six Months ended June 30,

    

2012

 

2013

 

2014

 

2014

 

2015

                 (unaudited)

Volatility factor

   56%   42%   40%   40%   39%

Expected term

   6.25 Years   6.25 Years   6.25 Years   6.25 Years   6.25 Years

Dividend yield

   —     —     —     —     —  

Risk-free interest rate

   1.04%-1.43%   2.26%   2.22%-2.27%   2.27%   1.92%

Forfeiture rate

   18%   18%   18%   18%   17%

If factors change and we employ different assumptions, stock-based compensation expense may differ significantly from what we have recorded in the past. If there is a difference between the assumptions used in determining stock-based compensation expense and the actual factors which become known over time, we may change the input factors used in determining stock-based compensation costs for future grants. These changes, if any, may materially impact our results of operations in the period such changes are made. We expect to continue to grant stock options in the future and to the extent that we do our actual stock-based compensation expense recognized in future periods will likely increase.

Significant Factors Used in Determining Fair Value of Our Common Stock

In the absence of a public trading market, our Board of Directors, in conjunction with an independent valuation firm, considered numerous objective and subjective factors to determine the fair value of our common stock as of the date of each award, including but not limited to, the following factors: (i) the rights, preferences and privileges of our preferred stock relative to the common stock; (ii) our financial performance and stage of development; and (iii) the likelihood of achieving a liquidity event for the shares of common stock underlying these awards. In valuing our common stock, we first determine a business enterprise value by taking an average of the values calculated under two valuation approaches—the income and market approaches. Once we determine our business enterprise value, that value is allocated to our common stock on a non-marketable minority interest basis. We have various classes of securities, and it is necessary for us to value each class of security for purposes of arriving at the value of the common stock. We used an options-based methodology for allocating the estimated aggregate value to each of our securities using the Black-Scholes-Merton pricing model.

The income approach quantifies the present value of the future cash flows that management expects to achieve from continuing operations. These future cash flows are discounted to their present values using a rate corresponding to our estimated weighted average cost of capital. The discount rate reflects the risk inherent in our cash flows and the market rates of return available from alternative investments of similar type and quality as of the valuation date. Our weighted average cost of capital is calculated by weighting the required return on interest-bearing debt and common equity capital in proportion to their estimated percentages in our capital structure.

 

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The market approach considers multiples of financial metrics based on acquisition values or quoted trading prices of comparable public companies. By reference to the trading and transaction values of publicly traded peers, we calculate a multiple of key metrics implied by their trading price or acquisition values. Based on the range of these observed multiples, we apply judgment in determining an appropriate multiple to apply to our metrics in order to derive an indication of value. As these multiples are observed in public company prices, we apply a marketability discount to reflect the fact that our common stock is not traded on a public exchange. The amount of the discount varies based on our expected timing of a liquidation event such as an initial public offering of our common stock.

Following this offering, it will not be necessary to determine the fair value of our common stock using these valuation approaches as shares of our common stock will be traded in the public market.

Based on an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, the aggregate intrinsic value of stock options outstanding as of June 30, 2015 was $         million, with $         million related to vested stock options.

Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, ASU, No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, or ASU 2013-11. ASU 2013-11 requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. The new standard is to be applied prospectively but retrospective application is permitted. We implemented the provisions of ASU 2013-11 as of January 1, 2015 and it did not have a material effect on our consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties About and Entity’s Ability to Continue as a Going Concern, or ASU 2014-15, which provides guidance on determining when and how to disclose going concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern. The update is effective for annual periods ending after December 15, 2016, and interim periods thereafter. Early adoption is permitted. We will implement the provisions of ASU 2014-15 as of January 1, 2016 and do not expect implementation will have a material effect on our consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, or ASU 2014-09, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for us on January 1, 2018, however application of the standard is allowed as early as January 1, 2017. The FASB recently issued an exposure draft of a proposed ASU that would delay the effective date of ASU 2014-09 by one year and allow for early adoption. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

 

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Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risks in the ordinary course of our business. These risks primarily include foreign currency and interest rate risks as follows:

Foreign Currency Risk

To date, substantially all of our product sales and inventory purchases have been denominated in U.S. dollars. We therefore have not had any material foreign currency risk associated with these two activities. The functional currency of all of our entities is the U.S. dollar. As we grow our operations, our exposure to foreign currency risk could become more significant. To date, we have not entered into any foreign currency exchange contracts and currently do not expect to enter into foreign currency exchange contracts for trading or speculative purposes.

Although we primarily procure and sell our products in U.S. dollars, our manufacturers incur many costs, including labor costs, in other currencies. To the extent that exchange rates move unfavorably for our manufacturers, they may seek to pass these additional costs on to us, which could have a material impact on our future prices and unit costs.

Interest Rate Risk

We had cash and cash equivalents as well as investments totaling $157.9 million, $221.6 million and $275.6 million at December 31, 2013 and 2014 and June 30, 2015, respectively. Our cash and cash equivalents consist of cash in bank accounts as well as restricted certificates of deposits. Our investments are in corporate and municipal bonds, U.S. Treasury securities, mutual funds which are purchased in accordance with our corporate investment policy. Restricted certificates of deposit represent investments in time certificates of deposits that have an original maturity date approximating one month from date of purchase and that renew upon maturity. The primary objectives of our investment activities are to preserve capital and provide liquidity without significantly increasing risk. Our cash and cash equivalents are held for working capital purposes. We do not enter into investments for trading or speculative purposes.

 

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BUSINESS

Our Mission

VIZIO’s mission is to deliver the ultimate entertainment experience through our community of connected consumers, advertisers and media content providers.

Company Overview

VIZIO is transforming the way consumers discover and experience media content through our connected entertainment platform. Since our founding in 2002, we have sold over 65 million televisions and audio and other products and built an industry-leading brand. We have achieved significant U.S. market share of both Smart TVs, or Internet-connectable televisions, and sound bars. Our strong brand, technological leadership and go-to-market strategy have driven the broad adoption of our Smart TVs, creating a community of over 8 million VIZIO connected units, or VCUs. A VCU is a Smart TV that has been connected to the Internet and has transmitted data collected by our Inscape data services. Our Inscape data services capture real-time viewing behavior data from our VCUs and enables us to provide it to advertisers and media content providers. The scale of our VCU community, together with our engaged user base and our Inscape data services, positions us at the nexus of the connected entertainment ecosystem.

As a leading connected entertainment platform, we focus on delivering cutting-edge technology and building a premium global brand. Since we are not vertically integrated, we are able to maintain flexibility and adapt to changes in market demand, product supply and pricing. Our strategic relationships with our manufacturers and retailers as well as our efficient operating model have been critical to the success of our business. We have leveraged our manufacturers’ purchasing power and expertise in supply chain management to drive cost reductions and rapidly scale our business. Our efficient operating model has enabled us to minimize overhead costs, more accurately forecast inventory levels and achieve high inventory turnover. As a result, we have been profitable for the last nine years and have grown our business with minimal external funding.

Our Platform

The VIZIO platform combines our connected entertainment products, discovery and engagement software and Inscape data services:

 

    Connected Entertainment Products. Our Smart TV and audio products combine best-in-class technology with beautifully simple design. Our award-winning products offer industry-leading picture and audio quality and are at the forefront of innovative technology. Our focus on connectivity has driven our consumers to connect their Smart TVs to the Internet at a high rate, with approximately 61% of our Smart TVs having been connected as of June 30, 2015. Our product leadership is highlighted by a number of industry awards including the 2014 CES Editor’s Choice by Reviewed.com for both our P-Series and Reference Series Smart TVs, CNET’s Best Tech Products of 2014 for our M-Series Smart TVs, and Sound & Vision’s Top Picks of 2014 for 42” and 54” Home Theater Sound Bar Systems.

 

    Discovery & Engagement Software: VIZIO Internet Apps Plus. Our discovery and engagement software, VIZIO Internet Apps Plus, connects consumers to a wide range of premium entertainment content and enhances the value of our products. We provide an intuitive and engaging interface that enables viewers to easily discover and engage with entertainment and other content on our Smart TVs from traditional and streaming content providers, such as Netflix, Hulu, YouTube and Amazon Instant Video. Since 2009, users have streamed more than 3 billion hours of content through our discovery and engagement software.

 

   

Inscape Data Services. Our Inscape data services capture, in real time, up to 100 billion anonymized viewing data points each day from our over 8 million VCUs. Inscape collects and stores data regarding most content displayed on VCU television screens, including content from

 

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cable and satellite providers, streaming devices and gaming consoles. Inscape provides highly specific viewing behavior data on a massive scale with great accuracy, which can be used to generate intelligent insights for advertisers and media content providers and to drive their delivery of more relevant, personalized content through our VCUs.

LOGO

Consumer Use and Engagement Model

We believe our business focus enables a self-reinforcing consumer use and engagement model that we expect to fuel our growth while driving revenue. Our connected entertainment products and discovery and engagement software provides a personalized entertainment experience for consumers that enhances our brand and helps generate additional sales of our products. As more consumers buy our connected entertainment products, Inscape gathers more anonymized data on viewing behaviors, which we can deliver to advertisers and media content providers. These companies in turn can deliver more relevant and personalized content for viewers, further enhancing the entertainment experience. We believe this self-reinforcing cycle will increase our brand awareness and enhance demand for our connected entertainment products.

 

 

LOGO

 

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Our Market Position

Our strong market position is underscored by our growth and market share in Smart TVs and audio products. The scale of our connected platform is illustrated by the volume of content delivered through our products and large amount of real-time data we collect from our VCUs about viewing behaviors and preferences.

LOGO

 

(1) The NPD Group/Retail Tracking Service, LCD TV units with apps included, total units sold in the U.S., January 2014 – December 2014; The NPD Group/Retail Tracking Service, sound bar units sold in the U.S., January 2014 – December 2014.
(2) Based on VIZIO internal data as of June 30, 2015.
(3) Based on VIZIO internal data as of July 15, 2015.

We have rapidly grown to become a leading Smart TV and audio brand. Our products are sold in over 8,000 retail stores across the United States. Our strong brand, technological leadership and go-to-market strategy have driven significant growth in recent periods. For the years ended December 31, 2013 and 2014 and the six months ended June 30, 2015, we generated net sales of $3.0 billion, $3.1 billion and $1.3 billion and reported net income of $25.7 million, $45.0 million and $31.4 million, respectively. Substantially all of these amounts were generated from the sale of televisions and sound bars.

 

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Our Market Opportunity

 

 

LOGO

 

(1) Global market spend

High-Definition Television. Currently, we compete primarily in the North American high-definition television market, which was estimated by IHS Technology as a $21.1 billion market as of 2014. To date, substantially all of our product sales have occurred in the United States, although we have sold a relatively smaller number of products in Canada and Mexico. While television viewership levels are expected to remain stable, changing consumer preferences for content discovery and engagement are revolutionizing the way people consume video entertainment. The proliferation of Internet-enabled video delivery has dramatically increased content choice and convenience for consumers. IHS Technology is projecting shipments of Smart TVs to experience steady growth in North America, increasing from 15.6 million units in 2014 to 20.5 million units in 2019, representing a 5.6% compound annual growth rate. Furthermore, according to IHS Technology, Smart TVs are expected to comprise an even greater percentage of North American annual television shipments, rising from 35.8% in 2014 to 49.1% in 2019. Moreover, while we have not historically focused on opportunities outside of North America, international revenue for high-definition television shipments totaled $77.1 billion in 2014, according to IHS Technology, and international markets represent a natural extension of our current market focus.

We believe that the Smart TV will be at the center of the entertainment ecosystem and will help drive rapid innovation across multiple industries. While the television continues to be the preferred medium of entertainment content consumption, the manner in which advertising and content is being delivered to the end consumer is changing. This change has resulted in fragmented viewing audiences and creates new challenges for advertisers and media content providers looking for more relevant, measurable and interactive solutions to address the needs of consumers. As consumers continue to shift their content preferences towards digital mediums, and as we continue to expand our connected platform, we believe there is an opportunity to extend our addressable market.

 

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Video on Demand, or VOD. As content delivery shifts from linear to digital, streaming continues to grow rapidly as viewers access time-shifted video content. According to Markets and Markets, the global VOD market is forecasted to grow from $25.3 billion in 2014 to $61.4 billion in 2019, representing a compound annual growth rate of 19.4%. We believe that our platform, which enables ease of discovery and access to digital content for television viewers, creates the opportunity to deliver and monetize additional services relating to this market.

Audience & Advertisement Measurement. Changes in media consumption are revolutionizing the manner in which advertisers and media content providers conduct market research. Advertisers and media content providers are looking for access to accurate, real-time data regarding consumer preferences and behaviors so they can better measure and increase their return on content creation and advertising spend. We believe total global market spend on audience and advertisement measurement services was approximately $1.9 billion in 2014, and represents an attractive market opportunity for our Inscape data services.

Television/Digital Advertising. According to eMarketer, U.S. digital advertising spend has grown at a compound annual growth rate of 17.4% from 2012 to 2014, driven largely by the ability to accurately target relevant consumers and measure return on advertising spend. Television advertising spend in the United States, however, represents the largest advertising medium with approximately $68.5 billion spent in 2014, according to eMarketer. We believe recent advancements in television data and analytics capabilities will bring the optimization benefits of digital advertising to television advertising, allowing us to attract digital advertisers and capitalize on digital growth trends through our Inscape data services.

Mobile/Television Commerce. The rise of mobile devices has changed the way consumers browse, shop and purchase from retailers. According to eMarketer, in 2014, U.S. consumers spent $58.1 billion on products and services using Internet-enabled mobile devices, such as tablets and smartphones. We believe that the Smart TV represents a future driver of retail mobile commerce sales as consumers will be able to simultaneously view complementary content and advertising on their tablet or smartphone and easily purchase goods and services seen on the television screen with those handheld devices. A Nielsen study found that roughly 40% of tablet and smartphone owners use their device as a “second screen” daily. According to a recent Delivery Agent survey, 68% of respondents were interested or very interested in using their television to shop.

Powerful Trends Driving Our Market

Several powerful trends are driving the growth of the television and advertising markets:

Advances in technology are enhancing the television viewing and audio playback experience. Revolutionary technological innovations, such as Ultra-High Definition, or UHD, High-Dynamic-Range, or HDR, and 3D vector-based audio reproduction offer major enhancements to the entertainment experience. UHD televisions deliver four times the picture resolution and, in combination with other new technologies like Full Array LED backlighting with Active LED Zones, can deliver higher contrast ratios, better frame refresh rates and a more lifelike viewing experience when compared to current high-definition televisions. HDR televisions will deliver a brighter picture with an ultra-wide color spectrum of more than 1 billion possible colors, which creates an image with up to 64 times the amount of detail as compared to prior technology. Improvements in electronics and manufacturing technology are making televisions lighter, thinner and less expensive, thereby driving an increase in demand for larger televisions. Furthermore, improvements in sound quality, wireless connectivity and design are driving consumer demand for audio products to pair with televisions. We believe these factors represent major consumer upgrade catalysts and should accelerate the replacement cycle of prior generation televisions and audio products. According to IHS Technology, shipments of UHD televisions in North America reached over 1.5 million units in 2014 and are expected to reach 18.2 million units in 2018, representing a compound annual growth rate of 87%.

The television is finally connected to the Internet. The wide adoption of high-speed broadband Internet access has enabled a vast range of bandwidth-intensive video and Internet services to be delivered directly to the television. According to eMarketer, U.S. household broadband penetration was 76% in 2014. Broadband

 

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connectivity has driven demand for Smart TVs, which allow consumers to access and view content as a connected entertainment experience on the largest screens in their home. In addition, Smart TVs also enable consumers to engage and transact with other Internet-enabled services that deliver content such as social media, music, photos, news and more. As new technologies and services are introduced, we believe Smart TVs will be an integral part of the connected, digital home due to their connectability and larger, higher quality screens which drive a more immersive and enjoyable viewing experience.

Consumers demand an intuitive, easy-to-use interactive entertainment experience. The television is the primary device used by U.S. consumers for content and media viewing due to their preference for larger and higher quality screens. U.S. consumers spend an average of 31 hours per week watching television, according to eMarketer. This figure has remained stable over the past five years, despite recent growth in smartphone and tablet media consumption, which has been incremental to television consumption. We believe consumers want to search for and discover content, regardless of source, on their television through intuitive and easy-to-use interfaces as well as applications that offer optimized experiences, in the same manner they do on their smartphone or tablet. Consumers also desire seamless integration between the multiple screens they are using, such as using a mobile device to interact with their television for discovery, streaming or to view complementary content. We believe innovations in discovery and engagement software functionality and ease-of-use will increase consumer engagement with the television as seamless access of content across multiple screens greatly enhances the entertainment experience.

Delivering personalized content to consumers requires next generation viewing data and analytics capabilities. Smart TVs enable content consumption from multiple sources, greatly increasing the volume of content available to consumers. In June 2014, the Consumer Electronics Association reported that, in the 12 months ended April 2014, 45% of U.S. television households were streaming content on their TVs, up from 28% in the 12 months ended April 2013. This trend has further increased the difficulty for content creators and distributors to collect and decipher viewing behaviors using traditional means such as consumer surveys and sampling. The collection and analysis of viewing data is crucial to create and distribute content that further enhances consumers’ viewing experiences.

Advertisers want to leverage viewing data to deliver more targeted ads. The Internet has enabled advertisers, media content providers and analytics providers to deploy more relevant, personalized advertising through computers and mobile devices based on user behavior. This trend of personalized advertising has not previously been possible through traditional televisions, which were not connected to the Internet. Meanwhile, television advertising continues to represent the largest portion of total U.S. media advertising spend, at 39% of total spend in 2014, according to eMarketer. Smart TVs now enable advertisers to leverage real-time viewing behavior data to deliver more effective, targeted advertising campaigns. We believe the ability to collect and analyze real-time viewing data will enable measurable and increased return on marketing investment, enhance the value of television advertising, and drive increased television advertising spend.

Our Solution

The VIZIO connected platform delivers quality entertainment experiences and accurate viewing behavior data through:

Leading product design with broad market appeal. We are an industry-leading technology innovator with broad market consumer brand appeal, delivering best-in-class products. We are also developing the next generation user experience for intuitive discovery and access to a wide variety of content. We relentlessly pursue our goal of delivering premium quality video and audio products in a way that helps accelerate mass adoption of new technologies, including UHD and HDR technology, and on a broad range of display sizes ranging from 24” to 120”. We were the first television brand to enable our retailers to offer a 50” UHD Smart TV at a less than $1,000 retail price.

 

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Intuitive, powerful and personal user interface. We believe that increasing consumers’ enjoyment of their entertainment experience enhances the value of our products. Our Smart TVs connect consumers with an intuitive yet powerful user interface, capable of facilitating discovery of and engagement with a wide variety of content as well as relevant, personal content recommendations based on their viewing behavior. Viewers can quickly and easily discover and engage with entertainment and other content from traditional and streaming content providers on our Smart TVs.

Real-time data on our consumers’ viewing behavior. Our Inscape data services and community of over 8 million VCUs enable us to capture up to 100 billion anonymized viewing data points each day. We believe this user base is large enough to reflect U.S. census demographics, which we believe enables us to offer higher quality, more accurate and timely viewing behavior data than previously available from other sources. This real-time data will allow us to provide the media and advertising ecosystem with actionable viewership insights. With an approximate 61% connection rate and the scale and diversity of our community of connected units in the United States, we believe we provide more accurate viewing behavior data at scale in real time, than any other brand.

Advertising and content optimization for the marketing and media ecosystem. We are developing strong partnerships with advertisers, media content providers and analytics providers, and brands to monetize our connected platform. VIZIO’s platform can provide these parties with anonymized, highly specific viewing data using our Inscape data services. We believe the monetization of our connected platform through these partnerships will represent a significant component of our solution set in the future.

Our Competitive Strengths—What Sets Us Apart

We believe that the following strengths are the keys to our success:

Leading Consumer Brand. We have built a strong, recognized and trusted brand that symbolizes premium technology, quality and value. Our products provide consumers with cutting edge picture and audio performance that enhances their entertainment experience while being intuitively simple and engaging to use. We have made significant investments to support both awareness and engagement with our brand, with over $300 million of marketing expenses to prominently feature our brand at events such as the 2014 Centennial Rose Bowl Game, and as the 2015 Official Home Entertainment Sponsor of the American Film Institute. Since our founding in 2002, VIZIO has built a highly recognizable brand in the United States, with seven out of ten respondents recognizing VIZIO, and eight out of ten VIZIO owners recommending VIZIO to their friends and family, according to a 2015 survey conducted by survey solutions company Toluna commissioned by us. We believe that the power of our brand has driven our strong market share, high recommendation rates and adoption of new products. For example, in sound bar audio systems, VIZIO was the #1 market leader in 2014 in units sold.(6)

Premium Product Design and Technology. We offer a selection of premium media entertainment products, including televisions, sound bars and other Smart TVs designed to enhance the entertainment experience. Using consumer research and feedback, we focus on creating products that combine best-in-class video and audio performance with powerful user interface software that simplifies access to a wide variety of entertainment content. We have deployed new technologies that advance the picture and audio quality of our products, such as UHD, HDR, Ultra Color Spectrum, full-array LED backlight designs and new picture processing technologies that have been consistently recognized and awarded by industry press.

Positioned at the Nexus of the Connected Entertainment Ecosystem. We are strategically positioned at the center of the connected entertainment ecosystem. Our Smart TVs can collect viewing behavior data from any connected media source (e.g., set-top boxes, digital video recorders, streaming media players, blu-ray and DVD players and gaming consoles), which generates a broader data set than can be obtained from any single media

 

(6) The NPD Group/Retail Tracking Service, sound bar units sold in the U.S., January 2014—December 2014.

 

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source. We can provide this broader data set, at scale and with real-time delivery, to advertisers and media content providers, who in turn can create more relevant, personalized entertainment experience and drive further engagement.

Efficient Operating Model. We have been profitable for the last nine years and have grown our business with minimal external funding. Our strategic relationships with our manufacturers and retailers as well as our efficient operating model have been critical to the success of our business. We have leveraged the purchasing power and expertise in supply chain management of our manufacturers to drive cost reductions and rapidly scale our business. Our efficient operating model has enabled us to minimize overhead costs, more accurately forecast inventory levels and achieve high inventory turnover. This efficient model has enabled us to minimize our daily funding needs and allows us to invest excess cash in product innovation.

Proven Management Team. We have assembled a proven management team that is led by one of our founders, William Wang. Our current management team has been with VIZIO for an average of nine years and collectively has over 100 years of industry experience. Our leadership team shares a passion for creating world class entertainment products with focus on building teams and scalable processes that execute with high efficiency.

Our Growth Strategy

We intend to continue to grow our business and expand into new markets. Key elements of our growth strategy include the following:

Continue to Introduce Innovative Products and Functionality. We relentlessly pursue our mission of delivering the ultimate media entertainment experience. To accomplish this mission, we are focused on continued product innovation and leadership. We plan to increase our investment in research and development to expand and enhance the features and capabilities of our award-winning products, including our discovery and engagement software, 3D vector-based audio reproduction and Inscape data services. We plan to leverage our brand strength and efficient operating model to opportunistically enter new product categories.

Continue to Monetize our Platform. We believe that our strong and growing installed base of Smart TVs positions us well to become a leading solution provider in the connected entertainment ecosystem. With over 8 million VCUs, the size of our user base compares favorably to the television subscriber bases of AT&T U-Verse, Verizon FiOS and Cox Communications, providing us with an opportunity to create additional revenue streams in the form of paid advertising placements, software applications for content search, control and recommendations as well as insights into end consumer behavior. Additional monetization opportunities include developing enhanced capabilities such as intelligent search and discovery features, improving our ability to deliver relevant content as well as advanced viewership analytics.

Expand into Markets Outside of North America. Leveraging our efficient operating model, we have begun to expand into international markets beginning with Canada and Mexico. We intend to expand into additional international markets based on the anticipated demand in these markets for our platform, including Inscape data services. These countries represent significant addressable markets that present an attractive opportunity to expand our brand footprint and grow our sales volume and profitability. International revenue for high-definition television shipments totaled $77.1 billion in 2014, according to IHS Technology. We intend to expand into these markets by continuing to partner with our existing retail partners and manufacturers, as well as expanding our on-line retail presence.

Increase Penetration within U.S. Retailers. Since the introduction of our products at a mass market retailer in 2006, we have successfully penetrated most of the wholesale club and mass market retailers in the United States, including Costco, Sam’s Club, Best Buy, Target and Wal-Mart. Currently, the VIZIO brand is carried in major retailers across the United States occupying approximately 150,000 shelf spaces, up

 

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approximately 10% year over year since Spring 2014. According to Gap Intelligence, as of June 30, 2015, VIZIO held the #1 or #2 HDTV shelf share at major consumer electronics retailers such as Wal-Mart, Best Buy, Costco, Sam’s Club and Target. However, we believe there is an opportunity to expand shelf space of our products with our existing retailers to take further market share from our competitors. We believe our distribution footprint covers a significant portion of the U.S. consumer electronics market, but we have not yet made a focused effort to penetrate regional independent retailers. We believe that these regional independent retailers represent a significant growth opportunity for us, and we plan to capitalize on the strength of our brand to increase our presence. We intend to work with retailers to expand the footprints of our merchandising displays and shelf space for both our television and audio products, with a particular focus on our premium product lines, such as our UHD large screen Smart TVs. We will continue to invest in producing and installing VIZIO-branded merchandising displays to prominently showcase our products in many of the retail outlets in which our televisions and audio products are offered.

Continue to Invest in Our Brand. As the television industry becomes more concentrated, we believe established brands will gain additional market share. In 2014, VIZIO had significant U.S. market share for Smart TVs and in the overall U.S. television market. In sound bar audio systems, VIZIO was the #1 market leader in 2014 units sold.(7) Since our founding in 2002, VIZIO has built a highly recognizable brand in the United States, with seven out of ten respondents recognizing VIZIO, and eight out of ten VIZIO owners recommending VIZIO to their friends and family, according to a 2015 survey commissioned by us and conducted by survey solutions company Toluna. We will continue to invest in our brand to strengthen our foothold in the United States, while simultaneously leveraging our previous success to expand our brand internationally.

Our Products

We offer a wide array of connected entertainment products including a portfolio of Smart TVs, sound bars and other accessories that address the full range of consumers, from college students to mainstream families to cinephiles. Our innovations center around identifying the feature sets that address the needs of each consumer segment, building technologies in partnership with other industry leaders, and integrating them into our product offerings with a focus on leveraging our scale to drive down our cost of goods in order to accelerate mass adoption of compelling new technologies.

 

(7) The NPD Group/Retail Tracking Service, sound bar units sold in the U.S., January 2014—December 2014.

 

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Television Portfolio

Our broad television portfolio consists of five series, each designed to target a specific consumer segment and their needs for best-in-class picture quality, powerful processing and video performance, streamlined connectivity and convenience features, and a stylish, modern industrial design that can complement any décor.

Since our founding in 2002, we have continually focused on advancing the picture quality of flat screen displays with investments in key technologies that increase contrast levels for brighter whites and deeper black levels, produce more accurate and wider ranges of color, and drive better clarity and detail in images, especially in fast moving scenes. In 2014, we were the first to bring advanced direct LED backlighting to the mass market, across every model in our collection. Capable of producing richer contrast levels and more vibrant picture quality than conventional backlighting technologies, we optimized the design of each model to take advantage of full-array LED backlighting, even across our entry-level E-Series collection, to deliver the best possible picture quality for each consumer segment.

 

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Audio Portfolio

We sell additional products that enhance the functionality and versatility of our television products and enable a better viewing experience for our consumers. Our broad collection of high performance audio products delivers the home theater experience with designs optimized to fit the user’s room and television size. From simple 2.0 sound upgrades for bedroom TVs, to 5.1 surround sound for the growing market of 55” and larger TVs, our audio products also feature simple setup and Bluetooth streaming.

As an early entrant in the sound bar category, we have learned to optimize the industrial design and feature sets of our audio products through iterative consumer studies resulting in products that we believe resonate with the consumer. Every sound bar includes Bluetooth to allow consumers to easily pair and stream music from their mobile device or personal computer, and every sound bar includes clear, quick-start instructions, mounting guides and all of the common cables necessary for set-up, improving the out-of-box experience and reducing support calls.

Our audio lineup also addresses another key consumer insight that has evolved over the last five years. According to CEA’s 17th Annual CE Ownership and Market Potential Study, the average U.S. household owns 2.8 TVs, suggesting that the television has migrated from the living room to bedrooms, dens and other living spaces of various sizes. Understanding that the quality of the audio experience is in part dependent on properly creating the right sound stage for the size of television in the room, we have designed our sound bars to align with the most popular sizes of TVs and mapped them with the key user segments that seek upgrades from simple 2.0 channels to a full 5.1 surround sound experience:

 

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Discovery and Engagement Software

Our Smart TVs are currently powered by our second generation connected platform, called VIZIO Internet Apps Plus, that enables consumers to easily discover and engage with premium content services such as Netflix, Hulu, YouTube and Amazon Instant Video. Our consumer-focused approach to our Smart TV platform emphasizes usability to allow users to surf seamlessly between over-the-top, linear or recorded content. The ease-of-use of our platform is reflected in our connection rate, with approximately 61% of our Smart TVs having been connected as of June 30, 2015, and has made VIZIO a leading Smart TV brand, with approximately 13 million cumulative Smart TVs shipped to date. For the six months ended June 30, 2015, approximately 74% of the televisions we shipped were Smart TVs.

 

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With quick one-click button access on the VIZIO Smart TV remote, the VIZIO Internet Apps Plus user interface displays a streamlined App Launcher that allows users to quickly browse favorite apps along the lower portion of the screen, without disrupting current video playback. The VIZIO Smart TV remote enables users to conveniently and quickly access, browse and control playback of streaming and traditional content sources, featuring a built-in keyboard (on premium product lines) that allows users to efficiently search, enter credentials or even play games. A simple double click of the VIZIO button on the remote then displays the full collection of apps available through the Full Screen Apps Window which allows users to easily discover, personalize, and launch new apps. In addition, the remote also features three shortcut keys to top premium content services, further reinforcing user discovery and engagement with VIZIO’s software platform.

 

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Our Smart TV experience also supports seamless integration between smartphones, tablets and the TV, using the DIAL protocol to enable users to browse for content on supporting apps like Netflix and YouTube on their mobile device, then just click to seamlessly play content on the TV.

 

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Inscape Data Services

Inscape data services are powered by automatic content recognition, or ACR, technology that leverages VIZIO’s base of VCUs to collect viewing behavior data about most content displayed on our Smart TVs. Our Inscape data services have the ability to collect viewing behavior from any content displayed on the screens of our Smart TVs. We currently collect viewing behavior on most content that connects to our Smart TVs via external input. However, we do not currently collect viewing behavior streamed through VIZIO Internet Apps Plus or on Smart TVs located outside the United States. Inscape metrics can be used to enhance consumers’ experience and provide significant value by delivering proprietary insights into content consumption, which in turn may be used real-time by Inscape customers to deliver to consumers a wide array of advanced entertainment experiences, from interactive to relevant promotions and advertising, to opportunities to browse and buy content, goods and services. Advertisers and media content providers also will be able to glean specific insights that may enable them to make better-informed decisions regarding content production, programming and advertising. To date, we have entered into data licensing agreements with several analytics service providers and are in discussions with additional potential licensees of our data.

Inscape data services’ ability to collect and measure viewing behavior data from content displayed on our entertainment products positions us at the center of the connected entertainment ecosystem. Our Smart TVs can collect viewing data behavior from all media sources that connect via external input to our Smart TVs (e.g., set top boxes, digital video recorders, streaming media players, blu-ray and DVD players and gaming consoles), which generates a richer data set than can be obtained from any single media source. We can deliver this richer data set to advertisers and media content providers, who in turn can deliver more relevant, personalized content for viewers, enhancing the consumer entertainment experience.

 

 

 

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Awards and Accolades

We have received numerous top-rated product recommendations from highly regarded industry publications such as CNET.com, PCMag.com, PC World and Popular Mechanics. In recent years, we have received a number of industry awards including:

E-Series Televisions:

 

    In 2014, we received the Top Pick award from Sound & Vision magazine for our E-Series TVs.

 

    In 2014, we were named Reviewed.com’s Best Television Under $500 and Best Mid-range LCD TV for our E-Series TVs.

M-Series Televisions:

 

    In 2014, we received the Top Pick award from Sound & Vision magazine for our M-Series TVs.

 

    We were named one of CNET’s Best Tech Products of 2014 for our M-Series products.

P-Series Televisions:

 

    Wired named the P-Series the Best of CES.

 

    TheVerge named the P-Series as Best TV—CES 2014.

 

    In 2014, Reviewed.com named the P-Series as Best Value 4K Television.

Reference Series Televisions:

 

    At CES 2014, Reviewed.com named the Reference Series as their Editors’ Choice.

 

    IGN named the Reference Series as their Best of CES 2014.

Audio Products:

 

    At CES 2013, CNET.com named the 42” 5.1 Sound Bar System their Best of CES Audio Product.

 

    Sound & Vision named the VIZIO 42” 2.1 and 5.1 Sound Bar Systems Top Picks of the Year in 2014.

In addition, VIZIO’s customer service, which is entirely U.S.-based, is consistently recognized for excellence. We were awarded 2014 Gold, Silver and Bronze Stevie Awards for Sales & Customer Service, have received 40 awards for customer service over four years, and were ranked by J.D. Power as “Highest in Customer Satisfaction with HDTVs” in 2012 and “Highest in Customer Satisfaction with HDTVs Less Than 50 Inches in a Tie” in 2013.

Our Privacy Practices

We maintain privacy policies on our website and direct consumers to these policies on our Smart TVs. These policies disclose to consumers how we collect, use and share information collected from or about them personally or their VIZIO devices. We make diligent efforts to ensure these policies are accurate, comprehensive, and fully implemented, consistent with Federal Trade Commission and other regulatory guidance or requirements. We also make diligent efforts to keep our policies updated as our privacy practices may change,

 

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and to promptly notify consumers of any such changes to our privacy practices. We currently collect personal information, which we define as data that can be used to identify or contact a single natural person, including name and contact information (such as email address or street address), from consumers who provide this data directly to VIZIO, as they interact with us, for example to register our products for warranty purposes, seek customer service, or participate in promotions such as sweepstakes. We store, process, and use this personal information for internal purposes, such as marketing and research and development, and we also may make it available to third parties for limited purposes, such as warranty service providers. We collect payment details as needed to process purchases or other customer transactions. We also collect non-personal information, which we define as data that does not in and of itself permit direct association with any specific person. Examples include unique device identifiers associated with our Smart TVs, the IP addresses associated with a Smart TV, the zip code associated with the IP address, and attributes of content displayed on our Smart TVs which are matched against a database of content drawn from studios, networks and other content providers. This information does not include name or contact information. We collect this non-personal information principally through our Smart TVs, and we may share this passively collected non-personal information with our ACR service providers, advertisers and other third parties. Our Smart TVs collect this non-personal information by default, but consumers have the means to opt out of (disable) this tracking through the Smart TV user settings. Disabling the collection of this non-personal information does not otherwise affect the performance of the Smart TV or any online services. We send the non-personal information we collect to our ACR service providers to determine the viewing data used in our Inscape data services.

Marketing

We expect that our reputation for premium and innovative products will continue to play a significant role in our growth and success, and that the high customer satisfaction of our consumers will continue to fuel word of mouth referrals of our brand to new customers. Since our founding in 2002, VIZIO has built a highly recognizable brand in the United States, with seven out of ten respondents recognizing VIZIO, and eight out of ten VIZIO owners recommending VIZIO to their friends and family, according to a 2015 survey commissioned by us and conducted by survey solution company Toluna.

In addition, we expect to continue our investment in advertising and marketing programs that further build brand awareness, drive deeper brand engagement and foster long-term brand loyalty. Our marketing programs focus on engaging the wide spectrum of consumers from first-time shoppers to premium home theater enthusiasts, and leverage traditional advertising, high-impact sponsorships, and public relations, as well as more innovative digital marketing, social media, and retail marketing strategies that drive consideration and purchase.

Brand Marketing

We focus on maximizing the efficiency and reach of our marketing spending by investment in programs that not only have mass market reach but also fuel active engagement with the brand. Early on, we employed the use of full-color packaging that served as high-impact advertising in wholesale and retail channels, accelerating initial consumer awareness and education about our products with minimal additional cost.

 

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marketing campaigns to drive media impressions into digital and offline engagement with the brand. In addition, we have sponsored television shows such as ESPN’s SportsCenter, the NFL Network’s Total Access, and The Tonight Show Starring Jimmy Fallon where we believe we can reach a target audience that appreciates the core value proposition of our products.

 

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Digital Marketing

In addition to paid media, we have developed innovative digital marketing programs to leverage shared, earned and owned media to efficiently drive brand engagement and consideration. In 2013, we launched Fandemonium, an online social community that recognizes and rewards fans for their engagement with the VIZIO brand, its entertainment partners, such as Netflix, Hulu Plus, YouTube, and Pandora and its retail partners like Best Buy and Wal-Mart. Fandemonium also leverages partnerships with brand ambassadors to fuel discovery and engagement with their fan bases. Our recent success with Fandemonium represents our focus on using highly efficient omni-channel campaigns that can convert paid media impressions into engagement through earned, owned and shared media that drive longer-term brand loyalty.

 

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As our products tend to be highly researched purchases, we have invested in building robust digital marketing programs to help drive shoppers along the consumer journey, with resources such as educational websites and product videos to explain new technologies like UHD and home theater audio quality, editorial content promoted through native advertising, and innovative tools like VIZIO Showroom, an augmented reality app that lets shoppers visualize their new VIZIO TV in their home before they purchase. With VIZIO Showroom, shoppers have the ability to select and compare various sizes and models of VIZIO TVs, see the item in three-dimensional space to help identify the best screen size for their space, share photos of their desired VIZIO TV on social media and learn more or shop for the product on VIZIO.com.

 

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Retail Marketing

Our in-store merchandising strategy focuses on engaging consumers with premium point of purchase displays that showcase the picture and audio quality of our products, explain the benefits of VIZIO’s technologies and features, and help streamline the final purchase decision with simple, consistent messaging across all communication points at point of sale, including packaging, fact tags, and other item level signage. Our merchandising programs are designed to target the key demographics of the shoppers in each channel and are optimized for effective deployment and compliance with each retailer’s operations, from mass market to warehouse club to premium electronics retail environments.

 

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Distribution and Sales

While we sell to large and small retailers across the United States, Canada and Mexico, and directly to consumers through our e-commerce channel, we have historically focused on the large scale distribution channels to drive the most efficient economies of scale and accelerate our market share in a relatively short period of time. This proved to be a highly successful strategy as we have rapidly achieved a leading market share position. This approach enabled us to keep our fixed costs low and grow revenue rapidly with low headcount. The VIZIO brand is carried in major retailers across the United States occupying approximately 150,000 shelf spaces. We believe that our retailer partners make up a significant portion of the total U.S. consumer electronics market. According to Gap Intelligence, as of June 30, 2015, VIZIO held the #1 or #2 HDTV shelf share at major consumer electronics retailers such as Wal-Mart, Best Buy, Costco, Sam’s Club and Target. We plan to continue to expand our product offerings to capture a higher share of shelf space at existing and new retail customers.

Warehouse Clubs and Mass Market Retailers

Our distribution strategy was initially focused on large wholesale and discount warehouse clubs such as Sam’s Club and Costco. By selling through this channel, we were able to drive sales and brand awareness with a highly efficient operating model. In addition, we initially faced less competition in this channel as larger, more established consumer electronics manufacturers preferred selling products at traditional big box retailers. We believe that our initial focus on the warehouse and discount club channel offered a unique value proposition to consumers. Building upon our success in the warehouse club channel, in 2007 we began to sell to mass market retailers with a national presence, representing a majority of the U.S. television market in 2014. These retailers include Best Buy, Target and Wal-Mart. We support these retailers with a dedicated and experienced sales management team enabling us to build strong relationships with these retailers. These retailers generally carry a broad assortment of our products targeting their particular customers.

For the years ended December 31, 2012, 2013, and 2014, we generated 85%, 84% and 80% of our net sales from four major customers. For the six month periods ended June 30, 2014 and 2015, we generated 82% and 81% of our net sales from four major customers. Costco, Sam’s Club and Wal-Mart each accounted for more than 10% of net sales in each of the periods noted, and Best Buy also accounted for more than 10% of net sales in each period beginning in 2013. For the year ended December 31, 2014, Wal-Mart and Sam’s Club comprised 40% and 12% of our net sales, respectively. Wal-Mart, Sam’s Club and several other entities purchasing from us are affiliates under common control, and collectively they comprised 54% of our net sales for the year ended December 31, 2014. However, throughout our history and presently, we have dealt with separate purchasing departments at Wal-Mart and Sam’s Club, and have at times sold products to Sam’s Club without selling products to Wal-Mart.

 

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Regional Retailers

We continue to build our relationships with distributors to expand into new channels, such as regional independent retailers, which are chains that generally sell in only a particular region of the United States. We believe that they provide an attractive growth opportunity for our business with retail models that can drive additional sales for our premium product lines.

Online Retailers

We offer our products online through large online retailers, which represented a smaller portion of the U.S. television market in 2014, such as Walmart.com and Amazon.com. We also sell our products directly to consumers through our online store at www.VIZIO.com, which we believe offers a best-in-class online shopping experience and is a key resource of timely and direct consumer feedback. We advertise our website to consumers through highly efficient traffic drivers such as search and shopping engines as well through awareness marketing programs such as sponsored events.

Consumer Experience and Support

We believe that one of our key differentiators is our focus on the consumer experience. Our motto, Beautifully Simple, reflects our goal of creating intuitive user experiences that solve for the most relevant pain points experienced by consumers. We leverage feedback from our award-winning, U.S.-based customer call center in the Midwest to improve our design in both performance and simplicity with each product design cycle. We believe that our focus on simplifying the initial consumer experience minimizes the need for backend support.

To maintain control over the quality of service, our customer service operations are domestically based. We outsource call center support to two service providers based in the United States only in situations where inbound calls exceed our capacity, especially during peak season demand on Black Friday and during the holidays. We spend a significant amount of time vetting these providers with the goal that they provide the same high quality of service our customers have come to expect. During periods of normal activity, our customer support personnel are responsible for handling general customer inquiries, answering customer questions about products and solving technical issues customers may have. Our customer service representatives also report the feedback that they gain from customers to our product development team on a monthly basis, so that we can continuously improve our products’ design and ease of use, installation and usability. We train and empower our customer support staff to solve issues and remedy situations in a timely manner, increasing customer satisfaction. We have received numerous industry awards including 2014 Gold, Silver and Bronze Stevie Awards for Sales & Customer Service.

Manufacturing and Operations

While all of our products are designed in California, we currently outsource manufacturing to a diversified base of manufacturers including Hon Hai Precision Industry Co., Ltd. (Foxconn), Wistron, TPV and AmTRAN, which purchase components and assemble our televisions and other entertainment products in facilities in China and Mexico. Although we do not have any long-term purchase contracts, we have executed product supply agreements with these manufacturers, which provide indemnification for intellectual property infringement, agreed upon price concessions, product quality requirements and vendor managed inventory expectations. We are not vertically integrated, which provides us with flexibility and an ability to adapt to market changes, product supply and pricing while keeping our fixed costs low. Our strategic relationships with our manufacturers are critical to new product introduction and the success of our business. We have strong relationships with our manufacturers, helping us meet our supply and support requirements.

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manufacturers for each of our finished products. Our operations team based in the United States and China coordinate with our manufacturers’ engineering, manufacturing and quality control personnel to develop the requisite manufacturing processes, quality checks and testing and general oversight of the manufacturing activities. We believe this model has enabled us to effectively and efficiently deliver high quality and innovative products while enabling us to minimize costs and manage inventory risk.

Research and Development

We are passionate about designing cutting-edge products that drive consumer demand and enhance our brand. We believe that our future success depends, in part, upon our ability to continue to develop innovative new products, enhancements to our existing products, and enhanced functionality and ease of use. We will continue to employ a consumer focused design approach by providing innovative products that respond to, anticipate and even drive consumer desires for enhanced picture quality, audio quality, functionality, design and ease of use.

Our strong relationships with our manufacturers give us access to a significant pool of research and development resources with the common goal of developing quality products that are accessible to consumers. Although we design our products in-house, we outsource the majority of our research and development as well as leverage the resources of our suppliers’ research and development functions in the development of new product introductions.

We carefully design our products to be aesthetically pleasing, with a focus on premium picture quality and an intuitive user experience. Our products include next generation technology, such as full-array LED backlighting, which enhances the viewing experience.

Logistics and Fulfillment

The parts for our products are procured directly by our manufacturers. We utilize our business planning team to obtain competitive pricing on certain components, and we leverage our manufacturers’ volume purchases for best pricing on common parts. Televisions, sound bars and accessories are typically manufactured and packaged for retail sale and shipped via ocean freighter from our manufacturers in China and by trucks from our manufacturers in Mexico to logistics hubs. Our business planning team also coordinates with our manufacturers to ensure the shipment of our products from the manufacturer to these logistics hubs meets customer needs. We typically take ownership of the products directly from these logistics hubs, and our logistics team manages this process as we deliver the products to our customers. We utilize a vendor-managed inventory strategy that allows us to reduce costs across the entire supply chain and improve inventory flexibility.

Competition

We believe the principal competitive factors impacting the market for our products are brand, price, features, quality, design, customer service, time-to-market and availability. We believe that we compete favorably in these areas. The consumer electronics market in which we operate is highly competitive and includes large, well-established companies. We face competition from large consumer electronics brands such as Samsung, Sony, LG, Sharp, Toshiba, Panasonic and Funai. Many of our competitors have greater financial, distribution, marketing and other resources, longer operating histories, better brand recognition and greater economies of scale. In addition, these competitors have long-term relationships with many of our retail customers.

We believe the principal competitive factors impacting the market for our Inscape data services are the quality and accuracy of our data, the timeliness of our data, and the amount and level of detailed information and insight that we can provide. We believe that we compete favorably in these areas. The market for viewing behavior data and analysis is highly competitive and includes well-established companies such as A.C. Nielsen and Rentrak. Many of Inscape’s competitors have greater financial, marketing and other resources, longer

 

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operating histories, better brand recognition among advertisers and media content providers, and greater economies of scale. In addition, these competitors have long-term relationships with many advertisers and media content providers.

Intellectual Property

Intellectual property is an important aspect of our business, and we seek protection for our intellectual property as appropriate. We rely upon a combination of patent, trade secret, and trademark laws and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our proprietary rights.

We own and utilize the trade name “VIZIO” and the VIZIO logo and trademark on all of our products. We believe that having distinctive marks that are registered and readily identifiable is an important factor in identifying our brand. We own 607 active trademark applications and registrations throughout the world, with 46 pending and registered trademarks in the United States.

To remain competitive and generate additional revenue, we have purchased portfolios of patents to be used defensively in current and potential lawsuits, as well as offensively to actively secure royalties from licensees. As of June 30, 2015, we owned 124 issued patents in the United States, Canada and Taiwan and had 48 pending patent applications in the United States. However, we cannot be certain that our patent applications will be issued or that any issued patents will continue to provide us with any competitive advantage or will not be challenged by third parties. Our issued U.S. patents will expire between 2015 and 2033.

We often rely on licenses of intellectual property for use in our business, including to ACR technology for our Inscape data services, which we have the right to use on a non-exclusive basis until 2017, at which point the license will renew automatically for successive one-year periods unless either we or the licensor gives at least 60 days’ non-renewal notice, and are obligated to pay royalties to the licensor. See “Risk Factors—Risks Relating to Our Industry and Business” for more information.

Historically, we have been contractually indemnified and reimbursed by our manufacturers for most intellectual property royalty obligations and commitments. We receive such funding from the manufacturers either through direct reimbursement from or payment of net purchase price. We cannot guarantee that we will be able to obtain such licenses or indemnities on favorable terms or at all.

In addition to the foregoing protections, we generally control access to, and use of our proprietary and other confidential information, through the use of internal and external controls, including contractual protections with employees, manufacturers, distributors and others. We will continue to file and prosecute patent applications when appropriate to attempt to protect our rights in our proprietary technologies.

Employees

As of June 30, 2015, we had approximately 407 full-time, U.S.-based employees. During the holiday season, we have historically added temporary workers to augment our full-time work force. None of our employees are currently covered by a collective bargaining agreement. We consider our relationship with our employees to be excellent and have never experienced a labor-related work stoppage.

 

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Facilities

We (or our affiliates) currently operate the following principal facilities: