BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unless otherwise noted in this report, any description of “we,” “us,” or “our” includes Crocs, Inc. (“Crocs” or the “Company”) and its wholly-owned subsidiaries within our reportable operating segments and corporate operations. The Company is engaged in the design, development, manufacturing, worldwide marketing, and distribution of casual lifestyle footwear and accessories for men, women, and children. We strive to be the global leader in the sale of molded footwear featuring fun, comfort, color, and functionality. Our reportable operating segments include: the Americas, operating in North and South America; Asia Pacific, operating throughout Asia, Australia, New Zealand, Africa, and the Middle East; and Europe, operating throughout Europe and Russia.

The accompanying unaudited condensed consolidated interim financial statements include the Company’s accounts and those of its wholly-owned subsidiaries, and reflect all adjustments which are necessary for a fair statement of the financial position, results of operations, and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Such unaudited interim condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

These unaudited condensed consolidated interim financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2016 (“Annual Report”), and have been prepared on a consistent basis with the accounting policies described in Note 1 of the Notes to the Audited Consolidated Financial Statements included in our Annual Report. Our accounting policies did not change in the nine months ended September 30, 2017, except for the new accounting pronouncements adopted as described in Note 2 — Recent Accounting Pronouncements.

Seasonality of Business

Due to the seasonal nature of our footwear, which is more heavily focused on styles suitable for warmer weather, the Company’s business is typically affected by seasonal trends, with higher wholesale sales in its first and second quarters and higher retail sales in its second and third quarters. In addition, our quarterly results of operations may fluctuate significantly as a result of other factors, including general economic conditions or consumer confidence. Accordingly, the Company’s operating results and cash flows for the three and nine months ended September 30, 2017 are not necessarily indicative of the operating results and cash flows for any other quarter or for the full year.

Transactions with Affiliates

The Company receives services from three subsidiaries of Blackstone Capital Partners VI L.P. (“Blackstone”). Blackstone and certain of its permitted transferees currently beneficially own all the outstanding shares of the Company’s Series A Convertible Preferred Stock, which is convertible into approximately 16.1% of the Company’s common stock as of September 30, 2017. Blackstone also has the right to nominate two representatives to serve on the Company’s Board of Directors (the “Board”).

Certain Blackstone subsidiaries provide various services to the Company, including inventory count, cybersecurity and consulting, and workforce management services. The Company paid $0.1 million and less than $0.1 million for the three months ended September 30, 2017 and 2016, respectively, and $0.6 million and $0.6 million for the nine months ended September 30, 2017 and 2016, respectively, for these services. Expenses related to these services are reported in ‘Selling, general and administrative expenses’ in the condensed consolidated statements of operations.

Research, Design, and Development Expenses

Research, design, and development expenses were $2.3 million and $3.7 million for the three months ended September 30, 2017 and 2016, respectively, and $7.4 million and $9.3 million for the nine months ended September 30, 2017 and 2016, respectively, and are reported in ‘Selling, general and administrative expenses’ in the condensed consolidated statements of operations.

Marketing, Advertising, and Promotional Expenses

Advertising production and promotion costs are expensed when the advertising is first run. Advertising communication costs are expensed in the periods that the communications occur. Certain of the Company’s promotional expenses result from payments under endorsement contracts. Payments under endorsement contracts are expensed on a straight-line basis over the related annual contract terms.

Total marketing expenses inclusive of advertising, production, promotional, and agency expenses reported in ‘Selling, general and administrative expenses’ were:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
	(in thousands)
Advertising, production, promotional, and agency expenses	$	9,946	$	11,066	$	49,614	$	48,664

Prepaid advertising and promotional endorsement costs of $7.3 million and $4.5 million are included in ‘Prepaid expenses and other assets’ in the condensed consolidated balance sheets at September 30, 2017 and December 31, 2016, respectively.

Depreciation and Amortization Expense

Depreciation and amortization expense related to property and equipment and amortization expense related to definite-lived intangible assets, reported in ‘Cost of sales’ and ‘Selling, general and administrative expenses,’ respectively, were:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
	(in thousands)
Property and equipment:
Selling, general and administrative expenses	$	2,945	$	3,179	$	9,287	$	9,987
Cost of sales	554		420		1,677		1,226
Total depreciation and amortization expense	3,499		3,599		10,964		11,213
Intangibles:
Selling, general and administrative expenses	3,304		3,637		10,251		10,385
Cost of sales	1,083		1,206		3,486		3,875
Total amortization expense	4,387		4,843		13,737		14,260
Total depreciation and amortization expense	$	7,886	$	8,442	$	24,701	$	25,473