424B4 1 d54385d424b4.htm PROSPECTUS FILED PURSUANT TO RULE 424(B)(4) Prospectus Filed Pursuant to Rule 424(b)(4)
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Filed pursuant to Rule 424(b)(4)
Registration No. 333-207753

PROSPECTUS

 

17,000,000 Shares

 

LOGO

 

CLASS A COMMON STOCK

 

 

 

Fitbit, Inc. is offering 3,000,000 shares of its Class A common stock and the selling stockholders are offering 14,000,000 shares of Class A common stock. We will not receive any proceeds from the sale of shares by the selling stockholders.

 

We have two classes of 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 voting and conversion rights. Each share of Class A common stock is entitled to one vote. Each share of Class B common stock is entitled to ten votes and is convertible at any time into one share of Class A common stock. The holders of our outstanding Class B common stock will hold approximately 96.3% of the voting power of our outstanding capital stock following this offering, with our directors, executive officers, significant stockholders, and their affiliates holding approximately 76.8%.

 

Our Class A common stock is listed on the New York Stock Exchange under the symbol “FIT.” On November 12, 2015, the last reported sale price of our Class A Common Stock was $31.68 per share.

 

 

 

We are an “emerging growth company” as defined under the federal securities laws. Investing in our Class A common stock involves risks. See the section titled “Risk Factors” beginning on page 14.

 

 

 

PRICE $29.00 A SHARE

 

 

 

     Price to Public      Underwriting
Discounts and
Commissions
(1)
     Proceeds to Fitbit      Proceeds to Selling
Stockholders
 

Per share

   $ 29.00       $ 0.87       $ 28.13       $ 28.13   

Total

   $ 493,000,000       $ 14,790,000       $ 84,390,000       $ 393,820,000   

 

(1)   See the section titled “Underwriters” for a description of the compensation payable to the underwriters.

 

The selling stockholders have granted the underwriters the right to purchase up to an additional 2,550,000 shares of Class A common stock.

 

The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the shares of Class A common stock to purchasers on November 18, 2015.

 

 

 

MORGAN STANLEY   DEUTSCHE BANK SECURITIES   BofA MERRILL LYNCH   BARCLAYS    
CITIGROUP
  

 

SUNTRUST ROBINSON HUMPHREY   PIPER JAFFRAY   RBC CAPITAL MARKETS   STIFEL

 

November 12, 2015

 


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LOGO


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TABLE OF CONTENTS

 

 

 

 

 

You should rely only on the information contained in this prospectus and in any free writing prospectus prepared by or on behalf of us and delivered or made available to you. Neither we, the selling stockholders, nor any of the underwriters have authorized anyone to provide you with additional or different information. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of our Class A common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus or a free writing prospectus is accurate only as of its date, regardless of its time of delivery or of any sale of shares of our Class A common stock. Our business, financial condition, operating results, and prospects may have changed since that date.

 

For investors outside the United States: Neither we, the selling stockholders, nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside of the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of Class A common stock and the distribution of this prospectus outside of the United States.

 

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PROSPECTUS SUMMARY

 

This summary highlights information presented in greater detail elsewhere in this prospectus. This summary is not complete and does not contain all the information you should consider before investing in our Class A common stock. You should read the entire prospectus carefully, including the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus, before investing in our Class A common stock.

 

FITBIT, INC.

 

Our Mission

 

Fitbit helps people lead healthier, more active lives by empowering them with data, inspiration, and guidance to reach their goals.

 

Overview

 

Fitbit is transforming the way millions of people around the world achieve their health and fitness goals. The Fitbit platform combines connected health and fitness devices with software and services, including an online dashboard and mobile apps, data analytics, motivational and social tools, personalized insights, and virtual coaching through customized fitness plans and interactive workouts. Our platform helps people become more active, exercise more, sleep better, eat smarter, and manage their weight. Fitbit appeals to a large, mainstream health and fitness market by addressing these key needs with advanced technology embedded in simple-to-use products and services. We pioneered the connected health and fitness market starting in 2007, and since then, we have grown into a leading global health and fitness brand. As of September 30, 2015, we have sold over 30.0 million devices since inception. According to The NPD Group, we held the leading position in the U.S. connected activity tracker market, with an 88% share, by dollars, in the third quarter of 2015.*

 

The core of our platform is our family of six wearable connected health and fitness trackers. These wrist-based and “clippable” devices automatically track users’ daily steps, calories burned, distance traveled, floors climbed, and active minutes and display real-time feedback to encourage them to become more active in their daily lives. Most of our trackers also measure sleep duration and quality, and our more advanced products track heart rate and GPS-based information such as speed, distance, and exercise routes. Several of our devices also feature deeper integration with smartphones, such as the ability to receive call and text notifications and control music. In addition, we offer a Wi-Fi connected scale that records weight, body fat, and body mass index, or BMI. We dedicate significant resources to developing proprietary sensors, algorithms, and software to ensure that our products have highly accurate measurements, insightful analytics, compact sizes, durability, and long battery lives. We are able to enhance the functionality and features of our connected devices through wireless updates.

 

Our platform also includes our online dashboard and mobile apps, which wirelessly and automatically sync with our devices. Our platform allows our users to see trends and achievements, access motivational tools such as virtual badges and real-time progress notifications, and connect, support, and compete with friends and family. Our direct connection with our users enables us to provide personalized insights, premium services, and information about new products and services. Premium services include virtual coaching through customized fitness plans and interactive video-based exercise experiences on mobile devices and computers. In addition, we extend the value of our platform through our open application programming interface, or API, which enables third-party developers to create health and fitness apps that interact with our platform. Through our open platform and our large community of users, we have established a growing ecosystem that includes thousands of third-party health and fitness apps that connect with our products and enhance the Fitbit experience.

 

*   

See “Industry and Market Data.”

 



 

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LOGO

 

Our platform enables all types of people to get fit their own way, whatever their interests and goals. Our users range from people interested in improving their health and fitness through everyday activities to endurance athletes seeking to maximize their performance. To address this range of needs, we design our devices, apps, and services to be easy to use so that they fit seamlessly into peoples’ daily lives or activities. Our users can sync their Fitbit devices with, and view their dashboard on, their computers and over 200 mobile devices, including iOS, Android, and Windows Phone products. This broad compatibility, combined with our market-leading position, has enabled us to attract what we believe is the largest community of connected health and fitness device users. The size of our user community increases the likelihood that our users will be able to find and engage with friends and family, creating positive network effects that reinforce our growth. In addition, data from our large community enables us to enhance our product features, provide improved insights, and offer more valuable guidance for our users.

 

We have rapidly grown to become a leading global health and fitness brand. We sell our products in over 48,000 retail stores and in 55 countries, through our retailers’ websites, through our online store at Fitbit.com, and as part of our corporate wellness offering. Our broad distribution and market-leading connected health and fitness platform have driven significant growth since our founding. In 2011, 2012, 2013, and 2014, we had revenue of $14.5 million, $76.4 million, $271.1 million, and $745.4 million, respectively, net income (loss) of $(4.3) million, $(4.2) million, $(51.6) million, and $131.8 million, respectively, and adjusted EBITDA of $(4.0) million, $(2.4) million, $79.0 million, and $191.0 million, respectively. For the nine months ended September 30, 2014 and 2015, we had revenue of $375.2 million and $1.1 billion, respectively, net income of $92.5 million and $111.5 million, respectively, and adjusted EBITDA of $115.4 million and $264.6 million, respectively. See the section titled “Selected Consolidated Financial and Other Data—Adjusted EBITDA” for information regarding our use of adjusted EBITDA and a reconciliation of adjusted EBITDA to net income (loss). The number of devices we sold grew from 0.2 million in 2011, to 1.3 million in 2012, to 4.5 million in 2013, and to 10.9 million in 2014, and from 5.6 million in the nine months ended September 30, 2014 to 13.1 million in the nine months ended September 30, 2015. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics” for additional information regarding devices sold.

 



 

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LOGO

 

Powerful Trends Driving Our Market

 

Several powerful trends are driving the growth of the connected health and fitness market:

 

   

Individuals and employers are increasingly focused on health and fitness. A variety of factors, such as changing consumer lifestyles and demographics, combined with rising healthcare costs and employers’ increased emphasis on productivity, are leading individuals and employers to increasingly focus on health and fitness. Based on information from industry sources, we estimate consumers spent over $200 billion in 2014 on health and fitness services, such as gym and health club memberships, commercial weight management services, and consumer health products, such as weight management products and dietary supplements. In addition, IBISWorld estimates that the corporate wellness industry will grow from $7.2 billion in 2015 to $9.9 billion in 2019 in the United States.*

 

   

Advances in technology have enabled the emergence of connected devices. Recent technological advances in sensors, lower power components, and longer-life batteries, combined with the introduction of wireless standards, such as Bluetooth low energy, have enabled the emergence of connected devices that are smaller, more power-efficient, track a broader range of biometric data, and fit a wide range of consumer preferences.

 

   

Mobile devices have become the preferred platform for accessing information. Mobile devices have become the preferred platform for people to access information and manage their lives, as well as the primary hub to connect a variety of consumer devices. According to Gartner, by 2018 more than 50% of users will go to a tablet or smartphone first for all online activities.*

 

   

More individuals are turning to technology solutions to improve health and fitness. Individuals are increasingly using mobile apps and other software to improve health and fitness, allowing consumers to directly manage and track their health and fitness in unprecedented ways. According to The NPD Group, over 25% of U.S. consumers reported using a fitness app on their smartphone.*

 

Our Market Opportunity

 

According to International Data Corporation, or IDC, consumer spend on the wearable devices market is growing faster than on any segment in the global consumer electronics market.* In 2014, shipments of wearable

 

*   

See “Industry and Market Data.”

 



 

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devices more than tripled compared to the prior year, reaching a total of 28.9 million units shipped.* IDC expects the market for wearable devices will reach 173.4 million units shipped in 2019, representing a $44.7 billion worldwide revenue opportunity.* We believe that we have been one of the drivers of the growth of the wearable devices market, and that the future growth of this market represents a significant opportunity for us. Further, as we continue to expand our platform and as consumers increasingly view our connected health and fitness products and services as an alternative or complement to other health and wellness activities, we believe there is an opportunity to extend our addressable market to the broader health and fitness market. Based on information from industry sources, we estimate this market represents an over $200 billion opportunity and includes consumer spend on health and fitness services, such as gym and health club memberships, commercial weight management services, and consumer health products, such as weight management products and dietary supplements. The broader health and fitness market, however, presents several challenges to overcome before we are able to take advantage of this opportunity, including competition from larger, more established traditional health and fitness companies, uncertainty as to whether consumers will adopt our products and services as an alternative or complement to other health and wellness activities, and our relative lack of experience selling other products and services.

 

Our Solution—The Fitbit Platform

 

Our leading connected health and fitness platform is designed to enable our users to improve their health and fitness by:

 

   

Tracking activities through our connected health and fitness devices. We empower users to live healthier, more active lifestyles by both tracking the information that matters most to them and providing them with real-time feedback. Our connected health and fitness devices span multiple styles, form factors, and price points, addressing the needs of everyone—from people simply looking to get fit by increasing their activity levels to endurance athletes seeking to maximize their performance.

 

   

Learning through our online dashboard and mobile apps. We offer our users a personalized online dashboard and mobile apps that sync automatically with our connected health and fitness devices and provide our users with a wide range of information and analytics, such as charts and graphs of their progress and the ability to log caloric intake.

 

   

Staying motivated through social features, notifications, challenges, and virtual badges. Our products help millions of users achieve their goals both individually and within the community that they choose. We motivate users by delivering real-time feedback including notifications, leaderboard and challenge updates, and virtual badges. Users can choose to share some or all of their health and fitness information on an opt-in basis with friends, family, and other parties, with third-party apps, and through social networks.

 

   

Improving health and fitness through goal-setting, personalized insights, premium services, and virtual coaching. We believe our platform assists users in changing their daily behavior, such as eating healthier foods or going for a run or walking more to reach a goal or win a challenge. We also offer premium services on a subscription basis that provide personalized insights and virtual coaching through customized fitness plans and interactive video-based exercise experiences on mobile devices and computers.

 

*   

See “Industry and Market Data”

 



 

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Our Competitive Strengths—What Sets Us Apart

 

We believe the following strengths will allow us to maintain and extend our leadership position:

 

   

Leading market position and global brand. Our singular focus on building a connected health and fitness platform, coupled with our leading market share, has led to our brand becoming synonymous with the connected health and fitness category. According to The NPD Group, we had the highest selling connected activity trackers in the United States in the third quarter of 2015, with an 88% share of the U.S. connected activity tracker market, by dollars.* In addition, according to The NPD Group, Fitbit Surge, which we began selling in December 2014, was the highest selling GPS fitness watch in the United States in the third quarter of 2015, with a 57% share of the U.S. GPS fitness watch market, by dollars.*

 

   

Broad range of connected health and fitness devices. We believe everyone’s approach to fitness is different, so we offer our users a range of connected health and fitness devices spanning multiple styles, form factors, and price points to allow people to find the devices that fit their lifestyles and goals.

 

   

Advanced, purpose-built hardware and software technologies. Our connected health and fitness devices leverage industry-standard technologies, such as Bluetooth low energy, as well as proprietary technologies, such as our PurePulse continuous heart rate tracking, and our algorithms that more accurately measure and analyze user health and fitness metrics. Our online and mobile apps provide in-depth analysis and guidance and our highly-scalable cloud infrastructure enables millions of users around the world to engage with our platform in real-time.

 

   

Broad mobile compatibility and open API. Our broad mobile compatibility and open API enable a large and growing health and fitness ecosystem that provides additional value to our existing users and extends our reach to potential new users. Our users can sync their Fitbit devices with, and view their online dashboard on, their computers and over 200 mobile devices, including iOS, Android, and Windows Phone products, which has enabled us to build what we believe is the largest community of connected health and fitness device users.

 

   

Broad and differentiated go-to-market strategy. We sell our products in over 48,000 retail stores and in 55 countries, through our retailers’ websites, through our online store at Fitbit.com, and as part of our corporate wellness offering. We believe the breadth and depth of our established selling channels and prominent presence in retail stores are unmatched in the connected health and fitness category and would be difficult for a competitor to replicate.

 

   

Large and growing community and powerful network effects. As our community of users continues to grow, we will develop a deeper understanding of our users and expect to deliver additional value to them through more detailed insights and analysis.

 

   

Direct relationship and continuous communication with our users. The connectivity of our devices allows us to better understand our users’ health and fitness goals and communicate the most relevant analysis, features, advice, and content to them throughout the day with our online dashboard, mobile apps, emails, and notifications.

 

*   

See “Industry and Market Data.”

 



 

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Our Growth Strategy

 

We intend to maintain and extend our position as the leading platform for connected health and fitness. Key elements of our growth strategy include:

 

   

Continue to introduce innovative products. We will continue to develop the world’s most innovative and diverse connected health and fitness devices and we plan to continue to make significant investments in research and development to further strengthen our platform through both internally-developed and acquired technologies.

 

   

Introduce new features and services. We will continue to introduce innovative new features and services to increase user engagement and revenue. For example, we acquired FitStar in March 2015 to enhance our services offerings through interactive video-based exercise experiences on mobile devices and computers.

 

   

Expand brand awareness and drive sales of our products and services. We intend to increase our marketing efforts to further expand global awareness of our brand and drive greater sales of our products and services.

 

   

Increase global distribution through select new channels. We believe that international markets represent a significant growth opportunity for us and we intend to expand sales of our products and services globally through select retailers and strategic partnerships.

 

   

Further penetrate the corporate wellness market. We intend to increase our focus on building relationships with employers and wellness providers and increase revenue through employee wellness programs, although it may be challenging to increase market acceptance of our corporate wellness offerings because we do not track continuous engagement of our individual users over periods of time.

 

Our Devices

 

We believe everyone’s approach to fitness is different, so we have created products with a wide variety of styles, sizes, features, and price points.

 

   

Fitbit Zip is our entry-level wireless activity tracker that allows users to track the most important daily activity statistics such as steps, distance, calories burned, and active minutes. Fitbit Zip has a U.S. manufacturer’s suggested retail price, or U.S. MSRP, of $59.95.

 

   

Fitbit One is a more advanced clippable wireless tracker that tracks stairs climbed and sleep in addition to daily steps, distance, calories burned, and active minutes. Fitbit One has a U.S. MSRP of $99.95.

 

   

Fitbit Flex is our first wristband-style tracker, with a sleek and stylish design, that tracks steps, distance, calories burned, active minutes, and sleep. Fitbit Flex has a U.S. MSRP of $99.95.

 

   

Fitbit Charge is a wireless activity and sleep wristband that tracks steps, distance, calories burned, active minutes, floors climbed, and sleep. Fitbit Charge has a U.S. MSRP of $129.95.

 

   

Fitbit Charge HR is a wireless heart rate and activity wristband that has all the features available on the Fitbit Charge and also includes our proprietary PurePulse heart rate tracking technology. Fitbit Charge HR has a U.S. MSRP of $149.95.

 

   

Fitbit Surge is our fitness “super watch” that combines popular features of a GPS watch, heart rate tracker, activity tracker, and smartwatch. Fitbit Surge has a U.S. MSRP of $249.95.

 

   

Aria is our Wi-Fi connected scale that tracks weight, body fat percentage, and BMI. Aria has a U.S. MSRP of $129.95.

 



 

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We also sell various accessories, such as colored bands and clips for our devices, charging cables, and Fitbit apparel. These accessories are offered at U.S. MSRPs ranging from $4.95 to $195.00.

 

Selected Risks Associated with Our Business

 

Our business is subject to a number of risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this prospectus summary. Some of these risks are:

 

   

We operate in a highly competitive market;

 

   

We must be able to anticipate and satisfy consumer preferences in a timely manner;

 

   

We must successfully develop and timely introduce new products and services or enhance existing products and services;

 

   

We must be able to accurately forecast consumer demand for our products and services and adequately manage our inventory;

 

   

Our quarterly operating results or other operating metrics may fluctuate significantly;

 

   

We rely on a limited number of third-party suppliers, contract manufacturers, and logistics providers over which we have limited control;

 

   

Many of our key components in our products come from limited or sole sources of supply, and we are susceptible to supply shortages, long lead times for components, and supply changes, which could disrupt our supply chain;

 

   

The market for connected health and fitness devices is still in the early stages of growth and may not continue to develop;

 

   

An economic downturn or economic uncertainty may adversely affect demand for our products and services;

 

   

Our current and future products and services may experience quality problems from time to time that can result in adverse publicity, product recalls, litigation, regulatory proceedings, and warranty claims;

 

   

We recalled one of our products, the Fitbit Force, in March 2014, due to reports of allergic reactions, which exposed us to U.S. Consumer Product Safety Commission, or CPSC, proceedings and private litigation;

 

   

We may not be able to sustain our revenue growth or profitability in the future;

 

   

Material disruption or breach of our information technology systems or those of third parties could materially damage user and business partner relationships; and

 

   

The dual class structure of our common stock has the effect of concentrating voting control with certain stockholders, including our directors, executive officers, significant stockholders, and their affiliates who will hold in the aggregate 76.8% of the voting power of our capital stock following the completion of this offering, which will limit or preclude your ability to influence corporate matters, 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 corporate transaction requiring stockholder approval.

 

Corporate Information

 

We were incorporated in Delaware in March 2007 as Healthy Metrics Research, Inc. We changed our name to Fitbit, Inc. in October 2007. Our principal executive offices are located at 405 Howard Street, San Francisco,

 



 

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California 94105, and our telephone number is (415) 513-1000. Our website address is Fitbit.com. The information on, or that can be accessed through, our website is not incorporated by reference into this prospectus and should not be considered to be a part of this prospectus.

 

Unless otherwise indicated, the terms “Fitbit,” “the company,” “we,” “us,” and “our” refer to Fitbit, Inc., a Delaware corporation, together with its consolidated subsidiaries.

 

Fitbit, the Fitbit logo, Fitbit Zip, Fitbit One, Fitbit Flex, Fitbit Charge, Fitbit Charge HR, Fitbit Surge, Aria, PurePulse, FitStar, and our other registered or common law trade names, trademarks, or service marks appearing in this prospectus are our intellectual property. This prospectus contains additional trade names, trademarks, and service marks of other companies that are the property of their respective owners.

 

Implications of Being an Emerging Growth Company

 

As a company with less than $1.0 billion in revenue during our last completed fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting requirements that are otherwise applicable generally to public companies. These reduced reporting requirements that are available to us include:

 

   

an exemption from compliance with the auditor attestation requirement on the effectiveness of our internal control over financial reporting;

 

   

an exemption from compliance with any requirement that the Public Company Accounting Oversight Board may adopt regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

 

   

reduced disclosure about our executive compensation arrangements; and

 

   

an exemption from the requirements to obtain a non-binding advisory vote on executive compensation or a stockholder approval of any golden parachute arrangements.

 

We will remain an emerging growth company until December 31, 2015. Until such date, we may choose to take advantage of some, but not all, of the available benefits under the JOBS Act.

 



 

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THE OFFERING

 

Class A common stock offered by us

3,000,000 shares

 

Class A common stock offered by the selling stockholders

14,000,000 shares

 

Option to purchase additional shares offered by the selling stockholders

2,550,000 shares

 

 

Class A common stock to be outstanding after this offering

59,061,250 shares (61,611,250 shares if the option to purchase additional shares is exercised in full)

 

Class B common stock to be outstanding after this offering

152,611,008 shares (150,061,008 shares if the option to purchase additional shares is exercised in full)

 

Total Class A and Class B common stock to be outstanding after this offering

211,672,258 shares (211,672,258 shares if the option to purchase additional shares is exercised in full)

 

Use of proceeds

We estimate that the net proceeds from the sale of shares of our Class A common stock that we are selling in this offering will be approximately $82.7 million, based upon the public offering price of $29.00 per share, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. In connection with this offering, our co-founder, President, Chief Executive Officer, and Chairman, James Park, will sell 2,226,980 shares of Class A common stock, and our co-founder and Chief Technology Officer, Eric N. Friedman, will sell 1,113,490 shares of Class A common stock. In addition, other selling stockholders are selling an aggregate of 10,659,530 shares of Class A common stock.

 

 

The principal purposes of this offering are to increase our financial flexibility, obtain additional capital, facilitate an orderly distribution of shares for the selling stockholders, and increase our public float. We intend to use the net proceeds that we receive from this offering for working capital and other general corporate purposes, including research and development and sales and marketing activities, general and administrative matters, and capital expenditures. We may also use a portion of the net proceeds to invest in or acquire complementary businesses, products, services, technologies, or other assets. See the section titled “Use of Proceeds” for additional information.

 



 

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Voting rights

Shares of Class A common stock are entitled to one vote per share.

 

 

Shares of Class B common stock are entitled to ten votes per share.

 

 

Holders of our Class A common stock and Class B common stock generally vote together as a single class, unless otherwise required by law or our restated certificate of incorporation. Each share of our Class B common stock is convertible into one share of our Class A common stock at any time and will convert automatically upon certain transfers and upon the earlier of June 17, 2027 or the date the holders of a majority of our Class B common stock elect to convert the Class B common stock to Class A common stock. The holders of our outstanding Class B common stock will hold 96.3% of the voting power of our outstanding capital stock following this offering, with our directors, executive officers, significant stockholders, and their affiliates holding 76.8% in the aggregate. These holders have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of our directors and the approval of any change in control transaction. See the sections titled “Principal and Selling Stockholders” and “Description of Capital Stock” for additional information.

 

New York Stock Exchange symbol

“FIT”

 

The number of shares of our Class A and Class B common stock to be outstanding after this offering is based upon 42,061,250 shares of our Class A common stock and 165,122,004 shares of our Class B common stock outstanding as of September 30, 2015 (prior to the automatic conversion of shares of our Class B common stock into an equivalent number of shares of our Class A common stock that will be sold by the selling stockholders in this offering) and does not include:

 

   

348,000 shares of our Class A common stock and 48,307,308 shares of our Class B common stock issuable upon the exercise of options to purchase shares of our Class A common stock and Class B common stock outstanding as of September 30, 2015, with a weighted-average exercise price of $2.99 per share (including 1,489,004 shares of our Class B common stock issuable upon the exercise of options to purchase shares of Class B common stock and the automatic conversion of those shares into an equivalent number of shares of our Class A common stock that will be sold in this offering);

 

   

1,597,667 shares of Class A common stock and 498,908 shares of our Class B common stock issuable upon the vesting of restricted stock units, or RSUs, outstanding as of September 30, 2015;

 

   

596,533 shares of our Class A common stock issuable upon the vesting of RSUs granted after September 30, 2015;

 

   

425,643 shares of our Class B common stock issuable upon the exercise of warrants to purchase shares of our Class B common stock outstanding as of September 30, 2015, with an exercise price of $0.6667 per share; and

 



 

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8,518,814 shares of our common stock reserved for future issuance under our equity compensation plans, consisting of:

 

  ¡    

4,768,814 shares of Class A common stock reserved for future issuance under our 2015 Equity Incentive Plan, or 2015 Plan, as of September 30, 2015 (which reserve does not reflect the RSUs granted after September 30, 2015); and

 

  ¡    

3,750,000 shares of Class A common stock reserved for future issuance under our 2015 Employee Stock Purchase Plan, or 2015 ESPP.

 

The shares available for issuance under our 2015 Plan include the shares that were reserved for issuance under our Amended and Restated 2007 Stock Plan, as amended, or 2007 Plan, on June 16, 2015, when our 2015 Plan became effective and we ceased granting awards under the 2007 Plan. Our 2015 Plan and 2015 ESPP also provide for automatic annual increases in the number of shares reserved thereunder. See the section titled “Executive Compensation—Employee Benefit Plans” for additional information.

 

Except as otherwise indicated, all information in this prospectus assumes:

 

   

the automatic conversion of 14,000,000 shares of our Class B common stock (including the shares that are issued upon the exercise of options to purchase shares of our Class B common stock that will be sold in this offering) into an equivalent number of shares of our Class A common stock that will be sold by the selling stockholders in this offering;

 

   

no exercise or settlement of outstanding stock options, RSUs, or warrants, except for 1,489,004 shares of our Class B common stock issued upon the exercise of options to purchase shares of Class B common stock and the automatic conversion of those shares into an equivalent number of shares of our Class A common stock that will be sold in this offering; and

 

   

no exercise by the underwriters of their option to purchase up to an additional 2,550,000 shares of our Class A common stock from the selling stockholders in this offering.

 



 

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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

 

The following tables summarize our consolidated financial and other data. We derived the summary consolidated statements of operations data for 2012, 2013, and 2014 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the summary consolidated statements of operations data for the nine months ended September 30, 2014 and 2015 and the summary consolidated balance sheet data as of September 30, 2015 from our unaudited consolidated financial statements included elsewhere 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 that we consider necessary for a fair statement of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that may be expected in the future. You should read this data together with our consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

     As of or For the Year Ended
December 31,
    As of or For the Nine
Months Ended
September 30,
 
     2012     2013(1)     2014(1)     2014(1)     2015(1)  
     (in thousands, except per share data)  

Consolidated Statements of Operations Data:

          

Revenue

   $ 76,373      $ 271,087      $ 745,433      $ 375,249      $ 1,146,428   

Cost of revenue(2)

     49,733        210,836        387,776        188,486        593,664   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     26,640        60,251        357,657        186,763        552,764   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Research and development(2)

     16,210        27,873        54,167        35,842        95,808   

Sales and marketing(2)

     10,237        26,847        112,005        42,123        178,672   

General and administrative(2)

     3,968        14,485        33,556        23,909        48,327   

Change in contingent consideration

                                 (7,704
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     30,415        69,205        199,728        101,874        315,103   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (3,775     (8,954     157,929        84,889        237,661   

Interest and other income (expense), net

     (150     (4,731     (18,156     (9,263     (60,191
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (3,925     (13,685     139,773        75,626        177,470   

Income tax expense (benefit)

     291        37,937        7,996        (16,911     65,958   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (4,216   $ (51,622   $ 131,777      $ 92,537      $ 111,512   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common stockholders(3):

          

Basic

   $ (0.11   $ (1.32   $ 0.70      $ 0.49      $ 0.57   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.11   $ (1.32   $ 0.63      $ 0.44      $ 0.48   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Data:

          

Devices sold(4)

     1,279        4,476        10,904        5,627        13,097   

Adjusted EBITDA(5)

   $ (2,401   $ 79,049      $ 191,042      $ 115,436      $ 264,615   

 



 

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(1)  

In March 2014, we recalled the Fitbit Force. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Fitbit Force Product Recall” for additional information. The recall, which primarily affected our results for the fourth quarter of 2013 and the first quarter of 2014, had the following effect on our income (loss) before income taxes:

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
             2013                     2014                     2014                     2015          
    

(in thousands)

 

Reduction of revenue

   $ (30,607   $ (8,112   $ (11,561   $   

Incremental (benefit to) cost of revenue

     51,205        11,339        9,117        (2,040
  

 

 

   

 

 

   

 

 

   

 

 

 

Impact on gross profit

     (81,812     (19,451     (20,678     2,040   

Incremental general and administrative expenses (benefit)

     2,838        3,389        4,361        (53
  

 

 

   

 

 

   

 

 

   

 

 

 

Impact on income (loss) before income taxes

   $ (84,650   $ (22,840   $ (25,039   $ 2,093   
  

 

 

   

 

 

   

 

 

   

 

 

 
(2)  

Includes stock-based compensation expense as follows:

 

     Year Ended December 31,      Nine Months Ended
September 30,
 
       2012          2013          2014          2014          2015    
     (in thousands)  

Cost of revenue

   $ 15       $ 37       $ 890       $ 534       $ 2,622   

Research and development

     62         288         2,350         1,157         10,910   

Sales and marketing

     29         204         1,295         649         5,080   

General and administrative

     26         91         2,269         1,105         7,072   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 132       $ 620       $ 6,804       $ 3,445       $ 25,684   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(3)  

See notes 3 and 15 of the notes to our consolidated financial statements included elsewhere in this prospectus for an explanation of the calculations of our net income (loss) per share attributable to common stockholders, basic and diluted.

(4)  

See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics—Devices Sold” for more information.

(5)  

Adjusted EBITDA is a financial measure that is not calculated in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. See the section titled “Selected Consolidated Financial and Other Data—Adjusted EBITDA” for information regarding our use of adjusted EBITDA and a reconciliation of adjusted EBITDA to net income (loss).

 

     As of September 30, 2015  
     Actual      As  Adjusted(1)  
     (in thousands)  

Consolidated Balance Sheet Data:

     

Cash, cash equivalents, and marketable securities

   $ 575,478       $ 658,805   

Working capital

     714,866         798,193   

Total assets

     1,262,457         1,345,784   

Total long-term debt

               

Retained earnings

     178,754         178,754   

Total stockholders’ equity

     784,172         867,499   

 

(1)  

The as adjusted column reflects the receipt of (i) $82.7 million in net proceeds from our sale of 3,000,000 shares of Class A common stock in this offering at the public offering price of $29.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and (ii) aggregate net proceeds of $0.6 million received by us in connection with the exercise of options to purchase an aggregate of 1,489,004 shares of Class B common stock in order to sell those shares in this offering.

 



 

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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 all of the other information in this prospectus, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, before making a decision to invest in our Class A common stock. Our business, operating results, financial condition, or prospects could be materially and adversely affected by any of these risks and uncertainties. If any of these risks actually occurs, the trading price of our Class A common stock could decline and you might lose all or part of your investment. Our business, operating results, financial performance, or prospects could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material.

 

Risks Related to Our Business

 

We operate in a highly competitive market. If we do not compete effectively, our prospects, operating results, and financial condition could be adversely affected.

 

The connected health and fitness devices market is highly competitive, with companies offering a variety of competitive products and services. We expect competition in our market to intensify in the future as new and existing competitors introduce new or enhanced products and services that are potentially more competitive than our products and services. The connected health and fitness devices market has a multitude of participants, including specialized consumer electronics companies, such as Garmin, Jawbone, and Misfit, and traditional health and fitness companies, such as adidas and Under Armour. In addition, many large, broad-based consumer electronics companies either compete in our market or adjacent markets or have announced plans to do so, including Apple, Google, LG, Microsoft, and Samsung. For example, Apple introduced the Apple Watch smartwatch in 2015, with broad-based functionalities, including some health and fitness tracking capabilities, and has sold a significant volume of its smartwatches since introduction. We may also face competition from manufacturers of lower-cost devices, such as Xiaomi and its Mi Band device. In addition, we compete with a wide range of stand-alone health and fitness-related mobile apps that can be purchased or downloaded through mobile app stores. We believe many of our competitors and potential competitors have significant competitive advantages, including longer operating histories, ability to leverage their sales efforts and marketing expenditures across a broader portfolio of products and services, larger and broader customer bases, more established relationships with a larger number of suppliers, contract manufacturers, and channel partners, greater brand recognition, ability to leverage app stores which they may operate, and greater financial, research and development, marketing, distribution, and other resources than we do. Our competitors and potential competitors may also be able to develop products or services that are equal or superior to ours, achieve greater market acceptance of their products and services, and increase sales by utilizing different distribution channels than we do. Some of our competitors may aggressively discount their products and services in order to gain market share, which could result in pricing pressures, reduced profit margins, lost market share, or a failure to grow market share for us. If we are not able to compete effectively against our current or potential competitors, our prospects, operating results, and financial condition could be adversely affected.

 

If we are unable to anticipate and satisfy consumer preferences in a timely manner, our business may be adversely affected.

 

Our success depends on our ability to anticipate and satisfy consumer preferences in a timely manner. All of our products are subject to changing consumer preferences that cannot be predicted with certainty. Consumers may decide not to purchase our products and services as their preferences could shift rapidly to different types of connected health and fitness devices or away from these types of products and services altogether, and our future success depends in part on our ability to anticipate and respond to shifts in consumer preferences. In addition, our newer products and services that have additional features, such as the Fitbit Charge, Fitbit Charge HR, and Fitbit Surge, may have higher prices than many of our earlier products and the products of some of our competitors, which may not appeal to consumers or only appeal to a smaller subset of consumers. It is also possible that

 

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competitors could introduce new products and services that negatively impact consumer preference for our connected health and fitness devices, which could result in decreased sales of our products and services and a loss in market share. Accordingly, if we fail to anticipate and satisfy consumer preferences in a timely manner, our business may be adversely affected.

 

If we are unable to successfully develop and timely introduce new products and services or enhance existing products and services, our business may be adversely affected.

 

We must continually develop and introduce new products and services and improve and enhance our existing products and services to maintain or increase our sales. The success of new or enhanced products and services may depend on a number of factors including, anticipating and effectively addressing consumer preferences and demand, the success of our sales and marketing efforts, timely and successful research and development, effective forecasting and management of product demand, purchase commitments, and inventory levels, effective management of manufacturing and supply costs, and the quality of or defects in our products.

 

The development of our products and services is complex and costly, and we typically have several products and services in development at the same time. Given the complexity, we occasionally have experienced, and could experience in the future, delays in completing the development and introduction of new and enhanced products and services. Problems in the design or quality of our products or services may also have an adverse effect on our brand, business, financial condition, and operating results. Unanticipated problems in developing products and services could also divert substantial research and development resources, which may impair our ability to develop new products and services and enhancements of existing products and services, and could substantially increase our costs. If new or enhanced product and service introductions are delayed or not successful, we may not be able to achieve an acceptable return, if any, on our research and development efforts, and our business may be adversely affected.

 

Our operating results could be materially harmed if we are unable to accurately forecast consumer demand for our products and services and adequately manage our inventory.

 

To ensure adequate inventory supply, we must forecast inventory needs and expenses and place orders sufficiently in advance with our suppliers and contract manufacturers based on our estimates of future demand for particular products. Our ability to accurately forecast demand for our products and services could be affected by many factors, including an increase or decrease in customer demand for our products and services or for products and services of our competitors, product and service introductions by competitors, unanticipated changes in general market conditions, and the weakening of economic conditions or consumer confidence in future economic conditions. Due to the recent rapid growth in demand for our connected health and fitness devices, and particularly in connection with new product introductions, we face challenges acquiring adequate and timely supplies of our products to satisfy the levels of demand, which we believe negatively affects our revenue. This risk may be exacerbated by the fact that we may not carry a significant amount of inventory, either directly or with our contract manufacturers or logistics providers to satisfy short-term demand increases. If we fail to accurately forecast customer demand, we may experience excess inventory levels or a shortage of products available for sale.

 

Inventory levels in excess of customer demand may result in inventory write-downs or write-offs and the sale of excess inventory at discounted prices, which would cause our gross margin to suffer and could impair the strength of our brand. Conversely, if we underestimate customer demand for our products and services, our contract manufacturers may not be able to deliver products to meet our requirements, and this could result in damage to our brand and customer relationships and adversely affect our revenue and operating results.

 

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Our quarterly operating results or other operating metrics may fluctuate significantly, which could cause the trading price of our Class A common stock to decline.

 

Our quarterly operating results and other operating metrics have fluctuated in the past and may continue to fluctuate from quarter to quarter. We expect that this trend will continue as a result of a number of factors, many of which are outside of our control and may be difficult to predict, including:

 

   

the level of demand for our connected health and fitness devices and our ability to maintain or increase the size and engagement of our community of users;

 

   

the timing and success of new product and service introductions by us or our competitors or any other change in the competitive landscape of our market;

 

   

the mix of products sold in a quarter;

 

   

the continued market acceptance of, and the growth of the market for, connected health and fitness devices;

 

   

pricing pressure as a result of competition or otherwise;

 

   

delays or disruptions in our supply, manufacturing, or distribution chain;

 

   

errors in our forecasting of the demand for our products, which could lead to lower revenue or increased costs, or both;

 

   

seasonal buying patterns of consumers;

 

   

increases in and timing of sales and marketing and other operating expenses that we may incur to grow and expand our operations and to remain competitive;

 

   

insolvency, credit, or other difficulties faced by our distributors and retailers, affecting their ability to purchase or pay for our products;

 

   

insolvency, credit, or other difficulties confronting our suppliers, contract manufacturers, or logistics providers leading to disruptions in our supply or distribution chain;

 

   

levels of product returns, stock rotation, and price protection rights;

 

   

adverse litigation judgments, settlements, or other litigation-related costs;

 

   

changes in the legislative or regulatory environment, such as with respect to privacy, information security, health and wellness devices, consumer product safety, and advertising;

 

   

product recalls, regulatory proceedings, or other adverse publicity about our products;

 

   

fluctuations in foreign exchange rates;

 

   

costs related to the acquisition of businesses, talent, technologies, or intellectual property, including potentially significant amortization costs and possible write-downs; and

 

   

general economic conditions in either domestic or international markets.

 

Any one of the factors above or the cumulative effect of some of the factors above may result in significant fluctuations in our operating results.

 

The variability and unpredictability of our quarterly operating results or other operating metrics could result in our failure to meet our expectations or those of any analysts that cover us or investors with respect to revenue or other operating results for a particular period. If we fail to meet or exceed such expectations for these or any other reasons, the market price of our Class A common stock could fall substantially, and we could face costly lawsuits, including securities class action suits.

 

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We rely on a limited number of suppliers, contract manufacturers, and logistics providers, and each of our products is manufactured by a single contract manufacturer.

 

We rely on a limited number of suppliers, contract manufacturers, and logistics providers. In particular, we use contract manufacturers located in Asia, and each of our products is manufactured by a single contract manufacturer. Flextronics is our primary contract manufacturer and is currently the sole manufacturer of the majority of our devices. Our reliance on sole contract manufacturers for each of our products increases our risks since we do not currently have any alternative or replacement manufacturers. In the event of an interruption from a contract manufacturer, we may not be able to develop alternate or secondary sources without incurring material additional costs and substantial delays. Furthermore, these risks could materially and adversely affect our business if one of our contract manufacturers is impacted by a natural disaster or other interruption at a particular location because each of our contract manufacturers produces our products from a single location. In addition, some of our suppliers, contract manufacturers, and logistics providers may have more established relationships with our competitors and potential competitors, and as a result of such relationships, such suppliers, contract manufacturers, and logistics providers may choose to limit or terminate their relationship with us.

 

If we experience significantly increased demand, or if we need to replace an existing supplier, contract manufacturer, or logistics provider, we may be unable to supplement or replace such supply, contract manufacturing, or logistics capacity on terms that are acceptable to us, which may undermine our ability to deliver our products to customers in a timely manner. For example, for certain of our products, it may take a significant amount of time to identify a contract manufacturer that has the capability and resources to build the product to our specifications in sufficient volume. Identifying suitable suppliers, contract manufacturers, and logistics providers is an extensive process that requires us to become satisfied with their quality control, technical capabilities, responsiveness and service, financial stability, regulatory compliance, and labor and other ethical practices. Accordingly, a loss of any key supplier, contract manufacturer, or logistics provider could adversely impact our revenue and operating results.

 

We have limited control over our suppliers, contract manufacturers, and logistics providers, which subjects us to significant risks, including the potential inability to obtain or produce quality products on a timely basis or in sufficient quantity.

 

We have limited control over our suppliers, contract manufacturers, and logistics providers, including aspects of their specific manufacturing processes and their labor, environmental, or other practices, which subjects us to significant risks, including the following:

 

   

inability to satisfy demand for our products;

 

   

reduced control over delivery timing and product reliability;

 

   

reduced ability to oversee the manufacturing process and components used in our products;

 

   

reduced ability to monitor compliance with our product manufacturing specifications;

 

   

reduced ability to develop comprehensive manufacturing specifications that take into account materials shortages, materials substitutions, and variance in the manufacturing capabilities of our third-party contract manufacturers;

 

   

price increases;

 

   

the failure of a key supplier, contract manufacturer, or logistics provider to perform its obligations to us for technical, market, or other reasons;

 

   

difficulties in establishing additional contract manufacturing relationships if we experience difficulties with our existing contract manufacturers;

 

   

shortages of materials or components;

 

   

misappropriation of our intellectual property;

 

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exposure to natural catastrophes, political unrest, terrorism, labor disputes, and economic instability resulting in the disruption of trade from foreign countries in which our products are manufactured;

 

   

changes in local economic conditions in countries where our suppliers, contract manufacturers, or logistics providers are located;

 

   

the imposition of new laws and regulations, including those relating to labor conditions, quality and safety standards, imports, duties, taxes, and other charges on imports, as well as trade restrictions and restrictions on currency exchange or the transfer of funds; and

 

   

insufficient warranties and indemnities on components supplied to our contract manufacturers.

 

If there are defects in the manufacture of our products by our contract manufacturers, we may face negative publicity, government investigations, and litigation and we may not be fully compensated by our contract manufacturers for any financial or other liability that we suffer as a result.

 

Because many of the key components in our products come from limited or sole sources of supply, we are susceptible to supply shortages, long lead times for components, and supply changes, any of which could disrupt our supply chain.

 

Many of the key components used to manufacture our products come from limited or sole sources of supply. Our contract manufacturers generally purchase these components on our behalf, subject to certain approved supplier lists, and we do not have any long-term arrangements with our suppliers. We are therefore subject to the risk of shortages and long lead times in the supply of these components and the risk that our suppliers discontinue or modify components used in our products. In addition, the lead times associated with certain components are lengthy and preclude rapid changes in quantities and delivery schedules. We have in the past experienced and may in the future experience component shortages, and the predictability of the availability of these components may be limited. While component shortages have historically been immaterial, they could be material in the future. In the event of a component shortage or supply interruption from suppliers of these components, we may not be able to develop alternate sources in a timely manner. Developing alternate sources of supply for these components may be time-consuming, difficult, and costly and we may not be able to source these components on terms that are acceptable to us, or at all, which may undermine our ability to meet our requirements or to fill our orders in a timely manner. Any interruption or delay in the supply of any of these parts or components, or the inability to obtain these parts or components from alternate sources at acceptable prices and within a reasonable amount of time, would harm our ability to meet our scheduled product deliveries to our customers and users. This could harm our relationships with our channel partners and users and could cause delays in shipment of our products and adversely affect our operating results. In addition, increased component costs could result in lower gross margins. If we are unable to buy these components in quantities sufficient to meet our requirements on a timely basis, we will not be able to deliver products and services to our customers and users.

 

The market for connected health and fitness devices is still in the early stages of growth and if it does not continue to grow, grows more slowly than we expect, or fails to grow as large as we expect, our business and operating results would be harmed.

 

The market for connected health and fitness devices is relatively new and unproven, and it is uncertain whether connected health and fitness devices will sustain high levels of demand and wide market acceptance. Our success will depend to a substantial extent on the willingness of people to widely adopt these products and services. In part, adoption of our products and services will depend on the increasing prevalence of connected health and fitness devices as well as new entrants to the connected health and fitness device market to raise the profile of both the market as a whole and our own platform. Our connected health and fitness devices have largely been used to measure and track activities such as walking, running, and sleeping. However, they have not been as widely adopted for other sports, exercise, and activities such as cycling, skiing, and swimming for which other niche products are more often used. Furthermore, some individuals may be reluctant or unwilling to use

 

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connected health and fitness devices because they have concerns regarding the risks associated with data privacy and security. If the wider public does not perceive the benefits of our connected health and fitness devices or chooses not to adopt them as a result of concerns regarding privacy or data security or for other reasons, then the market for these products and services may not further develop, it may develop more slowly than we expect, or it may not achieve the growth potential we expect it to, any of which would adversely affect our operating results. The development and growth of this relatively new market may also prove to be a short-term trend.

 

An economic downturn or economic uncertainty may adversely affect consumer discretionary spending and demand for our products and services.

 

Our products and services may be considered discretionary items for consumers. Factors affecting the level of consumer spending for such discretionary items include general economic conditions, and other factors, such as consumer confidence in future economic conditions, fears of recession, the availability and cost of consumer credit, levels of unemployment, and tax rates. As global economic conditions continue to be volatile or economic uncertainty remains, trends in consumer discretionary spending also remain unpredictable and subject to reductions. Unfavorable economic conditions may lead consumers to delay or reduce purchases of our products and services and consumer demand for our products and services may not grow as we expect. Our sensitivity to economic cycles and any related fluctuation in consumer demand for our products and services may have an adverse effect on our operating results and financial condition.

 

Our current and future products and services may experience quality problems from time to time that can result in adverse publicity, product recalls, litigation, regulatory proceedings, and warranty claims resulting in significant direct or indirect costs, decreased revenue and operating margin, and harm to our brand.

 

We sell complex products and services that could contain design and manufacturing defects in their materials, hardware, and firmware. These defects could include defective materials or components, or “bugs” that can unexpectedly interfere with the products’ intended operations or cause injuries to users. Although we extensively and rigorously test new and enhanced products and services before their release, there can be no assurance we will be able to detect, prevent, or fix all defects.

 

Failure to detect, prevent, or fix defects could result in a variety of consequences including greater number of returns of products than expected from users and retailers, regulatory proceedings, product recalls, and litigation, which could harm our revenue and operating results. We generally provide a 45-day right of return for purchases through Fitbit.com and a 12-month warranty on all of our products, except in the European Union, where we provide a two-year warranty on all of our products. The occurrence of real or perceived quality problems or material defects in our current and future products could expose us to warranty claims in excess of our current reserves. As of December 31, 2014, our reserves for warranty claims were $20.1 million, or 3% of our revenue for 2014. Moreover, we offer limited stock rotation rights and price protection to our distributors. If we experience greater returns from retailers or users in excess of our reserves, our business and operating results could be harmed. In addition, any negative publicity or lawsuits filed against us related to the perceived quality and safety of our products could also affect our brand and decrease demand for our products and services, and adversely affect our operating results and financial condition.

 

Furthermore, our products are used to track and display various information about users’ activities, such as daily steps taken, calories burned, distance traveled, floors climbed, active minutes, sleep duration and quality, and heart rate and GPS-based information such as speed, distance, and exercise routes. In the past, there have been reports and claims made against us alleging that our products do not provide accurate measurements and data to users, including claims asserting that certain features of our products do not operate as advertised. Such reports and claims have resulted in negative publicity, and, in some cases, have required us to expend time and resources to defend litigation. If our products fail to provide accurate measurements and data to users, or if there are reports or claims of inaccurate measurements or claims regarding the overall health benefits of our products and services in the future, we may become the subject of negative publicity, litigation, including class action litigation, regulatory proceedings, and warranty claims, and our brand, operating results, and business could be harmed.

 

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We recalled the Fitbit Force in March 2014. The recall has exposed us to CPSC regulatory proceedings and extensive litigation in various jurisdictions, including multi-jurisdiction complex federal and state class action and personal injury claims, which required significant management attention and disrupted our business operations, and adversely affected our financial condition, operating results, and our brand.

 

In March 2014, we recalled one of our products, the Fitbit Force, after some of our users experienced allergic reactions to adhesives in the wristband. These reactions included skin irritation, rashes, and blistering. The recall had a negative impact on our operating results, primarily in our fourth quarter of 2013 and the first quarter of 2014. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Fitbit Force Product Recall” for additional information regarding the financial impact of the recall on our historical operating results. We have provided and are continuing to provide full refunds to consumers who return the Fitbit Force. Users may also exchange their Fitbit Force for a Fitbit Charge. If returns of the Fitbit Force or other costs related to the recall are higher than anticipated, we will be required to increase our reserves related to the recall which would negatively impact our operating results in the future.

 

The recall is being conducted in conjunction with the CPSC, which has been monitoring recall effectiveness and compliance. In addition to the financial impacts discussed elsewhere in this prospectus, this recall requires us to provide a significant amount of information to the CPSC and to continue to provide reports on an ongoing basis, which takes significant time and internal and external resources.

 

A large number of lawsuits, including multi-jurisdiction complex federal and state class action and personal injury claims, were filed against us relating to the Fitbit Force. These litigation matters have required significant attention of our management and resources and disrupted the ordinary course of our business operations. While we have settled all of the class action lawsuits, a number of personal injury claims remain outstanding. While we do not believe that these on-going legal proceedings relating to the Fitbit Force are material, due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of any such proceedings and these actions or other third-party claims against us will result in the diversion of management time and attention from other aspects of our business and may cause us to incur substantial litigation or settlement costs.

 

In addition, the CPSC conducted an investigation into several of our products. Although the CPSC has not found a substantial product hazard, there can be no assurances that investigations will not be conducted or that product hazards or other defects will not be found in the future with respect to our products. The Fitbit Force product recall, regulatory proceedings, and litigation have had and may continue to have, and any future recalls, regulatory proceedings, and litigation could have an adverse impact on our financial condition, operating results, and brand. Furthermore, because of the global nature of our product sales, in the event we experience defects with respect to products sold outside the United States, we could become subject to recalls, regulatory proceedings, and litigation by foreign governmental agencies and private litigants, which could significantly increase the costs of managing any product issues. Any ongoing and future regulatory proceedings or litigation, regardless of their merits, could further divert management’s attention from our operations and result in substantial legal fees and other costs.

 

There have been reports that some users of the Fitbit Flex, Fitbit Charge, Fitbit Charge HR, and Fitbit Surge have experienced skin irritations, which could result in additional negative publicity or otherwise harm our business. In addition, some of our users have filed personal injury lawsuits against us relating to the Fitbit Flex, Fitbit Charge, Fitbit Charge HR, and Fitbit Surge products, which could divert management’s attention from our operations and result in substantial legal fees and other costs.

 

Due to the nature of some of our wearable devices, some users have had in the past and may in the future experience skin irritations or other biocompatibility issues not uncommon with jewelry or other wearable products that stay in contact with skin for extended periods of time. There have been reports of some users of Fitbit Flex, Fitbit Charge, Fitbit Charge HR, and Fitbit Surge experiencing skin irritations. This negative publicity could harm sales of our products and also adversely affect our relationships with retailers that sell our products, including causing them to be reluctant to continue to sell our products. In addition, some of our users

 

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have filed personal injury lawsuits against us relating to the Fitbit Zip, Fitbit One, Fitbit Flex, Fitbit Charge, Fitbit Charge HR, and Fitbit Surge products. While we do not believe that these lawsuits are material, due to the inherent uncertainties of litigation we cannot accurately predict the ultimate outcome of any proceedings arising from such claims, and these actions or other third-party claims against us may result in the diversion of our management’s time and attention from other aspects of our business and may cause us to incur substantial litigation or settlement costs. If large numbers of users experience these problems, we could be subject to enforcement actions or the imposition of significant monetary fines, other penalties, or proceedings by the CPSC or other U.S. or foreign regulatory agencies and face additional personal injury or class action litigation, any of which could have a material adverse impact on our business, financial condition, and operating results.

 

We may not be able to sustain our revenue growth or profitability in the future.

 

Our recent revenue growth should not be considered indicative of our future performance. As we grow our business, we expect our revenue growth to slow in future periods due to a number of reasons, which may include slowing demand for our products and services, increasing competition, a decrease in the growth of our overall market, our failure, for any reason, to continue to capitalize on growth opportunities, or the maturation of our business. Due to competitive pricing pressures, new product introductions by us or our competitors, or other factors, the average selling price of our products and services may decrease. If we are unable to offset any decreases in our average selling price by increasing our sales volumes or by adjusting our product mix, our operating results and financial condition may be harmed.

 

While we achieved profitability in 2014, we have not consistently achieved profitability on a quarterly or annual basis. We expect expenses to increase substantially in the near term, particularly as we make significant investments in our research and development and sales and marketing organizations, expand our operations and infrastructure both domestically and internationally, develop new products and services, and enhance our existing products and services. In addition, we expect to incur additional significant legal, accounting, and other expenses in connection with operating as a public company. If our revenue does not increase to offset these increases in our operating expenses, we may not be profitable in future periods.

 

Our operating margins may decline as a result of increasing product costs.

 

Our business is subject to significant pressure on pricing and costs caused by many factors, including intense competition, the cost of components used in our products, labor costs, constrained sourcing capacity, inflationary pressure, pressure from users to reduce the prices we charge for our products and services, and changes in consumer demand. Costs for the raw materials used in the manufacture of our products are affected by, among other things, energy prices, consumer demand, fluctuations in commodity prices and currency, and other factors that are generally unpredictable and beyond our control. Increases in the cost of raw materials used to manufacture our products or in the cost of labor and other costs of doing business in the United States and internationally could have an adverse effect on, among other things, the cost of our products, gross margins, operating results, financial condition, and cash flows. Moreover, if we are unable to offset any decreases in our average selling price by increasing our sales volumes or by adjusting our product mix, our operating results and financial condition may be harmed.

 

Our business is affected by seasonality.

 

Our business is affected by general seasonal spending trends associated with holidays. For example, our fourth quarter has typically been our strongest quarter in terms of revenue, reflecting our historical strength in sales during the holiday season. We generated approximately 43%, 40%, and 50% of our full year revenue during the fourth quarters of 2012, 2013, and 2014, respectively. Accordingly, any shortfall in expected fourth quarter revenue would adversely affect our annual operating results. Furthermore, our rapid growth in recent years may obscure the extent to which seasonality trends have affected our business and may continue to affect our business. Accordingly, yearly or quarterly comparisons of our operating results may not be useful and our results in any particular period will not

 

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necessarily be indicative of the results to be expected for any future period. Seasonality in our business can also be impacted by introductions of new or enhanced products and services, including the costs associated with such introductions.

 

Any material disruption of our information technology systems, such as the five-hour outage we experienced during the peak holiday season in December 2014, or those of third-party partners could materially damage user and business partner relationships, and subject us to significant reputational, financial, legal, and operational consequences.

 

We depend on our information technology systems, as well as those of third parties, to develop new products and services, operate our website, host and manage our services, store data, process transactions, respond to user inquiries, and manage inventory and our supply chain. Any material disruption or slowdown of our systems or those of third parties whom we depend upon, including a disruption or slowdown caused by our failure to successfully manage significant increases in user volume or successfully upgrade our or their systems, system failures, or other causes, could cause outages or delays in our services, which could harm our brand and adversely affect our operating results. In addition, such disruption could cause information, including data related to orders, to be lost or delayed which could—especially if the disruption or slowdown occurred during the holiday season—result in delays in the delivery of products to stores and users or lost sales, which could reduce demand for our merchandise, harm our brand and reputation, and cause our revenue to decline. For example, during the peak holiday season in December 2014, we suffered an approximately five-hour outage of our information systems due to high levels of platform usage, which rendered us unable to process and support new users signing onto our platform during that time. If changes in technology cause our information systems, or those of third parties whom we depend upon, to become obsolete, or if our or their information systems are inadequate to handle our growth, we could lose users and our business and operating results could be adversely affected.

 

We collect, store, process, and use personal information and other customer data, which subjects us to governmental regulation and other legal obligations related to privacy, information security, and data protection, and any security breaches or our actual or perceived failure to comply with such legal obligations could harm our business.

 

We collect, store, process, and use personal information and other user data, and we rely on third parties that are not directly under our control to do so as well. Our users’ health and fitness-related data and other highly personal information may include, among other information, names, addresses, phone numbers, email addresses, payment account information, height, weight, and biometric information such as heart rates, sleeping patterns, GPS-based location, and activity patterns. Due to the volume and sensitivity of the personal information and data we manage and the nature of our products, the security features of our platform and information systems are critical. If our security measures, some of which are managed by third parties, are breached or fail, unauthorized persons may be able to obtain access to or acquire sensitive user data. If we or our third-party service providers, business partners, or third-party apps with which our users choose to share their Fitbit data were to experience a breach of systems compromising our users’ sensitive data, our brand and reputation could be adversely affected, use of our products and services could decrease, and we could be exposed to a risk of loss, litigation, and regulatory proceedings. Depending on the nature of the information compromised, in the event of a data breach or other unauthorized access to or acquisition of our user data, we may also have obligations to notify users about the incident and we may need to provide some form of remedy, such as a subscription to a credit monitoring service, for the individuals affected by the incident. A growing number of legislative and regulatory bodies have adopted consumer notification requirements in the event of unauthorized access to or acquisition of certain types of personal data. Such breach notification laws continue to evolve and may be inconsistent from one jurisdiction to another. Complying with these obligations could cause us to incur substantial costs and could increase negative publicity surrounding any incident that compromises user data. Our users may also accidentally disclose or lose control of their passwords, creating the perception that our systems are not secure against third-party access. Additionally, if third-party service providers that host user data on our behalf experience security breaches or violate applicable

 

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laws, agreements, or our policies, such events may also put our users’ information at risk and could in turn have an adverse effect on our business. While we maintain insurance coverage that, subject to policy terms and conditions and a significant self-insured retention, is designed to address certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses or all types of claims that may arise in the event we experience a security breach.

 

Our success depends on our ability to maintain our brand. If events occur that damage our brand, our business and financial results may be harmed.

 

Our success depends on our ability to maintain the value of the “Fitbit” brand. The “Fitbit” name is integral to our business as well as to the implementation of our strategies for expanding our business. Maintaining, promoting, and positioning our brand will depend largely on the success of our marketing and merchandising efforts, our ability to provide consistent, high quality products and services, and our ability to successfully secure, maintain, and defend our rights to use the “Fitbit” mark and other trademarks important to our brand. Our brand could be harmed if we fail to achieve these objectives or if our public image or brand were to be tarnished by negative publicity. For example, there has been media coverage of some of the users of our products reporting skin irritation, as well as personal injury lawsuits filed against us relating to the Fitbit Zip, Fitbit One, Fitbit Flex, Fitbit Charge, Fitbit Charge HR, and Fitbit Surge products. We also believe that our reputation and brand may be harmed if we fail to maintain a consistently high level of customer service. In addition, we believe the popularity of the “Fitbit” brand makes it a target for counterfeiting or imitation, with third parties attempting to sell counterfeit products that attempt to replicate our products. Any occurrence of counterfeiting, imitation, or confusion with our brand could adversely affect our reputation, place negative pricing pressure on our products, reduce sales of our products, and impair the value of our brand. Maintaining, protecting, and enhancing our brand may require us to make substantial investments, and these investments may not be successful. If we fail to successfully maintain, promote, and position our brand and protect our reputation or if we incur significant expenses in this effort, our business, financial condition and operating results may be adversely affected.

 

The failure to effectively manage the introduction of new or enhanced products may adversely affect our operating results.

 

We must successfully manage introductions of new or enhanced products. Introductions of new or enhanced products could adversely impact the sales of our existing products to retailers and consumers. For instance, retailers often purchase less of our existing products in advance of new product launches. Moreover, consumers may decide to purchase new or enhanced products instead of existing products. This could lead to excess inventory and discounting of our existing products. In addition, we have historically incurred higher levels of sales and marketing expenses accompanying each product introduction. Accordingly, if we fail to effectively manage introductions of new or enhanced products, our operating results would be harmed.

 

We depend on retailers and distributors to sell and market our products, and our failure to maintain and further develop our sales channels could harm our business.

 

We primarily sell our products through retailers and distributors and depend on these third-parties to sell and market our products to consumers. Any changes to our current mix of retailers and distributors could adversely affect our gross margin and could negatively affect both our brand image and our reputation. Our sales depend, in part, on retailers adequately displaying our products, including providing attractive space and point of purchase, or POP, displays in their stores, and training their sales personnel to sell our products. If our retailers and distributors are not successful in selling our products or overestimate demand for our products, our revenue would decrease and we could experience lower gross margin due to product returns or price protection claims. Our retailers also often offer products and services of our competitors in their stores. In addition, our success in expanding and entering into new markets internationally will depend on our ability to establish relationships with new retailers and distributors. We also sell and will need to continue to expand our sales through online retailers,

 

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such as Amazon.com. If we do not maintain our relationship with existing retailers and distributors or develop relationships with new retailers and distributors our ability to sell our products and services could be adversely affected and our business may be harmed.

 

In 2014 and for the nine months ended September 30, 2015, our five largest retailers and distributors accounted for approximately 49% and 53% of our revenue, respectively. Of these retailers and distributors, Wynit Distribution, Best Buy, and Amazon.com accounted for approximately 13%, 12%, and 11% of our revenue for 2014, respectively, and approximately 15%, 12%, and 12% of our revenue for the nine months ended September 30, 2015, respectively. Accordingly, the loss of a small number of our large retailers and distributors, or the reduction in business with one or more of these retailers and distributors, could have a significant adverse impact on our operating results. While we have agreements with these large retailers and distributors, these agreements do not require them to purchase any meaningful amount of our products.

 

Consolidation of retailers or concentration of retail market share among a few retailers may increase and concentrate our credit risk and impair our ability to sell products.

 

The wearable, fitness, and electronics retail markets in some countries are dominated by a few large retailers with many stores. These retailers have in the past increased their market share and may continue to do so in the future by expanding through acquisitions and construction of additional stores. These situations concentrate our credit risk with a relatively small number of retailers, and, if any of these retailers were to experience a shortage of liquidity, it would increase the risk that their outstanding payables to us may not be paid. In addition, increasing market share concentration among one or a few retailers in a particular country or region increases the risk that if any one of them substantially reduces their purchases of our connected health and fitness devices, we may be unable to find a sufficient number of other retail outlets for our products to sustain the same level of sales. Any reduction in sales by our retailers would adversely affect our revenue, operating results, and financial condition.

 

The insolvency, credit problems, or other financial difficulties confronting our retailers and distributors could expose us to financial risk.

 

Some of our retailers and distributors have experienced financial difficulties in the past. The insolvency, credit problems, or other financial difficulties confronting our retailers and distributors could expose us to financial risk. In addition, if the credit capacity of any retailers or distributors and accounts receivable balances increase, we may be subject to additional financial risk. Financial difficulties of our retailers and distributors could impede their effectiveness and also expose us to risks if they are unable to pay for the products they purchase from us. The difficulties of retailers and distributors may also lead to price cuts of our products and adverse effects on our brand and operating results. Any reduction in sales by our current retailers or distributors, loss of large resellers or distributors, or decrease in revenue from our retailers or distributors could adversely affect our revenue, operating results, and financial condition.

 

We have recently begun to spend significant amounts on advertising and other marketing campaigns to acquire new users, which may not be successful or cost-effective.

 

We have recently begun to spend significant amounts on advertising and other marketing campaigns, such as television, cinema, print advertising, and social media, as well as increased promotional activities, to acquire new users and we expect our marketing expenses to increase in the future as we continue to spend significant amounts to acquire new users and increase awareness of our products and services. In 2014 and for the nine months ended September 30, 2015, advertising expenses were $71.9 million and $119.5 million, respectively, representing approximately 10% and 10% of our revenue, respectively. While we seek to structure our advertising campaigns in the manner that we believe is most likely to encourage people to use our products and services, we may fail to identify advertising opportunities that satisfy our anticipated return on advertising spend as we scale our investments in marketing, accurately predict user acquisition, or fully understand or estimate the conditions and behaviors that drive user behavior. If for any reason any of our advertising campaigns prove less

 

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successful than anticipated in attracting new users, we may not be able to recover our advertising spend, and our rate of user acquisition may fail to meet market expectations, either of which could have an adverse effect on our business. There can be no assurance that our advertising and other marketing efforts will result in increased sales of our products and services.

 

If we continue to grow at a rapid pace, we may not be able to effectively manage our growth and the increased complexity of our business, which could negatively impact our brand and financial performance.

 

We were founded in 2007 and have expanded our operations rapidly since our inception. Our employee headcount and the scope and complexity of our business have increased significantly, with the number of employees increasing from 222 as of December 31, 2013 to 905 as of September 30, 2015, and we expect headcount growth to continue for the foreseeable future. If our operations continue to grow at a rapid pace, we may experience difficulties in obtaining components for our products in quantities sufficient to meet market demand, as well as delays in production and shipments, as our products are subject to risks associated with third-party sourcing and manufacturing. We could be required to continue to expand our sales and marketing, product development, and distribution functions, to upgrade our management information systems and other processes and technology, and to obtain more space for our expanding workforce. This expansion could increase the strain on our resources, and we could experience serious operating difficulties, including difficulties in hiring, training, and managing an increasing number of employees. If we do not adapt to meet these evolving challenges, and if the current and future members of our management team do not effectively scale with our growth, we may experience erosion to our brand, the quality of our products and services may suffer, and our corporate culture may be harmed.

 

Because we have only a limited history operating our business at its current scale, it is difficult to evaluate our current business and future prospects, including our ability to plan for and model future growth. Our limited operating experience at this scale, combined with the rapidly evolving nature of the market in which we sell our products and services, substantial uncertainty concerning how these markets may develop, and other economic factors beyond our control, reduces our ability to accurately forecast quarterly or annual revenue. As such, any predictions about our future revenue and expenses may not be as accurate as they would be if we had a longer operating history or operated in a more developed and predictable market. Failure to manage our future growth effectively could have an adverse effect on our business, which, in turn, could have an adverse impact on our operating results and financial condition.

 

Our failure or inability to protect our intellectual property rights, or claims by others that we are infringing upon or unlawfully using their intellectual property could diminish the value of our brand and weaken our competitive position, and adversely affect our business, financial condition, operating results, and prospects.

 

We currently rely on a combination of patent, copyright, trademark, trade secret, and unfair competition laws, as well as confidentiality agreements and procedures and licensing arrangements, to establish and protect our intellectual property rights. We have devoted substantial resources to the development of our proprietary technologies and related processes. In order to protect our proprietary technologies and processes, we rely in part on trade secret laws and confidentiality agreements with our employees, licensees, independent contractors, commercial partners, and other advisors. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. We cannot be certain that the steps taken by us to protect our intellectual property rights will be adequate to prevent infringement of such rights by others, including imitation of our products and misappropriation of our brand. Additionally, the process of obtaining patent or trademark protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications or apply for all necessary or desirable trademark applications at a reasonable cost or in a timely manner. We have obtained and applied for U.S. and foreign trademark registrations for the “Fitbit” brand and a variety of our product names, and will continue to evaluate the registration of additional trademarks as appropriate. However, we cannot guarantee that any of our pending trademark or patent applications will be approved by the applicable governmental authorities. Moreover, intellectual property protection may be unavailable or limited in some

 

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foreign countries where laws or law enforcement practices may not protect our intellectual property rights as fully as in the United States, and it may be more difficult for us to successfully challenge the use of our intellectual property rights by other parties in these countries. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and our failure or inability to obtain or maintain trade secret protection or otherwise protect our proprietary rights could adversely affect our business.

 

We are and may in the future be subject to patent infringement and trademark claims and lawsuits in various jurisdictions, and we cannot be certain that our products or activities do not violate the patents, trademarks, or other intellectual property rights of third-party claimants. Companies in the technology industry and other patent, copyright, and trademark holders seeking to profit from royalties in connection with grants of licenses own large numbers of patents, copyrights, trademarks, domain names, and trade secrets and frequently commence litigation based on allegations of infringement, misappropriation, or other violations of intellectual property or other rights. As we face increasing competition and gain an increasingly high profile, the intellectual property rights claims against us and asserted by us have grown and will likely continue to grow. For example, we are currently involved in litigation with Aliphcom, Inc. d/b/a Jawbone, or Jawbone and its subsidiaries, which is described in “Business—Legal Proceedings.”

 

We intend to vigorously defend and prosecute these litigation matters and, based on our review, we believe we have valid defenses and claims with respect to each of these matters. However, litigation is inherently uncertain, and any judgment or injunctive relief entered against us or any adverse settlement could materially and adversely impact our business, financial condition, operating results, and prospects. In addition, litigation can involve significant management time and attention and can be expensive, regardless of outcome. During the course of these litigation matters, there may be announcements of the results of hearings and motions, and other interim developments related to the litigation matters. If securities analysts or investors regard these announcements as negative, the market price of our common stock may decline.

 

Further, from time to time, we have received and may continue to receive letters from third parties alleging that we are infringing upon their intellectual property rights. Our technologies and other intellectual property may not be able to withstand such third-party claims, and successful infringement claims against us could result in significant monetary liability, prevent us from selling some of our products and services, or require us to change our branding. In addition, resolution of claims may require us to redesign our products, license rights from third parties at a significant expense, or cease using those rights altogether. We have also in the past and may in the future bring claims against third parties for infringing our intellectual property rights. Costs of supporting such litigation and disputes may be considerable, and there can be no assurances that a favorable outcome will be obtained. Patent infringement, trademark infringement, trade secret misappropriation, and other intellectual property claims and proceedings brought against us or brought by us, whether successful or not, could require significant attention of our management and resources and have in the past and could further result in substantial costs, harm to our brand, and have an adverse effect on our business.

 

Cybersecurity risks could adversely affect our business and disrupt our operations.

 

The threats to network and data security are increasingly diverse and sophisticated. Despite our efforts and processes to prevent breaches, our devices, as well as our servers, computer systems, and those of third parties that we use in our operations are vulnerable to cybersecurity risks, including cyber attacks such as viruses and worms, phishing attacks, denial-of-service attacks, physical or electronic break-ins, employee theft or misuse, and similar disruptions from unauthorized tampering with our servers and computer systems or those of third parties that we use in our operations, which could lead to interruptions, delays, loss of critical data, and loss of consumer confidence. In addition, we may be the target of email scams that attempt to acquire sensitive information or company assets. Despite our efforts to create security barriers to such threats, we may not be able to entirely mitigate these risks. Any cyber attack that attempts to obtain our data and assets, disrupt our service, or otherwise access our systems, or those of third parties we use, if successful, could adversely affect our business, operating results, and financial condition, be expensive to remedy, and damage our reputation.

 

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Our financial performance is subject to risks associated with changes in the value of the U.S. dollar versus local currencies.

 

Our primary exposure to movements in foreign currency exchange rates relates to non-U.S. dollar denominated sales and operating expenses worldwide. Weakening of foreign currencies relative to the U.S. dollar adversely affects the U.S. dollar value of our foreign currency-denominated sales and earnings, and generally leads us to raise international pricing, potentially reducing demand for our products. In some circumstances, for competitive or other reasons, we may decide not to raise local prices to fully offset the strengthening of the U.S. dollar, or at all, which would adversely affect the U.S. dollar value of our foreign currency denominated sales and earnings. Conversely, a strengthening of foreign currencies relative to the U.S. dollar, while generally beneficial to our foreign currency-denominated sales and earnings, could cause us to reduce international pricing, incur losses on our foreign currency derivative instruments, and incur increased operating expenses thereby limiting any benefit. Additionally, strengthening of foreign currencies may also increase our cost of product components denominated in those currencies, thus adversely affecting gross margins.

 

We use derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not offset any, or more than a portion, of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place.

 

Our inability to effectively control the sales of our products on the gray market could adversely affect our business, operating results, and financial condition.

 

From time to time, our products may be diverted from our authorized retailers and distributors and sold on the “gray market.” Gray market products result in shadow inventory that is not visible to us, thus making it difficult to forecast demand accurately. Also, when gray market products enter the market, we and our channel partners compete with often heavily discounted gray market products, which adversely affects demand for our products and negatively impacts our margins. In addition, our inability to control gray market activities could result in user satisfaction issues, which may have a negative impact on our brand. When products are purchased outside our authorized retailers and distributors, there is a risk that our customers are buying substandard products, including products that may have been altered, mishandled, or damaged, or used products represented as new.

 

To date, we have derived substantially all of our revenue from sales of our connected health and fitness devices, and sales of our subscription-based premium services have historically accounted for less than 1% of our revenue.

 

To date, substantially all of our revenue has been derived from sales of our connected health and fitness devices, and we expect to continue to derive the substantial majority of our revenue from sales of these devices for the foreseeable future. In each of 2012, 2013, 2014, and the nine months ended September 30, 2014 and 2015, we derived less than 1% of our revenue from sales of our subscription-based premium services. However, in the future we expect to increase sales of subscriptions to these services. Our inability to successfully sell and market our premium services could deprive us of a potentially significant source of revenue in the future. In addition, sales of our premium services may lead to additional sales of our connected health and fitness devices and user engagement with our platform. As a result, our future growth and financial performance may depend, in part, on our ability to sell more subscriptions to our premium services.

 

Our business is subject to a variety of U.S. and foreign laws and regulations that are continuously evolving, including those related to privacy, data security, and data protection due to our collection, processing, and use of personal information and other user data, such as the E.U. Data Protection Directive which covers the transfer of personal data from the European Union to the United States.

 

We are or may become subject to a variety of laws and regulations in the United States and abroad that involve matters central to our business, including laws and regulations regarding privacy, data protection, data

 

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security, data retention, consumer protection, advertising, electronic commerce, intellectual property, manufacturing, anti-bribery and anti-corruption, and economic or other trade prohibitions or sanctions. These laws and regulations are continuously evolving and developing. The scope and interpretation of the laws that are or may be applicable to us are often uncertain and may be conflicting, particularly with respect to foreign laws.

 

In particular, there are numerous U.S. federal, state, and local laws and regulations and foreign laws and regulations regarding privacy and the collection, sharing, use, processing, disclosure, and protection of personal information and other user data, the scope of which is changing, subject to differing interpretations, and may be inconsistent among different jurisdictions. We strive to comply with all applicable laws, policies, legal obligations, and industry codes of conduct relating to privacy, data security, and data protection. However, given that the scope, interpretation, and application of these laws and regulations are often uncertain and may be conflicting, it is possible that these obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Any failure or perceived failure to comply with our privacy or security policies or privacy-related legal obligations by us or third-party service-providers or the failure or perceived failure by third-party apps, with which our users choose to share their Fitbit data, to comply with their privacy policies or privacy-related legal obligations as they relate to the Fitbit data shared with them, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other user data, may result in governmental enforcement actions, litigation, or negative publicity, and could have an adverse effect on our brand and operating results.

 

We have certified that we comply with the U.S.-E.U. Safe Harbor Framework as developed by the U.S. Department of Commerce, which has historically provided a method for U.S. companies operating within the European Union to transfer personal data from citizens of E.U. member countries to the United States in a way that is consistent with the E.U. Data Protection Directive. However, the Court of Justice of the European Union recently declared the U.S.-E.U. Safe Harbor Framework invalid. Accordingly, we will need to develop alternative solutions to ensure that data transfers from the E.U. to the United States provide adequate protections to comply with the E.U. Data Protection Directive. If we fail to develop such alternative data transfer solutions, one or more national data protection authorities in the European Union could bring enforcement actions seeking to prohibit or suspend our data transfers to the United States and we could also face additional legal liability, fines, negative publicity, and resulting loss of business.

 

Certain health-related laws and regulations such as the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and the Health Information Technology for Economic and Clinical Health Act, or HITECH, may have an impact on our business. For example, we recently announced that we intend to offer HIPAA compliant capabilities to certain customers of our corporate wellness offerings who are “covered entities” under HIPAA, which may include our execution of Business Associate Agreements with such covered entities. In addition, changes in applicable laws and regulations may result in the user data we collect being deemed protected health information, or PHI, under HIPAA and HITECH. If we are unable to comply with the applicable privacy and security requirements under HIPAA and HITECH, or we fail to comply with Business Associate Agreements that we enter into with covered entities, we could be subject to claims, legal liabilities, penalties, fines, and negative publicity, which could harm our operating results.

 

Governments are continuing to focus on privacy and data security and it is possible that new privacy or data security laws will be passed or existing laws will be amended in a way that is material to our business. Any significant change to applicable laws, regulations, or industry practices regarding our users’ data could require us to modify our services and features, possibly in a material manner, and may limit our ability to develop new products, services, and features. Although we have made efforts to design our policies, procedures, and systems to comply with the current requirements of applicable state, federal, and foreign laws, changes to applicable laws and regulations in this area could subject us to additional regulation and oversight, any of which could significantly increase our operating costs.

 

The labeling, distribution, importation, marketing, and sale of our products are subject to extensive regulation by various U.S. state and federal and foreign agencies, including the CPSC, Federal Trade

 

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Commission, Food and Drug Administration, or FDA, Federal Communications Commission, and state attorneys general, as well as by various other federal, state, provincial, local, and international regulatory authorities in the countries in which our products and services are distributed or sold. If we fail to comply with any of these regulations, we could become subject to enforcement actions or the imposition of significant monetary fines, other penalties, or claims, which could harm our operating results or our ability to conduct our business.

 

The global nature of our business operations also create various domestic and foreign regulatory challenges and subject us to laws and regulations such as the U.S. Foreign Corrupt Practices Act, or FCPA, the U.K. Bribery Act, and similar anti-bribery and anti-corruption laws in other jurisdictions, and our products are also subject to U.S. export controls, including the U.S. Department of Commerce’s Export Administration Regulations and various economic and trade sanctions regulations established by the Treasury Department’s Office of Foreign Assets Controls. If we become liable under these laws or regulations, we may be forced to implement new measures to reduce our exposure to this liability. This may require us to expend substantial resources or to discontinue certain products or services, which would negatively affect our business, financial condition, and operating results. In addition, the increased attention focused upon liability issues as a result of lawsuits, regulatory proceedings, and legislative proposals could harm our brand or otherwise impact the growth of our business. Any costs incurred as a result of compliance or other liabilities under these laws or regulations could harm our business and operating results.

 

Our international operations subject us to additional costs and risks, and our continued expansion internationally may not be successful.

 

We have entered into many international markets in a relatively short time and may enter into additional markets in the future. Outside of the United States, we currently have operations in Australia and a number of countries in Asia and Europe. There are significant costs and risks inherent in conducting business in international markets, including:

 

   

establishing and maintaining effective controls at foreign locations and the associated increased costs;

 

   

adapting our technologies, products, and services to non-U.S. consumers’ preferences and customs;

 

   

variations in margins by geography;

 

   

increased competition from local providers of similar products;

 

   

longer sales or collection cycles in some countries;

 

   

compliance with foreign laws and regulations;

 

   

compliance with the laws of numerous taxing jurisdictions where we conduct business, potential double taxation of our international earnings, and potentially adverse tax consequences due to U.S. and foreign tax laws as they relate to our international operations;

 

   

compliance with anti-bribery laws, such as the FCPA and the U.K. Bribery Act, by us, our employees, and our business partners;

 

   

complexity and other risks associated with current and future foreign legal requirements, including legal requirements related to consumer protection, consumer product safety, and data privacy frameworks, such as the E.U. Data Protection Directive, the proposed E.U. Data Protection Regulation, and applicable privacy and data protection laws in foreign jurisdictions where we currently conduct business or intend to conduct business in the future;

 

   

currency exchange rate fluctuations and related effects on our operating results;

 

   

economic and political instability in some countries, particularly those in China where we have recently expanded;

 

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the uncertainty of protection for intellectual property rights in some countries and practical difficulties of enforcing rights abroad; and

 

   

other costs of doing business internationally.

 

These factors and other factors could harm our international operations and, consequently, materially impact our business, operating results, and financial condition. Further, we may incur significant operating expenses as a result of our international expansion, and it may not be successful. We have limited experience with regulatory environments and market practices internationally, and we may not be able to penetrate or successfully operate in new markets. We may also encounter difficulty expanding into new international markets because of limited brand recognition in certain parts of the world, leading to delayed acceptance of our products and services by users in these new international markets. If we are unable to continue to expand internationally and manage the complexity of our global operations successfully, our financial condition and operating results could be adversely affected.

 

We depend on third-party data center service providers. Any disruption in the operation of the data center facilities or failure to renew the services could adversely affect our business.

 

Our services are hosted using data centers operated by third parties. We control neither the operation of the data centers nor our third-party data center service providers. We have entered into agreements for the lease of our data centers with third-party data center service providers which expire at various times. The third-party data center service providers may have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms, we may be required to transfer our servers or data to new data center facilities or engage new service providers, and we may incur significant costs and a possible interruption in our platform in connection with doing so.

 

Problems with our third-party data center service providers, the telecommunications network providers with whom they contract, or with the systems by which telecommunications providers allocate capacity among their users could adversely affect the experience of our users. Our third-party data center service providers could decide to close their facilities or cease providing us services without adequate notice. In addition, any financial difficulties, such as bankruptcy, faced by our third-party data center service providers or parties they contract with may have negative effects on our business, the nature and extent of which are difficult to predict. Additionally, any failure of our data centers to meet our needs for capacity could have an adverse effect on our business. Any changes in third-party service levels at our data centers or any errors, defects, disruptions, or other performance problems with our platform could harm our brand and may damage the data of our users. We have in the past had outages at our data centers, and future interruptions to our platform might reduce our revenue, cause us to issue refunds, subject us to potential liability, or harm our ability to retain users and attract new users.

 

Our future success depends on the continuing efforts of our key employees, including our founders, James Park and Eric N. Friedman, and on our ability to attract and retain highly skilled personnel and senior management.

 

Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel. In particular, we are highly dependent on the contributions of our co-founders, James Park and Eric N. Friedman, as well as other members of our management team. The loss of any key personnel could make it more difficult to manage our operations and research and development activities, reduce our employee retention and revenue, and impair our ability to compete. Although we have generally entered into employment offer letters with our key personnel, these agreements have no specific duration and provide for at-will employment, which means they may terminate their employment relationship with us at any time.

 

Competition for highly skilled personnel is often intense, especially in the San Francisco Bay Area where we are located, and we may incur significant costs to attract them. We may not be successful in attracting, integrating, or retaining qualified personnel to fulfill our current or future needs. We have, from time to time, experienced, and we

 

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expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. In addition, job candidates and existing employees often consider the value of the equity awards they receive in connection with their employment. If the perceived value of our equity or equity awards declines, it may adversely affect our ability to retain highly skilled employees. Additionally, we have a number of current employees whose equity ownership in our company gives them a substantial amount of personal wealth. Likewise, we have a number of current employees whose equity awards are fully vested and are entitled to receive substantial amounts of our capital stock. As a result, it may be difficult for us to continue to retain and motivate these employees, and this wealth could affect their decisions about whether or not they continue to work for us. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed.

 

Changes in legislation in U.S. and foreign taxation of international business activities or the adoption of other tax reform policies, as well as the application of such laws, could materially impact our financial position and operating results.

 

Recent or future changes to the U.S. and other foreign tax laws could impact the tax treatment of our foreign earnings. We generally conduct our international operations through wholly-owned subsidiaries, branches, or representative offices and report our taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. Our income tax obligations are based on our corporate operating structure, including the manner in which we develop, value, and use our intellectual property, scope of our international operations, and intercompany arrangements with and amongst the subsidiaries within the company group. Our direct and indirect subsidiaries are subject to complex transfer pricing tax regulations administered by taxing authorities in various jurisdictions. Changes in the tax laws applicable to our international business activities, including the laws of the U.S. and other jurisdictions, may increase our worldwide effective tax rate, and may adversely affect our financial position, and operating results.

 

In addition, our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in foreign currency exchange rates, or by changes in the relevant tax, accounting, and other laws, regulations, principles, and interpretations, or by changes in the valuation of our deferred tax assets and liabilities. As we operate in numerous taxing jurisdictions, the application of tax laws can be subject to diverging and sometimes conflicting interpretations by tax authorities of these jurisdictions.

 

We are subject to review and audit by U.S. and other tax authorities. If any tax authority disagrees with any position we have taken, our tax liabilities and operating results may be adversely affected.

 

If we are unable to protect our domain names, our brand, business, and operating results could be adversely affected.

 

We have registered domain names for websites, or URLs, that we use in our business, such as Fitbit.com. If we are unable to maintain our rights in these domain names, our competitors or other third parties could capitalize on our brand recognition by using these domain names for their own benefit. In addition, although we own the “Fitbit” domain name under various global top level domains such as .com and .net, as well as under various country-specific domains, we might not be able to, or may choose not to, acquire or maintain other country-specific versions of the “Fitbit” domain name or other potentially similar URLs. The regulation of domain names in the United States and elsewhere is generally conducted by Internet regulatory bodies and is subject to change. If we lose the ability to use a domain name in a particular country, we may be forced to either incur significant additional expenses to market our solutions within that country, including the development of a new brand and the creation of new promotional materials, or elect not to sell our solutions in that country. Either result could substantially harm our business and operating results. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars, or modify the requirements for holding domain names. As a result, we may not be able to acquire or maintain the domain names that utilize the name “Fitbit” in all of the countries in which we currently conduct or intend to conduct business. Further, the relationship between

 

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regulations governing domain names and laws protecting trademarks and similar proprietary rights varies among jurisdictions and is unclear in some jurisdictions. Domain names similar to ours have already been registered in the United States and elsewhere, and we may be unable to prevent third parties from acquiring and using domain names that infringe, are similar to, or otherwise decrease the value of, our brand or our trademarks. Protecting and enforcing our rights in our domain names and determining the rights of others may require litigation, which could result in substantial costs, divert management attention, and not be decided favorably to us.

 

Our use of “open source” software could negatively affect our ability to sell our products and subject us to possible litigation.

 

A portion of the technologies we use incorporates “open source” software, and we may incorporate open source software in the future. Such open source software is generally licensed by its authors or other third parties under open source licenses. These licenses may subject us to certain unfavorable conditions, including requirements that we offer our products and services that incorporate the open source software for no cost, that we make publicly available source code for modifications or derivative works we create based upon, incorporating, or using the open source software, or that we license such modifications or derivative works under the terms of the particular open source license. Additionally, if a third-party software provider has incorporated open source software into software that we license from such provider, we could be required to disclose or provide at no cost any of our source code that incorporates or is a modification of such licensed software. If an author or other third party that distributes open source software that we use or license were to allege that we had not complied with the conditions of the applicable license, we could be required to incur significant legal expenses defending against such allegations and could be subject to significant damages and enjoined from the sale of our products and services that contained the open source software. Any of the foregoing could disrupt the distribution and sale of our products and services and harm our business.

 

We may engage in merger and acquisition activities, which could require significant management attention, disrupt our business, dilute stockholder value, and adversely affect our operating results.

 

As part of our business strategy, we may make investments in other companies, products, or technologies. We may not be able to find suitable acquisition candidates and we may not be able to complete acquisitions on favorable terms, if at all. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, and any acquisitions we complete could be viewed negatively by users or investors. In addition, if we fail to successfully integrate such acquisitions, or the technologies associated with such acquisitions, into our company, the revenue and operating results of the combined company could be adversely affected. For example, we acquired FitStar in March 2015 and we may fail to successfully integrate FitStar into our company.

 

Acquisitions may disrupt our ongoing operations, divert management from their primary responsibilities, subject us to additional liabilities, increase our expenses, and adversely impact our business, financial condition, operating results, and cash flows. We may not successfully evaluate or utilize the acquired technology and accurately forecast the financial impact of an acquisition transaction, including accounting charges. We may have to pay cash, incur debt, or issue equity securities to pay for any such acquisition, each of which could affect our financial condition or the value of our capital stock and could result in dilution to our stockholders. If we incur more debt it would result in increased fixed obligations and could also subject us to covenants or other restrictions that would impede our ability to manage our operations. Additionally, we may receive indications of interest from other parties interested in acquiring some or all of our business. The time required to evaluate such indications of interest could require significant attention from management, disrupt the ordinary functioning of our business, and adversely affect our operating results.

 

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The Aria Wi-Fi connected scale is subject to FDA regulation, and sales of this product or future regulated products could be adversely affected if we fail to comply with the applicable requirements.

 

The Aria scale is regulated as a medical device by the FDA and corresponding state regulatory agencies, and we may have future products that are regulated as medical devices. The medical device industry in the United States is regulated by governmental authorities, principally the FDA and corresponding state regulatory agencies. Before we can market or sell a new regulated product or make a significant modification to an existing medical device in the United States, we must obtain regulatory clearance or approval from the FDA, unless an exemption from pre-market review applies. We received a pre-market clearance for the Aria scale in June 2014. The process of obtaining regulatory clearances or approvals to market a medical device can be costly and time consuming, and we may not be able to obtain these clearances or approvals on a timely basis, or at all, for future products. Any delay in, or failure to receive or maintain, clearance or approval for any medical device products under development could prevent us from generating revenue from these products. Medical devices, including the Aria scale, are also subject to numerous ongoing compliance requirements under the regulations of the FDA and corresponding state regulatory agencies, which can be costly and time consuming. For example, under FDA regulations medical device manufacturers are required to, among other things, (i) establish a quality system to help ensure that their products consistently meet applicable requirements and specifications, (ii) establish and maintain procedures for receiving, reviewing, and evaluating complaints, (iii) establish and maintain a corrective and preventive action procedure, (iv) report certain device-related adverse events and product problems to the FDA, and (v) report to the FDA the removal or correction of a distributed product. If we experience any product problems requiring reporting to the FDA or if we otherwise fail to comply with applicable FDA regulations or the regulations of corresponding state regulatory agencies, with respect to the Aria scale or future regulated products, we could jeopardize our ability to sell our products and could be subject to enforcement actions such as fines, civil penalties, injunctions, recalls of products, delays in the introduction of products into the market, and refusal of the FDA or other regulators to grant future clearances or approvals, which could harm our reputation, business, operating results, and financial condition.

 

If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.

 

We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the rules and regulations of the applicable listing standards of the New York Stock Exchange. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting, and financial compliance costs, make some activities more difficult, time-consuming, and costly, and place significant strain on our personnel, systems, and resources.

 

The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are required to make a formal assessment and provide an annual management report on the effectiveness of our internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the Securities and Exchange Commission, or SEC, is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight.

 

Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our operating results or cause us to fail to meet

 

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our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our Class A common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the New York Stock Exchange.

 

Prior to our initial public offering we were a private company and were not required to test our internal controls on a systematic basis. Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until the later of (1) the year following our first annual report required to be filed with the SEC or (2) the date we are no longer an “emerging growth company.” We will cease to be an “emerging growth company” on December 31, 2015, and therefore, pursuant to Sections 302 and 404 of the Sarbanes-Oxley Act, we will be required to evaluate and determine the effectiveness, provide a management report and be subject to attestation of our internal control over financial reporting, beginning with our annual report for the fiscal year ending December 31, 2016. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed, or operating. Any failure to maintain effective disclosure controls and internal control over financial reporting could have a material and adverse effect on our business and operating results and could cause a decline in the price of our Class A common stock.

 

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.

 

Our business is subject to the risk of earthquakes, fire, power outages, floods, and other catastrophic events, and to interruption by manmade problems such as terrorism.

 

Our business is vulnerable to damage or interruption from earthquakes, fires, floods, power losses, telecommunications failures, terrorist attacks, acts of war, human errors, break-ins, and similar events. The third-party systems and operations and contract manufacturers we rely on, such as the data centers we lease, are subject to similar risks. For example, a significant natural disaster, such as an earthquake, fire, or flood, could have an adverse effect on our business, operating results, and financial condition, and our insurance coverage may be insufficient to compensate us for losses that may occur. Our corporate offices and one of our data center facilities are located in California, a state that frequently experiences earthquakes. In addition, the facilities at which our contract manufacturers manufacture our products are located in parts of Asia that frequently endure typhoons and earthquakes. Acts of terrorism, which may be targeted at metropolitan areas that have higher population density than rural areas, could also cause disruptions in our or our suppliers’, contract manufacturers’, and logistics providers’ businesses or the economy as a whole. We may not have sufficient protection or recovery plans in some circumstances, such as natural disasters affecting California or other locations where we have data centers or store significant inventory of our products. As we rely heavily on our data center facilities, computer and communications

 

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systems, and the Internet to conduct our business and provide high-quality customer service, these disruptions could negatively impact our ability to run our business and either directly or indirectly disrupt suppliers’ businesses, which could have an adverse effect on our business, operating results, and financial condition.

 

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 U.S. 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 “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 revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, inventories, product warranty reserves, the Fitbit Force recall, accounting for derivative financial instruments, business combinations, accounting for income taxes, and stock-based compensation expense. 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 the price of our Class A common stock.

 

Our revolving credit facilities provide our lenders with first-priority liens against substantially all of our assets, including our intellectual property, and contain financial covenants and other restrictions on our actions, which could limit our operational flexibility and otherwise adversely affect our financial condition.

 

Our credit agreements restrict our ability to, among other things:

 

   

use our accounts receivable, inventory, trademarks, and most of our other assets as security in other borrowings or transactions;

 

   

incur additional indebtedness;

 

   

sell certain assets;

 

   

guarantee certain obligations of third parties;

 

   

declare dividends or make certain distributions; and

 

   

undergo a merger or consolidation or other transactions.

 

Our credit agreements also prohibit us from exceeding a consolidated fixed charge coverage ratio and require us to maintain a minimum liquidity reserve. Our ability to comply with these and other covenants is dependent upon a number of factors, some of which are beyond our control.

 

Our failure to comply with the covenants or payment requirements, or the occurrence of other events specified in our credit agreements, could result in an event of default under the credit agreements, which would give our lenders the right to terminate their commitments to provide additional loans under the credit agreements and to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable. In addition, we have granted our lenders first-priority liens against all of our assets, including our intellectual property, as collateral. Failure to comply with the covenants or other restrictions in the credit agreements could result in a default. If the debt under our credit agreements was to be accelerated, we may not have sufficient cash on hand or be able to sell sufficient collateral to repay it, which would have an immediate adverse effect on our business and operating results. This could potentially cause us to cease operations and result in a complete loss of your investment in our Class A common stock. We intend to replace these credit facilities as further described in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facilities.”

 

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We are exposed to fluctuations in the market values of our investments.

 

Credit ratings and pricing of our investments can be negatively affected by liquidity, credit deterioration, financial results, economic risk, political risk, sovereign risk, changes in interest rates, or other factors. As a result, the value and liquidity of our cash, cash equivalents, and marketable securities may fluctuate substantially. Therefore, although we have not realized any significant losses on its cash, cash equivalents, and marketable securities, future fluctuations in their value could result in a significant realized loss, which could materially adversely affect our financial condition and operating results.

 

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Class A common stock less attractive to investors.

 

We are an “emerging growth company,” as defined in the JOBS Act, and we take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may take advantage of these exemptions until December 31, 2015, after which date we will no longer be an “emerging growth company.” We cannot predict if investors will find our Class A common stock less attractive because we will rely on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and the price of our Class A common stock may be more volatile.

 

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.

 

We are subject to requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which will require us to conduct due diligence on and disclose 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 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 due diligence 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.

 

Risks Related to this Offering and Ownership of Our Class A Common Stock

 

The market price of our Class A common stock has been and will likely continue to be volatile, and you could lose all or part of your investment.

 

The market price of our Class A common stock has been, and will likely continue to be, volatile. Since shares of our Class A common stock were sold in our initial public offering in June 2015 at a price of $20.00 per share, our stock price has ranged from $29.50 to $51.90 through September 30, 2015. In addition, the trading prices of the securities of technology companies in general have been highly volatile.

 

The market price of our Class A common stock may continue to fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

   

overall performance of the equity markets;

 

   

actual or anticipated fluctuations in our revenue and other operating results;

 

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

 

   

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

 

   

recruitment or departure of key personnel;

 

   

the economy as a whole and market conditions in our industry;

 

   

negative publicity related to problems in our manufacturing or the real or perceived quality of our products, as well as the failure to timely launch new products that gain market acceptance;

 

   

rumors and market speculation involving us or other companies in our industry;

 

   

announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;

 

   

new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

 

   

lawsuits threatened or filed against us;

 

   

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

 

   

the expiration of contractual lock-up or market standoff agreements; and

 

   

sales of shares of our Class A common stock by us or our stockholders.

 

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. Stock prices of many companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.

 

Sales of substantial amounts of our Class A common stock in the public markets, including when the “lock-up” or “market standoff” period ends, or the perception that they might occur, could cause the market price of our Class A common stock to decline.

 

Sales of a substantial number of shares of our Class A common stock into the public market, particularly sales by our directors, executive officers, and principal stockholders, or the perception that these sales might occur, could cause the market price of our Class A common stock to decline.

 

In connection with our initial public offering, we, all of our directors and executive officers, and the holders of substantially all of our outstanding equity securities agreed, subject to certain exceptions, not to offer, sell, or agree to sell, directly or indirectly, any shares of Class A common stock for a period of 180 days from the date of our initial public offering. Morgan Stanley & Co. LLC, on behalf of the underwriters, has consented to the release of these lock-up restrictions with respect to 14,000,000 shares of Class A common stock to be sold in this offering by the selling stockholders, including 9,635,896 shares beneficially owned by our directors and executive officers or their affiliated entities. The release took effect on the pricing of this offering. In addition, Morgan Stanley & Co. LLC, on behalf of the underwriters, has also released the lock-up restrictions with respect to 2,426,211 shares, which represents 10% of the shares of Class A common stock or Class B common stock or outstanding options or RSUs held by certain of our employees and consultants as of October 31, 2015, which release took effect on November 4, 2015. See the section titled “Shares Eligible for Future Sale” for additional information.

 

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In addition, in connection with this offering, subject to certain exceptions, we, all of our directors and executive officers, and the selling stockholders have agreed not to offer, sell or agree to sell, directly or indirectly, any shares of Class A common stock without the permission of Morgan Stanley & Co. LLC, on behalf of the underwriters, for a period of 90 days from the date of this prospectus.

 

When the applicable lock-up periods expire, we and our security holders subject to such lock-up agreements will be able to sell shares in the public market.

 

In addition, Morgan Stanley & Co. LLC may, in its discretion, permit our security holders to sell shares prior to the expiration of the restrictive provisions contained in the lock-up agreements. Shares held by directors, executive officers, and other affiliates will also be subject to volume limitations under Rule 144 under the Securities Act and various vesting agreements.

 

In addition, as of September 30, 2015, we had options outstanding that, if fully exercised, would result in the issuance of 348,000 shares of Class A common stock and 48,307,308 shares of Class B common stock. We also had RSUs outstanding as of September 30, 2015 that may be settled for 1,597,667 shares of Class A common stock and 498,908 shares of Class B common stock. All of the shares issuable upon the exercise of stock options or settlement of RSUs, and the shares reserved for future issuance under our equity incentive plans, are registered for public resale under the Securities Act. Accordingly, these shares may be freely sold in the public market upon issuance subject to existing lock-up or market standoff agreements and applicable vesting requirements.

 

Immediately following this offering, the holders of 146,466,491 shares of our Class B common stock (or warrants to purchase shares of our Class B common stock) will have rights, subject to some conditions, to require us to file registration statements for the public resale of the Class A common stock issuable upon conversion of such shares or to include such shares in registration statements that we may file for us or other stockholders.

 

The dual class structure of our common stock has the effect of concentrating voting control with those stockholders who held our capital stock prior to the completion of this offering, including our directors, executive officers, significant stockholders, and their affiliates, who will hold in the aggregate 76.8% of the voting power of our capital stock following the completion of this offering. This will limit or preclude your ability to influence corporate matters, 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 corporate transaction requiring stockholder approval.

 

Our Class B common stock has ten votes per share, and our Class A common stock, which is the stock we are offering in this offering, has one vote per share. Following this offering, our directors, executive officers, significant stockholders, and their affiliates, will hold in the aggregate 76.8% of the voting power of our capital stock. Because of the ten-to-one voting ratio between our Class B and Class A common stock, the holders of our Class B common stock collectively will continue to control a majority of the combined voting power of our common stock and therefore be able to control all matters submitted to our stockholders for approval until the earlier of June 17, 2027 or the date the holders of a majority of our Class B common stock choose to convert their shares. This concentrated control will limit or preclude your ability to influence corporate matters for the foreseeable future, 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 corporate transaction requiring stockholder approval. 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.

 

Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions, such as certain transfers effected for estate planning purposes. The conversion of Class B common stock to Class A common stock will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long term. See the section titled “Description of Capital Stock—Anti-Takeover Provisions” for additional information.

 

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If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, the price of our Class A common stock and trading volume could decline.

 

The trading market for our Class A common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If industry analysts cease coverage of us, the trading price for our common stock would be negatively affected. If one or more of the analysts who cover us downgrade our Class A common stock or publish inaccurate or unfavorable research about our business, our common stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our Class A common stock could decrease, which might cause our Class A common stock price and trading volume to decline.

 

We will have broad discretion in the use of the net proceeds to us from this offering and may not use them effectively.

 

We will have broad discretion in the application of the net proceeds to us from this offering, including for any of the purposes described in the section titled “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. The failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in short-term, investment-grade interest-bearing securities such as money market accounts, certificates of deposit, commercial paper, and guaranteed obligations of the U.S. government that may not generate a high yield to our stockholders. These investments may not yield a favorable return to our investors.

 

We do not intend to pay dividends for the foreseeable future.

 

We have never declared or paid any cash dividends on our common stock and do not intend to pay any cash dividends in the foreseeable future. We anticipate that we will retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments. In addition, our credit facilities contain restrictions on our ability to pay dividends.

 

Provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management, limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees, and limit the market price of our common stock.

 

Provisions in our restated certificate of incorporation and restated bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our restated certificate of incorporation and restated bylaws include provisions that:

 

   

provide that our board of directors will be classified into three classes of directors with staggered three-year terms at such time as the outstanding shares of our Class B common stock represent less than a majority of the combined voting power of our common stock;

 

   

permit the board of directors to establish the number of directors and fill any vacancies and newly-created directorships;

 

   

require super-majority voting to amend some provisions in our restated certificate of incorporation and restated bylaws;

 

   

authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan;

 

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provide that only the chairman of our board of directors, our chief executive officer, or a majority of our board of directors will be authorized to call a special meeting of stockholders;

 

   

provide for a dual class common stock structure in which holders of our Class B common stock have the ability to control the outcome of matters requiring stockholder approval, even if they own significantly less than a majority of the outstanding shares of our Class A and Class B common stock, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets;

 

   

prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

 

   

provide that the board of directors is expressly authorized to make, alter, or repeal our bylaws; and

 

   

establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.

 

In addition, our restated certificate of incorporation provides 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 restated certificate of incorporation, or our restated 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 restated 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.

 

Moreover, Section 203 of the Delaware General Corporation Law may discourage, delay, or prevent a change in control of our company. Section 203 imposes certain restrictions on mergers, business combinations, and other transactions between us and holders of 15% or more of our common stock. See the section titled “Description of Capital Stock” for additional information.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements within the meaning of the federal securities laws. All statements contained in this prospectus other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “plan,” and similar expressions are intended to identify forward-looking statements.

 

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors, including those discussed in the section titled “Risk Factors” and elsewhere in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make in this prospectus. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially and adversely from those described or anticipated in the forward-looking statements.

 

The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.

 

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INDUSTRY AND MARKET DATA

 

This prospectus contains statistical data, estimates, and forecasts that are based on independent industry publications or reports or other publicly available information, as well as other information based on our internal sources. This information involves a number of assumptions and limitations, are subject to risks and uncertainties, and are subject to change based on various factors, including those discussed in the section titled “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

The source of certain statistical data, estimates, and forecasts contained in this prospectus are the following independent industry publications or reports:

 

   

Gartner, Inc., Gartner Predicts 2015: Mobile and Wireless, November 2014.

 

   

IBISWorld Inc., IBISWorld Industry Report: Corporate Wellness Services in the U.S., September 2015.

 

   

International Data Corporation, Consumer Market Model 2010-2021 data, October 2015.

 

   

International Data Corporation, Worldwide Wearables 2015-2019 Forecast, October 2015.

 

   

The NPD Group, Inc., Retail Tracking Service, Digital Fitness Devices data, January 2013 - September 2015. We refer to connected activity trackers elsewhere in this prospectus, which has been defined in The NPD Group data as digital fitness wrist band and multi-location devices that connect to other devices (e.g., mobile devices and computers, via ANT+, Bluetooth, Wi-Fi, wireless combinations, wired connection only, and other wireless connections). We also refer to GPS fitness watches elsewhere in this prospectus, which has been defined in The NPD Group data as digital fitness watches that are GPS enabled. GPS fitness watches are not included in the connected activity trackers category.

 

   

The NPD Group, Inc., Strong Holiday Season Ahead for Wearables as Fitness Device Awareness Doubles, November 5, 2014.

 

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USE OF PROCEEDS

 

We estimate that the net proceeds from the sale of shares of our Class A common stock that we are selling in this offering will be approximately $82.7 million, based on the public offering price of $29.00 per share, 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 our Class A common stock by the selling stockholders.

 

The principal purposes of this offering are to increase our financial flexibility, obtain additional capital, facilitate an orderly distribution of shares for the selling stockholders, and increase our public float. We intend to use the net proceeds that we receive from this offering for working capital and other general corporate purposes, including research and development and sales and marketing activities, general and administrative matters, and capital expenditures. We may also use a portion of the net proceeds to invest in or acquire complementary businesses, products, services, technologies, or other assets.

 

We currently have no specific plans for the use of the net proceeds that we receive from this offering. Accordingly, we will have broad discretion in using these proceeds. Pending their use as described above, we plan to invest the net proceeds in short-term, interest-bearing obligations, investment-grade instruments, certificates of deposit, or direct or guaranteed obligations of the U.S. government.

 

MARKET PRICE OF OUR CLASS A COMMON STOCK

 

Our Class A common stock has been listed on the New York Stock Exchange under the symbol “FIT” since June 18, 2015. Prior to that date, there was no public trading market for our Class A common stock. The following table sets forth for the periods indicated the high and low sale prices per share of our Class A common stock as reported on the New York Stock Exchange:

 

     High      Low  

Fiscal Year 2015

     

Second Quarter (from June 18, 2015)

   $ 40.45       $ 29.50   

Third Quarter

     51.90         30.51   

Fourth Quarter (through October 30, 2015)

     41.11         33.43   

 

On November 12, 2015, the last reported sale price of our Class A common stock on the New York Stock Exchange was $31.68 per share. As of September 30, 2015, we had 203 holders of record of our common stock. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees.

 

DIVIDEND POLICY

 

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings and do not expect to pay any cash dividends on our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, operating results, capital requirements, general business conditions, and other factors that our board of directors considers relevant. In addition, the terms of our credit facilities contain restrictions on our ability to declare and pay cash dividends on our capital stock.

 

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CAPITALIZATION

 

The following table sets forth our cash, cash equivalents, and marketable securities and capitalization as of September 30, 2015 on an:

 

   

actual basis; and

 

   

as adjusted basis to give effect to (i) the sale and issuance of the 3,000,000 shares of our Class A common stock offered by us in this offering based upon the public offering price of $29.00 per share, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, (ii) the issuance of 1,489,004 shares of our Class B common stock to certain selling stockholders upon the exercise of stock options in order to sell such shares in this offering, including net proceeds of $0.6 million received by us in connection with the exercise of such options, and (iii) the automatic conversion of 14,000,000 shares of our Class B common stock into an equivalent number of shares of our Class A common stock that will be sold by the selling stockholders in this offering.

 

You should read this table together with our consolidated financial statements and related notes, and the sections titled “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” each included elsewhere in this prospectus.

 

     As of September 30, 2015  
           Actual            As  Adjusted(1)  
     (in thousands, except share and per share data)  

Cash, cash equivalents, and marketable securities

   $ 575,478       $ 658,805   
  

 

 

    

 

 

 

Total long-term debt

   $       $   
  

 

 

    

 

 

 

Stockholders’ equity:

     

Preferred stock, $0.0001 par value per share: 10,000,000 shares authorized, issued, and outstanding, actual and as adjusted

               

Class A common stock, $0.0001 par value per share: 600,000,000 shares authorized, 42,061,250 shares issued and outstanding, actual; 600,000,000 shares authorized, 59,061,250 shares issued and outstanding, as adjusted

     4         6   

Class B common stock, $0.0001 par value per share: 350,000,000 shares authorized, 165,122,004 shares issued and outstanding, actual; 350,000,000 shares authorized, 152,611,008 shares issued and outstanding, as adjusted

     17         15   

Additional paid-in capital

     604,323         687,650   

Accumulated other comprehensive income

     1,074         1,074   

Retained earnings

     178,754         178,754   
  

 

 

    

 

 

 

Total stockholders’ equity

     784,172         867,499   
  

 

 

    

 

 

 

Total capitalization

   $ 784,172       $ 867,499   
  

 

 

    

 

 

 

 

(1)  

If the underwriters’ option to purchase additional shares is exercised in full, we would have 61,611,250 shares of our Class A common stock and 150,061,008 shares of our Class B common stock issued and outstanding, as adjusted.

 

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The number of shares of our Class A and Class B common stock to be outstanding after this offering is based upon 42,061,250 shares of our Class A common stock and 165,122,004 shares of our Class B common stock outstanding as of September 30, 2015 (prior to the automatic conversion of shares of our Class B common stock into an equivalent number of shares of our Class A common stock upon their sale by the selling stockholders in this offering) and does not include:

 

   

348,000 shares of our Class A common stock and 48,307,308 shares of our Class B common stock issuable upon the exercise of options to purchase shares of our Class A common stock and Class B common stock outstanding as of September 30, 2015, with a weighted-average exercise price of $2.99 per share (including 1,489,004 shares of our Class B common stock issuable upon the exercise of options to purchase shares of Class B common stock and the automatic conversion of those shares into an equivalent number of shares of Class A common stock that will be sold in this offering);

 

   

1,597,667 shares of Class A common stock and 498,908 shares of our Class B common stock issuable upon the vesting of RSUs outstanding as of September 30, 2015;

 

   

596,533 shares of our Class A common stock issuable upon the vesting of RSUs granted after September 30, 2015;

 

   

425,643 shares of our Class B common stock issuable upon the exercise of warrants to purchase shares of our Class B common stock outstanding as of September 30, 2015, with an exercise price of $0.6667 per share; and

 

   

8,518,814 shares of our common stock reserved for future issuance under our equity compensation plans, consisting of:

 

  ¡    

4,768,814 shares of Class A common stock reserved for future issuance under our 2015 Plan as of September 30, 2015 (which reserve does not reflect the RSUs granted after September 30, 2015); and

 

  ¡    

3,750,000 shares of Class A common stock reserved for future issuance under our 2015 ESPP.

 

The shares available for issuance under our 2015 Plan include the shares that were reserved for issuance under our 2007 Plan on June 16, 2015, when our 2015 Plan became effective and we ceased granting awards under our 2007 Plan. Our 2015 Plan and 2015 ESPP also provide for automatic annual increases in the number of shares reserved thereunder. See the section titled “Executive Compensation—Employee Benefit Plans” for additional information.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

 

We derived the selected consolidated statements of operations data for 2012, 2013, and 2014 and the selected consolidated balance sheet data as of December 31, 2013 and 2014 from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for 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 selected consolidated statements of operations data for the nine months ended September 30, 2014 and 2015 and the selected consolidated balance sheet data as of September 30, 2015 are derived from our unaudited consolidated financial statements included elsewhere 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 that we consider necessary for a fair statement of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that may be expected in the future. You should read this data together with our consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

    As of or For the Year Ended December 31,     As of or For the
Nine Months Ended
September 30,
 
    2010     2011     2012     2013(1)     2014(1)     2014(1)     2015(1)  
    (in thousands, except per share data)  

Consolidated Statements of Operations Data:

             

Revenue

  $ 5,180      $ 14,454      $ 76,373      $ 271,087      $ 745,433      $ 375,249      $ 1,146,428   

Cost of revenue(2)

    3,524        9,222        49,733        210,836        387,776        188,486        593,664   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    1,656        5,232        26,640        60,251        357,657        186,763        552,764   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

             

Research and development(2)

    1,909        6,133        16,210        27,873        54,167        35,842        95,808   

Sales and marketing(2)

    484        1,868        10,237        26,847        112,005        42,123        178,672   

General and administrative(2)

    629        1,544        3,968        14,485        33,556        23,909        48,327   

Change in contingent consideration

                                      

  
    (7,704
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    3,022        9,545        30,415        69,205        199,728        101,874        315,103   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (1,366     (4,313     (3,775     (8,954     157,929        84,889        237,661   

Interest expense, net

    (69     (15     (176     (1,082     (2,222     (1,541     (1,062

Other income (expense), net

    4        15        26        (3,649     (15,934     (7,722     (59,129
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (1,431     (4,313     (3,925     (13,685     139,773        75,626        177,470   

Income tax expense (benefit)

           4        291        37,937        7,996        (16,911     65,958   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (1,431   $ (4,317   $ (4,216   $ (51,622   $ 131,777      $ 92,537      $ 111,512   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common stockholders(3):

             

Basic

  $ (0.04   $ (0.12   $ (0.11   $ (1.32   $ 0.70      $ 0.49      $ 0.57   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (0.04   $ (0.12   $ (0.11   $ (1.32   $ 0.63      $ 0.44      $ 0.48   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Data:

             

Devices sold(4)

    58        208        1,279        4,476        10,904        5,627        13,097   

Adjusted EBITDA(5)

  $ (1,255   $ (4,023   $ (2,401   $ 79,049      $ 191,042      $ 115,436      $ 264,615   

 

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(1)  

In March 2014, we recalled the Fitbit Force. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Fitbit Force Product Recall” for additional information. The recall, which primarily affected our results for the fourth quarter of 2013 and the first quarter of 2014, had the following effect on our income (loss) before income taxes:

 

     Year Ended December 31,      Nine Months Ended
September 30,
 
         2013              2014              2014              2015      
     (in thousands)  

Reduction of revenue

   $ (30,607    $ (8,112    $ (11,561    $   

Incremental (benefit to) cost of revenue

     51,205         11,339         9,117         (2,040
  

 

 

    

 

 

    

 

 

    

 

 

 

Impact on gross profit

     (81,812      (19,451      (20,678      2,040   

Incremental general and administrative expenses (benefit)

     2,838         3,389         4,361         (53
  

 

 

    

 

 

    

 

 

    

 

 

 

Impact on income (loss) before income taxes

   $ (84,650    $ (22,840    $ (25,039    $ 2,093   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(2)  

Includes stock-based compensation expense as follows:

 

     Year Ended December 31,      Nine Months Ended
September 30,
 
       2010          2011          2012          2013          2014          2014          2015    
     (in thousands)  

Cost of revenue

   $       $ 8       $ 15       $ 37       $ 890       $ 534       $ 2,622   

Research and development

     4         27         62         288         2,350         1,157         10,910   

Sales and marketing

                     29         204         1,295         649         5,080   

General and administrative

     2         25         26         91         2,269         1,105         7,072   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6       $ 60       $ 132       $ 620       $ 6,804       $ 3,445       $ 25,684   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(3)  

See notes 3 and 15 of the notes to our consolidated financial statements included elsewhere in this prospectus for an explanation of the calculations of our net income (loss) per share attributable to common stockholders, basic and diluted.

(4)  

See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics—Devices Sold” for more information.

(5)  

Adjusted EBITDA is a financial measure that is not calculated in accordance with U.S. GAAP. See the section titled “—Adjusted EBITDA” for information regarding our use of adjusted EBITDA and a reconciliation of adjusted EBITDA to net income (loss).

 

     As of December 31,      As of
September  30,

2015
 
     2010     2011     2012     2013     2014     
     (in thousands)  

Consolidated Balance Sheet Data:

         

Cash, cash equivalents, and marketable securities

   $ 7,948      $ 14,788      $ 13,148      $ 81,728      $ 195,626       $ 575,478   

Working capital

     6,775        15,073        17,477        14,457        135,415         714,866   

Total assets

     9,197        22,139        51,699        230,774        633,051         1,262,457   

Total long-term debt

     444        739        8,439        10,710        132,589           

Retained earnings (accumulated deficit)

     (4,380     (8,697     (12,913     (64,535     67,242         178,754   

Total stockholders’ equity (deficit)

     (4,370     (8,627     (12,707     (63,466     75,262         784,172   

 

Adjusted EBITDA

 

To supplement our consolidated financial statements presented in accordance with U.S. GAAP, we monitor and consider adjusted EBITDA, which is a non-GAAP financial measure. This non-GAAP financial measure is not based on any standardized methodology prescribed by U.S. GAAP and is not necessarily comparable to similarly-titled measures presented by other companies.

 

We define adjusted EBITDA as net income (loss) adjusted to exclude the impact of the Fitbit Force recall, stock-based compensation expense, the revaluation of our redeemable convertible preferred stock warrant liability prior to our initial public offering, depreciation and intangible assets amortization, change in contingent consideration, interest expense, net, and income tax expense.

 

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We use adjusted EBITDA to evaluate our operating performance and trends and make planning decisions. We believe that adjusted EBITDA helps identify underlying trends in our business that could otherwise be masked by the effect of the expenses and other items that we exclude in adjusted EBITDA. In particular, the exclusion of the effect of the Fitbit Force recall, which primarily impacted our results for the fourth quarter of 2013 and the first quarter of 2014, discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Fitbit Force Product Recall” and certain expenses in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our business. Additionally, we use this measure to evaluate our operating performance and trends and make planning decisions. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects, and allowing for greater transparency with respect to a key financial metric used by our management in its financial and operational decision-making.

 

Adjusted EBITDA is not prepared in accordance with U.S. GAAP, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with U.S. GAAP. There are a number of limitations related to the use of this non-GAAP financial measure rather than net income (loss), which is the nearest U.S. GAAP equivalent of adjusted EBITDA. Some of these limitations are:

 

   

adjusted EBITDA excludes the Fitbit Force recall, which primarily impacted our results for the fourth quarter of 2013 and the first quarter of 2014, and which had a negative impact on our revenue and expenses during these periods;

 

   

adjusted EBITDA excludes stock-based compensation expense, which has recently been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy;

 

   

adjusted EBITDA excludes the revaluation of our redeemable convertible preferred stock warrant liability, which was a historically recurring non-cash charge prior to our initial public offering, but will not recur in the periods following the completion of our initial public offering;

 

   

adjusted EBITDA excludes depreciation and intangible assets amortization expense and, although these are non-cash expenses, the assets being depreciated and amortized may have to be replaced in the future;

 

   

adjusted EBITDA excludes change in contingent consideration, a non-recurring benefit received for the reversal of a contingent liability incurred in connection with the acquisition of FitStar;

 

   

adjusted EBITDA does not reflect interest expense, or the cash requirements necessary to service interest or principal payments on our debt, which reduces cash available to us;

 

   

adjusted EBITDA does not reflect income tax payments that reduce cash available to us; and

 

   

the expenses and other items that we exclude in our calculation of adjusted EBITDA may differ from the expenses and other items, if any, that other companies may exclude from adjusted EBITDA when they report their operating results.

 

Because of these limitations, adjusted EBITDA should be considered along with other operating and financial performance measures presented in accordance with U.S. GAAP.

 

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

 

     Year Ended December 31,      Nine Months Ended
September 30,
 
     2010     2011     2012     2013     2014      2014     2015  
     (in thousands)  

Net income (loss)

   $ (1,431   $ (4,317   $ (4,216   $ (51,622   $ 131,777       $ 92,537      $ 111,512   

Impact of Fitbit Force recall

                          84,650        22,840         25,039        (2,093

Stock-based compensation expense

     6        60        132        620        6,804         3,445        25,684   

Revaluation of redeemable convertible preferred stock warrant liability

            13        37        3,370        13,272         6,821        56,655   

Depreciation and amortization

     101        202        1,179        3,012        6,131         2,964        13,541   

Change in contingent consideration

                                                (7,704

Interest expense, net

     69        15        176        1,082        2,222         1,541        1,062   

Income tax expense

            4        291        37,937        7,996         (16,911     65,958   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Adjusted EBITDA

   $ (1,255   $ (4,023   $ (2,401   $ 79,049      $ 191,042       $ 115,436      $ 264,615   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the section titled “Selected Consolidated Financial and Other Data” and our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from such forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed above in the section titled “Risk Factors” included elsewhere in this prospectus.

 

Overview

 

Fitbit is transforming the way millions of people around the world achieve their health and fitness goals. The Fitbit platform combines connected health and fitness devices with software and services, including an online dashboard and mobile apps, data analytics, motivational and social tools, personalized insights, and virtual coaching through customized fitness plans and interactive workouts. Our platform helps people become more active, exercise more, sleep better, eat smarter, and manage their weight. Fitbit appeals to a large, mainstream health and fitness market by addressing these key needs with advanced technology embedded in simple-to-use products and services. We pioneered the connected health and fitness market starting in 2007, and since then, we have grown into a leading global health and fitness brand. As of September 30, 2015, we have sold over 30.0 million devices since inception. According to The NPD Group, we held the leading position in the U.S. connected activity tracker market, with an 88% share, by dollars, in the third quarter of 2015.*

 

*   

See “Industry and Market Data.”

 

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We were founded by James Park and Eric N. Friedman in 2007 to help people lead healthier, more active lives by empowering them with data, inspiration, and guidance to reach their goals.

 

Our Key Milestones

 

LOGO

September   

Began selling our first connected health and fitness device, the Fitbit tracker, which tracked steps, distance, calories burned, and sleep. We also introduced our online dashboard which could be synced to the Fitbit tracker.

  LOGO  

LOGO

     
December   

Introduced social features on our online dashboard, including friends and leaderboards.

   

LOGO

     

LOGO

July   

Began selling premium services through our online dashboard with a virtual trainer and additional analytics.

  LOGO  
     
October   

Completed our first corporate wellness sale that included over 1,000 devices.

   
     

LOGO

February   

Released an open API, allowing third-party developers to integrate with our platform.

  LOGO  

LOGO

     
October   

Began selling our second product, the Fitbit Ultra, which introduced tracking for floors climbed. We also released a native iOS mobile app.

   
     
December   

Began selling in the United Kingdom, our first country outside the United States.

   

LOGO

March   

Released a native Android mobile app.

  LOGO  

LOGO

     
April   

Began selling Aria, a Wi-Fi connected scale which measures weight, body fat, and BMI.

   
     
September   

Began selling the Fitbit Zip, our first Bluetooth low energy-enabled activity tracker.

   
     
October   

Began selling the Fitbit One.

   

LOGO

   

LOGO

 

LOGO

May   

Began selling our first wrist-based device, the Fitbit Flex.

   
   
November   

Surpassed five million cumulative devices sold since inception.

   
     

LOGO

February   

Announced a partnership with Tory Burch offering accessories for the Fitbit Flex.

  LOGO  

LOGO

     
July   

Released a native mobile app for Windows Phone and introduced GPS-based tracking for our mobile apps.

   
     
August   

Introduced Fitbit Challenges on our online dashboard and mobile apps to encourage friendly competition among our users. We also surpassed ten million cumulative devices sold since inception.

   
     
October   

Began selling the Fitbit Charge which introduced caller ID information.

   
     
December   

Began selling the Fitbit Charge HR and Fitbit Surge, which introduced automatic and continuous heart rate tracking. In addition, we also introduced GPS tracking on the Fitbit Surge. We maintained our position as one of the top three health and fitness apps on the iOS App Store for each month in 2014.

   

LOGO

March 

 

Acquired FitStar to enhance our software and services offerings.

  LOGO  

LOGO

     
June   

Completed initial public offering.

   
     

September 

 

 

Corporate wellness offering enhanced through HIPAA compliant capabilities.

   

 

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The core of our platform is our family of six wearable connected health and fitness trackers. These wrist-based and “clippable” devices automatically track users’ daily steps, calories burned, distance traveled, floors climbed, and active minutes and display real-time feedback to encourage them to become more active in their daily lives. Most of our trackers also measure sleep duration and quality, and our more advanced products track heart rate and GPS-based information such as speed, distance, and exercise routes. Several of our devices also feature deeper integration with smartphones, such as the ability to receive call and text notifications and control music. In addition, we offer a Wi-Fi connected scale that records weight, body fat, and BMI. We are able to enhance the functionality and features of our connected devices through wireless updates. Our platform also includes our online dashboard and mobile apps, which wirelessly and automatically sync with our devices. Our platform allows our users to see trends and achievements, access motivational tools such as virtual badges and real-time progress notifications, and connect, support, and compete with friends and family. We intend to continue to significantly invest in research and development in order to enhance our products and services.

 

We design our products primarily in California and outsource the production of our devices to contract manufacturers, which are responsible for procuring most of the components used in the manufacturing of our products from third-party suppliers. We also outsource packaging and fulfillment to third-party logistics providers around the world.

 

We generate substantially all of our revenue from sales of our connected health and fitness devices. We sell our products in over 48,000 retail stores and in 55 countries, through our retailers’ websites, through our online store at Fitbit.com, and as part of our corporate wellness offering. We seek to build global brand awareness, increase product adoption, and drive sales through our sales and marketing efforts. We intend to continue to significantly invest in these sales and marketing efforts in the future.

 

Our growth will depend in part on the adoption and sale of our products and services in international markets. In recent periods, we have experienced significant growth in international sales. In 2014 and for the nine months ended September 30, 2015, 25% and 26%, respectively, of our revenue, based on ship-to destinations, was from sales outside of the United States. We believe international markets represent a significant growth opportunity for us. We intend to expand sales of our products and services in new and existing international markets by expanding our distribution channels through select retailers and strategic partnerships. We also intend to continue to invest across all geographic regions in sales and marketing efforts, including increasing our global advertising efforts, and in infrastructure and personnel to support our international expansion, including establishing additional sales offices globally. Our international expansion efforts have resulted and will continue to result in increased costs and are subject to a variety of risks, including increased competition, uncertain enforcement of our intellectual property rights, more complex distribution logistics, and the complexity of compliance with foreign laws and regulations.

 

We have grown significantly since our inception. In 2012, 2013, and 2014, we had revenue of $76.4 million, $271.1 million, and $745.4 million, respectively, net income (loss) of $(4.2) million, $(51.6) million, and $131.8 million, respectively, and adjusted EBITDA of $(2.4) million, $79.0 million, and $191.0 million, respectively. For the nine months ended September 30, 2014 and 2015, we had revenue of $375.2 million and $1.1 billion, respectively, net income of $92.5 million and $111.5 million, respectively, and adjusted EBITDA of $115.4 million and $264.6 million, respectively. See the section titled “Selected Consolidated Financial and Other Data—Adjusted EBITDA” for information regarding our use of adjusted EBITDA and a reconciliation of adjusted EBITDA to net income (loss). For 2012, 2013, and 2014, we sold 1.3 million, 4.5 million, and 10.9 million devices, respectively, and in the nine months ended September 30, 2014 and 2015, we sold 5.6 million and 13.1 million devices, respectively. See the section titled “—Key Business Metrics” for additional information regarding devices sold.

 

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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.

 

     As of or For the Year Ended
December 31,
     As of or For the
Nine Months Ended
September 30,
 
     2012     2013      2014      2014      2015  
     (in thousands)  

Devices sold

     1,279        4,476         10,904         5,627         13,097   

Adjusted EBITDA

   $ (2,401   $ 79,049       $ 191,042       $ 115,436       $ 264,615   

 

Devices Sold

 

Devices sold represents the number of connected health and fitness devices that are sold during a period, net of expected returns and provisions for the Fitbit Force recall. Devices sold does not include sales of accessories. Growth rates between devices sold and revenue are not necessarily correlated because our revenue is affected by other variables, such as the types of products sold during the period, the introduction of new product offerings that have different U.S. MSRPs, and sales of accessories and premium services.

 

Adjusted EBITDA

 

We define adjusted EBITDA as net income (loss) adjusted to exclude the impact of the Fitbit Force recall, stock-based compensation expense, the revaluation of our redeemable convertible preferred stock warrant liability, depreciation and intangible assets amortization, change in contingent consideration, interest expense and income tax expense. See the section titled “Selected Consolidated Financial and Other Data—Adjusted EBITDA” for information regarding our use of adjusted EBITDA and a reconciliation of adjusted EBITDA to net income (loss).

 

Factors Affecting Our Future Performance

 

Product Introductions

 

To date, product introductions have had a significant, positive impact on our operating results due primarily to increases in revenue associated with sales of the new products in the quarters following their introduction. Since the beginning of 2013, we have released five new connected health and fitness devices, including the Fitbit Charge, Fitbit Charge HR, and Fitbit Surge, which were released in the fourth quarter of 2014 and were the primary drivers of our revenue growth in the first three quarters of 2015. We expect that the impact of these new product introductions on our revenue will lessen over time and we cannot assure you that they will have a similarly positive impact on the fourth quarter of 2015 or in 2016. Furthermore, new product introductions could also adversely impact the sales of our existing products to retailers and users. New products may also have higher costs associated with them, as was the case for new products introduced in the fourth quarter of 2014, which could adversely affect our margins. In addition, we have incurred higher levels of sales and marketing expenses accompanying each product introduction. In the future, we intend to continue to release new products and enhance our existing products, and we expect that our operating results will be impacted by these releases.

 

International Expansion

 

Our products are sold in 55 countries, and we have experienced significant growth in international sales in recent periods. In 2014 and for the nine months ended September 30, 2015, 25% and 26%, respectively, of our revenue, based on ship-to destinations, was from sales outside of the United States. We believe our global opportunity is significant, and to address this opportunity, we intend to continue to invest in sales and marketing efforts, distribution channels, and infrastructure and personnel to support our international expansion, including establishing additional sales offices globally. Our growth will depend in part on the adoption and sales of our

 

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products and services in international markets. Moreover, our international expansion efforts have resulted and will continue to result in increased costs and are subject to a variety of risks, including increased competition, uncertain enforcement of our intellectual property rights, more complex distribution logistics, and the complexity of compliance with foreign laws and regulations.

 

Category Adoption and Market Growth

 

Consumer spend on the wearable devices market is growing faster than on any segment in the global consumer electronics market. As a pioneer of this market and a leading connected health and fitness platform, we believe we have contributed significantly to the market’s growth. However, our future growth depends in part on the continued consumer adoption of wearable devices as a means to improve health and fitness and the growth of this market.

 

Seasonality

 

Historically, we have experienced higher revenue in the fourth quarter compared to other quarters due in large part to seasonal holiday demand. For example, in 2013 and 2014, our fourth quarter represented 40% and 50% of our annual revenue, respectively. We also incur higher sales and marketing expenses during these periods.

 

Investing in Growth

 

We intend to continue to make investments across our business to drive our growth. We intend to continue to invest significant resources in our sales, marketing, advertising, and brand management efforts to drive demand for our products and services globally. We also intend to continue to invest in research and development to enable us to introduce innovative new products and services and enhance existing products and services. We may also make acquisitions to further drive our growth. For example, we acquired FitStar in March 2015 to enhance our software and services offerings through interactive video-based exercise experiences on mobile devices and computers.

 

Furthermore, we intend to increase our focus on building relationships with employers and wellness providers. The corporate wellness market for connected health and fitness devices is new and is subject to a variety of challenges, including whether employers will continue to invest in such programs, long sales cycles, and substantial upfront sales costs. In each of 2012, 2013, and 2014, and the nine months ended September 30, 2014 and 2015, we derived less than 10% of our revenue from our corporate wellness offerings. However, we believe that as healthcare costs continue to rise and as employers continue to seek ways to keep their employees active, engaged, and productive, more employers will implement or enhance their corporate wellness programs. In order to grow our corporate wellness presence, we intend to enhance our corporate wellness offering as well as expand our sales team focused on this market.

 

Components of our Operating Results

 

Revenue

 

We generate substantially all of our revenue from the sale of our connected health and fitness devices and accessories. We also generate a small portion of our revenue from our subscription-based premium services.

 

Cost of Revenue

 

Cost of revenue consists of product costs, including costs of contract manufacturers for production, shipping and handling costs, warranty replacement costs, packaging, costs related to the Fitbit Force recall, fulfillment costs, manufacturing and tooling equipment depreciation, warehousing costs, excess and obsolete inventory write-downs, amortization of developed technology intangible assets acquired, and certain allocated costs related to management, facilities, and personnel-related expenses and other expenses associated with supply chain logistics. Personnel-related expenses include salaries, bonuses, benefits, and stock-based compensation.

 

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Operating Expenses

 

Operating expenses consist of research and development, sales and marketing, and general and administrative expenses.

 

Research and Development. Research and development expenses consist primarily of personnel-related expenses, consulting and contractor expenses, tooling and prototype materials, and allocated overhead costs.

 

Substantially all of our research and development expenses are related to developing new products and services and improving our existing products and services. To date, research and development expenses have been expensed as incurred, because the period between achieving technological feasibility and the release of products and services for sale has been short and development costs qualifying for capitalization have been insignificant.

 

We expect our research and development expenses to increase in absolute dollars as we continue to make significant investments in developing new products and services and enhancing existing products and services.

 

Sales and Marketing. Sales and marketing expenses represent the largest component of our operating expenses and consist primarily of advertising and marketing promotions of our products and services and personnel-related expenses, as well as sales incentives, trade show and event costs, sponsorship costs, consulting and contractor expenses, travel, POP display expenses and related amortization, and allocated overhead costs. We expect our sales and marketing expenses to increase in absolute dollars as we continue to actively promote our products and services.

 

General and Administrative. General and administrative expenses consist of personnel-related expenses for our finance, legal, human resources, and administrative personnel, as well as the costs of professional services, any allocated overhead, information technology, amortization of intangible assets acquired, and other administrative expenses. We expect our general and administrative expenses to increase in absolute dollars due to the anticipated growth of our business and related infrastructure as well as legal, accounting, insurance, investor relations, and other costs associated with becoming a public company.

 

Change in contingent consideration. The change in contingent consideration relates to the benefit received from the reversal of a contingent liability incurred in connection with the acquisition of FitStar. See Note 17 of the notes to our condensed consolidated financial statements included elsewhere in this prospectus for additional information.

 

Interest Expense, Net

 

Interest expense, net consists of interest expense associated with our debt financing arrangements, amortization of debt issuance costs, and interest income earned on our cash and cash equivalents.

 

Other Income (Expense), Net

 

Other income (expense), net consists of mark-to-market adjustments for the revaluation of our redeemable convertible preferred stock warrant liability prior to our initial public offering and foreign currency gains and losses.

 

Income Tax Expense (Benefit)

 

We are subject to income taxes in the United States and foreign jurisdictions in which we do business. These foreign jurisdictions have statutory tax rates different from those in the United States. Accordingly, our effective tax rates will vary depending on the relative proportion of foreign to U.S. income, the utilization of foreign tax credits, and changes in tax laws.

 

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Fitbit Force Product Recall

 

In March 2014, we recalled the Fitbit Force after some of our users experienced allergic reactions to adhesives in the wristband. This recall primarily impacted our results for the fourth quarter of 2013 and the first quarter of 2014. We established a reserve for the Fitbit Force recall after considering various factors including cost estimates for customer returns, logistics and handling fees for managing product returns and processing refunds, obsolescence of on-hand inventory, cancellation charges for existing purchase commitments, rework of component inventory with the contract manufacturer, legal fees and settlement costs, and write-offs of tooling and manufacturing equipment.

 

The recall had the following effect on our income (loss) before income taxes:

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
             2013                     2014                     2014                     2015          
     (in thousands)  

Reduction of revenue

   $ (30,607   $ (8,112   $ (11,561   $   

Incremental (benefit to) cost of revenue

     51,205        11,339        9,117       
(2,040

  

 

 

   

 

 

   

 

 

   

 

 

 

Impact on gross profit

     (81,812     (19,451     (20,678     2,040   

Incremental general and administrative expenses (benefit)

     2,838        3,389        4,361        (53
  

 

 

   

 

 

   

 

 

   

 

 

 

Impact on income (loss) before income taxes

   $ (84,650   $ (22,840   $ (25,039   $ 2,093   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

During 2013, incremental cost of revenue related to the recall included charges to the recall reserve of $49.5 million and a write-off of tooling and manufacturing equipment of $1.7 million, which was recognized as incurred. During 2014, general and administrative expenses included legal fees of $2.9 million, which were recognized as incurred, and legal settlement costs of $0.5 million, which were included in the Fitbit Force recall reserve. During the nine months ended September 30, 2015, general and administrative expenses consisted of the benefit to legal expenses of $0.1 million, which was not included in the Fitbit Force recall reserve. See note 6 of the notes to our consolidated financial statements included elsewhere in this prospectus for additional information.

 

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Operating Results

 

The following tables set forth the components of our consolidated statements of operations for each of the periods presented and as a percentage of our revenue for those periods. The period-to-period comparison of operating results is not necessarily indicative of results for future periods.

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
     2012     2013(1)     2014(1)     2014(1)     2015(1)  
     (in thousands)  

Consolidated Statements of Operations Data:

          

Revenue

   $ 76,373      $ 271,087      $ 745,433      $ 375,249      $ 1,146,428   

Cost of revenue(2)

     49,733        210,836        387,776        188,486        593,664   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     26,640        60,251        357,657        186,763        552,764   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Research and development(2)

     16,210        27,873        54,167        35,842        95,808   

Sales and marketing(2)

     10,237        26,847        112,005        42,123        178,672   

General and administrative(2)

     3,968        14,485        33,556        23,909        48,327   

Change in contingent consideration

                                 (7,704
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     30,415        69,205        199,728        101,874        315,103   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (3,775     (8,954     157,929        84,889        237,661   

Interest expense, net

     (176     (1,082     (2,222     (1,541     (1,062

Other income (expense), net

     26        (3,649     (15,934     (7,722     (59,129
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (3,925     (13,685    
139,773
  
    75,626        177,470   

Income tax expense (benefit)

     291        37,937        7,996        (16,911     65,958   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (4,216   $ (51,622   $ 131,777      $ 92,537      $ 111,512   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  

In March 2014, we recalled the Fitbit Force. See the section titled “—Fitbit Force Product Recall” for additional information. The recall, which primarily affected our results for the fourth quarter of 2013 and the first quarter of 2014, had the following effect on our income (loss) before income taxes:

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
           2013                 2014                 2014                 2015        
     (in thousands)  

Reduction of revenue

   $ (30,607   $ (8,112   $ (11,561   $   

Incremental (benefit to) cost of revenue

     51,205        11,339        9,117        (2,040
  

 

 

   

 

 

   

 

 

   

 

 

 

Impact on gross profit

     (81,812     (19,451     (20,678     2,040   

Incremental general and administrative expenses (benefit)

     2,838        3,389        4,361        (53
  

 

 

   

 

 

   

 

 

   

 

 

 

Impact on income (loss) before income taxes

   $ (84,650   $ (22,840   $ (25,039   $ 2,093   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(2)  

Includes stock-based compensation expense as follows:

 

     Year Ended December 31,      Nine Months  Ended
September 30,
 
       2012          2013          2014          2014          2015    
     (in thousands)  

Cost of revenue 

   $ 15       $ 37       $ 890       $ 534       $ 2,622   

Research and development

     62         288         2,350         1,157         10,910   

Sales and marketing

     29         204         1,295         649         5,080   

General and administrative

     26         91         2,269         1,105         7,072   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 132       $ 620       $ 6,804       $ 3,445       $ 25,684   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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     Year Ended December 31,     Nine Months Ended
September 30,
 
       2012         2013(1)          2014(1)        2014(1)     2015(1)  
     (as a percentage of revenue)  

Consolidated Statements of Operations Data:

          

Revenue

     100     100     100     100     100

Cost of revenue

     65        78        52        50        52   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     35        22        48        50        48   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Research and development

     21        10        7        10        8   

Sales and marketing

     14        10        15        11        16   

General and administrative

     5        5        5        6        4   

Change in contingent consideration

                                 (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     40        25        27        27        27   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (5     (3     21        23        21   

Interest income (expense), net

                          (1       

Other income (expense), net

            (2     (2     (2     (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (5     (5     19        20        16   

Income tax expense (benefit)

            14        1        (5     6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (5 )%      (19 )%      18     25     10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  

In March 2014, we recalled the Fitbit Force. See the section titled “—Fitbit Force Product Recall” for additional information. The recall, which primarily affected our results for the fourth quarter of 2013 and the first quarter of 2014, had the following effect on our income (loss) before income taxes:

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
     2013     2014     2014     2015  
     (as a percentage of revenue)  

Incremental (benefit to) cost of revenue

     19     2     2    
  

 

 

   

 

 

   

 

 

   

 

 

 

Impact on gross profit

     (30     (3     (6       

Incremental general and administrative expenses

     1               1          
  

 

 

   

 

 

   

 

 

   

 

 

 

Impact on income (loss) before taxes

     (31 )%      (3 )%      (7 )%     
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Comparison of the Nine Months Ended September 30, 2014 and 2015

 

Revenue

 

     Nine Months Ended
September 30,
     Change  
     2014(1)      2015      $      %  
     (in thousands)  

Revenue

   $ 375,249       $ 1,146,428       $ 771,179         206

 

(1)  

The Fitbit Force recall resulted in a decrease to revenue of $11.6 million for the nine months ended September 30, 2014. See the section titled “—Fitbit Force Product Recall” for additional information.

 

Revenue increased $771.2 million, or 206%, from $375.2 million for the nine months ended September 30, 2014 to $1.1 billion for the nine months ended September 30, 2015. A substantial majority of the increase was due to an increase in the number of devices sold from 5.6 million in the nine months ended September 30, 2014 to 13.1 million in the nine months ended September 30, 2015, including $869.0 million in revenue from new products introduced in the fourth quarter of 2014. Revenue also increased due to an increase in the average selling price of our devices by 34% from $64 per device for the nine months ended September 30, 2014 to $86 per device for the nine months ended September 30, 2015, due to new products introduced in the fourth quarter

 

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of 2014. The increase in revenue includes the negative impact of foreign currency exchange rates of $39.7 million net of the impact of foreign currency hedges. U.S. revenue, based on ship-to destinations, increased $552.5 million, or 186%, from $296.3 million for the nine months ended September 30, 2014 to $848.8 million for the nine months ended September 30, 2015, and international revenue, based on ship-to destinations, increased by $218.7 million, or 277%, from $78.9 million for the nine months ended September 30, 2014 to $297.6 million for the nine months ended September 30, 2015.

 

Cost of Revenue

 

     Nine Months Ended
September 30,
    Change  
     2014(1)     2015(1)     $      %  
     (dollars in thousands)  

Cost of revenue

   $ 188,486      $ 593,664      $ 405,178         215

Gross profit

     186,763        552,764        366,001         196

Gross margin

     50 %      48     

 

(1)  

The Fitbit Force recall resulted in an increase to cost of revenue of $9.1 million and a benefit to cost of revenue of $2.0 million in the nine months ended September 30, 2014 and 2015, respectively, a decrease in gross profit of $20.7 million and an increase in gross profit of $2.0 million in the nine months ended September 30, 2014 and 2015, respectively, and a decrease of 6 percentage points and a negligible increase in gross margin in the nine months ended September 30, 2014 and 2015, respectively. See the section titled “—Fitbit Force Product Recall” for additional information.

 

Cost of revenue increased $405.2 million, or 215%, from $188.5 million for the nine months ended September 30, 2014 to $593.7 million for the nine months ended September 30, 2015. The increase was primarily due to the increase in the number of devices sold and an increase in average cost per device related to new products introduced in the fourth quarter of 2014. In addition, we recognized a $2.0 million benefit to cost of revenue in the nine months ended September 30, 2015 compared to a $9.1 million increase to cost of revenue in the nine months ended September 30, 2014 in connection with the recall of the Fitbit Force.

 

Gross margin decreased to 48% for the nine months ended September 30, 2015 from 50% for the nine months ended September 30, 2014. The decrease in gross margin for the nine months ended September 30, 2015 was primarily due to the aforementioned impact of lower margins on new products introduced in the fourth quarter of 2014 and the negative impact of foreign currency exchange rates on product pricing, partially offset by a reduction in costs incurred in connection with the recall of the Fitbit Force and to a lesser extent, reduced estimated costs of warranty claims.

 

Research and Development

 

     Nine Months Ended
September 30,
     Change  
     2014      2015      $      %  
     (in thousands)  

Research and development

   $ 35,842       $ 95,808       $ 59,966         167

 

Research and development expenses increased $60.0 million, or 167%, from $35.8 million for the nine months ended September 30, 2014 to $95.8 million for the nine months ended September 30, 2015. The increase was primarily due to a $41.4 million increase in personnel-related expenses due to a 166% increase in headcount, a $9.3 million increase in consultant and contractor expenses, a $4.6 million increase in tooling and prototype materials, a $2.0 million increase in allocated overhead, and a $1.1 million increase in travel expenses.

 

Sales and Marketing

 

     Nine Months Ended
September 30,
     Change  
     2014      2015      $      %  
     (in thousands)  

Sales and marketing

   $ 42,123       $ 178,672       $ 136,549         324

 

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Sales and marketing expenses increased $136.5 million, or 324%, from $42.1 million for the nine months ended September 30, 2014 to $178.7 million for the nine months ended September 30, 2015. The increase was primarily due to a $110.1 million increase in expenses associated with advertising costs and other marketing programs, driven by the launch of media campaigns during the nine months ended September 30, 2015. In addition, personnel-related expenses increased $13.5 million due to a 90% increase in headcount, and consulting and contractor expenses increased $12.4 million.

 

We expect advertising costs and other marketing programs expenses to increase in the fourth quarter of 2015 due to the holiday season.

 

General and Administrative

 

     Nine Months Ended
September 30,
     Change  
     2014(1)      2015      $      %  
     (in thousands)  

General and administrative

   $ 23,909       $ 48,327       $ 24,418         102

 

(1)  

The Fitbit Force recall resulted in an increase to general and administrative expenses of $4.4 million for the nine months ended September 30, 2014. See the section titled “—Fitbit Force Product Recall” for additional information.

 

General and administrative expenses increased $24.4 million, or 102%, from $23.9 million for the nine months ended September 30, 2014 to $48.3 million for the nine months ended September 30, 2015. The increase was primarily due to a $15.8 million increase in personnel-related expenses due to a 108% increase in headcount, a $5.3 million increase in consulting and contractor expenses, and a $1.9 million increase in other administrative fees.

 

Change in Contingent Consideration

 

     Nine Months Ended
September 30,
     Change  
         2015              2014          $  
     (in thousands)  

Change in contingent consideration

   $ (7,704    $       $ (7,704

 

The change in contingent consideration benefit of $7.7 million for the nine months ended September 30, 2015 is a result of our re-measurement of the contingent consideration liability related to our acquisition of FitStar. This is a non-recurring benefit. There was no contingent liability as of September 30, 2015, and the terms of the contingent liability have expired.

 

Interest and Other Expense, Net

 

     Nine Months Ended
September 30,
     Change  
     2014      2015      $      %  
     (in thousands)  

Interest expense, net

   $ (1,541    $ (1,062    $ 479         (31 )% 

Other expense, net

    
(7,722

     (59,129      (51,407      666

 

Other expense, net, increased $51.4 million, from $7.7 million for the nine months ended September 30, 2014 to $59.1 million for the nine months ended September 30, 2015. The increase was primarily due to an increase of $49.8 million in charges related to the revaluation of our convertible preferred stock warrant liability and a $1.6 million increase in foreign exchange loss.

 

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Income Tax Expense

 

     Nine Months Ended
September 30,
     Change  
     2014      2015      $      %  
     (in thousands)  

Income tax expense (benefit)

   $ (16,911    $ 65,958       $ 82,869         490

 

Income tax expense increased $82.9 million, or 490%, from a benefit of $16.9 million for the nine months ended September 30, 2014 to an expense of $66.0 million for the nine months ended September 30, 2015. Our effective tax rate was 37.2% and (22.4)% for the nine months ended September 30, 2015 and 2014, respectively. The increase in income tax expense and effective tax rate for the nine months ended September 30, 2015 was primarily due to increased earnings during this period. The income tax benefit and effective tax rate for the nine months ended September 30, 2014 was due to a $51.3 million tax benefit related to the release of a valuation allowance on deferred tax assets for accruals, which includes the impact of costs incurred in 2013 in connection with the Fitbit Force recall, and tax credits from prior years, partially offset by income tax expense on earnings.

 

Comparison of 2013 and 2014

 

Revenue

 

     Year Ended December 31,      Change  
     2013(1)      2014(1)      $      %  
     (in thousands)  

Revenue

   $ 271,087       $ 745,433       $ 474,346         175

 

(1)  

The Fitbit Force recall resulted in a decrease to revenue of $30.6 million and $8.1 million in 2013 and 2014, respectively. See the section titled “—Fitbit Force Product Recall” for additional information.

 

Revenue increased $474.3 million, or 175%, from $271.1 million for 2013 to $745.4 million for 2014. A substantial majority of the increase was due to an increase in the number of devices sold from 4.5 million in 2013 to 10.9 million in 2014, including $151.9 million from new products that we began selling in 2014. U.S. revenue, based on ship-to destinations, increased $356.5 million, or 173%, from $206.1 million for 2013 to $562.6 million for 2014 and international revenue, based on ship-to destinations, increased by $117.9 million, or 181%, from $65.0 million for 2013 to $182.9 million for 2014.

 

Cost of Revenue

 

     Year Ended December 31,      Change  
     2013(1)      2014(1)      $      %  
     (dollars in thousands)  

Cost of revenue

   $ 210,836       $ 387,776       $ 176,940         84

Gross profit

     60,251         357,657         297,406         494

Gross margin

     22%         48%         

 

(1)  

The Fitbit Force recall resulted in an increase to cost of revenue of $51.2 million and $11.3 million in 2013 and 2014, respectively, a decrease in gross profit of $81.8 million and $19.5 million in 2013 and 2014, respectively, and a decrease of 30 percentage points and 3 percentage points in gross margin in 2013 and 2014, respectively. See the section titled “—Fitbit Force Product Recall” for additional information.

 

Cost of revenue increased $176.9 million, or 84%, from $210.8 million for 2013 to $387.8 million for 2014. The increase was primarily due to the increase in the number of devices sold, partially offset by a decrease of $39.9 million in costs, from $51.2 million in 2013 to $11.3 million in 2014, incurred in connection with the recall of the Fitbit Force.

 

Gross margin increased to 48% for 2014 from 22% for 2013. The increase in gross margin was primarily due to a reduction in costs incurred in connection with the recall of the Fitbit Force.

 

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Research and Development

 

     Year Ended December 31,      Change  
         2013              2014          $      %  
     (in thousands)  

Research and development

   $ 27,873       $ 54,167       $ 26,294         94

 

Research and development expenses increased $26.3 million, or 94%, from $27.9 million for 2013 to $54.2 million for 2014. The increase was primarily due to a $13.9 million increase in personnel-related expenses due to a 110% increase in headcount, a $12.9 million increase in consultant and contractor expenses, and a $3.6 million increase in allocated overhead, which was partially offset by a decrease in expenses for tooling and prototype materials of $4.2 million.

 

Sales and Marketing

 

     Year Ended December 31,      Change  
           2013                 2014            $      %  
     (in thousands)  

Sales and marketing

   $ 26,847       $ 112,005       $ 85,158         317

 

Sales and marketing expenses increased $85.2 million, or 317%, from $26.8 million for 2013 to $112.0 million for 2014. The increase was primarily due to a $66.9 million increase in expenses associated with advertising costs and other marketing programs. In addition, consulting and contractor expenses increased $9.6 million and personnel-related expenses increased $9.3 million due to a 131% increase in headcount, partially offset by a decrease of $0.6 million of other expenses.

 

General and Administrative

 

     Year Ended December 31,      Change  
          2013(1)               2014(1)          $      %  
     (in thousands)  

General and administrative

   $ 14,485       $ 33,556       $ 19,071         132

 

(1)  

The Fitbit Force recall resulted in an increase to general and administrative expenses of $2.8 million and $3.4 million in 2013 and 2014, respectively. See the section titled “—Fitbit Force Product Recall” for additional information.

 

General and administrative expenses increased $19.1 million, or 132%, from $14.5 million for 2013 to $33.6 million for 2014. The increase was primarily due to a $6.8 million increase in legal fees, a $5.7 million increase in personnel-related expenses due to a 64% increase in headcount, a $2.2 million increase in allocated overhead, and a $2.7 million increase in consulting and contractor expenses.

 

Interest and Other Income (Expense), Net

 

     Year Ended December 31,     Change  
         2013             2014         $     %  
     (in thousands)  

Interest expense, net

   $ (1,082   $ (2,222   $ (1,140     105

Other expense, net

     (3,649     (15,934     (12,285     337

 

Interest expense, net increased $1.1 million, or 105%, from $1.1 million for 2013 to $2.2 million for 2014. The increase was primarily due to an increase in average indebtedness outstanding compared to 2013. Other expense, net, increased $12.3 million, or 337%, from $3.6 million for 2013 to $15.9 million for 2014. The increase was primarily due to an increase of $9.9 million in charges related to the revaluation of our convertible preferred stock warrant liability and a $2.5 million increase in foreign exchange loss.

 

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Income Tax Expense

 

     Year Ended December 31,      Change  
         2013              2014          $     %  
     (in thousands)  

Income tax expense

   $ 37,937       $ 7,996       $ (29,941     (79 )% 

 

Income tax expense decreased $29.9 million, or 79%, from $37.9 million for 2013 to $8.0 million for 2014. Our effective tax rate was 277.2% and 5.7% for 2013 and 2014, respectively. The decrease in income tax expense and effective tax rate in 2014 was due to a $51.3 million tax benefit related to the release of a valuation allowance on deferred tax assets for accruals, which includes the impact of costs incurred in 2013 in connection with the Fitbit Force recall, and tax credits from prior years. This non-recurring tax benefit is offset by income tax expense on earnings in 2014 and a downward revaluation of our deferred tax assets due to a change in state tax law enacted in 2014.

 

Comparison of 2012 and 2013

 

Revenue

 

     Year Ended December 31,      Change  
     2012      2013(1)      $      %  
     (in thousands)  

Revenue

   $ 76,373       $ 271,087       $ 194,714         255

 

(1)  

The Fitbit Force recall resulted in a decrease to revenue of $30.6 million in 2013. See the section titled “—Fitbit Force Product Recall” for additional information.

 

Revenue increased $194.7 million, or 255%, from $76.4 million for 2012 to $271.1 million for 2013. A substantial majority of the change was due to an increase in the number of devices sold from 1.3 million in 2012 to 4.5 million in 2013, including $141.1 million from new products that we began selling in 2013. U.S. revenue, based on ship-to destinations, increased $138.8 million, or 206%, from $67.3 million for 2012 to $206.1 million for 2013 and international revenue, based on ship-to destinations, increased by $55.9 million, or 614%, from $9.1 million for 2012 to $65.0 million for 2013.

 

Cost of Revenue

 

     Year Ended December 31,     Change  
         2012              2013(1)         $      %  
     (dollars in thousands)  

Cost of revenue

   $ 49,733      $ 210,836      $ 161,103         324

Gross profit

     26,640        60,251        33,611         126

Gross margin

     35     22     

 

(1)  

The Fitbit Force recall resulted in an increase to cost of revenue of $51.2 million in 2013, a decrease in gross profit of $81.8 million in 2013, and a decrease of 30 percentage points in gross margin in 2013. See the section titled “—Fitbit Force Product Recall” for additional information.

 

Cost of revenue increased $161.1 million, or 324%, from $49.7 million for 2012 to $210.8 million for 2013. The increase was primarily due to the increase in the number of devices sold and $51.2 million in costs incurred in connection with the recall of the Fitbit Force.

 

Gross margin decreased to 22% for 2013 from 35% for 2012. The decrease in gross margin was primarily due to an increase in costs incurred in connection with the recall of the Fitbit Force partially offset by improved margins on our products.

 

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Research and Development

 

     Year Ended December 31,      Change  
         2012              2013          $      %  
     (in thousands)  

Research and development

   $ 16,210       $ 27,873       $ 11,663         72

 

Research and development expenses increased $11.7 million, or 72%, from $16.2 million for 2012 to $27.9 million for 2013. The increase was primarily due to a $5.5 million increase in personnel-related expenses due to a 96% increase in headcount and a $5.2 million increase in expenses for tooling and prototype materials associated with new product introductions in 2013.

 

Sales and Marketing

 

     Year Ended December 31,      Change  
         2012              2013          $      %  
     (in thousands)  

Sales and marketing

   $ 10,237       $ 26,847       $ 16,610         162

 

Sales and marketing expenses increased $16.6 million, or 162%, from $10.2 million for 2012 to $26.8 million for 2013. The increase was primarily due to an $8.0 million increase in marketing expenses associated with increased advertising and promotional activities. In addition, consulting and contractor expenses increased $3.3 million and personnel-related expenses increased $3.0 million due to a 55% increase in headcount.

 

General and Administrative

 

     Year Ended December 31,      Change  
         2012               2013(1)          $      %  
     (in thousands)  

General and administrative

   $ 3,968       $ 14,485       $ 10,517         265

 

(1)  

The Fitbit Force recall resulted in an increase to general and administrative expenses of $2.8 million in 2013. See the section titled “—Fitbit Force Product Recall” for additional information.

 

General and administrative expenses increased $10.5 million, or 265%, from $4.0 million for 2012 to $14.5 million for 2013. The increase was primarily due to a $4.3 million increase in legal fees, a $2.5 million increase in personnel-related expenses due to a 133% increase in headcount, and a $2.1 million increase in allocated overhead.

 

Interest Expense and Other Income (Expense), Net

 

     Year Ended December 31,     Change  
         2012             2013         $     %  
     (in thousands)  

Interest expense, net

   $ (176   $ (1,082   $ (906     515

Other income (expense), net

     26        (3,649     (3,675     NM   

 

Interest expense, net increased $0.9 million, or 515%, from $0.2 million for 2012 to $1.1 million for 2013. The increase was due to an increase in average indebtedness outstanding compared to 2012. Other income (expense), net increased $3.7 million from 2012 primarily due to an increase of $3.4 million in charges related to the revaluation of our convertible preferred stock warrant liability.

 

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Income Tax Expense

 

     Year Ended December 31,      Change  
         2012              2013          $      %  
     (in thousands)  

Income tax expense

   $ 291       $ 37,937       $ 37,646         NM   

 

Income tax expense increased $37.6 million, from $0.3 million for 2012 to $37.9 million for 2013. The increase was primarily due to the continued recognition of a full valuation allowance on our deferred tax assets, which included the accrual for the Fitbit Force recall.

 

Quarterly Results of Operations and Key Metrics

 

Quarterly Results of Operations

 

The following table sets forth unaudited quarterly consolidated statements of operations data for each of the eleven quarters ended September 30, 2015. The information for each of these quarters has been prepared on the same basis as the audited annual consolidated financial statements appearing elsewhere in this prospectus and, in our opinion, includes all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of the results of operations for these periods. This information should be read in conjunction with our audited consolidated financial statements and related notes appearing elsewhere in the prospectus. These quarterly results are not necessarily indicative of our operating results for a full year or any future period.

 

    Three Months Ended  
    Mar. 31,
2013
    Jun. 30,
2013
    Sept. 30,
2013
    Dec. 31,
2013(1)
    Mar. 31,
2014(1)
    Jun. 30,
2014(1)
    Sept. 30,
2014(1)
    Dec. 31,
2014(1)
    Mar.  31,
2015(1)
    Jun.  30,
2015(1)
    Sept.  30,
2015(1)
 
   

(in thousands)

 

Consolidated statement of operations data:

                     

Revenue

  $ 33,121      $ 47,169      $ 83,667      $ 107,130      $ 108,815      $ 113,572      $ 152,862      $ 370,184      $ 336,754      $ 400,412      $ 409,262   

Cost of revenue

    18,132        25,947        42,412        124,345        64,046        55,183        69,257        199,290        167,545        212,870        213,249   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    14,989        21,222        41,255        (17,215     44,769        58,389        83,605        170,894        169,209        187,542        196,013   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

                     

Research and development

    5,346        6,507        7,766        8,254        9,088        11,809        14,945        18,325        22,426        30,492        42,890   

Sales and marketing

    4,217        5,433        6,159        11,038        11,273        13,311        17,539        69,882        43,867        69,690        65,115   

General and administrative

    1,338        2,154        2,853        8,140        8,617        7,443        7,849        9,647        12,981        14,648        20,698   

Change in contingent consideration

                                                                   (7,704       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    10,901        14,094        16,778        27,432        28,978        32,563        40,333        97,854        79,274        107,126        128,703   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    4,088        7,128        24,477        (44,647     15,791        25,826        43,272        73,040        89,935        80,416        67,310   

Interest expense, net

    (196     (268     (274     (344     (409     (452     (680     (681     (467     (379     (216

Other income (expense), net

    (209     (655     (1,221     (1,564     (1,219     (3,687     (2,816     (8,212     (13,077     (45,308     (744