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Table of Contents


 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________________________
FORM 10-Q
____________________________________________
(Mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2019 
or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number: 001-37444
__________________________________________
FITBIT, INC.
(Exact name of registrant as specified in its charter)
____________________________________________
Delaware
 
 
20-8920744
(State or other jurisdiction of
incorporation or organization)
 
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
 
 
 
199 Fremont Street,
14th Floor
 
 
San Francisco,
California
 
94105
(Address of principal executive offices)
 
(Zip Code)
(415) 513-1000
(Registrant’s telephone number, including area code)
____________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol
Name of each exchange on which registered
Class A Common Stock, $0.0001 par value
FIT
The New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer


Accelerated filer
Non-accelerated filer
 
Smaller reporting company
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No

As of October 23, 2019, there were 228,860,902 shares of the registrant’s Class A common stock outstanding and 31,267,322 shares of the registrant’s Class B common stock outstanding.


Table of Contents


TABLE OF CONTENTS

 
 
Page 
Number
 
 
 
 
  
 
  
  
 
Condensed Consolidated Balance Sheets—September 28, 2019 and December 31, 2018
 
  
  
 
Condensed Consolidated Statements of Operations—for the three and nine months ended September 28, 2019 and September 29, 2018
 
  
  
 
Condensed Consolidated Statements of Comprehensive Loss—for the three and nine months ended September 28, 2019 and September 29, 2018
 
 
 
 
Condensed Consolidated Statements of Stockholders’ Equity—for the three and nine months ended September 28, 2019 and September 29, 2018
 
  
  
 
Condensed Consolidated Statements of Cash Flows—for the nine months ended September 28, 2019 and September 29, 2018
 
  
  
 
 
  
  
 
  
  
 
  
  
 
  
  
  
 
  
  
 
  
  
 
  
  
 
 
 
 
 
 
 
 
 



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NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which involve risks and uncertainties. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations 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,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

the expected timing and anticipated closing of our pending acquisition by Google LLC;
our future revenue, cost of revenue, gross margin, operating expenses, including personnel costs, research and development expense, sales and marketing expense and general and administrative expense;
continued investments in research and development, sales and marketing and international expansion and the impact of those investments;
competitors and competition in our markets;
our ability to anticipate and satisfy consumer preferences;
our smartwatches and their market acceptance and future potential;
our ability to develop and introduce new products and services, including recurring non-device revenue offerings, and improve our existing products and services;
our ability to grow and engage our user base;
our expectations to derive the substantial majority of our revenue from sales of devices;
our ability to accurately forecast consumer demand and adequately manage inventory;
trends in our quarterly operating results and other operating metrics;
the impact of tariffs or other restrictions placed on our products imported into the United States from other countries, including China;
the impact of changes in tax laws on our operating results;
the impact of our adoption of accounting pronouncements;
our ability to deliver an adequate supply of product to meet demand;
our ability to maintain and promote our brand and expand brand awareness;
our ability to detect, prevent, or fix defects;
our reliance on third-party suppliers, contract manufacturers, and logistics providers and our limited control over such parties;
legal proceedings and the impact of such proceedings;
the effect of seasonality on our results of operations;
our ability to attract and retain highly skilled employees;
the impact of our acquisitions in enhancing the features and functionality of our devices;
the impact of foreign currency exchange rates;
the sufficiency of our existing cash and cash equivalent balances and cash flow from operations to meet our working capital and capital expenditure needs for at least the next 12 months; and
general market, political, economic and business conditions.

We caution you that the foregoing list does not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q 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 described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. 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 that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. 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 from those described in the forward-looking statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information

3

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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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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
FITBIT, INC.
Condensed Consolidated Balance Sheets
(In thousands)
(unaudited)
 
 
September 28, 2019
 
December 31, 2018
 
 
 
 
 
 
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
287,431

 
$
473,956

Marketable securities
 
214,817

 
249,493

Accounts receivable, net
 
345,562

 
414,209

Inventories
 
245,096

 
124,871

Income tax receivable
 
965

 
6,957

Prepaid expenses and other current assets
 
33,376

 
42,325

Total current assets
 
1,127,247

 
1,311,811

Property and equipment, net
 
88,232

 
106,286

Operating lease right-of-use assets
 
71,529

 

Goodwill
 
60,979

 
60,979

Intangible assets, net
 
17,519

 
23,620

Deferred tax assets
 
3,925

 
4,489

Other assets
 
7,170

 
8,362

Total assets
 
$
1,376,601

 
$
1,515,547

Liabilities and Stockholders’ Equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
263,181

 
$
251,657

Accrued liabilities
 
365,812

 
437,234

Operating lease liabilities
 
23,313

 

Deferred revenue
 
28,076

 
29,400

Income taxes payable
 
986

 
1,092

Total current liabilities
 
681,368

 
719,383

Long-term deferred revenue
 
6,174

 
7,436

Long-term operating lease liabilities
 
70,202

 

Other liabilities
 
29,883

 
52,790

Total liabilities
 
787,627

 
779,609

Commitments and contingencies (Note 6)
 

 

Stockholders’ equity:
 
 
 
 
Class A and Class B common stock
 
26

 
25

Additional paid-in capital
 
1,107,659

 
1,055,046

Accumulated other comprehensive income (loss)
 
232

 
(66
)
Accumulated deficit
 
(518,943
)
 
(319,067
)
Total stockholders’ equity
 
588,974

 
735,938

Total liabilities and stockholders’ equity
 
$
1,376,601

 
$
1,515,547


The accompanying notes are an integral part of these condensed consolidated financial statements.

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FITBIT, INC.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(unaudited)
 
 
Three Months Ended
 
Nine Months Ended
   
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Revenue
$
347,200

 
$
393,575

 
$
932,646

 
$
940,784

Cost of revenue
239,248

 
240,061

 
627,027

 
554,132

Gross profit
107,952

 
153,514

 
305,619

 
386,652

Operating expenses:
 
 
 
 
 
 
 
   Research and development
65,693

 
79,840

 
213,651

 
256,223

   Sales and marketing
71,296

 
66,676

 
222,972

 
239,573

   General and administrative
23,083

 
24,812

 
74,640

 
91,111

Total operating expenses
160,072

 
171,328

 
511,263

 
586,907

Operating loss
(52,120
)
 
(17,814
)
 
(205,644
)
 
(200,255
)
Interest income, net
2,388

 
2,072

 
8,476

 
5,599

Other income (expense), net
(492
)
 
(5,141
)
 
1,242

 
(2,366
)
Loss before income taxes
(50,224
)
 
(20,883
)
 
(195,926
)
 
(197,022
)
Income tax expense (benefit)
1,669

 
(18,827
)
 
3,950

 
4,179

Net loss
$
(51,893
)
 
$
(2,056
)
 
$
(199,876
)
 
$
(201,201
)
Net loss per share:
 
 
 
 
 
 
 
Basic
$
(0.20
)
 
$
(0.01
)
 
$
(0.78
)
 
$
(0.83
)
Diluted
$
(0.20
)
 
$
(0.01
)
 
$
(0.78
)
 
$
(0.83
)
Shares used to compute net loss per share:
 
 
 
 
 
 
 
Basic
258,753

 
245,838

 
256,046

 
242,746

Diluted
258,753

 
245,838

 
256,046

 
242,746


 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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FITBIT, INC.
Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Net loss
$
(51,893
)
 
$
(2,056
)
 
$
(199,876
)
 
$
(201,201
)
Other comprehensive loss:
 
 
 
 
 
 
 
   Cash flow hedges:
 
 
 
 
 
 
 
Change in unrealized gain (loss) on cash flow hedges, net of tax benefit of $0, $43, $0 and $709, respectively
(66
)
 
868

 
(66
)
 
6,780

Less: reclassification for realized net loss included in net loss, net of tax benefit of $0, $(115), $0 and $(244), respectively

 
(2,334
)
 

 
(3,362
)
Net change, net of tax
(66
)
 
(1,466
)
 
(66
)
 
3,418

 
 
 
 
 
 
 
 
Available-for-sale investments:
 
 
 
 
 
 
 
  Change in unrealized gain (loss) on investments
35

 
120

 
364

 
(88
)
Less reclassification for realized net gain included in net loss

 

 

 
12

Net change, net of tax
35

 
120

 
364

 
(76
)
 
 
 
 
 
 
 
 
Comprehensive loss
$
(51,924
)
 
$
(3,402
)
 
$
(199,578
)
 
$
(197,859
)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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FITBIT, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(In thousands, except share amounts)
(unaudited)
 
Three Months Ended September 28, 2019
 
Class A and Class B Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 29, 2019
258,139,452

 
$
25

 
$
1,092,306

 
$
263

 
$
(467,050
)
 
$
625,544

Issuance of common stock
1,746,274

 
1

 
232

 

 

 
233

Stock-based compensation expense

 

 
17,971

 

 

 
17,971

Taxes related to net share settlement of restricted stock units

 

 
(2,850
)
 

 

 
(2,850
)
Net loss

 

 

 

 
(51,893
)
 
(51,893
)
Other comprehensive loss

 

 

 
(31
)
 

 
(31
)
Balance at September 28, 2019
259,885,726

 
$
26

 
$
1,107,659

 
$
232

 
$
(518,943
)
 
$
588,974

 
Three Months Ended September 29, 2018
 
Class A and Class B Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2018
245,041,726

 
$
25

 
$
1,006,639

 
$
4,679

 
$
(332,384
)
 
$
678,959

Issuance of common stock
2,569,552

 

 
908

 

 

 
908

Stock-based compensation expense

 

 
23,954

 

 

 
23,954

Taxes related to net share settlement of restricted stock units

 

 
(5,698
)
 

 

 
(5,698
)
Net loss

 

 

 

 
(2,056
)
 
(2,056
)
Other comprehensive loss

 

 

 
(1,346
)
 

 
(1,346
)
Balance at September 29, 2018
247,611,278

 
$
25

 
$
1,025,803

 
$
3,333

 
$
(334,440
)
 
$
694,721


The accompanying notes are an integral part of these condensed consolidated financial statements.

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FITBIT, INC.
Condensed Consolidated Statements of Stockholders’ Equity (Continued)
(In thousands, except share amounts)
(unaudited)

 
Nine Months Ended September 28, 2019
 
Class A and Class B Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
252,362,841

 
$
25

 
$
1,055,046

 
$
(66
)
 
$
(319,067
)
 
$
735,938

Issuance of common stock
7,522,885

 
1

 
7,044

 

 

 
7,045

Stock-based compensation expense

 

 
59,064

 

 

 
59,064

Taxes related to net share settlement of restricted stock units

 

 
(13,495
)
 

 

 
(13,495
)
Net loss

 

 

 

 
(199,876
)
 
(199,876
)
Other comprehensive income

 

 

 
298

 

 
298

Balance at September 28, 2019
259,885,726

 
$
26

 
$
1,107,659

 
$
232

 
$
(518,943
)
 
$
588,974


 
Nine Months Ended September 29, 2018
 
Class A and Class B Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
238,756,522

 
$
24

 
$
956,060

 
$
(9
)
 
$
(132,112
)
 
$
823,963

Issuance of common stock
8,854,756

 
1

 
11,645

 

 

 
11,646

Stock-based compensation expense

 

 
73,783

 

 

 
73,783

Taxes related to net share settlement of restricted stock units

 

 
(15,685
)
 

 

 
(15,685
)
Cumulative effect adjustment related to opening retained earnings for adoption of ASU 2014-09

 

 

 

 
(1,127
)
 
(1,127
)
Net loss

 

 

 

 
(201,201
)
 
(201,201
)
Other comprehensive income

 

 

 
3,342

 

 
3,342

Balance at September 29, 2018
247,611,278

 
$
25

 
$
1,025,803

 
$
3,333

 
$
(334,440
)
 
$
694,721


The accompanying notes are an integral part of these condensed consolidated financial statements.


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FITBIT, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
 
Nine Months Ended
 
September 28, 2019
 
September 29, 2018
 
 
 
 
Cash Flows from Operating Activities
 
 
 
Net loss
$
(199,876
)
 
$
(201,201
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Provision for doubtful accounts
29

 
37

Provision for inventory obsolescence
5,163

 
9,019

Depreciation
43,215

 
35,388

Non-cash lease expense
17,961

 

Write-off of property and equipment
169

 
7,513

Amortization of intangible assets
6,100

 
5,866

Stock-based compensation
59,175

 
73,613

Deferred income taxes
618

 
(1,690
)
Impairment of equity investment

 
6,000

Other
(50
)
 
(693
)
Changes in operating assets and liabilities, net of acquisition:
 
 
 
Accounts receivable
68,617

 
80,227

Inventories
(125,500
)
 
(80,064
)
Prepaid expenses and other assets
11,872

 
123,356

Fitbit Force recall reserve
242

 
(395
)
Accounts payable
11,826

 
16,357

Accrued liabilities and other liabilities
(61,005
)
 
(67,813
)
Lease liabilities
(20,975
)
 

Deferred revenue
(2,586
)
 
(9,649
)
Income taxes payable
(107
)
 
5,653

Net cash provided by (used in) operating activities
(185,112
)
 
1,524

Cash Flows from Investing Activities
 
 
 
Purchase of property and equipment
(26,277
)
 
(40,174
)
Purchases of marketable securities
(287,969
)
 
(284,986
)
Sales of marketable securities
2,016

 
93,020

Maturities of marketable securities
322,132

 
309,323

Acquisition, net of cash acquired
(2,625
)
 
(13,646
)
Net cash provided by investing activities
7,277

 
63,537

Cash Flows from Financing Activities
 
 
 
Repayment of debt

 
(747
)
Payment of financing lease liability
(2,239
)
 

Proceeds from issuance of common stock
7,044

 
11,641

Taxes paid related to net share settlement of restricted stock units
(13,495
)
 
(15,684
)
Net cash used in financing activities
(8,690
)
 
(4,790
)
Net increase (decrease) in cash and cash equivalents
(186,525
)
 
60,271

Cash and cash equivalents at beginning of period
473,956

 
341,966

Cash and cash equivalents at end of period
$
287,431

 
$
402,237


The accompanying notes are an integral part of these condensed consolidated financial statements.

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FITBIT, INC.
Notes to Condensed Consolidated Financial Statements


1.    Basis of Presentation and Summary of Significant Accounting Policies
 
The accompanying condensed consolidated financial statements of Fitbit, Inc. (the “Company”) are unaudited. The condensed consolidated balance sheet at December 31, 2018 has been derived from the audited financial statements of the Company. The accompanying condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information, and in management’s opinion, includes all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement of the Company’s financial position, its results of operations, and cash flows for the interim periods presented. The results of operations for the nine months ended September 28, 2019 are not necessarily indicative of the results to be expected for the full fiscal year or any other period.

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

The Company’s fiscal year ends on December 31 of each year. The Company is on a 4-4-5 week quarterly calendar. There were 91 days in each of the three months ended September 28, 2019 and September 29, 2018, respectively.

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

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

Significant Accounting Policies

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

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

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




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FITBIT, INC.
Notes to Condensed Consolidated Financial Statements (Continued)

Recent Accounting Pronouncements

Accounting Pronouncements Not Yet Adopted

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 provides for a new impairment model which requires measurement and recognition of expected credit losses for most financial assets and certain other instruments, including but not limited to accounts receivable and available for sale debt securities. In May 2019, the FASB issued ASU 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief. This ASU provides an option to irrevocably elect to measure certain individual financial assets at fair value instead of amortized cost. ASU 2016-13 and ASU 2019-05 will become effective for the Company on January 1, 2020 and early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test. The second step measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under ASU 2017-04, a company will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. ASU 2017-04 will be applied prospectively and is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect adoption of this guidance will have a material impact on its consolidated financial statements.


In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements on fair value measurements and will become effective for the Company on January 1, 2020 and early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 clarifies the accounting for implementation costs in cloud computing arrangements and will become effective for the Company on January 1, 2020 and early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. This ASU clarifies and corrects guidance related to Topic 326, Topic 815, and Topic 825. The applicable provisions of this ASU will become effective for the Company on January 1, 2020. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

Accounting Pronouncements Recently Adopted

In February 2016, the FASB issued ASU 2016-02, Leases and subsequent amendments to the initial guidance; ASU 2017-13, ASU 2018-10 and ASU 2018-11 (collectively, “Topic 842”). Topic 842 requires lessees to recognize ROU assets and lease liabilities for operating leases, initially measured at the present value of the lease payments, on the balance sheet. The Company adopted the standard effective January 1, 2019 using a modified retrospective approach. Prior periods were not retrospectively adjusted. The cumulative effect upon adoption on the opening accumulated deficit balance was zero. The Company elected the available practical expedients, which allowed for carryforward of historical assessments of whether contracts contain or are leases, historical lease classification, and remaining lease terms.

The standard had a material impact on the Company’s condensed consolidated balance sheets but did not have an impact on its condensed consolidated statements of operations. The most significant impact was the recognition of ROU assets and short-term and long-term lease liabilities for operating leases. The balances of operating lease ROU assets, operating lease liabilities, and long-term operating lease liabilities as of September 28, 2019 were $71.5 million, $23.3 million, and $70.2 million, respectively. The impact to other financial statement line items was immaterial. Adoption of the standard had no impact to net cash from or used in operating, investing, or financing activities in the Company’s consolidated statement of cash flows. Refer to Note 5 for further information on leases.

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FITBIT, INC.
Notes to Condensed Consolidated Financial Statements (Continued)


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

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 became effective for the Company on January 1, 2019. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

2.    Fair Value Measurements
 
The carrying values of the Company’s accounts receivable, accounts payable, and accrued liabilities approximated their fair values due to the short period of time to maturity or repayment.
 
The following tables set forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):
 
 
September 28, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Money market funds
$
95,079

 
$

 
$

 
$
95,079

U.S. government agencies

 
83,246

 

 
83,246

Corporate debt securities

 
222,823

 

 
222,823

Derivative assets

 
775

 

 
775

Total
$
95,079

 
$
306,844

 
$

 
$
401,923

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
9

 
$

 
$
9

Total
$

 
$
9

 
$

 
$
9


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

 
$

 
$

 
$
273,546

U.S. government agencies

 
72,840

 

 
72,840

Corporate debt securities

 
228,953

 

 
228,953

Derivative assets

 
623

 

 
623

Total
$
273,546

 
$
302,416

 
$

 
$
575,962

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
549

 
$

 
$
549

Stock warrant liability

 

 
410

 
410

Total
$

 
$
549

 
$
410

 
$
959


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

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FITBIT, INC.
Notes to Condensed Consolidated Financial Statements (Continued)


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

There were no Level 3 assets as of September 28, 2019 and December 31, 2018. There were no Level 3 liabilities as of September 28, 2019 and there were Level 3 liabilities as of December 31, 2018. There were no transfers between fair value measurement levels during the three and nine months ended September 28, 2019 and September 29, 2018.


3.    Financial Instruments

Cash, Cash Equivalents and Marketable Securities

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

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

The following table sets forth cash, cash equivalents and marketable securities as of September 28, 2019 (in thousands):
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Marketable Securities
 
 
 
 
 
 
 
 
 
 
 
 
Cash
$
101,100

 
$

 
$

 
$
101,100

 
$
101,100

 
$

Money market funds
95,079

 

 

 
95,079

 
95,079

 

U.S. government agencies
83,190

 
61

 
(5
)
 
83,246

 
18,232

 
65,014

Corporate debt securities
222,712

 
124

 
(13
)
 
222,823

 
73,020

 
149,803

Total
$
502,081

 
$
185

 
$
(18
)
 
$
502,248

 
$
287,431

 
$
214,817


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

 
$

 
$

 
$
148,110

 
$
148,110

 
$

Money market funds
273,546

 

 

 
273,546

 
273,546

 

U.S. government agencies
72,884

 
1

 
(45
)
 
72,840

 
9,738

 
63,102

Corporate debt securities
229,040

 

 
(87
)
 
228,953

 
42,562

 
186,391

Total
$
723,580

 
$
1

 
$
(132
)
 
$
723,449

 
$
473,956

 
$
249,493



The gross unrealized gains or losses on marketable securities as of September 28, 2019 and December 31, 2018 were not material. There were no available-for-sale investments as of September 28, 2019 and December 31, 2018 that have been in a continuous unrealized loss position for greater than 12 months on a material basis.






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FITBIT, INC.
Notes to Condensed Consolidated Financial Statements (Continued)

The following table classifies marketable securities by contractual maturities (in thousands):
 
September 28, 2019
 
December 31, 2018
 
 
 
 
Due in one year
$
205,923

 
$
249,493

Due in one to two years
8,894

 

Total
$
214,817

 
$
249,493



Derivative Financial Instruments

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

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

The Company had no outstanding contracts that were designated as cash flow hedges for forecasted revenue as of September 28, 2019 and December 31, 2018, respectively.

Balance Sheet Hedges

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

The Company had outstanding balance sheet hedges with a total notional amount of $118.6 million and $101.4 million as of September 28, 2019 and December 31, 2018, respectively.
 
Fair Value of Foreign Currency Derivatives

The foreign currency derivative contracts that were not settled at the end of the period are recorded at fair value, on a gross basis, in the condensed consolidated balance sheets. The following table presents the fair value of the Company’s foreign currency derivative contracts as of the periods presented (in thousands):

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FITBIT, INC.
Notes to Condensed Consolidated Financial Statements (Continued)

 
 
 
September 28, 2019
 
December 31, 2018
 
Balance Sheet Location
 
Fair Value Derivative
Assets
 
Fair Value Derivative Liabilities
 
Fair Value Derivative
Assets
 
Fair Value Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
Hedges not designated
Prepaid expenses and other current assets
 
$
775

 
$

 
$
623

 
$

Hedges not designated
Accrued liabilities
 

 
9

 

 
549

Total fair value of derivative instruments
 
 
$
775

 
$
9

 
$
623

 
$
549



Financial Statement Effect of Foreign Currency Derivative Contracts

The following table presents the pre-tax impact of the Company’s foreign currency derivative contracts on other comprehensive income (“OCI”) and the condensed consolidated statements of operations for the periods presented (in thousands):
 
 
 
Three Months Ended
 
Nine Months Ended
 
Income Statement Location
 
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
 
 
 
 
 
 
 
 
 
 
Foreign exchange cash flow hedges:
 
 
 
 
 
 
 
 
 
Gain recognized in OCI – effective portion
 
 
$

 
$
911

 
$

 
$
7,489

Gain reclassified from OCI into income – effective portion
Revenue
 

 
2,449

 

 
3,606

 
 
 
 
 
 
 
 
 
 
Foreign exchange balance sheet hedges:
 
 
 
 
 
 
 
 
 
Gain recognized in income
Other income, net
 
$
2,041

 
$
1,035

 
$
1,567

 
$
3,335



As of September 28, 2019, there were no net derivative gains related to the Company’s cash flow hedges to be reclassified from OCI into revenue within the next 12 months.

Effect of Derivative Contracts on Condensed Consolidated Statements of Operations

The following table provides the location in the condensed consolidated statements of operations and amount of the recognized gains or losses to the Company’s derivative instruments designated as hedging instruments (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
 
 
 
 
 
 
 
 
 
Total amounts presented in the condensed consolidated statement of operations in which the effects of cash flow hedges are recorded in revenue
 
$
347,200

 
$
393,575

 
$
932,646