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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________________________
FORM 10-K
____________________________________________
(Mark one) þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
or
o
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
(State or other jurisdiction of
incorporation or organization)
20-8920744
(I.R.S. Employer Identification No.)
405 Howard Street
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
Class A Common Stock, par value $0.0001
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þNo o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes oNo þ
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 þNo o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes þNo
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes oNo þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the closing sale price of the registrant's Class A common stock on July
1, 2016, the last business day of the registrant's most recently completed second fiscal quarter, as reported on the New York Stock Exchange, was approximately $2.0 billion.
As of February 17, 2017, there were 177,757,412 shares of the registrant’s Class A common stock outstanding and 48,450,746 shares of the registrant’s Class B common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement for the Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent
stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31, 2016.
Table of Contents
Fitbit, Inc.
Form 10-K
For the Fiscal Year Ended December 31, 2016
TABLE OF CONTENTS
Page
Part I
Item 1. Business 2
Item 1A. Risk Factors 11
Item 1B. Unresolved Staff Comments 32
Item 2. Properties 32
Item 3. Legal Proceedings 32
Item 4. Mine Safety Disclosures 32
Part II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities 33
Item 6. Selected Financial Data 35
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 39
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 57
Item 8. Financial Statements and Supplementary Data 58
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 96
Item 9A. Controls and Procedures 96
Item 9B. Other Information 96
Part III
Item 10. Directors, Executive Officers and Corporate Governance 97
Item 11. Executive Compensation 97
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 97
Item 13. Certain Relationships and Related Transactions and Director Independence 97
Item 14. Principal Accounting Fees and Services 97
Part IV
Item 15. Exhibits, Financial Statement Schedules 98
Signatures 99
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NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve
risks and uncertainties. All statements contained in this Annual Report on Form 10-K 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 Annual Report on Form 10-K include, but are not limited to, statements about:
• continued investments in research and development, sales and marketing and international expansion and the impact of those investments;
• trends in our operating expenses, including personnel costs, research and development expense, sales and marketing expense and general and
administrative expense;
• competitors and competition in our markets;
• our ability to anticipate and satisfy consumer preferences;
• our ability to develop new products and services or improve our existing products and services, or engage or expand our core user base;
• our ability to accurately forecast consumer demand and adequately manage inventory;
• 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;
• trends in our quarterly operating results and other operating metrics;
• trends in revenue, costs of revenue and gross margin;
• 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;
• our expectation to derive the substantial majority of our revenue from sales of devices;
• growing our sales of subscription-based services ;
• the impact of foreign currency exchange rates;
• releasing and shipping new products and services, and the timing thereof;
• 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;
• the continued availability of our credit facility; 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 Annual Report on Form 10-K.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Annual
Report on Form 10-K 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 Annual Report on Form 10-K. 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 Annual Report on Form 10-K. 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 Annual Report on Form 10-K 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 Annual Report on Form 10-K to reflect events or circumstances after the date of this Annual
Report on Form 10-K 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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PART I
Item 1. Business
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.
The core of our platform is our family of wearable connected health and fitness trackers. These wrist-based and “clippable” devices automatically track
users’ daily steps, calories burned, distance traveled, 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 floors climbed, 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. To accompany certain of our products, we offer accessories that include interchangeable wrist bands and frames, colored clips,
device charging cables, wireless sync dongles, band clasps, sleep bands, and Fitbit apparel. 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. 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 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 an ecosystem that includes thousands of third-party
health and fitness apps that connect with our products and enhance the Fitbit experience.
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.
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. Our devices, which include wrist-based and clippable fitness trackers and our Wi-Fi connected scale, feature
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proprietary and advanced sensor technologies and algorithms, high accuracy of measures, and long battery lives. In addition, the ease of use and small,
lightweight, and durable designs of our devices help them fit effortlessly into our users’ lifestyles.
• Learning through our online dashboard and mobile apps. We offer our users a personalized online dashboard and mobile apps that sync automatically
with, and display data from, our connected health and fitness devices. We 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. Both our online dashboard and mobile apps are free and work with all of our connected
health and fitness devices. Our internally-developed software is regularly updated and enhanced, increasing the utility of our health and fitness platform.
• 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. On an individual level, we motivate users by delivering real-time feedback, including
notifications, leaderboard and challenge updates, and virtual badges. Our platform also offers users social features that allow them to receive and provide
support and engage in friendly competition. Users can securely share some or all of their health and fitness information on an opt-in basis with friends,
family, and other parties and compete against each other on key statistics through leaderboards and daily or multi-day fitness challenges. In addition, users
can choose to share their data with thousands of third-party apps and through social networks on an opt-in basis. As users create more connections on our
network, they often benefit from higher levels of fitness activity and overall value from our platform.
• Improving health and fitness through goal-setting, personalized insights, premium services, and virtual coaching. Our primary goal is to help our users
improve their health and fitness. 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 empower our users to set their own health and fitness goals and track their progress towards these
goals. 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. Our premium services feature in-depth data analysis and personalized
reports, as well as benchmarking against peers.
Our Competitive Strengths
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.
• 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. In
addition to our wrist-based and clippable wearable health and fitness devices, we also offer a Wi-Fi connected scale that tracks weight, body fat, and BMI.
We believe the breadth of our connected health and fitness devices provides us with a competitive advantage over our competitors, which often have a
more limited line of products.
• 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. We devote significant resources to ensure that our devices effortlessly fit into our users’ lifestyles.
For example, we design our small, lightweight, durable, and fashionable products to be optimized for power efficiency, which enables automatic wireless
data syncing without compromising battery life. We place a similarly strong emphasis on our online dashboard and mobile apps to provide users with
visualization of their progress and personalized guidance. 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 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. This broad compatibility, combined
with our market-leading position, has enabled us to build what we believe is the largest community of connected health and fitness device users.
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Additionally, we enable seamless integration with thousands of apps across iOS, Android, and Windows Phone through our open API, which allows our
users to share data with third-party apps on an opt-in basis.
• Broad and differentiated go-to-market strategy. We have developed a broad go-to-market strategy that reaches individuals regardless of where they shop.
We sell our products in over 55,000 retail stores and in 65 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. We believe the size of our community of users makes it more likely that users can connect
with friends and family and attracts many new users to our platform. Each of our users add value to our platform by making progress towards their goals
and syncing their data with our platform, which we leverage to provide better insights for our users. 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. We believe
the growth and scale of our user community allows users to become not only more engaged with personalized and relevant content, but also less likely to
leave a community in which many of their friends and family are active members.
• Direct relationship and continuous communication with our users. The connectivity of our devices allows us to better understand our users’ health and
fitness goals. This connectivity also allows us to communicate the most relevant analysis, features, advice, and content to our users throughout the day
with our online dashboard, mobile apps, emails, and notifications. We also utilize these communication channels to help our users become aware of our
new products and services.
Our Users
We aim to empower all people to improve their health and fitness, whatever their lifestyle or goals. Our community of users generally falls into three fitness
levels and we design and market our products to them accordingly:
Everyday users represent our largest group of users. These users are looking to incorporate more activity into their daily routines as the primary means to
improve their overall fitness through everyday activities, such as walking more or taking the stairs instead of the elevator. They are most interested in receiving
feedback on daily activity measures such as steps, distance, calories burned, and active minutes. We primarily market the Fitbit Zip, Fitbit One, Fitbit Flex 2, and
Fitbit Alta to Everyday users.
Active users exercise regularly to reach their fitness goals through activities such as running, using cardio equipment, and playing sports recreationally. As a
result, these users are often interested in monitoring exercise intensity through heart rate tracking in addition to activity tracking. We primarily market the Fitbit
Charge 2 and Fitbit Blaze to Active users.
Performance users train regularly to improve their performance and achieve their personal bests. These users participate in endurance sports and fitness
activities with higher intensity and longer duration, such as interval or distance running and cycling, and thrive on personal improvement and competition.
Accordingly, these users are interested in GPS tracking of speed, distance, and exercise routes, in addition to heart rate and daily activity tracking. We primarily
market the Fitbit Surge to Performance users.
What Our Connected Health and Fitness Devices Track
With each successive product offering, we have expanded the features and accuracy of our products and now track the following measures:
• Steps. The cornerstone of our initial product offering, our trackers use accelerometers and proprietary algorithms that count the number of steps taken
throughout their day.
• Calories burned. Our users can estimate the amount of calories burned throughout the day based on several methods depending on the tracker. We
believe our more advanced devices that use our PurePulse heart rate tracking technology provide a more accurate estimate of calorie burn than non-
PurePulse based products.
• Distance traveled. Our users can track the distance they have traveled throughout the day as a function of the number of steps they have taken throughout
the day or through built-in GPS, depending upon the tracker.
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• Heart rate. On trackers that are outfitted with our proprietary PurePulse technology, our users are able to automatically and continuously track their heart
rate during everyday activity and exercise. Our PurePulse technology uses wrist-based optical LEDs, which measures heart rate using light reflection. We
believe our PurePulse technology makes heart rate relevant as a means to more accurately measure calorie burn, maintain intensity during exercise, and
train more effectively by using heart rate zones. Additionally, our heart rate tracking technology can conveniently provide our users with their resting
heart rate, which is a widely used indicator of cardiovascular fitness and conditioning.
• Floors climbed. Using a built-in altimeter sensor, our users are able to track flights of stairs climbed, which encourages users to take the stairs instead of
using an escalator or elevator. Floors climbed are tracked by all trackers except Fitbit Zip and Fitbit Alta.
• Sleep duration and quality. Users can track their sleep duration and quality on all trackers, except Fitbit Zip, including restless and awake episodes
throughout the night. Most trackers allow users to track this data automatically.
• Active minutes. Our trackers detect the number of minutes our users are more active.
• GPS-based tracking. Our Fitbit Surge allows our users to track their speed, distance, and exercise routes using the GPS capability integrated into the
device during activities such as running, cycling, hiking, and walking. For those without Fitbit Surge, our mobile apps provide GPS tracking using the
phone’s GPS capability. Fitbit Blaze allows users to connect to their smartphones’ GPS capabilities.
• SmartTrack. SmartTrack automatically recognizes continuous movement when users wear Fitbit Alta, Fitbit Charge HR, Fitbit Blaze, or Fitbit Surge. It
identifies the type of activity and records it in the Fitbit app along with an exercise summary, including duration, calories burned and heart rate stats.
SmartTrack is capable of identifying a wide variety of activities, including elliptical, outdoor biking, running, walking, and general categories of aerobic
workouts and sports.
• Weight, body fat, and BMI. Our Aria Wi-Fi connected scale allows users to track weight, BMI, lean mass, and body fat percentage separately and
privately for up to eight users, helping individuals to track progress towards and achieve their body composition goals.
• Caloric intake. Through our mobile apps, we provide a database with more than 300,000 specific food items that can be searched and tracked. Users can
log food consumption and set calorie budgets based on their caloric intake and daily activity to achieve a desired weight goal.
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 for Everyday users that allows them to track the most important daily activity statistics such as steps,
distance, calories burned, and active minutes. As a clippable tracker, Fitbit Zip can be worn discreetly in a pocket or on a belt. We offer the Fitbit Zip in five colors
with a replaceable watch battery that lasts up to six months. Fitbit Zip has a U.S. MSRP of $59.95.
Fitbit One is a more advanced clippable wireless tracker for Everyday users that tracks floors climbed and sleep in addition to daily steps, distance, calories
burned, and active minutes. Fitbit One also has a silent alarm that gently vibrates to wake users at a desired time. Fitbit One is available in two colors and offers a
rechargeable battery that lasts ten to fourteen days. Fitbit One has a U.S. MSRP of $99.95.
Fitbit Flex is our first wristband-style tracker, with a sleek and stylish design intended for Everyday users. Fitbit Flex tracks steps, distance, calories burned,
active minutes, and sleep. Fitbit Flex also has a silent alarm. Fitbit Flex features LED lights to show users’ progress towards their primary daily goal. We also offer
users the ability to change wristbands for different colors to match their mood or personal style. Its rechargeable battery lasts up to five days. Fitbit Flex has been
discontinued and replaced with Fitbit Flex 2.
Fitbit Flex 2 replaces Fitbit Flex, and is our first water-resistant fitness wristband. We began selling Fitbit Flex 2 in September 2016. Fitbit Flex 2 is water
resistant up to 50 meters, and automatically tracks pool swims including laps, duration and calories burned in the Fitbit App. It features SmartTrack automatic
exercise recognition, tracks daily activities such as steps, distance,
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calories burned, and active minutes, and automatically tracks sleep at night. Fitbit Flex 2 also features a slim design, easily interchangeable bands, and LED lights
to show progress toward a user’s daily goal. Fitbit Flex 2 is available in four colors and two sizes, and uses a rechargeable battery that lasts up to five days. Fitbit
Flex 2 has a U.S. MSRP of $99.95.
Fitbit Charge is our activity and sleep wristband for Everyday users that we began selling in October 2014. It tracks steps, distance, calories burned, active
minutes, floors climbed, and sleep. Fitbit Charge features a bright OLED display that shows users’ daily activity and time of day, as well as incoming caller ID
notifications when the device is paired with the user’s phone. Fitbit Charge tracks sleep automatically and offers a silent wake alarm. Its rechargeable battery lasts
seven to ten days. Fitbit Charge has been discontinued and replaced with Fitbit Charge 2.
Fitbit Alta is our slim, sleek, and customizable wristband for Everyday users that we began selling in March 2016. Fitbit Alta offers call, text, and calendar
notifications when paired with the user’s phone and SmartTrack automatic exercise recognition. It also features reminders to move throughout the day. It measures
daily activities such as steps, distance, calories burned, active minutes, and automatically tracks sleep at night. Fitbit Alta can be personalized with interchangeable
accessory bands and features a vibrant OLED display. Fitbit Alta is available in four colors and three sizes, and uses a rechargeable battery that lasts up to five
days. Fitbit Alta has a U.S. MSRP of $129.95.
Fitbit Charge HR is a wireless heart rate and activity wristband for Active users that we began selling in December 2014. Fitbit Charge HR offers all the
features available on the Fitbit Charge and also includes our proprietary PurePulse heart rate tracking technology and SmartTrack automatic exercise recognition.
Its rechargeable battery lasts up to five days. Fitbit Charge HR has been discontinued and replaced with Fitbit Charge 2.
Fitbit Charge 2 replaces Fitbit Charge and Fitbit Charge HR, and is a wireless heart rate and activity wristband that we began selling in August 2016. Fitbit
Charge 2 features connected GPS through a user’s smartphone, PurePulse heart rate tracking, and SmartTrack automatic exercise recognition. It provides an
estimate of the user’s cardio fitness level, features guided breathing sessions, and provides text and call notifications. Fitbit Charge 2 tracks daily activities such as
steps, distance, calories burned, floors climbed, and active minutes and automatically tracks sleep at night. Fitbit Charge 2 also features a slim design, easily
interchangeable bands, and a tap-sensitive display. Fitbit Charge 2 is available in four colors and three sizes. Its rechargeable battery lasts up to five days. Fitbit
Charge 2 has a U.S. MSRP of $149.95.
Fitbit Blaze is our smart fitness watch for Active users that we began selling in February 2016. It combines features of a smartwatch, heart rate tracker, and
activity tracker. It includes features such as FitStar on-screen workouts, connected GPS through a user’s smartphone’s GPS, PurePulse heart rate tracking, and
SmartTrack automatic exercise recognition. It provides multi-sport functionality, tracks outdoor cycling activity, provides run cues, includes a stop watch and
timer, and is also designed with advanced smartwatch features, including text and call notifications and music control. Like our other trackers, it measures daily
activities such as steps, distance, calories burned, floors climbed, and active minutes and automatically tracks sleep at night. Fitbit Blaze also features a slim
design, easily interchangeable bands and frames, and a color touchscreen. Fitbit Blaze is available in three colors and three sizes, and uses a rechargeable battery
that lasts up to five days. Fitbit Blaze has a U.S. MSRP of $199.95.
Fitbit Surge is our fitness “super watch” for Performance users that we began selling in December 2014. It combines features of a GPS watch, heart rate
tracker, activity tracker, and smartwatch. On its touch screen LCD display, Fitbit Surge displays real-time statistics from its built-in GPS tracker such as speed,
distance, and exercise routes. Fitbit Surge incorporates our PurePulse heart rate technology and SmartTrack automatic exercise recognition. It provides multi-sport
functionality, tracks outdoor cycling activity, provides run cues, includes a stop watch and timer, and is also designed with advanced smartwatch features,
including text and call notifications and music control. Like our other trackers, it measures daily activities such as steps, distance, calories burned, floors climbed,
and active minutes and automatically tracks sleep at night. Fitbit Surge is available in three colors and three sizes and incorporates a rechargeable battery that lasts
up to seven days. 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 identifies users and shows their weight and body fat percentage on
its easy-to-read display. The device recognizes up to eight individual users separately and privately. Aria is available in two colors and runs on standard AA
batteries. Aria has a U.S. MSRP of $129.95.
Fitbit Accessories include bands and frames for Fitbit Blaze, bands for Fitbit Charge 2, Fitbit Alta, Fitbit Flex 2 and Fitbit Flex, bangles and pendants for
Fitbit Flex 2, colored clips for Fitbit One and Fitbit Zip, device charging cables, wireless sync dongles, band clasps, sleep bands, and Fitbit apparel. In addition, our
partners Tory Burch, Simply Vera Vera Wang, and Public School offer accessory collections for Fitbit Alta and Fitbit Flex. Fitbit accessories are offered at U.S.
MSRPs ranging from $4.95 to $295.00.
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Our Interactive Experience
Fitbit online dashboard and mobile apps. We offer our users a personalized online dashboard and mobile apps that sync automatically with, and display
real-time data from, our connected health and fitness devices. Through these offerings, we provide users with charts and graphs of their progress, deeper analysis of
their activities, and the ability to log caloric intake. Additionally, we motivate users through real-time feedback including notifications, leaderboard and challenge
updates, and virtual badges. Our platform also offers users social features, such as leaderboards and challenges, that allow users to receive and provide support and
engage in friendly competition. Our online dashboard and mobile apps are available for free through the iOS App Store, Google Play, Windows Store, and on
Fitbit.com.
Fitbit Premium is our premium membership that serves as a 24/7 virtual personal trainer delivered to users through any web browser. The program features
personalized and dynamic 12 week fitness plans to gradually increase activity levels. It also includes personalized reports and analysis of weekly data accompanied
by recommended health and fitness targets and comparisons against peer benchmarks for weight, activity, and sleep. Fitbit Premium is offered on a subscription
basis for U.S. $49.99 per year.
FitStar. In March 2015, we acquired FitStar, a provider of interactive video-based exercise experiences on mobile devices and computers that utilize
proprietary algorithms to adjust and customize workouts for individual users based on data gathered during their workouts. Through our FitStar offerings, we
provide exercise programs through personal trainer and yoga apps that continuously adjust to our users based on feedback throughout the workout. FitStar is
offered monthly for U.S. $7.99 or on an annual subscription basis for U.S. $39.99 per year.
Compatibility and Wireless Syncing
In order to reach the widest set of users and facilitate a strong social experience on our platform, we focus on ensuring that our devices are compatible with a
broad range of mobile devices and operating systems.
Currently, our users can sync their Fitbit devices with, and use their online dashboard on, over 200 mobile devices including iOS, Android, and Windows
Phone operating systems. Additionally, our users can access their online dashboard through a web browser on any smartphone, tablet, PC, or Mac.
Our connected health and fitness trackers wirelessly sync with our online dashboard and mobile apps through Bluetooth low energy technology. This power
efficient technology enables our devices to sync with our mobile apps automatically, allowing us to provide users with real-time feedback and notifications. For
syncing our fitness trackers with computers, we include a Bluetooth low energy wireless sync dongle with each fitness tracker that plugs into any computer’s USB
port. Our Aria Wi-Fi connected scale syncs data wirelessly and automatically with users’ computers through their home Wi-Fi network. The combination of our
cross-platform compatibility and wireless syncing capabilities provides our users with a seamless connected health and fitness experience in the market and
differentiates us from our competitors, which may only sync to a single mobile operating system, such as iOS, or to a more limited number of Android mobile
devices, or not to computers at all.
Our Commitment to Privacy
We take privacy seriously and offer our users high levels of privacy and security. We are committed to respecting our users’ privacy, letting our users decide
how their information is used and shared, and keeping their data safe.
We have developed our data collection and use practices in accordance with the Fair Information Practice Principles, more commonly known as FIPPs. We
are committed to the following privacy principles as outlined in our privacy policy:
• Limited Collection. We only collect data that is useful to improving our products, services, and user experience.
• Transparent and Easy to Understand Policies. We are transparent about our data practices and explain them in clear language.
• No Unexpected Uses. We never sell user data or use it other than as described in our privacy policy.
• Clear Notice and Consent. We only share personally identifiable data with third parties, including employers, when our users consent to the sharing and
under the limited circumstances outlined in our privacy policy where users’ personally identifiable data can be shared without specific consent, such as
our receipt of search warrants or subpoenas from law enforcement agencies or in response to a validly issued legal process in a civil litigation matter. We
do not currently share
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information such as heart rate data or geolocation data with employers under our corporate wellness offerings and do not intend to share such data in the
future without specific user consent.
• Prioritize Security. We take the security of our users’ data seriously. We use a combination of technical and administrative security controls to maintain
the security of user data.
Our platform enables users to share information from Fitbit on an opt-in basis with friends, family, and other parties. Users may link their Fitbit accounts to
third-party apps, send status updates on social networks, such as Facebook and Twitter, or share certain data with employers as part of a corporate wellness
program. We allow our users to revoke their consent to share data with third parties at any time using their Fitbit account settings. If users choose to share their
data with a third party, the data is governed by the privacy policy of the third party.
Research and Development
We are passionate about developing innovative products and services that empower our users to reach their health and fitness goals. We believe our future
success depends on our ability to develop new products and features that expand the versatility and performance of our existing platform and we plan to continue to
invest significant resources to enhance performance, functionality, and convenience and style for our users.
Our global research and development team supports the design and development of our connected health and fitness devices, proprietary sensors, firmware,
data algorithms, and online dashboard and mobile apps. The team is comprised of dedicated research employees, electrical engineers, mechanical engineers,
firmware engineers, site operations engineers, and mobile app developers. Our research and development team is primarily based at our headquarters in San
Francisco, California as well as several other worldwide locations.
Our research and development expenses were $320.2 million , $150.0 million , and $54.2 million , for 2016 , 2015 , and 2014 , respectively.
Manufacturing, Logistics and Fulfillment
We outsource the manufacturing of our products to several contract manufacturers, including Flextronics which is our primary contract manufacturer. These
contract manufacturers produce our products in their facilities located in Asia. The components used in our products are sourced either directly by us or on our
behalf by our contract manufacturers from a variety of component suppliers selected by us and located worldwide. Our operations employees coordinate our
relationships with our contract manufacturers and component suppliers. We believe that using outsourced manufacturing enables greater scale and flexibility at
lower costs than establishing our own manufacturing facilities. We evaluate on an ongoing basis our current contract manufacturers and component suppliers,
including, whether or not to utilize new or alternative contract manufacturers or component suppliers.
Under our agreement with Flextronics, Flextronics manufactures certain of our products using design specifications, quality assurance programs, and
standards that we establish. We pay for and own all tooling and other equipment specifically required to manufacture our products and have purchase commitments
based on our purchase orders and demand forecasts for certain amounts of finished goods, works-in-progress, and components purchased in order to support such
purchase orders and forecasts. The agreement has an initial term of one-year that ends in March 2017, and automatically renews for successive one-year terms
unless either party provides at least 90 days prior written notice. We expect for the agreement to be renewed in March 2017 for a one-year term. We may terminate
the agreement for convenience upon providing at least 90 days prior written notice and Flextronics may terminate for convenience upon providing at least 180 days
prior written notice.
We work with third-party fulfillment partners that deliver our products from multiple locations worldwide, which allows us to reduce order fulfillment time,
reduce shipping costs, and improve inventory flexibility.
Sales Channels and Customers
We sell our products through three primary channels:
Retail and distribution channel. We offer our products in over 55,000 retail stores and in 65 countries. We focus on building close relationships with our
retailers, working with them to merchandise our products in a compelling manner both in-store and on their e-Commerce sites, promote our products through their
marketing efforts, and educate their sales forces about our products. In addition, we sell to distributors who resell our products to retailers.
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• Consumer electronics and specialty retailers. Our products are sold by retailers with a large domestic and international presence such as Best Buy.
• e-Commerce retailers. Our products are sold on Amazon.com, in addition to e-Commerce sites of our retailers.
• Mass merchant , department store, and club retailers. Our products are sold by large retailers, including Target, Costco, Macy’s, Kohl’s, and Walmart.
• Sporting goods and outdoors retailers. Our products are sold by sporting goods and outdoors retailers, including Dick’s Sporting Goods and REI.
• Wireless carriers. Our products are sold by wireless carriers, including AT&T, Sprint, and Verizon.
• Distributors. Our products are sold by a network of distributors, including Wynit Distribution.
Consumer direct channel. We sell our full line of products directly to consumers in the United States and other countries through our online store at
Fitbit.com. We drive consumers to our website through online and offline advertising as well as marketing promotions.
Corporate wellness channel. We offer products and services to employers looking to enhance their employee wellness programs. We sell our corporate
wellness offering directly to employers or through partners, such as wellness program providers and insurance companies. Through our corporate wellness offering
employers can purchase our products at quantity discounts for their employees. We also offer a range of other services to maximize wellness program success, such
as easy employee onboarding, an engaging employee leaderboard, real-time group reporting for company administrators, and employee insight into progress
towards program goals. We can also integrate with our partners’ existing wellness programs.
Backlog
There is a relatively short cycle between order and shipment of our sales. Therefore, we believe that backlog information is not material to the understanding
of our business.
Marketing and Advertising
Our marketing and advertising programs are focused on building global brand awareness, increasing product adoption, and driving sales. Our marketing and
advertising efforts target a wide range of consumers and leverage traditional advertising methods (including television, cinema, and print magazines), sponsorships
and public relations, digital marketing, channel marketing, and endorsements by professional athletes and celebrities.
Our in-store merchandising strategy focuses on our point of purchase, or POP displays. We install our freestanding, in-line, and endcap POP displays of
varying sizes at our various retailers. These displays communicate our marketing messages, present our products and their features and, in many cases, allow
consumers to try on our devices and view an interactive app that enables them to learn more about our products.
Intellectual Property
Intellectual property is an important aspect of our business, and we seek protection for our intellectual property as appropriate. We rely upon a combination
of patent, copyright, trade secret, and trademark laws and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our
proprietary rights.
As the leader in the fast-growing market for connected health and fitness devices, we have developed a significant patent portfolio to protect certain elements
of our proprietary technology. As of December 31, 2016, we had 229 issued patents and 262 patent applications pending worldwide. We continually review our
development efforts to assess the existence and patentability of new intellectual property. We pursue the registration of our domain names and trademarks and
service marks in the United States and in certain locations outside the United States. To protect our brand, as of December 31, 2016, we had an international
trademark portfolio comprised of 184 registered trademarks and 90 trademark applications pending in 70 countries.
Competition
The market for connected health and fitness devices is both evolving and competitive. The connected health and fitness devices category has a multitude of
participants including specialized consumer electronics companies such as Garmin, Jawbone, and Misfit, traditional health and fitness companies such as adidas
and Under Armour, and traditional watch companies such as Fossil and Movado. 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 sells the
Apple Watch, which is a smartwatch with broad-based functionalities, including some health and fitness tracking capabilities, and
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Apple has sold a significant volume of its smartwatches since introduction. We 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.
The principal competitive factors in our market include:
• brand awareness and focus;
• breadth of product offerings;
• battery life, sensor technology, and tracking features;
• online and mobile app experience;
• strength of sales and marketing efforts; and
• distribution strategy.
We believe we compete favorably with our competitors on the basis of these factors as a result of our leading market position and global brand, advanced
and proprietary sensor technologies, software-driven online dashboard and mobile apps, our motivational and social tools, and our premium software offerings. By
offering a broad range of products spanning styles and affordable price points and cross-platform compatibility, we empower a wide range of individuals with
different fitness routines and goals that are difficult for other competitors to address. Moreover, our singular focus on building a connected health and fitness
platform, coupled with a leading market share, has led to our brand becoming synonymous with the connected health and fitness category. This singular focus on
health and fitness has driven us to dedicate significant resources to developing proprietary sensors, algorithms, and software to ensure that our products, which are
specifically oriented towards health and fitness, have accurate measurements, insightful analytics, compact sizes, durability, and long battery lives. We believe this
singular focus allows us to compete favorably with companies that have introduced or have announced plans to introduce devices with broad-based functionalities,
including health and fitness tracking capabilities, which are not necessarily optimized for health and fitness usage. Furthermore, our platform and open API have
together enabled us to establish a large and growing health and fitness ecosystem that not only provides additional value to our existing users, but also extends our
reach to potential new users. 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, making it more likely that users can connect with friends and family and creating positive network effects
that reinforce our growth.
Employees
As of December 31, 2016 , we had 1,753 global employees. We have not experienced any work stoppages. We consider our relationship with our employees
to be good.
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. We completed
our initial public offering in June 2015 and our Class A common stock is listed on The New York Stock Exchange under the symbol “FIT.” Our principal
executive offices are located at 405 Howard Street, San Francisco, California 94105, and our telephone number is (415) 513-1000. Our website address is
www.fitbit.com and our investor relations website address is http://investor.fitbit.com. The information on, or that can be accessed through, our website is not
incorporated by reference into this Annual Report on Form 10-K. Fitbit, the Fitbit logo, Fitbit Surge, Fitbit Blaze, Fitbit Charge 2, Fitbit Charge HR, Alta, Fitbit
Charge, Fitbit Flex 2, Fitbit Flex, Fitbit One, Fitbit Zip, Aria, PurePulse, SmartTrack, FitStar, and our other registered or common law trade names, trademarks, or
service marks appearing in this Annual Report on Form 10-K are our intellectual property. This Annual Report on Form 10-K contains additional trade names,
trademarks, and service marks of other companies that are the property of their respective owners.
Through a link on our website, we make available the following filings as soon as reasonably practicable after they are electronically filed with or furnished
to the Securities and Exchange Commission, or SEC: our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All
such filings are available free of charge. The public may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F
Street, NE, Washington DC, 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains a website at www.sec.gov that contains all reports that we file or furnish with the SEC electronically.
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Item 1A. 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 Annual Report on Form 10-K, 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, traditional health and fitness companies, such as adidas and Under Armour, and traditional watch
companies such as Fossil and Movado. 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 sells the Apple Watch, which is a smartwatch with
broad-based functionalities, including some health and fitness tracking capabilities, and Apple has sold a significant volume of its smartwatches since introduction.
Moreover, smartwatches with health and fitness functionalities may displace the market for traditional connected health and fitness devices. 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 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. In addition, new products may have lower selling prices or higher costs than legacy products, which
could negatively impact our gross margins and operating results. Furthermore, current or potential competitors may be acquired by third parties with greater
available resources. As a result of such acquisitions, our current or potential competitors might be able to adapt more quickly to new technologies and consumer
needs, devote greater resources to the promotion or sale of their products and services, initiate or withstand substantial price competition, take advantage of
acquisition or other opportunities more readily or develop and expand their products and services more quickly than we do. 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 or new product
designs, such as the Fitbit Charge 2, Fitbit Flex 2, Fitbit Blaze, and Fitbit Alta 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 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, or if it is perceived that
our future products and services will not satisfy consumer preferences, our business may be adversely affected.
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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, including trackers and accessories, and services and improve and enhance our existing products
and services to maintain or increase our sales. We believe that our future growth depends on continuing to engage and expand our core user base by introducing
new form factors, software services and other offerings. 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. Our research and development efforts may require us to incur substantial expenses to support the development of our next
generation devices and other new products and services. Our research and development expenses were $320.2 million , $150.0 million , and $54.2 million , for
2016 , 2015 , and 2014 , respectively. We anticipate that research and development expense will continue to increase in absolute dollars and as a percentage of
revenue in 2017. 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. In addition, in
2016, we began offering accessory collections in conjunction with new product introductions. 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, including trackers and
accessories, 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 us and our competitors, channel inventory levels, sales promotions by us or our competitors,
unanticipated changes in general market conditions, and the weakening of economic conditions or consumer confidence in future economic conditions. We face
challenges acquiring adequate and timely supplies of our products to satisfy the levels of demand, particularly in connection with new product introductions, 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. In addition, as we continue to introduce new products, we may face
challenges managing the inventory of existing products. If we fail to accurately forecast customer demand, we may experience excess inventory levels or a
shortage of products available for sale. No assurance can be given that we will not incur additional charges in future periods related to our inventory management
or that we will not underestimate or overestimate forecast sales in a future period. If we do not accurately forecast customer demand for our products, we may in
future periods be unable to meet customer, retailer or distributor demand for our products, or may be required to incur higher costs to secure the necessary
production capacity and components, and our business and operating results could be adversely affected.
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
have caused and may continue to cause our gross margin to suffer and could impair the strength of our brand. For example, during the fourth quarter of 2016, as a
result of reduced demand, we recorded write-downs for excess and obsolete inventory, accelerated depreciation of manufacturing and tooling equipment, and
recorded a liability to our contract manufacturers for unutilized manufacturing capacity and components. In addition, we offered additional rebates and promotions
to retailers and distributors. 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 and the transition from legacy products;
• the timing and success of new product and service introductions by 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 levels of channel inventory resulting from sales to our retailers and distributors in anticipation of future demand;
• 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;
• levels of warranty claims or estimated costs of warranty claims;
• 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.
We do not expect to continue to grow in the future at the same rates as we have in the past and profitability in recent periods may not be indicative of future
performance.
Our historical revenue growth should not be considered indicative of our future performance. We expect our revenue growth to slow or decline 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. In addition, we have not
consistently achieved profitability on a quarterly or annual basis. Due to competitive pricing pressures, new product introductions by us or our competitors, or other
factors, the average selling price or gross margins of our products and services may decrease. If we are unable to offset any decreases in our average selling price
or gross margins by increasing our sales volumes or by adjusting our product mix, our operating results and financial condition may be harmed.
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From 2014 to 2016, our annual revenue grew rapidly from $745.4 million to $2.2 billion. As our revenue has increased, our annual growth rate has slowed,
and our historical growth should not be considered as indicative of our future performance. Although our annual revenue in 2016 was up 17% compared to 2015,
our fourth quarter 2016 revenue declined 19% on a year-over-year basis. In future periods, we could again experience a decline in revenue, or revenue could grow
more slowly than we expect, which could have a material negative effect on our future operating results. Specifically, we anticipate our 2017 revenue to decline on
a year-over-year basis. Lower levels of revenue and higher levels of operating expenses may result in limited profitability or losses. For example, we expect to
record a substantial net loss in 2017.
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. Our reliance on a sole contract manufacturer for each of our products increases the risk
that in the event of an interruption from any one of these contract manufacturers, including, without limitation, due to a natural catastrophe or labor dispute, we
may not be able to develop an alternate source without incurring material additional costs and substantial delays. Accordingly, an interruption from any key
supplier, contract manufacturer, or logistics provider could adversely impact our revenue, gross margins, and operating results.
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 on board 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, gross margins, and operating results.
Because some of the key components in our products come from a limited number or single source of supply, we are susceptible to supply shortages, long lead
times for components, and supply changes, any of which could disrupt our supply chain.
Some of the key components used to manufacture our products come from a limited or single source of supply. Our contract manufacturers generally
purchase these components on our behalf, subject to certain approved supplier lists. We are 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. In addition, some of our suppliers, contract manufacturers, and logistics providers may have more established
relationships with our competitors, and as a result of such relationships, such suppliers may choose to limit or terminate their relationship with us. 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.
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 or property.
For example, we recently corrected certain software errors relating to Fitbit Charge 2 through a software update. 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. For example, our
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products may fail to provide accurate measurements and data to users under all circumstances, or there may be reports or claims of inaccurate measurements under
certain circumstances.
Failure to detect, prevent, or fix defects, or an increase in defects could result in a variety of consequences including a greater number of returns of products
than expected from users and retailers, increases in warranty costs, regulatory proceedings, product recalls, and litigation, which could harm our revenue and
operating results. For example, in 2016, we experienced an increase in actual and estimated warranty claims of $108.5 million as compared to 2015, which caused
a 4% decline in gross margin in 2016 as compared to 2015. 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. Moreover, we may
offer stock rotation rights and price protection to our distributors. If we experience greater returns from retailers or users, or greater warranty claims, in excess of
our reserves, our business, revenue, gross margins, 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.
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;
• price increases;
• difficulties in establishing additional or alternative contract manufacturing relationships if we experience difficulties with our existing contract
manufacturers;
• shortages of materials or components;
• misappropriation of our intellectual property;
• suppliers, contract manufacturers, and logistics providers may choose to limit or terminate their relationship with us;
• 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, 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.
We are, and may in the future, be subject to claims and lawsuits alleging that our products fail to provide accurate measurements and data to our users.
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. We anticipate new
features and functionality in the future, as well. From time to time, 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. For example, in the first quarter of 2016, class
action lawsuits were filed against us based upon claims that the PurePulse heart rate tracking technology in the Fitbit Charge HR and Fitbit Surge do not
consistently and accurately record users’ heart rates. If our products fail to provide accurate measurements and data to users, or if there are reports or claims of
inaccurate measurements, claims of false advertisement, or claims regarding the overall health benefits of our products and services in the future, we may become
the
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subject of negative publicity, litigation, including class action litigation, regulatory proceedings, and warranty claims, and our brand, operating results, and
business could be harmed.
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, including trackers and accessories,
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. Furthermore, we may experience greater returns from retailers or users of existing products or retailers may be granted stock rotation
rights and price protection. Moreover, consumers may decide to purchase new or enhanced products instead of existing products. We may face challenges
managing the inventory of existing products, which could lead to excess inventory and discounting of our existing products. In addition, new products may have
lower selling prices or higher costs than legacy products, which could negatively impact our gross margins and operating results. We have also 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 could be harmed.
We spend significant amounts on advertising and other marketing campaigns to acquire new users, which may not be successful or cost-effective.
We 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 2016, advertising expenses were $316.8 million, representing approximately 15% of
our revenue. 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 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.
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, including
economic conditions resulting from recent volatility in European markets, 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 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 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. Fluctuations in the
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price of our Class A common stock may make it more difficult or costly to use equity awards to motivate, incentivize and retain our employees. If the perceived
value of our equity or equity awards declines, it may adversely affect our ability to attract or retain highly skilled employees. Furthermore, there can be no
assurances that the number of shares reserved for issuance under our equity incentive plans will be sufficient to grant equity awards adequate to recruit new
employees and to compensate existing 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.
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
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. Companies may also be subject to criminal prosecution for trade secret theft under 18 U.S.C. section 1832. As we face
increasing competition, 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 Jawbone and under a related federal criminal investigation concerning alleged theft of Jawbone’s trade secrets, which is
described in Note 7, “Commitments and Contingencies” in the notes to our consolidated financial statements.
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 Class A 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. 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
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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.
Our operating margins may decline as a result of increasing product costs and operating expenses.
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,
warranty claims, 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.
A substantial portion of our expenses are personnel related and include salaries, stock-based compensation and benefits, which are not seasonal in nature.
Accordingly, in the event of revenue shortfalls, we are generally unable to mitigate a negative impact on operating margins in the short term. To the extent such
revenue shortfalls recur in future periods, our operating results would be harmed.
Our business is affected by seasonality and if our sales fall below our forecasts, our overall financial conditions and results of operations could be adversely
affected.
Our revenue and operating results are affected by general seasonal spending trends associated with holidays. For example, our fourth quarter has typically
been our strongest quarter in terms of revenue and operating income, reflecting our historical strength in sales during the holiday season. We generated
approximately 26%, 38%, and 50% of our full year revenue during the fourth quarters of 2016, 2015, and 2014, respectively. Accordingly, any shortfall in
expected fourth quarter revenue would adversely affect our annual operating results, as was the case in the fourth quarter of 2016. In addition, if we fail to
accurately forecast customer demand for the holiday season, we may experience excess inventory levels or a shortage of products available for sale.
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 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, or those of third-party partners and data center providers 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. 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. 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. 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.
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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 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 we manage using third-party solutions, are breached or fail, unauthorized persons may be
able to obtain access to or acquire sensitive user data. Furthermore, if third-party service providers that host user data on our behalf experience security breaches or
violate applicable 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. Additionally, if we or any third-party, including third-party applications, 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 inadvertently disclose or lose
control of their passwords, creating the perception that our systems are not secure against third-party access. 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.
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, unauthorized access to user 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 or our users’ 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. In addition, any
such breaches may result in negative publicity, adversely affect our brand, decrease demand for our products and services, and adversely affect our operating
results and financial condition.
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.
In addition, 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
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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.
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 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 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.
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 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 margins due to product returns or price protection claims. Our retailers also often offer products and services
of our competitors in their stores. Furthermore, our business could be adversely affected if any of our large retailers were to experience financial difficulties or
store closures, or change the focus of their businesses in a way that deemphasized the sale of our products. 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, such as Amazon.com, as consumers increasingly make purchases online. 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 2016, our five largest retailers and distributors accounted for approximately 53% of our revenue. Of these retailers and distributors, Wynit Distribution,
Amazon.com, and Best Buy accounted for approximately 14%, 14%, and 10% of our revenue for 2016, 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 electronics retail and sporting goods 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
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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 and may continue to experience financial difficulties. 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.
If we continue to grow, 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 469 as of December 31, 2014 to 1,101 as of December 31, 2015 to 1,753 as of
December 31, 2016. In January 2017, we announced a reorganization, including a reduction in force, that impacted 107 employees, or 6% of our global workforce.
Despite this reorganization, we have experienced rapid growth in recent periods and headcount is expected to grow in 2017. If our operations continue to grow, 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 active user metric only represents the potential size and growth of our engaged user community, and our registered device user metric only represents the
number of users who have historically used our devices or paid for a subscription to our services. Therefore, you should not rely on these metrics as indicators
of future retention of users, continual user engagement, future payments by users or other revenue opportunities.
Our active user metric tracks the number of users who have an active Fitbit Premium or FitStar subscription, who paired a tracker or Aria scale to a Fitbit
account, or who logged at least 100 steps or took a weight measurement within three months of the measurement date. Our registered device user metric tracks the
number of users who have historically either paid for a Fitbit Premium or FitStar subscription or paired a tracker or Aria scale to a Fitbit account. The user is
counted only once on the first day of becoming a registered device user, and the registered device users as of any certain date presents cumulative registered device
users to date.
The active user metric and registered device user metric do not provide information regarding the individual users that no longer pay us, or how frequently
users engage with our platform or pay us. These metrics also do not take into account the extent to which inactive users are offset by new active users or how long
a user remains active or continues to pay us. Given the recent
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rapid growth of the number of users on our platform, it may be difficult to discern whether the growth in active users is the result of retaining existing users or
adding new users onto our platform.
The active user metric and registered device user metric only represent the potential size or growth of our user community and are not necessarily indicators
of the actual size and growth of our user community. Therefore, you should not rely on our active user metric or our registered device user metric as indicators of
the level of retention of individual users in the future, continual user engagement or future payments by users, nor the potential size and growth of our user
community as an indicator for other revenue opportunities, such as subscription-based premium services and our corporate wellness offerings. See the sections
titled, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics—Active Users,” and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics—Registered Device Users” in this Annual Report on Form 10-
K for additional information.
Our failure to comply with U.S. and foreign laws related to privacy, data security, and data protection, such as the E.U. Data Protection Directive, which
requires an adequate legal mechanism for the transfer of personal data from the European Union to the United States, could adversely affect our financial
condition, operating results, and our brand.
We are or may become subject to a variety of laws and regulations in the United States and abroad regarding privacy, data protection, and data security.
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. Such laws and regulations often have changes in scope, may be
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 by us or third-party service-providers to comply with
our privacy or security policies or privacy-related legal obligations, 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.
Beginning on August 1, 2016, U.S. companies could self-certify to the E.U.-U.S. Privacy Shield Framework, or Privacy Shield, which is a new framework
developed by the U.S. Department of Commerce and the European Commission to address transatlantic data flows. As of November 3, 2016, our self-certification
was approved by the U.S. Department of Commerce and our certification is available on the Privacy Shield website. This Privacy Shield Framework supersedes 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 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. If we fail to meet the
principles under Privacy Shield, or if any of these Frameworks are later invalidated by the European courts or otherwise become defunct, national data protection
authorities in the European Union or the Federal Trade Commission, or FTC, could bring enforcement actions seeking to prohibit or suspend our data transfers to
the United States, or against us for being misleading or deceptive, 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, in September 2015 we 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
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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.
Our business and products are subject to a variety of additional U.S. and foreign laws and regulations that are central to our business; our failure to comply
with these laws and regulations could harm our business or our operating results.
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 consumer protection, advertising, privacy, intellectual property, manufacturing, anti-bribery and anti-corruption, and economic or
other trade prohibitions or sanctions.
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 U.S. Consumer Product Safety Commission, or CPSC, FTC, 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. General 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 expanded;
• the uncertainty of protection for intellectual property rights in some countries and practical difficulties of enforcing rights abroad;
• tariffs and customs duties and the classification of our products by applicable governmental bodies; and
• other costs of doing business internationally.
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Our products are manufactured overseas and imported into the United States, the European Union, and other countries and may be subject to duties, tariffs
and anti-dumping penalties imposed by applicable customs authorities. Those duties and tariffs are based on the classification of each of our products and is
routinely subject to review by the applicable customs authorities. We are unable to predict whether those authorities will agree with our classifications and if those
authorities do not agree with our classifications additional duties, tariffs or other trade restrictions may be imposed on the importation of our products. Such actions
could result in increases in the cost of our products generally and might adversely affect our sales and profitability.
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.
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 2015 and 2016, 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.
We are regularly subject to general litigation, regulatory disputes, and government inquiries.
We are regularly subject to claims, lawsuits, including potential class actions, government investigations, and other proceedings involving competition and
antitrust, intellectual property, privacy, consumer protection, accessibility claims, securities, tax, labor and employment, commercial disputes, and other matters.
The number and significance of these disputes and inquiries have increased as our company has grown larger, our business has expanded in scope and geographic
reach, and our products and services have increased in complexity.
The outcome and impact of such claims, lawsuits, government investigations, and proceedings cannot be predicted with certainty. Regardless of the outcome,
such investigations and proceedings can have an adverse impact on us because of legal costs, diversion of management resources, and other factors. Determining
reserves for our pending litigation is a complex, fact-intensive process that is subject to judgment calls. It is possible that a resolution of one or more such
proceedings could require us to make substantial payments to satisfy judgments, fines or penalties or to settle claims or proceedings, any of which could harm our
business. These proceedings could also result in reputational harm, criminal sanctions, or orders preventing us from offering certain products, or services, or
requiring a change in our business practices in costly ways, or requiring development of non-infringing or otherwise altered products or technologies. Any of these
consequences could harm our business.
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.
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We use derivative instruments, such as foreign currency forward 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. In addition, our counterparties may be unable to meet the terms of the agreements. We seek to mitigate this risk by limiting
counterparties to major financial institutions and by spreading the risk across several major financial institutions.
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. Economic and political pressures to increase tax revenue in various jurisdictions may adversely impact various aspects of the existing framework
under which our tax obligations are determined in various countries in which we operate. Any 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 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 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
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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. For example, in 2016, we acquired assets from
Coin, Pebble and Vector Watch to enhance the features and functionality of our devices, and accelerate the expansion of our platform and ecosystem. 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.
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 would have to pay cash, incur debt, or issue
equity securities to pay for any such acquisition, each of which may 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.
There have been reports that some users of certain of our devices 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 certain of our devices, 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
certain of our devices 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 have filed personal injury
lawsuits against us relating to certain of our devices. 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 be subject to CPSC recalls, regulatory proceedings and litigation in various jurisdictions, including multi-jurisdiction federal and state class action
and personal injury claims, which may require significant management attention and disrupt our business operations, and adversely affect our financial
condition, operating results, and our brand.
We face product liability, product safety and product compliance risks relating to the sale, use and performance of our products. The products we sell must
be designed and manufactured to be safe for their intended purposes. Certain of our products must comply with certain federal and state laws and regulations. For
example, some of our products are subject to the Consumer Product Safety Act and the Consumer Product Safety Improvement Act, which empower the CPSC.
The CPSC is empowered to take action against hazards presented by consumer products, up to and including product recalls. We are required to report certain
incidents related to the safety and compliance of our products to the CPSC, and failure to do so could result in a civil penalty.
Our products may, from time to time, be subject to recall for product safety and compliance reasons. For example, in March 2014, we recalled one of our
products, the Fitbit Force, after some of our users experienced allergic reactions to adhesives in the
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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, the first quarter of 2014, and the fourth quarter of 2015. We have provided and are continuing to provide full refunds to consumers who return the Fitbit
Force. 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 Quarterly Report on Form 10-Q, this recall requires us to collect a significant amount of information for the CPSC, 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. We have settled all of the class action lawsuits, and a number of personal injury claims. In the fourth quarter of 2015, we received proceeds from the
insurance policies that apply to these claims and related legal fees, and we recorded an accrual for liabilities arising under these claims that was immaterial and
falls within the amount of the insurance proceeds received.
In addition, the CPSC previously conducted an investigation into several of our products. Although the CPSC did not find 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.
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 by the FDA. 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. 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 strain on our personnel, systems, and
resources.
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The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial
reporting. We are also required to make a formal assessment and provide an annual management report on the effectiveness of our internal control over financial
reporting, which must be attested to by our independent registered public accounting firm. In order to maintain 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, resources, including accounting-related
costs and 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 maintain or develop effective controls or any
difficulties encountered in their implementation or improvement could harm our operating results or cause us to fail to meet our reporting obligations and may
result in a restatement of our financial statements for prior periods. Any failure to 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. 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.
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. We are subject to significant regulatory oversight and reporting obligations under
the federal securities laws and the continuous scrutiny of securities analysts and investors. These obligations and constituents require significant attention from our
senior management and 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 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” in
this Annual Report on Form 10-K. 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, 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.
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Our revolving credit facility provides our lenders with first-priority liens against substantially all of our assets, excluding our intellectual property, and
contains financial covenants and other restrictions on our actions, which could limit our operational flexibility and otherwise adversely affect our financial
condition.
In December 2015, we amended and restated our existing revolving credit facility and revolving credit and guarantee agreement into one senior credit facility.
Our credit agreement restricts 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 agreement also prohibits us from exceeding a consolidated fixed charge coverage ratio and requires 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 agreement, could result in an
event of default under the credit agreement, which would give our lenders the right to terminate their commitments to provide additional loans under the credit
agreement 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, excluding our intellectual property, as collateral. Failure to comply with the covenants or other
restrictions in the credit agreement could result in a default. If the debt under our credit agreement 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.
Based on our forecasts, we may fail to meet certain of our financial covenants under our Senior Facility during 2017. We currently do not have any
borrowings outstanding under the Senior Facility and have $38.0 million in letters of credit issued under the line. We believe that should we fail to meet any of the
financial covenants under the line of credit, we would be able to negotiate revised terms or fund outstanding letters of credit with available cash balances.
However, if we are unable to do so we may default under our credit agreement.
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.
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.
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Risks Related to 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
IPO in June 2015 at a price of $20.00 per share, our stock price has ranged from $5.62 to $51.90 through February 17, 2017. 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;
• 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; 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. We are currently subject to securities litigation, which is described in Note 7, “Commitments and Contingencies” in the notes to our consolidated
financial statements. This or any future securities litigation 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, 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.
As of December 31, 2016, there were 225.7 million shares of Class A and Class B common stock outstanding. All shares of our common stock are available
for sale in the public market, subject in certain cases to volume limitations under Rule 144 under the Securities Act of 1933, as amended, or the Securities Act,
various vesting agreements, as well as our insider trading policy.
In addition, as of December 31, 2016, we had stock options outstanding that, if fully exercised, would result in the issuance of 1.2 million shares of Class A
common stock and 33.2 million shares of Class B common stock (which shares of Class B common stock generally convert to Class A common stock upon their
sale or transfer). We also had RSUs outstanding as of December 31, 2016 that may be settled for 11.3 million shares of Class A common stock and 0.3 million
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 applicable vesting requirements.
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In addition, certain holders of our capital stock have rights, subject to some conditions, to require us to file registration statements for the public resale of
their 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 holders of our Class B common stock, including our
directors, executive officers, and significant stockholders. 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 has one vote per share. As of December 31, 2016, our directors, executive
officers, and holders of more than 5% of our common stock, and their respective affiliates, held a substantial majority 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 control a
majority of the combined voting power of our common stock and therefore are 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.
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 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 facility contains 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.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We are a global company with our corporate headquarters located in San Francisco, California. Our headquarters facilities in San Francisco comprise
approximately 570,000 square feet of space pursuant to several leases that expire at various dates through June 2024. Our corporate headquarters serve as the
principal facilities for our administrative, sales, marketing, product development, and customer support groups. We also lease additional office space in San
Francisco and around the world for various product development, operational and support purposes. We believe our existing facilities are adequate to meet our
current requirements. If we were to require additional space, we believe we will be able to obtain such space on acceptable and commercially reasonable terms.
Item 3. Legal Proceedings
For a discussion of legal proceedings, see Note 7, “Commitments and Contingencies,” in the notes to our consolidated financial statements included in Part
II, Item 8 of this Annual Report on Form 10-K, which is incorporated herein by reference.
Further, we are and, from time to time, we may become, involved in legal proceedings or be subject to claims arising in the ordinary course of our business.
We are not presently a party to any other legal proceedings that in the opinion of our management, if determined adversely to us, would individually or taken
together have a material adverse effect on our business, operating results, financial condition, or cash flows.
Item 4. Mine Safety Disclosures
None.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Price Range of 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 2016
Fourth Quarter $ 15.08
$ 7.20
Third Quarter $ 17.18
$ 12.05
Second Quarter $ 18.85
$ 11.65
First Quarter $ 30.96
$ 11.91
Fiscal Year 2015
Fourth Quarter $ 41.97
$ 26.46
Third Quarter $ 51.90
$ 30.51
Second Quarter (from June 18, 2015) $ 40.45
$ 29.50
Our Class B common stock is neither listed nor traded.
Holders of Record
As of December 31, 2016 , we had 33 holders of record of our Class A common stock. Because many of our shares of Class A common stock are held by
brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. As of
December 31, 2016 , we had 37 holders of record of our Class B common stock.
Dividends
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 facility contains restrictions on our ability to declare and pay cash dividends.
Securities Authorized for Issuance under Equity Compensation Plans
The information required by this item with respect to our equity compensation plans is incorporated by reference to our Proxy Statement for the 2017 Annual
Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2016 .
Stock Performance Graph
The following graph compares the cumulative total return on our Class A common stock with that of the S&P 500 Index and the Nasdaq Composite Index.
The period shown commences on June 18, 2015 and ends on December 31, 2016 , the end of our last fiscal year. The graph assumes $100 was invested at the close
of market on June 28, 2015 in our Class A common stock, the S&P 500 Index and the Nasdaq Composite Index, and assumes the reinvestment of any dividends.
The stock price performance on the following graph is not intended to forecast or be indicative of future stock price performance of our Class A common stock.
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This performance graph shall not be deemed incorporated by reference into any of our other filings under the Exchange Act, or the Securities Act, except to
the extent we specifically incorporate it by reference into such filing.
Recent Sales of Unregistered Securities.
None.
Use of Proceeds
On June 17, 2015, the SEC declared our registration statement on Form S-1 (File No. 333-203941) for our initial public offering effective. On November 12,
2015, the SEC declared our registration statement on Form S-1 (File No. 333-207753) for our follow-on offering effective.
There has been no material change in the planned use of proceeds from our initial public offering or our follow-on offering as described in our final
prospectuses filed with the SEC on June 18, 2015 and November 13, 2015, respectively, pursuant to Rule 424(b)(4).
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
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Item 6. Selected Financial Data
We derived the selected consolidated statements of operations data for 2016 , 2015 , and 2014 and the selected consolidated balance sheet data as of
December 31, 2016 and 2015 from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The consolidated
statements of operations data for 2013 and 2012 , and the consolidated balance sheet data as of December 31, 2014 , 2013 , and 2012 are derived from consolidated
financial statements that are not included in this Annual Report on Form 10-K. 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and
the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
As of or For the Year Ended December 31,
2016
2015
(1)
2014
(1)
2013
(1)
2012
(in thousands, except per share data)
Consolidated Statements of Operations Data :
Revenue $ 2,169,461
$ 1,857,998
$ 745,433
$ 271,087
$ 76,373
Cost of revenue
(2)
1,323,577
956,935
387,776
210,836
49,733
Gross profit
845,884
901,063
357,657
60,251
26,640
Operating expenses:
Research and development
(2)
320,191
150,035
54,167
27,873
16,210
Sales and marketing
(2)
491,255
332,741
112,005
26,847
10,237
General and administrative
(2)
146,903
77,793
33,556
14,485
3,968
Change in contingent consideration —
(7,704)
—
—
—
Total operating expenses
958,349
552,865
199,728
69,205
30,415
Operating income (loss)
(112,465)
348,198
157,929
(8,954)
(3,775)
Interest income (expense), net 3,156
(1,019)
(2,222)
(1,082)
(176)
Other income (expense), net 14
(59,230)
(15,934)
(3,649)
26
Income (loss) before income taxes
(109,295)
287,949
139,773
(13,685)
(3,925)
Income tax expense (benefit) (6,518)
112,272
7,996
37,937
291
Net income (loss)
$ (102,777)
$ 175,677
$ 131,777
$ (51,622)
$ (4,216)
Net income (loss) per share attributable to common stockholders
(3)
:
Basic $ (0.47)
$ 0.88
$ 0.70
$ (1.32)
$ (0.11)
Diluted
$ (0.47)
$ 0.75
$ 0.63
$ (1.32)
$ (0.11)
Other Data :
Devices sold
(4)
22,295
21,355
10,904
4,476
1,279
Active users
(5)
23,238
16,903
6,700
2,570
558
Registered device users
(5)
50,155
29,033
11,068
3,534
Adjusted EBITDA
(6)
$ 29,985
$ 389,879
$ 191,042
$ 79,049
$ (2,401)
Non-GAAP free cash flow
(7)
$ 30,894
$ 78,591
$ (7,721)
$ 25,647
$ (9,389)
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(1) In March 2014, we recalled the Fitbit Force. The recall, which primarily affected our results for the fourth quarter of 2013, the first quarter of 2014, and the fourth quarter of 2015, had the
following effect on our income (loss) before income taxes in 2015, 2014, and 2013. The recall had a negligible effect on our loss before income taxes in 2016.
Year Ended December 31,
2015
2014
2013
(in thousands)
Reduction of revenue
$ —
$ (8,112)
$ (30,607)
Incremental (benefit to) cost of revenue
(5,755)
11,339
51,205
Impact on gross profit
(5,755)
(19,451)
(81,812)
Incremental general and administrative expenses (benefit)
(4,416)
3,389
2,838
Impact on income (loss) before income taxes
$ 10,171
$ (22,840)
$ (84,650)
(2) Includes stock-based compensation expense as follows:
Year Ended December 31,
2016
2015
2014
2013
2012
(in thousands)
Cost of revenue
$ 4,797
$ 4,739
$ 890
$ 37
$ 15
Research and development
47,207
18,251
2,350
288
62
Sales and marketing
11,575
7,419
1,295
204
29
General and administrative
15,853
10,615
2,269
91
26
Total
$ 79,432
$ 41,024
$ 6,804
$ 620
$ 132
(3) See notes 2 and 10 of the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K 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) We believe that the active user and registered device user metrics are indicators of the potential size of our community, but currently we do not believe that these have a direct effect on our
revenue and operating results. We began tracking registered device users in 2013. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Key Business Metrics” for more information.
(6) Adjusted EBITDA is a financial measure that is not calculated in accordance with U.S. GAAP. See the section titled “—Non-GAAP Financial Measures—Adjusted EBITDA” for
information regarding our use of adjusted EBITDA and a reconciliation of adjusted EBITDA to net income (loss).
(7) Non-GAAP free cash flow is a financial measure that is not calculated in accordance with U.S. GAAP. See the section titled “—Non-GAAP Financial Measures—Non-GAAP free cash
flow” for information regarding our use of non-GAAP free cash flow and a reconciliation to net cash provided by (used in) operating activities.
As of December 31,
2016
2015
2014
2013
2012
(in thousands)
Consolidated Balance Sheet Data :
Cash, cash equivalents, and marketable securities $ 706,013
$ 664,478
$ 195,626
$ 81,728
$ 13,148
Working capital 718,639
847,157
101,860
14,457
17,477
Total assets 1,820,226
1,519,066
633,051
230,774
51,699
Total long-term debt —
—
132,589
10,710
8,439
Retained earnings (accumulated deficit) 140,142
242,919
67,242
(64,535)
(12,913)
Total stockholders’ equity (deficit) 998,532
981,451
75,262
(63,466)
(12,707)
Non-GAAP Financial Measures
To supplement our consolidated financial statements presented in accordance with U.S. GAAP, we monitor and consider adjusted EBITDA and free cash
flow, which are non-GAAP financial measures. These non-GAAP financial measures are not based on any standardized methodology prescribed by U.S. GAAP
and are not necessarily comparable to similarly-titled measures presented by other companies.
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Adjusted EBITDA
We define adjusted EBITDA as net income adjusted to exclude stock-based compensation expense, depreciation and intangible assets amortization, litigation
expense related to matters with Aliphcom, Inc. d/b/a Jawbone, or Jawbone, the impact of the Fitbit Force recall, the revaluation of our redeemable convertible
preferred stock warrant liability prior to our initial public offering, or IPO, change in contingent consideration, interest income (expense), net, and income tax
expense (benefit). We began excluding Jawbone related litigation expense in the second quarter of 2016 because we do not believe these expenses have a direct
correlation to the operations of our business and because of the singular nature of the claims underlying the Jawbone litigation matters.
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 stock-based compensation expense and certain expenses in calculating adjusted EBITDA can provide a useful measure for period-to-
period comparisons of our business. 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 stock-based compensation expense, which has 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 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 external litigation expenses to support our legal proceedings with Jawbone, which may continue to be a recurring expense;
• adjusted EBITDA excludes the Fitbit Force recall, which primarily impacted our results for the fourth quarter of 2013, the first quarter of 2014, and the
fourth quarter of 2015;
• 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 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,
2016
2015
2014
2013
2012
(in thousands)
Net income (loss) $ (102,777)
$ 175,677
$ 131,777
$ (51,622)
$ (4,216)
Stock-based compensation expense 79,432
41,024
6,804
620
132
Depreciation and amortization 38,133
21,107
6,131
3,012
1,179
Litigation expense — Jawbone 24,845
—
—
—
—
Impact of Fitbit Force recall 26
(10,171)
22,840
84,650
—
Revaluation of redeemable convertible preferred stock warrant liability —
56,655
13,272
3,370
37
Change in contingent consideration —
(7,704)
—
—
—
Interest (income) expense, net (3,156)
1,019
2,222
1,082
176
Income tax expense (benefit) (6,518)
112,272
7,996
37,937
291
Adjusted EBITDA
$ 29,985
$ 389,879
$ 191,042
$ 79,049
$ (2,401)
Non-GAAP free cash flow
We define non-GAAP free cash flow as net cash provided by (used in) operating activities less purchase of property and equipment. We consider free cash
flow to be a profitability and liquidity measure that provides useful information to management and investors about the amount of cash generated by the business
that can possibly be used for investing in our business and strengthening the balance sheet, but it is not intended to represent the residual cash flow available for
discretionary expenditures. Non-GAAP free cash flow 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.
The following table presents a reconciliation of net cash provided by (used in) operating activities to non-GAAP free cash flow:
Year Ended December 31,
2016
2015
2014
2013
2012
(in thousands)
Net cash provided by (used in) operating activities $ 109,534
$ 109,157
$ 18,774
$ 33,171
$ (6,884)
Purchase of property and equipment (78,640)
(30,566)
(26,495)
(7,524)
(2,505)
Non-GAAP free cash flow
$ 30,894
$ 78,591
$ (7,721)
$ 25,647
$ (9,389)
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Item 7. 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
Financial Data” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. 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 Annual Report on Form 10-K.
Overview
Our mission is to help people lead healthier, more active lives by empowering them with data, inspiration, and guidance to reach their goals.
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.
We generate substantially all of our revenue from sales of our connected health and fitness devices. We sell our products in over 55,000 retail stores and in
65 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.
The following are financial highlights for 2016 , 2015 , and 2014 :
Year Ended December 31,
2016
2015
2014
(in thousands)
Revenue $ 2,169,461
$ 1,857,998
$ 745,433
Net income (loss) $ (102,777)
$ 175,677
$ 131,777
Adjusted EBITDA $ 29,985
$ 389,879
$ 191,042
Devices sold 22,295
21,355
10,904
See the section titled “Selected Financial Data—Adjusted EBITDA” in this Annual Report on Form 10-K for information regarding our use of adjusted
EBITDA and a reconciliation of adjusted EBITDA to net income (loss). See the section titled “—Key Business Metrics” in this Annual Report on Form 10-K for
additional information regarding devices sold.
As our revenue has increased, our annual growth rate has slowed to 17% in 2016 as compared to 149% in 2015, and our fourth quarter 2016 revenue declined
19% on a year- over-year basis due to softer-than-expected demand during the holiday season.
In January 2017, we announced cost-efficiency measures to be implemented in 2017 that include realigning sales and marketing spend and improved
optimization of research and development investments. In addition, we announced a reorganization, including a reduction in workforce. This reorganization
impacted 107 employees or approximately 6% of our global workforce. We anticipate that we will complete the reorganization by the end of the second quarter of
2017. We estimate approximately $3.7 million in total restructuring expenses to be recorded in the first quarter of 2017.
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.
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As of or For the Year Ended
December 31,
2016
2015
2014
(in thousands)
Devices sold 22,295
21,355
10,904
Active users 23,238
16,903
6,700
Registered device users 50,155
29,033
11,068
Adjusted EBITDA $ 29,985
$ 389,879
$ 191,042
Non-GAAP free cash flow $ 30,894
$ 78,591
$ (7,721)
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 with differing U.S. MSRPs, and sales
of accessories and premium services.
Active Users
We define an active user as a registered Fitbit user who, within the three months prior to the date of measurement, has (a) an active Fitbit Premium or FitStar
subscription, (b) paired a health and fitness tracker or Aria scale with his or her Fitbit account, or (c) logged at least 100 steps with a health and fitness tracker or a
weight measurement using an Aria scale. The number of active users is based on subscription and device activity associated with each Fitbit user account and,
accordingly, a user with multiple devices synced to his or her Fitbit account is counted as only one active user regardless of the number of devices that such user
syncs to the account. The number of active users excludes users who have downloaded our mobile apps without purchasing any of our connected health and fitness
devices and users who have downloaded free versions of FitStar but are not subscribers to its paid premium offerings.
We believe that the active user metric is an indicator of the size and growth of our community, but currently we do not believe that it has a direct effect on
our revenue and operating results since substantially all of our revenue to date has been derived from sales of our connected health and fitness devices. The active
user metric is not necessarily an indicator of the actual size and future growth of our user community, who we believe to be the most likely to purchase additional
products and services on our platform, such as our subscription-based premium services. Accordingly, the active user metric only represents the potential size or
growth of our engaged user community. The active user metric is not a measure of the levels of continuous engagement of our individual users over periods of time
and does not track the number of individual users that have become inactive on our platform in a period. Instead, the active user metric, as of any given
measurement date, represents an aggregate of both existing and new users who have met the definition of an “active user” on one occasion during the previous
three months, whether that user became newly active or was an existing active user from a prior period. Accordingly, this metric does not take into account the
extent to which inactive users are offset by new active users or how long an individual user remains active. Given the recent rapid growth of the number of users on
our platform, it may be difficult to discern whether the growth in active users is the result of retaining existing users or adding new users onto our platform.
Therefore, you should not rely on our active user metric as an indicator of the level of user retention of individual users in the future, continual user
engagement or of future payments, nor the potential size and growth of our user community as an indicator for other revenue opportunities, such as subscription-
based premium services and our corporate wellness offerings.
Registered Device Users
A user becomes a registered device user on the first day the user: (a) becomes a paid subscriber of Fitbit Premium, (b) becomes a paid subscriber to FitStar or
(c) uses a health and fitness tracker or Aria scale with his or her Fitbit account. The user is counted only once on the first day of becoming a registered device user,
and the registered device users as of any certain date presents cumulative registered device users to date. The number of registered device users excludes users who
have only downloaded our mobile apps without pairing a health and fitness tracker or Aria scale and users who have only downloaded free versions of FitStar but
are not subscribers to its paid premium offerings.
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We believe that the registered device user metric is an indicator of the potential size and growth of our paid user community but is not necessarily an
indicator of the actual size and future growth of our paid user community. The registered device user metric only reflects users that have historically used our
devices or paid for a subscription to our services and it is not necessarily an indicator of future payments by users. The registered device user metric also does not
provide information regarding the individual users that no longer pay us, how frequently users pay us, or how long a user remains paying. Furthermore, the
registered device user metric is not a measure of the levels of continuous engagement of our individual users over periods of time and does not track the number of
individual users that have become inactive on our platform in a period.
Therefore, you should not rely on our registered device user metric as an indicator of the level of retention of individual users in the future, continual user
engagement, future payment by users, nor the potential size and growth of our user community as an indicator for other revenue opportunities, such as
subscription-based premium services and our corporate wellness offerings.
Adjusted EBITDA
We define adjusted EBITDA as net income adjusted to exclude stock-based compensation expense, depreciation and intangible assets amortization,
litigation expense related to matters with Aliphcom, Inc. d/b/a Jawbone, or Jawbone, the impact of the Fitbit Force recall, the revaluation of our redeemable
convertible preferred stock warrant liability prior to our initial public offering, or IPO, change in contingent consideration, interest income (expense), net, and
income tax expense (benefit). See the section titled “Selected Financial Data—Non-GAAP Financial Measures—Adjusted EBITDA” in this Annual Report on
Form 10-K for information regarding our use of adjusted EBITDA and a reconciliation of adjusted EBITDA to net income (loss).
Non-GAAP free cash flow
We define non-GAAP free cash flow as net cash provided by (used in) operating activities less purchase of property and equipment. See the section titled
“Selected Financial Data—Non-GAAP Financial Measures—Non-GAAP free cash flow” in this Annual Report on Form 10-K for information regarding our use of
non-GAAP free cash flow and a reconciliation of non-GAAP free cash flow to net cash provided by (used in) operating activities.
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. 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 2016, 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 65 countries, and we have experienced significant historical growth in international sales. In 2016 , 29% 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 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. In 2016, revenue from the EMEA region increased 86% as compared to 2015. We have recently experienced, and may experience in the future, a
decline in growth rates in the APAC region.
Category Adoption, Expansion of our Total Addressable Market, and Market Growth
As a pioneer of the wearable device 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. In addition, our long-term growth depends in part on our ability to expand into adjacent markets in the future, such as the smartwatch market
category.
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Competition
The market for connected health and fitness devices is both evolving and competitive. The connected health and fitness devices category has a multitude of
participants, including specialized consumer electronics companies such as Garmin, Jawbone, and Misfit, traditional health and fitness companies such as adidas
and Under Armour, and traditional watch companies such as Fossil and Movado. 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 sells the
Apple Watch, which is a smartwatch with broad-based functionalities, including some health and fitness tracking capabilities, and has sold a significant volume of
its smartwatches since introduction. We 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 we compete favorably with our competitors as a result of our leading market position and global brand, advanced and proprietary sensor
technologies, software-driven online dashboard and mobile apps, our motivational and social tools, and our premium software offerings. By offering a broad range
of products spanning styles and affordable price points and cross-platform compatibility, we empower a wide range of individuals with different fitness routines
and goals that are difficult for other competitors to address.
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 2016, 2015 and 2014, our fourth quarter represented 26%, 38% 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 long-term growth. We intend to continue to invest resources in our sales,
marketing, advertising, and brand management efforts, and to realign sales and marketing spend, to drive demand for our products and services globally. We also
intend to improve optimization of our research and development investments 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. In 2016, we acquired assets from Coin, Pebble and
Vector Watch to enhance the features and functionality of our devices, and accelerate the expansion of our platform and ecosystem.
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 2016 , 2015 , and 2014 , 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.
Product Quality
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 or property.
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. In addition, we utilize products and services provided by third-parties, such as vendors and contract manufacturers, and we rely on their
representations and do not have full control over their processes. Failure to detect, prevent, or fix defects, or an increase in defects could result in a variety of
consequences including a greater number of returns of products than expected from users and retailers, increases in warranty costs, regulatory proceedings, product
recalls, and litigation, which could harm our revenue and operating results.
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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, write-downs of excess
and obsolete inventory, 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.
Operating Expenses
Operating expenses consist of research and development, sales and marketing, general and administrative expenses, and change in contingent consideration.
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.
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.
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.
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 12 of the notes to our consolidated financial statements included elsewhere in this Annual Report on
Form 10-K 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, cash equivalents, and marketable securities.
Other Expense, Net
Other 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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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,
2016
2015
2014
(in thousands)
Consolidated Statements of Operations Data :
Revenue $ 2,169,461
$ 1,857,998
$ 745,433
Cost of revenue
(1)
1,323,577
956,935
387,776
Gross profit
845,884
901,063
357,657
Operating expenses:
Research and development
(1)
320,191
150,035
54,167
Sales and marketing
(1)
491,255
332,741
112,005
General and administrative
(1)
146,903
77,793
33,556
Change in contingent consideration —
(7,704)
—
Total operating expenses
958,349
552,865
199,728
Operating income (loss)
(112,465)
348,198
157,929
Interest income (expense), net 3,156
(1,019)
(2,222)
Other income (expense), net 14
(59,230)
(15,934)
Income (loss) before income taxes
(109,295)
287,949
139,773
Income tax expense (benefit) (6,518)
112,272
7,996
Net income (loss)
$ (102,777)
$ 175,677
$ 131,777
(1) Includes stock-based compensation expense as follows:
Year Ended December 31,
2016
2015
2014
(in thousands)
Cost of revenue $ 4,797
$ 4,739
$ 890
Research and development 47,207
18,251
2,350
Sales and marketing 11,575
7,419
1,295
General and administrative 15,853
10,615
2,269
Total
$ 79,432
$ 41,024
$ 6,804
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Year Ended December 31,
2016
2015
2014
(as a percentage of revenue)
Consolidated Statements of Operations Data :
Revenue 100 %
100%
100%
Cost of revenue 61
52
52
Gross profit
39
48
48
Operating expenses:
Research and development 15
8
7
Sales and marketing 22
18
15
General and administrative 7
4
5
Change in contingent consideration —
—
—
Total operating expenses
44
30
27
Operating income (loss)
(5)
18
21
Interest income (expense), net —
—
—
Other income (expense), net —
(3)
(2)
Income (loss) before income taxes
(5)
15
19
Income tax expense —
6
1
Net income (loss)
(5)%
9%
18%
Comparison of 2016 and 2015
Revenue
Year Ended December 31,
Change
2016
2015
$
%
(in thousands)
Revenue $ 2,169,461
$ 1,857,998
$ 311,463
17%
Revenue increased $311.5 million , or 17% , from $1.9 billion for 2015 to $2.2 billion for 2016 . A substantial majority of the increase was due to an increase
in the average selling price of our devices of 10% from $85 per device for 2015 to $94 per device for 2016 , due to new products introduced in 2016 , partially
offset by a decrease in average selling price for certain legacy products. Average selling price was affected by a $42.2 million increase in rebates and promotions to
retailers and distributors. Revenue from new products introduced in 2016 was $1.5 billion, or 70% of revenue, for 2016 . An increase in the number of devices sold
from 21.4 million in 2015 to 22.3 million in 2016 also contributed to the increase in revenue.
U.S. revenue, based on ship-to destinations, increased $158.4 million, or 11%, from $1.4 billion for 2015 to $1.5 billion for 2016 , and international revenue,
based on ship-to destinations, increased by $153.1 million, or 32%, from $476.8 million for 2015 to $629.9 million for 2016 , primarily due to an increase in
revenue from the EMEA region of 86%, partially offset by a decrease in revenue in the APAC region of 26%.
For the full year 2017, we expect revenue to decrease as compared to 2016.
Cost of Revenue
Year Ended December 31,
Change
2016
2015
$
%
(dollars in thousands)
Cost of revenue $ 1,323,577
$ 956,935
$ 366,642
38 %
Gross profit 845,884
901,063
(55,179)
(6)%
Gross margin 39%
48%
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Cost of revenue increased $366.6 million , or 38% , from $956.9 million for 2015 to $1.3 billion for 2016 . The increase was primarily due to an increase in
average cost per device related to new products introduced in 2016, an increase in the number of devices sold, an increase in actual and estimated costs of warranty
claims on legacy products of $108.5 million, and as a result of a decrease in forecasted demand, a charge for liabilities to our contract manufacturers for excess
components of $59.0 million, and accelerated depreciation of manufacturing and tooling equipment of $19.0 million.
Gross margin decreased from 48% for 2015 to 39% for 2016 . Gross margin for 2016 was primarily affected by an increase in actual and estimated costs of
warranty claims for legacy products, a charge for liabilities to our contract manufacturers for excess components, an increase in rebates and promotions to retailers
and distributors, and accelerated depreciation of manufacturing and tooling equipment, which decreased gross margin by 4%, 3%, 2%, and 1%, respectively. These
decreases in gross margin were partially offset by reduced costs on certain warranty replacement units, which increased gross margin by 1%.
Research and Development
Year Ended December 31,
Change
2016
2015
$
%
(in thousands)
Research and development $ 320,191
$ 150,035
$ 170,156
113%
Research and development expenses increased $170.2 million , or 113% , from $150.0 million for 2015 to $320.2 million for 2016 . The increase was
primarily due to a $95.3 million increase in personnel-related expenses due to a 71% increase in headcount, a $41.1 million increase in allocated overhead, a $12.8
million increase in consultant and contractor expenses, an $11.7 million increase in tooling and prototype materials, a $4.4 million increase in travel expenses, and
a $3.6 million increase in expenses for third-party hosting services.
For the full year 2017, we expect our research and development expenses to increase in absolute dollars and as a percentage of revenue as compared to 2016.
The increase is expected to be at a slower rate than historical periods due to the improved optimization of research and development investments.
Sales and Marketing
Year Ended December 31,
Change
2016
2015
$
%
(in thousands)
Sales and marketing $ 491,255
$ 332,741
$ 158,514
48%
Sales and marketing expenses increased $158.5 million , or 48% , from $332.7 million for 2015 to $491.3 million for 2016 . The increase was primarily due
to a $98.2 million increase in expenses associated with advertising costs and other marketing programs, driven by the launch of media campaigns for the new
products introduced during 2016. The increase was also due to a $52.3 million increase in consulting and contractor expenses, a $20.5 million increase in
personnel-related expenses due to a 48% increase in headcount, and a $4.6 million increase in expenses for purchased software, partially offset by a $18.1 million
decrease in allocated overhead.
For the full year 2017, we expect sales and marketing expenses to decrease in absolute dollars and remain relatively consistent as a percentage of revenue as
compared to the full year 2016 as we realign sales and marketing spend.
General and Administrative
Year Ended December 31,
Change
2016
2015
$
%
(in thousands)
General and administrative $ 146,903
$ 77,793
$ 69,110
89%
General and administrative expenses increased $69.1 million , or 89% , from $77.8 million for 2015 to $146.9 million for 2016 . The increase was primarily
due to a $31.1 million increase in legal fees, a $20.3 million increase in personnel-related expenses due to a 48% increase in headcount, a $12.5 million increase in
consulting and contractor expenses, a $3.1 million increase in other administrative expenses and travel expenses, and a $3.2 million increase in allocated overhead.
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For the full year 2017, we expect general and administrative expenses to decrease in absolute dollars and remain relatively consistent as a percentage of
revenue as compared to the full year 2016.
Change in Contingent Consideration
Year Ended December 31,
Change
2016
2015
$
(in thousands)
Change in contingent consideration $ —
$ (7,704)
$ 7,704
The change in contingent consideration benefit of $7.7 million for 2016 is a result of our re-measurement of the contingent consideration liability related to
our acquisition of FitStar in 2015. This is a non-recurring benefit. The terms of the contingent liability expired as of December 31, 2015.
Interest and Other Income (Expense), Net
Year Ended December 31,
Change
2016
2015
$
%
(in thousands)
Interest income (expense), net $ 3,156
$ (1,019)
$ 4,175
(410)%
Other income (expense), net 14
(59,230)
59,244
(100)%
Interest income (expense), net increased $4.2 million , or 410% , from expense of $1.0 million for 2015 to income of $3.2 million for 2016 . The increase
was primarily due to interest earned on our cash, cash equivalents, and marketable securities. Other expense, net, increased $59.2 million , from expense of
$59.2 million for 2015 to $14,000 for 2016 . The increase in other income (expense), net was primarily due to a decrease of $56.7 million in charges related to the
revaluation of our convertible preferred stock warrant liability as the liability is no longer outstanding subsequent to our IPO, and an increase in foreign currency
gains of $3.7 million.
Income Tax Expense (Benefit)
Year Ended December 31,
Change
2016
2015
$
%
(in thousands)
Income tax expense (benefit) $ (6,518)
$ 112,272
$ (118,790)
(106)%
Effective tax rate 6.0%
39.0%
Income tax expense decreased $(118.8) million from expense of $112.3 million for 2015 to a benefit of $(6.5) million for 2016 . Our effective tax rate was
6.0% and 39.0% for 2016 and 2015 , respectively. The decrease in income tax expense and effective tax rate for 2016 was primarily due to shift in geographic mix
of profits before tax, increased losses in certain foreign jurisdictions for which a tax benefit may not be realized, and an increase in U.S. tax benefits from tax
credits resulting from the increase in research and development expenses.
Comparison of 2015 and 2014
Revenue
Year Ended December 31,
Change
2015
2014
$
%
(in thousands)
Revenue $ 1,857,998
$ 745,433
$ 1,112,565
149%
Revenue increased $1.1 billion, or 149%, from $745.4 million for 2014 to $1.9 billion for 2015. A substantial majority of the increase was due to an increase
in the number of devices sold from 10.9 million in 2014 to 21.4 million in 2015, including $1.4 billion in revenue in 2015 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 29% from $66 per device for 2014 to $85 per
device for 2015, due to new
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products introduced in the fourth quarter of 2014. The increase in revenue includes the negative impact of foreign currency exchange rates of $56.3 million, net of
the impact of foreign currency hedges. U.S. revenue, based on ship-to destinations, increased $818.6 million, or 146%, from $562.5 million for 2014 to $1,381.1
million 2015, and international revenue, based on ship-to destinations, increased by $293.9 million, or 161%, from $182.9 million for 2014 to $476.8 million for
2015.
Cost of Revenue
Year Ended December 31,
Change
2015
2014
$
%
(dollars in thousands)
Cost of revenue $ 956,935
$ 387,776
$ 569,159
147%
Gross profit 901,063
357,657
543,406
152%
Gross margin 48%
48%
Cost of revenue increased $569.2 million, or 147%, from $387.8 million for 2014 to $956.9 million for 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 $5.8 million benefit to cost of revenue for 2015 compared to an $11.3 million increase to cost of revenue for 2014 in connection with the recall of the
Fitbit Force.
Gross margin was 48% for both 2015 and 2014. Gross margin for 2015 was primarily affected by 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, 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
Year Ended December 31,
Change
2015
2014
$
%
(in thousands)
Research and development $ 150,035
$ 54,167
$ 95,868
177%
Research and development expenses increased $95.9 million, or 177%, from $54.2 million for 2014 to $150.0 million for 2015. The increase was primarily
due to a $64.3 million increase in personnel-related expenses due to a 176% increase in headcount, a $14.5 million increase in consultant and contractor expenses,
a $6.8 million increase in tooling and prototype materials, a $5.3 million increase in allocated overhead, and a $2.2 million increase in travel expenses.
Sales and Marketing
Year Ended December 31,
Change
2015
2014
$
%
(in thousands)
Sales and marketing $ 332,741
$ 112,005
$ 220,736
197%
Sales and marketing expenses increased $220.7 million, or 197%, from $112.0 million for 2014 to $332.7 million for 2015. The increase was primarily due
to a $178.2 million increase in expenses associated with advertising costs and other marketing programs, driven by the launch of media campaigns during 2015. In
addition, consulting and contractor expenses increased $21.2 million, and personnel-related expenses increased $20.0 million due to a 96% increase in headcount.
General and Administrative
Year Ended December 31,
Change
2015
2014
$
%
(in thousands)
General and administrative $ 77,793
$ 33,556
$ 44,237
132%
General and administrative expenses increased $44.2 million, or 132%, from $33.6 million for 2014 to $77.8 million for 2015. The increase was primarily
due to a $23.8 million increase in personnel-related expenses due to a 141% increase in headcount,
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an $8.7 million increase in consulting and contractor expenses, a $7.8 million increase in other administrative expenses and taxes, a $0.9 million increase in
recruiting expenses, a $0.8 million increase in allocated overhead, and a $0.7 million increase in legal fees. The $0.7 million increase in legal fees is net of a benefit
of $4.4 million related to the Fitbit Force recall.
Change in Contingent Consideration
Year Ended December 31,
Change
2015
2014
$
(in thousands)
Change in contingent consideration $ (7,704)
$ —
$ (7,704)
The change in contingent consideration benefit of $7.7 million for 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 December 31, 2015 as the terms of the contingent consideration
have expired.
Interest and Other Income (Expense), Net
Year Ended December 31,
Change
2015
2014
$
%
(in thousands)
Interest expense, net $ (1,019)
$ (2,222)
$ 1,203
(54)%
Other expense, net (59,230)
(15,934)
(43,296)
272 %
Interest expense, net decreased $1.2 million, or 54%, from $2.2 million for 2014 to $1.0 million for 2015. The decrease was primarily due to a decrease in
2015 in average indebtedness outstanding compared to 2014. Other expense, net, increased $43.3 million, from $15.9 million for 2014 to $59.2 million for 2015.
The increase was primarily due to an increase of $43.4 million in charges related to the revaluation of our convertible preferred stock warrant liability from $13.3
million for 2014 to $56.7 million for 2015.
Income Tax Expense
Year Ended December 31,
Change
2015
2014
$
%
(in thousands)
Income tax expense $ 112,272
$ 7,996
$ 104,276
1,304%
Effective tax rate 39.0%
5.7%
Income tax expense increased $104.3 million from $8.0 million for 2014 to $112.3 million for 2015. Our effective tax rate was 39.0% and 5.7% for 2015 and
2014, respectively. The increase in income tax expense and effective tax rate for 2015 was primarily due to increased earnings during this period. The low 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 related to 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.
Liquidity and Capital Resources
Our operations have been financed primarily through cash flow from operating activities, the net proceeds from the sale of our equity securities, and
borrowings under our credit facilities. As of December 31, 2016 , we had cash and cash equivalents of $301.3 million and marketable securities of $404.7 million .
Of our total cash, cash equivalents, and marketable securities, $137.1 million is held by our foreign subsidiaries. Our intent is to indefinitely reinvest our
earnings from foreign operations and current plans do not anticipate that we will require funds generated from foreign operations to fund our domestic operations.
In the event funds from foreign operations are needed to fund operations in the United States in the future, and if U.S. income tax has not been previously accrued
on unremitted earnings, we may be required to accrue and pay additional U.S. taxes on repatriated funds at that time.
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We believe our existing cash, cash equivalent, and marketable securities balances, and cash flow from operations will be sufficient to meet our working
capital and capital expenditure needs for at least the next 12 months. Our future capital requirements may vary materially from those currently planned and will
depend on many factors, including our levels of revenue, the timing and extent of spending on research and development efforts and other business initiatives, the
expansion of sales and marketing activities, the timing of new product introductions, market acceptance of our products, acquisitions, and overall economic
conditions. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be
required to seek additional equity or debt financing. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of debt
financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict
our operations.
Credit Facility
In December 2015, we entered into a second amended and restated credit agreement, or Senior Facility, with Silicon Valley Bank, or SVB, as administrative
agent, collateral agent, and lender, SunTrust Bank as syndication agent, and several other lenders to replace our existing asset-based credit facility and cash flow
facility. This Senior Facility allows us to borrow up to $250.0 million, including up to $50.0 million for the issuance of letters of credit and up to $25.0 million for
swing line loans, subject to certain financial covenants and ratios. Borrowings under the Senior Facility may be drawn as Alternate Base Rate, or ABR, loans or
Eurodollar loans, which matures in December 2020. ABR loans bear interest at a variable rate equal to the applicable margin plus the highest of (i) the prime rate,
(ii) the federal funds effective rate plus 0.5%, and (iii) the Eurodollar rate plus 1.0%, but in any case at a minimum rate of 3.25% per annum. Eurodollar loans bear
interest at a variable rate based on the LIBOR rate and Eurodollar reserve requirements, but in any case at a minimum rate of 1.0% per annum.
We have the option to repay our borrowings under the Senior Facility without penalty prior to maturity. The Senior Facility requires us to comply with
certain financial covenants, including maintaining a consolidated fixed charge coverage ratio of at least 1.15:1, and a consolidated leverage ratio of less than 3:1.
The Senior Facility also requires us to comply with certain non-financial covenants. Pursuant to the terms of the Senior Facility, we excluded certain expenses from
the consolidated fixed charge coverage ratio calculation with the approval of our lenders, and as a result, we were in compliance with all covenants as of
December 31, 2016 . Our obligations under the credit facility are collateralized by substantially all of our assets, excluding our intellectual property. As of
December 31, 2016 , we had no outstanding borrowings under the Senior Facility.
Based on our forecasts, we may fail to meet certain of our financial covenants under our Senior Facility during 2017. We currently do not have any
borrowings outstanding under the Senior Facility and have $38.0 million in letters of credit issued under the line. We believe that should we fail to meet any of the
financial covenants under the line of credit, we would be able to negotiate revised terms or fund outstanding letters of credit with available cash balances.
As of December 31, 2016 , we had outstanding letters of credit totaling $38.0 million issued to cover various security deposits on our facility leases.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Year Ended December 31,
2016
2015
2014
(in thousands)
Net cash provided by (used in):
Operating activities $ 109,534
$ 109,157
$ 18,774
Investing activities (392,666)
(170,027)
(24,185)
Financing activities 48,980
401,053
119,264
Net change in cash and cash equivalents
$ (234,152)
$ 340,183
$ 113,853
Cash Flows from Operating Activities
Net cash provided by operating activities of $109.5 million for 2016 was primarily due to an increase in net change in operating assets and liabilities of
$197.5 million and non-cash adjustments of $14.8 million, partially offset by a net loss of $102.8 million. The increase in net change in operating assets and
liabilities was primarily due to a $259.0 million increase in accounts payable and accrued liabilities, largely driven by increases in the product warranty reserve,
sales rebates accruals, and reserves for excess components, partially offset by a $62.0 million increase in inventories, a $37.9 million increase in prepaid expenses
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and other assets, and an $8.7 million increase in accounts receivable. Non-cash adjustments primarily consisted of stock-based compensation expense, depreciation
and amortization, and the abandonment of property and equipment, partially offset by deferred taxes and excess tax benefits from stock-based compensation. Our
days sales outstanding in accounts receivable, calculated as the number of days of revenue represented by the accounts receivable balance as of period end,
increased from 56 days as of December 31, 2015 to 85 days as of December 31, 2016 due to slower collections in the fourth quarter of 2016 as compared to the
fourth quarter of 2015.
Net cash provided by operating activities of $109.2 million for 2015 was primarily due to net income of $175.7 million and non-cash adjustments of $44.5
million, partially offset by a decrease in net change in operating assets and liabilities of $111.1 million. Non-cash adjustments primarily consisted of the
revaluation of the redeemable convertible preferred stock warrant liability, stock-based compensation expense, and depreciation and amortization, partially offset
by deferred taxes and excess tax benefits from stock-based compensation. The decrease in net change in operating assets and liabilities was primarily due to a
$231.1 million increase in accounts receivable due to increased sales in the fourth quarter of 2015, and a $68.1 million increase in inventories as a result of
increased product demand, partially offset by a $195.5 million increase in accounts payable and accrued liabilities related to growth of expenditures to support
general business growth.
Net cash provided by operating activities of $18.8 million for 2014 was primarily due to net income of $131.8 million, partially offset by a decrease in net
change in operating assets and liabilities of $102.8 million, and non-cash adjustments of $10.2 million. The decrease in net change in operating assets and liabilities
was primarily due to a $158.8 million increase in accounts receivable due to increased sales in the fourth quarter of 2014 as a result of increased product demand, a
$61.6 million increase in inventories as a result of a decrease in inventory turnover during 2014 primarily due to increased inventory levels for new products
announced in the fourth quarter of 2014, and a $60.5 million decrease in Fitbit Force recall liabilities, partially offset by a $171.5 million increase in accounts
payable and accrued liabilities and other liabilities related to growth of expenditures to support general business growth. Non-cash adjustments primarily consisted
of deferred taxes, partially offset by the revaluation of the redeemable convertible preferred stock warrant liability.
Cash Flows from Investing Activities
Cash used in investing activities for 2016 of $392.7 million was due to the purchases of marketable securities of $638.1 million, partially offset by the sale
and maturities of marketable securities of $362.3 million, purchases of property and equipment of $78.6 million, and the cash portion of acquisitions of
$38.3 million, net of cash acquired.
Cash used in investing activities for 2015 of $170.0 million was due to the purchases of marketable securities of $230.9 million, purchases of property and
equipment of $30.6 million, and the cash portion of the acquisition of FitStar of $11.0 million, net of cash acquired, partially offset by the sale and maturities of
marketable securities of $102.5 million.
Cash used in investing activities for 2014 of $24.2 million was due to $26.5 million used for purchases of property and equipment, partially offset by a
decrease of $2.3 million in restricted cash related to operating lease obligations.
We may continue to use cash in the future to acquire businesses and technologies that enhance and expand our product offerings. Due to the nature of these
transactions, it is difficult to predict the amount and timing of such cash requirements to complete such transactions. We may be required to raise additional funds
to complete future acquisitions.
Cash Flows from Financing Activities
Cash provided by financing activities for 2016 of $49.0 million was primarily related to excess tax benefits of $29.2 million from stock-based compensation,
and net proceeds from issuance of common stock related to employee equity incentive plans of $21.0 million.
Cash provided by financing activities for 2015 of $401.1 million was primarily related to proceeds from our public stock offerings of $505.3 million and
excess tax benefits of $32.1 million from stock compensation, partially offset by net repayments of borrowings of $134.5 million under our credit facilities.
Cash provided by financing activities for 2014 of $119.3 million was primarily related to net borrowings of $119.1 million under our credit facilities.
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Contractual Obligations and Other Commitments
The following table summarizes our non-cancelable contractual obligations as of December 31, 2016 :
Payments Due By Period
Total
Less than
1 Year
1-3
Years
3-5
Years
More than
5 Years
(in thousands)
Operating leases
(1)
$ 300,360
$ 33,867
$ 86,165
$ 81,324
$ 99,004
Total
$ 300,360
$ 33,867
$ 86,165
$ 81,324
$ 99,004
(1) We lease our facilities under long-term operating leases, which expire at various dates through June 2024. The lease agreements frequently include provisions which require us to pay
taxes, insurance, or maintenance costs.
Purchase orders or contracts for the purchase of certain goods and services are not included in the preceding table. The aggregate amount of purchase orders
open as of December 31, 2016 was approximately $158.4 million . We cannot determine the aggregate amount of such purchase orders that represent contractual
obligations because purchase orders may represent authorizations to purchase rather than binding agreements. Our purchase orders are based on our current needs
and are fulfilled by our suppliers, contract manufacturers, and logistics providers within short periods of time. We subcontract with other companies to
manufacture our products. During the normal course of business, we and our contract manufacturers procure components based upon a forecasted production plan.
If we cancel all or part of the orders, or materially reduce forecasted orders, we may be liable to our suppliers and contract manufacturers for the cost of the excess
components purchased by our contract manufacturers. As of December 31, 2016, approximately $50.9 million was accrued for such liabilities to contract
manufacturers.
The table above excludes the liability for uncertain tax positions of $34.0 million as of December 31, 2016 , due to the uncertainty of when the related tax
settlements will become due.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.
Critical Accounting Polices and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have
been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported
revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we
believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting
policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving
management’s estimates, assumptions, and judgments.
Revenue Recognition
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 services. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price
is fixed or determinable, and collection is reasonably assured. We consider delivery of our products to have occurred once title and risk of loss has been
transferred. For customers where transfer of risk of loss is at the customer’s destination, we use estimates to defer sales at the end of the reporting period based on
historical experience of average transit time. We recognize revenue, net of estimated sales returns, sales incentives, discounts, and sales tax. We generally
recognize revenue for products sold through retailers and distributors on a sell-in basis.
We enter into multiple element arrangements that include hardware, software, and services. The first deliverable is the hardware and firmware essential to
the functionality of our connected health and fitness devices delivered at the time of sale. The second deliverable is the software services included with the
products, which are provided free of charge and enables users to sync, view, and access real-time data on our online dashboard and mobile apps. The third
deliverable is the embedded right included with the purchase of the device to receive, on a when-and-if-available basis, future unspecified firmware upgrades and
features
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relating to the product’s essential firmware. In addition, we occasionally offer a fourth deliverable in bundled arrangements that allows access to certain
subscription-based services related to our FitStar offering.
We allocate revenue to all deliverables based on their relative selling prices. We use a hierarchy to determine the selling price to be used for allocating
revenue to deliverables: (i) vendor-specific objective evidence, or VSOE, of fair value, (ii) third-party evidence, or TPE, and (iii) best estimate of the selling price,
or BESP, of selling price. Our process for determining BESP considers multiple factors including consumer behaviors and our internal pricing model and may vary
depending upon the facts and circumstances related to each deliverable. BESP for our connected health and fitness devices and unspecified upgrade rights reflect
our best estimate of the selling prices if they were sold regularly on a stand-alone basis and comprise the majority of the arrangement consideration. BESP for
upgrade rights currently ranges from $1 to $3. TPE for our online dashboard and mobile apps is currently estimated at $0.99. VSOE for access to FitStar
subscription-based services is based on the price charged when sold separately.
Amounts allocated to the delivered health and fitness devices are recognized at the time of delivery, provided the other conditions for revenue recognition
have been met. Amounts allocated to our online dashboard and mobile apps and unspecified upgrade rights are deferred and recognized on a straight-line basis
over the estimated usage period.
We offer our users the ability to purchase subscription-based services, through which our users receive incremental features, including access to a digital
personal trainer, in-depth analytics regarding the user’s personal metrics, or video-based customized workouts. Amounts paid for subscriptions are deferred and
recognized ratably over the service period which is typically one year. Revenue from subscription-based premium services was less than 1% of revenue for all
periods presented.
In addition, we offer access to software and services to certain customers in the corporate wellness program, which includes distribution capabilities, a real-
time dashboard, and support services. We are currently unable to establish VSOE or TPE for the corporate wellness software and services. BESP for the corporate
wellness software and services is determined based on our internal pricing model for anticipated renewals for existing customers and pricing for new customers.
Revenue allocated to the corporate wellness software and services is deferred and recognized on a straight-line basis over the estimated access period of one year,
which is the typical service period. Revenue from the corporate wellness software and services was less than 1% of revenue for all periods presented.
We account for shipping and handling fees billed to customers as revenue. Sales taxes and value added taxes collected from customers are remitted to
governmental authorities, are not included in revenue, and are reflected as a liability on our consolidated balance sheets.
Rights of Return, Stock Rotation Rights, and Price Protection
We offer limited rights of return, stock rotation rights, and price protection under various policies and programs with our retailer and distributor customers and
end-users. We estimate reserves for these policies and programs based on historical experience and record the reserves as a reduction of revenue and accounts
receivable. Through December 31, 2016 , actual returns have primarily been open-box returns. When necessary, we also provide a specific reserve for products in
the distribution channel in excess of estimated requirements. This estimate can be affected by the amount of a particular product in the channel, the rate of sell-
through, product plans, and other factors. We also consider whether there are circumstances which may result in anticipated returns higher than the historical return
rate from direct customers and record an additional specific reserve as necessary.
Sales Incentives
We offer sales incentives such as cooperative advertising and marketing development fund programs, rebates, and other incentives. We record cooperative
advertising and marketing development fund programs with customers as a reduction to revenue unless we receive an identifiable benefit in exchange for credits
claimed by the customer and can reasonably estimate the fair value of the identifiable benefit received, in which case we will record it as a marketing expense. We
recognize a liability with a reduction to revenue for rebates or other incentives based on the estimated amount of rebates or credits that will be claimed by
customers.
Inventories
Inventories consist of finished goods and component parts, which are purchased from contract manufacturers and component suppliers. Inventories are stated
at the lower of cost or market on a first-in, first-out basis. We assess the valuation of inventory and periodically write down the value for estimated excess and
obsolete inventory based upon estimates of future demand and market conditions.
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Product Warranty
We offer a standard product warranty that our products will operate under normal use for a period of one-year from the date of original purchase, except in
the European Union where we provide a two-year warranty. We have the obligation, at our option, to either repair or replace the defective product. At the time
revenue is recognized, an estimate of future warranty costs is recorded as a component of cost of revenues. Factors that affect the warranty obligation include
product failure rates, service delivery costs incurred in correcting the product failures, and warranty policies. The warranty obligation does not consider historical
experience of the Fitbit Force product as a separate reserve has been established for the Fitbit Force recall. Our products are manufactured by contractor
manufacturers, and in certain cases, we may have recourse to such contract manufacturers.
Business Combinations, Goodwill, and Intangible Assets
We allocate the fair value of purchase consideration to tangible assets, liabilities assumed, and intangible assets acquired based on their estimated fair values.
The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is allocated to goodwill. The allocation of the
purchase consideration requires management to make significant estimates and assumptions, especially with respect to intangible assets. These estimates can
include, but are not limited to, future expected cash flows of acquired customers, acquired technology, and trade names from a market participant perspective, and
estimates of useful lives, and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently
uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which is up to one year from the acquisition
date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement
period, any subsequent adjustments are recorded to earnings.
We assess goodwill for impairment at least annually during the fourth quarter and whenever events or changes in circumstances indicate that the carrying
value of the asset may not be recoverable. Consistent with our determination that we have one operating segment, we have determined that there is one reporting
unit and test goodwill for impairment at the entity level. We test goodwill using the two-step process in accordance with ASC 350, Intangibles—Goodwill and
Other . In the first step, we compare the carrying amount of the reporting unit to the fair value based on the fair value of our common stock. If the fair value of the
reporting unit exceeds the carrying value, goodwill is not considered impaired and no further testing is required. If the carrying value of the reporting unit exceeds
the fair value, goodwill is potentially impaired and the second step of the impairment test must be performed. In the second step, we would compare the implied
fair value of the goodwill, as defined by ASC 350, to its carrying amount to determine the amount of impairment loss, if any. We tested goodwill for impairment as
of October 31, 2016, and 2015, and the fair value of our reporting unit exceeded the carrying value.
Acquired finite-lived intangible assets are amortized over their estimated useful lives. We evaluate the recoverability of our intangible assets for possible
impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is measured
by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review indicates that the carrying
amount of intangible assets is not recoverable, the carrying amount of such assets is reduced to fair value. We have not recorded any such impairment charge
during the years presented.
Income Taxes
We utilize the asset and liability method of accounting for income taxes, which requires the recognition of deferred tax assets and liabilities for expected
future consequences of temporary differences between the financial reporting and income tax bases of assets and liabilities using enacted tax rates. We make
estimates, assumptions, and judgments to determine our expense (benefit) for income taxes and also for deferred tax assets and liabilities and any valuation
allowances recorded against our deferred tax assets. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the
extent we believe that recovery is not likely, we establish a valuation allowance.
The calculation of our income tax expense involves the use of estimates, assumptions, and judgments while taking into account current tax laws, our
interpretation of current tax laws, and possible outcomes of future tax audits. We have established reserves to address potential exposures related to tax positions
that could be challenged by tax authorities. Although we believe our estimates, assumptions, and judgments to be reasonable, any changes in tax law or our
interpretation of tax laws and the resolutions of potential tax audits could significantly impact the amounts provided for income taxes in our consolidated financial
statements.
The calculation of our deferred tax asset balance involves the use of estimates, assumptions, and judgments while taking into account estimates of the
amounts and type of future taxable income. Actual future operating results and the underlying amount
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and type of income could differ materially from our estimates, assumptions, and judgments, thereby impacting our financial position and operating results.
We include interest and penalties related to unrecognized tax benefits within income tax expense. Interest and penalties related to unrecognized tax benefits
have been recognized in the appropriate periods presented.
Stock-Based Compensation
Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense, net of estimated forfeitures, over
the requisite service period, which is generally the vesting period of the respective award.
Determining the fair value of stock-based awards at the grant date requires judgment. The fair value of restricted stock units, or RSUs, is the fair value of our
common stock on the grant date. We use the Black-Scholes option-pricing model to determine the fair value of stock options and shares issued under our 2015
Employee Stock Purchase Plan, or 2015 ESPP. The determination of the grant date fair value of stock options and shares issued under our 2015 ESPP using an
option-pricing model is affected by our estimated common stock fair value as well as assumptions regarding a number of variables. These variables include the fair
value of our common stock, our expected common stock price volatility over the expected life of the options, expected term of the stock option, risk-free interest
rates, and expected dividends, which are estimated as follows:
Fair Value of Our Common Stock . Prior to our initial public offering, the fair value of the shares of common stock underlying stock options was historically
established by our board of directors, which was responsible for these estimates, and was based in part upon a valuation provided by an independent third-party
valuation firm. Because there was no public market for our common stock prior to our initial public offering, our board of directors considered this independent
valuation and other factors, including, but not limited to, revenue growth, the current status of the technical and commercial success of our operations, our financial
condition, the stage of our development, and competition to establish the fair value of our common stock at the time of grant of the option. The fair value of the
underlying common stock was determined by the board of directors until our common stock was listed on a stock exchange. For stock options and RSUs granted
subsequent to our initial public offering, the fair value was based on the closing price of our Class A common stock as reported on the New York Stock Exchange
on the date of grant.
Expected Term . The expected term represents the period over which we anticipate stock-based awards to be outstanding. We do not have sufficient historical
exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time stock-based awards have been exercisable. As a
result, for stock options, we used the simplified method to calculate the expected term estimate based on the vesting and contractual terms of the option. Under the
simplified method, the expected term is equal to the average of the stock-based award’s weighted average vesting period and its contractual term. The expected
term of equity awards issued under our 2015 ESPP is the contractual term.
Volatility . Expected volatility is a measure of the amount by which the stock price is expected to fluctuate. We estimate the expected volatility of the
common stock underlying our stock options and equity awards issued under our 2015 ESPP at the grant date by taking the average historical volatility of the
common stock of a group of comparable publicly traded companies over a period equal to the expected life. We use this method because we have limited
information on the volatility of our Class A common stock because of our short trading history.
Risk-Free Rate . The risk-free interest rate is estimated average interest rate based on U.S. Treasury zero-coupon notes with terms consistent with the
expected term of the awards.
Dividend Yield . We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently,
we used an expected dividend yield of zero.
In addition, we are required to estimate the amount of stock-based compensation we expect to be forfeited based on our historical experience. The
assumptions used in calculating the fair value of the stock-based awards represent management judgment. As a result, if factors change and different assumptions
are used, the stock-based compensation expense could be materially different in the future.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU 2014-09 (ASC 606), Revenue from Contracts with Customers , which affects
any entity that either enters into contracts with customers to transfer goods and services or enters into contracts for the transfer of nonfinancial assets. ASU 2014-
09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The standard’s core principle is that a company will
recognize revenue when it transfers promised
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goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In
doing so, companies will need to use more judgment and make more estimates than under the currently effective guidance. This may include identifying
performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to
each separate performance obligation. ASU 2014-09 will become effective for us on January 1, 2018 and can be adopted either retrospectively to each prior
reporting period presented or as a cumulative effect adjustment as of the date of adoption. In April 2016, the FASB issued ASU 2016-10, which clarifies guidance
on identifying performance obligations and licensing implementation. We currently expect to adopt the revenue standards as of January 1, 2018, utilizing the
modified retrospective transition method. Although the new standard may, in certain circumstances, impact the timing of when revenue is recognized for product
shipped, and the timing and classification of certain sales incentives, we believe the new guidance is consistent with our current revenue policy. Therefore, we do
not currently expect adoption to have a material impact on the consolidated financial statements. We are continuing to evaluate the impact of the adoption and
preliminary assessments are subject to change.
In February 2016, the FASB issued ASU 2016-02, Leases . This ASU requires lease assets and lease liabilities arising from leases, including operating
leases, to be recognized on the balance sheet. ASU 2016-02 will become effective for us on January 1, 2019, and requires adoption using a modified retrospective
approach. We are currently evaluating the impact of this guidance on the consolidated financial statements. We anticipate that the adoption will have a material
impact on our consolidated balance sheets; however, we do not expect the adoption to have a material impact on our statements of operations.
In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718). This ASU simplifies several aspects of the accounting
for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the
statement of cash flows. ASU 2016-09 will become effective for us on January 1, 2017 and early adoption is permitted. We adopted ASU 2016-09 as of January 1,
2017. Any deferred tax asset recognized on adoption of ASU 2016-09 related to excess stock-based compensation, net of any applicable valuation allowance, was
recorded to retained earnings as of the date of adoption. We do not currently expect the adoption to have a material impact on the consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
This ASU 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. ASU 2016-13 will become effective for us on January 1, 2020
and early adoption is permitted. We are currently evaluating the impact of this guidance on the consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) . This ASU provides guidance intended to reduce diversity in practice
in how certain transactions are classified in the statement of cash flows. ASU 2016-15 will become effective for the Company on January 1, 2018 and early
adoption is permitted. We are currently evaluating the impact of this guidance on the consolidated financial statements.
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate and foreign currency risks as follows:
Interest Rate Risk
Our exposure to changes in interest rates relates primarily to our investment portfolio. As of December 31, 2016 , we had cash and cash equivalents of
$301.3 million and marketable securities of $404.7 million , which consisted primarily of bank deposits, money market funds, U.S. government and agency
securities, commercial paper, and corporate notes and bonds. The primary objectives of our investment activities are to preserve principal and provide liquidity
without significantly increasing risk. Our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure to any
single issue, issuer, or type of investment.
To date, we have not been exposed, nor do we anticipate being exposed, to material risks due to changes in interest rates. A hypothetical 10% change in
interest rates during any of the periods presented would not have had a material impact on our consolidated financial statements.
Foreign Currency Risk
To date, all of our inventory purchases have been denominated in U.S. dollars. Our international sales are primarily denominated in foreign currencies and
any unfavorable movement in the exchange rate between U.S. dollars and the currencies in which we conduct sales in foreign countries could have an adverse
impact on our revenue. A portion of our operating expenses are incurred outside the United States and are denominated in foreign currencies, which are also
subject to fluctuations due to changes in foreign currency exchange rates. In addition, our suppliers incur many costs, including labor costs, in other currencies. To
the extent that exchange rates move unfavorably for our suppliers, they may seek to pass these additional costs on to us, which could have a material impact on our
gross margins. Our operating results and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates. However, we believe
that the exposure to foreign currency fluctuation from operating expenses is relatively small at this time as the related costs do not constitute a significant portion
of our total expenses.
To partially mitigate the impact of changes in currency exchange rates on net cash flows from our foreign currency denominated revenue and expenses, we
enter into foreign currency exchange forward and option contracts. We also hedge certain monetary assets and liabilities denominated in foreign currencies, which
reduces but does not eliminate our exposure to currency fluctuations between the date a transaction is recorded and the date that cash is collected or paid. In
general, the market risks of these contracts are offset by corresponding gains and losses on the transactions being hedged.
We had outstanding contracts with a total notional amount of $20.0 million and $20.9 million in cash flow hedges for forecasted revenue and expense
transactions, respectively, as of December 31, 2016 . We had outstanding balance sheet hedges with a total notional amount of $177.0 million as of December 31,
2016 . We assessed our exposure to movements in currency exchange rates by performing a sensitivity analysis of adverse changes in exchange rates and the
corresponding impact to our results of operations. Based on transactions denominated in currencies other than respective functional currencies, a hypothetical
change of 10% would have resulted in an impact on loss before income taxes of approximately $40.5 million for 2016 .
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Item 8. Financial Statements and Supplementary Data
FITBIT, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm
59
Consolidated Financial Statements:
Consolidated Balance Sheets 60
Consolidated Statements of Operations 61
Consolidated Statements of Comprehensive Income (Loss) 62
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) 63
Consolidated Statements of Cash Flows 65
Notes to Consolidated Financial Statements 66
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Fitbit, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of comprehensive income (loss), of
redeemable convertible preferred stock and stockholders’ equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Fitbit,
Inc. and its subsidiaries as of December 31, 2016 and December 31, 2015, and the results of their operations and their cash flows for each of the three years in the
period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is
responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to
express opinions on these financial statements and on the Company's internal control over financial reporting based on our audits (which was an integrated audit in
2016). We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
March 1, 2017
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FITBIT, INC.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
December 31,
2016
2015
Assets
Current assets:
Cash and cash equivalents $ 301,320
$ 535,846
Marketable securities 404,693
128,632
Accounts receivable, net 477,825
469,260
Inventories 230,387
178,146
Prepaid expenses and other current assets 66,346
43,530
Total current assets
1,480,571
1,355,414
Property and equipment, net 76,553
44,501
Goodwill 51,036
22,157
Intangible assets, net 27,521
12,216
Deferred tax assets 174,097
83,020
Other assets 10,448
1,758
Total assets
$ 1,820,226
$ 1,519,066
Liabilities, Redeemable Convertible Preferred Stock, and Stockholders’ Equity
Current liabilities:
Accounts payable $ 313,773
$ 260,842
Accrued liabilities 390,561
200,099
Deferred revenue 49,904
44,448
Income taxes payable 7,694
2,868
Total current liabilities
761,932
508,257
Other liabilities 59,762
29,358
Total liabilities
821,694
537,615
Commitments and contingencies (Note 7)
Stockholders’ equity:
Preferred stock, $0.0001 par value, 10,000,000 shares authorized —
—
Class A common stock, $0.0001 par value, 600,000,000 shares authorized; 177,212,531 and 99,416,351 shares
issued and outstanding as of December 31, 2016 and 2015, respectively 18
10
Class B common stock, $0.0001 par value, 350,000,000 shares authorized; 48,450,746 and 115,365,222 shares
issued and outstanding as of December 31, 2016 and 2015, respectively 5
11
Additional paid-in capital 859,345
737,820
Accumulated other comprehensive income (loss) (978)
691
Retained earnings 140,142
242,919
Total stockholders’ equity
998,532
981,451
Total liabilities and stockholders’ equity
$ 1,820,226
$ 1,519,066
The accompanying notes are an integral part of these consolidated financial statements.
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FITBIT, INC.
Consolidated Statements of Operations
(In thousands, except per share amounts)
Year Ended December 31,
2016
2015
2014
Revenue $ 2,169,461
$ 1,857,998
$ 745,433
Cost of revenue 1,323,577
956,935
387,776
Gross profit
845,884
901,063
357,657
Operating expenses:
Research and development 320,191
150,035
54,167
Sales and marketing 491,255
332,741
112,005
General and administrative 146,903
77,793
33,556
Change in contingent consideration —
(7,704)
—
Total operating expenses
958,349
552,865
199,728
Operating income (loss)
(112,465)
348,198
157,929
Interest income (expense), net 3,156
(1,019)
(2,222)
Other income (expense), net 14
(59,230)
(15,934)
Income (loss) before income taxes
(109,295)
287,949
139,773
Income tax expense (benefit) (6,518)
112,272
7,996
Net income (loss)
(102,777)
175,677
131,777
Less: noncumulative dividends to preferred stockholders —
(2,526)
(5,326)
Less: undistributed earnings to participating securities —
(59,133)
(98,103)
Net income (loss) attributable to common stockholders—basic
(102,777)
114,018
28,348
Add: adjustments for undistributed earnings to participating securities —
8,821
10,175
Net income (loss) attributable to common stockholders—diluted
$ (102,777)
$ 122,839
$ 38,523
Net income (loss) per share attributable to common stockholders:
Basic $ (0.47)
$ 0.88
$ 0.70
Diluted
$ (0.47)
$ 0.75
$ 0.63
Shares used to compute net income (loss) per share attributable to common stockholders:
Basic 220,405
129,886
40,351
Diluted
220,405
164,213
61,179
The accompanying notes are an integral part of these consolidated financial statements.
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FITBIT, INC.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
Year Ended December 31,
2016
2015
2014
Net income (loss) $ (102,777)
$ 175,677
$ 131,777
Other comprehensive income (loss):
Cash flow hedges:
Change in unrealized gain on cash flow hedges, net of tax expense (benefit) of ($1,251),
$1,509, and $ —, respectively 9,422
1,276
—
Less reclassification for realized net gains included in net income (loss), net of tax expense
of $509, $759, and $ —, respectively (10,650)
(525)
—
Net change, net of tax
(1,228)
751
—
Available-for-sale investments:
Change in unrealized loss on investments (126)
(63)
—
Less reclassification for realized net gains included in net income (loss) (6)
8
—
Net change, net of tax
(132)
(55)
—
Change in foreign currency translation adjustment, net of tax
(309)
(42)
37
Comprehensive income (loss)
$ (104,446)
$ 176,331
$ 131,814
The accompanying notes are an integral part of these consolidated financial statements.
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FITBIT, INC.
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(In thousands except share amounts)
Redeemable Convertible
Preferred Stock
Class A and Class B
Common Stock
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
(Accumulated
Deficit)
Total
Stockholders’
Equity
(Deficit) Shares
Amount
Shares
Amount
Balance at December 31, 2013
139,503,915
$ 66,236
40,140,159
$ 4
$ 1,065
$ —
$ (64,535)
$ (63,466)
Issuance of redeemable convertible preferred
stock upon exercise of redeemable convertible
preferred stock warrants 347,568
1,578
—
—
—
—
—
—
Issuance of common stock upon exercise of
stock options —
—
735,424
—
97
—
—
97
Stock-based compensation expense
—
—
—
—
6,804
—
—
6,804
Excess tax benefit from stock-based
compensation —
—
—
—
13
—
—
13
Net income
—
—
—
—
—
—
131,777
131,777
Other comprehensive income
—
—
—
—
—
37
—
37
Balance at December 31, 2014
139,851,483
67,814
40,875,583
4
7,979
37
67,242
75,262
Issuance of common stock upon public
offerings, net of offering costs —
—
25,387,500
3
499,102
—
—
499,105
Issuance of redeemable convertible preferred
stock upon net exercise of redeemable
convertible preferred stock warrants 1,485,583
56,678
—
—
—
—
—
—
Conversion of redeemable convertible preferred
stock to common stock upon initial public
offering (141,337,066)
(124,492)
141,337,066
14
124,478
—
—
124,492
Reclassification of redeemable convertible
preferred stock warrant liability into additional
paid in capital upon initial public offering —
—
—
—
15,774
—
—
15,774
Issuance of common stock upon exercise of
stock options —
—
5,396,591
—
4,018
—
—
4,018
Issuance of common stock in connection with
acquisition —
—
1,059,688
—
13,317
—
—
13,317
Issuance of common stock subject to vesting in
connection with acquisition —
—
308,216
—
—
—
—
—
Issuance of common stock upon net exercise of
common stock warrants —
—
416,929
—
—
—
—
—
Stock-based compensation expense
—
—
—
—
41,052
—
—
41,052
Excess tax benefit from stock-based
compensation —
—
—
—
32,100
—
—
32,100
Net income
—
—
—
—
—
—
175,677
175,677
Other comprehensive income
—
—
—
—
—
654
—
654
Balance at December 31, 2015
—
—
214,781,573
21
737,820
691
242,919
981,451
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FITBIT, INC.
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) (Continued)
(In thousands except share amounts)
Redeemable Convertible
Preferred Stock
Common Stock
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
(Accumulated
Deficit)
Total
Stockholders’
Equity
(Deficit) Shares
Amount
Shares
Amount
Issuance of common stock
—
—
10,881,704
2
25,812
—
—
25,814
Stock-based compensation expense
—
—
—
—
79,107
—
—
79,107
Taxes related to net share settlement of restricted
stock units —
—
—
—
(4,939)
—
—
(4,939)
Excess tax benefit from stock-based compensation
—
—
—
—
21,545
—
—
21,545
Net loss
—
—
—
—
—
—
(102,777)
(102,777)
Other comprehensive loss
—
—
—
—
—
(1,669)
—
(1,669)
Balance at December 31, 2016 —
$ —
225,663,277
$ 23
$ 859,345
$ (978)
$ 140,142
$ 998,532
The accompanying notes are an integral part of these consolidated financial statements.
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FITBIT, INC.
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
2016
2015
2014
Cash Flows from Operating Activities
Net income (loss)
$ (102,777)
$ 175,677
$ 131,777
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for doubtful accounts
339
1,115
864
Provision for excess and obsolete inventory
4,993
5,060
2,964
Depreciation
36,046
19,405
6,131
Amortization of intangible assets
2,087
1,702
—
Accelerated depreciation of property and equipment
19,805
1,206
1,004
Amortization of issuance costs and discount on debt
466
961
795
Stock-based compensation
79,432
41,024
6,804
Deferred income taxes
(98,734)
(42,538)
(42,001)
Excess of tax benefit from stock-based compensation
(29,186)
(32,100)
(13)
Revaluation of redeemable convertible preferred stock warrant liability
—
56,655
13,272
Change in contingent consideration
—
(7,704)
—
Other
(423)
(263)
—
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable
(8,701)
(231,100)
(158,788)
Inventories
(61,975)
(68,108)
(61,595)
Prepaid expenses and other assets
(37,876)
(29,215)
(9,679)
Fitbit Force recall reserve
(3,869)
(17,354)
(60,462)
Accounts payable
45,654
56,759
123,761
Accrued liabilities and other liabilities
213,361
138,748
47,733
Deferred revenue
5,456
34,891
3,403
Income taxes payable
45,436
4,336
12,804
Net cash provided by operating activities
109,534
109,157
18,774
Cash Flows from Investing Activities
Purchase of property and equipment
(78,640)
(30,566)
(26,495)
Purchase of marketable securities
(638,055)
(230,935)
—
Sales of marketable securities
46,511
58,011
—
Maturities of marketable securities
315,774
44,500
—
Acquisitions, net of cash acquired
(38,256)
(11,037)
—
Change in restricted cash
—
—
2,310
Net cash used in investing activities
(392,666)
(170,027)
(24,185)
Cash Flows from Financing Activities
Payment of offering costs
(1,236)
(5,089)
—
Proceeds from issuance of common stock
25,969
4,018
97
Excess of tax benefit from stock-based compensation
29,186
32,100
13
Taxes paid related to net share settlement of restricted stock units
(4,939)
—
—
Proceeds from public offerings, net of underwriting discounts and commissions
—
505,275
—
Proceeds from issuance of debt and revolving credit facility
—
160,000
163,000
Repayment of debt
—
(294,503)
(41,346)
Payment of issuance costs
—
(748)
(2,575)
Proceeds from exercise of redeemable convertible preferred stock warrants
—
—
75
Net cash provided by financing activities
48,980
401,053
119,264
Net increase (decrease) in cash and cash equivalents
(234,152)
340,183
113,853
Effect of exchange rate on cash and cash equivalents
(374)
37
45
Cash and cash equivalents at beginning of period
535,846
195,626
81,728
Cash and cash equivalents at end of period
$ 301,320
$ 535,846
$ 195,626
Supplemental Disclosure
Cash paid for interest
$ 624
$ 1,157
$ 835
Cash paid for income taxes
$ 34,014
$ 150,923
$ 34,616
Supplemental Disclosure of Non-Cash Investing and Financing Activity
Purchase of property and equipment included in accounts payable and accrued liabilities
$ 19,778
$ 10,534
$ 2,492
Conversion of redeemable convertible preferred stock into Class B common stock
$ —
$ 124,492
$ —
Reclassification of redeemable convertible preferred stock warrant liability to additional paid in capital
$ —
$ 15,774
$ —
Issuance of redeemable convertible preferred stock upon net exercise of redeemable convertible preferred stock
warrants
$ —
$ 56,678
$ —
Issuance of redeemable convertible preferred stock warrants in connection with debt financing
$ —
$ —
$ —
Deferred offering costs included in accounts payable and accruals
$ —
$ 1,080
$ —
Issuance of common stock in connection with acquisitions
$ —
$ 13,317
$ —
Contingent consideration related to acquisitions
$ —
$ (7,704)
$ —
The accompanying notes are an integral part of these consolidated financial statements.
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FITBIT, INC.
Notes to Consolidated Financial Statements
1. Business Overview and Basis of Presentation
Description of Business
Fitbit, Inc. (the “Company”) 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. The Company sells devices through diversified sales
channels that include distributors, retailers, a corporate wellness offering, and Fitbit.com. The Company was incorporated in Delaware in 2007. The Company has
established wholly-owned subsidiaries globally and its corporate headquarters are located in San Francisco, California.
Basis of Presentation and Principles of Consolidation
The consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The consolidated
financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated.
The Company’s fiscal year ends on December 31 of each year. In the first quarter of 2016, the Company adopted a 4-4-5 week quarterly calendar, which, for
the 2016 fiscal year, was comprised of four fiscal quarters ending on April 2, 2016, July 2, 2016, October 1, 2016, and December 31, 2016. The Company did not
adjust operating results for quarters prior to 2016.
Use of Estimates
The preparation of consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (“U.S.
GAAP”) requires management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and
accompanying notes. The estimates and assumptions made by management related to revenue recognition, reserves for sales returns and incentives, reserves for
warranty, valuation of stock options, 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 number of reporting segments, the recoverability of intangible assets and
their useful lives, the valuations of deferred income tax assets and uncertain tax positions, and accruals for the Fitbit Force recall. Actual results could differ from
those estimates, and such differences may be material to the consolidated financial statements.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of two components, net income (loss) and other comprehensive income (loss), net of tax. Other comprehensive
income refers to revenue, expenses, and gains and losses that are recorded as an element of stockholders’ equity but are excluded from net income (loss). The
Company’s other comprehensive income (loss) consists of net unrealized gains and losses on derivative instruments accounted for as cash flow hedges, foreign
currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, and unrealized gains and losses on available-for-sale
securities.
Out-of-Period Adjustment
During the first quarter of 2016, the Company identified an error, which resulted in an understatement of income tax expense by $3.0 million for the year
ended December 31, 2015. The Company recorded an out-of-period adjustment to correct the error in the quarter ended April 2, 2016. The Company assessed the
materiality of this error and concluded the error was not material to the 2015 and 2016 consolidated financial statements, and therefore, the Company recorded the
correction in the first quarter of 2016.
Non-Monetary Transaction
The Company entered into an agreement with a third party during 2016 to exchange inventory for advertising credits and cash. The Company recorded the
transaction based on the estimated fair value of the products exchanged. The Company recorded $15.0 million of revenue during 2016 related to the transaction.
The $13.0 million of unused advertising credits remaining as of
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December 31, 2016 were recorded in prepaid expenses and other current assets and other assets. Such credits are expected to be used over three years , and will be
expensed as advertising services are received.
2. Significant Accounting Policies
Cash, Cash Equivalents and Marketable Securities
Cash and cash equivalents include all cash balances and highly liquid investments with original maturities of three months or less from the date of purchase.
Cash equivalents and marketable securities consist of money market funds, U.S. government and agency securities, commercial paper, and corporate notes and
bonds.
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 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 expense, net as incurred. Realized gains and losses on the sale of
securities are determined by specific identification of each security’s cost basis. Investments are reviewed periodically to identify possible other-than-temporary
impairments. No impairment loss has been recorded on the securities as the Company believes that any 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.
Fair Value of Financial Instruments
Assets and liabilities recorded at fair value on a recurring basis are categorized based upon the level of judgment associated with inputs used to measure their
fair values. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the reporting date.
The Company estimates fair value by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the
categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1 —Quoted prices in active markets for identical assets or liabilities;
Level 2 —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 for substantially the full term of the assets or
liabilities; and
Level 3 —Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing
the asset or liability.
Foreign Currencies
The Company and certain of the Company’s wholly-owned subsidiaries use the U.S. dollar as their functional currency. The Company’s subsidiaries that use
the U.S. dollar as their functional currency remeasure local currency denominated monetary assets and liabilities at exchange rates in effect at the end of each
period, and inventories, property, plant and equipment and other nonmonetary assets and liabilities at historical rates. Gains and losses from these remeasurements
have been included in the Company’s operating results within other income (expense), net. Local currency transactions of these international operations are
remeasured into U.S. dollars at the rates of exchange in effect at the date of the transaction. Foreign currency transaction gains (losses) were $ 11.7 million , $(1.3)
million , and $(2.7) million for 2016 , 2015 , and 2014 , respectively.
The Company translates the assets and liabilities of its non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect at the
end of each period. Revenue and expenses for these subsidiaries are translated using rates that approximate those in effect during the related period. Gains and
losses from translations are recognized in foreign currency translation included in accumulated other comprehensive income (loss).
Derivative Instruments
The Company accounts for its derivative instruments as either assets or liabilities and carries them at fair value. Derivatives held by the Company that are not
designated as hedges are adjusted to fair value through earnings at each reporting date. In addition,
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the Company enters into derivatives that are accounted for as cash flow hedges. The Company records the gains or losses, net of tax, related to the effective portion
of its cash flow hedges as a component of accumulated other comprehensive income in stockholders’ equity and subsequently reclassifies the gains or losses into
revenue and operating expenses when the underlying hedged transactions are recognized. The Company periodically assesses the effectiveness of its cash flow
hedges. The fair value of derivative assets and liabilities are included in prepaid expenses and other current assets and accrued liabilities on the consolidated
balance sheets.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, accounts receivables,
and derivative instruments. Cash and cash equivalents are deposited with high quality financial institutions and may, at times, exceed federally insured limits.
Management believes that the financial institutions that hold the Company’s deposits are financially credit worthy and, accordingly, minimal credit risk exists with
respect to those balances. Generally, these deposits may be redeemed upon demand and, therefore, bear minimal interest rate risk.
The Company’s accounts receivable are derived from customers located principally in the United States. The Company maintains credit insurance for the
majority of its customer balances, performs ongoing credit evaluations of its customers, and maintains allowances for potential credit losses on customers’
accounts when deemed necessary. Credit losses historically have not been significant. The Company continuously monitors customer payments and maintains an
allowance for doubtful accounts based on its assessment of various factors including historical experience, age of the receivable balances, and other current
economic conditions or other factors that may affect customers’ ability to pay.
The Company’s derivative instruments expose it to credit risk to the extent that its counterparties may be unable to meet the terms of the agreements. The
Company seeks to mitigate this risk by limiting counterparties to major financial institutions and by spreading the risk across several major financial institutions. In
addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored on an ongoing basis.
Supplier Concentration
The Company relies on third parties for the supply and manufacture of its products, as well as third-party logistics providers. In instances where these parties
fail to perform their obligations, the Company may be unable to find alternative suppliers or satisfactorily deliver its products to its customers on time, if at all.
Inventories
Inventories consist of finished goods and component parts, which are purchased from contract manufacturers and component suppliers. Inventories are stated
at the lower of cost or market on a first-in, first-out basis. The Company assesses the valuation of inventory and periodically writes down the value for estimated
excess and obsolete inventory based upon estimates of future demand and market conditions.
Property and Equipment, Net
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization of property and equipment is
calculated using the straight-line method over the estimated useful lives of the assets. Cost of maintenance and repairs that do not improve or extend the lives of the
respective assets are expensed as incurred.
The useful lives of the property and equipment are as follows:
Tooling and manufacturing equipment
One to three years
Furniture and office equipment
Three years
Purchased software
Three years
Capitalized internally-developed software
Two to eight years
Leasehold improvements
Shorter of remaining lease term or ten years
Internally-Developed Software Costs
The Company capitalizes eligible costs to acquire, develop, or modify internal-use software that are incurred subsequent to the preliminary project stage.
Capitalized internally-developed software costs, net, were $6.3 million as of December 31, 2016 and were immaterial as of December 31, 2015.
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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 the Company’s research and development expenses are related to developing new products and services and
improving 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.
Business Combinations, Goodwill, and Intangible Assets
The Company allocates the fair value of purchase consideration to tangible assets, liabilities assumed, and intangible assets acquired based on their estimated
fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is allocated to goodwill. The
allocation of the purchase consideration requires management to make significant estimates and assumptions, especially with respect to intangible assets. These
estimates can include, but are not limited to, future expected cash flows from acquired customers, acquired technology, and trade names from a market participant
perspective, useful lives, and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently
uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which is up to one year from the acquisition
date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the
measurement period, any subsequent adjustments are recorded to earnings.
The Company assesses goodwill for impairment at least annually during the fourth quarter and whenever events or changes in circumstances indicate that the
carrying value of the asset may not be recoverable. Consistent with the determination that the Company has one operating segment, the Company has determined
that there is one reporting unit and tests goodwill for impairment at the entity level. Goodwill is tested using the two-step process in accordance with ASC 350,
Intangibles—Goodwill and Other . In the first step, the carrying amount of the reporting unit is compared to the fair value based on the fair value of the Company’s
common stock. If the fair value of the reporting unit exceeds the carrying value, goodwill is not considered impaired and no further testing is required. If the
carrying value of the reporting unit exceeds the fair value, goodwill is potentially impaired and the second step of the impairment test must be performed. In the
second step, the implied fair value of the goodwill, as defined by ASC 350, is compared to its carrying amount to determine the amount of impairment loss, if any.
The Company tested goodwill for impairment as of October 31, 2016, and 2015, and the fair value of the reporting unit exceeded the carrying value.
Acquired finite-lived intangible assets are amortized over their estimated useful lives. The Company evaluates the recoverability of intangible assets for
possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is
measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review indicates that the
carrying amount of intangible assets is not recoverable, the carrying amount of such assets is reduced to fair value. The Company has not recorded any such
impairment charge during the years presented.
Impairment of Long-Lived Assets
The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability is measured by comparison of the carrying amounts to the expected future undiscounted cash flows attributable to these assets.
If it is determined that an asset is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the assets exceeds the expected
discounted future cash flows arising from those assets.
Revenue Recognition
The Company derives substantially all of its revenue from sales of connected health and fitness devices and accessories. The Company also generates a small
portion of revenue from its subscription-based services. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has
occurred, the sales price is fixed or determinable, and collection is reasonably assured. The Company considers delivery of its products to have occurred once title
and risk of loss has been transferred. For customers where transfer of risk of loss is at the customer’s destination, the Company uses estimates to defer sales at the
end of the reporting period based on historical experience of average transit time. The Company recognizes revenue, net of estimated sales returns, sales incentives,
discounts, and sales tax. The Company generally recognizes revenue for products sold through retailers and distributors on a sell-in basis.
The Company enters into multiple element arrangements that include hardware, software, and services. The first deliverable is the hardware and firmware
essential to the functionality of the connected health and fitness device delivered at the time of sale.
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The second deliverable is the software services included with the products, which are provided free of charge and enable users to sync, view, and access real-time
data on the Company’s online dashboard and mobile apps. The third deliverable is the embedded right included with the purchase of the device to receive, on a
when-and-if-available basis, future unspecified firmware upgrades and features relating to the product’s essential firmware. Commencing in the first quarter of
2015, the Company began accounting for the embedded right as a separate unit of accounting, which is when it believes, through public announcements, it had
created an implied obligation to, from time to time, provide future unspecified firmware upgrades and features to the firmware to improve and add new
functionality to the health and fitness devices. In addition, the Company occasionally offers a fourth deliverable in bundled arrangements that allows access to
subscription-based services related to the Company’s FitStar offering.
The Company allocates revenue to all deliverables based on their relative selling prices. The Company uses a hierarchy to determine the selling price to be
used for allocating revenue to deliverables: (i) vendor-specific objective evidence (“VSOE”) of fair value, (ii) third-party evidence (“TPE”), and (iii) best estimate
of the selling price (“BESP”). The Company’s process for determining its BESP considers multiple factors including consumer behaviors and the Company’s
internal pricing model and may vary depending upon the facts and circumstances related to each deliverable. BESP for the health and fitness devices and
unspecified upgrade rights reflect the Company’s best estimate of the selling prices if they were sold regularly on a stand-alone basis and comprise the majority of
the arrangement consideration. BESP for upgrade rights currently ranges from $1 to $3 . TPE for the online dashboard and mobile apps is currently estimated at
$0.99 . VSOE for access to FitStar subscription-based services is based on the price charged when sold separately.
Amounts allocated to the delivered health and fitness devices are recognized at the time of delivery, provided the other conditions for revenue recognition
have been met. Amounts allocated to the online dashboard and mobile apps and unspecified upgrade rights are deferred and recognized on a straight-line basis over
the estimated usage period.
The Company offers its users the ability to purchase subscription-based services, through which the users receive incremental features, including access to a
digital personal trainer, in-depth analytics regarding the user’s personal metrics, or video-based customized workouts. Amounts paid for subscriptions are deferred
and recognized ratably over the service period which is typically one year. Revenue from subscription-based services was less than 1% of revenue for all periods
presented.
In addition, the Company offers access to software and services to certain customers in the corporate wellness program, which includes distribution
capabilities, a real-time dashboard, and support services. The Company is currently unable to establish VSOE or TPE for the corporate wellness software and
services. BESP for the corporate wellness software and services is determined based on the Company’s internal pricing model for anticipated renewals for existing
customers and pricing for new customers. Revenue allocated to the corporate wellness software and services is deferred and recognized on a straight-line basis over
the estimated access period of one year, which is the typical service period. Revenue for corporate wellness software and services was less than 1% of revenue for
all periods presented.
The Company accounts for shipping and handling fees billed to customers as revenue. Sales taxes and value added taxes (“VAT”) collected from customers
are remitted to governmental authorities are not included in revenue, and are reflected as a liability on the consolidated balance sheets.
Rights of Return, Stock Rotation Rights, and Price Protection
The Company offers limited rights of return, stock rotation rights, and price protection under various policies and programs with its retailer and distributor
customers and end-users. The Company estimates reserves for these policies and programs based on historical experience, and records the reserves as a reduction
of revenue and accounts receivable. Through December 31, 2016 , actual returns have primarily been open-box returns. When necessary, the Company also
provides a specific reserve for products in the distribution channel in excess of estimated requirements. This estimate can be affected by the amount of a particular
product in the channel, the rate of sell-through, product plans, and other factors. The Company also considers whether there are circumstances which may result in
anticipated returns higher than the historical return rate from direct customers and records an additional specific reserve as necessary.
Sales Incentives
The Company offers sales incentives through various programs, consisting primarily of cooperative advertising and marketing development fund programs.
The Company records advertising and marketing development fund programs with customers as a reduction to revenue unless it receives an identifiable benefit in
exchange for credits claimed by the customer and can reasonably estimate the fair value of the identifiable benefit received, in which case the Company records it
as a marketing expense. The Company recognizes a liability and reduces revenue for rebates or other incentives based on the estimated amount of rebates or credits
that will be claimed by customers.
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Cost of Revenue
Cost of revenue consists of product costs, including costs of contract manufacturers for production, shipping and handling costs, packaging, warranty
replacement costs, fulfillment costs, manufacturing and tooling equipment depreciation, warehousing costs, excess and obsolete inventory write-downs, costs
related to the Fitbit Force product recall, and certain allocated costs related to management, facilities, and personnel-related expenses and other expenses associated
with supply chain logistics.
Advertising Costs and Point of Purchase (“POP”) Displays
Costs related to advertising and promotions, excluding cooperative advertising costs, are expensed to sales and marketing as incurred. Advertising and
promotion expenses, including expenses for POP displays, for 2016 , 2015 , and 2014 were $316.8 million , $237.0 million , and $71.9 million , respectively. Co-
op advertising costs are recorded as a reduction to revenue, and for 2016 , 2015 , and 2014 were $52.9 million , $38.3 million , and $12.7 million , respectively.
The Company provides retailers with POP displays, generally free of charge, in order to facilitate the marketing of the Company’s products within retail
stores. Any amounts capitalized related to the costs of the POP displays are recorded as prepaid expenses and other current assets on the consolidated balance
sheets and recognized as expense over the expected period of the benefit provided by these assets, which is generally 12 months. The related expenses are included
in sales and marketing expenses on the consolidated statements of operations.
Product Warranty
The Company offers a standard product warranty that the product will operate under normal use for a period of one year from date of original purchase
except in the European Union where the Company provides a two -year warranty. The Company has the obligation, at its option, to either repair or replace the
defective product.
At the time revenue is recognized, an estimate of future warranty costs is recorded as a component of cost of revenues. Factors that affect the warranty
obligation include product failure rates, service delivery costs incurred in correcting the product failures, and warranty policies. The warranty obligation does not
consider historical experience of the Fitbit Force product as a separate reserve has been established for the Fitbit Force recall. The Company’s products are
manufactured by third-party contract manufacturers, and in certain cases, the Company may have recourse to such third-party contract manufacturers.
Fitbit Force Product Recall
The Company established reserves for the Fitbit Force recall when circumstances giving rise to the recall became known. It considered various factors in
estimating the product recall exposure. These include estimates for:
• refunds and product returns from retailer and distributor customers and end-users, which were charged to revenue and cost of revenue on the
consolidated statements of operations;
• logistics and handling fees for managing product returns and processing refunds, obsolescence of on-hand inventory, cancellation charges for existing
purchase commitments and rework of component inventory by the Company’s contract manufacturers, accelerated depreciation of tooling and
manufacturing equipment, which were charged to cost of revenue on the consolidated statements of operations; and
• legal fees and settlement costs, which were charged to general and administrative expenses on the consolidated statements of operations.
These factors above are updated and reevaluated each period and the related reserves are adjusted when factors indicate that the recall reserves are either
insufficient to cover or exceed the estimated product recall expenses.
Stock-Based Compensation
Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense, net of estimated forfeitures, over
the requisite service period, which is generally the vesting period of the respective award. Determining the fair value of stock-based awards at the grant date
requires judgment. The fair value of restricted stock units, or RSUs, is the fair value of the Company’s common stock on the grant date. The Company uses the
Black-Scholes option-pricing model to determine the fair value of stock options and shares issued under our 2015 Employee Stock Purchase Plan, or 2015 ESPP.
The Company recognizes tax benefits related to stock-based compensation to the extent that the total reduction to its income tax liability from stock-based
compensation is greater than the amount of the deferred tax assets previously recorded in anticipation
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of these benefits. The Company recognizes a benefit from stock-based compensation in equity to the extent that an incremental tax benefit is realized by following
the ordering provisions of the tax laws.
Segment Information
The Company operates as one operating segment as it only reports financial information on an aggregate and consolidated basis to its Chief Executive
Officer, who is the Company’s chief operating decision maker.
Income Taxes
The Company utilizes the asset and liability method of accounting for income taxes, which requires the recognition of deferred tax assets and liabilities for
expected future consequences of temporary differences between the financial reporting and income tax bases of assets and liabilities using enacted tax rates. The
Company makes estimates, assumptions, and judgments to determine its expense for income taxes and also for deferred tax assets and liabilities and any valuation
allowances recorded against its deferred tax assets. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income
and, to the extent it believes that recovery is not likely, the Company establishes a valuation allowance.
The calculation of the Company’s income tax expense involves the use of estimates, assumptions, and judgments while taking into account current tax laws,
its interpretation of current tax laws, and possible outcomes of future tax audits. The Company has established reserves to address potential exposures related to tax
positions that could be challenged by tax authorities. Although the Company believes its estimates, assumptions, and judgments to be reasonable, any changes in
tax law or its interpretation of tax laws and the resolutions of potential tax audits could significantly impact the amounts provided for income taxes in its
consolidated financial statements.
The calculation of the Company’s deferred tax asset balance involves the use of estimates, assumptions, and judgments while taking into account estimates
of the amounts and type of future taxable income. Actual future operating results and the underlying amount and type of income could differ materially from the
Company’s estimates, assumptions, and judgments, thereby impacting its financial position and operating results.
The Company includes interest and penalties related to unrecognized tax benefits within income tax expense. Interest and penalties related to unrecognized
tax benefits have been recognized in the appropriate periods presented.
Net Income (Loss) per Share Attributable to Common Stockholders
Basic and diluted net income per share attributable to common stockholders is presented in conformity with the two-class method required for participating
securities. The Company considers its redeemable convertible preferred stock to be participating securities. The holders of the redeemable convertible preferred
stock did not have a contractual obligation to share in losses. In accordance with the two-class method, earnings allocated to these participating securities and the
related number of outstanding shares of the participating securities, which include contractual participation rights in undistributed earnings, have been excluded
from the computation of basic and diluted net income per share attributable to common stockholders. For the calculation of diluted EPS, net income attributable to
common stockholders for basic EPS is adjusted by the effect of dilutive securities. Diluted net income per share attributable to common stockholders is computed
by dividing the net income attributable to common stockholders by the weighted-average number of common shares outstanding, including all potentially dilutive
common shares, if the effect of such shares is dilutive.
In connection with the IPO in 2015, the Company established two classes of authorized common stock: Class A common stock and Class B common stock.
As a result, all then-outstanding shares of common stock were converted into shares of Class B common stock. The rights of the holders of Class A common stock
and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and
each share of Class B common stock is entitled to ten votes per share. Each share of Class B common stock is convertible at any time at the option of the
stockholder into one share of Class A common stock, generally automatically converts into Class A common stock upon a transfer, and has no expiration date. The
Company applies the two-class method of calculating earnings per share, but as the dividend rights of both classes are identical, basic and diluted earnings per
share are the same for both classes.
In 2016, basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the
weighted-average number of shares of common stock outstanding during the period without consideration of common stock equivalents or the participation rights
of the preferred stock as they do not share in losses. As the Company was in a net loss position in 2016, basic net loss per share attributable to common
stockholders is the same as diluted net loss per share attributable to common stockholders as the inclusion of all potential shares of common stock outstanding
would have been anti-dilutive.
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Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU 2014-09 (ASC 606), Revenue from Contracts with Customers , which affects
any entity that either enters into contracts with customers to transfer goods and services or enters into contracts for the transfer of nonfinancial assets. ASU 2014-
09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The standard’s core principle is that a company will
recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be
entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under the currently
effective guidance. This may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the
transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 will become effective for the Company on January 1,
2018 and can be adopted either retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoption. In April
2016, the FASB issued ASU 2016-10, which clarifies guidance on identifying performance obligations and licensing implementation. The Company currently
expects to adopt the revenue standards as of January 1, 2018, utilizing the modified retrospective transition method. Although the new standard may, in certain
circumstances, impact the timing of when revenue is recognized for product shipped, and the timing and classification of certain sales incentives, the Company
believes the new guidance is consistent with its current revenue policy. Therefore, the Company does not currently expect adoption to have a material impact on
the consolidated financial statements. The Company is continuing to evaluate the impact of the adoption and preliminary assessments are subject to change.
In February 2016, the FASB issued ASU 2016-02, Leases . This ASU requires lease assets and lease liabilities arising from leases, including operating
leases, to be recognized on the balance sheet. ASU 2016-02 will become effective for the Company on January 1, 2019, and requires adoption using a modified
retrospective approach. The Company is currently evaluating the impact of this guidance on its consolidated financial statements. The Company anticipates that the
adoption will have a material impact on its consolidated balance sheets; however, the Company does not expect the adoption to have a material impact on its
statements of operations.
In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718). This ASU simplifies several aspects of the accounting
for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the
statement of cash flows. The Company adopted ASU 2016-09 as of January 1, 2017. Any deferred tax asset recognized on adoption of ASU 2016-09 related to
excess stock-based compensation, net of any applicable valuation allowance, was recorded to retained earnings as of the date of adoption. The Company does not
currently expect the adoption to have a material impact on the consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
This ASU 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 accounts receivable and available for sale debt securities. ASU 2016-13 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 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) . This ASU provides guidance intended to reduce diversity in practice
in how certain transactions are classified in the statement of cash flows. ASU 2016-15 will become effective for the Company on January 1, 2018 and early
adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
3. Fair Value Measurements
Fair Value Measurement of Financial Assets and Liabilities
The carrying values of the Company’s accounts receivable and accounts payable, approximated their fair values due to the short period of time to maturity or
repayment.
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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):
December 31, 2016
Level 1
Level 2
Level 3
Total
Assets:
Money market funds $ 50,125
$ —
$ —
$ 50,125
U.S. government agencies —
86,526
—
86,526
Corporate debt securities —
390,286
—
390,286
Derivative assets —
10,625
—
10,625
Total
$ 50,125
$ 487,437
$ —
$ 537,562
Liabilities:
Derivative liabilities $ —
$ 3,780
$ —
$ 3,780
December 31, 2015
Level 1
Level 2
Level 3
Total
Assets:
Money market funds $ 248,128
$ —
$ —
$ 248,128
U.S. government agencies —
113,314
—
113,314
Corporate debt securities —
193,964
—
193,964
Derivative assets —
6,002
—
6,002
Total
$ 248,128
$ 313,280
$ —
$ 561,408
Liabilities:
Derivative liabilities $ —
$ 2,640
$ —
$ 2,640
The fair value of the Company’s Level 1 financial instruments is based on quoted market prices in active markets for identical instruments. The fair value of
the Company’s Level 2 financial instruments is based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted
prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data.
In addition, Level 2 assets and liabilities include derivative financial instruments associated with hedging activity, which are further discussed in Note 3.
Derivative financial instruments are initially measured at fair value on the contract date and are subsequently remeasured to fair value at each reporting date using
inputs such as spot rates, forward rates, and discount rates. There is not an active market for each hedge contract, but the inputs used to calculate the value of the
instruments are tied to active markets.
The unexercised warrants to purchase redeemable convertible preferred stock were converted into warrants to purchase shares of Class B common stock
upon the closing of the IPO in 2015. As a result, the Company revalued and reclassified the redeemable convertible preferred stock liability to additional paid-in
capital upon the closing of the IPO. The fair value of the warrant liability was calculated using an option-pricing model. The following table sets forth a summary
of the changes in the fair value of the redeemable convertible preferred stock warrant liability (in thousands):
Balance at December 31, 2014 $ 15,797
Change in fair value 56,655
Settlement of warrant liability upon exercise (56,678)
Reclassification of unexercised warrants to additional paid in capital upon the IPO (15,774)
Balance at December 31, 2015
$ —
The Company’s acquisition-related contingent consideration was determined using the Monte Carlo simulation method. The increases or decreases in the fair
value of the contingent consideration payable could result from changes in the anticipated fair value of the Company’s common stock, stock price volatility, and
probability of various market-based scenarios. As the fair value
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measure is based on significant inputs that are not observable in the market, they are categorized as Level 3. For additional information on the contingent
consideration, see Note 12.
The following table sets forth a summary of the changes in the fair value of the acquisition-related contingent consideration (in thousands):
Balance at December 31, 2014 $ —
Addition from acquisition 7,704
Change in fair value of contingent consideration (7,704)
Balance at December 31, 2015
$ —
There was no activity relating to Level 3 financial assets or liabilities during 2016, and there were no Level 3 financial assets or liabilities as of December 31,
2016. There have been no transfers between fair value measurement levels during 2016 , 2015 , and 2014 .
4. Financial Instruments
Cash, Cash Equivalents, and Marketable Securities
The following table sets forth the cash, cash equivalents, and marketable securities as of December 31, 2016 (in thousands):
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Cash and
Cash
Equivalents
Marketable
Securities
Cash
$ 179,076
$ —
$ —
$ 179,076
$ 179,076
$ —
Money market funds 50,125
—
—
50,125
50,125
—
U.S. government agencies 86,533
8
(15)
86,526
—
86,526
Corporate debt securities 390,466
24
(204)
390,286
72,119
318,167
Total
$ 706,200
$ 32
$ (219)
$ 706,013
$ 301,320
$ 404,693
The following table sets forth the cash, cash equivalents, and marketable securities as of December 31, 2015 (in thousands):
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Cash and
Cash
Equivalents
Marketable
Securities
Cash
$ 109,072
$ —
$ —
$ 109,072
$ 109,072
$ —
Money market funds 248,128
—
—
248,128
248,128
—
U.S. government agencies 113,315
3
(4)
113,314
63,464
49,850
Corporate debt securities 194,018
1
(55)
193,964
115,182
78,782
Total
$ 664,533
$ 4
$ (59)
$ 664,478
$ 535,846
$ 128,632
The gross unrealized gains or losses on marketable securities as of December 31, 2016 and December 31, 2015 were not material. There were no
available-for-sale investments as of December 31, 2016 and December 31, 2015 that have been in a continuous unrealized loss position for greater than twelve
months.
The following table classifies marketable securities by contractual maturities (in thousands):
December 31, 2016
December 31, 2015
Due in one year
$ 355,152
$ 128,632
Due in one to two years 49,541
—
Total
$ 404,693
$ 128,632
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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
Beginning in the third quarter of 2015, the Company has entered 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. All elements of the hedged transaction are included in the effectiveness assessment. The Company records the
gains or losses, net of tax, related to the effective portion of 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 and operating expenses when the underlying hedged transactions are recognized.
The Company records the gains or losses related to the ineffective portion of the cash flow hedges, if any, immediately in other income (expense), net. 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 outstanding contracts with a total notional amount of $20.0 million and $20.9 million in cash flow hedges for forecasted revenue and
expense transactions, respectively, as of December 31, 2016 , and $254.1 million in cash flow hedges for forecasted revenue transactions as of December 31, 2015
.
Balance Sheet Hedges
The Company enters into foreign exchange contracts to hedge 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 expense, net and offset the foreign currency gain or loss on the
underlying net monetary assets or liabilities.
The net notional amount of foreign currency contracts open in U.S. dollar equivalents was $177.0 million and $104.8 million as of December 31, 2016 and
December 31, 2015 , 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 consolidated balance
sheets. The following table presents the fair value of the Company’s foreign currency derivative contracts as of the dates presented (in thousands):
December 31, 2016
December 31, 2015
Balance Sheet Location
Fair
Value
Derivative
Assets
Fair
Value
Derivative
Liabilities
Fair
Value
Derivative
Assets
Fair
Value
Derivative
Liabilities
Cash flow designated hedges
Prepaid expense and other current
assets
$ 813
$ —
$ 3,116
$ —
Cash flow designated hedges Accrued liabilities
—
1,428
—
1,327
Hedges not designated Prepaid expense and other current
assets
9,812
—
2,886
—
Hedges not designated Accrued liabilities
—
2,352
—
1,313
Total fair value of derivative instruments
$ 10,625
$ 3,780
$ 6,002
$ 2,640
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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
consolidated statement of operations for the periods presented (in thousands):
Year Ended
December 31,
Income Statement Location
2016
2015
2014
Foreign exchange cash flow hedges:
Gain (loss) recognized in OCI—effective portion
$ 8,171
$ 2,785
$ —
Gain (loss) reclassified from OCI into income—effective portion Revenue
10,153
2,183
—
Gain (loss) reclassified from OCI into income—effective portion Operating expenses
17
(899)
—
Gain (loss) recognized in income—ineffective portion Other expense, net
(1,026)
202
—
Foreign exchange balance sheet hedges:
Gain (loss) recognized in income Other expense, net
$ 10,916
$ 5,861
$ 211
As of December 31, 2016 , all net derivative gains related to the Company’s cash flow hedges will be reclassified from OCI into net income within the next
12 months.
Offsetting of Foreign Currency Derivative Contracts
The Company presents its derivative assets and derivative liabilities at gross fair values in the consolidated balance sheets. The Company generally enters
into master netting arrangements, which mitigate credit risk by permitting net settlement of transactions with the same counterparty. The Company is not required
to pledge, and is not entitled to receive, cash collateral related to these derivative instruments.
The following table sets forth the available offsetting of net derivative assets under the master netting arrangements as of December 31, 2016 and
December 31, 2015 (in thousands):
December 31, 2016
Gross Amounts
of Recognized
Assets
Gross Amounts
Offset in the
Condensed
Consolidated
Balance Sheets
Net Amounts
Presented in
Condensed
Consolidated
Balance Sheets
Gross Amounts Not
Offset in Condensed
Consolidated Balance
Sheets
Financial
Instruments
Cash
Collateral
Received
Net
Amount
Foreign exchange contracts
$ 10,625
$ —
$ 10,625
$ 3,780
$ —
$ 6,845
December 31, 2015
Gross Amounts
of Recognized
Assets
Gross Amounts
Offset in the
Condensed
Consolidated
Balance Sheets
Net Amounts
Presented in
Condensed
Consolidated
Balance Sheets
Gross Amounts Not
Offset in Condensed
Consolidated Balance
Sheets
Financial
Instruments
Cash
Collateral
Received
Net
Amount
Foreign exchange contracts
$ 6,002
$ —
$ 6,002
$ 2,100
$ —
$ 3,902
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The following table sets forth the available offsetting of net derivative liabilities under the master netting arrangements as of December 31, 2016 and
December 31, 2015 (in thousands):
December 31, 2016
Gross Amounts
of Recognized
Liabilities
Gross Amounts
Offset in the
Condensed
Consolidated
Balance Sheets
Net Amounts
Presented in
Condensed
Consolidated
Balance Sheets
Gross Amounts Not
Offset in Condensed
Consolidated Balance
Sheets
Financial
Instruments
Cash
Collateral
Pledged
Net
Amount
Foreign exchange contracts
$ 3,780
$ —
$ 3,780
$ 3,780
$ —
$ —
December 31, 2015
Gross Amounts
of Recognized
Liabilities
Gross Amounts
Offset in the
Condensed
Consolidated
Balance Sheets
Net Amounts
Presented in
Condensed
Consolidated
Balance Sheets
Gross Amounts Not
Offset in Condensed
Consolidated Balance
Sheets
Financial
Instruments
Cash
Collateral
Pledged
Net
Amount
Foreign exchange contracts
$ 2,640
$ —
$ 2,640
$ 2,100
$ —
$ 540
5. Balance Sheet Components
Accounts Receivable Reserves
Changes in accounts receivable reserves were as follows (in thousands):
Allowance for
Doubtful
Accounts
Revenue
Reserve
Balance at December 31, 2013
$ 743
$ 15,416
Increases 864
42,740
Write-offs/returns taken (769)
(31,597)
Balance at December 31, 2014
838
26,559
Increases 1,115
169,677
Write-offs/returns taken (128)
(122,191)
Balance at December 31, 2015
1,825
74,045
Increases 339
275,815
Write-offs/returns taken (1,882)
(251,009)
Balance at December 31, 2016
$ 282
$ 98,851
Increases in the revenue returns reserve include provisions for open box returns and stock rotations.
Inventories
Inventories consisted of the following (in thousands):
December 31,
2016
2015
Components
$ 1,035
$ 5,359
Finished goods 229,352
172,787
Total inventories
$ 230,387
$ 178,146
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Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
December 31,
2016
2015
POP displays, net
$ 22,804
$ 9,990
Derivative assets 10,625
6,002
Prepaid marketing 5,764
150
Other 27,153
27,388
Total prepaid expenses and other current assets
$ 66,346
$ 43,530
Property and Equipment, Net
Property and equipment, net, consisted of the following (in thousands):
December 31,
2016
2015
Tooling and manufacturing equipment
$ 60,944
$ 53,092
Furniture and office equipment 14,424
6,809
Purchased and internally-developed software 12,032
3,794
Leasehold improvements 28,489
8,388
Total property and equipment
115,889
72,083
Less: Accumulated depreciation and amortization (39,336)
(27,582)
Property and equipment, net
$ 76,553
$ 44,501
Goodwill and Intangible Assets
The changes in the carrying amount of goodwill were as follows (in thousands). See Note 12 for additional information.
Goodwill
Balance at December 31, 2014
$ —
Goodwill acquired 22,562
Subsequent goodwill adjustments (405)
Balance at December 31, 2015
22,157
Goodwill acquired 28,879
Balance at December 31, 2016
$ 51,036
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The carrying amounts of the intangible assets as of December 31, 2016 and December 31, 2015 were as follows (in thousands, except useful life). See Note
12 for additional information. In-process research and development is not amortized until the completion or abandonment of the related development.
December 31, 2016
December 31, 2015
Weighted
Average
Remaining
Useful Life
(years) Gross
Accumulated
Amortization
Net
Gross
Accumulated
Amortization
Net
Developed technology $ 26,092
$ (3,247)
$ 22,845
$ 12,640
$ (1,442)
$ 11,198
4.8
Trademarks and other 1,278
(542)
736
1,278
(260)
1,018
3.5
Total finite-lived intangible assets
subject to amortization, net 27,370
(3,789)
23,581
13,918
(1,702)
12,216
In-process research and development 3,940
—
3,940
—
—
—
Total intangible assets, net
$ 31,310
$ (3,789)
$ 27,521
$ 13,918
$ (1,702)
$ 12,216
Total amortization expense related to intangible assets was $2.1 million and $1.7 million for 2016 and 2015 , respectively. There were no recognized
intangible assets outstanding as of December 31, 2014.
The estimated future amortization expense of acquired finite-lived intangible assets to be charged to cost of revenue and operating expenses after 2016 , is as
follows (in thousands):
Cost of
Revenue
Operating
Expenses
Total
2017 $ 5,436
$ 230
$ 5,666
2018 5,276
230
5,506
2019 4,496
230
4,726
2020 3,716
46
3,762
2021 3,557
—
3,557
Thereafter 364
—
364
Total intangible assets, net
$ 22,845
$ 736
$ 23,581
Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
December 31,
2016
2015
Product warranty
$ 99,923
$ 40,212
Accrued manufacturing expense and freight 75,579
10,723
Accrued sales incentives 74,181
24,324
Accrued sales and marketing 41,948
33,389
Accrued co-op advertising and marketing development funds 40,002
29,077
Employee related liabilities 13,934
27,394
Sales taxes and VAT payable 8,891
8,349
Inventory received but not billed 7,363
4,292
Accrued legal fees 3,963
3,138
Derivative liabilities 3,780
2,640
Customer deposits 1,923
2,062
Other 19,074
14,499
Accrued liabilities
$ 390,561
$ 200,099
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Product warranty reserve activities were as follows (in thousands):
Reserve For
Product
Warranty
(1)
Balance at December 31, 2013
$ 8,480
Charged to cost of revenue 19,462
Settlement of claims (7,844)
Balance at December 31, 2014
20,098
Charged to cost of revenue 55,642
Changes in estimate related to pre-existing warranties (8,968)
Settlement of claims (26,560)
Balance at December 31, 2015
$ 40,212
Charged to cost of revenue 134,771
Changes in estimate related to pre-existing warranties 4,073
Settlement of claims (79,133)
Balance at December 31, 2016
$ 99,923
(1) Does not include reserves established as a result of the recall of the Fitbit Force. See the section titled “—Fitbit Force Recall Reserve” for additional information regarding such reserves.
During 2016, changes related to pre-existing warranties resulted primarily from a reduction in the estimated cost of replacement units. During 2015, changes
in estimate related to pre-existing warranties resulted from a reduction in the estimated number of units to be replaced and in the estimated cost of replacement
units based on additional historical experience.
Fitbit Force Recall Reserve
In March 2014, the Company announced a recall for one of its products, the Fitbit Force (“Fitbit Force Recall”). The product recall, which is regulated by the
U.S. Consumer Product Safety Commission, covered all Fitbit Force units sold since the product was first introduced in October 2013. The product recall program
has no expiration date.
As a result of the product recall, the Company established reserves that include cost estimates for customer refunds, logistics and handling fees for managing
product returns and processing refunds, obsolescence of on-hand inventory, cancellation charges for existing purchase commitments and rework of component
inventory with the contract manufacturer, accelerated depreciation of tooling and manufacturing equipment, and legal settlement costs.
Fitbit Force recall reserve activities were as follows (in thousands):
Reserve For
Fitbit Force
Recall
Balance at December 31, 2013
$ 82,938
Charged to revenue 8,112
Charged to cost of revenue 11,339
Charged to general and administrative 505
Settlement of claims (80,418)
Balance at December 31, 2014
22,476
Charged to cost of revenue (5,755)
Charged to general and administrative (1,174)
Settlement of claims (10,425)
Balance at December 31, 2015
5,122
Settlement of claims (3,869)
Balance at December 31, 2016
$ 1,253
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During 2014, legal fees of $2.9 million were recognized as incurred, in addition to legal settlement costs of $0.5 million related to the Fitbit Force recall,
which were included in general and administrative costs in the consolidated statement of operations. During 2015, a benefit to cost of revenue of $5.8 million was
recognized due to a change in estimate of costs to fulfill Fitbit Force returns. In addition, a benefit to legal expenses of $4.4 million was recognized in general and
administrative costs, of which $1.2 million was previously included in the Fitbit Force recall reserve, due to the settlement of Fitbit Force legal liabilities.
Accumulated Other Comprehensive Income
The components and activity of accumulated other comprehensive income (“AOCI”), net of tax, were as follows (in thousands):
Unrealized Gains on Cash
Flow Hedges
Currency Translation
Adjustments
Unrealized Gains (Losses) on
Available-for-Sale
Investments
Total
Balance at December 31, 2014
$ —
$ 37
$ —
$ 37
Other comprehensive income (loss) before
reclassifications 1,276
(42)
(63)
1,171
Amounts reclassified from AOCI (525)
—
8
(517)
Other comprehensive income (loss)
751
(42)
(55)
654
Balance at December 31, 2015
751
(5)
(55)
691
Other comprehensive income (loss) before
reclassifications 9,422
(309)
(126)
8,987
Amounts reclassified from AOCI (10,650)
—
(6)
(10,656)
Other comprehensive income (loss)
(1,228)
(309)
(132)
(1,669)
Balance at December 31, 2016
$ (477)
$ (314)
$ (187)
$ (978)
Other comprehensive income consisted only of currency translation adjustments of an immaterial amount in 2014.
6. Debt
2015 Credit Agreement
In December 2015, the Company entered into a second amended and restated credit agreement, or Senior Facility, with Silicon Valley Bank, or SVB, as
administrative agent, collateral agent, and lender, SunTrust Bank as syndication agent, SunTrust Robinson Humphrey, Inc. and several other lenders to replace the
existing asset-based credit facility and cash flow facility. This Senior Facility allows the Company to borrow up to $250.0 million , including up to a $50.0 million
for the issuance of letters of credit and up to $25.0 million for swing line loans, subject to certain financial covenants and ratios. Borrowings under the Senior
Facility may be drawn as Alternate Base Rate, or ABR, loans or Eurodollar loans, and matures in December 2020. ABR loans bear interest at a variable rate equal
to the applicable margin plus the highest of (i) the prime rate, (ii) the federal funds effective rate plus 0.5% , and (iii) the Eurodollar rate plus 1.0% , but in any case
at a minimum rate of 3.25% per annum. Eurodollar loans bear interest at a variable rate based on the LIBOR rate and Eurodollar reserve requirements, but in any
case at a minimum rate of 1.0% per annum.
The Company has the option to repay our borrowings under the Senior Facility without penalty prior to maturity. The Senior Facility requires the Company
to comply with certain financial covenants, including maintaining a consolidated fixed charge coverage ratio of at least 1.15:1 , and a consolidated leverage ratio of
less than 3:1 . The Senior Facility also requires the Company to comply with certain non-financial covenants. The Senior Facility contains customary covenants
that restrict the Company’s ability to, among other things, 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 certain other transactions. Pursuant to the terms of the Senior Facility, the
Company excluded certain expenses from the consolidated fixed charge coverage ratio calculation with the approval of its lenders, and as a result, the Company
was in compliance with all covenants as of December 31, 2016 . Obligations under the credit facility are collateralized by substantially all of our assets, excluding
our intellectual property. As of December 31, 2016 , there were no outstanding borrowings under the Senior Facility.
Based on the Company’s forecasts, the Company may fail to meet certain of its financial covenants under the Senior Facility during 2017. The Company
currently does not have any borrowings outstanding under the Senior Facility and has $38.0 million
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in letters of credit issued under the line. The Company believes that should it fail to meet any of the financial covenants under the line of credit, the Company
would be able to negotiate revised terms or fund outstanding letters of credit with available cash balances.
Capitalized issuance costs are amortized to interest expense over the term of the related financing arrangement on a straight-line basis. Interest expense
related to issuance costs for 2016 , 2015 , and 2014 was $0.5 million , $1.0 million , and $0.8 million , respectively. As of December 31, 2016, capitalized issuance
costs were $ 1.3 million .
Letters of Credit
As of December 31, 2016 and 2015 , the Company had outstanding letters of credit of $38.0 million and $17.1 million , respectively, issued to cover the
security deposit on the lease of its office headquarters in San Francisco, California, and other facility leases.
7. Commitments and Contingencies
Leases
The Company’s principal facility is located in San Francisco, California. The Company also leases office space in various locations with expiration dates
between 2017 and 2024. The lease agreements often include leasehold improvement incentives, escalating lease payments, renewal provisions and other provisions
which require the Company to pay taxes, insurance, maintenance costs or defined rent increases. All of Company’s leases are accounted for as operating leases.
Rent expense is recorded over the lease terms on a straight-line basis. Rent expense was $29.9 million , $8.4 million , and $4.1 million for 2016 , 2015 , and
2014 , respectively.
Future minimum payments under the leases as of December 31, 2016 were as follows (in thousands):
Year ending December 31, Amounts
2017
$ 33,867
2018 41,222
2019 44,943
2020 41,176
2021 40,148
Thereafter 99,004
Total
$ 300,360
Purchase Commitments
The aggregate amount of purchase orders open as of December 31, 2016 was approximately $158.4 million . The Company cannot determine the aggregate
amount of such purchase orders that represent contractual obligations because purchase orders may represent authorizations to purchase rather than binding
agreements. The Company’s purchase orders are based on its current needs and are fulfilled by its suppliers, contract manufacturers, and logistics providers within
short periods of time.
Legal Proceedings
Jawbone. On May 27, 2015, Aliphcom, Inc. d/b/a Jawbone (“Jawbone”), filed a lawsuit in the Superior Court of California in the County of San Francisco
against the Company and certain of its employees who were formerly employed by Jawbone, alleging trade secret misappropriation and unfair and unlawful
business practices against all defendants, and alleging breach of contract and breach of implied covenant of good faith and fair dealing against the employee
defendants. The complaint seeks unspecified damages, including punitive damages and injunctive relief. On June 23, 2016, Jawbone filed a Second Amended
Complaint, adding an additional employee defendant and related allegations. No trial date has been set.
On June 10, 2015, Jawbone and BodyMedia, Inc., a wholly-owned subsidiary of Jawbone (“BodyMedia”), filed a lawsuit against the Company in the U.S.
District Court for the Northern District of California alleging that the Company infringes certain U.S. patents. The complaint seeks unspecified compensatory
damages and attorneys’ fees from the Company and to permanently
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enjoin the Company from making, manufacturing, using, selling, importing, or offering the Company’s products for sale. The lawsuit has been stayed pending the
investigation in the U.S. International Trade Commission (the “ITC”).
On July 7, 2015, Jawbone and BodyMedia filed a complaint with the ITC requesting an investigation into purported violations of the Tariff Act of 1930 by
the Company and Flextronics International Ltd. and Flextronics Sales and Marketing (A-P) Ltd. The complaint makes the same patent infringement and trade
secret misappropriation claims as the two earlier cases. The complaint seeks a limited exclusion order and a cease and desist order halting the importation and sale
of the infringing products. The ITC instituted the investigation on August 17, 2015. As a result of motions, all of the patent infringement claims were dismissed
from the case. A trial on the trade secrets allegations took place from May 9, 2016 through May 17, 2016. On August 23, 2016, the ALJ concluded that the
Company did not misappropriate any Jawbone trade secrets. On October 20, 2016, the ITC terminated the investigation in the ITC. On December 19, 2016,
Jawbone filed a notice of appeal with the Federal Circuit.
On September 3, 2015, the Company filed a complaint for patent infringement against Jawbone in the U.S. District Court for the District of Delaware,
asserting that Jawbone’s activity trackers infringe certain U.S. patents. This case has been transferred to the U.S. District Court for the Northern District of
California. On September 8, 2015, the Company filed a complaint for patent infringement against Jawbone in the U.S. District Court for the Northern District of
California, asserting that Jawbone’s activity trackers infringe certain U.S. patents. On October 29, 2015, the Company filed a complaint for patent infringement
against Jawbone in the United States District Court for the District of Delaware, asserting that Jawbone’s activity trackers infringe certain U.S. patents. This case
has been stayed pending the ITC investigation.
On November 2, 2015, the Company filed a complaint with the ITC requesting an investigation into violations of the Tariff Act of 1930 by Jawbone and
Body Media. The complaint asserts that Jawbone’s products infringe certain U.S. patents. The complaint seeks a limited exclusion order and a cease and desist
order halting the importation and sale of infringing products. The ITC instituted the investigation on December 1, 2015. On December 23, 2016, the Company filed
a motion to terminate the investigation based on changed circumstances.
On August 12, 2016, the Company was notified by Jawbone that Jawbone had received a confidential subpoena from the U.S. Attorney’s Office in the
Northern District of California requesting certain Fitbit confidential business information that appeared to be related to Jawbone’s allegations of trade secret
misappropriation. On February 17, 2017, the Company received a subpoena from the same office. Fitbit is cooperating with the U.S. Attorney’s Office.
The Company intends to vigorously defend and prosecute each of the Jawbone litigation matters and, based on its review, the Company believes it has valid
defenses and claims with respect to each of these matters. However, litigation is inherently uncertain, and any judgment or injunctive relief entered against the
Company or any adverse settlement could materially and adversely impact its business, financial condition, operating results, and prospects. Regarding the five
matters still in the early stages of litigation, the Company is unable to estimate a reasonably possible loss or range of loss, if any, that may result from these
matters. In addition, these litigation matters are complex, likely to involve significant management time and attention, and the cost of defending and prosecuting
these matters is likely to be expensive, regardless of outcome.
Sleep Tracking. On May 8, 2015, a purported class action lawsuit was filed against the Company in the U.S. District Court for the Northern District of
California, alleging that the sleep tracking function available in certain trackers does not perform as advertised. Plaintiffs seek class certification, restitution, an
award of unspecified compensatory and punitive damages, an award of reasonable costs and expenses, including attorneys’ fees, and other further relief as the
Court may deem just and proper. Plaintiffs have amended their complaint four times, and on January 15, 2016, the Company moved to dismiss the Fourth
Amended Complaint. On July 15, 2016, the Court denied the motion to dismiss. Trial is currently scheduled for July 10, 2017.
The Company believes that the plaintiffs’ allegations are without merit, and intends to vigorously defend against the claims. Because the Company is in the
early stages of this litigation matter, the Company is unable to estimate a reasonably possible loss or range of loss, if any, that may result from this matter.
Heart Rate Tracking . On January 6, 2016 and February 16, 2016, two purported class action lawsuits were filed against the Company in the U.S. District
Court for the Northern District of California, alleging that the PurePulse heart rate tracking technology does not consistently and accurately record users’ heart
rates. Plaintiffs allege common law claims as well as violations of various states’ false advertising and unfair competition statutes, and seek class certification,
injunctive and declaratory relief, restitution, an award of unspecified compensatory damages, exemplary damages, punitive damages, and statutory penalties and
damages, an award of reasonable costs and expenses, including attorneys’ fees, and other further relief as the Court may deem just and proper. On April 15, 2016,
the plaintiffs filed a Consolidated Master Class Action Complaint and, on May 19, 2016, filed an Amended
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Consolidated Master Class Action Complaint. The Company has filed a motion to compel arbitration, and a hearing has been scheduled for March 16, 2017.
The Company believes that the plaintiffs’ allegations are without merit, and intends to vigorously defend against the claims. Because the Company is in the
early stages of this litigation matter, the Company is unable to estimate a reasonably possible loss or range of loss, if any, that may result from this matter.
Securities Litigation. On January 11, 2016, a putative securities class action was filed in the U.S. District Court for the Northern District of California
naming as defendants the Company, certain of its officers and directors, and underwriters of the Company’s IPO. On May 10, 2016, the Court appointed the Fitbit
Investor Group (consisting of five individual investors) as lead plaintiff, and an Amended Complaint was filed on July 1, 2016. Plaintiffs allege violations of the
Securities Act of 1933, as amended, or the Securities Act, and the Securities Exchange Act of 1934, as amended, or the Exchange Act, based on alleged materially
false and misleading statements about the Company’s products between October 27, 2014 and November 23, 2015. Plaintiffs seek to represent a class of persons
who purchased or otherwise acquired the Company’s securities (i) on the open market between June 18, 2015 and May 19, 2016; and/or (ii) pursuant to or
traceable to the IPO. Plaintiffs seek class certification, an award of unspecified compensatory damages, an award of reasonable costs and expenses, including
attorneys’ fees, and other further relief as the Court may deem just and proper.
On April 28, 2016, a putative class action lawsuit alleging violations of the Securities Act was filed in the Superior Court of California, County of San
Mateo, naming as defendants the Company, certain of its officers, its board members, underwriters of our IPO, and a number of its investors. Plaintiff alleges that
the IPO registration statement contained material misstatements about the Company’s products. Plaintiff seeks to represent a class of persons who purchased the
Company’s common stock in and/or traceable to the IPO. Plaintiff seeks class certification, an award of unspecified compensatory damages, an award of
reasonable costs and expenses, including attorneys’ fees, and other further relief as the Court may deem just and proper. On May 17, 2016, a similar class action
lawsuit was filed in the Superior Court of California, County of San Francisco. The cases have now been consolidated in the County of San Francisco.
On November 11, 2016, a derivative lawsuit was filed in the U.S. District Court for the Northern District of California naming as defendants the Company
and certain of its officers and board members. Plaintiffs allege breach of fiduciary duty based on the same alleged set of facts in the federal and state securities
class action litigation. The court has ordered a stay in the litigation.
The Company believes that the plaintiffs’ allegations in these actions are without merit, and intends to vigorously defend against the claims. Because the
Company is in the early stages of this litigation matter, the Company is unable to estimate a reasonably possible loss or range of loss, if any, that may result from
this matter.
Other. The Company is and, from time to time, may in the future become, involved in other legal proceedings in the ordinary course of business. The
Company currently believes that the outcome of any of these existing legal proceedings, including the aforementioned cases, either individually or in the aggregate,
will not have a material impact on the operating results, financial condition or cash flows of the Company. With respect to existing legal proceedings, the Company
has either determined that the existence of a material loss is not reasonably possible or that it is unable to estimate a reasonably possible loss or range of loss. The
Company may incur substantial legal fees, which are expensed as incurred, in defending against these legal proceedings.
Indemnifications
In the ordinary course of business, the Company enters into agreements that may include indemnification provisions. Pursuant to such agreements, the
Company may indemnify, hold harmless and defend an indemnified party for losses suffered or incurred by the indemnified party. Some of the provisions will
limit losses to those arising from third-party actions. In some cases, the indemnification will continue after the termination of the agreement. The maximum
potential amount of future payments the Company could be required to make under these provisions is not determinable. To date, the Company has not incurred
material costs to defend lawsuits or settle claims related to these indemnification provisions. The Company has also entered into indemnification agreements with
its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as
directors or officers to the fullest extent permitted by Delaware corporate law. The Company also currently has directors’ and officers’ insurance.
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8. Stockholders’ Equity
Initial public offering and follow-on offering
In June 2015, the Company completed its IPO of Class A common stock, in which the Company issued and sold 22.4 million shares and certain of its
stockholders sold 19.7 million shares, for which the Company did not receive any proceeds, including 5.5 million shares pursuant to the underwriters’ option to
purchase additional shares. The shares were sold at an initial public offering price of $20.00 per share for net proceeds of $420.9 million to the Company, after
deducting underwriting discounts and commissions of $26.9 million . Offering costs incurred by the Company were approximately $5.0 million .
In November 2015, the Company completed a follow-on offering of Class A common stock, in which the Company sold 3 million shares and certain of its
stockholders sold 16.6 million shares, for which the Company did not receive any proceeds, including 2.6 million shares pursuant to the underwriters’ option to
purchase additional shares. The shares were sold at a public offering price of $29.00 per share for net proceeds of $84.4 million to the Company, after deducting
underwriting discounts and commissions of $2.6 million . Offering costs incurred by the Company were approximately $1.2 million .
Redeemable convertible preferred stock and redeemable convertible preferred stock warrants
In connection with the Company’s IPO, the then-outstanding 141.3 million shares of redeemable convertible preferred stock were converted into Class B
common stock upon the closing of the IPO. In addition, the then-outstanding 0.4 million redeemable convertible preferred stock warrants automatically converted
to Class B common stock warrants upon the closing of the IPO. These remaining outstanding Class B common stock warrants were exercised subsequent to the
IPO during 2015.
Preferred Stock
Upon completion of its IPO on June 22, 2015, the Company filed a Restated Certificate of Incorporation, which authorized the issuance of preferred stock
with rights and preferences, including voting rights, designated from time to time by the board of directors. As of December 31, 2016 , there were 10 million
shares of preferred stock authorized with a par value of $0.0001 per share, and no shares of preferred stock issued or outstanding.
Common Stock
In connection with the IPO in 2015, the Company established two classes of authorized common stock, Class A common stock and Class B common stock.
All shares of common stock outstanding immediately prior to the IPO were converted into an equivalent amount of shares of Class B common stock. As of
December 31, 2016 , the Company had 600 million shares of Class A common stock authorized with a par value of $0.0001 per share and 350 million shares of
Class B common stock authorized with a par value of $0.0001 per share. As of December 31, 2016 , 177.2 million shares of Class A common stock were issued
and outstanding and 48.5 million shares of Class B common stock were issued and outstanding. As of December 31, 2015 , the Company 99.4 million shares of
Class A common stock were issued and outstanding and 115.4 million shares of Class B common stock were issued and outstanding.
Holders of Class A common stock are entitled to one vote for each share of Class A common stock held on all matters submitted to a vote of stockholders
and holders of Class B common stock are entitled to ten votes for each share of Class B common stock held on all matters submitted to a vote of stockholders.
Except with respect to voting, the rights of the holders of Class A and Class B common stock are identical. Shares of Class B common stock are voluntarily
convertible into shares of Class A common stock at the option of the holder and generally automatically convert into shares of our Class A common stock upon a
transfer.
2007 Equity Incentive Plan
The Amended and Restated 2007 Stock Plan (the “2007 Plan”) provides for the grant of incentive and non-statutory stock options and RSUs to employees,
directors, and consultants under terms and provisions established by the board of directors. Stock options granted under the 2007 Plan are generally subject to a
four -year vesting period, with 25% vesting after a one -year period and monthly vesting thereafter. Stock options expire after ten years. RSUs granted under the
2007 Plan are generally subject to a three - or four -year vesting period with annual vesting.
The 2015 Equity Incentive Plan (the “2015 Plan”) became effective in June 2015. As a result, the Company will not grant any additional stock options under
the 2007 Plan and the 2007 Plan has been terminated. Any outstanding stock options and RSUs granted under the 2007 Plan will remain outstanding, subject to the
terms of the 2007 Plan and applicable award agreements, until
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such shares are issued under those awards, by exercise of stock options or settlement of RSUs, or until the awards terminate or expire by their terms.
2015 Equity Incentive Plan
In May 2015, the Company’s board of directors and stockholders adopted and approved the 2015 Plan. The 2015 Plan became effective in June 2015 and
serves as the successor to the 2007 Plan. The remaining shares available for issuance under the 2007 Plan became reserved for issuance under the 2015 Plan. The
number of shares reserved for issuance under the 2015 Plan will increase automatically on the first day of January of each year starting in 2016 through 2025 by
the number of shares of Class A common stock equal to 5% of the total outstanding shares of common stock as of the immediately preceding December 31. The
share reserve may also increase to the extent that outstanding awards expire or terminate un-exercised. As of December 31, 2016 , 6.7 million shares were available
for grant under the 2015 Plan.
The 2015 Plan authorizes the award of stock options, restricted stock awards, stock appreciation rights, RSUs, performance awards, and stock bonuses to
employees, directors, consultants, independent contractors, and advisors. In general, stock options and RSUs will vest over a four -year period, and have a
maximum term of ten years. The exercise price of a stock option will be not less than 100% of the fair market value of the shares on the date of grant.
2015 Employee Stock Purchase Plan
In May 2015, the Company’s board of directors adopted the 2015 Employee Stock Purchase Plan (“2015 ESPP”), which became effective in June 2015. The
number of shares reserved for issuance under the 2015 Plan will increase automatically on the first day of January of each year starting in 2016 through 2025 by
the number of shares of Class A common stock equal to 1% of the total outstanding shares of common stock as of the immediately preceding December 31. The
2015 ESPP allows eligible employees to purchase shares of the Company’s Class A common stock at a discount through payroll deductions of up to 15% of
eligible compensation, subject to any plan limitations. Except for the initial offering period, the 2015 ESPP provides for 6-month offering periods beginning in
May and November of each year. The initial offering period began June 17, 2015, and ended in May 2016.
On each purchase date, eligible employees will purchase Class A common stock at a price per share equal to 85% of the lesser of the fair market value of the
Company’s Class A common stock (i) on the first trading day of the applicable offering period and (ii) the last trading day of each purchase period in the applicable
offering period.
Stock Options
Activity under the 2007 Plan and 2015 Plan is as follows (in thousands except per share amounts):
Stock Options Outstanding
Number of
Shares Subject
to
Stock Options
Weighted–
Average
Exercise
Price
Weighted–
Average Remaining
Contractual Term
(in years)
Aggregate
Intrinsic
Value
Balance—December 31, 2015
44,362
$ 3.20
Granted 955
$ 14.06
Exercised (8,619)
$ 1.21
$ 121,268
Canceled (2,244)
$ 5.54
Balance—December 31, 2016
34,454
$ 3.85
6.8
$ 145,568
Stock options exercisable—December 31, 2016
20,654
$ 2.51
6.2
$ 107,573
Stock options vested and expected to vest—December 31, 2016
34,223
$ 3.82
6.8
$ 145,097
The aggregate intrinsic values of stock options outstanding, exercisable, vested and expected to vest were calculated as the difference between the exercise
price of the stock options and the fair value of the Class A common stock of $7.32 as of December 31, 2016 .
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Restricted Stock Units
RSU activity under the equity incentive plans is as follows:
RSUs
Outstanding
Weighted-
Average
Grant Date
Fair Value
(in thousands)
Unvested balance—December 31, 2015 3,292
$ 34
Granted 10,356
13.48
Vested (1,117)
31.5
Forfeited or canceled (953)
27.87
Unvested balance—December 31, 2016
11,578
16.85
Stock-Based Compensation Expense
Total stock-based compensation recognized was as follows (in thousands):
Year Ended December 31,
2016
2015
2014
Cost of revenue $ 4,797
$ 4,739
$ 890
Research and development 47,207
18,251
2,350
Sales and marketing 11,575
7,419
1,295
General and administrative 15,853
10,615
2,269
Total stock-based compensation expense
$ 79,432
$ 41,024
$ 6,804
The weighted-average grant date fair value of stock options granted during 2016 , 2015 , and 2014 was $14.06 , $10.67 , and $2.40 per share, respectively.
The total grant date fair value of stock options that vested during 2016 , 2015 , and 2014 was $32.9 million , $18.6 million , and $1.7 million , respectively. As of
December 31, 2016 , the total unrecognized compensation expense related to unvested stock options, net of estimated forfeitures, was $49.8 million , which the
Company expects to recognize over an estimated weighted average period of 2.1 years . As of December 31, 2016 , the total unrecognized compensation expense
related to unvested RSUs, net of estimated forfeitures, was $163.7 million , which the Company expects to recognize over an estimated weighted average period of
3.2 years .
Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense, net of estimated forfeitures, over
the requisite service period, which is generally the vesting period of the respective award. The fair value of RSUs is the fair value of the Company’s Class A
common stock on the grant date. In determining the fair value of the stock options and the equity awards issued under the 2015 ESPP, the Company uses the
Black-Scholes option-pricing model and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment.
Fair Value of Common Stock —The fair value of the shares of common stock underlying stock options had historically been established by the Company’s
board of directors. Following the completion of the IPO, the Company began using the market closing price for the Company’s Class A common stock as reported
on the New York Stock Exchange.
Expected Term —The Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to
the limited period of time stock-based awards have been exercisable. As a result, for stock options, the Company used the simplified method to calculate the
expected term, which is equal to the average of the stock-based award’s weighted average vesting period and its contractual term. The expected term of the 2015
ESPP is based on the contractual term.
Volatility —The Company estimates the expected volatility of the common stock underlying its stock options at the grant date by taking the average
historical volatility of the common stock of a group of comparable publicly traded companies over a period equal to the expected life of the stock options.
Risk-Free Rate —The risk-free interest rate is estimated average interest rate based on U.S. Treasury zero-coupon notes with terms consistent with the
expected term of the awards.
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Dividend Yield —The Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable future.
Consequently, it used an expected dividend yield of zero.
In addition, the Company is required to estimate the amount of stock-based compensation that it expects to be forfeited based on historical experience. The
assumptions used in calculating the fair value of the stock-based awards represent management judgment. As a result, if factors change and different assumptions
are used, the stock-based compensation expense could be materially different in the future. The fair value of the stock option awards and awards issued under the
2015 ESPP granted to employees was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions:
Year Ended December 31,
2016
2015
2014
Employee stock options
Expected term (in years) 6.25
6.25
6.25
Volatility 40.7%
52.1% - 56.9%
54.83% – 60.94%
Risk-free interest rate 1.6%
1.5% - 1.9%
1.73% – 2.04%
Dividend yield —%
—%
—%
Employee stock purchase plan
Expected term (in years) 0.5
0.5 – 0.9
—
Volatility 30.1% - 39.0%
27.7% - 35.0%
—%
Risk-free interest rate 0.4% - 0.6%
0.3%
—%
Dividend yield —%
—%
—%
9. Income Taxes
The following table presents domestic and foreign components of income (loss) before income taxes for the periods presented (in thousands):
Year Ended December 31,
2016
2015
2014
United States
$ 5,577
$ 286,380
$ 150,137
Foreign (114,872)
1,569
(10,364)
Total
$ (109,295)
$ 287,949
$ 139,773
The income tax expense (benefit) is composed of the following (in thousands):
Year Ended December 31,
2016
2015
2014
Current:
Federal $ 78,025
$ 140,396
$ 47,565
State 9,878
13,307
2,319
Foreign 4,313
1,107
113
Total current
92,216
154,810
49,997
Deferred:
Federal (86,827)
(33,421)
(39,339)
State (11,622)
(8,941)
(2,651)
Foreign (285)
(176)
(11)
Total deferred
(98,734)
(42,538)
(42,001)
Total income tax expense (benefit)
$ (6,518)
$ 112,272
$ 7,996
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The reconciliation of the Company’s effective tax rate to the statutory federal rate is as follows:
Year Ended December 31,
2016
2015
2014
Tax at federal statutory rate
35.0 %
35.0 %
35.0 %
State taxes, net of federal effect 4.3
1.5
(0.2)
Foreign rate differential (38.9)
(0.8)
2.7
Tax credits 9.0
(2.0)
(1.1)
Domestic production activities deduction 5.0
(3.3)
(2.6)
Stock-based compensation (4.6)
1.7
—
Change in prior year reserves 1.9
—
—
Out-of-period adjustment (2.8)
—
—
Warrant fair value adjustment —
6.9
3.3
Change in valuation allowance —
—
(32.0)
Other (2.9)
—
0.6
Effective tax rate
6.0 %
39.0 %
5.7 %
For 2016, the Company recorded a benefit for income taxes of $(6.5) million , for an effective tax rate of 6.0% . The effective tax rate is different than the
statutory federal tax rate primarily due to losses incurred in certain foreign jurisdictions for which we will not realize a tax benefit. The decrease in our provision
was also a result of additional federal research and development credits and a reduction in state taxes. For 2015, the Company recorded an expense for income
taxes of $112.3 million , for an effective tax rate of 39% . The effective tax rate is higher than the statutory federal tax rate primarily due to state taxes, net of
federal benefit and certain permanent differences related to the non-deductible change in fair value of the redeemable convertible preferred stock warrant liability
and non-deductible stock-based compensation expense, partially offset by non-taxable income associated with the change in contingent consideration from the
FitStar acquisition and a permanent domestic production activities deduction.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets were as follows (in thousands):
December 31,
2016
2015
Net operating losses and credits
$ 9,446
$ 5,225
Fixed assets and intangible assets 16,272
1,227
Accruals and reserves 111,216
54,891
Fitbit Force recall reserve 469
1,910
Stock-based compensation 17,864
9,642
Inventory 8,513
3,477
Other 10,665
7,089
Gross deferred tax assets
174,445
83,461
Debt issuance costs (353)
(441)
Net deferred tax assets
$ 174,092
$ 83,020
The Company accounts for deferred taxes under ASC Topic 740, “Income Taxes” (“ASC 740”) which involves weighing positive and negative evidence
concerning the realizability of the Company’s deferred tax assets in each jurisdiction. The Company evaluated its ability to realize the benefit of its net deferred tax
assets and weighed all available positive and negative evidence both objective and subjective in nature. In determining the need for a valuation allowance, the
weight given to positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. Consideration was given to
negative evidence such as: the duration and severity of losses in prior years, high seasonal revenue concentrations, increasing competitive pressures, and a
challenging retail environment. Realization of our net deferred tax assets is dependent upon our generation of sufficient taxable income in future years in
appropriate tax jurisdictions to obtain benefit from the reversal of temporary differences, net operating loss carryforwards and tax credit carryforwards. The amount
of net deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income change. As of December 31, 2016 ,
the Company continued
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to believe that it was more-likely-than-not that it would have future taxable income sufficient to realize the benefit of the Company’s net deferred tax assets.
As of December 31, 2016, the Company has federal net operating loss carryforwards of $2.2 million which expire beginning after 2033 and California net
operating loss carryforwards of $2.2 million which expire beginning after 2033. As of December 31, 2016, the Company has federal research tax credit
carryforwards of approximately $0.2 million , which if not utilized, begin to expire after 2030, California research tax credit carryforwards of approximately $16.2
million , which do not expire, Massachusetts research tax credit carryforwards of approximately $0.4 million , which if not utilized, begin to expire after 2031, and
California hiring tax credit carryforwards of approximately $0.1 million , which if not utilized, begin to expire after 2026. As of December 31, 2016, the Company
has United Kingdom net operating loss carryforwards of $16.5 million , which do not expire. These United Kingdom net operating losses are related to excess
stock-based compensation, and accordingly no deferred tax asset is recognized for such amounts prior to the adoption of ASU 2016-09. Any deferred tax asset
recognized on adoption of ASU 2016-09 related to excess stock-based compensation, net of any applicable valuation allowance, will be recorded to retained
earnings as of the date of adoption.
Utilization of the net operating loss and tax credit carry forwards are subject to an annual limitation due to the ownership percentage change limitations
provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of the net operating loss before
utilization. The Company does not expect the limitation to result in a reduction in total amount utilizable.
It is the intention of the Company to indefinitely reinvest the earnings of the Company’s foreign subsidiaries. The Company does not provide for U.S.
income taxes on the earnings of its foreign subsidiaries as such earnings are to be reinvested indefinitely. If these earnings were distributed to the United States in
the form of dividends or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred the Company would be subject to additional U.S.
income taxes, subject to adjustment for foreign tax credits, and foreign withholding taxes. As of December 31, 2016 , there was $0.6 million of cumulative foreign
earnings upon which U.S. income taxes have not been provided. Determining the unrecognized deferred tax liability related to investments in these non-U.S.
subsidiaries that are indefinitely reinvested is not practical.
We are subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. Significant judgment is required in evaluating our tax
positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the
ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes
will be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully
supportable. We adjust these reserves in light of changing facts and circumstances, such as the outcome of tax audits. The provision for income taxes includes the
impact of reserve provisions and changes to reserves that are considered appropriate. As of December 31, 2016 and 2015, the Company has $35.6 million and
$23.5 million of unrecognized tax benefits. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
December 31,
2016
2015
2014
Balance at beginning of year
$ 23,518
$ 10,594
$ 7,991
Reductions based on tax positions related to prior year (2,100)
(18)
(418)
Additions based on tax positions related to prior year 2,809
—
—
Additions based on tax positions related to current year
11,357
12,942
3,021
Balance at end of year
$ 35,584
$ 23,518
$ 10,594
At December 31, 2016 , the total amount of gross unrecognized tax benefits was $35.6 million , all of which would affect the effective tax rate if recognized.
The Company does not have any tax positions as of December 31, 2016 for which it is reasonably possible the total amount of gross unrecognized tax benefits will
increase or decrease within the following 12 months . The Company’s policy is to record interest and penalties related to unrecognized tax benefits as income tax
expense. As of December 31, 2016 and 2015, the Company has accrued $2.2 million and $0.6 million related to interest and penalties.
The Company is subject to taxation in the United States and various states and foreign jurisdictions. The material jurisdictions in which the Company is
subject to potential examination include the United States and Ireland. The Company believes that adequate amounts have been reserved for these jurisdictions.
The Company is under examination by the Internal Revenue Service for the tax years 2013 and 2014 and under state examinations for the tax years 2013 through
2016. For federal, state and non-U.S. tax returns, the Company is generally no longer subject to tax examinations for years prior to 2008.
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10. Net Income (Loss) per Share Attributable to Common Stockholders
The following table sets forth the computation of the Company’s basic and diluted net income (loss) per share attributable to common stockholders (in
thousands, except per share amounts):
Year Ended December 31,
2016
2015
2014
Numerator:
Net income (loss) $ (102,777)
$ 175,677
$ 131,777
Less: noncumulative dividends to preferred stockholders —
(2,526)
(5,326)
Less: undistributed earnings to participating securities —
(59,133)
(98,103)
Net income (loss) attributable to common stockholders—basic
(102,777)
114,018
28,348
Add: adjustments to undistributed earnings to participating securities
—
8,821
10,175
Net income (loss) attributable to common stockholders—diluted $ (102,777)
$ 122,839
$ 38,523
Denominator:
Weighted-average shares of common stock—basic for Class A and Class B 220,405
129,886
40,351
Effect of dilutive securities —
34,327
20,828
Weighted-average shares of common stock—diluted for Class A and Class B
220,405
164,213
61,179
Net income (loss) per share attributable to common stockholders:
Basic $ (0.47)
$ 0.88
$ 0.70
Diluted
$ (0.47)
$ 0.75
$ 0.63
The following potentially dilutive common shares (in thousands) were excluded from the computation of diluted net income (loss) per share for the periods
presented because including them would have been antidilutive:
December 31,
2016
2015
2014
Stock options to purchase common stock 34,454
445
4,420
Restricted stock units 11,578
692
—
Redeemable convertible preferred stock —
65,903
139,851
Redeemable convertible preferred stock warrants —
921
1,955
Total
46,032
67,961
146,226
11. Significant Customer Information and Other Information
Retailer and Distributor Concentration
Retailers and distributors with revenue equal to or greater than 10% of total revenue were as follows:
December 31,
2016
2015
2014
A
14%
15%
13%
C 14
14
11
B 10
14
12
* Revenue was less than 10%.
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Retailers and distributors that accounted for equal to or greater than 10% of accounts receivable at December 31, 2016 and 2015 were as follows:
December 31,
2016
2015
C
19%
23%
A 16
15
D 12
*
B *
19
* Accounts receivable were less than 10%.
Geographic and Other Information
Revenue by geographic region, based on ship-to destinations, was as follows (in thousands):
December 31,
2016
2015
2014
United States $ 1,539,600
$ 1,381,152
$ 562,553
Americas excluding United States 110,111
92,252
38,576
Europe, Middle East, and Africa 389,154
208,767
60,699
APAC 130,596
175,827
83,605
Total
$ 2,169,461
$ 1,857,998
$ 745,433
As of December 31, 2016 and 2015 , long-lived assets, which represent property and equipment, located outside the United States were $30.1 million and
$28.9 million , respectively.
12. Acquisitions
2016 Acquisitions
In December 2016, the Company completed a purchase of certain assets from Pebble Industries, Inc., a privately-held company, which was accounted for as a
business combination, for total cash consideration of $23.4 million , of which $9.6 million was allocated to developed technology intangible assets, $14.4 million
to goodwill, and $0.6 million to assumed liabilities. Approximately $3.5 million of the consideration payable to Pebble Industries, Inc. was held as partial security
for certain indemnification obligations, and will be held back for payment until March 2018. The acquisition is expected to enhance the features and functionality
of the Company’s devices. The amortization period of the acquired developed technology is approximately 5 years . Goodwill is deductible for tax purposes.
In December 2016, the Company completed a purchase of certain assets from Vector Watch S.R.L., a privately-held company, which was accounted for as a
business combination, for total cash consideration of $15.0 million , of which $3.9 million was allocated to developed technology intangible assets, $11.4 million
to goodwill, and $0.3 million to assumed liabilities. Approximately $2.3 million of the consideration payable to Vector Watch S.R.L. was held as partial security
for certain indemnification obligations, and will be held back for payment until December 2018. The acquisition is expected to enhance the features and
functionality of the Company’s devices. The amortization period of the acquired developed technology is approximately 2.5 years . Goodwill is deductible for tax
purposes.
In May 2016, the Company completed a purchase of certain assets from Coin, Inc., a privately-held company, which was accounted for as a business
combination, for total cash consideration of $7.0 million , of which $3.9 million was allocated to in-process research and development intangible assets, and $3.1
million to goodwill. The acquisition is expected to enhance the features and functionality of the Company’s devices. In-process research and development is not
amortized until the completion or abandonment of the related development. Goodwill is deductible for tax purposes.
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FitStar Acquisition — 2015
In March 2015, the Company acquired all of the outstanding securities of FitStar, Inc., a privately-held company, for aggregate acquisition consideration of
$32.5 million , comprised of $13.3 million related to the issuance of 1,059,688 shares of the Company’s common stock, net of a repurchase of 24,949 shares,
$11.5 million of cash, and $7.7 million of contingent consideration. FitStar is a provider of interactive video-based exercise experiences on mobile devices and
computers that utilize proprietary algorithms to adjust and customize workouts for individual users. The acquisition is expected to enhance the Company’s software
and services offerings.
Under the acquisition agreement, the Company was obligated to issue additional common stock or pay cash to FitStar shareholders. The actual amount of
this contingent consideration depended on market-based events that may occur in the future. The Company determined the fair market value of this contingent
consideration to be $7.7 million as of the acquisition date using the Monte Carlo simulation method. The fair value of this liability was adjusted at each reporting
period, and the change in fair value was included in other income (expense), net on the consolidated statement of operations. As a result of the Company’s IPO, the
Company recorded a change in fair value of $7.7 million as a benefit and as of December, 31, 2015 the fair value of the contingent consideration liability was zero
. The terms related to the contingent consideration have expired as of December 31, 2015 and no amounts were paid or shares issued for the contingent
consideration.
The following table summarizes the fair value of assets acquired and liabilities assumed (in thousands):
Goodwill $ 22,157
Developed and core technology 12,640
Customer relationships 128
Trademarks 1,150
Assumed liabilities, net of assets (3,552)
Total
$ 32,523
The amortization periods of the acquired developed technology, customer relationships, and trademarks are 7.0 years , 1.3 years , and 5.0 years ,
respectively. Goodwill is not deductible for tax purposes.
In addition, upon acquisition, the Company issued 308,216 shares of common stock net of a repurchase of 24,948 shares, valued at $4.2 million . The
Company is also obligated to make cash payments up to $1.2 million . Both the common stock and the cash payments are additional consideration which is
contingent upon former employees of FitStar continuing to be employed by the Company. As such, this additional consideration was not part of the purchase price
and is recognized as post-acquisition compensation expense over the related requisite service period.
The Company recorded acquisition-related transaction costs of $1.3 million and $0.3 million , which were included in general and administrative expenses in
the consolidated statement of operations during 2016 and 2015, respectively.
The results of operations for the acquired companies during 2016 and 2015 are included in the accompanying consolidated statements of operations from the
date of acquisition. Pro forma and historical results of operations for the acquired companies have not been presented because they are not material, either
individually or in the aggregate, to the Company’s consolidated financial statements.
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13. Selected Unaudited Quarterly Financial Data
The following tables show a summary of the Company’s unaudited quarterly financial information for each of the four quarters of 2016 and 2015 (in
thousands, except per share amounts):
Three Months Ended
December 31,
2016
October 1,
2016
July 2,
2016
April 2,
2016
Revenue
$ 573,775
$ 503,802
$ 586,528
$ 505,356
Gross profit $ 126,502
$ 240,658
$ 244,969
$ 233,755
Net income (loss) $ (146,273)
$ 26,120
$ 6,341
$ 11,035
Net income (loss) per share attributable to common stockholders—basic $ (0.65)
$ 0.12
$ 0.03
$ 0.05
Net income (loss) per share attributable to common stockholders—
diluted $ (0.65)
$ 0.11
$ 0.03
$ 0.05
Three Months Ended
December 31,
2015
September 30,
2015
June 30,
2015
March 31,
2015
Revenue
$ 711,570
$ 409,262
$ 400,412
$ 336,754
Gross profit $ 348,299
$ 196,013
$ 187,542
$ 169,209
Net income $ 64,165
$ 45,834
$ 17,681
$ 47,997
Net income per share attributable to common stockholders—basic $ 0.30
$ 0.22
$ 0.09
$ 0.26
Net income per share attributable to common stockholders—diluted $ 0.26
$ 0.19
$ 0.07
$ 0.22
14. Subsequent Events
Restructuring
In January 2017, the Company announced a reorganization, including a reduction in workforce. This reorganization impacted 107 employees or
approximately 6% of the Company’s global workforce. The Company anticipates that it will complete the reorganization by the end of the second quarter of 2017,
and estimates it will incur approximately $ 3.7 million in restructuring expenses to be recorded in the first quarter of 2017.
Stock Option Exchange
The Company intends to seek stockholder approval for a program under which certain employees may relinquish out-of-the-money stock options at the time
of the exchange program in return for a fewer number of RSUs. An estimate of the financial impact of the exchange program is impracticable to be made until the
terms of the exchange program are finalized.
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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that
information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to
the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required
disclosure. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure
controls and procedures as of December 31, 2016 . Based on the evaluation of our disclosure controls and procedures as of December 31, 2016 , our Chief
Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance
level.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act). Our management conducted an assessment of the effectiveness of our internal control over financial reporting based on the criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the
assessment, our management has concluded that our internal control over financial reporting was effective as of December 31, 2016 to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. The effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, as stated in their report included in Part II, Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the
Exchange Act that occurred during the three months ended December 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including the CEO and CFO, recognizes that our disclosure controls or our internal control over financial reporting cannot prevent or detect all
possible instances of errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that
the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must
be considered relative to their costs.
Item 9B. Other Information
None.
Table of Contents
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required for this Item is incorporated by reference from our Proxy Statement to be filed in connection with our 2017 Annual Meeting of
Stockholders within 120 days after the end of the fiscal year ended December 31, 2016 .
Item 11. Executive Compensation
The information required for this Item is incorporated by reference from our Proxy Statement to be filed in connection with our 2017 Annual Meeting of
Stockholders within 120 days after the end of the fiscal year ended December 31, 2016 .
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required for this Item is incorporated by reference from our Proxy Statement to be filed in connection with our 2017 Annual Meeting of
Stockholders within 120 days after the end of the fiscal year ended December 31, 2016 .
Item 13. Certain Relationships and Related Transaction, and Director Independence
The information required for this Item is incorporated by reference from our Proxy Statement to be filed in connection with our 2017 Annual Meeting of
Stockholders within 120 days after the end of the fiscal year ended December 31, 2016 .
Item 14. Principal Accounting Fees and Services
The information required for this Item is incorporated by reference from our Proxy Statement to be filed in connection with our 2017 Annual Meeting of
Stockholders within 120 days after the end of the fiscal year ended December 31, 2016 .
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PART IV
ITEM 15. Exhibits, Financial Statement Schedules.
(a) The following documents are filed as part of this Annual Report on Form 10-K:
1. Consolidated Financial Statements
The financial statements filed as part of this Annual Report on Form 10-K are listed in the “Index to Consolidated Financial Statements” under Part
II, Item 8 of this Annual Report on Form 10-K.
2. Financial Statement Schedules
All schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or notes
to consolidated financial statements under Item 8.
3. Exhibits
See Exhibit Index following the signature page of this Annual Report on Form 10-K.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
March 1, 2017 FITBIT, INC.
By: /s/ James Park
James Park
President, Chief Executive Officer, and Chairman
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature appears below constitutes and appoints James Park and William
Zerella, and each of them, his true and lawful attorneys-in-fact and agents with full power of substitution, for him and in his name, place, and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to
be done or by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Name Title Date
/s/ James Park
President, Chief Executive Officer, and Chairman
March 1, 2017
James Park
(Principal Executive Officer)
/s/ William Zerella
Chief Financial Officer
March 1, 2017
William Zerella
(Principal Financial and Accounting Officer)
/s/ Eric N. Friedman
Chief Technology Officer and Director
March 1, 2017
Eric N. Friedman
/s/ Laura J. Alber
Director
March 1, 2017
Laura J. Alber
/s/ Jonathan D. Callaghan
Director
March 1, 2017
Jonathan D. Callaghan
/s/ Glenda Flanagan
Director
March 1, 2017
Glenda Flanagan
/s/ Steven Murray
Director
March 1, 2017
Steven Murray
/s/ Christopher Paisley
Director
March 1, 2017
Christopher Paisley
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Table of Contents
EXHIBIT INDEX
Incorporated by Reference
Exhibit
Number
Exhibit Description
Form
File No.
Exhibit
Filing
Date
Filed
Herewith
3.1
Restated Certificate of Incorporation of Registrant.
10-Q
001-37444
3.1
8/7/2015
3.2
Restated Bylaws of Registrant.
10-Q
001-37444
3.2
8/7/2015
4.1
Form of Registrant’s Class A common stock certificate.
S-1/A
333-203941
4.1
6/2/2015
4.2
Third Amended and Restated Investors’ Rights Agreement by and among
the Registrant and certain stockholders of the Registrant, dated June 6,
2013.
S-1
333-203941
4.2
5/7/2015
10.1*
Form of Indemnification Agreement.
S-1
333-203941
10.1
5/7/2015
10.2*
Amended and Restated 2007 Stock Plan, as amended, and forms of award
agreements.
S-1
333-203941
10.2
5/7/2015
10.3*
2015 Equity Incentive Plan and forms of award agreements.
S-1
333-203941
10.3
5/7/2015
10.4*
Form of Notice of Stock Option Grant and Stock Option Agreement under
the 2015 Equity Incentive Plan.
8-K
001-37444
10.1
2/9/2016
10.5*
2015 Employee Stock Purchase Plan.
S-1
333-203941
10.4
5/7/2015
10.6*
Offer Letter by and between the Registrant and William Zerella, dated
April 24, 2014.
S-1
333-203941
10.5
5/7/2015
10.7*
Offer Letter by and between the Registrant and Edward Scal, dated
October 9, 2010.
10-K
001-37444
10.7
2/29/2016
10.8*
Offer Letter by and between the Registrant and Andy Missan, dated
March 15, 2013.
10-K
001-37444
10.8
2/29/2016
10.9
Office Lease by and between the Registrant and 405 Howard, LLC, dated
September 30, 2013.
S-1
333-203941
10.6
5/7/2015
10.10
Office Lease by and between the Registrant and GLL BIT Fremont Street
Partners, L.P., dated June 26, 2015.
10-Q
001-37444
10.3
8/7/2015
10.11†
Flextronics Manufacturing Services Agreement by and among Fitbit
International Limited, the Registrant, and Flextronics Sales & Marketing
(A-P) Ltd., dated March 19, 2015.
S-1/A
333-203941
10.7
5/21/2015
10.12
Second Amended and Restated Credit Agreement, by and among Fitbit,
Inc., the lenders party thereto and Silicon Valley Bank, as administrative
agent, dated December 10, 2015.
8-K
001-37444
10.1
12/15/2015
Table of Contents
Incorporated by Reference
Exhibit
Number
Exhibit Description
Form
File No.
Exhibit
Filing
Date
Filed
Herewith
10.13
Revolving Credit and Guaranty Agreement by and among Registrant, the
Guarantors party thereto, the Lenders party thereto, Morgan Stanley Bank
N.A., and Morgan Stanley Senior Funding, Inc., dated August 13, 2014.
S-1
333-203941
10.9
5/7/2015
10.14*
Form of Retention Agreement.
S-1/A
333-203941
10.10
5/21/2015
10.15*
Fitbit, Inc. Bonus Plan.
8-K
001-37444
10.1
3/29/2016
10.16*
Global Notice of Stock Option Grant and Global Stock Option Agreement
under the 2015 Equity Incentive Plan.
10-Q
001-37444
10.3
5/6/2016
10.17†
Office Sublease, dated April 11, 2016, by and between the Registrant and
Charles Schwab & Co., Inc..
10-Q
001-37444
10.1
8/4/2016
21.1
List of Subsidiaries of Registrant.
X
23.1
Consent of PricewaterhouseCoopers LLP, independent registered public
accounting firm.
X
24.1
Power of Attorney (included on page II-2).
X
31.1
Rule 13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer.
X
31.2
Rule 13a-14(a)/ 15d-14(a) Certification of Chief Financial Officer.
X
32.1◊
Section 1350 Certification of Chief Executive Officer.
X
32.2◊
Section 1350 Certification of Chief Financial Officer.
X
101.INS
XBRL Instance Document.
X
101.SCH
XBRL Schema Linkbase Document.
X
101.CAL
XBRL Calculation Linkbase Document.
X
101.DEF
XBRL Definition Linkbase Document.
X
101.LAB
XBRL Extension Label Linkbase Document.
X
101.PRE
XBRL Presentation Linkbase Document.
X
* Indicates a management contract or compensatory plan.
† Portions of this exhibit have been granted confidential treatment by the SEC
◊
These certifications are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liability of that
section, nor shall they be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.
EXHIBIT 21.1
LIST OF SUBSIDIARIES
FITBIT, INC.*
Fitbit International Limited (Ireland)
Fitbit Holdings (Ireland)
*Pursuant to Item 601(b)(21)(ii) of Regulation S-K, the names of other subsidiaries of Fitbit, Inc. are omitted because, considered in the aggregate, they would not constitute a significant
subsidiary as of the end of the year covered by this Annual Report on Form 10-K.
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-205045 and No. 333-209787) of Fitbit, Inc. of our report
dated March 1, 2017 relating to the consolidated financial statements and the effectiveness of internal control over financial reporting, which appears in this Form
10-K.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
March 1, 2017
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, James Park, certify that:
1. I have reviewed this annual report on Form 10-K of Fitbit, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting.
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 1, 2017 /s/ James Park
James Park
President, Chief Executive Officer, and Chairman
(Principal Executive Officer)
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, William Zerella, certify that:
1. I have reviewed this annual report on Form 10-K of Fitbit, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting.
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 1, 2017 /s/ William Zerella
William Zerella
Chief Financial Officer
(Principal Financial and Accounting Officer)
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, James Park, President, Chief Executive Officer and Chairman of Fitbit Inc., do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
• the Annual Report on Form 10-K of Fitbit, Inc. for the year ended December 31, 2016 fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
• the information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of
Fitbit, Inc.
Date: March 1, 2017 By: /s/ James Park
James Park
President, Chief Executive Officer, and Chairman
(Principal Executive Officer)
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, William Zerella, Chief Financial Officer of Fitbit Inc., do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that to the best of my knowledge:
• the Annual Report on Form 10-K of Fitbit, Inc. for the year ended December 31, 2016 fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
• the information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of
Fitbit, Inc.
Date: March 1, 2017 By: /s/ William Zerella
William Zerella
Chief Financial Officer
(Principal Financial and Accounting Officer)
