roku-10q_20170930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to               

Commission File Number: 001-38211

 

Roku, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

26-2087865

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

150 Winchester Circle

Los Gatos, California 95032

(Address of principal executive offices including zip code)

Registrant’s telephone number, including area code: (408) 556-9040

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  

Indicate by check mark whether the registrant has submitted electronically 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        No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

   (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

 

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

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

As of November 3, 2017, the registrant had 18,106,218 of Class A common stock, $0.0001 par value per share, and 79,718,676 shares of Class B common stock, $0.0001 par value per share, outstanding.

 

 

 

 


 

Table of Contents

 

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

1

Item 1.

Financial Statements (Unaudited)

 

1

 

Condensed Consolidated Balance Sheets

 

1

 

Condensed Consolidated Statements of Operations

 

2

 

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit

 

3

 

Condensed Consolidated Statements of Cash Flows

 

4

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

32

Item 4.

Controls and Procedures

 

32

PART II.

OTHER INFORMATION

 

33

Item 1.

Legal Proceedings

 

33

Item 1A.

Risk Factors

 

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

56

Item 3.

Defaults Upon Senior Securities

 

56

Item 4.

Mine Safety Disclosures

 

56

Item 5.

Other Information

 

56

Item 6.

Exhibits

 

57

Signatures

 

58

 

 

 

i


 

Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this report, including statements regarding our future results of operations and financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, forward-looking statements may be identified by words such as “anticipate,” “believe,” “continue,” “could,” “design,” “estimate,” “expect,” “intend,” “may,” “plan,” “potentially,” “predict,” “project,” “should,” “will” or the negative of these terms or other similar expressions.

Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, including risks described in the section titled “Risk Factors” and elsewhere in this Form 10-Q, regarding, among other things:

 

our financial performance, including our revenue, cost of revenue, operating expenses and our ability to attain and sustain profitability;

 

our ability to attract and retain users and increase hours streamed;

 

our ability to attract and retain advertisers;

 

our ability to attract and retain additional TV brands and service operators to license our platform;

 

our ability to license popular content on our platform, including the renewals of our existing agreements with content publishers;

 

changes in consumer viewing habits or the growth of TV streaming;

 

the growth of our relevant markets, including the growth in advertising spend on TV streaming platforms, and our ability to successfully grow our business in those markets;

 

our ability to adapt to changing market conditions and technological developments, including with respect to developing integrations with our platform partners;

 

our ability to develop and launch new streaming devices and provide ancillary services and support;

 

our ability to compete effectively with existing competitors and new market entrants;

 

our ability to successfully manage domestic and international expansion;

 

our ability to attract and retain qualified employees and key personnel;

 

security breaches and system failures;

 

our ability to maintain, protect and enhance our intellectual property; and

 

our ability to stay in compliance with laws and regulations that currently apply or may become applicable to our business both in the United States and internationally.

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

Other sections of this report may include additional factors that could harm our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment.  New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in, or implied by, any forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events.  We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur.  Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report or to conform these statements to actual results or to changes in our expectations. You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed as

ii


 

exhibits to this report with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

Investors and others should note that we may announce material business and financial information to our investors using our investor relations website (ir.roku.com/investor-relations), SEC filings, webcasts, press releases, and conference calls. We use these mediums, including our website, to communicate with our members and public about our company, our products, and other issues. It is possible that the information that we make available may be deemed to be material information. We therefore encourage investors and others interested in our company to review the information that we make available on our website.

 

iv


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

 

ROKU, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Assets

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash

 

$

66,918

 

 

$

34,562

 

Accounts receivable, net of allowances

 

 

84,840

 

 

 

79,325

 

Receivable from related parties

 

 

153

 

 

 

148

 

Inventories

 

 

35,450

 

 

 

43,568

 

Prepaid expenses and other current assets

 

 

7,702

 

 

 

4,981

 

Deferred cost of revenue

 

 

2,448

 

 

 

2,636

 

Total current assets

 

 

197,511

 

 

 

165,220

 

Property and equipment, net

 

 

12,807

 

 

 

9,528

 

Deferred cost of revenue, noncurrent portion

 

 

4,975

 

 

 

3,815

 

Intangible assets

 

 

2,215

 

 

 

Goodwill

 

 

1,554

 

 

 

 

Other noncurrent assets

 

 

6,440

 

 

 

515

 

Total Assets

 

$

225,502

 

 

$

179,078

 

Liabilities, Convertible Preferred Stock and Stockholders’ Deficit

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

49,171

 

 

$

31,397

 

Accrued liabilities

 

 

65,498

 

 

 

46,156

 

Current portion of long-term debt

 

 

 

 

15,000

 

Deferred revenue, current portion

 

 

30,822

 

 

 

23,952

 

Total current liabilities

 

 

145,491

 

 

 

116,505

 

Long-term debt, less current portion

 

 

23,043

 

 

 

 

Preferred stock warrant liability

 

 

52,355

 

 

 

9,990

 

Noncurrent deferred revenue

 

 

38,802

 

 

 

29,084

 

Other long-term liabilities

 

 

8,604

 

 

 

4,143

 

Total Liabilities

 

 

268,295

 

 

 

159,722

 

Commitments and Contingencies (Note 7)

 

 

 

 

 

 

 

 

Convertible Preferred Stock:

 

 

 

 

 

 

 

 

Convertible preferred stock

 

 

213,180

 

 

 

213,180

 

Stockholders’ Deficit:

 

 

 

 

 

 

 

 

Common stock

 

 

1

 

 

 

 

Additional paid-in capital

 

 

34,305

 

 

 

26,005

 

Accumulated deficit

 

 

(290,279

)

 

 

(219,829

)

Total stockholders’ deficit

 

 

(255,973

)

 

 

(193,824

)

Total Liabilities, Convertible Preferred Stock and Stockholders’ Deficit

 

$

225,502

 

 

$

179,078

 

 

See accompanying notes to condensed consolidated financial statements.

1


 

ROKU, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

2017

 

 

October 1,

2016

 

 

September 30,

2017

 

 

October 1,

2016

 

Net Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Player

 

$

67,254

 

 

$

64,789

 

 

$

184,583

 

 

$

183,905

 

Platform

 

 

57,528

 

 

 

24,264

 

 

 

139,919

 

 

 

67,404

 

Total net revenue

 

 

124,782

 

 

 

89,053

 

 

 

324,502

 

 

 

251,309

 

Cost of Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Player

 

 

61,925

 

 

 

56,156

 

 

 

165,047

 

 

 

155,531

 

Platform

 

 

12,962

 

 

 

6,847

 

 

 

33,083

 

 

 

19,396

 

Total cost of revenue

 

 

74,887

 

 

 

63,003

 

 

 

198,130

 

 

 

174,927

 

Gross Profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Player

 

 

5,329

 

 

 

8,633

 

 

 

19,536

 

 

 

28,374

 

Platform

 

 

44,566

 

 

 

17,417

 

 

 

106,836

 

 

 

48,008

 

Total gross profit

 

 

49,895

 

 

 

26,050

 

 

 

126,372

 

 

 

76,382

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

28,532

 

 

 

18,229

 

 

 

76,650

 

 

 

56,700

 

Sales and marketing

 

 

16,216

 

 

 

12,844

 

 

 

44,938

 

 

 

39,089

 

General and administrative

 

 

13,039

 

 

 

9,078

 

 

 

33,894

 

 

 

27,333

 

Total operating expenses

 

 

57,787

 

 

 

40,151

 

 

 

155,482

 

 

 

123,122

 

Loss from Operations

 

 

(7,892

)

 

 

(14,101

)

 

 

(29,110

)

 

 

(46,740

)

Other Income (Expense), Net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(815

)

 

 

(32

)

 

 

(1,286

)

 

 

(163

)

Change in fair value of preferred stock warrant liability

 

 

(37,682

)

 

 

1,481

 

 

 

(40,333

)

 

 

1,087

 

Other income (expense), net

 

 

212

 

 

 

(41

)

 

 

423

 

 

 

(66

)

Total other income (expense), net

 

 

(38,285

)

 

 

1,408

 

 

 

(41,196

)

 

 

858

 

Loss before income taxes

 

 

(46,177

)

 

 

(12,693

)

 

 

(70,306

)

 

 

(45,882

)

Income tax expense

 

 

58

 

 

 

50

 

 

 

144

 

 

 

103

 

Net loss attributable to common stockholders

 

$

(46,235

)

 

$

(12,743

)

 

$

(70,450

)

 

$

(45,985

)

Net loss per share attributable to common stockholders—basic

   and diluted

 

$

(8.79

)

 

$

(2.66

)

 

$

(14.09

)

 

$

(9.73

)

Weighted-average shares used in computing net loss per

   share attributable to common stockholders—basic and diluted

 

 

5,259,796

 

 

 

4,784,170

 

 

 

4,998,727

 

 

 

4,724,767

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

2


 

ROKU, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND

STOCKHOLDERS’ DEFICIT

(in thousands, except share data)

(unaudited)

 

 

 

Convertible

Preferred Stock

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Treasury

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Stock

 

 

Deficit

 

 

Deficit

 

Balance—December 31, 2016

 

 

80,844,138

 

 

$

213,180

 

 

 

4,818,812

 

 

$

-

 

 

$

26,005

 

 

$

-

 

 

$

(219,829

)

 

$

(193,824

)

Issuance of common stock upon

   exercise of stock options

 

 

 

 

 

 

 

 

445,995

 

 

 

1

 

 

 

1,442

 

 

 

 

 

 

 

 

 

1,443

 

Share repurchases

 

 

 

 

 

 

 

 

(92,637

)

 

 

 

 

 

 

 

 

(671

)

 

 

 

 

 

(671

)

Vesting of early exercised stock

   options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12

 

 

 

 

 

 

 

 

 

12

 

Issuance of common stock pursuant to acquisition

 

 

 

 

 

 

 

 

108,332

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

Issuance of common stock upon expiration of warrants

 

 

 

 

 

 

 

 

357,283

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,517

 

 

 

 

 

 

 

 

 

7,517

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(70,450

)

 

 

(70,450

)

Balance—September 30, 2017

 

 

80,844,138

 

 

$

213,180

 

 

 

5,637,785

 

 

$

1

 

 

$

34,976

 

 

$

(671

)

 

$

(290,279

)

 

$

(255,973

)

 

See accompanying notes to condensed consolidated financial statements.

3


 

ROKU, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

2017

 

 

October 1,

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(70,450

)

 

$

(45,985

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,883

 

 

 

4,201

 

Impairment of assets

 

 

-

 

 

 

320

 

Stock-based compensation expense

 

 

7,517

 

 

 

6,016

 

Provision for doubtful accounts

 

 

17

 

 

 

278

 

Change in fair value of preferred stock warrant liability

 

 

40,333

 

 

 

(1,087

)

Noncash interest expense

 

 

668

 

 

 

89

 

Loss on disposals of property and equipment

 

 

54

 

 

 

29

 

Loss from exit of facilities

 

 

232

 

 

 

3,804

 

Write-off of deferred initial public offering costs

 

 

-

 

 

 

594

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Due from related parties

 

 

(5

)

 

 

165

 

Accounts receivable

 

 

(5,532

)

 

 

(4,058

)

Inventories

 

 

8,118

 

 

 

(19,738

)

Prepaid expenses and other current assets

 

 

(2,867

)

 

 

385

 

Deferred cost of revenue

 

 

(972

)

 

 

(1,759

)

Other noncurrent assets

 

 

(5,870

)

 

 

445

 

Accounts payable

 

 

17,406

 

 

 

13,137

 

Accrued liabilities

 

 

17,662

 

 

 

20,193

 

Other long-term liabilities

 

 

4,410

 

 

 

959

 

Deferred revenue

 

 

16,588

 

 

 

9,102

 

Net cash provided by (used in) operating activities

 

 

31,192

 

 

 

(12,910

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(6,671

)

 

 

(7,380

)

Purchase of business, net of cash acquired

 

 

(2,959

)

 

 

-

 

Restricted cash

 

 

31

 

 

 

29

 

Net cash used in investing activities

 

 

(9,599

)

 

 

(7,351

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payments of costs related to initial public offering

 

 

-

 

 

 

(594

)

Proceeds from borrowings, net

 

 

24,691

 

 

 

-

 

Repayments of borrowings

 

 

(15,000

)

 

 

(15,000

)

Proceeds from exercise of stock options, net of repurchases

 

 

1,072

 

 

 

366

 

Net cash provided by (used in) financing activities

 

 

10,763

 

 

 

(15,228

)

Net Increase (Decrease) In Cash

 

 

32,356

 

 

 

(35,489

)

Cash—Beginning of period

 

 

34,562

 

 

 

75,748

 

Cash—End of period

 

$

66,918

 

 

$

40,259

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

583

 

 

$

149

 

Cash paid for income taxes

 

$

162

 

 

$

132

 

Supplemental disclosures of noncash investing and financing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment recorded in accounts payable

   and accrued liabilities

 

$

836

 

 

$

671

 

Issuance of convertible preferred stock warrants in connection with debt

 

$

2,032

 

 

$

-

 

Unpaid initial public offering costs

 

$

2,992

 

 

$

-

 

 

See accompanying notes to condensed consolidated financial statements.

4


 

ROKU, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. THE COMPANY

Organization and Description of Business

Roku, Inc. (the “Company” or “Roku”), was formed in October 2002 as Roku LLC under the laws of the State of Delaware. On February 1, 2008, Roku LLC was converted into Roku, Inc., a Delaware corporation. The Company’s TV streaming platform allows users to easily discover and access a wide variety of movies and TV episodes, as well as live sports, music, news and more. The Company operates in two reportable segments and generates revenue through the sale of streaming players, advertising, subscription and transaction revenue sharing, as well as through licensing arrangements with TV brands and cable, satellite, and telecommunication service operators (“service operators”).

Initial Public Offering

On October 2, 2017, the Company completed its initial public offering (IPO) of Class A common stock, in which it sold 10,350,000 shares, including 1,350,000 shares pursuant to the underwriters’ over-allotment option. The shares were sold at an IPO price of $14.00 per share for net proceeds of $134,757,000, after deducting underwriting discounts and commissions of $10,143,000. Additionally, offering costs incurred by the Company are expected to total approximately $4,000,000. Upon the closing of the Company’s IPO, all outstanding shares of its convertible preferred stock automatically converted into 80,844,138 shares of Class B common stock and all outstanding convertible preferred stock warrants automatically converted to Class B common stock warrants on a one-for-one basis. Following the IPO, we have two classes of authorized common stock – Class A common stock and Class B common stock.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Use of Estimates

The condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements contained in our final prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with the SEC on September 28, 2017 (the “Prospectus”). There have been no material changes in the Company’s significant accounting policies from those that were disclosed in the Prospectus, except as noted below.

Use of Estimates

The preparation of the Company’s consolidated financial statements in accordance with U.S. GAAP requires management to make certain estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Significant items subject to such estimates include revenue recognition for multiple element arrangements, determination of revenue reporting as net versus gross, sales return reserves, customer incentive programs, inventory valuation, the valuation of deferred income tax assets, the recognition and disclosure of contingent liabilities, the fair value of assets and liabilities acquired in business combinations and the fair value of the Company’s preferred stock and common stock. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results may differ from the Company’s estimates. To the extent that there are material differences between these estimates and actual results, the Company’s financial condition or operating results will be affected.

Principles of Consolidation

The condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and includes the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

5


 

Comprehensive Loss

Comprehensive loss is equal to the net loss for all periods presented.  Therefore, the consolidated statements of comprehensive loss have been omitted from the condensed consolidated financial statements.

Concentrations

Customers accounting for 10% or more of the Company’s net revenue were as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

2017

 

 

October 1,

2016

 

 

September 30,

2017

 

October 1,

2016

 

Customer A

 

 

10

%

 

 

16

%

 

*

 

 

14

%

Customer B

 

*

 

 

11

 

 

*

 

12

 

Customer C

 

18

 

 

25

 

 

19

 

25

 

Customer D

 

11

 

 

*

 

 

11

 

*

 

 

Customers accounting for 10% or more of the Company’s accounts receivable were as follows:

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Customer A

 

 

11

%

 

 

12

%

Customer B

 

*

 

 

 

11

 

Customer C

 

 

14

 

 

 

17

 

Customer D

 

 

19

 

 

 

17

 

 

*

Less than 10%

Business Combinations

The Company accounts for its acquisitions using the acquisition method. Goodwill is measured at the acquisition date as the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. Significant estimates and assumptions are made by management to value such assets and liabilities. Although the Company believes that those estimates and assumptions are reasonable and appropriate, they are inherently uncertain and subject to refinement. Additional information related to the acquisition date fair value of acquired assets and assumed liabilities obtained during the measurement period, not to exceed one year, may result in changes to the recorded values of such assets and liabilities, resulting in an offsetting adjustment to any goodwill associated with the business acquired. Uncertain tax positions and tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date. The Company will continue to collect information and reevaluate these estimates and assumptions quarterly.

Any contingent consideration payable is recognized at fair value at the acquisition date. Liability-classified contingent consideration is remeasured each reporting period with changes in fair value recognized in earnings until the contingent consideration is settled.

Acquisition related costs incurred in connection with a business combination, other than those associated with the issuance of debt or equity securities, are expensed as incurred.

Goodwill, Purchased Intangible Assets and Impairment Assessment

Goodwill represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed, if any, in a business combination. The Company reviews its goodwill for impairment annually, as of the beginning of the fourth quarter, and whenever events or changes in circumstances indicate that impairment may exist.

Purchased intangible assets consist of identifiable intangible assets, which consisted primarily of developed technology. Purchased intangible assets are recorded at fair value on the date of acquisition and amortized over their estimated useful lives following the pattern in which the economic benefits of the assets will be consumed, generally straight-line. The carrying amounts of our purchased intangible assets are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable or that the useful life is shorter than originally estimated.

 

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Streaming Content

The Company licenses certain content for users to access through The Roku Channel. The content licenses can be for a fixed fee and/or advertising revenue share with specific windows of content availability. The Company capitalizes the content fees and records a corresponding liability at the gross amount of the liability when the license period begins, the cost of the content is known and the content is accepted and available for streaming. At September 30, 2017, $506,000 of content met these requirements and is recorded in “Prepaid expenses and other current assets”. The Company amortizes the content assets in “Cost of Revenue, Platform” over the contractual window of availability.

Recently Issued Accounting Pronouncements Not Yet Adopted

In July 2017, the Financial Accounting Standards Board (“FASB”) issued new guidance to address the complexity of the accounting for certain financial instruments with down round features that result in the strike price being reduced on the basis of the pricing of future equity offerings. Under this guidance, when determining the classification of certain financial instruments as liability or equity, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is evaluating the impact of this new guidance on the consolidated financial statements and the related disclosures.

In January 2017, the FASB issued new guidance which eliminates Step 2 from the goodwill impairment test which measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under this guidance, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount, and should recognize an impairment loss for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the loss not exceeding the total amount of goodwill allocated to that reporting unit. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2019, with early adoption permitted. The guidance should be applied prospectively. The Company is evaluating the impact of this new guidance on the consolidated financial statements and the related disclosures.

In January 2017, the FASB issued new guidance which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities should be accounted for as an acquisition of a business or group of assets. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2017, with early adoption permitted. The guidance should be applied prospectively to any transactions occurring on or after the adoption date. The Company is evaluating the impact of this new guidance on the consolidated financial statements and the related disclosures.

In August 2016, the FASB issued new guidance which addresses classification of certain cash receipts and cash payments related to the statement of cash flows. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2017, with early adoption permitted. The Company is evaluating the impact of this new guidance on the consolidated financial statements and the related disclosures.

In February 2016, the FASB issued new guidance related to new accounting and reporting guidelines for leasing arrangements. The guidance requires organizations that lease assets to recognize assets and liabilities on the balance sheet related to the rights and obligations created by those leases, regardless of whether they are classified as finance or operating leases. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018, with early adoption permitted. The new standard is to be applied using a modified retrospective approach. The Company is evaluating the impact of this new guidance on the consolidated financial statements and the related disclosures.

In January 2016, the FASB issued new guidance related to the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is evaluating the impact of this new guidance on the consolidated financial statements and the related disclosures.

In May 2014, the FASB issued new guidance related to the recognition and reporting of revenue that establishes a comprehensive new revenue recognition model designed to depict the transfer of goods or services to a customer in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In August 2015, the FASB deferred the effective date for annual reporting periods beginning after December 15, 2017. In 2016 the FASB issued amendments on this guidance with the same effective date and transition guidance. The Company plans to adopt the new revenue standard in its first quarter of 2018 using the modified retrospective approach, which requires the cumulative impact of initially applying the guidance to be recognized as

7


 

an adjustment to the Company’s accumulated deficit as of January 1, 2018, the date of adoption. Prior periods will not be retroactively adjusted.

To date, the Company has established an implementation team and is in the process of evaluating the impact of the new standard on its accounting policies, processes, and system requirements. Furthermore, the Company has made and will continue to make investments in systems to enable timely and accurate reporting under the new standard.

The Company is continuing to evaluate the potential impact that the implementation of this standard will have on its condensed consolidated financial statements, but has not yet determined whether the effect will be material. However, the Company believes this new standard will impact its accounting for revenue arrangements as follows:

 

Revenue from the licensing of the Company’s technology and proprietary operating system to service operators and TV brands, will be recognized earlier and could result in greater variability in revenue recognition;

 

Estimation of variable consideration for content publisher arrangements with revenue share from user subscriptions and media purchases through its platform and the sale of branded channel buttons on its remote controls; and

 

Expanded disclosures.

The Company expects revenue recognition related to players to remain relatively unchanged under the new guidance and is in the process of evaluating the impact on its player arrangements.

Fair Value Measurements

Level 1—Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities.

Level 2—Observable inputs other than quoted prices included within Level 1, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs other than quoted prices that are observable or are derived principally from, or corroborated by, observable market data by correlation or other means.

Level 3—Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

Level 1 liabilities consist of accounts payable, accrued expenses and long-term debt. The carrying amounts of accounts receivable, prepaid expenses, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these items. Based on the borrowing rates currently available to the Company for debt with similar terms, the carrying value of the line of credit and term debt approximate fair value as well.

The tables below summarize the Company’s financial instruments’ classification within the fair value hierarchy as follows (in thousands):

 

 

 

September 30, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial liabilities—convertible preferred stock warrant

   liability

 

$

 

 

$

 

 

$

52,355

 

 

$

52,355

 

Total financial liabilities

 

$

 

 

$

 

 

$

52,355

 

 

$

52,355

 

 

 

 

December 31, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial liabilities—convertible preferred stock warrant

   liability

 

$

 

 

$

 

 

$

9,990

 

 

$

9,990

 

Total financial liabilities

 

$

 

 

$

 

 

$

9,990

 

 

$

9,990

 

 

Level 3 instruments consist solely of the Company’s preferred stock warrant liability in which the fair value was measured upon issuance and at each reporting date. Inputs used to determine the estimated fair value of the warrant liability as of the valuation date included remaining contractual term of the warrants, the risk-free interest rate, the volatility of comparable public companies over the remaining term, and the fair value of underlying shares. The significant unobservable inputs used in the fair value measurement of the

8


 

preferred stock warrant liability were the fair value of the underlying stock at the valuation date for periods prior to the IPO and the estimated term of the warrants. Generally, increases (decreases) in the fair value of the underlying stock and estimated term would result in a directionally similar impact to the fair value measurement.

The following table represents the activity of the fair value of Level 3 instruments (in thousands):

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Beginning balance

 

$

9,990

 

 

$

10,878

 

Fair value of warrants issued during the period

 

 

2,032

 

 

 

 

Change in fair value of preferred stock warrant liability

 

 

40,333

 

 

 

(888

)

Ending balance

 

$

52,355

 

 

$

9,990

 

 

3. BUSINESS COMBINATIONS

On September 6, 2017, the Company acquired all of the outstanding shares of a privately held technology company located in Denmark to enhance the Company’s player product offering, for an aggregate purchase price of $3,500,000. In addition, the Company issued 108,332 shares of its common stock to two of the founders as part of a continuing services arrangement. The shares are subject to a right of repurchase which lapses over a three year period at varying prices per share. In addition, the Company incurred approximately $350,000 of costs related to the acquisition.

The preliminary purchase price allocation includes $1,554,000 of goodwill and $2,215,000 of identifiable intangible assets, which primarily consist of developed technology, with an expected useful life of approximately four years. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired, and is not expected to be deductible for income tax purposes. The goodwill in this transaction is primarily attributable to the acquired workforce and expected operating synergies.

The results of operations of the acquired company are included in the results of the Company beginning on the date the acquisition was completed. Actual and pro forma results of operations have not been presented as the total amounts of revenue and net income are not material to the Company's consolidated results for all periods presented.

4. CONSOLIDATED Balance sheet components

Accounts Receivable, Net—Accounts receivable, net, consisted of the following (in thousands):

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Gross accounts receivable

 

$

100,059

 

 

$

95,538

 

Allowance for sales returns

 

 

(4,377

)

 

 

(6,916

)

Allowance for sales incentives

 

 

(10,499

)

 

 

(8,503

)

Other allowances

 

 

(343

)

 

 

(794

)

Total allowances

 

 

(15,219

)

 

 

(16,213

)

Total accounts receivable—net

 

$

84,840

 

 

$

79,325

 

 

Allowance for Sales Returns—Allowance for sales returns consisted of the following activities (in thousands):

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Beginning balance

 

$

(6,916

)

 

$

(9,514

)

Charged to revenue

 

 

(12,495

)

 

 

(20,810

)

Utilization of sales return reserve

 

 

15,034

 

 

 

23,408

 

Ending balance

 

$

(4,377

)

 

$

(6,916

)

 

Allowance for Sales Incentives—Allowance for sales incentives consisted of the following activities (in thousands):

 

9


 

 

 

September 30,

2017

 

 

December 31,

2016

 

Beginning balance

 

$

(8,503

)

 

$

(7,642

)

Charged to revenue

 

 

(28,048

)

 

 

(36,626

)

Utilization of sales incentive reserve

 

 

26,052

 

 

 

35,765

 

Ending balance

 

$

(10,499

)

 

$

(8,503

)

 

Property and Equipment, Net—Property and equipment, net consisted of the following (in thousands):

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Computers and equipment

 

$

10,982

 

 

$

8,787

 

Leasehold improvements

 

 

7,134

 

 

 

4,201

 

Website and internal-use software

 

 

4,384

 

 

 

2,902

 

Office equipment and furniture

 

 

1,824

 

 

 

1,452

 

Total property and equipment

 

 

24,324

 

 

 

17,342

 

Accumulated depreciation and amortization

 

 

(11,517

)

 

 

(7,814

)

Property and equipment, net

 

$

12,807

 

 

$

9,528

 

Depreciation and amortization expense for the three months ended September 30, 2017 and October 1, 2016, was $1,303,000 and $1,351,000, respectively. Depreciation and amortization expense for the nine months ended September 30, 2017 and October 1, 2016, was $3,883,000 and $4,201,000, respectively.

Accrued Liabilities—Accrued liabilities consisted of the following (in thousands):

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Accrued royalty expense

 

$

14,549

 

 

$

14,940

 

Accrued inventory

 

 

11,325

 

 

 

4,274

 

Accrued payroll and related expenses

 

 

4,352

 

 

 

5,342

 

Accrued cost of revenue

 

 

9,004

 

 

 

7,264

 

Accrued payments to content publishers

 

 

17,651

 

 

 

8,554

 

Other accrued expenses

 

 

8,617

 

 

 

5,782

 

Total accrued liabilities

 

$

65,498

 

 

$

46,156

 

 

Deferred Revenue—Deferred revenue consisted of the following (in thousands):

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Player, current

 

$

14,359

 

 

$

13,611

 

Platform, current

 

 

16,463

 

 

 

10,341

 

Total deferred revenue, current

 

 

30,822

 

 

 

23,952

 

Player, non-current

 

 

4,767

 

 

 

5,215

 

Platform, non-current

 

 

34,035

 

 

 

23,869

 

Total deferred revenue, non-current

 

 

38,802

 

 

 

29,084

 

Total deferred revenue

 

$

69,624

 

 

$

53,036

 

 

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5. DEBT

Debt obligations consisted of the following (in thousands):

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Term Loan

 

$