roku-10q_20180630.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 June 30, 2018

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 July 31, 2018, the registrant had 68,400,971 of Class A common stock, $0.0001 par value per share, and 37,677,499 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 Stockholders’ Equity

 

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

 

22

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

 

58

Item 3.

Defaults Upon Senior Securities

 

58

Item 4.

Mine Safety Disclosures

 

58

Item 5.

Other Information

 

58

Item 6.

Exhibits

 

59

Signatures

 

60

 

 

 

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 technology;

 

our ability to license popular content on our platform on favorable terms, or at all, 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 developing integrations with our platform partners;

 

our ability to develop and launch new streaming products 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 comply with laws and regulations that currently apply or may become applicable to our business both in the United States and internationally, including compliance with the EU General Data Protection Regulation.

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.

ii


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 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.

 

 

 

iii


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

 

ROKU, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

 

 

 

As of

 

 

 

June 30,

2018

 

 

December 31,

2017

 

Assets

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

174,167

 

 

$

177,250

 

Accounts receivable, net of allowances

 

 

123,612

 

 

 

120,553

 

Inventories

 

 

39,431

 

 

 

32,740

 

Prepaid expenses and other current assets

 

 

15,131

 

 

 

11,367

 

Deferred cost of revenue, current portion

 

 

1,439

 

 

 

3,007

 

Total current assets

 

 

353,780

 

 

 

344,917

 

Property and equipment, net

 

 

20,212

 

 

 

14,736

 

Deferred cost of revenue, non-current portion

 

 

 

 

 

5,403

 

Intangible assets, net

 

 

1,754

 

 

 

2,030

 

Goodwill

 

 

1,382

 

 

 

1,382

 

Other non-current assets

 

 

4,540

 

 

 

3,429

 

Total Assets

 

$

381,668

 

 

$

371,897

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

111,026

 

 

$

128,757

 

Deferred revenue, current portion

 

 

39,151

 

 

 

34,501

 

Total current liabilities

 

 

150,177

 

 

 

163,258

 

Deferred revenue, non-current portion

 

 

12,435

 

 

 

48,511

 

Other long-term liabilities

 

 

7,291

 

 

 

7,849

 

Total Liabilities

 

 

169,903

 

 

 

219,618

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value

 

 

 

 

 

 

Common stock, $0.0001 par value

 

 

11

 

 

 

10

 

Additional paid-in capital

 

 

462,901

 

 

 

435,607

 

Accumulated deficit

 

 

(251,147

)

 

 

(283,338

)

Total stockholders’ equity

 

 

211,765

 

 

 

152,279

 

Total Liabilities and Stockholders’ Equity

 

$

381,668

 

 

$

371,897

 

 

See accompanying notes to condensed consolidated financial statements.

1


ROKU, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

2018

 

 

June 30,

2017

 

 

June 30,

2018

 

 

June 30,

2017

 

Net Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Platform

 

$

90,341

 

 

$

45,976

 

 

$

165,418

 

 

$

82,391

 

Player

 

 

66,469

 

 

 

53,651

 

 

 

127,968

 

 

 

117,329

 

Total net revenue (See Note 10)

 

 

156,810

 

 

 

99,627

 

 

 

293,386

 

 

 

199,720

 

Cost of Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Platform

 

 

27,328

 

 

 

11,778

 

 

 

48,994

 

 

 

20,121

 

Player

 

 

51,730

 

 

 

50,212

 

 

 

103,528

 

 

 

103,122

 

Total cost of revenue

 

 

79,058

 

 

 

61,990

 

 

 

152,522

 

 

 

123,243

 

Gross Profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Platform

 

 

63,013

 

 

 

34,198

 

 

 

116,424

 

 

 

62,270

 

Player

 

 

14,739

 

 

 

3,439

 

 

 

24,440

 

 

 

14,207

 

Total gross profit

 

 

77,752

 

 

 

37,637

 

 

 

140,864

 

 

 

76,477

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

40,196

 

 

 

25,776

 

 

 

74,322

 

 

 

48,118

 

Sales and marketing

 

 

22,259

 

 

 

14,667

 

 

 

42,577

 

 

 

28,722

 

General and administrative

 

 

15,429

 

 

 

10,577

 

 

 

30,999

 

 

 

20,855

 

Total operating expenses

 

 

77,884

 

 

 

51,020

 

 

 

147,898

 

 

 

97,695

 

Loss from Operations

 

 

(132

)

 

 

(13,383

)

 

 

(7,034

)

 

 

(21,218

)

Other Income (Expense), Net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(57

)

 

 

(304

)

 

 

(108

)

 

 

(471

)

Change in fair value of preferred stock warrant

   liability

 

 

 

 

 

(1,916

)

 

 

 

 

 

(2,651

)

Other income, net

 

 

361

 

 

 

128

 

 

 

809

 

 

 

211

 

Total other income (expense), net

 

 

304

 

 

 

(2,092

)

 

 

701

 

 

 

(2,911

)

Income (Loss) Before Income Taxes

 

 

172

 

 

 

(15,475

)

 

 

(6,333

)

 

 

(24,129

)

Income tax expense (benefit)

 

 

(354

)

 

 

38

 

 

 

(225

)

 

 

86

 

Net Income (Loss) Attributable to Common Stockholders

 

$

526

 

 

$

(15,513

)

 

$

(6,108

)

 

$

(24,215

)

Net income (loss) per share attributable to

    common stockholders—basic

 

$

0.01

 

 

$

(3.18

)

 

$

(0.06

)

 

$

(4.98

)

Net income (loss) per share attributable to

    common stockholders—diluted

 

$

0.00

 

 

$

(3.18

)

 

$

(0.06

)

 

$

(4.98

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares used in computing net

   income (loss) per share attributable to

   common stockholders—basic

 

 

102,652

 

 

 

4,882

 

 

 

101,079

 

 

 

4,866

 

Weighted-average shares used in computing net

   income (loss) per share attributable to

   common stockholders—diluted

 

 

121,698

 

 

 

4,882

 

 

 

101,079

 

 

 

4,866

 

 

See accompanying notes to condensed consolidated financial statements.

2


ROKU, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

 

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Treasury

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Stock

 

 

Deficit

 

 

Equity

 

Balance—December 31, 2017

 

 

99,157

 

 

$

10

 

 

$

436,278

 

 

$

(671

)

 

$

(283,338

)

 

$

152,279

 

Vesting of early exercised stock options

 

 

 

 

 

 

 

 

173

 

 

 

 

 

 

 

 

 

173

 

Issuance of common stock pursuant to equity incentive

   plans, net of taxes

 

 

5,763

 

 

 

1

 

 

 

17,435

 

 

 

(52

)

 

 

 

 

 

17,384

 

Issuance of common stock pursuant to exercise

   of common stock warrants, net

 

 

141

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

9,738

 

 

 

 

 

 

 

 

 

9,738

 

Adoption of ASU 2016-16 (See Note 1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(40

)

 

 

(40

)

Adoption of ASU 2014-09 (See Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

38,339

 

 

 

38,339

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,108

)

 

 

(6,108

)

Balance—June 30, 2018

 

 

105,061

 

 

$

11

 

 

$

463,624

 

 

$

(723

)

 

$

(251,147

)

 

$

211,765

 

 

See accompanying notes to condensed consolidated financial statements.

3


ROKU, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Six Months Ended

 

 

 

June 30,

2018

 

 

June 30,

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(6,108

)

 

$

(24,215

)

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

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,606

 

 

 

2,580

 

Stock-based compensation expense

 

 

9,738

 

 

 

4,593

 

Provision for doubtful accounts

 

 

286

 

 

 

294

 

Change in fair value of preferred stock warrant liability

 

 

 

 

 

2,651

 

Noncash interest expense

 

 

 

 

 

300

 

Loss from exit of facilities

 

 

385

 

 

 

 

Loss on disposals of property and equipment

 

 

 

 

 

51

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

9,383

 

 

 

22,839

 

Inventories

 

 

(6,799

)

 

 

16,486

 

Prepaid expenses and other current assets

 

 

309

 

 

 

(2,098

)

Deferred cost of revenue

 

 

2,010

 

 

 

(2,615

)

Other noncurrent assets

 

 

(1,333

)

 

 

(2,803

)

Accounts payable and accrued liabilities

 

 

(19,000

)

 

 

(6,485

)

Other long-term liabilities

 

 

(558

)

 

 

3,558

 

Deferred revenue

 

 

(3,387

)

 

 

15,077

 

Net cash provided by (used in) operating activities

 

 

(11,468

)

 

 

30,213

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(9,013

)

 

 

(4,586

)

Change in deposits

 

 

 

 

 

86

 

Net cash used in investing activities

 

 

(9,013

)

 

 

(4,500

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from borrowings, net

 

 

 

 

 

24,691

 

Repayments of borrowings

 

 

 

 

 

(15,000

)

Proceeds from equity issued under incentive plans, net of repurchases

 

 

17,398

 

 

 

203

 

Net cash provided by financing activities

 

 

17,398

 

 

 

9,894

 

Net Increase (Decrease) In Cash

 

 

(3,083

)

 

 

35,607

 

Cash and cash equivalents—Beginning of period

 

 

177,250

 

 

 

34,562

 

Cash and cash equivalents—End of period

 

$

174,167

 

 

$

70,169

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

1

 

 

$

136

 

Cash paid for income taxes

 

$

349

 

 

$

66

 

Supplemental disclosures of noncash investing and financing

   activities:

 

 

 

 

 

 

 

 

Unpaid portion of property and equipment purchases

 

$

1,043

 

 

$

893

 

Unpaid initial public offering cost

 

$

 

 

$

186

 

Issuance of convertible preferred stock warrants in connection

   with debt

 

$

 

 

$

2,032

 

 

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 10.4 million shares, including 1.4 million 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 $134.8 million, after deducting underwriting discounts and commissions of $10.1 million. Upon the closing of the Company’s IPO, all outstanding shares of its convertible preferred stock automatically converted into 80.8 million 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. The Company has two classes of authorized common stock – Class A common stock and Class B common stock. Class A common stock entitles holders to one vote per share, and Class B common stock entitles holders to 10 votes per share.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on March 1, 2018.

The condensed consolidated balance sheet as of December 31, 2017 has been derived from the audited consolidated financial statements as of that date but does not include all of the information and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. The interim financial information is unaudited, but reflects all normal recurring adjustments that are, in the opinion of management, necessary to fairly present the information set forth herein. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the operating results to be expected for the full year or any future periods.

There have been no material changes in the Company’s significant accounting policies, other than the adoption of Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606), and ASU 2016-16, Income taxes: Intra-Entity Transfers of Assets Other Than Inventory (Topic 740) described below and in Note 10, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Use of Judgements and Estimates

The preparation of the Company’s condensed 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 related disclosures at the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), added new areas of judgements and estimates such as determination of performance obligations, variable consideration and standalone selling price. Other significant items subject to 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, stock-based compensation and the fair value of assets and liabilities acquired in business combinations. 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.

5


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.

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

 

 

Six Months Ended

 

 

 

June 30,

2018

 

 

June 30,

2017

 

 

June 30,

2018

 

 

June 30,

2017

 

Customer B

 

*

 

 

*

 

 

*

 

 

 

10

%

Customer C

 

 

17

%

 

 

18

%

 

 

17

%

 

 

20

%

Customer E

 

*

 

 

*

 

 

*

 

 

 

11

%

 

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

 

 

 

As of

 

 

 

 

June 30,

2018

 

 

December 31,

2017

 

 

Customer C

 

 

10

%

 

* %

 

 

Customer D

 

 

12

 

 

 

16

 

 

 

 

*

Less than 10%

 

Content Licensing Fees

The Company licenses content for viewing on The Roku Channel. The licensing arrangements 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. The Company amortizes licensed content assets into “Cost of Revenue, Platform” over the contractual window of availability.

As of June 30, 2018, $0.1 million of content related expenses met these requirements and is included in “Prepaid expenses and other current assets.

Adoption of New Accounting Standards

On January 1, 2018, the Company adopted guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), (“new revenue standard”) using the modified retrospective method. The Company applied the new revenue standard to all contracts that were not completed as of January 1, 2018. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. Comparative information for prior periods has not been restated and continues to be reported under the accounting standards in effect for those periods. Refer to Note 10 for the detail on the impact of adoption.

On January 1, 2018, the Company adopted guidance in ASU 2016-16, Income taxes: Intra-Entity Transfers of Assets Other Than Inventory (Topic 740), using the modified retrospective method. The new guidance allows a reporting entity to recognize the tax expense from the sale of the asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. The adoption of this guidance resulted in a decrease in prepaid expense and other current assets and an increase to the accumulated deficit in amounts that were not material.

6


Recently Issued Accounting Pronouncements Not Yet Adopted

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment, 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 February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), related to new accounting and reporting guidelines for leasing arrangements. The guidance requires recognition of right-to-use lease assets and lease liabilities for all leases (with the exception of short-term leases) on the balance sheet of lessees. 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.  

Fair Value Measurements

Level 1—Quoted prices in active markets for identical assets or liabilities.

Financial assets and liabilities measured using Level 1 inputs include cash equivalents, accounts receivable, prepaid expenses, accounts payable and accrued liabilities.

The Company considers all highly liquid investments purchased with an original or remaining maturity of less than three months at the date of purchase to be cash equivalents. The Company measured money market funds of $50.0 million as cash equivalents as of June 30, 2018 using Level 1 inputs. The Company did not have any cash equivalents as of December 31, 2017.

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.

The Company does not use Level 2 inputs to measure any assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity, are significant to the fair value of the assets or liabilities, and reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

The Company does not use Level 3 inputs to measure any assets or liabilities as of June 30, 2018 and December 31, 2017. During the six months ended June 30, 2017, Level 3 instruments consisted of the Company’s preferred stock warrant liability in which the fair value was measured upon issuance and at each reporting date. Pursuant to the IPO, all preferred stock warrants were converted into Class B common stock warrants, which did not require further re-measurements as they were deemed permanent equity.

For the three and six month periods ended June 30, 2017, the inputs that were used to determine the estimated fair value of the convertible preferred stock warrant liability as of the June 30, 2017 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 convertible 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 resulted in a directionally similar impact to the fair value measurement.

7


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

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2017

 

 

June 30, 2017

 

Convertible preferred stock warrant

   liability — beginning balance

 

$

10,725

 

 

$

9,990

 

Fair value of new warrants issued

 

 

2,032

 

 

 

2,032

 

Change in fair value of preferred stock warrant liability

 

 

1,916

 

 

 

2,651

 

Convertible preferred stock warrant

   liability — ending balance

 

$

14,673

 

 

$

14,673

 

 

 

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 product offerings, for an aggregate purchase price of $3.5 million. The Company paid $3.0 million of the aggregate purchase price at the time of acquisition with $0.5 million payable one year after the acquisition date. In addition, the Company issued 0.1 million shares of its Class B 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.

The purchase price allocation includes $1.4 million of goodwill and $2.2 million 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 assets acquired less liabilities assumed, 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.

4. Balance sheet components

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

 

 

 

June 30,

2018

 

 

December 31,

2017

 

Gross accounts receivable

 

$

134,564

 

 

$

138,292

 

Allowance for sales returns

 

 

(4,504

)

 

 

(6,907

)

Allowance for sales incentives

 

 

(6,153

)

 

 

(10,442

)

Other allowances

 

 

(295

)

 

 

(390

)

Total allowances

 

 

(10,952

)

 

 

(17,739

)

Total Accounts Receivable—net of allowances

 

$

123,612

 

 

$

120,553

 

 

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

 

 

 

June 30,

2018

 

 

December 31,

2017

 

Beginning balance

 

$

(6,907

)

 

$

(6,916

)

Charged to revenue

 

 

(6,755

)

 

 

(19,089

)

Utilization of sales return reserve

 

 

9,158

 

 

 

19,098

 

Ending balance

 

$

(4,504

)

 

$

(6,907

)

 

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

 

 

 

June 30,

2018

 

 

December 31,

2017

 

Beginning balance

 

$

(10,442

)

 

$

(8,503

)

Charged to revenue

 

 

(15,448

)

 

 

(44,264

)

Utilization of sales incentive reserve

 

 

19,737

 

 

 

42,325

 

Ending balance

 

$

(6,153

)

 

$

(10,442

)

 

8


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

 

 

 

June 30,

2018

 

 

December 31,

2017

 

Computers and equipment

 

$

13,508

 

 

$

11,631

 

Leasehold improvements

 

 

13,270

 

 

 

8,437

 

Website and internal-use software

 

 

6,925

 

 

 

5,461

 

Office equipment and furniture

 

 

2,597

 

 

 

1,987

 

Total property and equipment

 

 

36,300

 

 

 

27,516

 

Accumulated depreciation and amortization

 

 

(16,088

)

 

 

(12,780

)

Property and Equipment, net

 

$

20,212

 

 

$

14,736

 

 

Depreciation and amortization expense for the three months ended June 30, 2018 and 2017 was $1.8 million and $1.3 million, respectively. Depreciation and amortization expense for the six months ended June 30, 2018 and 2017 was $3.3 million and $2.6 million, respectively.

Accounts Payable and Accrued Liabilities—Accounts payable and accrued liabilities consisted of the following (in thousands):

 

 

 

June 30,

2018

 

 

December 31,

2017

 

Accounts payable

 

$

32,931

 

 

$

56,413

 

Accrued royalty expense

 

 

5,638

 

 

 

17,165

 

Accrued inventory

 

 

11,206

 

 

 

2,382

 

Accrued payroll and related expenses

 

 

10,181

 

 

 

8,699

 

Accrued cost of revenue

 

 

13,783

 

 

 

12,210

 

Accrued payments to content publishers

 

 

25,209

 

 

 

24,037

 

Taxes and related liabilities

 

 

912

 

 

 

1,463

 

Customer prepayments

 

 

5,255

 

 

 

545

 

Other accrued expenses

 

 

5,911

 

 

 

5,843

 

Total Accounts Payable and Accrued Liabilities

 

$

111,026

 

 

$

128,757

 

 

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

 

 

 

June 30,

2018

 

 

December 31,

2017

 

Platform, current

 

$

24,433

 

 

$

19,022

 

Player, current

 

 

14,718

 

 

 

15,479

 

Total deferred revenue, current

 

 

39,151

 

 

 

34,501

 

Platform, non-current

 

 

7,271

 

 

 

42,674

 

Player, non-current

 

 

5,164

 

 

 

5,837

 

Total deferred revenue, non-current

 

 

12,435

 

 

 

48,511

 

Total Deferred Revenue (See Note 10)

 

$

51,586

 

 

$

83,012

 

 

5. DEBT

The Company did not have any outstanding debt as of June 30, 2018 or December 31, 2017.

Line of credit

The Company first entered into a loan and security agreement (the “LSA”) with Silicon Valley Bank (“Bank’) in July 2011. The LSA was amended and restated in subsequent periods. The amended and restated loan and security agreement (the “Restated 2014 LSA”) entered into in November 2014, provides advances under a revolving line of credit up to $30.0 million and provides for letters of credit to be issued up to the lesser of the available line of credit, reduced by outstanding advances and drawn but unreimbursed letters of credit, or $5.0 million. The financial and non-financial covenants as well as the term of the agreement were updated in subsequent amendments to the Restated 2014 LSA.

9


In June 2017, the Company entered into a second amendment to the Restated 2014 LSA. The advances under the second amendment carry a floating per annum interest rate equal to, at the Company’s option, (1) the prime rate or (2) LIBOR plus 2.75%, or the prime rate plus 1% depending on certain ratios. The amendment further changed the financial covenant to maintain a current ratio (calculated as current assets, divided by current liabilities less deferred revenue) greater than or equal to 1.25. The revolving line of credit terminates on June 30, 2019 at which time all outstanding advances becomes due and payable. As of June 30, 2018 and December 31, 2017, the Company was in compliance with all of the covenants in the amended Restated 2014 LSA.

On July 18, 2018, the Company entered into a third amendment to the Restated 2014 LSA. The amendment increased the amount by which the Company can utilize its line of credit to support the issuances of letters of credits from $5.0 million to $30.0 million.

The Company did not have any borrowings outstanding on the revolving line of credit as of June 30, 2018 and December 31, 2017. The Company had $3.1 million and $1.5 million outstanding in letters of credit as of June 30, 2018 and December 31, 2017, respectively. The interest rate on the line of credit was 4.83% and 4.31% as of June 30, 2018 and December 31, 2017, respectively.

Term loan

In June 2017, the Company entered into a subordinated loan agreement (“2017 Agreement”) with the Bank. The 2017 Agreement provided for a term loan borrowing of $40.0 million, with a minimum of $25.0 million to be initially drawn at the close of the agreement with the remaining amount available for a 24 month period, to be drawn in no less than $5.0 million increments. Advances under the term loan incur a facility fee equal to 1% of the drawn borrowings, in addition to interest payments at an interest rate equal to, at the Company’s option, (1) the prime rate plus 3.5% or (2) LIBOR plus 6.5%, subject to a 1% LIBOR floor. Additionally, the borrowings incur payment in kind interest fees equal to 2.5%, accruing to the unpaid borrowings balance, compounded monthly. Payment in kind interest may be settled in cash, at the Company’s election, during the term or at maturity. The Company is also obligated to pay final payment fees ranging from 1% to 4% depending on the timing of the payment. On October 31, 2017 the Company repaid the entire amount outstanding, and subsequently terminated the 2017 Agreement.

In connection with the 2017 Agreement the Company issued 0.4 million warrants to purchase shares of Series H convertible preferred stock, with an exercise price of $9.17340. The warrants are exercisable up to ten years from the date of issuance. Upon repayment of the amounts borrowed and the subsequent termination of the 2017 Agreement, the Company cancelled 0.1 million warrants that were contingent on future borrowings. The warrant holders exercised 0.1 million warrants during the year ended December 31, 2017 and the remaining 0.2 million warrants during the three months ended March 31, 2018. There were no outstanding warrants as of June 30, 2018.

6. STOCKHOLDERS’ DEFICIT

Preferred Stock

The Company had outstanding convertible preferred stock before its IPO. Upon closing of the Company’s IPO, all outstanding shares of its convertible preferred stock automatically converted into 80.8 million shares of Class B common stock on a one-to-one basis.

On October 2, 2017, the Company filed an Amended and Restated Certificate of Incorporation, which changed the capital structure of the Company. The Company is now authorized to issue 10.0 million shares of undesignated preferred stock with rights and preferences determined by the Company’s Board of Directors (the “Board”) at the time of issuance of such shares. As of June 30, 2018 and December 31, 2017, there were no shares of preferred stock issued and outstanding.

Common Stock

The Company’s Amended and Restated Certificate of Incorporation filed on October 2, 2017, 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, including shares of common stock issued upon the conversion of the convertible preferred stock, were converted into an equivalent number of shares of Class B common stock.

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. Common stock options held prior to the IPO can be exercised into Class B or Class A common stock at the option of the holder. Warrants to purchase common stock held prior to the IPO were exercised into Class B common stock. Shares of Class B common stock are voluntarily convertible into shares of Class A common stock at the option of the holder and are automatically converted into shares of the Company's Class A common stock upon sale or transfer. All stock options and restricted stock units granted after the IPO are exercised or vested into shares of Class A common stock.  

10


The Company has reserved the following shares of common stock for future issuances (in thousands):

 

 

 

June 30, 2018

 

Common stock awards granted under equity

   incentive plans

 

 

21,485

 

Common stock awards available for grant under

   equity incentive plan

 

 

16,280

 

Total reserved shares of common stock

 

 

37,765

 

Equity Incentive Plans

The 2008 Equity Incentive Plan (the “2008 Plan”) became effective in February 2008. The 2008 Plan allowed for the grant of incentive stock options to employees and for the grant of non-statutory stock options and restricted stock awards to employees, directors and consultants. Options granted under the 2008 Plan were granted at a price per share equivalent to the fair market value on the date of grant. Recipients of option grants under the 2008 Plan who possess more than 10% of the combined voting power of the Company (a “10% Shareholder”) are subject to certain limitations, and incentive stock options granted to such recipients were at a price no less than 110% of the fair market value at the date of grant. Options under the 2008 Plan generally vest over four years and have a term of 10 years.

Commensurate with the Company’s IPO, the Company’s Board of Directors adopted the 2017 Equity Incentive Plan (the “2017 Plan”) which became effective in September 2017. No further equity awards can be granted under the 2008 Plan. The 2017 Plan provides for the grant of incentive stock options to employees and for the grant of non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards, and other forms of equity compensation to employees, directors and consultants. Options and restricted stock units under the 2017 Plan generally vest over four years and have a term of 10 years.

Stock-Based Compensation

The Company measures the cost awards granted under equity incentive plans based on the grant date fair value of the award. The Company uses the straight-line method for expense recognition. The Company recognizes forfeitures as they occur.

The following table shows total stock-based compensation expense for the three and six months ended June 30, 2018 and 2017 (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

2018

 

 

June 30,

2017

 

 

June 30,

2018

 

 

June 30,

2017

 

Cost of platform revenue

 

$

19

 

 

$

19

 

 

 

38

 

 

 

40

 

Cost of player revenue

 

 

67

 

 

 

38

 

 

 

111

 

 

 

74

 

Research and development

 

 

2,801

 

 

 

993

 

 

 

5,097

 

 

 

1,881

 

Sales and marketing

 

 

1,286

 

 

 

690

 

 

 

2,396

 

 

 

1,291

 

General and administrative

 

 

1,136

 

 

 

678

 

 

 

2,096

 

 

 

1,307

 

Total stock-based compensation

 

$

5,309

 

 

$

2,418

 

 

$

9,738

 

 

$

4,593

 

 

11


Stock Options

The summary of the Company’s stock option activity is as follows (in thousands, except price per share data):

 

 

 

Number of

Shares

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual

Life (Years)

 

 

Weighted

Average

Grant Date

Fair Value

Per Share

 

 

Aggregate

Intrinsic

Value

 

Balance, December 31, 2017 - outstanding

 

 

26,336

 

 

$

4.59

 

 

 

6.4

 

 

 

 

 

 

 

 

Granted

 

 

186

 

 

 

39.05

 

 

 

 

 

$

16.27

 

 

 

 

 

Exercised

 

 

(5,759

)

 

 

3.05

 

 

 

 

 

 

 

 

 

 

 

Forfeited and expired

 

 

(474

)

 

 

6.29