roku-10q_20180331.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 March 31, 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 May 3, 2018, the registrant had 48,906,481 of Class A common stock, $0.0001 par value per share, and 52,680,176 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

 

20

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

29

Item 4.

Controls and Procedures

 

29

PART II.

OTHER INFORMATION

 

30

Item 1.

Legal Proceedings

 

30

Item 1A.

Risk Factors

 

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

55

Item 3.

Defaults Upon Senior Securities

 

55

Item 4.

Mine Safety Disclosures

 

55

Item 5.

Other Information

 

55

Item 6.

Exhibits

 

56

Signatures

 

57

 

 

 

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, or GDPR.

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

 

 

 

March 31,

2018

 

 

December 31,

2017

 

Assets

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash

 

$

160,750

 

 

$

177,250

 

Accounts receivable, net of allowances

 

 

106,094

 

 

 

120,553

 

Inventories

 

 

38,062

 

 

 

32,740

 

Prepaid expenses and other current assets

 

 

30,546

 

 

 

11,367

 

Deferred cost of revenue, current portion

 

 

1,359

 

 

 

3,007

 

Total current assets

 

 

336,811

 

 

 

344,917

 

Property and equipment, net

 

 

16,835

 

 

 

14,736

 

Deferred cost of revenue, non-current portion

 

 

 

 

 

5,403

 

Intangible assets, net

 

 

1,892

 

 

 

2,030

 

Goodwill

 

 

1,382

 

 

 

1,382

 

Other non-current assets

 

 

3,560

 

 

 

3,429

 

Total Assets

 

$

360,480

 

 

$

371,897

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

111,776

 

 

$

128,757

 

Deferred revenue, current portion

 

 

33,948

 

 

 

34,501

 

Total current liabilities

 

 

145,724

 

 

 

163,258

 

Deferred revenue, non-current portion

 

 

13,549

 

 

 

48,511

 

Other long-term liabilities

 

 

7,731

 

 

 

7,849

 

Total Liabilities

 

 

167,004

 

 

 

219,618

 

Commitments and Contingencies (Note 7)

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value

 

 

 

 

 

 

Common stock, $0.0001 par value

 

 

10

 

 

 

10

 

Additional paid-in capital

 

 

445,139

 

 

 

435,607

 

Accumulated deficit

 

 

(251,673

)

 

 

(283,338

)

Total stockholders’ equity

 

 

193,476

 

 

 

152,279

 

Total Liabilities and Stockholders’ Equity

 

$

360,480

 

 

$

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

 

 

 

March 31,

2018

 

 

March 31,

2017

 

Net Revenue:

 

 

 

 

 

 

 

 

Platform

 

$

75,077

 

 

$

36,415

 

Player

 

 

61,499

 

 

 

63,678

 

Total net revenue (See Note 10)

 

 

136,576

 

 

 

100,093

 

Cost of Revenue:

 

 

 

 

 

 

 

 

Platform

 

 

21,666

 

 

 

8,343

 

Player

 

 

51,798

 

 

 

52,910

 

Total cost of revenue

 

 

73,464

 

 

 

61,253

 

Gross Profit:

 

 

 

 

 

 

 

 

Platform

 

 

53,411

 

 

 

28,072

 

Player

 

 

9,701

 

 

 

10,768

 

Total gross profit

 

 

63,112

 

 

 

38,840

 

Operating Expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

34,126

 

 

 

22,342

 

Sales and marketing

 

 

20,318

 

 

 

14,055

 

General and administrative

 

 

15,570

 

 

 

10,278

 

Total operating expenses

 

 

70,014

 

 

 

46,675

 

Loss from Operations

 

 

(6,902

)

 

 

(7,835

)

Other Income (Expense), Net:

 

 

 

 

 

 

 

 

Interest expense

 

 

(51

)

 

 

(167

)

Change in fair value of preferred stock warrant liability

 

 

 

 

 

(735

)

Other income, net

 

 

448

 

 

 

83

 

Total other income (expense), net

 

 

397

 

 

 

(819

)

Loss Before Income Taxes

 

 

(6,505

)

 

 

(8,654

)

Income tax expense

 

 

129

 

 

 

48

 

Net Loss Attributable to Common Stockholders

 

$

(6,634

)

 

$

(8,702

)

Net loss per share attributable to common stockholders—basic

   and diluted

 

$

(0.07

)

 

$

(1.79

)

Weighted-average shares used in computing net loss

   per share attributable to common stockholders—basic

   and diluted

 

 

99,488

 

 

 

4,850

 

 

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

 

 

 

 

 

 

 

 

106

 

 

 

 

 

 

 

 

 

106

 

Issuance of common stock upon exercise of stock options, net

 

 

1,670

 

 

 

 

 

 

5,049

 

 

 

(52

)

 

 

 

 

 

4,997

 

Issuance of common stock pursuant to exercise of common warrants, net

 

 

141

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

4,429

 

 

 

 

 

 

 

 

 

4,429

 

Adoption of ASU 2016-16 (See Note 1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(40

)

 

 

(40

)

Adoption of ASU 2014-09 (See Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

38,339

 

 

 

38,339

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,634

)

 

 

(6,634

)

Balance—March 31, 2018

 

 

100,968

 

 

$

10

 

 

$

445,862

 

 

$

(723

)

 

$

(251,673

)

 

$

193,476

 

 

See accompanying notes to condensed consolidated financial statements.

3


ROKU, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

2018

 

 

March 31,

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(6,634

)

 

$

(8,702

)

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

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,656

 

 

 

1,247

 

Stock-based compensation expense

 

 

4,429

 

 

 

2,175

 

Provision for doubtful accounts

 

 

201

 

 

 

161

 

Change in fair value of preferred stock warrant liability

 

 

 

 

 

735

 

Noncash interest expense

 

 

 

 

 

20

 

Loss from exit of facilities

 

 

129

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

26,986

 

 

 

18,251

 

Inventories

 

 

(5,430

)

 

 

5,712

 

Prepaid expenses and other current assets

 

 

(11,643

)

 

 

(2,572

)

Deferred cost of revenue

 

 

2,090

 

 

 

(425

)

Other noncurrent assets

 

 

(353

)

 

 

(2,949

)

Accounts payable and accrued liabilities

 

 

(18,474

)

 

 

(2,892

)

Other long-term liabilities

 

 

(118

)

 

 

3,797

 

Deferred revenue

 

 

(7,476

)

 

 

11,681

 

Net cash provided by (used in) operating activities

 

 

(14,637

)

 

 

26,239

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(3,407

)

 

 

(1,560

)

Net cash used in investing activities

 

 

(3,407

)

 

 

(1,560

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repayments of borrowings

 

 

 

 

 

(15,000

)

Proceeds from exercise of stock options, net of repurchases

 

 

1,544

 

 

 

473

 

Net cash provided by (used in) financing activities

 

 

1,544

 

 

 

(14,527

)

Net Increase (Decrease) In Cash

 

 

(16,500

)

 

 

10,152

 

Cash—Beginning of period

 

 

177,250

 

 

 

34,562

 

Cash—End of period

 

$

160,750

 

 

$

44,714

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

 

 

$

136

 

Cash paid for income taxes

 

$

180

 

 

$

29

 

Supplemental disclosures of noncash investing and financing

   activities:

 

 

 

 

 

 

 

 

Unpaid portion of property and equipment purchases

 

$

1,460

 

 

$

1,166

 

 

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 months ended March 31, 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 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 has 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

 

 

 

March 31,

2018

 

 

March 31,

2017

 

Customer B

 

 

10

%

 

 

13

%

Customer C

 

 

17

 

 

 

21

 

Customer E

 

*

 

 

 

13

 

Customer G

 

11

 

 

*

 

 

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

 

 

 

As of

 

 

 

March 31,

2018

 

 

December 31,

2017

 

Customer C

 

 

11

%

 

* %

 

Customer D

 

 

16

 

 

 

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 March 31, 2018, $0.1 million content 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 accounts receivable, prepaid expenses, accounts payable and accrued 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.

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 March 31, 2018 and December 31, 2017. During the year ended December 31, 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.

Inputs used to determine the estimated fair value of the convertible preferred stock 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 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.

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

 

 

 

Three Months Ended

 

 

 

March 31, 2017

 

Convertible preferred stock warrant

   liability — beginning balance

 

$

9,990

 

Fair value of new warrants issued

 

 

 

Change in fair value of preferred stock warrant liability

 

 

735

 

Convertible preferred stock warrant

   liability — ending balance

 

$

10,725

 

 

7


 

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

 

 

 

March 31,

2018

 

 

December 31,

2017

 

Gross accounts receivable

 

$

115,851

 

 

$

138,292

 

Allowance for sales returns

 

 

(3,799

)

 

 

(6,907

)

Allowance for sales incentives

 

 

(5,433

)

 

 

(10,442

)

Other allowances

 

 

(525

)

 

 

(390

)

Total allowances

 

 

(9,757

)

 

 

(17,739

)

Total Accounts Receivable—net

 

$

106,094

 

 

$

120,553

 

 

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

 

 

 

March 31,

2018

 

 

December 31,

2017

 

Beginning balance

 

$

(6,907

)

 

$

(6,916

)

Charged to revenue

 

 

(1,587

)

 

 

(19,089

)

Utilization of sales return reserve

 

 

4,695

 

 

 

19,098

 

Ending balance

 

$

(3,799

)

 

$

(6,907

)

 

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

 

 

 

March 31,

2018

 

 

December 31,

2017

 

Beginning balance

 

$

(10,442

)

 

$

(8,503

)

Charged to revenue

 

 

(8,067

)

 

 

(44,264

)

Utilization of sales incentive reserve

 

 

13,076

 

 

 

42,325

 

Ending balance

 

$

(5,433

)

 

$

(10,442

)

 

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

 

 

 

March 31,

2018

 

 

December 31,

2017

 

Computers and equipment

 

$

12,296

 

 

$

11,631

 

Leasehold improvements

 

 

10,122

 

 

 

8,437

 

Website and internal-use software

 

 

6,299

 

 

 

5,461

 

Office equipment and furniture

 

 

2,393

 

 

 

1,987

 

Total property and equipment

 

 

31,110

 

 

 

27,516

 

Accumulated depreciation and amortization

 

 

(14,275

)

 

 

(12,780

)

Property and Equipment, net

 

$

16,835

 

 

$

14,736

 

 

Depreciation and amortization expense for the three months ended March 31, 2018 and 2017 was $1.5 million and $1.2 million, respectively.  

8


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

 

 

 

March 31,

2018

 

 

December 31,

2017

 

Accounts payable

 

$

41,148

 

 

$

56,413

 

Accrued royalty expense

 

 

14,501

 

 

 

17,165

 

Accrued inventory

 

 

3,574

 

 

 

2,382

 

Accrued payroll and related expenses

 

 

9,879

 

 

 

8,699

 

Accrued cost of revenue

 

 

9,577

 

 

 

12,210

 

Accrued payments to content publishers

 

 

23,590

 

 

 

24,037

 

Taxes and related liabilities

 

 

1,218

 

 

 

1,463

 

Customer prepayments

 

 

1,887

 

 

 

545

 

Other accrued expenses

 

 

6,402

 

 

 

5,843

 

Total Accounts Payable and Accrued Liabilities

 

$

111,776

 

 

$

128,757

 

 

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

 

 

 

March 31,

2018

 

 

December 31,

2017

 

Platform, current

 

$

19,110

 

 

$

19,022

 

Player, current

 

 

14,838

 

 

 

15,479

 

Total deferred revenue, current

 

 

33,948

 

 

 

34,501

 

Platform, non-current

 

 

8,047

 

 

 

42,674

 

Player, non-current

 

 

5,502

 

 

 

5,837

 

Total deferred revenue, non-current

 

 

13,549

 

 

 

48,511

 

Total Deferred Revenue (See Note 10)

 

$

47,497

 

 

$

83,012

 

 

5. DEBT

The Company did not have any outstanding debt as of March 31, 2018 and 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.

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 March 31, 2018 and December 31, 2017, the Company was in compliance with all of the covenants in the amended Restated 2014 LSA.

The Company did not have any borrowings outstanding on the revolving line of credit as of March 31, 2018 and December 31, 2017. The Company had $2.2 million and $1.5 million outstanding in letters of credit as of March 31, 2018 and December 31, 2017, respectively. The interest rate on the line of credit was 4.63% and 4.31% as of March 31, 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

9


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 the 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 Bank exercised 0.1 million warrants during the year ended December 31, 2017 and 0.2 million warrants during the three months ended March 31, 2018. There were no outstanding warrants as of March 31, 2018.

6. STOCKHOLDERS’ DEFICIT

Preferred Stock

The Company had outstanding convertible preferred stock before its IPO. 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 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 March 31, 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.  

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

 

 

 

March 31, 2018

 

Common stock awards granted under equity

   incentive plans

 

 

24,933

 

Common stock awards available for grant under

   equity incentive plan

 

 

17,096

 

Total reserved shares of common stock

 

 

42,029

 

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.

10


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 months ended March 31, 2018 and 2017 (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

2018

 

 

March 31,

2017

 

Cost of platform revenue

 

$

19

 

 

$

21

 

Cost of player revenue

 

 

44

 

 

 

36

 

Research and development

 

 

2,296

 

 

 

888

 

Sales and marketing

 

 

1,110

 

 

 

601

 

General and administrative

 

 

960

 

 

 

629

 

Total stock-based compensation

 

$

4,429

 

 

$

2,175

 

 

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

 

 

82

 

 

 

45.96

 

 

 

 

 

$

19.32

 

 

 

 

 

Exercised

 

 

(1,670

)

 

 

3.04

 

 

 

 

 

 

 

 

 

 

 

Forfeited and expired

 

 

(302

)

 

 

6.37

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2018 - outstanding

 

 

24,446

 

 

$

4.81

 

 

 

6.4

 

 

 

 

 

$

644,801

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at March 31, 2018

 

 

14,583

 

 

$

3.16

 

 

 

4.8

 

 

 

 

 

$

407,437

 

 

The intrinsic value for options exercised during the three months ended March 31, 2018 and 2017, was $56.2 million and $0.1 million, respectively, representing the difference between the fair values of the Company’s common stock underlying these options at the dates of exercise and the exercise prices paid. As of March 31, 2018, the Company had $29.3 million of unrecognized stock compensation expense related to unvested stock options that is expected to be recognized over a weighted-average period of approximately 2.5 years.

The fair value of options granted under the equity incentive plans is estimated on the grant date using the Black-Scholes option-valuation model. The assumptions used in the Black-Scholes model are as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

2018

 

 

March 31,

2017

 

Dividend rate

 

 

 

 

 

 

Expected term (in years)

 

 

6.1

 

 

6.1 - 6.5

 

Risk-free interest rate

 

2.32 - 2.67%

 

 

2.18 - 2.25%

 

Expected volatility

 

39 - 40%

 

 

43 - 44%

 

 

11


Restricted Stock Units

Pursuant to the 2017 Plan, the Company issued restricted stock units to employees. The summary of the Company’s restricted stock unit activity is as follows (in thousands, except price per share data):

 

 

 

Number of

Shares

 

 

Weighted Average

Grant Date Fair

Value Per Share

 

Balance, December 31, 2017 - outstanding

 

 

272

 

 

$

43.55

 

Awarded

 

 

227

 

 

 

42.98

 

Released

 

 

 

 

 

 

Forfeited

 

 

(12

)

 

 

43.55

 

Balance, March 31, 2018 - outstanding

 

 

487

 

 

$

43.29

 

 

The unrecognized compensation cost related to restricted stock units as of March 31, 2018 was $19.7 million, which the Company expects to recognize over 3.7 years. No restricted stock units vested during the three months ended March 31, 2018.

Warrants

On March 31, 2018, the Company had no outstanding warrants. As of December 31, 2017, the Company had outstanding warrants to purchase 0.2 million shares of Class B common stock.

Convertible preferred stock warrants issued and outstanding at the time of the Company’s IPO were automatically converted into Class B common stock warrants at the time of the Company’s IPO. Prior to the IPO the fair value of these convertible preferred stock warrants was recorded as a liability and remeasured at the end of each balance sheet date using the Black-Scholes option pricing model. The changes in the fair value during the year were recognized in the condensed consolidated statements of operations.  

The assumptions used to value the preferred stock warrants outstanding during the three months ended March 31, 2017 as follows:

 

 

 

Three Months Ended

 

 

 

March 31, 2017

 

Dividend rate

 

$

 

Expected term (in years)

 

3.2 - 3.4

 

Risk-free interest rate

 

1.5% - 1.6%

 

Expected volatility

 

45.3% - 45.9%

 

 

 

7. COMMITMENTS AND CONTINGENCIES

Office Space

The Company has operating lease agreements for office, research and development and sales and marketing space in the United States, the United Kingdom (U.K.), Denmark, and China, with various expiration dates up to November 2024. Rent expense for the three months ended March 31, 2018 and 2017 was $2.2 million and $1.5 million, respectively.

Manufacturing Purchase Commitments

The Company has contracts with vendors for the manufacture of inventory and related items in the normal course of business. As of March 31, 2018, the Company had $72.0 million purchase commitments for inventory and related items.

The Company records a liability for noncancelable purchase commitments in excess of its future demand forecasts. The Company recorded $0.9 million and $0.6 million for these purchase commitments in “Accrued liabilities” as of March 31, 2018 and December 31, 2017, respectively.

Content Licensing

The Company licenses certain content for users to access through The Roku Channel. The Company records an obligation for licensing of content when it enters into an agreement to obtain future titles and the cost of the content is known. Certain agreements include the obligation to license rights for unknown future titles, the ultimate quantity and/or fees for which are not yet determinable as of the reporting date.  As of March 31, 2018, the Company had $0.1 million of obligations recorded in “Accrued liabilities” for

12


license purchase commitments. As of March 31, 2018, the Company has $0.7 million of obligations that are not reflected on the financial statements as they do not yet meet the criteria for asset recognition.

Letters of Credit

As of March 31, 2018 and December 31, 2017, the Company had irrevocable letters of credit outstanding in the amount of $ 2.2 million and $ 1.5 million, respectively, related to facilities leases. The letters of credit have various expiration dates through 2019.

Contingencies

The Company may be involved in disputes or litigation matters that arise in the ordinary course of business. Management is not aware of any dispute that it believes would have a material adverse effect on its business, operating results, cash flows or financial condition.

Indemnification

Many of the Company’s agreements include certain provisions for indemnifying content publishers, licensees, contract manufacturers and suppliers if the Company’s products or services infringe a third party’s intellectual property rights. It is not possible to determine the maximum potential amount under these indemnification obligations due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each agreement. To date, the Company has not incurred any material costs as a result of such obligations and has not accrued any liabilities related to such obligations in the consolidated financial statements.

Player Warranties

Upon issuance of a standard player warranty, the Company recognizes a liability for the obligation it assumes under the warranty. As of March 31, 2018 and December 31, 2017, the accrued warranty reserve was immaterial.

8. INCOME TAXES

The Company is subject to income tax in the U.S. as well as other tax jurisdictions in which it conducts business. Earnings from non-U.S. activities are subject to local country income tax. The Company does not provide for federal income taxes on the undistributed earnings of its foreign subsidiaries. The Company has not yet made a determination of indefinite reinvestment assertion in light of the Tax Act and considers the conclusion to be incomplete under guidance issued by SEC. The Company expects to reach a final determination within the measurement period in accordance with Staff Accounting Bulletin 118.

The Company recorded an income tax expense of $0.1 million and $0.1 million for the three months ended March 31, 2018 and 2017, respectively, related to foreign income taxes and state minimum taxes. Based on the available objective evidence during the three months ended March 31, 2018, the Company believes it is more likely than not that the tax benefits of the U.S. losses incurred may not be realized. Accordingly, the Company recorded a full valuation allowance against the tax benefits of the U.S. losses incurred. The primary difference between the effective tax rate and the local statutory tax rate relates to the valuation allowance on the Company’s U.S. losses.

Effective January 1, 2018, the Company adopted the new revenue standard which results in a change to deferred revenues. The change in deferred revenues impacts the deferred tax asset arising out of deferring revenues for GAAP compared to for tax. The deferred tax asset is equally offset by the full valuation allowance.

The Tax Cuts and Job Act (TCJA) of 2017, enacted on December 22, 2017, contains significant changes to U.S. tax law, including lowering the U.S. corporate income tax rate to 21% and implementing a territorial tax system.

TCJA creates a new requirement that global intangible low-taxed income (GILTI) earned by controlled foreign corporations (CFCs) must be included currently in the gross income of the CFCs’ U.S. shareholder.  Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (i) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (ii) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). The Company’s selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing the global income to determine whether the Company expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. The Company has included GILTI in the annual effective tax rate calculation, however, it has not made a policy decision regarding whether to record deferred taxes on GILTI.

13


9. RELATED-PARTY TRANSACTIONS

The Company has agreements with one of the Company’s strategic investors. The Company recorded revenues of $1.0 million for the three months ended March 31, 2018 related to this investor. The revenues and expenses with this investor were not material for the three months ended March 31, 2017. The Company had accounts receivable balance of $1.3 million and $0.5 million as of March 31, 2018 and December 31, 2017, respectively, related to sales to this investor.

In addition, a member of the Company’s Board of Directors is a senior vice president at an operating unit of one of the strategic investors. The Company had no significant transactions with this investor for the three months ended March 31, 2018 and 2017, respectively. The Company did had insignificant balances outstanding with this investor as of March 31, 2018 and December 31, 2017, respectively.

10. REVENUE

On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), (the “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. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those prior periods.

Practical expedients and exemptions

The Company reflected the aggregate effect of all modifications that occurred prior to the date of adoption.

The Company expensed sales commissions when incurred because the amortization period is less than one year. The sales commissions are included in “Sales and marketing” expenses in the condensed consolidated statements of operations.

Impact on beginning balances

The cumulative effect of the changes made to the consolidated January 1, 2018 balance sheet for the adoption of the new revenue standard were as follows (in thousands):

 

 

 

As of

 

 

Adjustment on

 

 

As of

 

Balance Sheet line items impacted

 

December 31,

2017

 

 

adoption of new

revenue standard

 

 

January 1,

2018

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivables, net

 

$

120,553

 

 

$

12,728

 

 

$

133,281

 

Inventories

 

 

32,740

 

 

 

(108

)

 

 

32,632

 

Prepaid expenses and other current assets

 

 

11,367

 

 

 

4,113

 

 

 

15,480

 

Deferred cost of revenue, current portion

 

 

3,007

 

 

 

(1,076

)

 

 

1,931

 

Deferred cost of revenue, non-current portion

 

 

5,403

 

 

 

(3,885

)

 

 

1,518

 

Other non-current assets

 

 

3,429

 

 

 

(222

)

 

 

3,207

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

 

128,757

 

 

 

1,250

 

 

 

130,007

 

Deferred revenue, current portion

 

 

34,501

 

 

 

8,449

 

 

 

42,950

 

Deferred revenue, non-current portion

 

 

48,511

 

 

 

(36,488

)

 

 

12,023

 

Equity:

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

 

(283,338

)

 

 

38,339

 

 

 

(244,999

)

Revenue recognition

Revenue is recognized when control of the promised goods or services is transferred to the customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. This is achieved by applying the following five-step approach:

 

Identification of the contract, or contracts, with a customer

 

Identification of the performance obligations in the contract

 

Determination of the transaction price

 

Allocation of the transaction price to the performance obligations in the contract

 

Recognition of revenue when, or as, performance obligations are satisfied.

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The majority of the Company’s revenue recognized in the condensed consolidated statements of operations is revenue from contracts with customers. The Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations.

Shipping charges billed to customers are included in revenue and the related shipping costs are included in cost of revenue. Revenue is recorded net of taxes collected or accrued. Sales taxes are recorded as current liabilities until remitted to the relevant government authority.

The Company does not have any capitalized costs associated with contract acquisition because most direct contract acquisition costs relate to contracts that are recognized over a period of one year or less.

Arrangements with multiple performance obligations

The Company’s contracts may contain multiple distinct performance obligations. The transaction price is allocated to each performance obligation based on a relative stand-alone selling price (“SSP”). For performance obligations that the Company routinely sells separately, the SSP is determined by evaluating such stand-alone sales. For those performance obligations that are not routinely sold separately, the Company determines SSP based on a market assessment approach, or on an expected cost-plus margin approach.

Nature of products and services

Platform segment:

The Company’s platform segment generates revenue from advertising sales, subscription and transaction revenue share, sales of branded channel buttons on remote controls and licensing arrangements with TV brands and service operators.

The Company’s advertising revenue is mostly generated through video and display advertising delivered through advertising impressions. The Company enters into arrangements with advertising agencies that purchase advertising on its platform on behalf of the agencies’ clients. These advertising arrangements are typically sold on a cost-per-thousand basis and are evidenced by an Insertion Order (“IO”) that specifies the terms of the arrangement such as the type of ad product, pricing, insertion dates, and number of impressions in a stated period. Revenue is recognized over time based on the number of impressions delivered. IOs may include multiple performance obligations as they generally contain several different advertising products that each represent a separately identifiable promise within the contract. For such arrangements, the Company allocates revenue to each performance obligation on a relative stand-alone selling price basis. Stand-alone selling prices are based on the prices charged to customers. In addition, advertising revenue is also recognized as a distinct performance obligation as part of a content distribution arrangement with content publishers.

The Company earns revenue share from content publishers based on user subscriptions activated or billed through the Company’s platform and from purchases or renting of publishers’ media. The Company’s revenue share is generally equal to a fixed percentage of the price charged by the content publisher or a contractual flat fee.

The Company sells branded channel buttons on player and TV remote controls that provide one-touch access to the publishers’ content. The Company typically receives a fixed fee per button unit over a defined distribution period.

The Company licenses its technology and proprietary operating system to service operators and TV brands. Arrangements with service operators generally include performance obligations comprised of a license to the technology and proprietary operating system, unspecified upgrades or enhancements, hosting of a branded channel stor