roku-10q_20180930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes        No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

   

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

 

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

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

As of October 31, 2018, the registrant had 77,223,289 of Class A common stock, $0.0001 par value per share, and 31,941,328 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 Comprehensive Loss

 

3

 

Condensed Consolidated Statement of Stockholders’ Equity

 

4

 

Condensed Consolidated Statements of Cash Flows

 

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

6

Item 2.

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

 

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

34

Item 4.

Controls and Procedures

 

34

PART II.

OTHER INFORMATION

 

35

Item 1.

Legal Proceedings

 

35

Item 1A.

Risk Factors

 

35

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

60

Item 3.

Defaults Upon Senior Securities

 

61

Item 4.

Mine Safety Disclosures

 

61

Item 5.

Other Information

 

61

Item 6.

Exhibits

 

62

Signatures

 

63

 

 

 

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 management’s beliefs and assumptions and on information currently available. 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 deploy our technology;

 

our ability to acquire rights to distribute 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 investors and the general 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

 

 

 

September 30,

2018

 

 

December 31,

2017

 

Assets

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

137,670

 

 

$

177,250

 

Short-term investments

 

 

42,057

 

 

 

 

Accounts receivable, net of allowances

 

 

133,895

 

 

 

120,553

 

Inventories

 

 

68,803

 

 

 

32,740

 

Prepaid expenses and other current assets

 

 

13,867

 

 

 

11,367

 

Deferred cost of revenue, current portion

 

 

1,504

 

 

 

3,007

 

Total current assets

 

 

397,796

 

 

 

344,917

 

Property and equipment, net

 

 

23,260

 

 

 

14,736

 

Deferred cost of revenue, non-current portion

 

 

 

 

 

5,403

 

Intangible assets, net

 

 

1,615

 

 

 

2,030

 

Goodwill

 

 

1,382

 

 

 

1,382

 

Other non-current assets

 

 

4,305

 

 

 

3,429

 

Total Assets

 

$

428,358

 

 

$

371,897

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

147,255

 

 

$

128,757

 

Deferred revenue, current portion

 

 

38,543

 

 

 

34,501

 

Total current liabilities

 

 

185,798

 

 

 

163,258

 

Deferred revenue, non-current portion

 

 

13,376

 

 

 

48,511

 

Other long-term liabilities

 

 

7,308

 

 

 

7,849

 

Total Liabilities

 

 

206,482

 

 

 

219,618

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value

 

 

 

 

 

 

Common stock, $0.0001 par value

 

 

11

 

 

 

10

 

Additional paid-in capital

 

 

482,546

 

 

 

435,607

 

Accumulated other comprehensive loss

 

 

(7

)

 

 

 

Accumulated deficit

 

 

(260,674

)

 

 

(283,338

)

Total stockholders’ equity

 

 

221,876

 

 

 

152,279

 

Total Liabilities and Stockholders’ Equity

 

$

428,358

 

 

$

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

 

 

Nine Months Ended

 

 

 

September 30,

2018

 

 

September 30,

2017

 

 

September 30,

2018

 

 

September 30,

2017

 

Net Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Platform

 

$

100,050

 

 

$

57,528

 

 

$

265,468

 

 

$

139,919

 

Player

 

 

73,331

 

 

 

67,254

 

 

 

201,299

 

 

 

184,583

 

Total net revenue (Note 12)

 

 

173,381

 

 

 

124,782

 

 

 

466,767

 

 

 

324,502

 

Cost of Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Platform

 

 

29,504

 

 

 

12,962

 

 

 

78,498

 

 

 

33,083

 

Player

 

 

64,884

 

 

 

61,925

 

 

 

168,412

 

 

 

165,047

 

Total cost of revenue

 

 

94,388

 

 

 

74,887

 

 

 

246,910

 

 

 

198,130

 

Gross Profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Platform

 

 

70,546

 

 

 

44,566

 

 

 

186,970

 

 

 

106,836

 

Player

 

 

8,447

 

 

 

5,329

 

 

 

32,887

 

 

 

19,536

 

Total gross profit

 

 

78,993

 

 

 

49,895

 

 

 

219,857

 

 

 

126,372

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

45,370

 

 

 

28,532

 

 

 

119,692

 

 

 

76,650

 

Sales and marketing

 

 

25,603

 

 

 

16,216

 

 

 

68,180

 

 

 

44,938

 

General and administrative

 

 

19,769

 

 

 

13,039

 

 

 

50,768

 

 

 

33,894

 

Total operating expenses

 

 

90,742

 

 

 

57,787

 

 

 

238,640

 

 

 

155,482

 

Loss from Operations

 

 

(11,749

)

 

 

(7,892

)

 

 

(18,783

)

 

 

(29,110

)

Other Income (Expense), Net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(112

)

 

 

(815

)

 

 

(220

)

 

 

(1,286

)

Change in fair value of preferred stock warrant

   liability

 

 

 

 

 

(37,682

)

 

 

 

 

 

(40,333

)

Other income, net

 

 

2,162

 

 

 

212

 

 

 

2,971

 

 

 

423

 

Total other income (expense), net

 

 

2,050

 

 

 

(38,285

)

 

 

2,751

 

 

 

(41,196

)

Loss Before Income Taxes

 

 

(9,699

)

 

 

(46,177

)

 

 

(16,032

)

 

 

(70,306

)

Income tax expense (benefit)

 

 

(172

)

 

 

58

 

 

 

(397

)

 

 

144

 

Net Loss Attributable to Common Stockholders

 

$

(9,527

)

 

$

(46,235

)

 

$

(15,635

)

 

$

(70,450

)

Net loss per share attributable to

    common stockholders—basic and diluted

 

$

(0.09

)

 

$

(8.79

)

 

$

(0.15

)

 

$

(14.09

)

Weighted-average shares used in computing net

   loss per share attributable to

   common stockholders—basic and diluted

 

 

106,884

 

 

 

5,260

 

 

 

103,035

 

 

 

4,999

 

 

See accompanying notes to condensed consolidated financial statements.

2


ROKU, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

2018

 

 

September 30,

2017

 

 

September 30,

2018

 

 

September 30,

2017

 

Net Loss Attributable to Common Stockholders

 

$

(9,527

)

 

$

(46,235

)

 

$

(15,635

)

 

$

(70,450

)

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on short-term investments, net of tax

 

 

(7

)

 

 

 

 

 

(7

)

 

 

 

Other comprehensive loss, net of tax:

 

 

(7

)

 

 

 

 

 

(7

)

 

 

 

Comprehensive Net Loss

 

$

(9,534

)

 

$

(46,235

)

 

$

(15,642

)

 

$

(70,450

)

 

See accompanying notes to condensed consolidated financial statements.

3


ROKU, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

 

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Treasury

 

 

Accumulated Other

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Stock

 

 

Comprehensive Loss

 

 

Deficit

 

 

Equity

 

Balance—December 31, 2017

 

 

99,157

 

 

$

10

 

 

$

436,278

 

 

$

(671

)

 

$

 

 

$

(283,338

)

 

$

152,279

 

Vesting of early exercised stock options

 

 

 

 

 

 

 

 

213

 

 

 

 

 

 

 

 

 

 

 

 

 

213

 

Issuance of common stock pursuant to equity

   incentive plans, net of taxes

 

 

9,501

 

 

 

1

 

 

 

25,558

 

 

 

(69

)

 

 

 

 

 

 

 

 

25,490

 

Issuance of common stock pursuant to exercise

   of common stock warrants, net

 

 

141

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

21,237

 

 

 

 

 

 

 

 

 

 

 

 

 

21,237

 

Adoption of ASU 2016-16 (Note 2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(40

)

 

 

(40

)

Adoption of ASU 2014-09 (Note 12)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

38,339

 

 

 

38,339

 

Unrealized loss on short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7

)

 

 

 

 

 

(7

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,635

)

 

 

(15,635

)

Balance—September 30, 2018

 

 

108,799

 

 

$

11

 

 

$

483,286

 

 

$

(740

)

 

$

(7

)

 

$

(260,674

)

 

$

221,876

 

 

See accompanying notes to condensed consolidated financial statements.

4


ROKU, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

2018

 

 

September 30,

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(15,635

)

 

$

(70,450

)

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

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

5,824

 

 

 

3,883

 

Stock-based compensation expense

 

 

21,237

 

 

 

7,517

 

Provision for doubtful accounts

 

 

755

 

 

 

17

 

Change in fair value of preferred stock warrant liability

 

 

 

 

 

40,333

 

Noncash interest expense

 

 

216

 

 

 

668

 

Loss from exit of facilities

 

 

450

 

 

 

232

 

Loss on disposals of property and equipment

 

 

8

 

 

 

54

 

Amortization of premiums on short-term investments

 

 

(164

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,369

)

 

 

(5,537

)

Inventories

 

 

(36,171

)

 

 

8,118

 

Prepaid expenses and other current assets

 

 

1,357

 

 

 

(2,867

)

Deferred cost of revenue

 

 

1,945

 

 

 

(972

)

Other noncurrent assets

 

 

(1,098

)

 

 

(5,870

)

Accounts payable and accrued liabilities

 

 

16,943

 

 

 

35,068

 

Other long-term liabilities

 

 

(541

)

 

 

4,410

 

Deferred revenue

 

 

(3,054

)

 

 

16,588

 

Net cash (used in) provided by operating activities

 

 

(9,297

)

 

 

31,192

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(13,363

)

 

 

(6,671

)

Purchase of business, net of cash acquired

 

 

 

 

 

(2,959

)

Purchases of short-term investments

 

 

(44,900

)

 

 

 

Sales/maturities of short-term investments

 

 

3,000

 

 

 

 

Restricted cash

 

 

 

 

 

31

 

Net cash used in investing activities

 

 

(55,263

)

 

 

(9,599

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from borrowings, net

 

 

 

 

 

24,691

 

Repayments of borrowings

 

 

 

 

 

(15,000

)

Holdback payment for a prior business acquisition

 

 

(500

)

 

 

 

Proceeds from equity issued under incentive plans, net of repurchases

 

 

25,480

 

 

 

1,072

 

Net cash provided by financing activities

 

 

24,980

 

 

 

10,763

 

Net (Decrease) Increase in Cash

 

 

(39,580

)

 

 

32,356

 

Cash and cash equivalents—Beginning of period

 

 

177,250

 

 

 

34,562

 

Cash and cash equivalents—End of period

 

$

137,670

 

 

$

66,918

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

455

 

 

$

583

 

Cash paid for income taxes

 

$

404

 

 

$

162

 

Supplemental disclosures of noncash investing and financing

   activities:

 

 

 

 

 

 

 

 

Unpaid portion of property and equipment purchases

 

$

1,828

 

 

$

836

 

Unpaid initial public offering cost

 

$

 

 

$

2,992

 

Issuance of convertible preferred stock warrants in connection

   with debt

 

$

 

 

$

2,032

 

 

See accompanying notes to condensed consolidated financial statements.

5


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 nine months ended September 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 Accounting Standards Update (“ASU”) 2016-16, Income taxes: Intra-Entity Transfers of Assets Other Than Inventory (Topic 740) described below and the adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606) described below and in Note 12, 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, judgements, 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 determination of fair value of assets and liabilities. 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.

6


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 includes unrealized losses on the Company’s short-term investments for the three and nine months ended September 30, 2018. The Company had no short-term investments during the three and nine months ended September 30, 2017. As a result, comprehensive loss was equal to the net loss for the three and nine months ended September 30, 2017.

Concentrations

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

2018

 

 

September 30,

2017

 

 

September 30,

2018

 

 

September 30,

2017

 

Customer A

 

*

 

 

 

10

%

 

*

 

 

*

 

Customer B

 

 

10

%

 

*

 

 

*

 

 

*

 

Customer C

 

 

16

%

 

 

18

%

 

 

16

%

 

 

19

%

Customer E

 

*

 

 

 

11

%

 

*

 

 

 

11

%

 

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

 

 

 

As of

 

 

 

 

September 30,

2018

 

 

December 31,

2017

 

 

Customer C

 

 

10

%

 

*

 

 

Customer D

 

 

13

%

 

 

16

%

 

 

 

*

Less than 10%

 

Short-Term Investments

The Company considers investments in instruments purchased with an original maturity of 90 days or less to be cash equivalents. Investments in instruments with original maturities that are greater than 90 days but less than one year are short-term investments. The Company’s short-term investments consist of corporate bonds, commercial paper and U.S. Government agency securities. These investments are held in the custody of a major financial institution. As of September 30, 2018, the short-term investments were classified as available-for-sale and were recorded in the condensed consolidated balance sheet at fair value with net unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss), net of tax.

The Company recognizes an impairment charge if a decline in the fair value of its investments is considered to be other-than-temporary. The Company has determined that gross unrealized losses on short-term investments at September 30, 2018 were temporary in nature because each investment meets the Company’s credit quality requirements and the Company has the ability and intent to hold these investments until they recover their unrealized losses.

 

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 September 30, 2018, content related expenses that met these requirements were not material.

7


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 12 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.

Recently Issued Accounting Pronouncements Not Yet Adopted

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 Company will adopt this guidance on January 1, 2019 using the modified retrospective approach. The Company is continuing to evaluate the impact of this adoption including the use of practical expedients provided in the guidance. The Company believes that the increase in assets and liabilities for all of its existing leases upon adoption will be material.

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 does not believe the adoption of ASU 2018-15 will have a material impact on the consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Topic 350),  Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires hosting arrangements that are service contracts to follow the guidance for internal-use software to determine which implementation costs can be capitalized. The guidance is effective either prospectively or retrospectively for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the impact of this new guidance on the consolidated financial statements and the related disclosures.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurements (Topic 820), Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This standard removes, modifies, and adds certain disclosure requirements for fair value measurements. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company is currently in the process of evaluating the effects of the new guidance but does not expect the impact from this standard to be material.

 

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 and $0.5 million during the three months ended September 30, 2018. 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 is primarily attributable to the acquired workforce and expected operating synergies.

8


4. Balance sheet components

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

 

 

 

September 30,

2018

 

 

December 31,

2017

 

Gross accounts receivable

 

$

146,156

 

 

$

138,292

 

Allowance for sales returns

 

 

(4,221

)

 

 

(6,907

)

Allowance for sales incentives

 

 

(7,271

)

 

 

(10,442

)

Other allowances

 

 

(769

)

 

 

(390

)

Total allowances

 

 

(12,261

)

 

 

(17,739

)

Total Accounts Receivable—net of allowances

 

$

133,895

 

 

$

120,553

 

 

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

 

 

 

September 30,

2018

 

 

December 31,

2017

 

Beginning balance

 

$

(6,907

)

 

$

(6,916

)

Charged to revenue

 

 

(10,239

)

 

 

(19,089

)

Utilization of sales return reserve

 

 

12,925

 

 

 

19,098

 

Ending balance

 

$

(4,221

)

 

$

(6,907

)

 

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

 

 

 

September 30,

2018

 

 

December 31,

2017

 

Beginning balance

 

$

(10,442

)

 

$

(8,503

)

Charged to revenue

 

 

(24,017

)

 

 

(44,264

)

Utilization of sales incentive reserve

 

 

27,188

 

 

 

42,325

 

Ending balance

 

$

(7,271

)

 

$

(10,442

)

 

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

 

 

 

September 30,

2018

 

 

December 31,

2017

 

Computers and equipment

 

$

14,870

 

 

$

11,631

 

Leasehold improvements

 

 

16,615

 

 

 

8,437

 

Website and internal-use software

 

 

6,745

 

 

 

5,461

 

Office equipment and furniture

 

 

3,099

 

 

 

1,987

 

Total property and equipment

 

 

41,329

 

 

 

27,516

 

Accumulated depreciation and amortization

 

 

(18,069

)

 

 

(12,780

)

Property and Equipment, net

 

$

23,260

 

 

$

14,736

 

 

Depreciation and amortization expense for the three months ended September 30, 2018 and 2017 was $2.1 million and $1.3 million, respectively. Depreciation and amortization expense for the nine months ended September 30, 2018 and 2017 was $5.4 million and $3.9 million, respectively.

9


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

 

 

 

September 30,

2018

 

 

December 31,

2017

 

Accounts payable

 

$

55,298

 

 

$

56,413

 

Accrued royalty expense

 

 

6,182

 

 

 

17,165

 

Accrued inventory

 

 

22,857

 

 

 

2,382

 

Accrued payroll and related expenses

 

 

7,195

 

 

 

8,699

 

Accrued cost of revenue

 

 

15,628

 

 

 

12,210

 

Accrued payments to content publishers

 

 

28,815

 

 

 

24,037

 

Taxes and related liabilities

 

 

1,135

 

 

 

1,463

 

Customer prepayments

 

 

2,951

 

 

 

545

 

Other accrued expenses

 

 

7,194

 

 

 

5,843

 

Total Accounts Payable and Accrued Liabilities

 

$

147,255

 

 

$

128,757

 

 

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

 

 

 

September 30,

2018

 

 

December 31,

2017

 

Platform, current

 

$

23,681

 

 

$

19,022

 

Player, current

 

 

14,862

 

 

 

15,479

 

Total deferred revenue, current

 

 

38,543

 

 

 

34,501

 

Platform, non-current

 

 

8,300

 

 

 

42,674

 

Player, non-current

 

 

5,076

 

 

 

5,837

 

Total deferred revenue, non-current

 

 

13,376

 

 

 

48,511

 

Total Deferred Revenue (See Note 12)

 

$

51,919

 

 

$

83,012

 

 

5. SHORT-TERM INVESTMENTS

The following is a summary of the Company’s short-term investments (in thousands):

 

 

September 30, 2018

 

 

 

Amortized Cost

 

 

Gross Unrealized Gains

 

 

Gross Unrealized Loss

 

 

Fair Value

 

Corporate bonds and commercial paper

 

$

37,095

 

 

$

 

 

$

(5

)

 

$

37,090

 

U.S. government securities

 

 

4,969

 

 

 

 

 

 

(2

)

 

 

4,967

 

Total Short-Term Investments

 

$

42,064

 

 

$

 

 

$

(7

)

 

$

42,057

 

Tax amounts related to unrealized losses are not material for all periods presented.

The following table summarizes the maturities of the Company’s short-term investments by contractual maturity (in thousands):

 

 

September 30, 2018

 

 

 

Amortized Cost

 

 

Fair Value

 

Less than 1 year

 

$

42,064

 

 

$

42,057

 

Due in 1-3 years

 

 

 

 

 

 

Total Short-Term Investments

 

$

42,064

 

 

$

42,057

 

The Company did not have any short-term investments at December 31, 2017.

6. FAIR VALUE

The Company’s financial assets measured at fair value are as follows (in thousands):

 

10


 

 

September 30, 2018

 

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets: