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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2022-02-18 compared with 2021-02-26 · 3 added, 962 removed, 13 unchanged (99% of the section changed)

2 unchanged sentences

Our exposure to interest rate risk relates to the interest income generated by cash, cash equivalents, and interest expense on the Credit Facility.

The primary objective of our investment policy is to preserve principal while maximizing income without significantly increasing risk.

The primary objective of our investment policy is to preserve principal while maximizing

income without significantly increasing risk.

We do not believe that an increase or decrease in interest rates of 100 basis points would have a material effect on our operating results or financial condition.

5 unchanged sentences

dollar, resulting in minimal foreign currency risks.

In the future, if our international revenues increase or more of our expenses are denominated in currencies other than the U.S.

In the future, if our international revenue increases or more of our expenses are denominated in currencies other than the U.S.

dollar, our exposure to foreign currency risk will likely be more significant.

1 unchanged sentence

However, in the future, we may enter into derivatives or other financial instruments in an attempt to hedge our foreign currency exchange risk.

Financial Statemen ts and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Comprehensive Loss

Consolidated Statements of Stockholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Roku, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Roku, Inc.

and subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.

Changes in Accounting Principles

As discussed in Note 2 to the financial statements, the Company changed its method of accounting for leases in fiscal year 2019 due to the adoption of Accounting Standards Update No.

2016-02, Leases ( Topic 842 ), using the optional transition method.

Basis for Opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

Revenue Recognition - Variable Consideration Determination of Content Distribution Services and Branded Channel Buttons – Refer to Note 3 to the financial statements

Critical Audit Matter Description

As part of the Company’s revenue recognition for its arrangements with content publishers, management is required to estimate variable consideration primarily related to content distribution services from transactional revenue sharing, and the sale of branded channel buttons on remote controls.

Variable consideration related to content distribution services with content publishers is included in the estimated transaction price based on the expected value for which a significant reversal of revenue is not expected to occur.

For transactional revenue sharing arrangements, the estimate of the variable consideration is based on management’s assessment of historical, current, and forecasted performance of the publisher’s content application(s).

For the sale of branded channel buttons on remote controls, the estimate of the variable consideration is based on management’s assessment of historical, current, and forecasted player and Roku TV sales volumes.

We identified the revenue forecasts relating to content publisher arrangements as a critical audit matter due to the significant judgment necessary to estimate variable consideration and transaction prices.

Such estimates required a high degree of auditor judgment and an increased extent of effort relative to evaluating the reasonableness of management’s estimates and assumptions related to the forecasts of variable consideration.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to management’s forecast used in the determination of future variable consideration included the following, among others:

We tested the effectiveness of controls over management’s forecasting process related to content distribution services and branded channel buttons.

We selected a sample of revenue arrangements with variable consideration and performed the following:

Obtained contractual documents for each selection, including master agreements and other related documents.

Analyzed the contractual documents to determine if all arrangement terms that may have an impact on revenue recognition were identified and properly considered in the evaluation of the accounting for the contract, including terms and conditions for revenue sharing.

Performed inquiries with applicable individuals in the Company’s finance and sales departments regarding the estimates for sales of branded channel buttons.

Evaluated management’s accuracy of forecasting by comparing the historical forecasts of consideration to actual consideration received.

Evaluated changes from prior period forecasts to current period forecasts, when applicable.

Compared management’s forecasts of variable consideration to historical data, other information within the Company, and certain publicly available historical and forecasted industry information, when applicable.

Tested the mathematical accuracy of the compilation of the forecast.

/s/ DELOITTE & TOUCHE LLP

San Jose, California

February 25, 2021

We have served as the Company's auditor since 2008.

CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

As of December 31,

Current Assets:

Cash and cash equivalents

Restricted cash

Accounts receivable, net of allowances of $ 41,236 and $ 27,521 as of

December 31, 2020 and 2019, respectively

Prepaid expenses and other current assets

Total current assets

Property and equipment, net

Operating lease right-of-use assets

Intangible assets, net

Other non-current assets

Liabilities and Stockholders’ Equity

Current Liabilities:

Accounts payable

Accrued liabilities

Current portion of long-term debt

Deferred revenue, current portion

Total current liabilities

Long-term debt, non-current portion

Deferred revenue, non-current portion

Operating lease liability, non-current portion

Other long-term liabilities

Total Liabilities

Commitments and contingencies (Note 12)

Stockholders’ Equity:

Common stock, $ 0.0001 par value;

1,150,000 (Class A - 1,000,000 and Class B - 150,000 ) shares authorized

as of December 31, 2020 and 2019;

128,004 (Class A - 110,645 and Class B - 17,359 ) shares and

119,897 (Class A - 93,574 and Class B - 26,323 ) shares

issued and outstanding as of December 31, 2020 and 2019, respectively

Additional paid-in capital

Accumulated other comprehensive income

Accumulated deficit

Total stockholders’ equity

Total Liabilities and Stockholders’ Equity

See accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

Years Ended December 31,

Total net revenue

Cost of Revenue:

Total cost of revenue

Gross Profit:

Total gross profit

Operating Expenses:

Research and development

Sales and marketing

General and administrative

Total operating expenses

Loss from Operations

Other Income (Expense), Net:

Interest expense

Other income (expense), net

Total other income (expense), net

Loss Before Income Taxes

Income tax (benefit) expense

Net Loss Attributable to Common Stockholders

Net loss per share attributable to common stockholders—basic and diluted

Weighted-average shares used in computing net loss per share attributable to common stockholders—basic and diluted

See accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

Years Ended December 31,

Net Loss Attributable to Common Stockholders

Other comprehensive gain (loss), net of tax:

Unrealized gain (loss) on short-term investments, net of tax

Foreign currency translation adjustment

Other comprehensive gain (loss), net of tax

Comprehensive Net Loss

See accompanying Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands)

Additional Paid-in

Accumulated Other

Total Stockholders’

Comprehensive Loss

Balance—December 31, 2017

Vesting of early exercised stock options

Issuance of common stock pursuant to equity incentive plans, net of taxes

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

Stock-based compensation expense

Share repurchases

Adoption of ASU 2016-16

Adoption of ASU 2014-09

Unrealized loss on short-term investments

Balance—December 31, 2018

Vesting of early exercised stock options

Share repurchases

Issuance of common stock pursuant to equity incentive plans

Issuance of common stock pursuant in connection with at-the-market offerings, net of issuance costs of $ 6.4 million

Issuance of common stock in connection with acquisition

Stock-based compensation expense

Unrealized gain on short-term investments

Foreign currency translation adjustment

Balance—December 31, 2019

Vesting of early exercised stock options

Issuance of common stock pursuant to equity incentive plans

Issuance of common stock pursuant in connection with at-the-market offering, net of issuance costs of $ 6.8 million

Stock-based compensation expense

Adoption of ASU 2016-13

Balance—December 31, 2020

See accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Years Ended December 31,

Cash flows from operating activities:

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization

Stock-based compensation expense

Amortization of right-of-use assets

Amortization of content assets

Provision for doubtful accounts

Other items net

Changes in operating assets and liabilities:

Accounts receivable

Prepaid expenses and other current assets

Deferred cost of revenue

Other noncurrent assets

Accounts payable

Accrued liabilities

Operating lease liabilities

Other long-term liabilities

Deferred revenue

Net cash provided by operating activities

Cash flows from investing activities:

Purchase of property and equipment

Purchase of business, net of cash acquired

Proceeds from escrows associated with acquisition

Purchase of intangible assets

Purchases of short-term investments

Sales/maturities of short-term investments

Net cash used in investing activities

Cash flows from financing activities:

Proceeds from borrowings, net of issuance costs

Repayments of borrowings

Holdback payment for a prior business acquisition

Proceeds from equity issued under incentive plans, net of repurchases

Proceeds from equity issued under at-the-market offerings, net of offering costs

Net cash provided by financing activities

Net increase (decrease) in cash, cash equivalents and restricted cash

Effect of exchange rate changes on cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash —Beginning of period

Cash, cash equivalents and restricted cash —End of period

Cash, cash equivalents and restricted cash at end of period:

Cash and cash equivalents

Restricted cash

Cash, cash equivalents and restricted cash —End of period

Years Ended December 31,

Supplemental disclosures of cash flow information:

Cash paid for interest

Cash paid for income taxes

Supplemental disclosures of noncash investing and financing activities:

Issuance of common stock for business combinations

Unpaid portion of property and equipment purchases

Unpaid portion of acquisition related expenses

Unpaid portion of purchased intangibles

Unpaid portion of at-the-market offering costs

See accompanying Notes to Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Organization and Description of Business

(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 platform revenue from advertising, content distribution, audience development, billing services and licensing activities and player revenue from the sale of streaming players and audio products.

SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION

Basis of Presentation and Principles of Consolidation

The consolidated financial statements, which include the accounts of Roku, Inc.

and its wholly-owned subsidiaries, have been prepared in conformity with accounting principles generally accepted in the United States (“U.S.

All intercompany accounts and transactions have been eliminated in consolidation.

Reclassification of Prior Year Presentation

Certain prior period amounts within cash flow from operations in the statement of cash flows, have been reclassified to conform to current period presentation.

These reclassifications had no effect on net cash provided by operating activities for any period reported.

Use of Estimates

The preparation of the Company’s 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, liabilities, net revenue and expenses.

Significant items subject to such estimates and assumptions include:

for revenue recognition, determining the nature and timing of satisfaction of performance obligations, variable consideration, determining the stand-alone selling prices of performance obligations, gross versus net revenue recognition, evaluation of customer versus vendor relationships, and other obligations such as sales return reserves and sales incentive programs;

the impairment of goodwill and intangible assets;

useful lives of tangible and intangible assets;

allowances for doubtful accounts;

the valuation of deferred income tax assets;

and stock-based compensation.

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 and assumptions.

Comprehensive Loss

The comprehensive loss is equal to the net loss for the year ended December 31, 2020.

Comprehensive loss includes unrealized gains on the Company’s short-term investments and foreign currency translation adjustments for the year ended December 31, 2019.

Comprehensive loss includes unrealized losses on the Company’s short-term investments for the year ended December 31, 2018.

Income taxes on the unrealized gains or losses are not material.

Foreign Currency

The functional currency of the Company’s foreign subsidiaries is the U.S.

Monetary assets and liabilities of these subsidiaries are remeasured into U.S.

dollars from the local currency at rates in effect at period-end and nonmonetary assets and liabilities are remeasured at historical rates.

Revenues and expenses are remeasured at average exchange rates in effect during each period.

Foreign currency gains or losses from re-measurement and transaction gains or losses are recorded as other income (expense), net in the consolidated statements of operations.

During the year ended December 31, 2020, the Company recorded a foreign currency gain of $ 1.3 million.

During the years ended December 31, 2019 and 2018, the Company recorded a foreign currency loss of $ 0.2 million and $ 0.5 million, respectively.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

As of December 31, 2020, two financial institutions managed 46 % and 26 %, respectively, of the Company’s total cash and cash equivalents balance.

As of December 31, 2019, the same two financial institutions managed 65 % and 34 %, respectively, of the Company’s total cash and cash equivalents balance.

Accounts Receivable, net

Accounts receivable are typically unsecured and are derived from revenue earned from customers.

They are stated at invoice value less estimated allowances for sales returns, sales incentives and doubtful accounts.

The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses and doubtful accounts.

The Company considers historical experience, ongoing promotional activities, historical claim rate and other factors to determine the allowances for sales returns and sales incentives.

Allowance for Sales Returns :

Allowance for sales returns consist of the following activities (in thousands):

Years Ended December 31,

Beginning balance

Charged to revenue

Utilization of sales return reserve

Ending balance

Allowance for Sales Incentives :

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

Years Ended December 31,

Beginning balance

Charged to revenue

Utilization of sales incentive reserve

Ending balance

Allowance for Doubtful Accounts :

Allowance for doubtful accounts consisted of the following activities (in thousands):

Years Ended December 31,

Balance, beginning of period

Impact of adoption of ASU 2016-13

Adjusted balance, beginning of period

Provision for doubtful accounts

Adjustments for recovery and write-off

Balance, end of period

Customer H accounted for 11 % of the accounts receivable, net balance as of December 31, 2020.

The Company did no t have any customer that accounted for more than 10% of its accounts receivable, net balance as of December 31, 2019.

Business Combinations

The Company determines whether a transaction meets the definition of a business combination before applying the acquisition method of accounting to that transaction.

The Company allocates the fair value of the purchase consideration of its acquisitions to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values.

The excess of the fair value of purchase consideration over the fair values of identifiable assets and liabilities is recorded as goodwill.

The operating results of acquired business is included in the Company’s consolidated statement of operations beginning on their effective acquisition date.

Acquisition-related expenses and certain acquisition restructuring and other related charges are recognized separately from the business combination and are expensed as incurred.

Contingent consideration arrangements are recognized at fair value as of the acquisition date with subsequent fair value adjustments recorded in operations.

While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, estimates are inherently uncertain and subject to refinement.

As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill.

In addition, uncertain tax positions and tax-related valuation allowances are initially recorded in connection with a business combination as of the acquisition date.

The Company continues to collect information and reevaluates these estimates and assumptions quarterly and records any adjustments to the Company’s preliminary estimates to goodwill provided that the Company is within the measurement period.

Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations.

Intangible Assets

Intangible assets acquired through business combinations are recorded at their fair values upon acquisition close.

Intangible assets are amortized using the straight-line method over their estimated useful lives.

The Company evaluates the estimated remaining useful lives of its intangible assets annually and when events or changes in circumstances warrant a revision to the remaining periods of amortization.

Impairment Assessments

The Company evaluates goodwill for possible impairment at least annually during the fourth quarter of each fiscal year or more often, if and when circumstances indicate that goodwill may be impaired.

This includes but is not limited to significant adverse changes in the business climate, market conditions, or other events that indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value.

In performing its annual assessment, the Company can opt to perform a qualitative assessment to test a reporting unit’s goodwill for impairment or it can directly perform a quantitative assessment.

Based on the Company’s qualitative assessment, if

it is determined that the fair value of our reporting unit is, more likely than not, less than its carrying amount, then the quantitative assessment is performed.

Any excess of the reporting unit's carrying amount over its fair value is be recorded as an impairment loss.

The Company reviews long-lived assets, intangible assets and capitalized licensed content assets with finite lives for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of those assets are no longer appropriate.

The Company assesses these assets for impairment based on their estimated undiscounted future cash flows.

If the carrying value of the asset group exceeds the estimated future undiscounted cash flows, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the asset group.

The Company did no t recognize any impairment for goodwill, intangible assets or capitalized licensed content assets in any periods reported.

The impairments of operating right-of-use assets during the years ended December 31, 2020 and 2019 were not material.

Revenue Recognition

Revenue is recognized upon transfer of control of promised goods or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services.

The Company’s contracts include various product or services or a combination of both, which are generally capable of being distinct and are accounted for as separate performance obligations.

The Company’s contracts often contain multiple distinct performance obligations.

The Company estimates the transaction price of a contract based on the expected value for which a significant reversal of revenue is not expected to occur.

The estimate of the variable consideration is based on the assessment of historical, current, and forecasted performance noted and expected from the performance obligation.

In arrangements with multiple performance obligations, the estimated transaction price of each contract is allocated to each distinct performance obligation based on relative stand-alone selling price (“SSP”).

For performance obligations routinely sold 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 market conditions and other observable inputs.

When the Company sells third-party goods and services, it evaluates whether the Company is the principal, and reports revenues on a gross basis, or an agent, and reports revenues on a net basis.

In this assessment, the Company considers if it obtains control of the specified goods or services before they are transferred to the customer, as well as other indicators such as the party primarily responsible for fulfillment, inventory risk, and discretion in establishing price.

Revenue is recorded net of taxes collected from customers which are subsequently remitted to the relevant government authority.

The Company does not capitalize any cost associated with contract acquisition because it applies a practical expedient and expenses commissions when incurred as most direct contract acquisition costs relate to contracts that are recognized over a period of one year or less.

Sales commissions are included in Sales and marketing expenses in the consolidated statements of operations.

As-invoiced practical expedient is applied when the amount of consideration the Company has a right to invoice corresponds directly with the value to the customer of the entity’s performance completed to date.

Nature of Products and Services

Platform segment:

The Company generates platform revenue from the sale of digital advertising and related services, content distribution services, subscription and transaction revenue shares, Premium Subscriptions, billing services, sale of branded channel buttons on remote controls and licensing arrangements with service operators and TV brands.

The Company sells digital advertising directly to marketers or through advertising agencies.

Revenue from advertising is mostly generated through video and display advertising delivered through advertising impressions.

Advertising is typically sold on a cost-per-thousand (“CPM”) basis and is evidenced by an Insertion Order (“IO”).

Revenue is recognized as the number of impressions are delivered.

IOs may include multiple performance obligations as they contain distinct advertising products or services.

For such arrangements, the Company allocates revenue to each distinct performance obligation based on their relative SSP.

The Company also generates revenue from customers using its platform.

For that it charges a platform fee, which is a percentage of a customer’s advertising inventory spend during the month, along with data and any add-on features purchased through the platform.

The Company recognizes revenue on either a gross or net basis for digital advertising based on its determination as to whether it is acting as the principal in the revenue generation process or as an agent.

Where the Company is the principal, it controls the advertising inventory before it is transferred to its customers.

This is further supported by the Company being primarily responsible to its customers and having a level of discretion in establishing pricing.

Advertising arrangements comprised of multiple performance obligations are recognized either at a point in time or over time depending on the nature of the distinct performance obligation.

The Company’s content distribution revenue sharing arrangements include cash or non-cash consideration.

The revenue sharing arrangements generally apply to new subscriptions for accounts that sign up for new services and at the time of a movie rental or purchase.

Revenue is recognized on a net basis as the Company is deemed to be the agent between content publishers and end users.

Revenue is recognized on a time elapsed basis, by day, as the services are delivered over the contractual distribution term.

Non-cash consideration is usually in the form of advertising inventory, the fair value of which is determined based on relevant internal and third-party data.

The Company sells monthly subscriptions for premium content on The Roku Channel for varying fees for different content.

Revenue from such premium subscription fees is recognized on a gross basis over the service period as the Company is deemed to be the principal in the relationship with the end user.

The Company obtains control of the content before transferring to the end user and has latitude in establishing pricing.

The Company pays fixed fees to the providers of premium content on The Roku Channel based on the contractual arrangement and recognizes that in Cost of revenue, platform.

The Company sells branded channel buttons on remote controls of streaming devices that provide one-touch access to a publisher’s content.

The Company typically receives a fixed fee per button for each unit sold over a defined distribution period.

Revenue is recognized on a time elapsed basis, by day, over the distribution term.

The Company licenses the Roku OS, including updates and upgrades, to TV brands and service operators.

The licensing revenue is recognized at a point in time, when the Company makes the intellectual property available and the control transfers to the customer.

The revenue allocated to unspecified upgrades is recognized on a time elapsed basis, by day, over the service period.

Professional services revenue is recognized as services are provided or accepted.

Hosting fees are recognized on a time elapsed basis, by day, over the service period.

Player segment:

The Company sells the majority of its players and audio products to retail distribution channels in the U.S., including brick and mortar and online retailers, as well as through the Company’s website.

Player revenue primarily consists of hardware, embedded software and unspecified upgrades on a when and if-available basis.

The hardware and embedded software are considered as one performance obligation and revenue is recognized at a point in time when the control transfers to the customer.

Unspecified upgrades or enhancements are available to customers on a when-and-if available basis.

The Company records the allocated value of the unspecified upgrades as deferred revenue and recognizes it as player revenue ratably on a time elapsed basis over the estimated economic life of the associated players.

The Company’s player revenue includes allowances for sales returns and sales incentives in the estimated transaction price.

These estimates are based on historical experience and anticipated performance.

Shipping charges billed to customers are included in Revenue and the related shipping costs are included in Cost of revenue.

On January 1, 2019, the Company adopted the guidance in Leases (Topic 842), using the optional transition method and recorded operating right-of-use (“ROU”) assets and operating lease liabilities on its consolidated balance sheets.

The Company determines if an arrangement contains a lease at its inception.

Operating leases are included in operating lease right-of-use assets, accrued liabilities, and operating lease liability in our consolidated balance sheets.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease.

ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

As the rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of future lease payments.

The Company takes into consideration its credit rating and the length of the lease when calculating the incremental borrowing rate.

The Company considers the options to extend or terminate the lease in determining the lease term, when it is reasonably certain to exercise one of the options.

The Company combines lease and non-lease components into a single lease component for its real estate and equipment leases.

Fair Value of Financial Instruments

The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The Company applies fair value accounting for all assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements.

The carrying amounts reported in the consolidated financial statements for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their short-term nature.

The carrying amount of debt approximates fair value due to its variable interest rates.

The Company’s inventories consist primarily of finished goods and are stated at the lower of cost or net realizable value with cost determined on a first-in, first-out basis.

Provisions are made if the cost of the inventories exceeds their net realizable value.

The Company evaluates inventory levels and purchase commitments for excess and obsolete products, based on management’s assessment of future demand and market conditions.

Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives of the assets, generally ranging between eighteen months and five years .

Leasehold improvements are amortized over the shorter of the lease term or their estimated useful lives, which range from five to ten years .

The Company capitalizes costs to develop its internal-use software.

Costs that relate to the planning and post-implementation phases of development are expensed as incurred.

Costs are capitalized when preliminary efforts are successfully completed, management has authorized and committed to funding the project, and it is probable that the project will be completed and will be used as intended.

Costs incurred for enhancements that are expected to result in additional material functionality are capitalized.

During the years ended December 31, 2020, 2019 and 2018, the Company capitalized internal-use software development costs of $ 2.2 million, $ 0.1 million and $ 1.0 million, respectively.

Capitalized costs are amortized using the straight-line method over the estimated useful life of the asset, which is generally two to three years , beginning when the asset is ready for its intended use.

During the years ended December 31, 2020, 2019 and 2018, the Company amortized expenses of $ 0.5 million, $ 1.6 million and $ 2.0 million, respectively.

Deferred Revenue

The Company’s deferred revenue reflects fees received from licensing and service arrangements, including advertising, that will be recognized as revenue over time or as services are rendered.

Deferred revenue balances consist of the amount of player sales allocated to unspecified upgrades or enhancements on a when-and-if available

basis, licensing and services fees from service operators and TV brands, and payments from advertisers and content publishers.

Deferred revenue expected to be realized within one year is classified as current liabilities and the remaining is recorded as noncurrent liabilities.

Advertising Costs

Advertising costs are expensed when incurred and are included in Sales and marketing expense in the consolidated statements of operations.

The Company incurred advertising costs of $ 7.1 million, $ 7.3 million and $ 3.0 million for the years December 31, 2020, 2019 and 2018, respectively.

Stock-Based Compensation

The Company measures compensation expense for all stock-based awards, including restricted stock units and stock options granted to employees, based on the estimated fair value of the award on the date of grant.

For restricted stock units, the grant date fair value is based on the closing market price of the Company’s Class A common stock on the date of grant.

The fair value of each stock option is estimated using the Black-Scholes option-pricing model.

The Company accounts for forfeitures as they occur.

Stock-based compensation is recognized on a straight-line basis over the requisite vesting period.

The Company accounts for income taxes using an asset and liability approach.

Deferred tax assets and liabilities are determined based on the difference between the consolidated financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income.

Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not to be realized.

Net Loss per Share

Since the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share for all periods as the inclusion of all potential common shares outstanding and potentially dilutive securities would have been anti-dilutive.

Recently Adopted Accounting Standards

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments .

The guidance amended reporting of credit losses for assets held at amortized cost basis and available-for-sale debt securities to require that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down.

On January 1, 2020 , the Company adopted this guidance using the modified retrospective adoption method and recorded a cumulative-effect adjustment to the beginning balance of accumulated deficit of approximately $ 1.1 million.

The measurement of credit losses for newly recognized financial assets and subsequent changes in the allowance for credit losses are recorded in the statements of operations.

This impact mainly relates to credit losses recognized on the Company’s doubtful accounts.

As the Company did not have any available-for-sale debt securities as of the adoption date, there was no additional impact to accumulated deficit.

In March 2019, the FASB issued ASU 2019-02, Entertainment—Films—Other Assets—Film Costs (Subtopic 926-20) and Entertainment—Broadcasters—Intangibles—Goodwill and Other (Subtopic 920-350):

Improvements to Accounting for Costs of Films and License Agreements for Program Materials , in order to align the accounting for production costs of an episodic television series with the accounting for production costs of films by removing the content distinction for capitalization.

ASU 2019-02 also requires that an entity reassess estimates of the use of a film in a film group and account for any changes prospectively.

In addition, ASU 2019-02 requires that an entity test films and license agreements for program material for impairment at a film group level when the film

or license agreements are predominantly monetized with other films and license agreements.

On January 1, 2020 , the Company adopted the guidance in ASU 2019-02 .

There was no material impact to the Company’s consolidated financial statements.

The Company also adopted the following ASUs effective January 1, 2020 , none of which had a material impact on the Company’s financial position or results of operations.

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

Fair Value Measurements (Topic 820), Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement

Intangibles - Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment

Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments

Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842)—Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No.

119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No.

2016-02, Leases (Topic 842)

Codification Improvements to Financial Instruments

In March 2020, FASB issued ASU 2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting .

This guidance provides optional expedients and exceptions for applying U.S.

GAAP to contract modifications, hedging relationships, and other transactions that reference London Interbank Offered Rate (“LIBOR”) that is expected to be discontinued, subject to meeting certain criteria.

The guidance is effective as of March 12, 2020 through December 31, 2022.

The Company made a policy election in the second quarter of 2020 to elect a different reference rate for the Credit Agreement when LIBOR is discontinued.

It is still uncertain when the transition from LIBOR to another reference rate will occur or which reference rate will become the accepted market alternative to LIBOR.

Recent Accounting Standards Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes , to simplify the accounting for income taxes by removing certain exceptions to the general principles and also simplification of areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition of enactment of tax laws or rate changes.

The guidance is effective for fiscal years beginning after December 15, 2020, including interim reporting periods within those fiscal years, with early adoption permitted.

The Company believes that the adoption of this guidance will not have a material impact on the financial statements.

The Company’s disaggregated revenues are represented by the two reportable segments discussed in Note 17.

The contract balances include the following (in thousands):

As of December 31,

Accounts receivable, net

Contract assets (included in Prepaid expenses and other current assets)

Deferred revenue, current portion

Deferred revenue, non-current portion

Total deferred revenue

Accounts receivable are recorded at the amount invoiced, net of an allowance for doubtful accounts, sales returns, and sales incentives.

Payment terms can vary by customer and contract.

The timing of revenue recognition may differ from the timing of invoicing to customers.

Contract assets are created when invoicing occurs subsequent to revenue recognition.

Contract assets are transferred to accounts receivable when the right to invoice becomes unconditional.

The Company’s contract assets are generally current in nature and are included in Prepaid expenses and other current assets.

Contract assets increased by $ 3.8 million during the year ended December 31, 2020 and by $ 2.8 million during the year ended December 31, 2019 primarily due to an increase in the growth of platform revenue combined with the timing of billing which falls into a subsequent period.

Contract liabilities are included in deferred revenue and reflect consideration invoiced prior to the completion of performance obligations and revenue recognition.

Deferred revenue increased by approximately $ 21.5 million during the year ended December 31, 2020 due to the increase in estimated values of content publisher and licensing partner arrangements and change in the timing of fulfillment of performance obligations of approximately $ 12.4 million, and higher growth in the player segment, resulting in a net increase in deferred revenue related to unspecified upgrades of approximately $ 8.4 million.

Deferred revenue decreased by approximately $ 9.8 million during the year ended December 31, 2019 primarily due to revenue recognized of $ 5.0 million pursuant to customer acceptance of a milestone, and the remaining revenue recognized primarily relates to the timing of fulfillment of performance obligations.

Revenue recognized during the year ended December 31, 2020 from amounts included in deferred revenue as of December 31, 2019 was $ 42.9 million.

Revenue recognized during the year ended December 31, 2019 from amounts included in deferred revenue as of December 31, 2018 was $ 52.5 million.

Revenue allocated to remaining performance obligations represents estimated contracted revenue that has not yet been recognized which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods.

Estimated contracted revenue was $ 513.7 m illion as of December 31, 2020 of which the Company expects to recognize approximately 55 % over the next 12 months and the remainder thereafter.

The Company recognized $ 14.4 million and $ 10.9 million during the years ended December 31, 2020 and 2019, respectively, from performance obligations that were satisfied in previous periods due to the changes in transaction price of its revenue contracts.

Customer C accounted for 12 %, 14 % and 18 % of the total net revenue during the years ended December 31, 2020, 2019 and 2018, respectively.

business combination

On November 8, 2019, the Company acquired all outstanding shares of dataxu, Inc., (“dataxu”) according to the terms and conditions of the Agreement and Plan of Merger, dated as of October 22, 2019 (the “Merger Agreement”) .

dataxu is a demand-side platform (“DSP”) that enables marketers to plan and buy video ad campaigns.

The acquisition of dataxu’s platform complements the Company’s OTT advertising platform and enables marketers to access a single, data-driven software solution to plan, buy, and optimize their ad spend across TV and OTT providers.

The total purchase consideration for dataxu was $ 147.3 million, which consisted of $ 77.6 million in cash and $ 69.7 million for the fair value of the Company’s 571,459 shares of Class A common stock.

Pursuant to the Merger Agreement, the Company had deposited $ 18.8 million into an escrow account to secure certain indemnifications and other potential obligations.

As of the year ended December 31, 2020, a balance of $ 13.6 million is unreleased and remains in the escrow account.

The allocation of the purchase consideration to tangible and intangible assets acquired and liabilities assumed on acquisition date is based on estimated fair values and is as follows (in thousands):

Assets acquired

Estimated Useful Lives

Current assets

Restricted cash

Property and equipment, net

Intangible assets:

Developed Technology

Customer relationships

Operating lease right-of-use assets

Other long-term assets

Total assets acquired

Liabilities assumed

Current liabilities

Operating lease liabilities

Total liabilities assumed

Total purchase consideration

The fair value estimates of the net assets acquired are based upon calculations and valuations, and those estimates and assumptions regarding certain tangible assets acquired and liabilities assumed.

The excess of the total consideration over the tangible assets, identifiable intangible assets, and assumed liabilities is recorded as goodwill.

Goodwill is primarily attributable to expected synergies in our advertising offerings and cross-selling opportunities.

The goodwill recorded is not deductible for tax purposes.

In connection with the acquisition, a deferred tax liability is established for the book/tax differences related to non-goodwill intangible assets.

The deferred tax liability is not reflected as the Company also acquired deferred tax assets, including significant net operating losses, that offset the deferred tax liability.

Additionally, both companies have full valuation allowances recorded against their respective deferred tax assets, resulting in a net zero adjustment to deferred taxes on the consolidated balance sheets.

GOODWILL AND INTANGIBLE ASSETS

Goodwill represents the excess of purchase consideration in a business combination over the fair value of tangible and intangible assets acquired net of the liabilities assumed.

The following table reflects the carrying value of goodwill (in thousands):

Carrying Value

Balance as of December 31, 2018

dataxu acquisition

Balance as of December 31, 2019

dataxu working capital adjustments

Balance as of December 31, 2020

Goodwill is evaluated for impairment annually.

No impairment was recognized during the years ended December 31, 2020, 2019 and 2018.

Intangible Assets

The following table is the summary of Company’s intangible assets (in thousands):

As of December 31, 2020

Weighted-Average Useful Lives

Developed technology

Customer relationships

Intangible assets

As of December 31, 2019

Weighted-Average Useful Lives

Developed technology

Customer relationships

Intangible assets

The Company recorded expenses of $ 14.5 million, $ 2.8 million and $ 0.6 million for amortization of intangible assets during the years ended December 31, 2020, 2019 and 2018, respectively.

In the years ended December 31, 2020 and 2019, the Company recorded amortization of developed technology in Cost of revenue, platform, Cost of revenue, player, Research and development, and General and administrative expenses and recorded amortization of customer relationships and tradename in Sales and marketing expenses in the consolidated statements of operations.

In the year ended December 31, 2018, the Company recorded amortization of developed technology in Research and development expenses in the consolidated statements of operations.

The estimated future amortization expense for intangible asset for the next five years and thereafter is as follows (in thousands):

Year Ending December 31,

Balance sheet components

Accounts Receivable, net :

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

As of December 31,

Gross accounts receivable

Allowance for sales returns

Allowance for sales incentives

Allowance for doubtful accounts

Other allowances

Total allowances

Total Accounts Receivable, net of allowances

Property and Equipment, net :

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

As of December 31,

Computers and equipment

Leasehold improvements

Website and internal-use software

Office equipment and furniture

Total property and equipment

Accumulated depreciation and amortization

Property and Equipment, net

Depreciation and amortization expense, for property and equipment assets, for the years ended December 31, 2020, 2019 and 2018 was $ 21.7 million, $ 12.8 million and $ 7.8 million, respectively.

Accrued Liabilities :

Accrued liabilities consisted of the following (in thousands):

As of December 31,

Payments due to content publishers

Accrued cost of revenue

Marketing, retail and merchandising costs

Operating lease liability, current

Accrued royalty expense

Licensed content liability, current

Other accrued expenses

Total Accrued Liabilities

Deferred Revenue :

Deferred revenue consisted of the following (in thousands):

As of December 31,

Platform, current

Player, current

Total deferred revenue, current

Platform, non-current

Player, non-current

Total deferred revenue, non-current

Total Deferred Revenue

licensed Content Assets

The Company licenses content for streaming on The Roku Channel.

The licensing arrangements can be for a fixed fee or variable fee.

The licensing arrangements specify the period when the content is available for streaming.

The Company capitalizes the fixed content fees and its corresponding liability when the license period begins, the cost of the content is known, and the content is accepted and available for streaming.

If the licensing fee is not determinable or reasonably estimable, no asset or liability is recorded, and licensing costs are expenses as incurred.

The Company amortizes licensed content assets into Cost of Revenue, Platform, using the straight-line method over the contractual period of availability.

The liability is paid in accordance with the contractual terms of the arrangement.

On January 1, 2020 , the Company adopted the guidance in ASU 2019-02, Entertainment—Films—Other Assets—Film Costs (Subtopic 926-20) and Entertainment—Broadcasters—Intangibles—Goodwill and Other (Subtopic 920-350):

Improvements to Accounting for Costs of Films and License Agreements for Program Materials , on a prospective basis.

The adoption did not have material impact on its financial statements.

As of December 31, 2020, licensed content assets that met these requirements were $ 7.9 million and are recorded in “Other non-current assets.” As of December 31, 2019, licensed content assets that met these requirements were $ 1.7 million and are recorded in Prepaid expenses and other current assets.

Payments for content, including additions to content assets and the changes in related liabilities, are classified within Net cash provided by operating activities on the consolidated statements of cash flows.

The increase in the content asset is due to a change in the mix of content licensed and the period over which such content is available for streaming.

The corresponding liability is included in Accrued liabilities and Other long-term liabilities and is discussed in Note 12.

The Company recorded amortization expense of $ 22.4 million and $ 2.9 million for the years ended December 31, 2020 and 2019, respectively, in Cost of revenue, platform in the consolidated statements of operations, related to capitalized licensed content assets.

The following table reflects the amortization expense for the next three years for capitalized licensed content assets as of December 31, 2020 (in thousands):

Year Ending December 31,

Licensed content assets are primarily monetized together as a unit, referred to as a film group.

The film group is evaluated for impairment whenever an event occurs or circumstances change indicating the fair value is less than the carrying value.

The Company reviews various qualitative factors and indicators to assess whether the group asset is impaired.

As of December 31, 2020, the Company did no t recognize any impairment for capitalized licensed content assets.

FAIR VALUE DISCLOSURE

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

As of December 31, 2020

As of December 31, 2019

Cash and cash equivalents:

Money market funds

Restricted cash

Total assets measured and recorded at fair value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal market (or most advantageous market, in the absence of a principal market) for the asset or liability in an orderly transaction between market participants at the measurement date.

Further, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs in measuring fair value, and to utilize a three-level fair value hierarchy that prioritizes the inputs used to measure fair value.

The three levels of inputs used to measure fair value are as follows:

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

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

The Company considers all highly liquid investments purchased with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents.

The Company measured money market funds of $ 71.8 million and $ 51.7 million as cash equivalents as of December 31, 2020 and 2019, respectively, using Level 1 inputs.

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 did not have any Level 2 instruments as of December 31, 2020 and 2019.

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 did not have Level 3 instruments at December 31, 2020 and 2019.

Assets and liabilities that are measured at fair value on a non-recurring basis

Non-financial assets such as goodwill, intangible assets, property, plant, and equipment, operating lease right-of-use assets and licensed content assets are evaluated for impairment and adjusted to fair value using Level 3 inputs, only when impairment is recognized.

The impairments for operating ROU assets recorded by the Company for the years ended December 31, 2020 and 2019 were not material.

The Company has entered into operating leases primarily for office real estate.

The leases have remaining terms ranging from one year to 10 years and may include options to extend or terminate the lease.

The depreciable life of ROU assets is limited by the expected lease term.

The components of lease expense are as follows (in thousands):

Years Ended December 31,

Operating lease cost (1)

Sublease income

Net operating lease cost

(1) For the years ended December 31, 2020 and 2019, variable lease costs were $ 12.1 million and $ 4.9 million, respectively.

Variable lease costs primarily include common area maintenance charges.

Supplemental cash flow information related to leases is as follows (in thousands):

Years Ended December 31,

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash outflows from operating leases

Right-of-use assets obtained in exchange for lease obligations:

Operating leases

Supplemental balance sheet information related to leases was as follows (in thousands, except lease term and discount rate):

As of December 31,

Operating lease right-of-use assets

Included in accounts payable and accrued liabilities:

Operating lease liability, current

Operating lease liability, non-current

Total operating lease liability

Weighted Average Remaining Lease Term:

Operating leases (in years)

Weighted Average Discount Rate:

Operating leases

Future lease payments under operating leases as of December 31, 2020 were as follows (in thousands):

Year Ending December 31,

Operating Leases

Total future lease payments

imputed interest

expected tenant improvement allowance

As of December 31, 2020, the Company’s commitment relating to the operating lease that has not yet commenced is $ 2.7 million.

This operating lease commences in fiscal year 2025 and has a lease term of two years .

The Company’s outstanding debt as of December 31, 2020 and 2019 is as follows (in thousands):

As of December 31,

Interest Rate

Term Loan A Facility

Debt issuance costs

Net carrying amount of debt

The carrying amount of debt approximates fair value due to its variable interest rates.

The interest expense for the years ended December 31, 2020 and 2019 relating to the Credit Agreement is $ 2.6 million and $ 0.4 million, respectively.

Senior Secured Term Loan A and Revolving Credit Facilities

On February 19, 2019 (the “Original Closing Date”), the Company entered into a Credit Agreement (the “Existing Credit Agreement”) with Morgan Stanley Senior Funding, Inc.

On May 3, 2019, (the “Closing Date”), the Existing Credit Agreement was amended pursuant to an Incremental Assumption and Amendment No.

1 (the “Amendment” and the Existing Credit Agreement as amended by the Amendment, the “Credit Agreement”).

On the Original Closing Date, the Company terminated the Amended and Restated Loan and Security Agreement that it entered into with Silicon Valley Bank in November 2014 (the “Restated 2014 LSA”).

The Credit Agreement provides for (i) a four-year revolving credit facility in the aggregate principal amount of up to $ 100.0 million (the “Revolving Credit Facility”), (ii) a four-year delayed draw term loan A facility in the aggregate principal amount of up to $ 100.0 million (the “Term Loan A Facility”) and (iii) an uncommitted incremental facility, subject to the satisfaction of certain financial and other conditions, in the amount of up to (v) $ 50.0 million, plus (w) 1.0x of the Company’s EBITDA for the most recently completed four fiscal quarter period , plus (x) an additional amount at the Company’s discretion, so long as, on a pro forma basis at the time of incurrence, the Company’s secured leverage ratio does not exceed 1.50 to 1.00, plus (y) voluntary prepayments of the Revolving Credit Facility and Term Loan A Facility to the extent accompanied by concurrent reductions to the applicable Credit Facility (together with the Revolving Credit Facility and the Term Loan A Facility, collectively, the “Credit Facility”).

On November 18, 2019, the Company borrowed the Term Loan A facility in the aggregate principal amount of $ 100.0 million.

In March 2020, the Company borrowed the available balance of $ 69.3 million from the Revolving Credit Facility.

For both borrowings, the Company elected an interest rate equal to the adjusted one-month LIBOR rate plus an applicable margin of 1.75 % based on the Company’s secured leverage ratio.

In May 2020, the Company repaid the outstanding balance on the Revolving Credit Facility.

Loans under the Term Loan A Facility amortize in equal quarterly installments beginning on March 31, 2020, in an aggregate annual amount equal to (i) on or prior to December 31, 2021, 1.25 % of the drawn principal amount of the Term Loan Facility or $ 1.25 million and (ii) thereafter, 2.50 % of the drawn principal amount of the Term Loan Facility or $ 2.5 million, with the remaining balance payable on the maturity date of the Term Loan A Facility in February 2023 .

The Revolving Credit Facility may be borrowed, repaid and reborrowed until the fourth anniversary of the Closing Date in February 2023 , at which time all outstanding balances of the Revolving Credit Facility are due to be repaid.

The Company had outstanding letters of credit against the Revolving Credit Facility of $ 30.8 million and $ 30.7 million as of December 31, 2020 and December 31, 2019, respectively.

The Company’s obligations under the Credit Agreement are secured by substantially all of its assets.

In the future, certain of its direct and indirect subsidiaries may be required to guarantee the Credit Agreement.

The Company may prepay, and in certain circumstances would be required to prepay, loans under the Credit Agreement without payment of a premium.

The Credit Agreement contains customary representations and warranties, customary affirmative and negative covenants, a financial covenant that is tested quarterly and requires the Company to maintain a certain adjusted quick ratio of at least 1.00 to 1.00, and customary events of default.

As of December 31, 2020, the Company was in compliance with all of the covenants of the Credit Agreement.

STOCKHOLDERS’ EQUITY

Preferred Stock

The Company has 10 million shares of undesignated preferred stock authorized but not issued with rights and preferences determined by the Company’s Board of Directors at the time of issuance of such shares.

As of December 31, 2020 and 2019, there were no shares of preferred stock issued and outstanding.

The Company has two classes of authorized common stock, Class A common stock and 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.

Shares of Class B common stock are voluntarily convertible into shares of Class A common stock at the option of the holder and are generally automatically converted into shares of the Company's Class A common stock upon sale or transfer.

Shares issued in connection with exercises of stock options, vesting of restricted stock units, or shares purchased under the employee stock purchase plan are generally automatically converted into shares of the Company’s Class A common stock.

At-the-Market Offering

On May 13, 2020, the Company entered into an Equity Distribution Agreement with Morgan Stanley & Co.

LLC and Citigroup Global Markets Inc., as its sales agents, pursuant to which the Company sold an aggregate of 4.0 million shares of the Company’s Class A common stock and received gross proceeds of $ 504.0 million at an average selling price of $ 126.01 per share and incurred issuance costs of $ 6.8 million.

Common Stock Reserved For Issuance

At December 31, 2020, the Company had reserved shares of common stock for issuance as follows (in thousands):

As of December 31, 2020

Common stock awards granted under equity incentive plans

Common stock awards available for issuance under the 2017 Employee Stock Purchase Plan *

Common stock awards available for issuance under the 2017 Equity Incentive Plan

Total reserved shares of common stock

* The Company has not issued any common stock pursuant to the 2017 Employee Stock Purchase Plan.

Equity Incentive Plans

The Company has two equity incentive plans, the 2008 Equity Incentive Plan (the “2008 Plan”) and the 2017 Equity Incentive Plan (the “2017 Plan”).

The 2017 Plan became effective September 2017 in connection with the IPO.

No further shares have been issued under the 2008 Plan.

The 2017 Plan provides for the grant of incentive stock options to the Company’s 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 the Company’s employees, directors and consultants.

Restricted stock units granted under the plan are subject to continuous service.

Options granted under the plans are granted at a price per share equivalent to the fair market value on the date of grant.

Recipients of option grants 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 are at a price no less than 110 % of the fair market value at the date of grant.

Restricted Stock Units

Restricted stock unit activity for the year ended December 31, 2020 is as follows (in thousands, except per share data):

Weighted Average

Grant Date Fair

Value Per Share

Balance, December 31, 2019

Balance, December 31, 2020 - outstanding

The grant-date fair value of restricted stock units granted during the years ended December 31, 2020, 2019 and 2018 was $ 210.1 million, $ 195.2 million and $ 184.7 million, respectively.

The fair value of restricted stock units that vested during the years ended December 31, 2020, 2019 and 2018 was $ 83.7 million, $ 40.5 million and $ 11.4 million, respectively.

Total unrecognized compensation cost related to restricted stock units awarded to employees as of December 31, 2020 was $ 336.4 million, which the Company expects to recognize over 2.26 years.

Stock options

The following table summarizes the Company’s stock option activities under the 2008 Plan and 2017 Plan (in thousands, except per share data):

Balance, December 31, 2019

Forfeited and expired

Balance, December 31, 2020 - outstanding

Options exercisable at December 31, 2020

The weighted average grant-date fair value of options granted during the years ended December 31, 2020, 2019 and 2018 was $ 54.39 , $ 39.23 and $ 22.96 , respectively.

The intrinsic value for options exercised in the years ended December 31, 2020, 2019 and 2018 was $ 470.8 million, $ 474.2 million and $ 445.9 million, respectively.

Intrinsic value represents the difference between the fair values of the Company’s common stock and the options’ exercise price on the date of grant.

As of December 31, 2020, the Company had $ 50.8 million of unrecognized stock compensation expense related to unvested stock options that is expected to be recognized over a weighted-average period of approximately 1.78 years.

Stock-based Compensation

The Company measures the cost of employee services received in exchange for an equity award based on the grant date fair value of the award.

Generally, stock options granted to employees vest 25 % after one year and then 1/48th monthly thereafter and have a term of ten years .

Restricted stock units generally vest over 4 years.

For the years ended December 31, 2020, 2019, and 2018, the amount of stock-based compensation capitalized as part of internal use software was not material.

The following table shows total stock-based compensation expense for the years ended December 31, 2020, 2019 and 2018 (in thousands):

Years Ended December 31,

Cost of platform revenue

Cost of player revenue

Research and development

Sales and marketing

General and administrative

Total stock-based compensation

The fair value of options granted under the 2008 Plan and 2017 Plan is estimated on the grant date using the Black-Scholes option-valuation model.

This valuation model for stock-based compensation expense requires the Company to make certain assumptions and judgments about the variables used in the calculation, including the expected term, the expected volatility of the Company’s common stock, an assumed risk-free interest rate, and expected dividends.

The Company uses the straight-line method for expense recognition.

The Company recognizes forfeitures as they occur.

Fair Value of Common Stock:

T he Company uses the market closing price for the Class A common stock as reported on The Nasdaq Global Select Market on the date of grant.

Expected Term:

The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding and is determined based on the simplified method as described in ASC Topic 718-10-S99-1, SEC Materials SAB Topic 14, Share-Based Payment .

Expected Volatility:

The Company’s volatility factor is estimated using several comparable public company volatilities for similar option terms.

Expected Dividends:

The Company has never paid cash dividends and has no present intention to pay cash dividends in the future, and as a result, the expected dividends are $ 0 .

Risk-Free Interest Rate:

The Company bases the risk-free interest rate on the implied yield currently available on U.S.

Treasury zero coupon issues with a remaining term equivalent to the estimated life of the stock options.

Where the expected term of the Company’s stock options does not correspond with the term for which an interest rate is quoted, the Company performs a straight-line interpolation to determine the rate from the available term maturities.

The assumptions used to value stock options granted during the years ended December 31, 2020, 2019 and 2018 are as follows:

Years Ended December 31,

Expected term (in years)

Risk-free interest rate

Expected volatility

Dividend rate

COMMITMENTS AND CONTINGENCIES

Manufacturing Purchase Commitments

The Company has various manufacturing contracts with vendors in the conduct of the normal course of its business.

In order to manage future demand for its products, the Company enters into agreements with manufacturers and suppliers to procure inventory based upon certain criteria and timing.

Some of these commitments are non-cancelable.

As of December 31, 2020, the Company had $ 185.9 million purchase commitments for inventory.

The Company records a liability for non-cancelable purchase commitments in excess of projected demand forecasts.

The Company recorded $ 1.2 million and $ 0.3 million for these purchase commitments in “Accrued liabilities” as of December 31, 2020 and 2019, respectively.

License Content Commitments

As of December 31, 2020, the Company recognized a liability of $ 6.2 million in Accrued liabilities and $ 1.4 million in Other long-term liabilities for licensed content that is available for streaming.

As of December 31, 2019, the Company recorded $ 1.7 million as obligations in Accrued liabilities for licensed content that is available for streaming.

The increase in content liability is due to change in the mix of content licensed and the period over which this content is available for streaming.

The Company also enters into contracts with content publishers to acquire content or to buy ad inventory in the future.

As of December 31, 2020, the Company had $ 71.0 million in commitments with content publishers for content or to buy ad inventory that are non-cancellable.

These commitments include both content that is available

for streaming and is recognized as liabilities as well as content that is not yet available for streaming or ad inventories not yet purchased.

Letters of Credit

As of December 31, 2020 and 2019, the Company had irrevocable letters of credit outstanding in the amount of $ 30.9 million and $ 31.8 million, respectively, related to facilities leases.

The letters of credit have various expiration dates through 2030.

Contingencies

The Company accrues for loss contingencies, including liabilities for intellectual property licensing claims, when it believes such losses are probable and reasonably estimable.

These contingencies are reviewed at least quarterly and adjusted to reflect the impact of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events.

The resolution of these contingencies and of other legal proceedings can be, however, inherently unpredictable and subject to significant uncertainties.

As of December 31, 2020, the Company does not have any loss contingencies that are material.

During the year ended December 31, 2019, the Company recorded expenses of $ 9.9 million, in total cost of revenue, for various claims related to patent infringements.

During the year ended December 31, 2018, the Company changed its estimate of certain liabilities previously recorded for intellectual property licensing and released $ 8.9 million as a result of its assessment that the likelihood of payment is now remote.

The reversal of $ 8.9 million is recorded within cost of revenue, player during the year ended December 31, 2018, in the consolidated statements of operations.

From time to time, the Company is subject to legal proceedings, claims, and investigations in the ordinary course of business, including claims relating to employee relations, business practices and patent infringement.

The Company is involved in litigation matters not listed herein.

Although the results of these proceedings, claims, and investigations cannot be predicted with certainty, the Company does not believe that the final outcome of any matters that it is currently involved in are reasonably likely to have a material adverse effect on its business, financial condition, or results of operations.

Indemnification

In the ordinary course of business, the Company has entered into contractual arrangements which provide indemnification provisions of varying scope and terms to business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of such agreements and out of intellectual property infringement claims made by third parties.

The Company’s obligations under these agreements may be limited in terms of time or amount, and in some instances, the Company may have recourse against third parties for certain payments.

In addition, the Company has entered into indemnification agreements with its directors and certain of its officers that will require it, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers.

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 have not accrued any liabilities related to such obligations in the consolidated financial statements.

The components of loss before income taxes consist of the following (in thousands):

Years Ended December 31,

United States

Net loss before income taxes

The income tax (benefit) expense consisted of the following (in thousands):

Years Ended December 31,

The following is a reconciliation of the statutory federal income tax rate to the Company’s effective tax rate:

Years Ended December 31,

federal income tax at statutory rate

state and local income taxes

Change in valuation allowance

Federal research and development tax credit

Stock-based compensation

Meals and Entertainment

Permanent items

Foreign rate differential

Acquisition costs

Section 162(m) limitation

State apportionment change

Tax rate change

Provision to return true-up

Effective tax rate

Significant components of the Company’s deferred income tax assets and liabilities consist of the following (in thousands):

As of December 31,

Deferred tax assets:

Net operating loss carryforwards

Reserves and accruals

Research and development credits

Lease Obligation

Stock-based compensation

Total deferred tax assets

Deferred tax liabilities:

Right-of-use asset

Depreciation and amortization

Total deferred tax liabilities

Valuation allowance

Net deferred tax assets

A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized through future operations.

As a result of the Company’s analysis of all available objective evidence, both positive and negative, as of December 31, 2020, management believes it is more likely than not that the U.S.

deferred tax assets will not be fully realizable.

Accordingly, the Company has provided a full valuation allowance against its U.S.

deferred tax assets.

The Company's valuation allowance increased by $ 169.7 million and $ 178.9 million during the years ended December 31, 2020 and 2019, respectively, primarily due to U.S.

federal and state tax losses and credits incurred during the period.

For federal and state income tax reporting purposes, respective net operating loss carryforwards of $ 1,423.1 million and $ 1,273.9 million are available to reduce future taxable income, if any.

These net operating loss carryforwards will begin to expire in 2028 for federal and certain state net operating losses have expired in 2020 .

The federal net operating loss generated subsequent to 2017 can be carried forward indefinitely.

and Denmark income tax reporting purposes, the net operating loss carryforward of $ 17.6 million and $ 0.8 million, respectively, is available to reduce the future taxable income, if any.

and Denmark net operating loss can be carried forward indefinitely.

The Company also has U.K.

research and development tax credit carryforwards of $ 0.3 million.

The credit can be carried forward indefinitely.

As of December 31, 2020, the Company has research and development tax credit carryforwards of $ 82.6 million and $ 59.4 million for federal and state income tax purposes, respectively.

If not utilized, the federal and state carryforwards will begin to expire in 2028 and 2035 , respectively.

The Internal Revenue Code of 1986, as amended (the “Code”), contains provisions that may limit the net operating loss and credit carryforwards available for use in any given period upon the occurrence of certain events, including a statutorily defined significant change in ownership.

Utilization of the net operating loss and tax credit carryforwards is subject to an annual limitation due to an ownership change, as defined by section 382 of the Code.

The Company has assessed whether any section 382 ownership change has occurred since its formation and determined that a section 382 ownership change occurred on December 18, 2009 and tax attributes generated by the Company through the ownership change date are subject to the limitation.

A section 382 study was completed for dataxu covering the period from inception beginning May 1, 2008 through acquisition date of November 8, 2019.

Based on the study, the Company identified four ownership changes for Section 382 purposes.

As such, tax attributes generated by dataxu through the ownership change dates are subject to the limitation.

The total amount of unrecognized tax benefits as of December 31, 2020 is $ 29.2 million, of which $ 28.3 million is composed of research and development credits and $ 0.9 million is related international activities.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

As of December 31,

Unrecognized tax benefits at beginning of year

Gross increase for tax positions of current year

Gross decrease due to statue expiration

Gross decrease for tax positions of prior years

Unrecognized tax benefits balance at end of year

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of its income tax expense.

As of December 31, 2020, the Company recorded $ 0.2 million of accrued interest and penalties related to uncertain tax positions.

Change in the Company’s unrecognized tax benefits, if any, would have an immaterial impact on its effective tax rate.

The Company does not expect its gross unrecognized tax benefits to change significantly within the next 12 months.

The Company files income tax returns in the U.S.

federal jurisdiction and various state jurisdictions.

The Company is currently under examination by Texas Comptroller for calendar tax years 2015, 2016, and 2017.

All tax years remain subject to examination by federal and state authorities.

These audits include questioning the timing and amount of deductions;

the nexus of income among various tax jurisdictions;

and compliance with federal, state, and local tax laws.

The Company will continue to indefinitely reinvest earnings from its foreign subsidiaries, which are not significant.

While federal income tax expense has been recognized as a result of the Tax Cuts and Jobs Act of 2017, the Company has not provided any additional deferred taxes with respect to items such as foreign withholding taxes, state income tax or foreign exchange gain or loss.

It is not practicable for the Company to determine the amount of unrecognized tax expense on these reinvested international earnings.

RELATED-PARTY TRANSACTIONS

The Company did not engage in any material related party transactions for the year ended December 31, 2020.

There were no material amounts payable to or receivable from related parties as of December 31, 2020.

In prior years, the Company engaged in transactions with one of its strategic investors.

With respect to this investor, the Company recorded revenue of $ 8.5 million and $ 4.1 million for the years ended December 31, 2019 and 2018, respectively.

The Company had an accounts receivable balance of $ 2.4 million as of December 31, 2019 related to transactions with this investor.

The Company incurred expenses of $ 1.3 million and $ 1.3 million with this investor for the years ended December 31, 2019 and 2018, respectively.

The Company had a payable of $ 0.4 million to this investor as of December 31, 2019.

In addition, the Company had engaged in transactions with another company in which the Company’s Chief Executive Officer holds a majority voting interest and is a member of such company’s board of directors, and another member of the Company’s Board of Directors is such company’s Chief Executive Officer.

With respect to transactions with this other company, the Company incurred expenses of $ 1.2 million for the year ended December 31, 2019.

There were no outstanding amounts payable to this other company as of December 31, 2019.

The Company did no t consummate any transactions with the other company for the year ended December 31, 2018.

RETIREMENT PLANS

The Company maintains a 401(k) tax deferred saving plan (the “Savings Plan”) for the benefit of qualified employees.

Qualified employees may elect to make contributions to the Savings Plan on a biweekly basis, subject to certain limitations.

The Company may make contributions to the Savings Plan at the discretion of the Board of Directors.

No contributions were made for the years ended December 31, 2020, 2019 and 2018.

In 2014, the Company established a defined contribution plan in the U.K.

for its U.K.-based employees.

The Company contributed $ 0.7 million, $ 0.5 million and $ 0.4 million to the plan for the years ended December 31, 2020, 2019 and 2018, respectively.

NET LOSS PER SHARE

The Company’s basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding for the period.

For purposes of the calculation of diluted net loss per share options to purchase common stock, restricted stock units and unvested shares of common stock issued upon the early exercise of stock options and business acquisitions are considered common stock equivalents, but have been excluded from the calculation of diluted net loss per share as their effect is antidilutive.

Because the Company has reported a net loss for the years ended December 31, 2020, 2019 and 2018, diluted net loss per common share is the same as the basic net loss per share for those years.

The table presents the calculation of basic and diluted net loss per share as follows (in thousands, except per share data):

Years Ended December 31,

Net loss attributable to common stockholders

Weighted-average shares used in computing net loss per share, basic and diluted

Net loss per share, basic and diluted

The potential common shares that were excluded from the calculation of diluted net loss per share because their effect would have been antidilutive for the periods presented are as follows (in thousands):

Years Ended December 31,

Equity awards to purchase common stock

Unvested shares of common stock issued upon early exercise of stock options and business acquisition

SEGMENT INFORMATION

An operating segment is defined as a component of an entity for which discrete financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) for purposes of allocating resources and evaluating financial performance.

The Company’s CODM is its Chief Executive Officer, and the CODM evaluates performance and makes decisions about allocating resources to its operating segments based on financial information presented on a consolidated basis and on revenue and gross profit for each operating segment.

The Company uses the management approach to determine the segment financial information that should be disaggregated and presented separately in the Company’s notes to its consolidated financial statements.

The management approach is based on the manner by which management has organized the segments within the Company for making operating decisions, allocating resources, and assessing performance.

The Company reports its financial results consistent with the manner in which financial information is viewed by management for decision-making purposes.

The Company does not manage operating expenses such as research and development, sales and marketing and general and administrative expenses at the segment level.

The Company is organized into two reportable segments as follows:

Consists of revenue generated from sale of digital advertising, content distribution services, subscription and transaction revenue share including Premium Subscriptions, sale of branded buttons on remote controls and licensing arrangements with service operators and TV brands.

Consists of revenue generated from sale of streaming players, audio products and accessories through retailers and distributors, as well as directly to customers through the Company’s website.

The Company does not allocate property and equipment or any other assets or capital expenditures to reportable segments.

Operating expenses are not managed at the segment level.

The Company evaluates the performance of its reportable segments based on the financial measures, including segment gross profit, which are regularly reviewed by the CODM and provide insight into the individual segments and their ability to contribute to Company’s operating results.

Customers accounting for 10% or more of segment revenue, net, were as follows:

Years Ended December 31,

Platform segment revenue

Player segment revenue

Revenue in international markets was less than 10 % in each of the periods presented.

Substantially all Company assets were held in the United States and were attributable to the operations in the United States as of December 31, 2020 and 2019.

QUARTERLY FINANCIAL DATA (Unaudited)

The following table summarizes the Company’s information on total revenue, gross profit, net income (loss) and earnings per share by quarter for the years ended December 31, 2020 and 2019.

This data was derived from the Company’s unaudited consolidated financial statements (in thousands, except per share data):

Three Months Ended

Total Revenue

Net income (loss) attributable to common stockholders

Basic net income (loss) per share attributable to common stockholders

Diluted net income (loss) per share attributable to common stockholders

Three Months Ended

Total Revenue

Net loss attributable to common stockholders

Basic and diluted net loss per share attributable to common stockholders

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk