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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2021-02-26 compared with 2020-03-02 · 333 added, 461 removed, 642 unchanged (55% of the section changed)

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Interest Rate Fluctuation Risk

Our exposure to interest rate risk relates to the interest income generated by cash, cash equivalents and short-term investments and interest expense on the term loan.

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

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.

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.

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Foreign Currency Exchange Rate Risk

Most of our sales are currently within the United States and we have minimal foreign currency risk related to our revenue.

Most of our revenue is generated within the United States and we have minimal foreign currency risk related to our revenue.

In addition, most of our operating expenses are denominated in the U.S.

dollar, resulting in minimal foreign currency risks.

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

In the future, if our international revenues increase 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.

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Consolidated Statements of Comprehensive Loss

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

Consolidated Statements of Stockholders’ Equity

Consolidated Statements of Cash Flows

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

and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive loss, convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”).

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.

Change in Accounting Principle

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, and as discussed in Note 3 to the financial statements, the Company changed its method of accounting for revenue in fiscal year 2018 due to the adoption of Accounting Standards Update No.

2014-09, Revenue from Contracts with Customers (Topic 606) , using the modified retrospective method.

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

Basis for Opinion

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

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.

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

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

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.

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.

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

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

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

Obtained contractual documents for each selection, including master agreements, and other documents that were part of the agreement;

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.

Performed inquiries with applicable individuals in the Company’s sales department regarding the estimates for sales of branded channel buttons to corroborate evidence obtained around such estimates;

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

Business Combination - Refer to Note 4 to the consolidated financial statements

Critical Audit Matter Description

On November 8, 2019, the Company completed the acquisition of dataxu, Inc.

(“dataxu”) for $148.4 million.

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

The Company estimated the fair value of identifiable intangible assets to be $70.2 million.

The excess purchase price over the fair value of net tangible assets and identifiable intangible assets of $72.7 million was recorded as goodwill.

We identified the fair value determination of acquired intangible assets and the resulting goodwill for the business combination as a critical audit matter due to the significant judgement required in determining significant estimates

related to the d ataxu acquisition.

Management’s estimates of forecasted discounted cash flows included significant assumptions for revenue growth rates and the selection of an appropriate discount rate.

There was a high degree of auditor judgment and subjectivity in applying audit procedures relating to the fair value measurement of intangible assets acquired due to the significant amount of judgment by management when developing its estimates.

Significant audit effort was required in performing procedures and evaluating the significant assumptions relating to the estimate and the audit effort involved the use of professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained from these procedures.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to management’s estimates for the fair value of intangible assets included the following, among others:

We tested the effectiveness of controls over the business combination, including controls over the modelling of future cash flows, the determination of the revenue growth rates, expense and discount rate assumptions, and ultimately the determination of the fair value of the intangible assets acquired;

We assessed the reasonableness of management’s revenue growth rate assumptions by comparing the projected revenue to the acquiree’s historical results as well as those of certain peer companies, including testing the completeness, accuracy, and relevance of underlying historical data;

We assessed the reasonableness of management’s assumptions related to forecasted cost of revenue, research and development, and sales and marketing expenses by comparing the projected expenses to the acquired company’s historical results and those of certain peer companies, including testing the completeness, accuracy, and relevance of underlying historical data;

With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) discount rates, including testing the underlying source information, testing the mathematical accuracy of the calculation, and developing a range of independent estimates and comparing those to the discount rates selected by management;

Inquiries with appropriate individuals within the Company’s operations, engineering and finance departments regarding the revenue growth rate assumption as well as estimates related to cost of revenue, research and development and sales and marketing expenses;

Evaluating whether the audit evidence obtained through these procedures was consistent with evidence obtained in other areas of the audit.

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.

/s/ DELOITTE & TOUCHE LLP

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Cash and cash equivalents

Short-term investments

Restricted cash

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Deferred revenue, non-current portion

Operating lease liability, non-current

Operating lease liability, non-current portion

Other long-term liabilities

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Stockholders’ Equity:

Preferred stock, $ 0.0001 par value;

10,000 shares authorized as of December 31, 2019 and 2018;

no shares issued and outstanding as of December 31, 2019 and 2018

Common stock, $ 0.0001 par value;

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Additional paid-in capital

Accumulated other comprehensive loss

Accumulated other comprehensive income

Accumulated deficit

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Interest expense

Loss on extinguishment of debt

Change in fair value of preferred stock warrant liability

Other income (expense), net

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See accompanying Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands)

Comprehensive

Stockholders’

Balance—December 31, 2016

Issuance of common stock upon exercise of stock options

Share repurchases

Vesting of early exercised stock options

Stock-based compensation expense

Issuance of common stock pursuant to an acquisition

Issuance of common stock upon exercise of common and preferred warrants

Issuance of common stock pursuant to an initial public offering, net of issuance costs of $ 3.1 million

Conversion of preferred stock into common stock pursuant to an initial public offering

Reclassification of preferred stock warrants liability to additional paid-in-capital upon conversion to common stock warrants

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands)

Additional Paid-in

Accumulated Other

Total Stockholders’

Comprehensive Loss

Balance—December 31, 2017

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Share repurchases

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

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

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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.

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Stock-based compensation expense

Amortization of right-of-use assets

Amortization of content assets

Provision for doubtful accounts

Change in fair value of preferred stock warrant liability

Noncash interest expense

(Gain) Loss from exit of facilities and disposal of property and equipment

Loss from extinguishment of debt

Impairment of long-lived assets

Amortization of premiums on short-term investments

Other items net

Changes in operating assets and liabilities:

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Prepaid expenses and other current assets

Operating lease right-of-use assets

Deferred cost of revenue

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Purchase of business, net of cash acquired

Proceeds from escrows associated with acquisition

Purchase of intangible assets

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Sales/maturities of short-term investments

Change in deposits

Net cash used in investing activities

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Proceeds from equity issued under incentive plans, net of repurchases

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

Proceeds from issuance of common stock pursuant to an initial public offering, net of issuance costs

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

Net cash provided by financing activities

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Unpaid portion of at-the-market offering costs

Fair value of preferred stock warrants reclassified to additional paid in capital

Issuance of convertible preferred stock warrants in connection with debt

See accompanying Notes to Consolidated Financial Statements.

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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.

Initial Public Offering

On October 2, 2017 , the Company completed its initial public offering (“IPO”), of Class A common stock, in which it sold 10.4 million shares, including 1.4 million shares pursuant to the underwriters’ over-allotment option.

The shares were sold at an IPO price of $ 14.00 per share for net proceeds of $ 134.8 million, after deducting underwriting discounts and commissions of $ 10.1 million.

Additionally, offering costs incurred by the Company were $ 3.1 million.

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

Following the IPO, the Company has two classes of authorized common stock – Class A common stock and Class B common stock.

Class A common stock entitles holders to one vote per share, and Class B common stock entitles holders to 10 votes per share.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION

Basis of Presentation and Principles of Consolidation

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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

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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 customer incentive programs;

the fair value or impairment of goodwill and intangible assets;

the impairment of goodwill and intangible assets;

useful lives of tangible and intangible assets;

allowances for doubtful accounts;

the valuation of inventory, the valuation of deferred income tax assets;

the recognition and disclosure of contingent liabilities and stock-based compensation.

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.

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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.

During the year ended December 31, 2017, the Company had no short-term investments, and, as a result, comprehensive loss was equal to the net loss for the year ended December 31, 2017.

Income taxes on the unrealized loss are not material.

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

Foreign Currency

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

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.

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

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

The functional currency for one of the Company’s foreign subsidiaries is its local currency.

The Company translates the assets and liabilities of its non-U.S.

dollar functional currency subsidiary into U.S.

dollars using exchange rates in effect at the end of each reporting period.

Revenues and expenses are translated using rates that approximate those in effect during the period.

Gains and losses from these translations are recognized as cumulative translation adjustment and included in accumulated other comprehensive loss in stockholder’s equity.

Concentrations

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash, cash equivalents, short-term investments and accounts receivable.

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

As of December 31, 2018, 97 % of the Company’s cash and cash equivalents balance was managed by one financial institution.

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 returns, customer incentives and doubtful accounts.

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

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

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,

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

As of 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 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.

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

Additional information regarding the Company's contingent consideration arrangement is included in Note 4, Business Combinations.

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.

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Intangible Assets

Purchased intangible assets are carried at cost, net of accumulated amortization.

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

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 Assessment

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 goodwill assessment, the Company first performs a qualitative test and if necessary, then performs a quantitative test.

To conduct the quantitative impairment test of goodwill, the Company compares the fair value of a reporting unit to its carrying value.

The Company estimates the fair values of its reporting unit using discounted cash flow models or other valuation models, such as comparative transactions and market multiples.

If the reporting unit’s carrying value exceeds its fair value, the Company records an impairment loss to the extent that the carrying value of goodwill exceeds its implied fair value.

The Company reviews long-lived assets and intangible assets with finite lives for impairment at least annually or more often 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.

If impairment is indicated, the Company writes down the asset to its estimated fair value.

The Company did not recognize any impairment for goodwill and intangible assets in any periods.

The Company recorded $ 0.9 million in impairment to operating right-of-use assets during the year ended December 31, 2019 and $ 0.4 million in impairment to property and equipment during the year ended December 31, 2018 for assets that are no longer in use.

The Company did not record any impairment during the year ended December 31, 2017.

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, short-term investments, 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.

Short-Term Investments

The Company considers investments in highly liquid instruments purchased with an original maturity of 90 days or less to be cash equivalents.

The Company’s short-term investments consist of corporate bonds, commercial paper and U.S.

Government agency securities.

These investments are held in the custody of one major financial institution.

As of December 31, 2019, the Company did no t own any short-term investments.

As of December 31, 2018, the short-term investments were classified as available-for-sale and were recorded at fair value in the consolidated balance sheet with net unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss), net of tax.

The Company recognizes an impairment charge if a decline in the fair value of its investments is considered to be other-than-temporary.

The Company has determined that gross unrealized losses on short-term investments at December 31, 2018 were temporary in nature because each investment meets the Company’s credit quality requirements and the Company has the ability and intent to hold these investments until they recover their unrealized losses.

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 website and internal-use software.

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

Subsequent 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, 2019, 2018 and 2017, the Company capitalized website and internal-use software development costs of $ 0.1 million, $ 1.0 million and $ 2.6 million, respectively.

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

During the years ended December 31, 2019, 2018 and 2017, the Company amortized expenses of $ 1.6 million, $ 2.0 million and $ 1.1 million, respectively.

Content Licensing Fees

The Company licenses content for viewing on The Roku Channel.

The licensing arrangements can be for a fixed fee and/or advertising revenue share with specific windows of availability.

The Company capitalizes the content fees and records a corresponding liability at the gross amount of the liability when the license period begins, the cost of the content is known, and the content is accepted and available for streaming.

The Company amortizes licensed content assets into “Cost of Revenue, Platform” over the contractual window of availability .

As of December 31, 2019, content related expenses that met these requirements were $ 1.7 million.

As of December 31, 2018, content related expenses that met these requirements were not material .

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 $ 7.3 million, $ 3.0 million and $ 3.4 million for the years December 31, 2019, 2018 and 2017, 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.

Adoption of New Accounting Standards

In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases (Topic 842) (“ASC 842”) , in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under prior GAAP.

ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet.

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

As a result, periods prior to 2019 were not adjusted.

On the adoption date, the Company recognized ROU assets totaling $ 39.9 million, lease liabilities totaling $ 42.1 million and reclassification of deferred and prepaid rents of $ 2.2 million to ROU assets on its consolidated balance sheet.

There was no impact to the accumulated deficit.

The Company elected the package of practical expedients permitted under the transition guidance that allowed, among other things, the historical lease classification to be carried forward without reassessment.

The Company did not elect the hindsight practical expedient to determine the lease term for existing leases.

Refer to Note 9, Leases, for additional disclosures.

Recently Issued Accounting Pronouncements 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 is currently in the process of evaluating the impact of this new guidance on the consolidated financial statements and the related disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Topic 350), Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract , which requires hosting arrangements that are service contracts to follow the guidance for internal-use software to determine which implementation costs can be capitalized.

The guidance is effective either prospectively or retrospectively for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted.

The Company is currently in the process of evaluating the impact of this new guidance on the consolidated financial statements but does not expect the impact to be material.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurements (Topic 820), Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement .

This standard removes, modifies, and adds certain disclosure requirements for fair value measurements.

This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted.

The Company is currently in the process of evaluating the effects of the new guidance but does not expect the impact from this standard to be material.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment .

The guidance eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge (i.e.

Step 2 of the current guidance), instead measuring the impairment charge as the excess of the reporting unit's carrying amount over its fair value (i.e.

Step 1 of the current guidance).

The amendments in this update will be effective for fiscal years beginning after December 15, 2019 and should be applied prospectively.

Early adoption is permitted for impairment testing dates after January 1, 2017.

The Company is currently in the process of evaluating the effects of the new guidance but does not expect the impact from this standard to be material.

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments .

The guidance amends 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.

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.

The amendments in this update will be effective for fiscal years beginning after December 15, 2019.

The Company is currently in the process of evaluating the effects of the new guidance but does not expect the impact from this standard to be material.

The Company adopted accounting guidance in Accounting Standards Codification, Revenue from Contracts with Customers (Topic 606) (“ASC 606”), effective January 1, 2018, using the modified retrospective method.

Accordingly, the financial results for the year ended December 31, 2017 have not been restated.

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 service s.

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

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.

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

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.

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

The Company does no t have any capitalized costs associated with contract acquisition because most direct contract acquisition costs relate to contracts that are recognized over a period of one year or less.

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

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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.

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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 SSP of which is determined based on relevant internal and third-party data.

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.

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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 as direct cost.

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

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.

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

Arrangements may also include marketing development funds paid to TV brands, which are reflected as a reduction to the estimated transaction price.

Player segment:

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

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.

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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 returns and sales incentives in the estimated transaction price.

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.

Revenue disaggregation:

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

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.

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

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):

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 disaggregation is based on the evaluations that are regularly performed 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.

Contract balances:

Contract balances include the following (in thousands):

The contract balances include the following (in thousands):

As of December 31,

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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 approximately $ 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 assets decreased by

approximately $ 3.4 million during the year ended December 31, 2018 as the Company received the right to bill customers subsequent to revenue recognition.

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.

Deferred revenue increased by approximately $ 10.1 million during the year ended December 31, 2018 primarily due to the overall growth of the business .

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, 2018 from amounts included in deferred revenue as of January 1, 2018 was $ 38.5 million.

Revenue Allocated to Future Performance Obligations:

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

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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 $ 148.4 million, which consisted of $ 78.7 million in cash and $ 69.7 million for the fair value of the Company’s 571,459 shares of common stock.

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

Of this $ 18.8 million, $ 17.5 million is included in the purchase consideration.

The remaining amount is not considered part of the purchase consideration as it is utilized for post combination related activities by the Company and are recorded in general and administrative expenses in the consolidated statement of operations.

The total purchase consideration includes $ 1.8 million contingent consideration, carrying value of which approximates its fair value due to its short-term nature.

This contingent consideration is included in the escrow amount and may be transferred to dataxu shareholders if certain conditions set forth in the Merger Agreement are met.

The Company incurred $ 3.9 million in acquisition related expenses and has recorded them in general and administrative expenses in the consolidated statement of operations.

Purchase Price Allocation

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

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

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Intangible assets:

Developed Technology

Customer relationships

Operating lease right-of-use assets

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Total liabilities assumed

Total preliminary purchase consideration

The preliminary fair value estimates of the net assets acquired are based upon preliminary calculations and valuations, and those estimates and assumptions regarding certain tangible assets acquired and liabilities assumed, the valuation of intangible assets acquired, income taxes, and goodwill are subject to change as the Company obtains additional information during the measurement period (up to one year from the acquisition date).

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.

Identifiable Intangible Assets

The identifiable intangible assets acquired consisted of developed technology, customer relationships and tradename with estimated useful lives of 6 months to 6 years.

The Company amortizes the fair value of these intangible assets on a straight-line basis over their respective useful lives.

The fair value of the intangible assets has been estimated using the income approach in which the after-tax cash flows are discounted to present value.

The key valuation assumptions include the Company's estimates of revenue growth projections and discount rates.

The valuation of the intangible assets acquired from dataxu along with their estimated useful lives, is as follows (in thousands):

Estimated Fair Value

Estimated Useful Lives

Developed technology

Customer relationships

Estimated fair value of acquired intangible assets

The goodwill recorded is not deductible for tax purposes.

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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 sheet.

Unaudited Pro Forma Results

The unaudited pro forma financial information in the table below summarizes the combined results of operations for Roku and dataxu, as if the companies were combined as of the beginning of fiscal 2018.

The unaudited pro forma financial information for all periods presented included the business combination accounting effects resulting from this acquisition, mainly including adjustments to reflect the adoption of ASC 842 and ASC 606, additional amortization expense from acquired intangible assets, additional stock-based compensation expense, elimination of historical interest expense associated with dataxu’s historical convertible notes and indebtedness and the related tax effects as though dataxu was combined as of the beginning of fiscal 2018.

The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisitions had taken place at the beginning of fiscal 2018.

The unaudited pro forma financial information for fiscal 2019 combines the Company’s financial results for fiscal 2019 and the historical results of dataxu for fiscal 2019 up to the date it was acquired by the Company.

The unaudited pro forma financial information for fiscal 2018 combines the historical results of the Company and dataxu for their respective year ended December 31, 2018.

Both years include the effects of the pro forma adjustments listed above.

The unaudited pro forma financial information was as follows (in thousands):

For the Year Ended December 31,

Total Revenues

The Company recorded $ 16.8 million in revenue, $ 10.2 million in cost of revenue and $ 6.6 in gross profit in the Company’s consolidated statement of operations from the acquisition date of November 8, 2019 to December 31, 2019.

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.

During the year ended December 31, 2019, the Company recorded goodwill of $ 72.7 from the dataxu acquisition.

Goodwill recorded from the dataxu acquisition relates to the Company’s platform segment.

The goodwill is evaluated for impairment annually.

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.

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Developed technology

Customer relationships

Intangible assets

During the year ended December 31, 2019, the Company acquired $ 70.2 million of developed technology, customer relationships, and tradename as a part of the dataxu acquisition.

Additionally, during the year ended December 31, 2019, the Company acquired $ 4.1 million of patents and $ 3.8 million of developed technology in form of asset acquisitions.

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 year ended December 31, 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 in the consolidated statement of operations and recorded amortization of customer relationships and tradename in sales and marketing expenses in the consolidated statement of operations.

In the years ended December 31, 2018 and 2017, the Company recorded amortization of developed technology on research and development expenses in the consolidated statement of operations.

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):

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Allowance for sales incentives

Allowance for doubtful accounts

Other allowances

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Total Accounts Receivable, net of allowances

Allowance for Sales Returns :

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

As of December 31,

Beginning balance

Charged to revenue

Utilization of sales return reserve

Ending balance

Allowance for Sales Incentive :

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

As of December 31,

Beginning balance

Charged to revenue

Utilization of sales incentive reserve

Ending balance

Property and Equipment, net :

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Accrued cost of revenue

Marketing, retail and merchandising costs

Operating lease liability, current

Accrued royalty expense

Accrued payroll and related expenses

Accrued inventory

Marketing, retail and merchandising costs

Accrued legal expenses

Customer prepayments

Taxes and related liabilities

Licensed content liability, current

Other accrued expenses

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Total Deferred Revenue

SHORT-TERM INVESTMENTS

The Company did no t have any short-term investments as of December 31, 2019.

The following is a summary of the Company’s short-term investments as of December 31, 2018 (in thousands):

As of December 31, 2018

Corporate bonds and commercial paper

government securities

Total Short-Term Investments

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

As of December 31, 2018

Less than 1 year

Due in 1-3 years

Total Short-Term Investments

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

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Restricted cash

Short-term investments:

Corporate bonds and commercial paper

government securities

Total assets measured and recorded at fair value

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

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

The Company considers all highly liquid investments purchased with an original or remaining maturity of 90 days or less at the date of purchase to be cash equivalents.

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.

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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 measured its short-term investments using Level 2 inputs.

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.

During the year ended December 31, 2017, Level 3 instruments consisted of the Company’s convertible preferred stock warrant liability.

Pursuant to the Company’s IPO in October 2017, all convertible preferred stock warrants were converted into Class B common stock warrants, which did not require further re-measurements as they were deemed permanent equity.

For periods prior to the IPO, the Company’s convertible preferred stock warrant liability was measured at fair value upon issuance and at each reporting date prior to the IPO.

The inputs that were used to determine the estimated fair value of the convertible preferred stock warrant liability included the remaining contractual term of the warrants, the risk-free interest rate, the volatility of comparable public companies over the remaining term, and the fair value of underlying shares.

The significant unobservable inputs used in the fair value measurement of the convertible preferred stock warrant liability were the fair value of the underlying stock at the valuation date and the estimated term of the warrants.

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

December 31, 2017

Convertible preferred stock warrant liability — beginning balance

Fair value of new warrants issued

Change in fair value of preferred stock warrant liability*

Reclassification to additional paid in capital upon conversion to common warrants

Convertible preferred stock warrant liability — ending balance

Recognized in the consolidated statements of operations within other income (expense), net.

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 and operating lease right-of-use assets are evaluated for impairment and adjusted to fair value using Level 3 inputs, only when impairment is recognized.

The Company recorded an impairment of $ 0.9 million for operating lease right-of-use assets and $ 0.4 million for long-lived assets that were no longer in use during the years ended December 31, 2019 and 2018, respectively.

There were no indicators of impairment that required a fair value analysis during the year ended December 31, 2017.

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

Operating leases are included in operating lease right-of-use (“ROU”) 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.

The Company took 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.

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.

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

The Company earns sublease income from subleases for a portion of the former headquarters in Saratoga, California.

The subleases expire in 2020 when the underlying leases expire.

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

December 31, 2019

Years Ended December 31,

Operating lease cost (1)

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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):

December 31, 2019

Years Ended December 31,

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

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

December 31, 2019

As of December 31,

Operating lease right-of-use assets

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expected tenant improvement allowance

As of December 31, 2019, the Company has additional operating leases, primarily corporate offices, that have not yet commenced of $ 6.6 million.

These operating leases will commence in fiscal year 2020 with lease terms of 5 years to 11 years.

The following table summarizes the future minimum lease payments due under operating leases as of December 31, 2018 and reflect the application of the prior lease standard (ASC 840, Leases).

These amounts were disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (in thousands):

Year Ending December 31,

Operating Leases

sublease income

Rent expense, under ASC 840, for the years ended December 31, 2018 and 2017 was $ 9.7 million and $ 6.9 million, respectively.

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

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

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

The Company did no t have any outstanding debt as of December 31, 2018.

The following table sets forth the Company’s interest expense recognized in relation to the debt (in thousands):

December 31, 2019

Contractual interest expenses related to Term Loan A Facility

Amortization of debt issuance costs

Total interest expense

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

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

On the Original Closing Date, the Company terminated its Restated 2014 LSA (as defined below) with Silicon Valley Bank.

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 drew from the Term Loan A facility in the aggregate principal amount of $ 100.0 million and elected a Eurodollar borrowing with interest at a rate equal to the adjusted one-month LIBOR rate plus an applicable margin of 1.75 % based on the Company’s secured leverage ratio.

Loans under the Term Loan A Facility will 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 Company did no t have any borrowings outstanding on the Revolving Credit Facility as of December 31, 2019.

The Company had outstanding letters of credit as of December 31, 2019, totaling $ 30.7 million, which reduced the balance available to draw on the Revolving Credit Facility from $ 100.0 million to $ 69.3 million.

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”).

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 circumstances is 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 cu stomary events of default.

As of December 31, 2019, the Company is in compliance with all the covenants of the Credit Agreement.

Line of Credit with Silicon Valley Bank

The Company entered into a loan and security agreement (the “LSA”) with Silicon Valley Bank in July 2011.

The LSA was amended and restated in subsequent periods.

The amended and restated loan and security agreement (the “Restated 2014 LSA”) entered into in November 2014 provided advances under a revolving line of credit up to $ 30.0 million and provided for letters of credit to be issued up to $ 5.0 million.

In June 2017, the Company entered into a second amendment to the Restated 2014 LSA (such amendment, the “Second Amendment”).

Advances under the Second Amendment carry a floating per annum interest rate equal to, at the Company’s option, (1) the prime rate or (2) LIBOR plus 2.75 %, or the prime rate plus 1 % depending on certain ratios.

The Second Amendment further changed the financial covenant to maintain a current ratio (calculated as current assets, divided by current liabilities less deferred revenue) greater than or equal to 1.25 .

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

On July 18, 2018, the Company entered into a third amendment to the Restated 2014 LSA (such amendment, the “Third Amendment”).

The Third Amendment increased the amount by which the Company could utilize its line of credit to support the issuances of letters of credits from $ 5.0 million to $ 30.0 million.

On February 19, 2019, the Company terminated the Restated 2014 LSA agreement with Silicon Valley Bank.

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

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

STOCKHOLDERS’ EQUITY

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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.

Shares issued in connection with an exercise of the common stock warrants are converted into shares of the Company’s Class B common stock.

At-the-Market Offerings

On March 12, 2019, the Company entered into an Equity Distribution Agreement with Citigroup Global Markets Inc., as its sales agent (the “Citi Equity Distribution Agreement”), pursuant to which the Company could issue and sell from time-to-time shares of its Class A common stock for aggregate gross proceeds of up to $ 100.0 million.

In March 2019, the Company sold approximately 1.4 million shares of Class A common stock at an average selling price of $ 72.00 per share, constituting all available shares for sale under the Citi Equity Distribution Agreement for aggregate gross proceeds of $ 100.0 million and incurred issuance costs of $ 2.0 million.

At-the-Market Offering

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

LLC, as its sales agent (the “MS Equity Distribution Agreement”), pursuant to which the Company could issue and sell up to an aggregate of 1.0 million shares of its Class A common stock.

In May 2019, the Company sold all 1.0 million available shares for sale under the MS Equity Distribution Agreement at an average selling price of $ 82.90 per share, for aggregate gross proceeds of $ 82.9 million and incurred issuance costs of $ 1.6 million.

On November 19, 2019, the Company entered into another Equity Distribution Agreement with Citigroup Global Markets Inc.

as its sales agent (the “Citi Equity Distribution Agreement – 2”), pursuant to which the Company could issue and sell from time-to-time up to an aggregate of 1.0 million shares of its Class A common stock.

In November 2019, the Company sold all 1.0 million shares available for sale under the Citi Equity Distribution Agreement – 2 at an average selling price of $ 153.99 per share for aggregate gross proceeds of $ 153.99 million and incurred issuance costs of $ 2.8 million.

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

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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 year ended December 31, 2019 was $ 195.2 million.

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.

The intrinsic value of restricted stock units that vested in the years ended December 31, 2019 and 2018 was $ 100.1 million and $ 12.7 million, respectively, which represented the fair value of the Company’s common stock underlying the restricted stock units on their vesting date.

Stock options

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Options exercisable at December 31, 2020

The weighted average grant-date fair value of stock options granted during the years ended December 31, 2019, 2018 and 2017 was $ 39.23 , $ 22.96 and $ 3.73 , respectively.

The total intrinsic value of stock options exercised in the years ended December 31, 2019, 2018 and 2017 was $ 474.2 million, $ 445.9 million and $ 20.4 million, respectively, and represents the difference between the fair value of the Company’s common stock at the dates of exercise and the exercise price of the options.

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.

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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 , and restricted stock units issued generally vest 25 % after one year and then 1/16th quarterly thereafter .

The following table shows total stock-based compensation expense included in the accompanying Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017 (in thousands):

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,

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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:

Prior to our IPO, the fair value of the common stock underlying our stock options was determined by our Board of Directors.

The valuations of our common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.

Our Board of Directors, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of our common stock at each grant date, including but not limited to the prices, rights, preferences and privileges of our preferred stock relative to the common stock, our operating and financial performance, current business conditions and projections, our stage of development, likelihood of achieving a liquidity event for the shares of common stock underlying these stock options, such as an IPO or sale of our company, given prevailing market conditions, any adjustment necessary to recognize a lack of marketability of the common stock underlying the granted options, the market performance of comparable publicly-traded companies, the U.S.

and global capital market conditions.

Subsequent to our IPO, the Company uses the market closing price for our Class A common stock as reported on The Nasdaq Global Select Market on the date of grant.

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

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:

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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-based awards.

Where the expected term of the Company’s stock-based awards 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-based awards granted during the years ended December 31, 2019, 2018 and 2017 are as follows:

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,

Dividend rate

Expected term (in years)

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Expected volatility

Fair value of common stock

$2.56 - $18.46

Stock Warrants

The Company does no t have any outstanding warrants as of December 31, 2019 and 2018.

In July 2017 the Company issued 0.4 million shares of Class B common stock upon exercise of 0.4 million Class B common stock warrants issued in 2009.

Immediately prior to the Company’s IPO in 2017, warrants to purchase 2.2 million shares of convertible preferred stock were outstanding.

The warrants were automatically converted into warrants to purchase 2.2 million shares of Class B common stock upon the closing of the IPO.

The fair value of the convertible preferred stock warrants was recorded as a liability and was remeasured at the end of each balance sheet date using the Black-Scholes option pricing model.

The Company revalued the convertible preferred stock warrants as of the completion of the IPO and reclassified the outstanding preferred stock warrant liability balance to additional paid-in capital with no further re-measurement required as Class B common stock warrants are considered permanent equity.

Changes in the fair value of the convertible preferred stock warrants were recognized in the consolidated statements of operations.

The Company valued the convertible preferred stock warrants using the following assumptions:

December 31, 2017

Dividend rate

Expected term (in years)

Risk-free interest rate

Expected volatility

After conversion into warrants to purchase shares of Class B common stock, 1.9 million warrants were exercised and 0.1 million shares were cancelled during the year ended December 31, 2017.

The warrant agreements allowed for net settlement for Class B common stock.

As a result, the Company issued 1.8 million shares of Class B common stock upon exercise.

As of December 31, 2017, warrants to purchase 0.2 million shares of Class B common stock were outstanding, which were exercised during the year ended December 31, 2018.

COMMITMENTS AND CONTINGENCIES

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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 our products, the Company enters into agreements with manufacturers and suppliers to procure inventory based upon certain criteria and timing.

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, 2019 and 2018, the Company had $ 55.7 million and $ 40.6 million purchase commitments for inventory, respectively.

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 $ 0.3 million and $ 0.1 million for these purchase commitments in “Accrued liabilities” at December 31, 2019 and 2018, respectively.

Content License Purchase Commitments

At December 31, 2019, the Company recorded $ 1.7 million as obligations in “Accrued liabilities” for license purchase commitments.

The obligations for the year ended December 31, 2018 were not material.

As of December 31, 2019, the Company did not have any remaining performance obligations that are not reflected on the financial statements as they do not yet meet the criteria for asset and liability recognition.

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, 2019, the Company had irrevocable letters of credit outstanding in the amount of $ 31.8 million for the benefit of landlords related to non-cancelable facilities leases.

The letters of credit expire on various dates in 2030.

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

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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.

The expense includes accruals based on best estimates and are subject to adjustments in the future.

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.

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Federal research and development tax credit

Convertible preferred stock warrants

Stock-based compensation

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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, 2019, management believes it is more likely than not that the deferred tax assets will not be fully realizable.

Accordingly, the Company has provided a full valuation allowance against its deferred tax assets with the exception of deferred tax assets related to foreign entities in the U.K.

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.

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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 2019 .

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.

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Gross decrease due to statue expiration

Gross increase for tax positions of prior years

Gross decrease for tax positions of prior years

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

The Company does not believe unrecognized tax benefits will change significantly in the next 12 months.

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.

In the normal course of business, the Company is subject to examination by taxing authorities.

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;

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

The Company is not currently under audit by the Internal Revenue Service or other similar state and local authorities.

All tax years remain open to examination by major taxing jurisdictions to which the Company is subject.

The Company will continue to reinvest earnings from our foreign subsidiaries indefinitely.

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.

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RELATED-PARTY TRANSACTIONS

The Company has engaged in transactions with one of its strategic investors.

With respect to this investor, the Company recorded revenue of $ 8.5 million, $ 4.1 million and $ 0.6 million for the years ended December 31, 2019, 2018 and 2017 respectively.

The Company had an accounts receivable balance of $ 2.4 million as of December 31, 2019 and 2018, related to transactions with this investor.

The Company incurred expenses of $ 1.3 million, $ 1.3 million and $ 0.2 million with this investor for the years ended December 31, 2019, 2018 and 2017, respectively.

The Company had a payable of $ 0.4 million and $ 1.5 million to this investor as of December 31, 2019 and 2018, respectively.

In addition, the Company has 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.

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.

The Company did no t consummate any transactions with the other company for the years ended December 31, 2018 and 2017.

There were no outstanding amounts payable to this other company as of December 31, 2019, 2018 and 2017.

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

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

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.

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Years Ended December 31,

Net loss allocable to common stockholders

Net loss attributable to common stockholders

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

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

Warrants to purchase common stock

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.

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

In the second quarter of 2017 the Company changed the operating segments to combine one of the previous operating segments with two existing segments to reflect how the CODM evaluates performance and allocates resources.

This change did not result in a change to the reportable segments.

The Company is organized into two reportable segments as follows:

Consists primarily of fees received from advertisers and content publishers, and from licensing the Company’s technology and proprietary operating system to service operators.

Platform revenue primarily includes fees earned from the sale of digital advertising and revenue share from new or recurring user subscriptions activated through the Company’s platform and revenue share from user purchases of content publishers’ media through its platform.

The Company also earns revenue from the sale of branded channel buttons on player and TV remote controls.

Consists primarily of net sales of streaming media players, audio products and accessories through retailers and distributors, as well as directly to customers through the Company’s website.

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.

12 unchanged sentences

Total Revenue

Net loss attributable to common stockholders

Basic and diluted net loss per share attributable to common stockholders

Three Months Ended

Total Revenue

Net income (loss) attributable to common stockholders

1 unchanged sentence

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