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Summary of Significant Accounting Policies (Policies)
9 Months Ended
Sep. 30, 2017
Accounting Policies [Abstract]  
Basis of Presentation and Use of Estimates

Basis of Presentation and Use of Estimates

The condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements contained in our final prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with the SEC on September 28, 2017 (the “Prospectus”). There have been no material changes in the Company’s significant accounting policies from those that were disclosed in the Prospectus, except as noted below.

Use of Estimates

Use of Estimates

The preparation of the Company’s consolidated financial statements in accordance with U.S. GAAP requires management to make certain estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Significant items subject to such estimates include revenue recognition for multiple element arrangements, determination of revenue reporting as net versus gross, sales return reserves, customer incentive programs, inventory valuation, the valuation of deferred income tax assets, the recognition and disclosure of contingent liabilities, the fair value of assets and liabilities acquired in business combinations and the fair value of the Company’s preferred stock and common stock. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results may differ from the Company’s estimates. To the extent that there are material differences between these estimates and actual results, the Company’s financial condition or operating results will be affected.

Principles of Consolidation

Principles of Consolidation

The condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and includes the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Comprehensive Loss

Comprehensive Loss

Comprehensive loss is equal to the net loss for all periods presented.  Therefore, the consolidated statements of comprehensive loss have been omitted from the condensed consolidated financial statements.

Concentrations

Concentrations

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

2017

 

 

October 1,

2016

 

 

September 30,

2017

 

October 1,

2016

 

Customer A

 

 

10

%

 

 

16

%

 

*

 

 

14

%

Customer B

 

*

 

 

11

 

 

*

 

12

 

Customer C

 

18

 

 

25

 

 

19

 

25

 

Customer D

 

11

 

 

*

 

 

11

 

*

 

 

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

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Customer A

 

 

11

%

 

 

12

%

Customer B

 

*

 

 

 

11

 

Customer C

 

 

14

 

 

 

17

 

Customer D

 

 

19

 

 

 

17

 

 

*

Less than 10%

Business Combinations

Business Combinations

The Company accounts for its acquisitions using the acquisition method. Goodwill is measured at the acquisition date as the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. Significant estimates and assumptions are made by management to value such assets and liabilities. Although the Company believes that those estimates and assumptions are reasonable and appropriate, they are inherently uncertain and subject to refinement. Additional information related to the acquisition date fair value of acquired assets and assumed liabilities obtained during the measurement period, not to exceed one year, may result in changes to the recorded values of such assets and liabilities, resulting in an offsetting adjustment to any goodwill associated with the business acquired. Uncertain tax positions and tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date. The Company will continue to collect information and reevaluate these estimates and assumptions quarterly.

Any contingent consideration payable is recognized at fair value at the acquisition date. Liability-classified contingent consideration is remeasured each reporting period with changes in fair value recognized in earnings until the contingent consideration is settled.

Acquisition related costs incurred in connection with a business combination, other than those associated with the issuance of debt or equity securities, are expensed as incurred.

Goodwill, Purchased Intangible Assets and Impairment Assessment

Goodwill, Purchased Intangible Assets and Impairment Assessment

Goodwill represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed, if any, in a business combination. The Company reviews its goodwill for impairment annually, as of the beginning of the fourth quarter, and whenever events or changes in circumstances indicate that impairment may exist.

Purchased intangible assets consist of identifiable intangible assets, which consisted primarily of developed technology. Purchased intangible assets are recorded at fair value on the date of acquisition and amortized over their estimated useful lives following the pattern in which the economic benefits of the assets will be consumed, generally straight-line. The carrying amounts of our purchased intangible assets are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable or that the useful life is shorter than originally estimated.

Streaming Content

Streaming Content

The Company licenses certain content for users to access through The Roku Channel. The content licenses can be for a fixed fee and/or advertising revenue share with specific windows of content availability. The Company capitalizes the content fees and records a corresponding liability at the gross amount of the liability when the license period begins, the cost of the content is known and the content is accepted and available for streaming. At September 30, 2017, $506,000 of content met these requirements and is recorded in “Prepaid expenses and other current assets”. The Company amortizes the content assets in “Cost of Revenue, Platform” over the contractual window of availability.

Recently Issued Accounting Pronouncements Not Yet Adopted

Recently Issued Accounting Pronouncements Not Yet Adopted

In July 2017, the Financial Accounting Standards Board (“FASB”) issued new guidance to address the complexity of the accounting for certain financial instruments with down round features that result in the strike price being reduced on the basis of the pricing of future equity offerings. Under this guidance, when determining the classification of certain financial instruments as liability or equity, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is evaluating the impact of this new guidance on the consolidated financial statements and the related disclosures.

In January 2017, the FASB issued new guidance which eliminates Step 2 from the goodwill impairment test which measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under this guidance, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount, and should recognize an impairment loss for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the loss not exceeding the total amount of goodwill allocated to that reporting unit. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2019, with early adoption permitted. The guidance should be applied prospectively. The Company is evaluating the impact of this new guidance on the consolidated financial statements and the related disclosures.

In January 2017, the FASB issued new guidance which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities should be accounted for as an acquisition of a business or group of assets. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2017, with early adoption permitted. The guidance should be applied prospectively to any transactions occurring on or after the adoption date. The Company is evaluating the impact of this new guidance on the consolidated financial statements and the related disclosures.

In August 2016, the FASB issued new guidance which addresses classification of certain cash receipts and cash payments related to the statement of cash flows. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2017, with early adoption permitted. The Company is evaluating the impact of this new guidance on the consolidated financial statements and the related disclosures.

In February 2016, the FASB issued new guidance related to new accounting and reporting guidelines for leasing arrangements. The guidance requires organizations that lease assets to recognize assets and liabilities on the balance sheet related to the rights and obligations created by those leases, regardless of whether they are classified as finance or operating leases. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018, with early adoption permitted. The new standard is to be applied using a modified retrospective approach. The Company is evaluating the impact of this new guidance on the consolidated financial statements and the related disclosures.

In January 2016, the FASB issued new guidance related to the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is evaluating the impact of this new guidance on the consolidated financial statements and the related disclosures.

In May 2014, the FASB issued new guidance related to the recognition and reporting of revenue that establishes a comprehensive new revenue recognition model designed to depict the transfer of goods or services to a customer in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In August 2015, the FASB deferred the effective date for annual reporting periods beginning after December 15, 2017. In 2016 the FASB issued amendments on this guidance with the same effective date and transition guidance. The Company plans to adopt the new revenue standard in its first quarter of 2018 using the modified retrospective approach, which requires the cumulative impact of initially applying the guidance to be recognized as an adjustment to the Company’s accumulated deficit as of January 1, 2018, the date of adoption. Prior periods will not be retroactively adjusted.

To date, the Company has established an implementation team and is in the process of evaluating the impact of the new standard on its accounting policies, processes, and system requirements. Furthermore, the Company has made and will continue to make investments in systems to enable timely and accurate reporting under the new standard.

The Company is continuing to evaluate the potential impact that the implementation of this standard will have on its condensed consolidated financial statements, but has not yet determined whether the effect will be material. However, the Company believes this new standard will impact its accounting for revenue arrangements as follows:

 

Revenue from the licensing of the Company’s technology and proprietary operating system to service operators and TV brands, will be recognized earlier and could result in greater variability in revenue recognition;

 

Estimation of variable consideration for content publisher arrangements with revenue share from user subscriptions and media purchases through its platform and the sale of branded channel buttons on its remote controls; and

 

Expanded disclosures.

The Company expects revenue recognition related to players to remain relatively unchanged under the new guidance and is in the process of evaluating the impact on its player arrangements.

Fair Value Measurements

Fair Value Measurements

Level 1—Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities.

Level 2—Observable inputs other than quoted prices included within Level 1, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs other than quoted prices that are observable or are derived principally from, or corroborated by, observable market data by correlation or other means.

Level 3—Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

Level 1 liabilities consist of accounts payable, accrued expenses and long-term debt. The carrying amounts of accounts receivable, prepaid expenses, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these items. Based on the borrowing rates currently available to the Company for debt with similar terms, the carrying value of the line of credit and term debt approximate fair value as well.

The tables below summarize the Company’s financial instruments’ classification within the fair value hierarchy as follows (in thousands):

 

 

 

September 30, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial liabilities—convertible preferred stock warrant

   liability

 

$

 

 

$

 

 

$

52,355

 

 

$

52,355

 

Total financial liabilities

 

$

 

 

$

 

 

$

52,355

 

 

$

52,355

 

 

 

 

December 31, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial liabilities—convertible preferred stock warrant

   liability

 

$

 

 

$

 

 

$

9,990

 

 

$

9,990

 

Total financial liabilities

 

$

 

 

$

 

 

$

9,990

 

 

$

9,990

 

 

Level 3 instruments consist solely of the Company’s preferred stock warrant liability in which the fair value was measured upon issuance and at each reporting date. Inputs used to determine the estimated fair value of the warrant liability as of the valuation date included remaining contractual term of the warrants, the risk-free interest rate, the volatility of comparable public companies over the remaining term, and the fair value of underlying shares. The significant unobservable inputs used in the fair value measurement of the preferred stock warrant liability were the fair value of the underlying stock at the valuation date for periods prior to the IPO and the estimated term of the warrants. Generally, increases (decreases) in the fair value of the underlying stock and estimated term would result in a directionally similar impact to the fair value measurement.

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

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Beginning balance

 

$

9,990

 

 

$

10,878

 

Fair value of warrants issued during the period

 

 

2,032

 

 

 

 

Change in fair value of preferred stock warrant liability

 

 

40,333

 

 

 

(888

)

Ending balance

 

$

52,355

 

 

$

9,990