Fitbit SEC Filings: Unreported And Unnoticed

| About: Fitbit, Inc. (FIT)


On March 16th, executives were issued 732,100 shares worth of derivative securities with depressed exercise prices.

On March 29th, executives instituted a bonus plan administered by Jon Callaghan, the Venture capitalist who has profited most from Fitbit.

These potentially unlimited bonuses need not be disclosed until the 2016 proxy filing in mid-2017.

Fitbit (NYSE:FIT) has been propped up from its February 2016 low of $11.91 by recent press releases detailing large numbers of devices shipped, the global expansion of its FitStar Personal Trainer App, as well as initiation of coverage by the Longbow Research group with a "Buy" rating and $20 price target.

Fitbit ships over 1 million Blaze and Alta devices

Fitstar Personal Trainer App launched in new languages

Despite these positive signals, many investors would be happy to see FIT reach $16, a level still 20% below its IPO of $20. The stock price has taken multiple hits despite posting increasing earnings every quarter. Somewhat inexplicably, the revelation of the Fitbit Blaze on January 5, 2016, sent the stock tumbling nearly 40% from almost $30 to under $20 within a week. Analysts believed it would resemble the Apple (NASDAQ:AAPL) Watch too closely and be unable to compete, dooming it and the company to failure.

The inability of the company to bolster investor confidence and manage consumer expectations is even more troubling in light of recent SEC filings. On March 16th, executives took advantage of their own PR bungling by issuing themselves a total of 732,100 derivative securities with an exercise price of $13.93 and an expiration date of 3/14/2026. It's important to note that this doesn't constitute a stock purchase, rather it is a bonus given to the executives. This is only 14.5% above the all-time low value of the stock and far below the IPO price. If the stock does return to its IPO price of $20 then these bonuses amount to over $4.4 million in profit.

William Zerella Form 4

James Park Form 4

Timothy Roberts Form 4

Edward Scal Form 4

Hansgregory Hartmann Form 4

Andy Missan Form 4

Eric Friedman Form 4

If that wasn't enough, the executives have hedged their bets by instituting a "Bonus Plan" on March 25, 2016, retroactive to January 1, 2016. This plan allows the compensation committee to distribute cash bonuses to executives in addition to employees. This uncouples executive compensation from stock prices, shielding the executives from market fluctuations and allowing them to access capital for their personal use without regard to the interests of their investors. I always considered executive compensation through stock as a mechanism for ensuring accountability, such that the rise and fall of stock prices would affect the fortunes of the executives. For Fitbit, that is no longer the case.

Fitbit Bonus Plan

Ideally, the Compensation Committee would have the best interests of the stockholders in mind, but this may not be the case. The chair of the Compensation Committee is none other than Jonathan Callaghan, one of True Venture's partners. He has been closely involved with the company and its executives since 2008 and has already profited greatly from the company before its decline by selling nearly 4 million shares in a transaction worth more than $100 million in November 2015 before the stock dropped. In comparison, Under Armour (NYSE:UA), another wearables company, has a Compensation Committee composed of members whose combined total insider stock dispositions come in under $4 million. While Under Armour does have cash incentives for its executives, they have extremely strict criteria for payouts. On page 31 of the Under Armour Proxy, it shows that a total of $250,000 was paid out in bonus compensation to one executive, with the vast majority of bonuses given as stocks and derivatives. We can only hope that the two-person committee led by someone with close ties to the executives will be as frugal.

Fitbit Compensation Committee

Jon Callaghan Form 4

Under Armour Compensation Committee

Under Armour Proxy

Despite these misgivings, I have confidence in the short-term potential of the company. The Apple Watch, considered to be a competitor for Fitbit's more advanced devices, appears to be lagging behind sales projections. In addition, the stock has suffered from a soft Q1 and overall 2016 guidance, but based on reviews of the newly released Blaze and Alta as well as high shipment numbers, I expect an earnings beat in early May with revised guidance that could send the stock back toward its IPO price. In addition, the company nearly tripled its spending on R&D from 2014 to 2015, suggesting that new capabilities may be around the corner. If Fitbit is able to innovate and stand out in the wearables market, it could climb up out of these depressed valuations and earn its investors, not just its executives, a little money.

Disclosure: I am/we are long FIT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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