Case 4:19-cv-08046-HSG Document 1 Filed 12/10/19 Page 1 of 27
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`Benjamin Heikali (SBN 307466)
`FARUQI & FARUQI, LLP
`10866 Wilshire Boulevard, Suite 1470
`Los Angeles, CA 90024
`Telephone: (424) 256-2884
`Facsimile: (424) 256-2885
`E-mail: bheikali@faruqilaw.com
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`[Additional Captions on Signature Page]
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`Attorney for Plaintiff David Phillips
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` IN THE UNITED STATES DISTRICT COURT
`FOR THE NORTHERN DISTRICT OF CALIFORNIA
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`DAVID PHILLIPS, Individually and on
`Behalf of All Others Similarly Situated,
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`Plaintiff,
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`v.
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`FITBIT, INC., JAMES PARK, STEVEN J.
`MURRAY, ERIC N. FRIEDMAN,
`CHRISTOPHER B. PAISLEY, GLENDA J.
`FLANAGAN, LAURA J. ALBER,
`BRADLEY M. FLUEGEL and MATTHEW
`BROMBERG,
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`Defendants.
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`Case No. 3:19-cv-8046
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`CLASS ACTION COMPLAINT FOR
`VIOLATIONS OF SECTIONS 14(a) AND
`20(a) OF THE SECURITIES
`EXCHANGE ACT OF 1934
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`JURY TRIAL DEMANDED
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`CLASS ACTION COMPLAINT FOR VIOLATIONS OF SECTIONS 14(a) AND 20(a) OF
`THE SECURITIES EXCHANGE ACT OF 1934
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`3:19-cv-8046
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`Case 4:19-cv-08046-HSG Document 1 Filed 12/10/19 Page 2 of 27
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`Plaintiff David Phillips (“Plaintiff”), by his undersigned attorneys, alleges upon personal
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`knowledge with respect to himself, and information and belief based upon, inter alia, the
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`investigation of counsel as to all other allegations herein, as follows:
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`NATURE OF THE ACTION
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`This action is brought as a class action by Plaintiff on behalf of himself and the
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`other public holders of the common stock of Fitbit, Inc. (“Fitbit” or the “Company”) against the
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`Company and the members of the Company’s board of directors (collectively, the “Board” or
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`“Individual Defendants,” and, together with Fitbit, the “Defendants”) for their violations of
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`Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C.
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`§§ 78n(a), 78t(a), SEC Rule 14a-9, 17 C.F.R. § 240.14a-9, and Regulation G, 17 C.F.R. § 244.100,
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`in connection with the proposed merger (the “Proposed Transaction”) between Fitbit and Alphabet
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`Inc. (“Google”).
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`2.
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`On November 1, 2019, the Board caused the Company to enter into an agreement
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`and plan of merger (“Merger Agreement”), pursuant to which the Company’s shareholders stand
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`to receive $7.35 in cash for each share of Fitbit stock they own (the “Merger Consideration”).
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`3.
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`On November 25, 2019, in order to convince Fitbit shareholders to vote in favor of
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`the Proposed Transaction, the Board authorized the filing of a materially incomplete and
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`misleading Form PREM14A Preliminary Proxy Statement (the “Proxy”) with the Securities and
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`Exchange Commission (“SEC”), in violation of Sections 14(a) and 20(a) of the Exchange Act.
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`The materially incomplete and misleading Proxy violates both Regulation G (17 C.F.R. § 244.100)
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`and SEC Rule 14a-9 (17 C.F.R. § 240.14a-9), each of which constitutes a violation of Sections
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`14(a) and 20(a) of the Exchange Act.
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`4.
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`While touting the fairness of the Merger Consideration to the Company’s
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`shareholders in the Proxy, Defendants have failed to disclose certain material information that is
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`necessary for shareholders to properly assess the fairness of the Proposed Transaction, thereby
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`violating SEC rules and regulations and rendering certain statements in the Proxy materially
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`- 1 -
`CLASS ACTION COMPLAINT FOR VIOLATIONS OF SECTIONS 14(a) AND 20(a) OF
`THE SECURITIES EXCHANGE ACT OF 1934
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`3:19-cv-8046
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`Case 4:19-cv-08046-HSG Document 1 Filed 12/10/19 Page 3 of 27
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`incomplete and misleading.
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`5.
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`In particular, the Proxy contains materially incomplete and misleading information
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`concerning: (i) the financial projections for the Company that were prepared by the Company and
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`relied on by Defendants in recommending that Fitbit shareholders vote in favor of the Proposed
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`Transaction; and (ii) the summary of certain valuation analyses conducted by Fitbit’s financial
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`advisor, Qatalyst Partners LP (“Qatalyst”) in support of its opinion that the Merger Consideration
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`is fair to shareholders, on which the Board relied.
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`6.
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`It is imperative that the material information that has been omitted from the Proxy
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`is disclosed prior to the forthcoming vote to allow the Company’s shareholders to make an
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`informed decision regarding the Proposed Transaction.
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`7.
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`For these reasons, and as set forth in detail herein, Plaintiff asserts claims against
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`Defendants for violations of Sections 14(a) and 20(a) of the Exchange Act, based on Defendants’
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`violation of (i) Regulation G (17 C.F.R. § 244.100) and (ii) Rule 14a-9 (17 C.F.R. § 240.14a-9).
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`Plaintiff seeks to enjoin Defendants from holding the shareholder vote on the Proposed Transaction
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`and taking any steps to consummate the Proposed Transaction unless, and until, the material
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`information discussed below is disclosed to Fitbit shareholders sufficiently in advance of the vote
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`on the Proposed Transaction or, in the event the Proposed Transaction is consummated, to recover
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`damages resulting from the Defendants’ violations of the Exchange Act.
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`JURISDICTION AND VENUE
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`8.
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`This Court has subject matter jurisdiction pursuant to Section 27 of the Exchange
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`Act (15 U.S.C. § 78aa) and 28 U.S.C. § 1331 (federal question jurisdiction) as Plaintiff alleges
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`violations of Sections 14(a) and 20(a) of the Exchange Act.
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`9.
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`Personal jurisdiction exists over each Defendant either because the Defendant
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`conducts business in or maintains operations in this District, or is an individual who is either
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`present in this District for jurisdictional purposes or has sufficient minimum contacts with this
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`District as to render the exercise of jurisdiction over Defendant by this Court permissible under
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`CLASS ACTION COMPLAINT FOR VIOLATIONS OF SECTIONS 14(a) AND 20(a) OF
`THE SECURITIES EXCHANGE ACT OF 1934
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`3:19-cv-8046
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`Case 4:19-cv-08046-HSG Document 1 Filed 12/10/19 Page 4 of 27
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`traditional notions of fair play and substantial justice.
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`10.
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`Venue is proper in this District under Section 27 of the Exchange Act, 15 U.S.C. §
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`78aa, as well as under 28 U.S.C. § 1391, because Fitbit maintains its principal executive offices in
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`this District.
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`11.
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`12.
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`PARTIES
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`Plaintiff is, and at all relevant times has been, a holder of Fitbit common stock.
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`Defendant Fitbit is incorporated in Delaware and maintains its principal executive
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`offices at 199 Fremont Street, 14th Floor, San Francisco, California 94105. The Company’s
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`common stock trades on the NYSE under the ticker symbol “FIT.”
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`13.
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`Individual Defendant James Park is Fitbit’s President, Chief Executive Officer, Co-
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`Founder and Chairman and has been a director of Fitbit since March 2007.
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`14.
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`Individual Defendant Steven J. Murray is Fitbit’s Lead Director and has been a
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`director of Fitbit since June 2013.
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`15.
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`Individual Defendant Eric N. Friedman is Fitbit’s Chief Technology Officer and
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`Co-Founder and has been a director of Fitbit since March 2007.
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`16.
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`Individual Defendant Christopher B. Paisley has been a director of Fitbit since
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`January 2015.
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`17.
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`Individual Defendant Glenda J. Flanagan has been a director of Fitbit since June
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`2016.
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`2018.
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`Individual Defendant Laura J. Alber has been a director of Fitbit since June 2016.
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`Individual Defendant Bradley M. Fluegel has been a director of Fitbit since March
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`20.
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`Individual Defendant Matthew Bromberg has been a director of Fitbit since March
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`2018.
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`21.
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`The Individual Defendants referred to in paragraphs 13-20 are collectively referred
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`to herein as the “Individual Defendants” and/or the “Board.”
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`CLASS ACTION COMPLAINT FOR VIOLATIONS OF SECTIONS 14(a) AND 20(a) OF
`THE SECURITIES EXCHANGE ACT OF 1934
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`3:19-cv-8046
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`Case 4:19-cv-08046-HSG Document 1 Filed 12/10/19 Page 5 of 27
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`CLASS ACTION ALLEGATIONS
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`Plaintiff brings this class action pursuant to Fed. R. Civ. P. 23 on behalf of himself
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`and the other public shareholders of Fitbit (the “Class”). Excluded from the Class are Defendants
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`herein and any person, firm, trust, corporation, or other entity related to or affiliated with any
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`Defendant.
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`23.
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`This action is properly maintainable as a class action because:
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`The Class is so numerous that joinder of all members is impracticable. As
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`of November 15, 2019, there were approximately 261,000,000 shares of Fitbit common
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`stock outstanding, held by hundreds of individuals and entities scattered throughout the
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`country. The actual number of public shareholders of Fitbit will be ascertained through
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`discovery;
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`There are questions of law and fact that are common to the Class that
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`predominate over any questions affecting only individual members, including the
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`following:
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`i)
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`whether Defendants disclosed material information that includes
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`non-GAAP financial measures without providing a reconciliation of
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`the same non-GAAP financial measures to their most directly
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`comparable GAAP equivalent in violation of Section 14(a) of the
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`Exchange Act;
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`ii)
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`whether Defendants have misrepresented or omitted material
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`information concerning the Proposed Transaction in the Proxy in
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`violation of Section 14(a) of the Exchange Act;
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`iii)
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`whether the Individual Defendants have violated Section 20(a) of
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`the Exchange Act; and
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`whether Plaintiff and other members of the Class will suffer
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`irreparable harm if compelled to vote their shares regarding the
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`CLASS ACTION COMPLAINT FOR VIOLATIONS OF SECTIONS 14(a) AND 20(a) OF
`THE SECURITIES EXCHANGE ACT OF 1934
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`3:19-cv-8046
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`Case 4:19-cv-08046-HSG Document 1 Filed 12/10/19 Page 6 of 27
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`Proposed Transaction based on the materially incomplete and
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`misleading Proxy.
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`c.
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`Plaintiff is an adequate representative of the Class, has retained competent
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`counsel experienced in litigation of this nature, and will fairly and adequately protect the
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`interests of the Class;
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`Plaintiff’s claims are typical of the claims of the other members of the Class
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`and Plaintiff does not have any interests adverse to the Class;
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`The prosecution of separate actions by individual members of the Class
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`would create a risk of inconsistent or varying adjudications with respect to individual
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`members of the Class, which would establish incompatible standards of conduct for the
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`party opposing the Class;
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`Defendants have acted on grounds generally applicable to the Class with
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`respect to the matters complained of herein, thereby making appropriate the relief sought
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`herein with respect to the Class as a whole; and
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`A class action is superior to other available methods for fairly and
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`efficiently adjudicating the controversy.
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`SUBSTANTIVE ALLEGATIONS
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`I.
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`The Proposed Transaction
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`Fitbit is a technology company that combines wearable devices with software and
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`services to give users tools to help them reach their health and fitness goals, augmented by general
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`purpose features that add further utility and drive user engagement. The Company’s wearable
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`devices, which include health and fitness trackers and smartwatches, allow users to view data about
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`their daily activity, exercise and sleep in real time. The Company’s software and services, which
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`CLASS ACTION COMPLAINT FOR VIOLATIONS OF SECTIONS 14(a) AND 20(a) OF
`THE SECURITIES EXCHANGE ACT OF 1934
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`3:19-cv-8046
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`Case 4:19-cv-08046-HSG Document 1 Filed 12/10/19 Page 7 of 27
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`include an online dashboard and mobile app, provides users with data analytics, motivational and
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`social tools, and virtual coaching through customized fitness plans and interactive workouts.
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`25.
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`On November 1, 2019, Fitbit and Google issued a joint press release announcing
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`the Proposed Transaction, which states in pertinent part:
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`today
`SAN FRANCISCO--(BUSINESS WIRE)--Fitbit, Inc. (NYSE: FIT)
`announced that it has entered into a definitive agreement to be acquired by Google
`LLC for $7.35 per share in cash, valuing the company at a fully diluted equity value
`of approximately $2.1 billion.
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`“More than 12 years ago, we set an audacious company vision – to make everyone
`in the world healthier. Today, I’m incredibly proud of what we’ve achieved towards
`reaching that goal. We have built a trusted brand that supports more than 28 million
`active users around the globe who rely on our products to live a healthier, more
`active life,” said James Park, co-founder and CEO of Fitbit. “Google is an ideal
`partner to advance our mission. With Google’s resources and global platform, Fitbit
`will be able to accelerate innovation in the wearables category, scale faster, and
`make health even more accessible to everyone. I could not be more excited for what
`lies ahead.”
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`"Fitbit has been a true pioneer in the industry and has created terrific products,
`experiences and a vibrant community of users," said Rick Osterloh, Senior Vice
`President, Devices & Services at Google. "We're looking forward to working with
`the incredible talent at Fitbit, and bringing together the best hardware, software and
`AI, to build wearables to help even more people around the world."
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`Fitbit pioneered the wearables category by delivering innovative, affordable and
`engaging devices and services. Being “on Fitbit” is not just about the device – it is
`an immersive experience from the wrist to the app, designed to help users
`understand and change their behavior to improve their health. Because of this
`unique approach, Fitbit has sold more than 100 million devices and supports an
`engaged global community of millions of active users, utilizing data to deliver
`unique personalized guidance and coaching to its users. Fitbit will continue to
`remain platform-agnostic across both Android and iOS.
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`Consumer trust is paramount to Fitbit. Strong privacy and security guidelines have
`been part of Fitbit’s DNA since day one, and this will not change. Fitbit will
`continue to put users in control of their data and will remain transparent about the
`data it collects and why. The company never sells personal information, and Fitbit
`health and wellness data will not be used for Google ads.
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`The transaction is expected to close in 2020, subject to customary closing
`conditions, including approval by Fitbit’s stockholders and regulatory approvals.
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`- 6 -
`CLASS ACTION COMPLAINT FOR VIOLATIONS OF SECTIONS 14(a) AND 20(a) OF
`THE SECURITIES EXCHANGE ACT OF 1934
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`3:19-cv-8046
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`

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`Case 4:19-cv-08046-HSG Document 1 Filed 12/10/19 Page 8 of 27
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`Qatalyst Partners LLP acted as financial advisor to Fitbit, and Fenwick & West
`LLP acted as legal advisor.
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`About Fitbit, Inc. (NYSE: FIT)
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`Fitbit helps people lead healthier, more active lives by empowering them with data,
`inspiration and guidance to reach their goals. Fitbit designs products and
`experiences that track and provide motivation for everyday health and fitness.
`Fitbit’s diverse line of innovative and popular products include Fitbit Charge
`3™, Fitbit Inspire HR™, Fitbit Inspire™ and Fitbit Ace 2™ activity trackers, as
`well as the Fitbit Ionic™ and Fitbit Versa™ family of smartwatches, Fitbit
`Flyer™ wireless headphones, and Fitbit Aria family of smart scales. Fitbit products
`are carried in approximately 39,000 retail stores and in 100+ countries around the
`globe. Powered by one of the world’s largest databases of activity, exercise and
`sleep data and Fitbit’s leading health and fitness social network, the Fitbit platform
`delivers personalized experiences, insights and guidance through leading software
`and interactive tools, including the Fitbit and Fitbit Coach apps, and Fitbit OS for
`smartwatches. Fitbit’s paid subscription service, Fitbit Premium, uses your unique
`data to deliver actionable guidance and coaching in the Fitbit app to help you reach
`your health and fitness goals. Fitbit Health Solutions develops health and wellness
`solutions designed to help increase engagement, improve health outcomes, and
`drive a positive return for employers, health plans and health systems.
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`26.
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`Fitbit is well-positioned for financial growth and the Merger Consideration fails to
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`adequately compensate the Company’s shareholders. It is imperative that Defendants disclose the
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`material information they have omitted from the Proxy, discussed in detail below, so that the
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`Company’s shareholders can properly assess the fairness of the Merger Consideration for
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`themselves and make an informed decision concerning whether or not to vote in favor of the
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`Proposed Transaction.
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`If the false and/or misleading Proxy is not remedied and the Proposed Transaction
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`is consummated, Defendants will directly and proximately have caused damages and actual
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`economic loss (i.e., the difference between the value to be received as a result of the Proposed
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`Transaction and the true value of their shares prior to the merger), in an amount to be determined
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`at trial, to Plaintiff and the Class.
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`CLASS ACTION COMPLAINT FOR VIOLATIONS OF SECTIONS 14(a) AND 20(a) OF
`THE SECURITIES EXCHANGE ACT OF 1934
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`3:19-cv-8046
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`

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`Case 4:19-cv-08046-HSG Document 1 Filed 12/10/19 Page 9 of 27
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`II.
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`The Materially Incomplete and Misleading Proxy
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`28.
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`On November 25, 2019, Defendants caused the Proxy to be filed with the SEC in
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`connection with the Proposed Transaction. The Proxy solicits the Company’s shareholders to vote
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`in favor of the Proposed Transaction. Defendants were obligated to carefully review the Proxy
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`before it was filed with the SEC and disseminated to the Company’s shareholders to ensure that it
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`did not contain any material misrepresentations or omissions. However, the Proxy misrepresents
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`and/or omits material information that is necessary for the Company’s shareholders to make an
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`informed decision concerning whether to vote in favor of the Proposed Transaction, in violation
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`of Sections 14(a) and 20(a) of the Exchange Act.
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`The Materiality of Financial Projections
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`29.
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`A company’s financial forecasts are material information a board relies on to
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`determine whether to approve a merger transaction and recommend that shareholders vote to
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`approve the transaction. Here, the Proxy discloses that “[i]n connection with its evaluation of the
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`Transactions, Fitbit’s management prepared the Projections.” Proxy 42. The projections were
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`provided to the Board, Qatalyst and Google. Id.
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`30. When soliciting proxies from shareholders, a company must furnish the
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`information found in Schedule 14A (codified as 17 C.F.R. § 240.14a-101). Item 14 of Schedule
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`14A sets forth the information a company must disclose when soliciting proxies regarding mergers
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`and acquisitions. In regard to financial information, companies are required to disclose “financial
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`information required by Article 11 of Regulation S-X[,]” which includes Item 10 of Regulation S-
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`K. See Item 14(7)(b)(11) of 17 C.F.R. § 240.14a-101.
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`31.
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`Under Item 10 of Regulation S-K, companies are encouraged to disclose
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`“management’s projections of future economic performance that have a reasonable basis and are
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`presented in an appropriate format.” 17 C.F.R. § 229.10(b). Although the SEC recognizes the
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`usefulness of disclosing projected financial metrics, the SEC cautions companies to “take care to
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`CLASS ACTION COMPLAINT FOR VIOLATIONS OF SECTIONS 14(a) AND 20(a) OF
`THE SECURITIES EXCHANGE ACT OF 1934
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`3:19-cv-8046
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`Case 4:19-cv-08046-HSG Document 1 Filed 12/10/19 Page 10 of 27
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`assure that the choice of items projected is not susceptible of misleading inferences through
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`selective projection of only favorable items.” 17 C.F.R. § 229.10(b)(2).
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`32.
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`In order to facilitate investor understanding of the Company’s financial projections,
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`the SEC provides companies with certain factors “to be considered in formulating and disclosing
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`such projections[,]” including:
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`(i) When management chooses to include its projections in a Commission filing,
`the disclosures accompanying
`the projections should
`facilitate
`investor
`understanding of the basis for and limitations of projections. In this regard investors
`should be cautioned against attributing undue certainty to management’s
`assessment, and the Commission believes that investors would be aided by a
`statement indicating management’s intention regarding the furnishing of updated
`projections. The Commission also believes that investor understanding would be
`enhanced by disclosure of the assumptions which in management’s opinion are
`most significant to the projections or are the key factors upon which the financial
`results of the enterprise depend and encourages disclosure of assumptions in a
`manner that will provide a framework for analysis of the projection.
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`(ii) Management also should consider whether disclosure of the accuracy or
`inaccuracy of previous projections would provide investors with important insights
`into the limitations of projections. In this regard, consideration should be given to
`presenting the projections in a format that will facilitate subsequent analysis of the
`reasons for differences between actual and forecast results. An important benefit
`may arise from the systematic analysis of variances between projected and actual
`results on a continuing basis, since such disclosure may highlight for investors the
`most significant risk and profit-sensitive areas in a business operation.
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`17 C.F.R. § 229.10(b)(3) (emphasis added).
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`33.
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`Here, Fitbit’s shareholders would clearly find complete and non-misleading
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`financial projections material in deciding how to vote, considering that in making its
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`recommendation that shareholders vote in favor of the Proposed Transaction, the Board
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`specifically relied on the financial forecasts to determine that the “Merger Agreement and the
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`Merger are fair to and in the best interests of Fitbit stockholders.” Proxy 35-37.
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`34.
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`As discussed further below, the non-GAAP financial projections here do not
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`provide Fitbit’s shareholders with a materially complete understanding of the assumptions and key
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`factors considered in developing financial projections, which assumptions, factors and other inputs
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`the Board reviewed.
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`- 9 -
`CLASS ACTION COMPLAINT FOR VIOLATIONS OF SECTIONS 14(a) AND 20(a) OF
`THE SECURITIES EXCHANGE ACT OF 1934
`
`
`
`3:19-cv-8046
`
`

`

`Case 4:19-cv-08046-HSG Document 1 Filed 12/10/19 Page 11 of 27
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`The Financial Projections Relied on by the Board
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`35.
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`The Proxy discloses that “[i]n connection with its evaluation of the Transactions,
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`Fitbit’s management prepared the Projections.” Id. at 42. The projections were provided to the
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`Board, Qatalyst and Google. Id.
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`36.
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`The Proxy further discloses that the assumptions used in the financial projections
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`were “reasonably prepared to reflect the best currently available estimates and judgments of
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`Fitbit’s management of the future financial performance of Fitbit and other matters covered
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`thereby.” Id. at 43.
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`37.
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`The Proxy discloses two sets of financial projections. The first set of projections
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`(the “Projections”) was approved and relied on by the Board, utilized by Qatalyst, and made
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`available to Google. Id. at 42. The second set of projections (the “Advocacy Case”) was not
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`approved by the Board or utilized by Qatalyst. Id. at 45. The Advocacy Case was provided to
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`Google. Id.
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`38.
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`The Proxy goes on to disclose, inter alia, forecasted values for projected non-
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`GAAP (Generally Accepted Accounting Principles) financial metrics for 2019 through 2024 for:
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`(1) Non-GAAP Cost of Revenue; (2) Non-GAAP Gross Profit; (3) Non-GAAP Operating
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`Expense; (4) Non-GAAP Operating Income; (5) NOPAT; (6) Unlevered Free Cash Flow; (7)
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`Adjusted EBITDA; (8) Non-GAAP Net Income (Loss); and (9) Non-GAAP Earnings Per Share,
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`but fails to provide (i) the line items used to calculate these non-GAAP metrics nor (ii) a
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`reconciliation of these non-GAAP projections to the most comparable GAAP measures. Id. at 44-
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`45.
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`39.
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`The Proxy discloses the traditional income statement metrics Cost of Revenue,
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`Gross Profit, Operating Expenses and Operating Income, but adjusts them into non-GAAP forms.
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`Non-GAAP Cost of Revenue and Non-GAAP Gross Profit were adjusted by “subtracting stock-
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`based compensation expense, the impact of restructuring and intangible assets amortization.” Id.
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`at 44 nn.3-4. Non-GAAP Operating Expense and Non-GAAP Operating Income were similarly
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`- 10 -
`CLASS ACTION COMPLAINT FOR VIOLATIONS OF SECTIONS 14(a) AND 20(a) OF
`THE SECURITIES EXCHANGE ACT OF 1934
`
`
`
`3:19-cv-8046
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`

`

`Case 4:19-cv-08046-HSG Document 1 Filed 12/10/19 Page 12 of 27
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`adjusted by “subtracting stock-based compensation expense, certain litigation expenses, the impact
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`of restructuring and intangible assets amortization.” Id. at 44 nn.5-6. Nevertheless, the Proxy fails
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`to reconcile these income statement metrics to their most comparable GAAP measures or disclose
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`the line items used to calculate them, rendering the Proxy materially false and/or misleading. Id.
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`at 44-45.
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`40.
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`The Proxy defines NOPAT as “a non-GAAP financial measure calculated by
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`starting with Non-GAAP operating income (loss) and making an associated non-GAAP tax
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`adjustment.” Id. at 44. n.7. Nevertheless, the Proxy fails to reconcile NOPAT to its most
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`comparable GAAP measure, rendering the Proxy materially false and/or misleading. Id.
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`41.
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`The Proxy defines Unlevered Free Cash Flow (“UFCF”) as “a non-GAAP financial
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`measure calculated by starting with NOPAT and subtracting capital expenditures, adding back
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`depreciation and subtracting investment in working capital.” Id. at 44. n.8. Nevertheless, the
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`Proxy fails to reconcile UFCF to its most comparable GAAP measure, rendering the Proxy
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`materially false and/or misleading. Id.
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`42.
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`The Proxy defines Adjusted EBITDA as “a non-GAAP financial measure
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`calculated by starting with net loss and subtracting stock-based compensation expense, certain
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`litigation expenses, the impact of restructuring, impairment of equity investment, depreciation,
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`intangible assets amortization, interest income, net and income tax expense (benefit).” Id. at 44.
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`n.9. Nevertheless, the Proxy fails to reconcile Adjusted EBITDA to its most comparable GAAP
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`measure or disclose the line items used to calculate Adjusted EBITDA, rendering the Proxy
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`materially false and/or misleading. Id.
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`43.
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`The Proxy defines Non-GAAP Net Income (Loss) as “starting with net loss and
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`subtracting stock-based compensation expense, certain litigation expenses, the impact of
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`restructuring, impairment of equity investment, intangible assets amortization and the income tax
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`effect of non-GAAP adjustments.” Id. at 44. n.10. Nevertheless, the Proxy fails to reconcile Non-
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`GAAP Net Income (Loss) to its most comparable GAAP measure or disclose the line items used
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`- 11 -
`CLASS ACTION COMPLAINT FOR VIOLATIONS OF SECTIONS 14(a) AND 20(a) OF
`THE SECURITIES EXCHANGE ACT OF 1934
`
`
`
`3:19-cv-8046
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`

`

`Case 4:19-cv-08046-HSG Document 1 Filed 12/10/19 Page 13 of 27
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`to calculate Non-GAAP Net Income (Loss), rendering the Proxy materially false and/or
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`misleading. Id.
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`44.
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`The Proxy defines Non-GAAP Earnings Per Share as “exclud[ing] stock-based
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`compensation expense, certain litigation expense, the impact of restructuring, impairment of equity
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`investment, intangible assets amortization and the income tax effect of non-GAAP adjustments.”
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`Id. at 44. n.11. Nevertheless, the Proxy fails to reconcile Non-GAAP Earnings Per Share to its
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`most comparable GAAP measure or disclose the line items used to calculate Non-GAAP Earnings
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`Per Share, rendering the Proxy materially false and/or misleading. Id.
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`45.
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`Thus, the Proxy’s disclosure of these non-GAAP financial forecasts provides an
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`incomplete and materially misleading understanding of the Company’s future financial prospects
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`and the inputs and assumptions for which those prospects are based upon. It is clear that those
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`inputs and assumptions were in fact forecasted and utilized in calculating the non-GAAP measures
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`disclosed and relied on by the Board to recommend the Proposed Transaction in violation of
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`Section 14(a) of the Exchange Act.
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`46.
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`The financial projections disclosed on pages 44-45 of the Proxy violate Section
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`14(a) of the Exchange Act because: (i) the use of such forecasted non-GAAP financial measures
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`alone violates SEC Regulation G, as a result of Defendants’ failure to reconcile those non-GAAP
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`measures to their closest GAAP equivalent or otherwise disclose the specific financial assumptions
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`and inputs used to calculate the non-GAAP measures; and (ii) they violate SEC Regulation 14a-9
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`because they are materially misleading, as shareholders are unable to discern the veracity of the
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`financial projections.
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`47.
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`As such, this information must be disclosed in order to cure the materially
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`misleading disclosures regarding both the financial projections developed by the Company as well
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`as the projections relied upon by the Company’s financial advisors.
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`- 12 -
`CLASS ACTION COMPLAINT FOR VIOLATIONS OF SECTIONS 14(a) AND 20(a) OF
`THE SECURITIES EXCHANGE ACT OF 1934
`
`
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`3:19-cv-8046
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`

`

`Case 4:19-cv-08046-HSG Document 1 Filed 12/10/19 Page 14 of 27
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`The Financial Projections Violate Regulation G
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`48.
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`The SEC has acknowledged that potential “misleading inferences” are exacerbated
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`when the disclosed information contains non-GAAP financial measures1 and adopted Regulation
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`G2 “to ensure that investors and others are not misled by the use of non-GAAP financial
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`measures.”3
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`49.
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`Defendants must comply with Regulation G. More specifically, the company must
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`disclose the most directly comparable GAAP financial measure and a reconciliation (by schedule
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`or other clearly understandable method) of the differences between the non-GAAP financial
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`measure disclosed or released with the most comparable financial measure or measures calculated
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`and presented in accordance with GAAP. 17 C.F.R. § 244.100. This is because the SEC believes
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`“this reconciliation will help investors . . . to better evaluate the non-GAAP financial measures
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`. . . . [and] more accurately evaluate companies’ securities and, in turn, result in a more accurate
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`pricing of securities.”4
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`50. Moreover, the SEC has publicly stated that the use of non-GAAP financial
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`measures can be misleading.5 Former SEC Chairwoman Mary Jo White has stated that the frequent
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`use by publicly traded companies of unique company-specific non-GAAP finan