GOPRO, INC., 10-K filed on 2/20/2015
Annual Report
Document and Entity Information (USD $)
In Thousands, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Jun. 30, 2014
Document Information [Line Items]
 
 
Entity Registrant Name
GoPro, Inc. 
 
Entity Central Index Key
0001500435 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Non-accelerated Filer 
 
Document Type
10-K 
 
Document Period End Date
Dec. 31, 2014 
 
Document Fiscal Year Focus
2014 
 
Document Fiscal Period Focus
FY 
 
Amendment Flag
false 
 
Entity Well-known Seasoned Issuer
No 
 
Entity Voluntary Filers
No 
 
Entity Current Reporting Status
Yes 
 
Entity Public Float
 
$ 2,127,600 
Common Class A [Member]
 
 
Document Information [Line Items]
 
 
Entity Common Stock, Shares Outstanding
52,091,317 
 
Common Class B [Member]
 
 
Document Information [Line Items]
 
 
Entity Common Stock, Shares Outstanding
77,023,371 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Current assets:
 
 
Cash and cash equivalents
$ 319,929 
$ 101,410 
Marketable securities
102,327 
Accounts receivable, net of allowance for doubtful accounts of $1,250 and $520 at December 31, 2014 and 2013, respectively
183,992 
122,669 
Inventories, net
153,026 
111,994 
Prepaid expenses and other current assets
63,769 
21,967 
Total current assets
823,043 
358,040 
Property and equipment, net
41,556 
32,111 
Intangible assets and goodwill
17,032 
17,365 
Other long-term assets
36,060 
32,155 
Total assets
917,691 
439,671 
Current liabilities:
 
 
Accounts payable
126,240 
126,423 
Accrued liabilities
115,775 
86,391 
Deferred revenue
14,022 
7,781 
Income taxes payable
2,732 
19,702 
Current portion of long-term debt
60,297 
Total current liabilities
258,769 
300,594 
Long-term debt, less current portion
53,315 
Other long-term liabilities
17,718 
13,930 
Total liabilities
276,487 
367,839 
Commitments, contingencies and guarantees (Note 12)
   
   
Redeemable convertible preferred stock—$0.0001 par value; no and 36,000,000 shares authorized as of December 31, 2014 and 2013, respectively; no and 30,523,036 shares issued and outstanding as of December 31, 2014 and 2013, respectively; liquidation preference of $0 and $77,326 as of December 31, 2014 and 2013, respectively
77,198 
Stockholders’ equity (deficit)
 
 
Preferred stock—$0.0001 par value; 5,000,000 and no shares authorized as of December 31, 2014 and 2013, respectively; no shares issued and outstanding as of December 31, 2014
Common stock and additional paid-in capital—$0.0001 par value; 500,000,000 and no Class A shares authorized as of December 31, 2014 and 2013, respectively; 52,091,317 shares issued and outstanding as of December 31, 2014; 150,000,000 Class B shares authorized as of December 31, 2014 and 2013; 77,023,371 and 81,420,040 shares issued and outstanding as of December 31, 2014 and 2013, respectively
533,000 
14,518 
Retained earnings (accumulated deficit)
108,204 
(19,884)
Total stockholders’ equity (deficit)
641,204 
(5,366)
Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit)
$ 917,691 
$ 439,671 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Accounts receivable, allowance for doubtful accounts
$ 1,250 
$ 520 
Redeemable convertible preferred stock, par value ( in dollars per share)
$ 0.0001 
$ 0.0001 
Redeemable convertible preferred stock, shares authorized
36,000,000 
Redeemable convertible preferred stock, shares issued
30,523,036 
Redeemable convertible preferred stock, shares outstanding
30,523,036 
Liquidation preference
$ 0 
$ 77,326 
Preferred stock, par value (in dollars per share)
$ 0.0001 
$ 0.0001 
Preferred stock, shares authorized
5,000,000 
Preferred stock, shares issued
 
Preferred stock, shares outstanding
 
Common stock, shares authorized
 
150,000,000 
Common stock, shares issued
 
81,420,040 
Common stock, shares outstanding
 
81,420,040 
Common Class A [Member]
 
 
Common stock, par value (in dollars per share)
$ 0.0001 
$ 0.0001 
Common stock, shares authorized
500,000,000 
Common stock, shares issued
52,091,317 
 
Common stock, shares outstanding
52,091,317 
 
Common Class B [Member]
 
 
Common stock, par value (in dollars per share)
$ 0.0001 
$ 0.0001 
Common stock, shares authorized
150,000,000 
150,000,000 
Common stock, shares issued
77,023,371 
81,420,040 
Common stock, shares outstanding
77,023,371 
81,420,040 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Income Statement [Abstract]
 
 
 
Revenue
$ 1,394,205 
$ 985,737 
$ 526,016 
Cost of revenue
766,970 
623,953 
298,530 
Gross profit
627,235 
361,784 
227,486 
Operating expenses:
 
 
 
Research and development
151,852 
73,737 
36,115 
Sales and marketing
194,377 
157,771 
116,855 
General and administrative
93,971 
31,573 
20,899 
Total operating expenses
440,200 
263,081 
173,869 
Operating income
187,035 
98,703 
53,617 
Other expense, net
(6,060)
(7,374)
(407)
Income before income taxes
180,975 
91,329 
53,210 
Income tax expense
52,887 
30,751 
20,948 
Net income
128,088 
60,578 
32,262 
Less: distributed earnings
112,209 
Less: undistributed earnings allocable to participating securities
(16,512)
(16,727)
Undistributed net income (loss) attributable to common stockholders—basic
111,576 
43,851 
(79,947)
Add: adjustments to net income for dilutive securities allocable to: holders of preferred stock and unvested early exercised options and restricted stock
2,277 
2,309 
Undistributed net income (loss) attributable to common stockholders—diluted
113,853 
46,160 
(79,947)
Distributed earnings to common stockholders
$ 0 
$ 0 
$ 84,828 
Weighted-average shares used to compute net income per share attributable to common stockholders:
 
 
 
Basic (in shares)
104,453 
81,018 
74,226 
Diluted (in shares)
123,630 
98,941 
74,226 
Net income per share attributable to common stockholders:
 
 
 
Basic (in dollars per share)
$ 1.07 
$ 0.54 
$ 0.07 
Diluted (in dollars per share)
$ 0.92 
$ 0.47 
$ 0.07 
Consolidated Statements of Redeemable Convertible Preferred Stock and Shareholders' Equity (Deficit) (USD $)
In Thousands, except Share data, unless otherwise specified
Total
Redeemable Convertible Preferred Stock [Member]
Common Stock and Additional Paid-in Capital [Member]
Retained Earnings (Accumulated Deficit) [Member]
Beginning Balance, Temporary equity at Dec. 31, 2011
 
$ 91,146 
 
 
Beginning Balance at Dec. 31, 2011
(24,095)
 
6,901 
(30,996)
Beginning Balance, Shares at Dec. 31, 2011
 
 
73,806,000 
 
Beginning Balance, Temporary equity, Shares at Dec. 31, 2011
 
34,734,000 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
Preferred stock dividend accretion
(4,207)
4,207 
(4,207)
 
Exercise of stock options (shares)
2,486,000 
 
2,697,000 
 
Exercise of stock options and vesting of restricted stock and early exercise stock options
2,107 
 
2,107 
 
Excess tax benefit from stock-based compensation
4,182 
 
4,182 
 
Stock-based compensation expense
9,156 
 
9,156 
 
Conversion of preferred stock to common stock, net of issuance cost accretion, Shares
 
(4,211,000)
4,211,000 
 
Conversion of preferred stock to common stock, net of issuance cost accretion
11,502 
(11,502)
11,502 
 
Cash distribution to stockholders
(110,648)
(6,713)
29,162 
(81,486)
Net income
32,262 
 
 
32,262 
Increase (Decrease) in Temporary Equity [Roll Forward]
 
 
 
 
Preferred stock dividend accretion
(4,207)
4,207 
(4,207)
 
Conversion of preferred stock to common stock
11,502 
(11,502)
11,502 
 
Ending Balance, Temporary equity at Dec. 31, 2012
 
77,138 
 
 
Ending Balance at Dec. 31, 2012
(79,741)
 
479 
(80,220)
Ending Balance, Shares at Dec. 31, 2012
 
 
80,714,000 
 
Ending Balance, Temporary equity, Shares at Dec. 31, 2012
 
30,523,000 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
Preferred stock dividend accretion
 
 
 
Exercise of stock options (shares)
345,000 
 
613,000 
 
Exercise of stock options and vesting of restricted stock and early exercise stock options
1,148 
 
1,148 
 
Excess tax benefit from stock-based compensation
323 
 
323 
 
Stock-based compensation expense
10,887 
 
10,887 
 
Net income
60,578 
 
 
60,578 
Accretion of preferred stock issuance costs
(60)
60 
(60)
 
Retirement of common stock, Shares
 
 
(15,000)
 
Retirement of common stock
(242)
 
(242)
Issuance of common stock for acquisition, Shares
 
 
108,000 
 
Issuance of common stock for acquisition
1,741 
 
1,741 
 
Increase (Decrease) in Temporary Equity [Roll Forward]
 
 
 
 
Preferred stock dividend accretion
 
 
 
Accretion of preferred stock issuance costs
(60)
60 
(60)
 
Ending Balance, Temporary equity at Dec. 31, 2013
77,198 
77,198 
 
 
Ending Balance at Dec. 31, 2013
(5,366)
 
14,518 
(19,884)
Ending Balance, Shares at Dec. 31, 2013
 
 
81,420,000 
 
Ending Balance, Temporary equity, Shares at Dec. 31, 2013
30,523,036 
30,523,000 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
Preferred stock dividend accretion
 
 
 
Exercise of stock options (shares)
6,419,000 
 
6,889,000 
 
Exercise of stock options and vesting of restricted stock and early exercise stock options
8,241 
 
8,241 
 
Excess tax benefit from stock-based compensation
77,134 
 
77,134 
 
Stock-based compensation expense
71,399 
 
71,399 
 
Conversion of preferred stock to common stock, net of issuance cost accretion, Shares
 
(30,523,000)
30,523,000 
 
Conversion of preferred stock to common stock, net of issuance cost accretion
77,198 
(77,198)
77,198 
 
Net income
128,088 
 
 
128,088 
Retirement of common stock, Shares
 
 
(1,430,000)
 
Retirement of common stock
(1,177)
 
(1,177)
 
Issuance of common stock upon public offerings, net of offering costs, Shares
 
 
10,188,000 
 
Issuance of common stock upon public offerings, net of offering costs
286,247 
 
286,247 
 
Issuance of common stock upon release of RSUs, net of shares withheld for tax, Shares
 
 
1,525,000 
 
Issuance of common stock upon release of RSUs, net of shares withheld for tax
(560)
 
(560)
 
Increase (Decrease) in Temporary Equity [Roll Forward]
 
 
 
 
Preferred stock dividend accretion
 
 
 
Conversion of preferred stock to common stock
77,198 
(77,198)
77,198 
 
Ending Balance, Temporary equity at Dec. 31, 2014
 
 
Ending Balance at Dec. 31, 2014
$ 641,204 
 
$ 533,000 
$ 108,204 
Ending Balance, Shares at Dec. 31, 2014
 
 
129,115,000 
 
Ending Balance, Temporary equity, Shares at Dec. 31, 2014
 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Operating activities:
 
 
 
Net income
$ 128,088 
$ 60,578 
$ 32,262 
Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
17,945 
12,034 
3,975 
Deferred taxes
(16,920)
(8,129)
(2,121)
Excess tax benefit from stock-based compensation
(77,134)
(323)
(4,182)
Stock-based compensation
71,399 
10,887 
9,156 
Provision for doubtful accounts
971 
664 
736 
Provision for inventory obsolescence
4,075 
4,081 
1,955 
Amortization and write-off debt discount and issuance costs
1,806 
561 
21 
Other
59 
663 
36 
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(62,294)
(43,117)
(53,508)
Inventories
(45,108)
(55,664)
(43,718)
Prepaid expenses and other assets
(30,317)
(15,355)
(8,510)
Accounts payable and accrued liabilities
98,354 
135,197 
67,802 
Deferred revenue
5,998 
400 
4,462 
Net cash provided by operating activities
96,922 
102,477 
8,366 
Investing activities:
 
 
 
Purchases of property and equipment
(27,498)
(18,325)
(17,795)
Purchases of marketable securities
(103,827)
Maturities of marketable securities
1,083 
Proceeds from sale of property and equipment
288 
Payments made in connection with business acquisitions, net
(3,950)
(2,912)
Net cash used in investing activities
(133,904)
(21,237)
(17,795)
Financing activities:
 
 
 
Net proceeds from public offerings of common stock
293,969 
Proceeds from issuance of common stock on exercised options
7,608 
527 
2,762 
Payment of debt issuance costs and deferred public offering costs
(5,730)
(1,165)
(1,776)
Excess tax benefit from stock-based compensation
77,134 
323 
4,182 
Purchase of shares and net exercise of stock options
(920)
Taxes paid related to net share settlement of equity awards
(560)
Payment of indemnification holdback on acquired company
(2,000)
Proceeds from issuance of debt and revolving credit facility
30,000 
139,389 
Repayment of debt
(114,000)
(46,000)
(10,380)
Cash distribution to stockholders
(117,361)
Net cash provided by (used for) financing activities
255,501 
(16,315)
16,816 
Net increase in cash and cash equivalents
218,519 
64,925 
7,387 
Cash and cash equivalents, beginning of year
101,410 
36,485 
29,098 
Cash and cash equivalents, end of year
319,929 
101,410 
36,485 
Supplementary cash flow disclosure:
 
 
 
Cash paid for Interest
1,853 
4,904 
284 
Cash paid for income taxes
37,283 
2,831 
31,317 
Non-cash investing and financing activities:
 
 
 
Preferred stock dividend accretion
4,207 
Conversion of preferred stock to common stock, net of issuance cost accretion
77,198 
11,502 
Purchases of property and equipment included in accounts payable and accrued liabilities
2,474 
2,937 
4,621 
Reclass of deferred public offering costs to additional paid-in capital
7,722 
Deferred public offering costs not yet paid
$ 903 
$ 490 
$ 0 
Business overview
Business overview
Business overview
GoPro, Inc. (GoPro or the Company) was incorporated as Woodman Labs, Inc. in California on February 14, 2004 as an S Corporation and reincorporated in Delaware in December 2011 as a C Corporation. The Company produces mountable and wearable cameras and accessories, which the Company refers to as capture devices. Additionally, GoPro develops and provides desktop editing software and mobile applications for free to consumers. The Company’s capture devices are sold globally through retailers, wholesale distributors and on the Company’s website. The Company has wholly-owned subsidiaries in Hong Kong, Germany and the Cayman Islands. GoPro’s corporate headquarters are located in San Mateo, California with additional operational support offices in Hong Kong, the Netherlands and Shenzhen, China.
In July 2012, the Company’s board of directors (Board) approved a 3-for-1 split of the preferred stock and common stock. All share and per share amounts for all periods presented in these consolidated financial statements have been adjusted to reflect the stock split.
The Company completed its initial public offering (IPO) of Class A common stock on July 1, 2014. The Company sold 8,900,000 shares and certain of its stockholders sold 11,570,000 shares, including 2,670,000 shares for the underwriters' option to purchase additional shares. The shares were sold at an initial public offering price of $24.00 per share for net proceeds of $200.8 million to the Company, after deducting underwriting discounts and commissions of $12.8 million. Offering costs incurred by the Company were approximately $6.2 million.
The Company completed a follow-on offering of common stock in November 2014. The Company sold 1,287,533 shares of Class A common stock and certain of its stockholders sold 10,627,042 shares, including 1,554,075 shares for the underwriters' option to purchase additional shares. The shares were sold at an initial public offering price of $75.00 per share for net proceeds of $93.2 million to the Company, after deducting underwriting discounts and commissions of $3.4 million. Offering costs incurred by the Company were approximately $1.5 million.
Basis of presentation
Basis of presentation
Basis of presentation
The Company’s fiscal year ends on December 31, and its fiscal quarters end on March 31, June 30 and September 30.
Principles of consolidation
These consolidated financial statements include all the accounts of the Company and its wholly-owned subsidiaries. Unless otherwise specified, references to the Company are references to the Company and its consolidated subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation.
 
Use of estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported and disclosed in the Company’s consolidated financial statements and accompanying notes. The Company bases its estimates and assumptions on historical experience and on various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from management’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
Comprehensive income
For all periods presented, comprehensive income equaled net income. Therefore, the Consolidated Statements of Comprehensive Income have been omitted from the consolidated financial statements.
Summary of significant accounting policies
Summary of significant accounting policies
Summary of significant accounting policies
Cash equivalents
Cash equivalents consist of short-term, highly liquid financial instruments with immaterial interest rate risk that are readily convertible to cash and have maturities of three months or less from the date of purchase. As of December 31, 2014, cash equivalents consisted of money market funds recorded at cost, which approximates fair value and a corporate debt security that was less than 90 days from maturity when acquired, recorded at amortized cost which approximates fair value.
Marketable securities
Marketable securities consist of commercial paper, U.S. treasury securities, U.S. agency securities, and corporate debt securities, and are classified as available-for-sale securities. As the Company views these securities as available to support current operations, it has classified all available-for-sale securities as short-term. Available-for-sale securities are carried at fair value with unrealized gains and losses, if any, reported as a component of accumulated other comprehensive income in stockholders' equity, while realized gains and losses and other-than-temporary impairments, if any, are reported as a component of net income. As of December 31, 2014, the Company's marketable securities were recorded at their amortized cost which approximates fair value. An impairment charge is recorded in the Consolidated Statements of Operations for declines in fair value below the cost of an individual investment that is deemed to be other than temporary. The Company assesses whether a decline in value is temporary based on the length of time that the fair market value has been below cost, the severity of the decline and the intent and ability to hold or sell the investment. The Company did not identify any marketable securities as other-than-temporarily impaired as of December 31, 2014.
Accounts receivable and allowance for doubtful accounts
Accounts receivables are stated at invoice value less estimated allowances for returns and doubtful accounts. The Company continually monitors customer payments and maintains a reserve for estimated losses resulting from its customers’ inability to make required payments. The Company considers factors such as historical experience, credit quality, age of the accounts receivable balances, geographic related risks and economic conditions that may affect a customer’s ability to pay. In cases where there are circumstances that may impair a specific customer’s ability to meet its financial obligations, a specific allowance is recorded against amounts due, and thereby reduces the net recognized receivable to the amount reasonably believed to be collectible. For all periods presented, the activity in the allowance for doubtful accounts was not material.
Inventories
Inventories consist of finished goods and component parts, which are purchased directly or from contract manufacturers. Inventories are stated at the lower of cost or market on a first-in, first-out basis. The Company’s assessment of market value requires the use of estimates regarding the net realizable value of its inventory balances, including an assessment of excess or obsolete inventories. The Company determines excess and obsolete inventories based on an estimate of the future demand for its products within a specified time horizon, generally 12 months. The estimates used for future demand are also used for near-term capacity planning and inventory purchases and are consistent with revenue forecast assumptions. If the Company’s demand forecast is greater than actual demand, the Company may be required to record an excess inventory charge, which would decrease gross profit. Any write-downs taken establish a new cost basis for the underlying inventory. For all periods presented, inventories were predominantly comprised of finished goods.
 
Point of purchase (POP) displays
The Company sponsors a program to provide retailers with POP displays in order to facilitate the marketing of the Company’s products within retail stores. The POP displays contain a video display that broadcast video images taken by GoPro cameras with product placement available on the POP display for cameras and accessories. The Company generally provides these POP displays to customers free of charge. The costs of the POP displays, less any fees charged to customers, are capitalized as a long-term asset on the accompanying Consolidated Balance Sheets, and the net cost is recognized over the expected period of the benefit provided by these assets, which generally ranges from 24 to 36 months.

Property and equipment, net
Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful life of the assets, ranging from one to seven years. Leasehold improvements are stated at cost and amortized over the shorter of the lease term or the expected useful life of the improvements. Property and equipment pending installation, configuration or qualification are classified as construction in progress.
Fair value measurements
The Company categorizes the fair value of its financial assets according to the hierarchy established by the FASB, which prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are:
Level 1
Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to directly access.
Level 2
Valuations based on quoted prices for similar assets or liabilities; valuations for interest-bearing securities based on non-daily quoted prices in active markets; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
Level 3
Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. In circumstances in which a quoted price in an active market for the identical liability is not available, the Company is required to use the quoted price of the identical liability when traded as an asset, quoted prices for similar liabilities, or quoted prices for similar liabilities when traded as assets. If these quoted prices are not available, the Company is required to use another valuation technique, such as an income approach or a market approach.
Leases
The Company leases its facilities under cancelable and non-cancelable operating leases. For leases that contain rent escalation or rent concession provisions, the Company records the total rent expense on a straight-line basis over the term of the lease. The Company records the difference between the rent paid and the straight-line rent as a deferred rent liability on the accompanying Consolidated Balance Sheets. Leasehold improvements are included in property and equipment, net.
Goodwill, acquired intangible assets and other long-lived assets
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in a business combination. Goodwill is not amortized but the Company performs an annual qualitative assessment of its goodwill during the fourth quarter of each calendar year to determine if any events or circumstances exist, such as an adverse change in business climate or a decline in the overall industry demand, that would indicate that it would more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill. If events or circumstances do not indicate that the fair value of a reporting unit is below its carrying amount, then goodwill is not considered to be impaired and no further testing is required. If further testing is required, the Company performs a two-step process. The first step involves comparing the fair value of the Company’s reporting unit to its carrying value, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step of the test is performed by comparing the carrying value of the goodwill in the reporting unit to its implied fair value. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value. For the purpose of impairment testing, the Company has determined that it has one reporting unit. There has been no impairment of goodwill for any periods presented.
The Company’s long-lived assets consist of property and equipment and acquired intangible assets. Acquired intangible assets with definite lives are amortized on a straight-line basis over the remaining estimated economic life of the underlying products and technologies. The Company reviews its definite-lived long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Recoverability of an asset group is measured by comparing its carrying amount to the expected future undiscounted cash flows that the asset group is expected to generate. If it is determined that an asset group is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset group exceeds its fair value. There has been no impairment of long-lived assets for any periods presented.
Warranty
The Company generally provides 12-month warranty coverage on all of its products except in the European Union where the Company provides a two-year warranty. The Company’s warranty provides for repair or replacement of the associated products during the warranty period. The Company establishes a liability for estimated product warranty costs at the time product revenue is recognized. The warranty obligation is affected by product failure rates and the related use of materials, labor costs and freight incurred in correcting any product failure. Should actual product failure rates, use of materials, or other costs differ from the Company’s estimates, additional warranty liabilities could be required, which would reduce its gross profit.
Revenue recognition
Revenue is primarily comprised of product revenue, net of returns and sales incentives.
Revenue is primarily derived from the sale of capture devices, as well as the related implied post contract support (PCS). The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured. Evidence of an arrangement consists of an order from its distributors, resellers or online customers. The Company considers delivery to have occurred once title and risk of loss has been transferred. Customer deposits are included in accrued liabilities on the accompanying Consolidated Balance Sheets and are recognized as revenue when all the criteria for recognition of revenue are met.
The Company’s standard terms and conditions of sale for its non-web-based sales do not allow for product returns and it generally does not allow product returns other than under warranty. However, the Company grants limited rights to return product for certain large retailers and distributors. Estimates of expected future product returns are recognized at the time of sale based on analyses of historical return trends by customer class. Upon recognition, the Company reduces revenue and cost of sales for the estimated return. Return trends are influenced by product life cycle status, new product introductions, market acceptance of products, sales levels, product sell-through, the type of customer, seasonality, product quality issues, operational policies and procedures, and other factors. Return rates can fluctuate over time, but are sufficiently predictable to allow the Company to estimate expected future product returns.
For customers who purchase products directly from the Company’s website, transfer of risk of loss is determined to be upon delivery to the customer’s address. The Company defers those sales made to customers who purchase products from its website during a fixed time frame prior to the end of the reporting period for which the Company estimates delivery to occur in the following period. The Company uses estimates to determine when shipments are delivered based on third-party metrics for average transit time. Additionally, the Company provides a 30-day money back guarantee for web-based sales for which the Company reduces revenue by an estimate of potential future product returns related to the web-based sales, based on analyses of historical return trends and seasonality. Estimates for web-based sale returns and estimates to derive web sale shipment delivery dates may differ from actual results.
The Company’s camera products include multiple elements. Each element in a multiple element arrangement must be evaluated to determine whether it represents a separate unit of accounting. An element constitutes a separate unit of accounting when it has standalone value and delivery of an undelivered element is both probable and delivery is within the Company’s control.
The Company has determined its multiple element arrangements generally include two separate units of accounting: The first element is the hardware component (camera and accessories) and the embedded firmware essential to the functionality of the camera delivered at the time of sale. The second element is the implied right for the customer to receive post contract support included with the purchase of the Company’s camera products. PCS includes the right to receive, on a when and if available basis, future unspecified firmware upgrades and features as well as bug fixes, email and telephone support.
The Company accounts for each element separately and allocate fees from the arrangement based on the relative selling price of each element. Revenue allocated to an undelivered element is recognized over an estimated service period. The Company recognizes revenue for delivered elements only when all contractual obligations have been completed.
The Company uses a hierarchy to determine the allocation of revenue. The hierarchy is as follows: (i) vendor-specific objective evidence of fair value (VSOE), (ii) third-party evidence of selling price (TPE) and (iii) best estimate of the selling price (BESP).
i.
VSOE generally exists only when a company sells a deliverable separately and is the price actually charged by the company for that deliverable. The Company does not sell its deliverables separately and, as such, do not have VSOE.
ii.
TPE can be substantiated by determining the price that other parties sell similar or substantially similar offerings. The Company does not believe that there is accessible TPE evidence for similar deliverables since there are not comparable deliverables sold by other companies.
iii.
BESP reflects the Company’s best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis. The Company believes that BESP is the most appropriate methodology for determining the allocation of revenue for its multiple element arrangements.
The Company has allocated revenue between its two elements using the relative selling price method which is based on the BESP for all deliverables. Revenue allocated to the delivered hardware and the related essential software is recognized at the time of sale provided the conditions for recognition of revenue have been met. Revenue allocated to PCS is deferred and recognized on a straight-line basis over the estimated term of the support period, which is estimated to be one year based on historical experience. As of December 31, 2014, and 2013, deferred implied PCS revenue was $11.6 million and $6.4 million, respectively.
The Company’s process for determining the BESP for its deliverables involves multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable. Key factors considered by the Company in developing the BESP for PCS include evaluating the level of support provided to customers and analyzing the amount of time and cost that is allocated to the Company’s efforts to develop the undelivered elements, determining the cost of its support efforts, and then adding an appropriate level of gross profit to these costs.
Sales incentives
The Company offers sales incentives through various programs, consisting primarily of cooperative advertising and marketing development fund programs. The Company records cooperative advertising and marketing development fund programs with customers as a reduction to revenue unless it receives an identifiable benefit in exchange for credits claimed by the customer and can reasonably estimate the fair value of the identifiable benefit received, in which case the Company will record it as a marketing expense. In addition, the Company offers price protection discounts to certain customers when new capture device models are released and the customer has remaining inventory on hand of the older capture device model. The Company estimates price protection discounts, which are recorded as a reduction of revenue, by evaluating inventory currently held by the customer subject to price protection. The Company records reductions to revenue for sales incentives when the related revenue is recognized.
Cost of revenue
Cost of revenue includes actual product cost, the cost of shipping, depreciation and amortization, warehousing and processing inventory, warranty replacement costs, excess and obsolete inventory write-downs, certain allocated costs and license fees paid to third parties.
Shipping costs
The Company records amounts billed to customers for shipping costs as revenue in the accompanying Consolidated Statements of Operations. The Company classifies related shipping and handling costs incurred as cost of revenue in the accompanying Consolidated Statements of Operations.
Deferred revenue
Deferred revenue is comprised of customer deposits, undelivered post contract support and undelivered web sale shipments. The cost of revenue related to deferred web sales is included in inventory.
Research and development
Research and development expense includes internal and external costs. Internal costs include employee related expenses, equipment costs, depreciation expense and allocated facility costs. External research and development expenses consist of costs associated with consultants, tooling and prototype materials.
Substantially all research and development expense is related to new research and development efforts and the designing of significant improvements to existing products. Research and development expense to establish the technological feasibility of the Company’s internally developed software is expensed as incurred. To date, the period between achieving technological feasibility and the release of internally developed software to be sold, leased, or marketed has been short and development costs qualifying for capitalization have been insignificant.
Advertising costs
Advertising costs consist of costs associated with print, television and ecommerce media advertisements and are expensed as incurred. A significant amount of the Company’s promotional expenses result from payments under event, resort and athlete sponsorship contracts. Accounting for sponsorship payments is based upon specific contract provisions. These sponsorship arrangements are considered to be executory contracts and, as such, the costs are recognized as performance under the contract is received. The costs associated with preparation of sponsorship activities, including the supply of GoPro products, media team support and activation fees are considered costs of producing advertising and are expensed as incurred. Prepayments made under sponsorship agreements are included in prepaid expenses or other assets depending on the period to which the prepayment applies. Advertising costs were $47.2 million, $55.5 million, and $46.9 million for the years ended December 31, 2014, 2013, and 2012, respectively.
Stock-based compensation
The Company accounts for stock-based compensation activity using the fair value recognition and measurement provisions of GAAP. These provisions require the all share-based payments to employees, including grants of stock options, restricted stock units (RSUs), restricted stock awards (RSAs) and purchases under the Company's Employee Stock Purchase Plan (ESPP), to be measured based on the grant-date fair value of the awards, with the resulting expense generally recognized over the period during which the employee is required to perform service in exchange for the award. The fair value of each stock option granted is estimated using the Black-Scholes option pricing model. The fair value of service-based RSUs and RSAs granted represents the closing price of the Company's common stock on the date of grant. The fair value of stock-based awards with market and service conditions are estimated using a Monte Carlo valuation model. The fair value of purchases under the Company's ESPP is calculated based on the closing price of the Company's common stock on the date of grant. For service-based awards, stock-based compensation is recognized on a straight-line basis over the requisite service period, net of estimated forfeitures. The forfeiture rate is based on an analysis of the Company's actual historical forfeitures. For performance and market-based awards which also require a service period, the Company uses graded vesting over the longer of the derived service period or when the performance or market condition is satisfied.
The Company accounts for stock options and restricted stock issued to nonemployees based on the fair value of the awards determined using the Black-Scholes option pricing model. The fair value of awards granted to nonemployees is re-measured as the awards vest, and the resulting change in fair value, if any, is recognized in the Company's Consolidated Statement of Operations during the period the related services are rendered.
The Company recognizes a benefit from stock-based compensation as additional paid-in capital if an incremental tax benefit is realized by following the with-and-without approach. In addition, the indirect effects of stock-based compensation deductions are reflected in the income tax provision for purposes of measuring the excess tax benefit at settlement of awards.
Sales taxes
Sales taxes collected from customers and remitted to respective governmental authorities are not included in revenue and are reflected as a liability on the accompanying Consolidated Balance Sheets.
Foreign currency
The Company and the Company’s wholly-owned subsidiaries use the U.S. dollar as their functional currency. Local currency transactions of the Company’s international operations are remeasured into U.S. dollars at the rates of exchange in effect at the date of the transaction. For those wholly-owned subsidiaries with assets or liabilities denominated in currencies other than the U.S. dollar, non-monetary assets are remeasured into U.S. dollars using historical rates of exchange. Monetary assets and liabilities are remeasured into U.S. dollars using exchange rates prevailing on the balance sheet date. Transaction gains and losses were not material for all periods presented and are included in other expense, net, in the accompanying Consolidated Statements of Operations.
Income taxes
The Company utilizes the asset and liability method of accounting for income taxes which requires the recognition of deferred tax assets and liabilities for expected future consequences of temporary differences between the financial reporting and income tax bases of assets and liabilities using enacted tax rates. Management makes estimates, assumptions and judgments to determine the Company’s provision for income taxes and also for deferred tax assets and liabilities, and any valuation allowances recorded against the Company’s deferred tax assets. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent the Company believes that recovery is not likely, the Company must establish a valuation allowance.
The calculation of the Company’s current provision for income taxes involves the use of estimates, assumptions and judgments while taking into account current tax laws, interpretation of current tax laws and possible outcomes of future tax audits. The Company has established reserves to address potential exposures related to tax positions that could be challenged by tax authorities. Although the Company believes its estimates, assumptions and judgments to be reasonable, any changes in tax law or its interpretation of tax laws and the resolutions of potential tax audits could significantly impact the amounts provided for income taxes in the Company’s consolidated financial statements.
The calculation of the Company’s deferred tax asset balance involves the use of estimates, assumptions and judgments while taking into account estimates of the amounts and type of future taxable income. Actual future operating results and the underlying amount and type of income could differ materially from the Company’s estimates, assumptions and judgments thereby impacting the Company’s financial position and results of operations.
The Company has adopted ASC 740-10 “Accounting for Uncertainty in Income Taxes” that prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in the Company’s income tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
The Company includes interest and penalties related to unrecognized tax benefits within income tax expense in the accompanying Consolidated Statements of Operations.
Recent accounting pronouncements
On May 28, 2014, the Financial Accounting Standards Board (FASB) issued a new accounting standard update on revenue from contracts with customers, which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. The new guidance adheres to the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this principle, the new guidance lists five steps that entities should follow, including identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract and recognizing revenue when the entity satisfies a performance obligation. The new guidance becomes effective for the Company on January 1, 2017, with retrospective application permitted. Early application is not permitted. The Company is currently assessing the impact of this new guidance.
In June 2014, the FASB issued a new accounting standard update on the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The new guidance becomes effective for the Company on January 1, 2016, with early adoption permitted. The Company does not believe the adoption of this guidance will have a material impact on its consolidated financial statements.
In August 2014, the FASB issued new guidance related to the disclosures around going concern. The new standard update provides guidance around management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The Company does not believe the adoption of this guidance will have a material impact on its consolidated financial statements.
Fair value measurements
Fair value measurements
Fair value measurements
The Company measures its cash equivalents and marketable securities at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis, whereby, inputs used in valuation techniques are assigned a hierarchical level.
The Company’s assets that are measured at fair value on a recurring basis, by level, within the fair value hierarchy as of December 31, 2014 are summarized as follows:
 
December 31, 2014
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
80,968

 
$

 
$

 
$
80,968

Corporate debt securities

 
2,000

 

 
2,000

Total cash equivalents
$
80,968

 
$
2,000

 
$

 
$
82,968

Marketable securities:
 
 
 
 
 
 
 
U.S. treasury securities
$
1,994

 
$

 
$

 
$
1,994

U.S. agency securities

 
7,020

 

 
7,020

Commercial paper

 
2,497

 

 
2,497

Corporate debt securities

 
90,816

 

 
90,816

Total marketable securities
$
1,994

 
$
100,333

 
$

 
$
102,327


The fair value of the Company's Level 1 financial instruments, which are traded in active markets, are based on quoted market prices for identical instruments. The fair value of the Company's Level 2 fixed income securities are obtained from an independent pricing service, which may use quoted market prices for identical or comparable instruments or model driven valuations using observable market data or inputs corroborated by observable market data. The Company's procedures include controls to ensure that appropriate fair values are recorded, including comparing the fair values obtained from the Company's pricing service against fair values obtained from other independent sources.
Balance sheet components
Balance sheet components
Balance sheet components
Cash, cash equivalents and marketable securities
Cash, cash equivalents and marketable securities consist of the following:
 
December 31,
(in thousands)
2014
 
2013
Cash and cash equivalents:
 
 
 
Cash
$
236,961

 
$
101,410

Money market funds
80,968

 
 
Corporate debt securities
2,000

 

Cash and cash equivalents
$
319,929

 
$
101,410

Marketable securities:
 
 
 
Commercial paper
$
2,497

 
$

U.S. treasury securities
1,994

 

U.S. agency securities
7,020

 

Corporate debt securities
90,816

 

Marketable securities
$
102,327

 
$


$58.8 million of the Company’s marketable securities have a contractual maturity of one year or less and $43.5 million of the Company’s marketable securities have a contractual maturity of one to two years. As of December 31, 2014, marketable securities were recorded at their amortized cost which approximates fair value.
Inventories, net
Inventories, net consisted of the following:
 
December 31,
(in thousands)
2014
 
2013
Components
$
4,324

 
$
8,000

Finished goods
148,702

 
103,994

Inventories, net
$
153,026

 
$
111,994


Prepaid expenses and other current assets
Prepaid expenses and other current assets consisted of the following:
 
December 31,
(in thousands)
2014
 
2013
Prepaid income taxes
$
26,504

 
$

Current deferred tax assets
24,218

 
15,173

Prepaid expenses
3,905

 
2,739

Prepaid licenses
2,053

 
1,091

Deposits
1,244

 
2,049

Other current assets
5,845

 
915

Prepaid expenses and other current assets
$
63,769

 
$
21,967


Property and equipment, net
Property and equipment, net consisted of the following;
 
Useful life
(in years)
 
December 31,
(in thousands)
 
2014
 
2013
Leasehold improvements
3–7
 
$
22,787

 
$
20,111

Computers, software, equipment and furniture
2–4
 
24,636

 
11,988

Tooling
1–4
 
16,159

 
8,799

Construction in progress
 
 
3,944

 
2,151

Tradeshow equipment
2–5
 
2,863

 
2,613

Automobiles
3–5
 
967

 
856

Gross property and equipment
 
 
71,356

 
46,518

Less: Accumulated depreciation and amortization
 
 
(29,800
)
 
(14,407
)
Property and equipment, net
 
 
$
41,556

 
$
32,111


Depreciation expense was $16.8 million, $10.9 million and $2.8 million for years ended December 31, 2014, 2013 and 2012, respectively.
Goodwill and acquired intangible assets
Goodwill at December 31, 2012, 2013 and December 31, 2014 was as follows:
(In thousands)
Goodwill at December 31, 2012
$
4,233

Acquisition
9,862

Goodwill at December 31, 2013
$
14,095

Adjustments

Goodwill at December 31, 2014
$
14,095


Goodwill increased by approximately $9.9 million due to the acquisition of General Things, Inc. (General Things) in the fourth quarter of 2013. There were no impairments or other additions to goodwill during the years ended December 31, 2013 or 2014.
Acquired intangible assets at December 31, 2014, and 2013 were as follows:
 
December 31, 2014
 
Weighted average remaining useful life
(in years)
(in thousands)
Gross
 
Accumulated
amortization
 
Net
 
Developed technology
$
6,130

 
$
(3,427
)
 
$
2,703

 
2.4
Tradename
664

 
(509
)
 
155

 
1.2
Customer relationships
170

 
(170
)
 

 
0.0
Noncompete agreements
311

 
(247
)
 
64

 
0.8
Domain name
15

 

 
15

 
 
 
$
7,290

 
$
(4,353
)
 
$
2,937

 
 
 
December 31, 2013
 
Weighted
average
remaining
useful life
(in years)
(in thousands)
Gross
 
Accumulated
amortization
 
Net
 
Developed technology
$
5,330

 
$
(2,517
)
 
$
2,813

 
3.2
Tradename
664

 
(376)

 
288

 
2.2
Customer relationships
170

 
(161)

 
9

 
0.2
Noncompete agreements
311

 
(166)

 
145

 
1.8
Domain name
15

 

 
15

 
 
 
$
6,490

 
$
(3,220
)
 
$
3,270

 
 

Amortization expense for the years ended December 31, 2014, 2013, and 2012 was $1.1 million, $1.1 million, and $1.2 million, respectively.
The estimated future amortization expense of acquired intangible assets to be charged to cost of revenue and operating expenses as of December 31, 2014, is as follows:
(in thousands)
Cost of
revenue
 
Operating
expenses
 
Total
Years ending December 31,
 
 
 
 
 
2015
$
888

 
$
464

 
$
1,352

2016
888

 
289

 
1,177

2017
149

 
244

 
393

 
$
1,925

 
$
997

 
$
2,922


Other long-term assets
Other long-term assets consisted of the following:
 
December 31,
(in thousands)
2014
 
2013
POP displays
$
18,743

 
$
22,379

Long-term deferred tax assets
8,611

 
736

Deposits
4,706

 
2,698

Long-term licenses and other
4,000

 
4,000

Deferred financing charges

 
947

Deferred public offering costs

 
1,395

Other long-term assets
$
36,060

 
$
32,155


POP display amortization included in sales and marketing expense was $18.0 million, $13.5 million, and $8.6 million for the years ended December 31, 2014, 2013 and 2012, respectively.
Accrued liabilities
Accrued liabilities consisted of the following:
 
December 31,
(in thousands)
2014
 
2013
Accrued payables
$
57,064

 
$
49,975

Employee related liabilities
28,959

 
11,932

Accrued sales incentives
9,635

 
4,909

Warranty liability
6,025

 
3,691

Customer deposits
4,903

 
1,316

Sales commissions
4,254

 
2,454

Other
4,935

 
12,114

Accrued liabilities
$
115,775

 
$
86,391

Redeemable convertible preferred stock
Redeemable convertible preferred stock
Redeemable convertible preferred stock
As of December 31, 2013, there were 36,000,000 shares of Series A preferred stock authorized and 30,523,036 shares of Series A preferred stock issued and outstanding. Concurrent with the close of the IPO in July 2014, all shares of Series A preferred stock were converted into Class B common stock. Prior to their conversion to Class B common stock, the Series A preferred stock had the following terms:
Conversion
Each share of Series A preferred stock was convertible, at the option of the holder, into shares of common stock at a rate of 1-for-1. The conversion of all outstanding Series A preferred stock occurred in connection with the closing of the IPO.
Voting rights
The holders of shares of the Company’s Series A preferred stock voted equally with shares of Class B common stock on an as-if converted to common stock basis on all matters, including the election of directors.
Dividend rights
The holders of each Series A share were entitled to receive any noncumulative dividends on an equal basis with common stock, when and if declared by the Board.
Redemption rights
In the event of any liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary, the Company was required to redeem shares of Series A preferred stock at the original issue price of $2.53 per share plus any noncumulative dividends declared by the Board. If the holders had not previously exercised the rights granted to them, the Series A preferred stock was redeemable within 365 days after July 1, 2017, subject to a majority vote of the then outstanding Series A preferred shares. As the redemption events described above could have occurred and were not solely within the Company’s control, all shares of preferred stock were presented outside of permanent equity.
Stockholders' equity (deficit)
Stockholders' equity (deficit)
Stockholders’ equity (deficit)
Preferred stock
Upon completion of its IPO in July 2014, the Company filed a Restated Certificate of Incorporation, which authorized the issuance of undesignated preferred stock with rights and preferences, including voting rights, designated from time to time by its board of directors. As of December 31, 2014, there were 5,000,000 shares of preferred stock authorized, and no shares issued or outstanding.
Common stock
As of December 31, 2014, the Company had 500,000,000 shares of Class A common stock authorized and 150,000,000 shares of Class B common stock authorized. As of December 31, 2014, 52,091,317 shares of Class A stock were issued and outstanding and 77,023,371 shares of Class B stock were issued and outstanding.
In June 2014, the Company filed a Restated Certificate of Incorporation which established two classes of authorized common stock (Reclassification): Class A common stock and Class B common stock. As a result, all outstanding shares of common stock were converted into shares of Class B common stock. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to ten votes per share. Each share of Class B common stock is convertible at any time at the option of the stockholder into one share of Class A common stock and has no expiration date. The Class B common stock is also convertible into Class A common stock on the same basis upon any transfer, whether or not for value, except for “Permitted Transfers” as defined in the Company’s Restated Certificate of Incorporation. Each share of Class B common stock will convert automatically into one share of Class A common stock upon the date when the outstanding shares of Class B common stock represent less than 10% of the aggregate number of shares of common stock then outstanding.
As of December 31, 2013, the Company had 150,000,000 shares of common stock authorized for issuance. At December 31, 2013, there were 81,420,040 shares of common stock issued and outstanding.
The Company had the following shares of common stock reserved for issuance upon the exercise of equity instruments as of December 31, 2014 (in thousands):
Stock options outstanding
25,134

Restricted stock units outstanding
4,307

Stock options, restricted stock and RSUs available for future grants
12,885

 
42,326


Stock compensation plans
2014 Equity Incentive Plan
In June of 2014, stockholders approved the 2014 Equity Incentive Plan (2014 EIP) and the Company’s authority to grant new awards under the 2010 Equity Incentive Plan (2010 EIP) was terminated. The 2014 EIP provides for equity grants to employees, including executive officers, and non-employee directors and contractors, including stock options, RSUs, RSAs, stock appreciation rights, stock bonuses, and performance awards. Options granted under the 2014 EIP generally expire within 10 years from the date of grant and generally vest over four years, at the rate of 25% on the first anniversary of the date of grant and ratably on a monthly basis over the remaining 36-month period thereafter based on continued service and are exercisable for shares of the Company’s Class A common stock. Options with performance or market-based conditions are generally subject to a required service period along with the performance or market condition. RSUs granted under the 2014 EIP generally vest either annually or quarterly over three or four years based upon on continued service, and are settled upon vesting as shares of the Company’s Class A common stock. All awards that expire, are reacquired or repurchased at cost, are cancelled or otherwise terminate and shares that are withheld to satisfy exercise proceeds and tax withholding obligations are returned to the plan and are available for grant in conjunction with the issuance of new stock awards under the 2014 EIP. Awards settled in cash will not reduce the number of shares available under the 2014 EIP.
As of December 31, 2014 the 2014 EIP permitted the Company to grant up to 13,973,723 shares of the Company’s Class A common stock, which includes 339,259 shares previously reserved as Class B common stock but unissued under the 2010 EIP that became available for issuance as Class A common stock under the 2014 EIP, and 164,235 shares previously issuable pursuant to awards under the 2010 EIP that expired, forfeited or terminated unexercised, or were repurchased or used to pay the exercise price of an option or withheld to satisfy tax withholding obligations, that became available for issuance as Class A common stock under the 2014 EIP. The share reserve may also increase to the extent that outstanding awards under the 2010 EIP expire or terminate unexercised or shares that are repurchased at cost or used to pay the exercise price of an option or withheld to satisfy tax withholding obligations.
2010 Equity Incentive Plan
In August 2010, the Board approved the adoption of the 2010 EIP. The 2010 EIP provided for equity grants to employees, including executive officers, and non-employee directors and contractors that permits the granting of stock options, RSUs, RSAs and stock appreciation rights. Options granted under the 2010 EIP generally expire within 10 years from the date of grant. Options and RSUs granted under the 2010 Plan generally vest over four years based on continued service, and are settled or exercisable upon vesting as shares of the Company’s Class B common stock. Following the Reclassification, all shares subject to the 2010 EIP were reclassified into Class B common stock and all outstanding options under the 2010 EIP will become Class B shares upon exercise. In the second quarter of 2014, the Company terminated the authority to grant new awards under the 2003 Plan.
Employee Stock Purchase Plan
In June 2014, the Company approved the 2014 Employee Stock Purchase Plan (ESPP). The ESPP allows eligible employees to purchase shares of the Company's Class A common stock through payroll deductions at a price equal to 85% of the lower of the fair market values of the stock as of the beginning or the end of six-month offering periods. An employee's payroll deductions under the ESPP are limited to 15% of their eligible compensation and employees may not purchase more than 2,500 shares of stock per offering period. As of December 31, 2014, 3,367,557 shares were reserved for future issuance under the ESPP.
Stock option activity
A summary of the Company’s stock option activity and related information is as follows:
 
 
 
Options outstanding
(shares in thousands)
Shares
available
for grant
 
Shares
 
Weighted-
average
exercise
price
 
Weighted-
average
grant-
date fair
value
 
Total intrinsic
value of
options
exercised
(in thousands)
 
Weighted-
average
remaining
contractual
term
(in years)
 
Aggregate
intrinsic value
(in thousands)
Outstanding at December 31, 2011:
400

 
26,361

 
$
0.80

 
 
 
 
 
 
 
 
Additional shares authorized
2,100

 

 

 
 
 
 
 
 
 
 
Granted
(1,418
)
 
1,418

 
5.10

 
$
5.02

 
 
 
 
 
 
Exercised

 
(2,486)

 
1.11

 
 
 
$
30,605

 
 
 
 
Forfeited/Cancelled
891

 
(891)

 
1.43

 
 
 
 
 
 
 
 
Outstanding at December 31, 2012:
1,973

 
24,402

 
$
1.00

 
 
 
 
 
8.33
 
$
310,454

Additional shares authorized
2,000

 
 
 
 
 
 
 
 
 
 
 
 
Granted
(2,906)

 
2,906

 
15.14

 
$
8.45

 
 
 
 
 
 
Exercised

 
(345)

 
2.23

 
 
 
$
4,564

 
 
 
 
Forfeited/Cancelled
239

 
(239)

 
6.31

 
 
 
 
 
 
 
 
Outstanding at December 31, 2013:
1,306

 
26,724

 
$
2.47

 
 
 
 
 
7.55
 
$
367,395

Additional shares authorized
21,970

 

 

 
 
 
 
 
 
 
 
Granted
(5,208
)
 
5,208

 
21.68

 
$
11.51

 
 
 
 
 
 
RSUs granted
(5,573
)
 

 

 
 
 
 
 
 
 
 
Exercised

 
(6,419
)
 
1.24

 
 
 
$
253,332

 
 
 
 
Forfeited/Cancelled
390

 
(379
)
 
12.11

 
 
 
 
 
 
 
 
Outstanding at December 31, 2014:
12,885

 
25,134

 
$
6.62

 
 
 
 
 
7.09
 
$
1,425,339

Exercisable at December 31, 2014
 
 
17,971

 
$
2.00

 
 
 
 
 
6.37
 
$
1,100,208

Vested and expected to vest at
December 31, 2014
 
 
24,743

 
$
6.43

 
 
 
 
 
7.06
 
$
1,407,823


The total fair value of stock options vested in the years ended December 31, 2014, 2013, and 2012 was $16.0 million, $5.2 million, and $3.0 million, respectively. As of December 31, 2014, unearned stock-based compensation estimated to be expensed related to unvested employee options was $62.6 million and is expected to be recognized over a weighted-average period of 2.7 years.
The following is a further breakdown of the options outstanding at December 31, 2014:
 
Options outstanding 
 
Options exercisable 
(shares in thousands)
Shares
outstanding
 
Weighted-
average
remaining
contractual
life (in years)
 
Weighted-
average
exercise 
price
 
Shares
exercisable
 
Weighted-
average
exercise 
price
Range of exercise prices
 
 
 
 
 
 
 
 
 
$    0.18–0.66
7,696
 
5.75
 
$
0.62

 
7,696

 
$
0.62

      0.76–0.76
7,769
 
6.46
 
0.76

 
7,572

 
0.76

      1.52–2.96
1,606
 
7.01
 
1.91

 
1,119

 
1.86

      8.30–8.30
462
 
7.70
 
8.30

 
244

 
8.30

  13.72–15.59
1,771
 
8.36
 
14.68

 
687

 
14.61

  16.19–16.39
2,466
 
9.06
 
16.26

 
368

 
16.21

  18.40–18.40
2,793
 
9.42
 
18.40

 
285

 
18.40

  38.84–81.50
571
 
9.65
 
54.90

 

 

$  0.18–81.50
25,134
 
7.09
 
$
6.62

 
17,971

 
$
2.00


RSAs and early-exercised stock options' activity
RSAs represent share awards of the Company’s common stock that are generally subject to repurchase at the original issuance price upon termination of services prior to vesting. These repurchase terms are considered to be a forfeiture provision and do not result in mark-to-market accounting each reporting period. The Company has also granted options that provide certain option holders the right to exercise unvested options for shares of restricted stock. RSAs and restricted shares issued upon early exercise of stock are legally issued and outstanding, but are only deemed outstanding for basic earnings per share computation purposes upon the lapse of the Company’s right of repurchase. Cash received from option holders for exercise of unvested options is treated as a refundable deposit shown as a liability on the accompanying Consolidated Balance Sheets, and reclassified to Stockholders’ Equity (Deficit) as the Company’s repurchase right lapses.
A summary of the Company’s restricted stock and early-exercised stock options subject to repurchase activity is as follows:
(in thousands except for weighted average grant date fair value)
Shares
 
Weighted-
average
grant date
fair value
 
Aggregate
intrinsic
value
Non-vested shares at December 31, 2011
644
 
$
2.44

 
$
711

Vested
(212)
 
 
 
 
Non-vested shares at December 31, 2012
432
 
2.44

 
5,274

Granted
430
 
16.19

 
6,962

Vested
(375)
 
 
 
 
Non-vested shares at December 31, 2013
487
 
11.03

 
7,628

Vested
(470)
 
 
 
 
Non-vested shares at December 31, 2014
17
 
$
6.30

 
$
1,017


The total fair value of restricted stock and early exercised stock options subject to repurchase vested in the year ended December 31, 2014, 2013, and 2012 was $11.2 million, $6.1 million, and $2.9 million, respectively. As of December 31, 2014, the early exercised stock options were fully vested, and the amount of unearned stock-based compensation related to unvested restricted stock was $0.1 million, with a weighted average remaining vesting term of 0.1 years.
In December 2011, the Company granted 433,500 shares of restricted stock and 210,000 stock options at an exercise price of $1.52 per share to two consultants in accordance with the terms of their service agreements, subject to monthly vesting over a three-year service period and a two-year service period, respectively.
RSU activity
The Company has granted RSUs pursuant to the EIP. RSUs are share awards that, upon vesting, will deliver to the holder shares of the Company’s common stock. Typically, vesting of RSUs is subject to the employee’s continuing service to the Company on the vesting date. The cost of these awards is determined using the fair value of the Company’s common stock on the date of grant, and compensation is recognized on a straight-line basis over the requisite vesting period. The Company has also issued RSUs with both a market condition and a service condition.  The Company estimates the fair value of these market-based RSUs using a Monte Carlo valuation model on the date of grant.
The following table summarizes the activities of the Company’s RSUs:
(in thousands except for weighted average grant date fair value)
Shares
 
Weighted- average grant date fair value
Non-vested shares at December 31, 2013 and 2012
270

 
$
1.52

Granted
5,573

 
$
22.01

Vested
(1,533
)
 
$
18.42

Forfeited
(3
)
 
$
57.73

Non-vested shares at December 31, 2014
4,307

 
$
21.98


There were no RSUs awarded during the years ended December 31, 2012 and 2013. As of December 31, 2014, the amount of unearned stock-based compensation estimated to be expensed with respect to RSUs was $94.7 million, and the weighted average remaining vesting term was 2.9 years. The total fair value of RSUs vested during the year ended December 31, 2014 was $28.2 million.
In June of 2014, the Company issued 4,500,000 RSU's to the Chief Executive Officer (CEO RSUs) which included 1,500,000 RSUs that vested immediately upon grant. The balance as of December 31, 2014 included the remaining 3,000,000 unvested RSUs that vest subject to performance criteria set by the Compensation Committee as well as with continued service over a three-year period.
Fair value disclosures
The Company measures compensation expense for all stock-based payment awards, including stock options, RSUs, and RSAs granted to employees and purchases under the Company's ESPP, based on the estimated fair values on the date of the grant. The fair value of stock options granted and purchases under the Company's ESPP is estimated using the Black-Scholes option pricing model.
The Black-Scholes option pricing model requires the following major inputs:
Fair value of common stock. The Company uses the closing price of the Company's common stock on the date of grant. Prior to the Company's IPO which completed in July 2014, the fair value of its common stock was determined by its board of directors, which intended all options granted to be exercisable at a price per share not less than the per share fair value of the common stock underlying those options on the date of grant. The valuations of the Company's 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. Upon completion of the Company's initial public offering in July 2014, its Class A common stock was valued by reference to its publicly traded price.
Expected volatility. Expected volatility is a measure of the amount by which the stock price is expected to fluctuate. The Company estimates the expected volatility of its stock options at their grant date by taking the average historical volatility of a group of comparable publicly traded companies over a period equal to the expected life of the options.
Expected term. Expected term represents the period over which the Company anticipates stock-based awards to be outstanding. As the Company has undergone significant operational and structural changes, the historical exercise data do not provide a reasonable basis upon which to estimate expected life. As a result, the Company used the simplified method, as provided under Staff Accounting Bulletin Topic 14.D, “Share-Based Payment,” to calculate the expected term estimate based on the options’ vesting term and contractual terms. Under the simplified method, the expected life is equal to the average of the stock-based award’s weighted average vesting period and its contractual term.
Risk-free interest rate. The risk-free interest rate is the estimated average interest rate based on U.S. Treasury zero-coupon notes with terms consistent with the expected life of the awards.
Expected dividends. Since the Company does not anticipate paying any recurring cash dividends in the foreseeable future, it uses an expected dividend yield of 0% in stock option valuation models.
The fair value of stock options granted was estimated as of the grant date using the assumptions listed in the following table:
 
Years ended December 31,
 
2014
 
2013
 
2012
Volatility
   54%–56%
 
   56%–60%
 
   56%–60%
Expected term (years)
5.3–6.3
 
5.3–6.1
 
5.1–6.1
Risk-free interest rate
1.7%–2.0%
 
0.8%–2.4%
 
0.8%–2.4%
Dividend yield
—%
 
—%
 
—%
Expected forfeiture rate
   4%–6%
 
6%
 
5%-7%
Weighted average fair value
$11.51
 
$8.45
 
$5.08

To estimate the fair value of the CEO RSUs subject to a market condition that were granted during the year ended December 31, 2014, the Company used a Monte Carlo valuation model with the following assumptions:
Expected volatility
50.9%
Expected term (years)
10
Risk-free interest rate
2.69%
Dividend yield
—%
Grant date fair value of underlying shares
$18.40

The following assumptions were used to calculate the fair value of stock purchase rights granted under the Company's ESPP during the year ended December 31, 2014:
Volatility
45.5%
Expected term (years)
0.6
Risk-free interest rate
0.1%
Dividend yield
—%
Expected forfeiture rate
4%-6%

Stock-based compensation expense
The following table summarizes stock-based compensation expense related to stock options, restricted stock and RSUs for the three years ended December 31, 2014, 2013 and 2012:
 
Years ended December 31,
(in thousands)
2014
 
2013
 
2012
Stock-based compensation expense by type of award
 
 
 
 
 
Stock options
$
17,450

 
$
8,468

 
$
8,165

RSUs
41,412

 

 

RSAs
10,833

 
2,419

 
991

ESPP
1,704

 

 

Total stock-based compensation expense
$
71,399

 
$
10,887

 
$
9,156


The following table summarizes stock-based compensation expense as reported in the Company’s accompanying Consolidated Statements of Operations:
 
Years ended December 31,
(in thousands)
2014
 
2013
 
2012
Cost of revenue
$
835

 
$
690

 
$
333

Research and development
11,640

 
3,003

 
1,452

Sales and marketing
10,428

 
5,670

 
6,335

General and administrative
48,496

 
1,524

 
1,036

Total stock-based compensation expense
71,399

 
10,887

 
9,156

Total tax benefit recognized
(19,471)

 
(1,104)

 
(1,091)

Decrease in net income
$
51,928

 
$
9,783

 
$
8,065


Stock-based compensation expense related to the CEO RSUs for the year ended December 31, 2014 was $38.3 million and was included in general and administrative expense in the accompanying Consolidated Statement of Operations.
In October 2013, the Company issued 430,000 shares of restricted stock to two founders of an acquired company, of which 322,500 were subject to monthly vesting over a three-year service period. During the year ended December 31, 2014, vesting was accelerated for 195,740 shares of these shares due to the termination of one of the founders, per the terms of the original award agreements. The Company recorded a charge of $3.2 million to research and development in the accompanying Consolidated Statement of Operations.
Stock option modifications
During the year ended December 31, 2012, the Company modified options to purchase 250,000 shares of common stock of three employees to accelerate vesting and extend the time allowed to exercise the stock options in conjunction with termination of employment. The Company recorded a charge of $1.1 million related to the modification of these awards, of which $1.0 million was recorded to sales and marketing expense and the remaining amounts to research and development and general and administrative expenses based on the employees’ functional role within the Company.
Compensation cost recognized upon employee sale of shares to the Chief Executive Officer (CEO)
In December 2012, eight employees sold 760,500 shares of their common stock for $13.0 million to the Company’s CEO. The stock was sold at $17.08 per share, which was greater than the determined fair value of the common stock at the time of sale. The fair value was determined by the Board, based on the Company’s development and sales efforts, revenue growth, independent third-party valuations and additional objective and subjective factors relating to the Company’s business. The Company determined that the amount paid by the Company’s CEO exceeded the estimated fair value of these shares by $2.6 million and concluded that the value transferred to employees in excess of the fair value of shares sold was additional compensation to the selling employees. As a result, the Company recorded compensation expense of $2.6 million, of which $0.3 million was recorded to research and development, $1.7 million was recorded to sales and marketing and $0.6 million was recorded to general and administrative expense in the accompanying Consolidated Statements of Operations. Of the 760,500 shares sold, the Company's CEO purchased 240,000 shares from two employees who are family members of the Company’s CEO.
Net income per share attributable to common stockholders
Net income per share attributable to common stockholders
Net income per share attributable to common stockholders
Basic and diluted net income per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities. Prior to the IPO and their conversion, the Company considered its redeemable convertible preferred stock to be participating securities. In addition, the Company considers shares issued upon the early exercise of options subject to repurchase and non-vested restricted shares to be participating securities, as the holders of these shares have a nonforfeitable right to dividends.
Basic net income (loss) per share attributable to common stockholders is computed by dividing the net income attributable to common stockholders by the weighted-average number of common shares outstanding during the period. All participating securities are excluded from basic weighted average common shares outstanding. Diluted net income (loss) per share attributable to common stockholders is computed by dividing the net income attributable to common stockholders by the weighted-average number of common shares outstanding, including all potentially dilutive common shares, if the effect of each class of potential shares of common stock is dilutive.
The undistributed earnings are allocated based on the contractual participation rights of the Class A and Class B common shares as if the earnings for the year have been distributed. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis. The computation of the diluted net income (loss) per share of Class A common stock assumes the conversion of Class B common stock, while diluted net income (loss) per share of Class B common stock does not assume the conversion of Class A common stock as Class A common stock is not convertible into Class B common stock.
The following table presents the calculations of basic and diluted net income per share attributable to common stockholders:
 
 
 
Year ended December 31,
(in thousands, except per share amounts)
 
2014
 
2013
 
2012
 
 
 
Class A
 
Class B
 
Common
 
Common
Numerator:
 
 
 
 
 
 
 
 
 
Allocation of net income
 
$
16,647

 
$
111,441

 
$
60,578

 
$
32,262

Less: common stock distributed earnings
 

 

 

 
(84,828
)
Less: preferred stock distributed earnings, including accumulated accretion
 

 

 

 
(26,927
)
Less: unvested early exercised options and restricted stock distributed earnings
 

 

 

 
(454
)
Less: undistributed earnings allocable to:
 
 
 
 
 
 
 
 
holders of preferred stock
 
(2,102
)
 
(14,067
)
 
(16,521
)
 

holders of unvested early exercised options and restricted stock
 
(45
)
 
(298
)
 
(206
)
 

Undistributed net income (loss) attributable to common stockholders—basic
 
$
14,500

 
$
97,076

 
$
43,851

 
$
(79,947
)
Add: adjustments to net income for dilutive securities allocable to:
 
 
 
 
 
 
 
 
holders of preferred stock
 
2,229

 
1,940

 
2,281

 

holders of unvested early exercised options and restricted stock
 
48

 
41

 
28

 

Reallocation of undistributed earnings as a result of conversion of Class B to Class A
 
97,076

 

 

 

Reallocation of undistributed earnings to Class B shares
 

 
2,237

 

 

Undistributed net income (loss) attributable to common stockholders—diluted
 
$
113,853

 
$
101,294

 
$
46,160

 
$
(79,947
)
Distributed earnings to common stockholders
 
$

 
$

 
$

 
84,828

Denominator:
 
 
 
 
 
 
 
 
Weighted-average common shares—basic
 
13,575

 
90,878

 
81,018

 
74,226

Conversion of Class B to Class A common stock outstanding
 
90,878

 

 

 

Effect of potentially dilutive securities:
 
 
 
 
 
 
 
 
Stock options and RSUs
 
19,177

 
19,115

 
17,923

 

Weighted-average common shares—diluted
 
123,630

 
109,993

 
98,941

 
74,226

Net income per share attributable to common stockholders:
 
 
 
 
 
 
 
 
Distributed earnings—basic
 
$

 
$

 
$

 
$
1.15

Undistributed earnings—basic
 
$
1.07

 
$
1.07

 
$
0.54

 
$
(1.08
)
Basic net income per share
 
$
1.07

 
$
1.07

 
$
0.54

 
$
0.07

Distributed earnings—diluted
 
$

 
$

 
$

 
$
1.15

Undistributed earnings—diluted
 
$
0.92

 
$
0.92

 
$
0.47

 
$
(1.08
)
Diluted net income per share
 
 
$
0.92

 
$
0.92

 
$
0.47

 
$
0.07


The following potentially dilutive shares of common stock subject to options, unvested stock awards and redeemable convertible preferred stock were not included in the calculation of diluted shares outstanding as the effect would have been anti-dilutive:
 
Year ended December 31,
(in thousands)
2014
 
2013
 
2012
Series A redeemable convertible preferred stock
15,136

 
30,523
 
30,523
Stock options
360

 
1,409
 
24,402
Restricted stock awards and RSUs
425

 
380
 
432
 
15,921

 
32,312
 
55,357
Financing arrangements
Financing arrangements
Financing arrangements
Credit facility
On December 21, 2012, the Company entered into a $170.0 million syndicated senior secured credit facility consisting of a $120.0 million three-year term loan facility and a $50.0 million four-year revolving credit facility. The Company received net proceeds of $127.6 million, net of $2.4 million of debt issuance and lender costs. The debt issuance and lender costs were allocated between the term loan facility and the revolving credit facility based on the maximum lending commitment amounts. The debt issuance costs allocated to the term loan facility were reported as deferred charges and the lender costs allocated to the term loan facility were included in the carrying value of the term loan as debt discount. Borrowings under the credit facility were collateralized by substantially all of the assets of the Company. In August 2014, the Company terminated this credit facility.
As of December 31, 2013, $114.0 million of the term loan was outstanding and the remaining unamortized discount was $0.4 million. The effective interest rate on the term loan was 3.79% on December 31, 2013. The interest rate was based on the 6-month adjusted LIBOR (London Interbank Offered Rate) plus 2.5%. Mandatory additional principal prepayments could have been required based on excess cash flows of the Company. The Company’s excess cash flows, as defined in the credit facility, for 2013 triggered a contractual principal prepayment obligation of $48.5 million, which has been classified as a current liability as of December 31, 2013. Concurrent with the close of the IPO in July 2014, the Company repaid, in full, the term loan outstanding of $108.0 million, and recorded the remaining deferred issuance costs and debt discount of $0.6 million related to the term loan as interest expense.
The revolving credit facility contractually matured on December 21, 2016. As of December 31, 2013, zero of the revolving credit facility had been drawn down and $20.0 million was committed to a standby letter of credit. In April 2014, the $20.0 million standby letter of credit was terminated. In August 2014, the Company terminated the revolving credit facility and recorded the remaining deferred issuance costs of $0.5 million related to the revolving credit facility as interest expense. 
The credit agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to the Company and its restricted subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness and dividends and other distributions. The credit agreement contains an acceleration clause for certain events related to the Company’s financial creditworthiness, including a financial covenant that requires the Company to maintain specific consolidated ratios. As of December 31, 2013, the Company was in compliance with all covenants.
Income taxes
Income taxes
Income taxes
Income before income tax consisted of the following:
 
Years ended December 31,
(in thousands)
2014
 
2013
 
2012
Domestic
$
114,937

 
$
57,251

 
$
38,714

Foreign
66,038

 
34,078

 
14,496

 
$
180,975

 
$
91,329

 
$
53,210


Income tax expense consisted of the following:
 
 
Years ended December 31,
(in thousands)
2014
 
2013
 
2012
Current:
 
 
 
 
 
Federal
$
55,846

 
$
28,856

 
$
19,984

State
6,075

 
1,634

 
(493)

Foreign
8,219

 
8,058

 
3,578

Total current
70,140

 
38,548

 
23,069

Deferred:
 
 
 
 
 
Federal
(13,551
)
 
(7,268)

 
(2,247)

State
(3,369
)
 
(861)

 
126

Foreign
(333
)
 
332

 

Total deferred
(17,253
)
 
(7,797)

 
(2,121)

Income tax expense
$
52,887

 
$
30,751

 
$
20,948


Undistributed earnings of $96.2 million of the Company’s foreign subsidiaries are considered to be indefinitely reinvested and, accordingly, no provision for federal and state income taxes have been provided thereon. The Company intends to reinvest these earnings indefinitely in its foreign subsidiaries. If these earnings were distributed to the United States in the form of dividends or otherwise or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred the Company would be subject to additional U.S. income taxes (subject to adjustment for foreign tax credits) and foreign withholding taxes. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practical.
Income tax expense reconciles to the amount computed by applying the federal statutory rate (35%) to income before income taxes as follows:
 
 
Years ended December 31,
 
2014
 
2013
 
2012
(in thousands, except percentage)
$
%
 
$
%
 
$
%
Reconciliation to statutory rate:
 
 
 
 
 
 
 
 
Tax at federal statutory rate
$
63,341

35.0
 %
 
$
31,965

35.0
 %
 
$
18,623

35.0
 %
State taxes, net of federal benefit
4,911

2.7

 
2,344

2.6

 
1,384

2.6

Impact of foreign operations
(13,305
)
(7.4
)
 
(113
)
(0.1
)
 
(211
)
(0.4
)
Stock-based compensation
8,050

4.4

 
2,982

3.3

 
1,385

2.6

Tax credits
(10,616
)
(5.9
)
 
(5,637
)
(6.2
)
 
(415
)
(0.8
)
Other
506

0.4

 
(790
)
(0.9
)
 
182

0.4

 
$
52,887

29.2
 %
 
$
30,751

33.7
 %
 
$
20,948

39.4
 %

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities were as follows:
 
December 31,
(in thousands)
2014
 
2013
Components of deferred tax assets and liabilities
 
 
 
Deferred tax assets:
 
 
 
Net operating loss carryforwards
$

 
$
252

Tax credit carryforwards
2,347

 

Stock-based compensation
9,950

 
3,475

Accruals and reserves
23,950

 
15,463

Total deferred tax assets
$
36,247

 
$
19,190

Deferred tax liabilities:
 
 
 
Depreciation and amortization
$
(3,418
)
 
$
(3,063
)
Intangible assets

 
(550
)
Total deferred tax liabilities
(3,418
)
 
(3,613
)
Net deferred tax assets
$
32,829

 
$
15,577


Recognition of deferred tax assets is appropriate when realization of such assets is more likely than not. Based upon the weight of available evidence, which includes the Company’s historical operating performance and the U.S. cumulative net profits in prior periods, the Company believes it is more likely than not that deferred tax assets will be realized.
As of December 31, 2014, the Company’s federal and state net operating loss carryforwards for income tax purposes were $0.4 million and $10.1 million, respectively, and state tax credit carryforwards were approximately $6.2 million. All of the Company's federal and state loss carryforwards and $2.6 million of the state tax credit carryforwards will be recorded to additional paid-in capital when realized. If not utilized, the federal and state losses will begin to expire from 2019 to 2034, while the state tax credits may be carried forward indefinitely. If certain substantial changes in the entity's ownership occur, there could be an annual limitation on the amount of the carryforwards that can be utilized.
On December 19, 2014, The Tax Increase Prevention Act of 2014 was signed into law, which retroactively reinstated the federal research tax credit provisions from January 1, 2014 through December 31, 2014. As a result, the Company recognized an income tax benefit of $6.6 million for federal research and development tax credits.
Uncertain income tax positions
The Company has adopted ASC 740-10 “Accounting for Uncertainty in Income Taxes.” ASC 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in the Company’s income tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
The Company’s total amounts of gross unrecognized tax benefits as of December 31, 2014 was $16.6 million, which represented an increase in unrecognized tax benefits by $6.7 million during 2014. If recognized, $15.5 million of these unrecognized tax benefits (net of federal benefit) would be recorded as a reduction of future income tax provision for the year ending December 31, 2014.
A reconciliation of the beginning and ending amount of the unrecognized income tax benefits during the years ended December 31, 2014 and 2013 are as follows:
 
December 31,
 
 
(in thousands)
2014
 
2013
 
2012
Gross balance at January 1
$
9,898

 
$
4,439

 
$
966

Gross increase related to current year tax positions
6,401

 
5,280

 
3,473

Gross increase related to prior year tax positions
259

 
179

 

 
$
16,558

 
$