GOPRO, INC., S-1/A filed on 11/17/2014
Securities Registration Statement
Document and Entity Information
9 Months Ended
Sep. 30, 2014
Document And Entity Information [Abstract]
 
Document Type
S-1/A 
Amendment Flag
false 
Document Period End Date
Sep. 30, 2014 
Trading Symbol
GPRO 
Entity Registrant Name
GoPro, Inc. 
Entity Central Index Key
0001500435 
Entity Filer Category
Non-accelerated Filer 
Consolidated Balance Sheet (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2014
Dec. 31, 2013
Dec. 31, 2012
Current assets:
 
 
 
Cash and cash equivalents
$ 237,749 
$ 101,410 
$ 36,485 
Accounts receivable, net of allowance for doubtful accounts of $262, $520 and $700 at December 31, 2012, 2013 and September 30, 2014 (unaudited), respectively
94,563 
122,669 
80,197 
Inventories, net
117,014 
111,994 
60,412 
Prepaid expenses and other current assets
49,057 
21,967 
21,724 
Total current assets
498,383 
358,040 
198,818 
Property and equipment, net
40,339 
32,111 
22,440 
Intangible assets and goodwill
16,529 
17,365 
8,449 
Other long-term assets
33,807 
32,155 
16,958 
Total assets
589,058 
439,671 
246,665 
Current liabilities:
 
 
 
Accounts payable
112,270 
126,423 
53,746 
Accrued liabilities
99,928 
86,391 
48,714 
Deferred revenue
7,996 
7,781 
7,380 
Income taxes payable
4,795 
19,702 
3,578 
Notes payable and current portion of long-term debt
60,297 
15,782 
Total current liabilities
224,989 
300,594 
129,200 
Long-term debt, less current portion
53,315 
113,613 
Other long-term liabilities
13,408 
13,930 
6,455 
Total liabilities
238,397 
367,839 
249,268 
Commitments, contingencies and guarantees (Note 12)
   
   
   
Redeemable convertible preferred stock-$0.0001 par value; 36,000,000 shares authorized as of December 31, 2012 and 2013, no shares authorized as of September 30, 2014 (unaudited) 30,523,036 shares issued and outstanding as of December 31, 2012 and 2013, respectively; no shares issued or outstanding as of September 30, 2014 (unaudited); liquidation preference of $77,326 as of December 31, 2012 and 2013, respectively
77,198 
77,138 
Stockholders' equity (deficit)
 
 
 
Preferred stock-$0.0001 par value; No shares authorized as of December 31, 2012 and 2013, 5,000,000 shares authorized as of September 30, 2014 (unaudited), no shares issued and outstanding as of September 30, 2014 (unaudited)
   
   
   
Common stock
 
Additional paid-in capital
364,704 
14,510 
471 
Accumulated deficit
(14,056)
(19,884)
(80,220)
Total stockholders' equity (deficit)
350,661 
(5,366)
(79,741)
Total liabilities, redeemable convertible preferred stock and stockholders' equity (deficit)
589,058 
439,671 
246,665 
Common Class A [Member]
 
 
 
Stockholders' equity (deficit)
 
 
 
Common stock
Common Class B [Member]
 
 
 
Stockholders' equity (deficit)
 
 
 
Common stock
$ 10 
$ 0 
$ 0 
Consolidated Balance Sheet (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Sep. 30, 2014
Dec. 31, 2013
Dec. 31, 2012
Accounts receivable, allowance for doubtful accounts
$ 700 
$ 520 
$ 262 
Redeemable convertible preferred stock, par value ( in dollars per share)
$ 0.0000 
$ 0.0001 
$ 0.0001 
Redeemable convertible preferred stock, shares authorized
36,000,000 
36,000,000 
Redeemable convertible preferred stock, shares issued
30,523,036 
30,523,036 
Redeemable convertible preferred stock, shares outstanding
30,523,036 
30,523,036 
Liquidation preference
 
$ 77,326 
$ 77,326 
Preferred stock, par value (in dollars per share)
$ 0.0001 
 
 
Preferred stock, shares authorized
5,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value (in dollars per share)
$ 0.0001 
$ 0.0001 
$ 0.0001 
Common stock, shares authorized
150,000,000 
150,000,000 
150,000,000 
Common stock, shares issued
81,420,040 
80,714,412 
Common stock, shares outstanding
81,420,040 
80,714,412 
Common Class A [Member]
 
 
 
Common stock, par value (in dollars per share)
$ 0.0001 
 
 
Common stock, shares authorized
500,000,000 
Common stock, shares issued
26,292,404 
Common stock, shares outstanding
26,292,404 
Common Class B [Member]
 
 
 
Common stock, par value (in dollars per share)
$ 0.0001 
 
 
Common stock, shares authorized
150,000,000 
Common stock, shares issued
99,484,734 
Common stock, shares outstanding
99,484,734 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
9 Months Ended 12 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Income Statement [Abstract]
 
 
 
 
 
Revenue
$ 760,292 
$ 624,285 
$ 985,737 
$ 526,016 
$ 234,238 
Cost of revenue
436,870 
414,005 
623,953 
298,530 
111,683 
Gross profit
323,422 
210,280 
361,784 
227,486 
122,555 
Operating expenses:
 
 
 
 
 
Research and development
105,778 
48,286 
73,737 
36,115 
8,644 
Sales and marketing
133,151 
112,151 
157,771 
116,855 
64,375 
General and administrative
71,146 
21,715 
31,573 
20,899 
10,757 
Total operating expenses
310,075 
182,152 
263,081 
173,869 
83,776 
Operating income
13,347 
28,128 
98,703 
53,617 
38,779 
Other income (expense), net
(4,945)
(5,150)
(7,374)
(407)
12 
Income before income taxes
8,402 
22,978 
91,329 
53,210 
38,791 
Income tax expense
2,574 
6,129 
30,751 
20,948 
14,179 
Net income
5,828 
16,849 
60,578 
32,262 
24,612 
Less: common stock distributed earnings
(84,828)
(5,071)
Less: preferred stock distributed earnings, including accumulated accretion
(26,927)
(5,815)
Less: unvested early exercised options and restricted stock distributed earnings
(454)
Less: undistributed earnings allocable to: holders of preferred stock and unvested early exercised options and restricted stock
(1,022)
(4,653)
(16,727)
Undistributed net income (loss) attributable to common stockholders-basic
4,806 
12,196 
43,851 
(79,947)
13,726 
Add: adjustments to net income for dilutive securities allocable to: holders of preferred stock and unvested early exercised options and restricted stock
10 
638 
2,309 
Undistributed net income (loss) attributable to common stockholders-diluted
4,816 
12,834 
46,160 
(79,947)
13,726 
Distributed earnings to common stockholders
$ 0 
$ 0 
$ 0 
$ 84,828 
$ 5,071 
Weighted-average shares used to compute net income per share attributable to common stockholders:
 
 
 
 
 
Basic
96,905 
80,914 
81,018 
74,226 
73,481 
Diluted
115,578 
98,671 
98,941 
74,226 
78,551 
Net income per share attributable to common stockholders:
 
 
 
 
 
Basic
$ 0.05 
$ 0.15 
$ 0.54 
$ 0.07 
$ 0.26 
Diluted
$ 0.04 
$ 0.13 
$ 0.47 
$ 0.07 
$ 0.24 
Consolidated Statements of Redeemable Convertible Preferred Stock and Shareholders' Equity (Deficit) (USD $)
In Thousands, except Share data
Total
Redeemable preferred stock [Member]
Common Stock [Member]
Additional Paid-in Capital [Member]
Retained earnings (accumulated deficit) [Member]
Beginning Balance at Dec. 31, 2010
$ 12,402 
$ 0 
$ 263 
$ 674 
$ 11,465 
Beginning Balance, Shares at Dec. 31, 2010
 
 
73,160,000 
 
 
Reclassification of retained earnings due to termination of S corporation election
 
9,108 
(9,108)
Issuance of common stock upon initial public offering, net of offering costs
19,663 
Issuance of common stock upon initial public offering, net of offering costs, Shares
 
7,894,000 
 
 
 
Preferred stock dividend to common stockholders
(67,995)
67,995 
(10,030)
(57,965)
Preferred stock dividend to common stockholders
 
26,840,000 
 
 
 
Preferred stock dividend accretion
(3,432)
3,432 
(3,432)
Accretion of preferred stock issuance costs
(56)
56 
(56)
Exercise of stock options
11 
 
11 
Exercise of stock options, Shares
46,000 
 
646,000 
 
 
Stock-based compensation expense
8,975 
 
8,975 
Stock options assumed in acquisition
339 
 
339 
Stockholder contribution
6,120 
 
6,120 
Cash distribution to stockholders
(5,071)
 
(5,071)
Contribution of shares by executive
 
(267)
267 
Retirement of common stock
 
 
 
 
Net income
24,612 
 
24,612 
Ending Balance, Temporary equity at Dec. 31, 2011
 
91,146 
 
 
 
Ending Balance at Dec. 31, 2011
(24,095)
 
6,894 
(30,996)
Ending Balance, Temporary equity, Shares at Dec. 31, 2011
 
34,734,000 
 
 
 
Ending Balance, Shares at Dec. 31, 2011
 
 
73,806,000 
 
 
Preferred stock dividend to common stockholders
 
 
 
 
Preferred stock dividend accretion
(4,207)
4,207 
(4,207)
Accretion of preferred stock issuance costs
(67)
67 
(67)
Exercise of stock options
1,906 
 
1,906 
Exercise of stock options, Shares
2,486,000 
 
2,565,000 
 
 
Vesting of shares related to early exercise of common stock options
201 
 
201 
Vesting of shares related to restricted stock and early exercise of common stock options, Shares
 
 
132,000 
 
 
Stock-based compensation expense
9,156 
 
9,156 
Cash distribution to stockholders
(110,648)
(6,713)
(29,162)
(81,486)
Excess tax benefit from stock-based compensation
4,182 
 
4,182 
Retirement of common stock
 
 
 
 
Conversion of preferred stock to common stock
 
(4,211,000)
4,211,000 
 
 
Conversion of preferred stock to common stock
11,569 
(11,569)
11,568 
Net income
32,262 
 
32,262 
Ending Balance, Temporary equity at Dec. 31, 2012
77,138 
77,138 
 
 
 
Ending Balance at Dec. 31, 2012
(79,741)
 
471 
(80,220)
Ending Balance, Temporary equity, Shares at Dec. 31, 2012
30,523,036 
30,523,000 
 
 
 
Ending Balance, Shares at Dec. 31, 2012
 
 
80,714,000 
 
 
Preferred stock dividend to common stockholders
 
 
 
 
Preferred stock dividend accretion
 
 
 
 
Accretion of preferred stock issuance costs
(60)
60 
(60)
Exercise of stock options
769 
 
769 
Exercise of stock options, Shares
345,000 
 
346,000 
 
 
Vesting of shares related to early exercise of common stock options
379 
 
379 
Vesting of shares related to restricted stock and early exercise of common stock options, Shares
 
 
267,000 
 
 
Stock-based compensation expense
10,887 
 
10,887 
Issuance of common stock for acquisition, Shares
 
 
108,000 
 
 
Issuance of common stock for acquisition
1,741 
 
1,741 
Excess tax benefit from stock-based compensation
323 
 
323 
Retirement of common stock
(242)
 
(242)
Retirement of common stock, Shares
 
 
(15,000)
 
 
Net income
60,578 
 
60,578 
Ending Balance, Temporary equity at Dec. 31, 2013
77,198 
77,198 
 
 
 
Ending Balance at Dec. 31, 2013
(5,366)
 
14,510 
(19,884)
Ending Balance, Temporary equity, Shares at Dec. 31, 2013
30,523,036 
30,523,000 
 
 
 
Ending Balance, Shares at Dec. 31, 2013
 
 
81,420,000 
 
 
Issuance of common stock upon initial public offering, net of offering costs
194,617 
 
194,616 
Issuance of common stock upon initial public offering, net of offering costs, Shares
 
 
8,900,000 
 
 
Preferred stock dividend to common stockholders
 
 
 
 
Preferred stock dividend accretion
 
 
 
 
Accretion of preferred stock issuance costs
(34)
34 
(34)
Exercise of stock options
3,620 
 
3,620 
Exercise of stock options, Shares
3,932,000 
 
3,931,000 
 
 
Vesting of shares related to early exercise of common stock options
205 
 
205 
Vesting of shares related to restricted stock and early exercise of common stock options, Shares
 
 
151,000 
 
 
Contribution of shares by executive
 
Excess tax benefit from stock-based compensation
23,592 
 
23,592 
Retirement of common stock
(1,176)
 
(1,176)
Retirement of common stock, Shares
 
 
(64,000)
 
 
Conversion of preferred stock to common stock
 
(30,523,000)
30,523,000 
 
 
Conversion of preferred stock to common stock
77,232 
(77,232)
77,229 
Contribution of shares by executive, Shares
 
 
(665,000)
 
 
Stock-based compensation expense
52,143 
 
52,142 
Stock-based compensation expense
 
 
1,581,000 
 
 
Net income
5,828 
 
5,828 
Ending Balance, Temporary equity at Sep. 30, 2014
 
 
 
 
Ending Balance at Sep. 30, 2014
$ 350,661 
 
$ 13 
$ 364,704 
$ (14,056)
Ending Balance, Temporary equity, Shares at Sep. 30, 2014
 
 
 
 
Ending Balance, Shares at Sep. 30, 2014
 
 
125,777,000 
 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
9 Months Ended 12 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Operating activities:
 
 
 
 
 
Net income
$ 5,828 
$ 16,849 
$ 60,578 
$ 32,262 
$ 24,612 
Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
 
Depreciation and amortization
12,769 
8,508 
12,034 
3,975 
1,517 
Deferred taxes
(3,808)
(1,074)
(8,129)
(2,121)
(6,831)
Excess tax benefit from stock-based compensation
(23,592)
(901)
(323)
(4,182)
Stock-based compensation
52,143 
7,347 
10,887 
9,156 
8,975 
Provision for doubtful accounts
411 
411 
664 
736 
42 
Provision for inventory obsolescence
2,849 
4,002 
4,081 
1,955 
760 
Net loss on disposals of fixed assets and other
1,608 
994 
1,224 
57 
127 
Changes in operating assets and liabilities, net of effect of acquisitions:
 
 
 
 
 
Accounts receivable
27,695 
23,462 
(43,117)
(53,508)
(19,565)
Inventories
(7,869)
(47,714)
(55,664)
(43,718)
(12,737)
Prepaid expenses and other assets
(25,842)
(15,085)
(15,355)
(8,510)
(8,381)
Accounts payable and accrued liabilities
11,325 
25,194 
135,197 
67,802 
24,916 
Deferred revenue
215 
(1,846)
400 
4,462 
1,794 
Net cash provided by operating activities
53,732 
20,147 
102,477 
8,366 
15,229 
Investing activities:
 
 
 
 
 
Purchase of property and equipment
(22,854)
(14,578)
(18,325)
(17,795)
(1,954)
Proceeds from sale of property and equipment
288 
Net cash used in acquisitions
(3,200)
(2,912)
(7,955)
Net cash used in investing activities
(25,766)
(14,578)
(21,237)
(17,795)
(9,909)
Financing activities:
 
 
 
 
 
Net proceeds from initial public offering
200,784 
Proceeds from issuance of common stock
3,364 
200 
527 
2,762 
11 
Proceeds from issuance of debt and revolving credit facility
20,000 
30,000 
139,389 
Proceeds from issuance of Series A preferred stock, net of issuance costs
19,663 
Excess tax benefit from stock-based compensation
23,592 
901 
323 
4,182 
Payment of debt issuance costs and deferred public offering costs
(4,447)
(1,026)
(1,165)
(1,776)
Repayment of debt
(114,000)
(14,500)
(46,000)
(10,380)
(380)
Purchase of shares and net exercise of stock options
(920)
Cash distribution to stockholders
(117,361)
(5,071)
Stockholder contribution
6,120 
Net cash provided by (used for) financing activities
108,373 
5,575 
(16,315)
16,816 
20,343 
Net increase in cash and cash equivalents
136,339 
11,144 
64,925 
7,387 
25,663 
Beginning of year
101,410 
36,485 
36,485 
29,098 
3,435 
End of period
237,749 
47,629 
101,410 
36,485 
29,098 
Supplementary cash flow disclosure:
 
 
 
 
 
Cash paid for Interest
1,853 
3,508 
4,904 
284 
31 
Income taxes
18,139 
2,831 
2,831 
31,317 
10,280 
Non-cash investing and financing activities:
 
 
 
 
 
Accretion of preferred stock dividends
4,207 
3,432 
Conversion of preferred stock to common stock
77,232 
11,569 
Purchases of property and equipment included in accounts payable and accrued expenses
1,983 
2,260 
2,937 
4,621 
785 
Vesting of shares related to restricted stock and early exercise of common stock options
205 
283 
379 
201 
Preferred stock dividend to common stockholders
67,995 
Notes payable and stock options assumed in acquisition of CineForm
1,099 
Retirement of common stock
1,176 
241 
242 
Reclass of deferred offering costs to additional paid-in capital
6,166 
Deferred offering costs not yet paid
$ 814 
$ 0 
$ 490 
$ 0 
$ 0 
Business overview
Business overview

1. Business overview

GoPro, Inc. (GoPro or the Company) was incorporated as Woodman Labs, Inc. in California on February 14, 2004 as an S Corporation. The Company produces mountable and wearable cameras and accessories, which the Company refers to as capture devices. The Company’s products are sold globally through retailers, wholesale distributors and on the Company’s website. In 2012, the Company established wholly-owned subsidiaries in Hong Kong, Germany and the Cayman Islands. The Company’s corporate headquarters are located in San Mateo, California with additional operational support offices in Hong Kong and Shenzhen, China.

On February 18, 2011, the Company issued 26,839,707 shares of Series A redeemable convertible (Series A) preferred stock to all of its then existing common stockholders in exchange for the same amount of common shares and the common shares exchanged were subsequently cancelled. The preferred stock issuance was accounted for as a stock dividend. The cancellation of the common shares was accounted for as a reverse stock split; accordingly, all share and per share amounts for all periods presented in these consolidated financial statements and related notes, have been adjusted to reflect the reverse stock split. On February 24, 2011, the Company amended and restated its Articles of Incorporation to increase the authorized number of shares of common stock on a post-split basis from 120.0 million to 150.0 million and approved an additional 36.0 million shares of Series A preferred stock, both with no par value. As a result of this amendment and restatement of the Company’s Articles of Incorporation, the Company changed from an S corporation to a C corporation. On October 27, 2011, the Company re-incorporated in the state of Delaware and changed its no par value common and preferred stock to $0.0001 par value. 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 (including the February 2011 transaction described above).

Initial public offering (unaudited)

The Company completed its initial public offering (IPO) of its Class A common stock on July 1, 2014 in accordance with the Securities Act of 1933, as amended. 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.

Basis of presentation
Basis of presentation

2. 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.

Changes in classification

The Company has reclassified certain amounts from its previously issued consolidated financial statements. The Company has revised its presentation of certain operating expenses for 2011 and 2012 and has now included $2.1 million and $3.2 million, respectively, in sales and marketing expenses that was previously classified in general and administrative expenses. In addition, the Company has revised its disclosure of advertising costs for 2011 and 2012 to include costs of sponsorships of $2.6 million and $8.2 million, respectively.

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 regularly evaluates estimates and assumptions related to its allowance for doubtful accounts, stock-based compensation, inventory valuation, warranty liabilities, sales returns, web-based sale deliveries at period-end, implied post contract support and marketing allowances, the valuation and useful life evaluation of acquired intangibles, the valuation of deferred income tax assets and uncertain tax positions. 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.

Unaudited interim consolidated financial statements

The accompanying interim consolidated balance sheet as of September 30, 2014, the interim consolidated statements of operations and cash flows for the nine months ended September 30, 2014 and 2013 and the interim consolidated statement of redeemable convertible preferred stock and stockholders’ equity (deficit) for the nine months ended September 30, 2014 are unaudited. The unaudited interim consolidated financial statements have been prepared on a basis consistent with the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s financial position as of September 30, 2014 and its results of operations and cash flows for the nine months ended September 30, 2014 and 2013. The financial data and the other financial information disclosed in the notes to these consolidated financial statements related to the nine-month periods are also unaudited. The results of operations for the nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2014, or for any other future year or interim period.

Summary of significant accounting policies
Summary of significant accounting policies

3. Summary of significant accounting policies

Cash equivalents (unaudited)

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 September 30, 2014, cash equivalents consisted of money market funds and are stated at cost, which approximates fair value.

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 from contract manufacturers. Inventories are stated at the lower of average 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 is generally 24 months. POP display amortization included in sales and marketing expense were $3.6 million, $8.6 million, $13.5 million, $8.9 million and $13.2 million for 2011, 2012, 2013 and the nine months ended September 30, 2013 (unaudited) and September 30, 2014 (unaudited), respectively.

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 does not have any financial instruments, such as investments in debt or equity securities or derivative instruments that are required to be measured at fair value on a recurring basis. The carrying amounts of the Company’s accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their short maturities. Based on borrowing rates currently available to the Company for its credit facility with similar terms and remaining maturities, and considering the Company’s credit risk, the carrying value of the credit facility approximates fair value and was determined to be a Level 2 measurement.

Fair value measurements (unaudited)

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.

The carrying amounts of the Company’s accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their short maturities. As of September 30, 2014, the Company’s financial assets included only money market funds, which are classified within Level 1 of the hierarchy.

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 comprised of product revenue, net of returns and sales incentives.

Revenue is 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 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 in the last four days 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. At December 31, 2012, 2013 and September 30, 2014 (unaudited), deferred implied PCS revenue was $3.8 million, $6.4 million and $7.4 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 products are expensed as incurred. To date, the period between achieving technological feasibility and the release of products for sale 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 $23.7 million, $46.9 million, $55.5 million, $38.7 million and $32.3 million for 2011, 2012 and 2013 and the nine months ended September 30, 2013 (unaudited) and 2014 (unaudited), respectively.

Stock-based compensation

The Company accounts for stock-based compensation activity using the fair value method, which requires the measurement and recognition of compensation expense for all share-based payment awards based on estimated fair values. This method requires companies to estimate the fair value of stock-based compensation on the date of grant using an option pricing model. The Company uses the Black-Scholes option pricing model to measure stock-based compensation. The Black-Scholes model determines the fair value of share-based payment awards based on the fair value of the underlying common stock on the date of grant and is affected by assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the fair value of the underlying common stock, expected volatility over the term of the awards and actual and projected employee stock option exercise behaviors. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. The assumptions used in calculating the fair value of the stock-based awards represent management judgment. As a result, if factors change and different assumption are used, the stock-based compensation expense could be materially different in the future. Compensation expense relating to employee stock awards is recorded on a straight-line basis in the accompanying Consolidated Statements of Operations.

Stock awards issued to non-employees are accounted for at fair value. The Company believes that the fair value of the awards is more reliably measured than the fair value of services received. The Company records compensation expense based on the then-current fair values of the stock awards at each financial reporting date. Compensation recorded during the service period is adjusted in subsequent periods for changes in the stock award’s fair value until the earlier of the date at which the non-employee’s performance is complete or a performance commitment is reached, which is generally when the stock option award vests. Compensation expense relating to non-employee stock awards is recorded on a straight-line basis in the accompanying Consolidated Statements of Operations.

 

The Company recognizes a benefit from stock-based compensation as additional paid-in capital if an incremental tax benefit is realized by following the ordering provisions of the tax law. In addition, the indirect effects of stock-based compensation deductions are reflected in the income tax provision for purposes of measuring the windfall 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 income (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. The Company has not incurred any interest or penalties related to unrecognized tax benefits in any of the periods presented.

Recent accounting pronouncements

In July 2013, the Financial Accounting Standards Board (FASB) issued a new accounting standard update on the financial statement presentation of unrecognized tax benefits. The new guidance provides that a liability related to an unrecognized tax benefit would be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. The new guidance becomes effective for the Company on January 1, 2014 and it should be applied prospectively to unrecognized tax benefits that exist at the effective date with retrospective application permitted. The Company adopted the guidance on January 1, 2014. The guidance had no material impact to the Company’s financial position or results of operations in the first quarter of 2014.

On May 28, 2014, the Financial Accounting Standards Board 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 (unaudited).

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 (unaudited).

 

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 (unaudited).

Correction of error (unaudited)

During the preparation of the condensed consolidated financial statements for the period ended June 30, 2014, the Company determined that within the consolidated statement of cash flows previously disclosed for the quarter ended March 31, 2014, net cash provided by operating activities was understated by $3.2 million and net cash used for investing activities was understated by the same amount. The Company has properly presented its consolidated statement of cash flows for the nine months ended September 30, 2014 and determined that this revision is not material to prior periods.

Balance sheet components
Balance sheet components

4. Balance sheet components

Inventories, net

Inventories, net consisted of the following:

 

      December 31,     

September 30,

2014

 
(in thousands)    2012      2013     

 

 
                   (unaudited)  

Components

   $ 3,240       $ 8,000       $ 9,515   

Finished goods

     57,172         103,994         107,499   
  

 

 

 

Inventories, net

   $ 60,412       $ 111,994       $ 117,014   

 

 

Prepaid expenses and other current assets

Prepaid expenses and other current assets consisted of the following:

 

      December 31,     

September 30,

2014

 
(in thousands)    2012      2013     

 

 
                   (unaudited)  

Prepaid income taxes

   $ 9,529       $       $ 25,064   

Current deferred tax assets

     7,226         15,173         14,981   

Prepaid expenses

     1,947         2,739         4,715   

Deposits

     1,193         2,049         1,584   

Prepaid licenses

     544         1,091         1,834   

Other current assets

     1,285         915         879   
  

 

 

 
   $ 21,724       $ 21,967       $ 49,057   

 

 

 

Property and equipment, net

Property and equipment, net consisted of the following;

 

     

Useful life

(in years)

     December 31,    

September 30,

2014

 
(in thousands)       2012     2013    

 

 
                        (unaudited)  

Leasehold improvements

     3–7       $ 7,595      $ 20,111      $ 22,342   

Computers, software, equipment and furniture

     2–7         4,757        11,988        20,724   

Tooling

     1–4         4,197        8,799        14,860   

Construction in progress

        6,356        2,151        3,790   

Tradeshow equipment

     2–5         2,308        2,613        2,792   

Automobiles

     3–5         717        856        967   
     

 

 

   

 

 

   

 

 

 
        25,930        46,518        65,475   

Less: Accumulated depreciation and amortization

        (3,490     (14,407     (25,136
     

 

 

   

 

 

   

 

 

 
      $ 22,440      $ 32,111      $ 40,339   

 

 

Depreciation expense was $0.6 million, $2.8 million, $10.9 million, $7.7 million and $11.9 million for years ended December 31, 2011, 2012 and 2013 and the nine months ended September 30, 2013 (unaudited) and September 30, 2014 (unaudited), respectively.

Goodwill and acquired intangible assets

Goodwill at December 31, 2012, 2013 and September 30, 2014 (unaudited) was as follows:

 

(In thousands)  

Goodwill at December 31, 2012

   $ 4,233   

Acquisition

     9,862   
  

 

 

 

Goodwill at December 31, 2013

   $ 14,095   

Adjustments (unaudited)

       
  

 

 

 

Goodwill at September 30, 2014 (unaudited)

   $ 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 in 2013 or the nine months ended September 30, 2014 (unaudited).

 

Acquired intangible assets at December 31, 2012, 2013 and September 30, 2014 (unaudited) were as follows:

 

      December 31, 2012     

Weighted
average
remaining

useful life

(in years)

 
(in thousands)    Gross      Accumulated
amortization
    Net     

 

 

Developed technology

   $ 5,330       $ (1,629   $ 3,701         4.2   

Tradename

     664         (243     421         3.2   

Customer relationships

     170         (104     66         1.2   

Noncompete agreements

     150         (137     13         0.2   

Domain name

     15                15      
  

 

 

    
   $ 6,329       $ (2,113   $ 4,216      

 

 

 

      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      

 

 

 

      September 30, 2014 (unaudited)     

Weighted
average
remaining

useful life
(in years)

 
(in thousands)    Gross      Accumulated
amortization
    Net     

 

 

Developed technology

   $ 5,330       $ (3,183   $ 2,147         2.5   

Tradename

     664         (476     188         1.5   

Customer relationships

     170         (170               

Noncompete agreements

     311         (227     84         1.1   

Domain name

     15                15      
  

 

 

    
   $ 6,490       $ (4,056   $ 2,434      

 

 

Amortization expense in fiscal years 2011, 2012, 2013 and the nine months ended September 30, 2013 (unaudited) and September 30, 2014 (unaudited) was $1.0 million, $1.2 million, $1.1 million, $0.8 million and $0.8 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, 2013, is as follows:

 

(in thousands)    Cost of
revenue
     Operating
expenses
     Total  

 

 

Years ending December 31,

        

2014

   $ 888       $ 223       $ 1,111   

2015

     888         197         1,085   

2016

     888         22         910   

2017

     149                 149   
  

 

 

 
   $ 2,813       $ 442       $ 3,255   

 

 

The estimated future amortization expense of acquired intangible assets to be charged to cost of revenue and operating expenses as of September 30, 2014 (unaudited), is as follows:

 

(in thousands)    Cost of
revenue
     Operating
expenses
     Total  

 

 

Years ending December 31,

        

2014 (remaining 3 months)

   $ 221       $ 54       $ 275   

2015

     888         197         1,085   

2016

     888         22         910   

2017

     149                 149   
  

 

 

 
   $ 2,146       $ 273       $ 2,419   

 

 

Other long-term assets

Other long-term assets consisted of the following:

 

      December 31,     

September,

2014

 
(in thousands)    2012      2013     

 

 
                   (unaudited)  

POP displays

   $ 13,106       $ 22,379       $ 19,517   

Deposits

     1,920         2,698         5,492   

Long-term licenses

             4,000         4,062   

Deferred financing charges

     1,378         947           

Long-term deferred tax assets

     554         736         4,736   

Deferred public offering costs

             1,395           
  

 

 

 
   $ 16,958       $ 32,155       $ 33,807   

 

 

Deferred public offering costs consist principally of legal, accounting and other fees incurred through the balance sheet date that are directly related to this public offering and that will be charged to stockholders’ equity (deficit) upon the receipt of the capital raised. As of December 31, 2013 and September 30, 2014 (unaudited), $0.5 million and $0.8 million, respectively, of deferred public offering costs are included in accrued liabilities.

 

Accrued liabilities

Accrued liabilities consisted of the following:

 

      December 31,     

September 30,

2014

 
(in thousands)    2012      2013     

 

 
                   (unaudited)  

Accrued payables

   $ 33,112       $ 49,975       $ 45,180   

Employee related liabilities

     2,716         11,932         24,217   

Customer deposits

     1,372         1,316         3,566   

Warranty liability

     1,734         3,691         5,138   

Taxes payable

     2,561         7,766         11,340   

Accrued sponsorship expense

     504         2,909         1,697   

Accrued sales incentives

     3,314         4,909         5,066   

Sales commissions

     2,579         2,454         2,037   

Other

     822         1,439         1,687   
  

 

 

 
   $ 48,714       $ 86,391       $ 99,928   

 

 

Redeemable convertible preferred stock
Redeemable convertible preferred stock

5. Redeemable convertible preferred stock

At December 31, 2012, and 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 with the following terms:

Conversion

Each share of Series A preferred stock is 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 will occur in connection with the closing of an initial public offering, provided the aggregate offering price equals or exceeds $50.0 million.

Voting rights

The holders of shares of the Company’s Series A preferred stock vote equally with shares of 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 are 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 is 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 have not previously exercised the rights granted to them, the Series A preferred stock is 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 occur and are not solely within the Company’s control, all shares of preferred stock have been presented outside of permanent equity.

On December 19, 2012, certain Series A stockholders exercised their conversion right and converted 4,211,303 shares of Series A preferred stock to common stock to participate in a common share sale transaction between the Company’s principal stockholder and a new investor pursuant to the pre-existing tag-along right. On December 20, 2012, the Series A preferred stock was modified to eliminate an 8% cumulative dividend and to extend the redemption date to July 2017. The 8% cumulative dividend had been accreted using the effective interest method from the time of issue through February 28, 2016, until the 8% cumulative dividend was eliminated on December 20, 2012. The Company recorded preferred stock dividend accretion of $4.2 million and $3.4 million in the years ended December 31, 2012 and 2011, respectively. On December 21, 2012, a dividend of $1.05 per share was declared and paid to holders of common and preferred stock totaling $117.4 million. The dividend payment to the preferred stockholders represented a settlement of accumulated dividends to date, prepayments of future cumulative dividends and participation in additional dividends paid to common stockholders as contractually provided for. The cash dividend was reflected first as a reduction to preferred stock to the extent that such dividend payments were accreted, with any cash paid in excess of this amount recorded as a reduction of retained earnings until exhausted, then as a reduction of additional paid-in-capital until exhausted, and then as accumulated deficit.

Stockholders' equity (deficit)
Stockholders' equity (deficit)

6. Stockholders’ equity (deficit)

Preferred stock (unaudited)

Upon completion of its IPO on July 1, 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 September 30, 2014, there were 5,000,000 shares of preferred stock authorized, and no shares issued or outstanding.

Common stock

At December 31, 2012 and 2013, the Company had 150,000,000 shares of common stock authorized for issuance. At December 31, 2012 and 2013, there were 80,714,412 and 81,420,040 shares of common stock issued and outstanding, respectively.

In July 2012, the Company approved a 3-for-1 split of the Company’s common and preferred stock. All share and per share amounts in these consolidated financial statements have been adjusted to reflect this stock split.

 

In October 2011, the Company re-incorporated in the State of Delaware and converted its no par value common stock and Series A preferred stock to a par value of $0.0001. The carrying value of common stock was adjusted to state common stock at par value.

In February 2011, the Company issued 26,839,707 shares of Series A preferred stock to its existing stockholders in exchange for the same number of common shares previously held. The common shares exchanged were subsequently cancelled. The cancellation of common shares was accounted for as a 26.8% reverse stock split. All of the share and per share amounts in these consolidated financial statements have been adjusted to reflect the reverse stock split.

On February 24, 2011, the Company amended and restated its Articles of Incorporation to increase the authorized number of post-split shares of common stock from 120.0 million to 150.0 million, and change its status from an S corporation to a C corporation.

In October 2010, the Company converted a convertible promissory note of $0.2 million plus interest of $0.1 million into 7.3 million shares of common stock.

The Company had the following shares of common stock reserved for issuance upon the exercise of equity instruments:

 

(in thousands)    December 31,
2013
     September 30,
2014
 

 

 
            (unaudited)  

Stock options outstanding

     26,724         27,518   

Restricted stock units outstanding

     270         3,900   

Stock options, restricted stock and RSUs available for future grants

     1,306         13,403   
  

 

 

 
     28,300         44,821   

 

 

Common stock reclassification (unaudited)

On June 20, 2014, the Company filed a Restated Certificate of Incorporation to establish two classes of authorized common stock (Reclassification): Class A common stock and Class B common stock. As a result of the Reclassification, all outstanding shares of common stock were converted into shares of Class B common stock. As of September 30, 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 September 30, 2014, 26,292,404 shares of Class A stock were issued and outstanding and 99,484,734 shares of Class B stock were issued and outstanding.

Equity incentive plan

In August 2010, the Board approved the adoption of the 2010 Equity Incentive Plan (EIP). As amended, the EIP permits the Company to grant up to 32,420,000 shares of the Company’s common stock. The EIP provides for the grant of incentive and nonqualified stock options, restricted stock, restricted stock units (RSUs) and stock appreciation rights to employees, non-employee directors and consultants of the Company. All shares that are cancelled, forfeited or expired are returned to the plan and are available for grant in conjunction with the issuance of new stock awards.

 

The Board oversees the administration of the Company’s equity plans and generally determines eligibility, vesting schedules and other terms for awards granted under the plans. Stock options under the plan have a maximum contractual term of not more than ten years from the date of grant and are generally exercisable upon vesting. Vesting generally occurs over four years and becomes exercisable 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. Awards that provide for early exercise are subject to repurchase upon the termination of services prior to vesting. The exercise price of stock options must generally be at least 100% of the fair value of the Company’s common stock on the date of grant as determined by the Board.

Prior to the Reclassification, the EIP permitted the Company to grant up to 40,920,000 shares of the Company’s Class B common stock (unaudited).

2014 Equity Incentive Plan (unaudited)

Following the Reclassification, all shares subject to the EIP were converted into Class B common stock. The EIP terminated with the establishment of the 2014 Equity Incentive Plan (2014 EIP), and no further grants were issued out of the EIP following termination, though outstanding awards under the EIP at the time of the plan’s termination remained outstanding in accordance with their terms.

In June 2014, the Board approved the adoption of the 2014 EIP, which became effective on June 26, 2014. As of September 30, 2014, the 2014 EIP permits the Company to grant up to 13,921,880 shares of the Company’s Class A common stock, which includes 451,651 shares of Class B common stock previously reserved but unissued under the EIP 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 EIP expire or terminate unexercised.

The 2014 EIP will terminate in 2024, unless sooner terminated by the Board. The 2014 EIP provides for the grant of incentive and nonqualified stock options, restricted stock, RSUs, stock appreciation rights and performance awards to employees, non-employee directors and consultants of the Company. All shares that are cancelled, forfeited or expired are returned to the 2014 EIP and are available for grant in conjunction with the issuance of new stock awards.

Employee Stock Purchase Plan (unaudited)

Concurrent with the effectiveness of the Company’s registration statement on Form S-1 on June 25, 2014, the Company’s 2014 Employee Stock Purchase Plan (ESPP) became effective. The ESPP allows eligible employees to purchase shares of the Company’s Class A common stock at a discount through payroll deductions of up to 15% of their eligible compensation, subject to any plan limitations. The ESPP generally provides for six-month offering periods, and at the end of each offering period, employees are able to purchase shares at 85% of the lower of the fair market value of the Company’s Class A common stock on the first trading day of the offering period or on the last day of the offering period

 

Stock option activity

A summary of the Company’s stock option activity and related information is as follows:

 

     Shares
available
for grant
    Options outstanding  
(shares in thousands)     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, 2010:

    3,268        13,043      $ 0.66           

Additional shares authorized

    12,010                         

Options granted

    (14,100     14,100        0.93      $ 1.01         

Restricted stock and early exercised options granted subject to repurchase

    (1,244                      

RSUs granted

    (270                      

Exercised

           (46     0.24        $ 60       

Forfeited/Cancelled

    736        (736     0.72           
 

 

 

         

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 (unaudited)

    21,970                         

Granted (unaudited)

    (5,058     5,058        19.91      $ 10.58         

RSUs granted (unaudited)

    (5,147                      

Exercised (unaudited)

           (3,932     0.92        $ 84,219       

Forfeited/Cancelled (unaudited)

    332        (332     11.77           
 

 

 

         

Outstanding at September 30, 2014 (unaudited):

    13,403        27,518      $ 5.79            7.38      $ 2,419,222   
 

 

 

         

Exercisable at December 31, 2013

      20,605      $ 0.84            7.26      $ 316,812   

Vested and expected to vest at December 31, 2013

      25,798      $ 2.32            7.52      $ 358,624   

Exercisable at September 30, 2014 (unaudited)

      19,356      $ 1.49            6.70      $ 1,784,809   

Vested and expected to vest at September 30, 2014 (unaudited)

      26,546      $ 5.45            7.33      $ 2,342,529   

 

 

In December 2010, the Company granted a total of 2,400,000 stock options to two employees who are family members of the principal stockholder and Chief Executive Officer (CEO) of the Company. These stock options contain terms similar to other employee stock option grants.

The total fair value of stock options vested in the years ended December 31, 2011, 2012 and 2013 and the nine months ended September 30, 2013 (unaudited) and September 30, 2014 (unaudited) was $1.9 million, $3.0 million, $5.2 million, $3.7 million and $8.9 million, respectively.

 

The following is a further breakdown of the options outstanding at December 31, 2013:

 

      Options outstanding      Options exercisable  
(options in thousands)    Options
outstanding
     Weighted-
average
remaining
contractual
life (in years)
     Weighted-
average
exercise price
     Options
exercisable
     Weighted-
average
exercise price
 

 

 

Range of exercise prices

              

$    0.18–0.66

     11,451         6.98       $ 0.62         10,594       $ 0.62   

      0.76–0.76

     9,757         7.46         0.76         8,706         0.76   

      1.52–2.96

     2,119         8.05         1.91         1,071         1.83   

      8.30–8.30

     574         8.80         8.30         184         8.30   

  13.72–13.72

     891         9.15         13.72         28         13.72   

  15.40–15.40

     611         9.44         15.40         22         15.40   

  15.59–15.59

     472         9.64         15.59                   

  16.19–16.19

     849         9.88         16.19                   
  

 

 

 

$  0.18–16.19

     26,724         7.55       $ 2.47         20,605       $ 0.84   

 

 

The following is a further breakdown of the options outstanding at September 30, 2014 (unaudited):

 

      Options outstanding      Options exercisable  
(options in thousands)    Options
outstanding
     Weighted-
average
remaining
contractual
life (in years)
     Weighted-
average
exercise price
     Options
exercisable
     Weighted-
average
exercise price
 

 

 

Range of exercise prices

              

$    0.18–0.66

     8,901         6.37       $ 0.62         8,814       $ 0.62   

      0.76–0.76

     8,712         6.72         0.76         8,310         0.76   

      1.52–2.96

     1,767         7.31         1.91         1,147         1.87   

      8.30–8.30

     504         8.05         8.30         243         8.30   

  13.72–13.72

     871         8.40         13.72         347         13.72   

  15.40–15.40

     572         8.69         15.40         204         15.40   

  15.59–15.59

     431         8.90         15.59         122         15.59   

  16.19–16.19

     761         9.14         16.19         13         16.19   

  16.22–16.22

     1,125         9.33         16.22                   

  16.39–16.39

     651         9.52         16.39         14         16.39   

  18.40–18.40

     2,800         9.68         18.40         142         18.40   

  38.84–41.98

     192         9.81         40.85                   

  43.96–65.23

     231         9.84         49.40                   
  

 

 

 

$  0.18–65.23

     27,518         7.38       $ 5.79         19,356       $ 1.49   

 

 

Restricted stock

The Company has granted restricted stock pursuant to its EIP. Restricted stock are share awards that, upon grant, the holder receives restricted shares of the Company’s common stock, 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. Restricted stock is legally issued and outstanding. However, restricted stock is only deemed outstanding for basic earnings per share computation purposes upon the lapse of the Company’s right of repurchase.

In June 2011, the Company issued 600,000 shares of restricted stock at a purchase price of $0.0033 per share to a related party for consulting services, which vested on the grant date. The intrinsic value on the date of grant was $0.5 million.

In December 2011, the Company issued 433,500 shares of restricted stock to a consultant at a purchase price of $1.52 per share in accordance with the terms of their service agreements, subject to monthly vesting over a three-year service period.

In October 2013, in connection with the acquisition of General Things, the Company issued 430,000 shares of restricted stock to the two founders, of which 322,500 are subject to monthly vesting over a three-year service period.

Early exercised stock options subject to repurchase

The Company has granted options that provide certain option holders the right to exercise unvested options for shares of restricted stock pursuant to its EIP. Restricted shares issued upon early exercise of stock options are legally issued and outstanding. However, these restricted shares 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.

In December 2011, the Company granted 210,000 stock options to a consultant at an exercise price of $1.52 per share in accordance with the terms of his service agreement, subject to monthly vesting over a two-year service period. In December 2012, the stock options were exercised early and the shares were purchased.

 

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, 2010

          $       $   

Granted

     1,244        1.68      

Vested

     (600     0.98      
  

 

 

      

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 (unaudited)

     (215     
  

 

 

      

Non-vested shares at September 30, 2014 (unaudited)

     272        13.76         25,424   

 

 

The weighted average remaining vesting term for the restricted stock and unvested early-exercised stock options subject to repurchase as of December 31, 2013 and September 30, 2014 (unaudited) was 1.4 and 1.1 years, respectively. The total fair value of restricted stock and early exercised stock options subject to repurchase vested in the year ended December 31, 2012 and 2013 and the nine months ended September 30, 2013 (unaudited) and September 30, 2014 (unaudited) were $2.9 million, $6.1 million, $2.7 million and $3.1 million, respectively.

Sharing of proceeds from sale of securities

During the development stage of the Company, the founder and CEO entered into a verbal agreement with a sales employee to share 10% of any proceeds from the sale of equity securities held by the founder and CEO. As a result of the issuance of preferred stock to common stockholders in February 2011, and subsequent sale of these preferred shares by the founder and CEO to third parties, an obligation under this verbal agreement arose. In order to satisfy this obligation and any future obligations that may have arisen out of this verbal agreement, the Company entered into a written agreement and provided the following forms of compensation to the employee:

 

Ÿ  

In March 2011, the Company paid the employee $6.1 million in cash, which was recorded as compensation expense within sales and marketing expense. Also in March 2011, the CEO reimbursed the Company for $6.1 million, which is recorded as a stockholder contribution to additional paid-in capital;

 

Ÿ  

In June 2011, the Company issued the employee an option to purchase 6,584,427 shares of common stock at an exercise price of $0.763 per share. The options vested immediately and have a contractual life of 10 years. $6.8 million of stock compensation expense was recorded in June 2011 within sales and marketing expense as a result of this grant. Upon exercise of this option by the employee, the founder and CEO will contribute an equal number of common shares back to the Company. In June 2014 (unaudited), the employee exercised the option to purchase 665,443 shares, for which the CEO contributed the same number of shares back to the Company; and

 

Ÿ  

In December 2011, the Company issued the employee 270,000 RSUs.

Restricted stock units

The Company has granted RSUs pursuant to its EIP. The Company issued 270,000 RSUs in December 2011 as part of the sharing of proceeds from a sale of securities. There were no RSUs awarded during the years ended December 31, 2012 and 2013.

RSUs are share awards that, upon vesting, will deliver to the holder shares of the Company’s common stock under the EIP. The vesting of the December 2011 RSU grant of 270,000 RSUs described above is based on the acquisition of the Company. No stock-based compensation expense has been recognized for this grant because satisfaction of the performance condition is not probable.

The weighted average fair value per share of the RSUs awarded in the year ended December 31, 2011 and the nine months ended September 30, 2014 (unaudited) was $2.23 and $17.39, respectively. The weighted average fair value per share was calculated based on the fair market value of the Company’s common stock on the grant date. As of December 31, 2013 and September 30, 2014 (unaudited), the fair value of RSUs outstanding was $4.4 million and $62.4 million, respectively.

Restricted stock unit activity during the nine months ended September 30, 2014 (unaudited)

Typically, vesting of RSUs is subject to the employee’s continuing service to the Company. 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 also issues 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

     270      $ 1.52   

Granted (unaudited)

     5,147        17.39   

Vested (unaudited)

     (1,517     18.41   
  

 

 

   

Non-vested shares at September 30, 2014 (unaudited)

     3,900        16.01   

 

 

In January 2014, the Company issued a total of 300,000 RSUs to employees, comprised of three different grants. Two of the grants, or a total of 200,000 shares, are subject to annual vesting over four years based on continued service. The third grant of 100,000 shares will vest 50% on the four-year anniversary and 50% on the five-year anniversary of the grant date based on continued service.

The balance as of September 30, 2014 included 3,000,000 RSUs subject to a market condition. These RSUs were issued to the CEO in the second quarter of fiscal 2014 and can be earned ratably over a period of three years, subject to the achievement of certain market condition milestones that were set by the Compensation and Leadership Committee. The Company estimated the fair value of these shares using a Monte Carlo valuation model with the following weighted-average assumptions:

 

Dividend yield

     None   

Expected volatility

     50.9%   

Risk-free interest rate

     2.69%   

Expected term (years)

     10   

Grant date fair value of underlying shares

   $ 18.40   

 

 

The weighted average remaining vesting term for RSUs as of September 30, 2014 (unaudited) was 3.0 years. The amount of unearned stock-based compensation currently estimated to be expensed with respect to RSUs at September 30, 2014 was $56.2 million. The total fair value of RSUs vested in the nine months ended September 30, 2014 was $28.5 million.

Stock-based compensation
Stock-based compensation

7. Stock-based compensation

The following table summarizes stock-based compensation expense related to stock options, restricted stock and RSUs for the three years ended December 31, 2011, 2012 and 2013 and the nine months ended September 30, 2013 (unaudited) and September 30, 2014 (unaudited), as follows:

 

      Years ended December 31,      Nine months ended
September 30,
 
(in thousands)    2011      2012      2013            2013            2014  

 

 
                          (unaudited)  

Stock-based compensation expense by type of award

              

Stock options

   $ 8,518       $ 8,165       $ 8,468       $ 5,843       $ 11,504   

ESPP

                                     873   

Restricted stock

     457         991         2,419         1,504         4,906   

RSUs

                                     34,860   
  

 

 

 

Total stock-based compensation expense

     8,975         9,156         10,887         7,347         52,143   

 

 

 

The following table summarizes stock-based compensation expense as reported in the Company’s accompanying Consolidated Statements of Operations:

 

      Years ended December 31,     Nine months ended
September 30,
 
(in thousands)    2011     2012     2013            2013            2014  

 

 
                       (unaudited)  

Cost of revenue

   $ 122      $ 333      $ 690      $ 530      $ 555   

Research and development

     261        1,452        3,003        1,737        5,486   

Sales and marketing

     7,690        6,335        5,670        4,077        6,293   

General and administrative

     902        1,036        1,524        1,003        39,809   
  

 

 

 

Total stock-based compensation expense

     8,975        9,156        10,887        7,347        52,143   

Total tax benefit recognized

     (2,897     (1,091     (1,104     (838     (14,774
  

 

 

 

Decrease in net income

   $ 6,078      $ 8,065      $ 9,783      $ 6,509      $ 37,369   

 

 

Stock-based compensation expense related to manufacturing personnel that was capitalized into inventory was immaterial for all periods presented.

The amount of unearned stock-based compensation currently estimated to be expensed with respect to unvested employee options at December 31, 2013 and September 30, 2014 (unaudited) was $22.8 million and $58.5 million, respectively. As of December 31, 2013 and September 30, 2014 (unaudited), the weighted-average period over which the unearned stock-based compensation is expected to be recognized was 1.0 year and 3.4 years, respectively. If there are any modifications or cancellations of the underlying unvested awards, the Company may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Future stock-based compensation expense will increase to the extent that the Company grants additional equity awards or assumes unvested equity awards in connection with acquisitions.

Stock option valuation assumptions

The fair value of the options granted was estimated as of the grant date using the Black-Scholes option pricing model assuming the assumptions listed in the following table:

 

      Years ended December 31,      Nine months ended
September 30,
 
     2011      2012      2013      2013      2014  

 

 
                          (unaudited)  

Expected life (years)

     5.0–6.1         5.1–6.1         5.3–6.1         5.3–6.1         5.3–6.3   

Risk-free interest rate

     1.1%–2.4%         0.8%–2.4%         0.8%–2.4%         0.8%–2.0%         1.7%–2.0%   

Volatility

     56%–59%         56%–60%         56%–60%         56%-60%         54%–56%   

Dividend yield

     0%         0%         0%         0%         0%   

Expected forfeiture rate

     5%         5%–7%         6%         6%         5%–6%   

Weighted average fair value

     $0.98         $5.08         $8.45         $8.20         $10.58   

 

 

 

Compensation amortization period

All stock-based compensation is amortized over the requisite service period of the awards, which is generally the same as the vesting period of the awards. The Company amortizes the fair value cost on a straight-line basis over the expected service periods.

Expected life

Expected life 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.

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.

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

The Company concluded that cash dividends paid prior to being converted to a C corporation from an S corporation were solely for meeting stockholders’ tax liabilities as a pass-through entity. The cash dividend in 2012 was structured as a one-off event to return value to the stockholders, as discussed in Note 5, “Redeemable Convertible Preferred Stock.” The Company may from time to time contemplate capital transactions, including for example a nonrecurring dividend to create a liquidity event for its stockholders. However, the Company does not anticipate paying any recurring cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of 0% in stock option valuation models.

Expected forfeitures

Stock-based compensation expense recognized in the consolidated statements of operations for the three years ended December 31, 2013 and nine months ended September 30, 2013 (unaudited) and September 30, 2014 (unaudited) are based on awards that are expected to vest less estimated forfeitures. The Company estimates the forfeiture rate of its stock-based awards based on an analysis of actual forfeitures, employee turnover and other factors. The impact from a forfeiture rate adjustment would be recognized in full in the period in which the forfeiture rate changes and, if the actual number of future forfeitures differs from prior estimates, the Company may record adjustments to stock-based compensation, if necessary.

 

Determining the fair value of the Company’s common stock

Determining the fair value of the Company’s common stock requires complex and subjective judgment and estimates. There is inherent uncertainty in making these judgments and estimates. The absence of an active market for the Company’s common stock required the Board to estimate the fair value of the common stock for purposes of setting the exercise price of the options and estimating the fair value of the common stock at each meeting at which options were granted based on factors such as the valuations of comparable companies, the status of 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 performed its analysis in accordance with applicable elements of the practice aid issued by the American Institute of Certified Public Accountants entitled Valuation of Privately Held Company Equity Securities Issued as Compensation. The fair value of the underlying common stock will be determined by the Board until such time as its common stock is listed on an established stock exchange.

Stock option modifications

During 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. During 2013, the Company modified options to purchase 8,438 shares of common stock to accelerate vesting and extend the time allowed to exercise the stock options after termination of employment. The Company recorded a charge of $0.1 million related to the modification of this award to cost of revenue, based on the employee’s functional role within the Company.

Compensation cost recognized upon employee sale of shares to the 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, based on the employees’ functional roles within the Company. Of the 760,500 shares sold, the Company repurchased 240,000 shares from two employees who are family members of the Company’s CEO.

 

Restricted stock and early exercised options subject to repurchase

In June 2011, the Company granted a total of 600,000 shares of restricted stock at a purchase price of $0.0033 per share to two family members of the CEO for consulting services, which vested on the grant date. These shares of restricted stock were accounted for at fair value. General and administrative expense related to these options for the year ended December 31, 2011 was $0.5 million.

In December 2011, the Company granted 433,500 shares of restricted stock and 210,000 stock options to two consultants that the Company sponsors at an exercise price of $1.52 per share 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. Sales and marketing expense related to these restricted shares for the years ended December 31, 2011, 2012 and 2013 and the nine months ended September 30, 2013 (unaudited) and September 30, 2014 (unaudited) was $1,000, $1.9 million, $3.5 million, $2.6 million and $3.8 million, respectively.

In October 2013, pursuant to the acquisition of General Things, the Company issued 430,000 shares of restricted stock to the two founders, of which 322,500 are subject to monthly vesting over a three-year service period. Research and development expense related to these restricted shares for the year ended December 31, 2013 and the nine months ended September 30, 2014 (unaudited) was $0.3 million and $1.3 million, respectively.

The amount of unearned stock-based compensation currently estimated to be expensed with respect to unvested non-employee share-based payment awards at December 31, 2013 and September 30, 2014 (unaudited) was $7.4 million and $8.0 million, respectively. As of December 31, 2013 and September 30, 2014 (unaudited), the weighted-average period over which the unearned stock-based compensation is expected to be recognized was 1.4 years and 1.1 years, respectively.

Restricted stock units (unaudited)

In January 2014, the Company issued a total of 300,000 RSUs to employees, comprised of three different grants. Two of the grants, or a total of 200,000 shares, are subject to annual vesting over four years based on continued service. The third grant of 100,000 shares will vest 50% on the four-year anniversary and 50% on the five-year anniversary based on continued service.

The balance as of September 30, 2014 included 3,000,000 RSUs subject to a market condition. These RSUs were issued to the CEO in the second quarter of fiscal 2014 and can be earned ratably over a period of three years, subject to the achievement of certain market condition milestones that were set by the Compensation and Leadership Committee.

General and administrative expense related to these RSUs for the nine months ended September 30, 2014 was $34.9 million. The amount of unearned stock-based compensation currently estimated to be expensed related to these RSUs at September 30, 2014 was $56.2 million. As of September 30, 2014, the weighted-average period over which the unearned stock-based compensation is expected to be recognized was 3.0 years.

 

Non-employee options

In December 2011, the Company granted options to purchase 90,000 shares of common stock to consultants at an exercise price of $1.52, which vested on the grant date. Sales and marketing expense related to these options for the year ended December 31, 2011 was $0.2 million.

In April 2013, the Company granted options to purchase 44,000 shares of common stock to two contractors at an exercise price of $15.40. In September 2013, one of the contractors was terminated and the other contractor was converted to an employee on October 1, 2013. Sales and marketing expense related to these options was $0.2 million in 2013. Non-employee stock compensation expense is included in the stock-based compensation tables in this footnote.

Net income per share attributable to common stockholders
Net income per share attributable to common stockholders

8. 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. The Company considers its redeemable convertible preferred stock to be participating securities. Prior to December 20, 2012, the holders of the Company’s Series A preferred stock were entitled to receive cumulative dividends at the annual rate of 8% per share per annum, payable prior and in preference to any dividends on any shares of the Company’s common stock. In the event a dividend was paid on common stock, the holders of preferred stock were entitled to a proportionate share of any such dividend as if they were holders of common stock (on an as-if converted basis). All participating dividends paid on the Series A preferred stock reduced accrued past or future preferred dividends by such amount. On December 20, 2012, the Company’s Series A preferred stock was modified to eliminate the 8% cumulative dividend. The holders of the Series A preferred stock do not have a contractual obligation to share in losses. 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. In accordance with the two-class method, earnings allocated to these participating securities and the related number of outstanding shares of the participating securities, which include contractual participation rights in undistributed earnings, have been excluded from the computation of basic and diluted net income (loss) per share attributable to common stockholders.

Under the two-class method, net income attributable to common stockholders after deduction of preferred stock dividends is determined by allocating undistributed earnings between the common stock and the participating securities based on their respective rights to receive dividends. In computing diluted net income attributable to common stockholders, undistributed earnings are re-allocated to reflect the potential impact of dilutive securities. Basic net income 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 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.

 

Class A common stock and Class B common stock (unaudited)

In June 2014, the Company filed a Restated Certificate of Incorporation which established two classes of authorized common stock: 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.

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,     Nine months ended
September 30,
 
(in thousands, except per share amounts)   2011
Common
    2012
Common
    2013
Common
    2013
Common
    2014
Class A
    2014
Class B
 

 

 
                            (unaudited)  

Numerator:

           

Allocation of net income

  $ 24,612      $ 32,262      $ 60,578      $ 16,849      $ 417      $ 5,411   

Less: common stock distributed earnings

    (5,071     (84,828                            

Less: preferred stock distributed earnings, including accumulated accretion

    (5,815     (26,927                            

Less: unvested early exercised options and restricted stock distributed earnings

           (454                            

Less: undistributed earnings allocable to:

           

holders of preferred stock

                  (16,521     (4,601     (72     (932

holders of unvested early exercised options and restricted stock

                  (206     (52     (1     (17
 

 

 

 

Undistributed net income (loss) attributable to common stockholders—basic

  $ 13,726      $ (79,947   $ 43,851      $ 12,196      $ 344      $ 4,462   
 

 

 

 

Add: adjustments to net income for dilutive securities allocable to:

           

holders of preferred stock

                  2,281        631        10        128   

holders of unvested early exercised options and restricted stock

                  28        7               2   
 

 

 

 

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

                                4,462          

Undistributed net income (loss) attributable to common stockholders—diluted

  $ 13,726      $ (79,947   $ 46,160      $ 12,834      $ 4,816      $ 4,592   
 

 

 

 

Distributed earnings to common stockholders

  $ 5,071      $ 84,828      $      $      $      $   
 

 

 

 

Denominator:

           

Weighted-average common shares—basic

    73,481        74,226        81,018        80,914        6,941        89,964   

Conversion of Class B to Class A common stock outstanding

                                89,964          

Effect of potentially dilutive securities:

           

Stock options and RSUs

    5,070               17,923        17,757        18,673        18,621   
 

 

 

 

Weighted-average common shares—diluted

    78,551        74,226        98,941        98,671        115,578        108,585   
 

 

 

 

Net income per share attributable to common stockholders:

           

Distributed earnings—basic

  $ 0.07      $ 1.15      $      $      $      $   

Undistributed earnings—basic

    0.19        (1.08     0.54        0.15        0.05        0.05   
 

 

 

 

Basic net income per share

  $ 0.26      $ 0.07      $ 0.54      $ 0.15      $ 0.05      $ 0.05   
 

 

 

 

Distributed earnings—diluted

  $ 0.06      $ 1.15      $      $      $      $   

Undistributed earnings—diluted

    0.18        (1.08     0.47        0.13        0.04        0.04   
 

 

 

 

Diluted net income per share

  $ 0.24      $ 0.07      $ 0.47      $ 0.13      $ 0.04      $ 0.04   

 

 

 

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,      Nine months
ended September 30,
 
(in thousands)      2011        2012        2013            2013            2014  

 

 
                          (unaudited)  

Series A redeemable convertible preferred stock

     28,744         30,523         30,523         30,523         20,237   

Stock options

     7,107         24,402         1,409         1,080         2,871   

Unvested stock awards and stock options

     2         432         380         346         376   
  

 

 

 
     35,853         55,357         32,312         31,949         23,484   

 

 

Financing arrangements
Financing arrangements

9. 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 are reported as deferred charges and the lender costs allocated to the term loan facility are included in the carrying value of the term loan as debt discount. The deferred issuance and lender costs allocated to the term loan facility are amortized to interest expense over the contractual term of the term loan facility using the effective interest method. Costs allocated to the revolving credit facility are deferred and amortized using the straight-line method over the four year contractual term of the revolving credit facility. Borrowings under the credit facility are collateralized by substantially all of the assets of the Company.

The term loan facility has scheduled quarterly principal repayments due on the last day of each quarter of $1.5 million per quarter in 2013, $3.0 million per quarter in 2014 and $6.0 million for the first three quarters of 2015 with the balance of $84.0 million due on December 21, 2015. The interest rate is based on the 6-month adjusted LIBOR (London Interbank Offered Rate) plus 2.5%. The initial contractual interest rate is 3.06% and will adjust every six months. The inception date effective interest rate was 3.71%. The Company may prepay the term loan at any time, without penalty. Mandatory additional principal prepayments may be 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. In April 2014, the Company amended the credit facility agreement for its term loan to extend the due date for this contractual principal prepayment from April 2014 to December 2014.

As of December 31, 2013, $114.0 million of the term loan was outstanding. The remaining unamortized discount was $0.4 million as of December 31, 2013. The effective interest rate on the term loan was 3.79% on December 31, 2013.

 

The revolving credit facility matures on December 21, 2016. Principal can be paid and re-borrowed during the term of the revolving credit facility. The interest rate is based on the 3-month adjusted LIBOR plus 2.5%. The initial interest rate was 2.81% and will adjust quarterly for any balance outstanding. Mandatory additional principal repayments may be required based on excess cash flows of the Company once the term loan facility has been fully repaid. As of December 31, 2013, zero of the revolving credit facility was drawn down. As of December 31, 2013 $20.0 million of the revolving credit facility was committed to a standby letter of credit. In April 2014, the $20.0 million standby letter of credit was terminated.

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.

Repayment of credit facility (unaudited)

Concurrent with the close of the IPO on July 1, 2014, the Company repaid, in full, the term loan outstanding of $108.0 million. The Company recorded the remaining deferred issuance costs and debt discount of $0.6 million related to the term loan as interest expense during the three months ended September 30, 2014.

In August 2014, the Company terminated the revolving credit facility and the then remaining deferred issuance costs of $0.5 million as interest expense during the three months ended September 30, 2014.

Line of credit

Prior to the credit facility in December 2012, the Company had a line of credit agreement which provided for borrowings of up to $15.0 million, which was later amended to increase the maximum amount of borrowings up to $50.0 million, with interest at the bank’s prime rate. Borrowings under this line of credit were collateralized by substantially all of the assets of the Company. During 2012, the Company failed to provide a required pledge agreement upon creation of a foreign subsidiary, failed to provide audited financial statements within 120 days after year end and did not meet the quarterly net income covenant for the quarter ended September 30, 2012. All covenant defaults were waived by the bank. In December 2012, the line of credit was cancelled due to the new credit facility that was entered in December 2012.

License financing arrangement

In August 2013, the Company entered into a Stadium Builders License Agreement (License Agreement) with the Santa Clara Stadium Authority. As part of the License Agreement, the Company will have rights during the agreement term to season tickets for a National Football League team. The cost of the license was $4.0 million, of which $3.2 million was financed with the Santa Clara Stadium Authority at an 8.5% fixed interest rate over the course of the first ten years of the new stadium. Interest was to begin accruing on March 1, 2014. The financing arrangement requires ten annual payments of $0.4 million, with an option to pay off the principal at any time without any prepayment penalty. As of December 31, 2013, the Company had made a payment of $0.4 million, and recorded a long term asset of $4.0 million and a short term liability of $3.6 million on the accompanying Consolidated Balance Sheets related to this License Agreement. In January and February 2014, the Company paid down the remaining $3.6 million related to the license agreement with the Santa Clara Stadium Authority. As of September 30, 2014 (unaudited), there were no further financial obligations related to this License Agreement outstanding.

Loan agreement

In December 2010, the Company entered into a loan agreement with a bank which provided for borrowings up to $5.0 million and bore interest at the bank’s prime rate plus 1.75%. The loan agreement expired on December 27, 2011, with no funds borrowed.

CineForm noteholders note payable

As part of the acquisition consideration of CineForm, Inc., the Company assumed $760,000 of the outstanding balance due to CineForm Noteholders. See Note 15, “Acquisition of CineForm.” The note balance was payable in six equal quarterly installments plus accrued interest at 7%. This note was fully repaid in 2012.

Income taxes
Income taxes

10. Income taxes

Income before income tax consisted of the following:

 

      Years ended December 31,  
(in thousands)    2011      2012      2013  

 

 

Domestic

   $ 38,791       $ 38,714       $ 57,251   

Foreign

             14,496         34,078   
  

 

 

 
   $ 38,791       $ 53,210       $ 91,329   

 

 

 

Income tax expense consisted of the following:

 

      Years ended December 31,  
(in thousands)    2011     2012     2013  

 

 

Current:

      

Federal

   $ 16,687      $ 19,984      $ 28,856   

State

     4,323        (493     1,634   

Foreign

            3,578        8,058   
  

 

 

 

Total current

     21,010        23,069        38,548   
  

 

 

 

Deferred:

      

Federal

     (5,962     (2,247     (7,268

State

     (869     126        (861

Foreign

                   332   
  

 

 

 

Total deferred

     (6,831     (2,121     (7,797
  

 

 

 

Income tax expense

   $ 14,179      $ 20,948      $ 30,751   

 

 

Undistributed earnings of $36.9 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,  
     2011     2012     2013  
(in thousands, except percentage)    $     %     $     %     $     %  

 

 

Reconciliation to statutory rate:

            

Tax at federal statutory rate

   $ 13,577        35.0%      $ 18,623        35.0%      $ 31,965        35.0%   

State taxes, net of federal benefit

     2,229        5.8        1,384        2.6        2,344        2.6   

Impact of foreign operations

                   (211     (0.4     (113     (0.1

Stock-based compensation

     540        1.4        1,385        2.6        2,982        3.3   

S corporation status benefit

     (1,082     (2.8                            

S corporation conversion—DTA setup

     (965     (2.5                            

Tax credits

     (211     (0.5     (415     (0.8     (5,637     (6.2

Other

     91        0.3        182        0.3        (790     (0.9
  

 

 

 
   $ 14,179        36.6%      $ 20,948        39.4%      $ 30,751        33.7%   

 

 

 

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)    2012     2013  

 

 

Components of deferred tax assets and liabilities

    

Deferred tax assets:

    

Net operating loss carryforwards

   $ 746      $ 252   

Stock-based compensation

     3,477        3,475   

Accruals and reserves

     6,973        15,463   
  

 

 

 

Gross deferred tax assets

     11,196        19,190   

Valuation allowance

     (204       
  

 

 

 

Total deferred tax assets

     10,992        19,190   

Deferred tax liabilities:

    

Depreciation and amortization

     (1,998     (3,063

Intangible assets

     (1,214     (550
  

 

 

 

Total deferred tax liabilities

     (3,212     (3,613
  

 

 

 

Net deferred tax assets

   $ 7,780      $ 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, 2013, the Company’s federal and state net operating loss carryforwards for income tax purposes were $0.4 million and $0.2 million, respectively. If not utilized, the federal and state losses will begin to expire in 2022 and 2014, respectively. Utilization of these federal and state tax credit carryforwards are subject to an annual utilization limitation of $1.2 million due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions.

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, 2013 was $9.9 million, which represented an increase in unrecognized tax benefits by $5.5 million during 2013. If recognized, $9.4 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, 2013.

 

A reconciliation of the beginning and ending amount of the unrecognized income tax benefits during the years ended December 31, 2012 and 2013 are as follows:

 

      December 31,  
(in thousands)    2011      2012      2013  

 

 

Gross balance at January 1

   $       $ 966       $ 4,439   

Gross increase related to current year tax positions

     171         3,473         5,280   

Gross increase related to prior year tax positions

     795                 179   
  

 

 

 
   $ 966       $ 4,439       $ 9,898   

 

 

The Company’s policy is to account for interest and penalties as income tax expense. As of the December 31, 2013, the Company had accrued no interest or penalties related to unrecognized tax benefits.

It is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase within the next 12 months. However, the range of the reasonably possible change cannot be reliably estimated.

The Company files income tax returns in the U.S. federal jurisdiction, certain U.S. states and Hong Kong. The Company is subject to U.S. federal income tax examination for calendar tax years ending 2010 through 2013, from 2009 through 2013 for state tax purposes and 2013 for Hong Kong. The U.S. federal and U.S. state taxing authorities may choose to audit tax returns for tax years beyond the statute of limitation period due to significant tax attribute carryforwards from prior years, making adjustments only to carryforward attributes.

The Company was contacted for audit in December 2013 by the Internal Revenue Service for the 2011 tax year which included a partial year S corporation and partial year C corporation return. At this time, the Company is not able to estimate the potential impact that the examination may have on income tax expense. If the examination is resolved unfavorably, there is a possibility it may have a material negative impact on the Company’s results of operations.

Related parties
Related parties

11. Related parties

Beginning in fiscal year 2013, the Company entered into agreements for certain contract manufacturing and engineering services with a company affiliated with one of its investors. In 2013 and the nine months ended September 30, 2014 (unaudited), the Company made payments of $3.6 million and $11.9 million, respectively, for services rendered. As of December 31, 2013 and September 30, 2014 (unaudited), the Company had accounts payable associated with this vendor of $3.9 million and zero, respectively.

In the second quarter of fiscal year 2013, the Company settled an outstanding legal matter with one of the CEO’s family members for $0.2 million.

In the second quarter of fiscal year 2013, the Company loaned one of its executive officers $150,000 pursuant to a demand payment loan that did not bear interest, which was fully repaid in March 2014.

 

In the third quarter of fiscal year 2013, the Company entered into an agreement with a company affiliated with the son of one of the members of the Board to acquire certain naming rights to a sprint kart race track. As consideration for these naming rights, the Company will pay a total of $0.5 million in installments beginning in October 2013 over the naming rights period. In addition to the fee, the Company will also provide the company with 100 GoPro capture devices at no cost each year during the term of the agreement, which is three years. As of September 30, 2014 (unaudited), the Company has paid $0.2 million related to this agreement.

In December 2013, the Company entered into a separation agreement with the Company’s former Chief Financial Officer, pursuant to which the Company paid him cash severance of $0.3 million.

In fiscal year 2013 and during the nine months ended September 30, 2014 (unaudited), the Company incurred and expensed chartered aircraft fees for the use of the CEO’s private plane, for which $0.3 million was paid during the nine months ended September 30, 2014 (unaudited) and $0.4 million was accrued as of September 30, 2014 (unaudited).

In May 2014 (unaudited), the Company amended the outstanding stock options granted to the former Chief Financial Officer to facilitate the net exercise of those options and subsequently repurchased 41,154 shares of common stock from the former Chief Financial Officer’s estate at a purchase price of $18.40 per share.

On June 3, 2014 (unaudited), the Company granted to the newly hired President of the Company an option to purchase 2,227,106 shares of common stock. In addition, the Company issued the President 248,749 RSUs and the CEO 4,500,000 RSUs. Of the 4,500,000 RSUs issued to the CEO, 1,500,000 RSUs vested immediately, 1,500,000 RSUs vest over a three-year period with the attainment of a milestone stock price for 30 consecutive days, and 1,500,000 RSUs vest over a three-year period with the attainment of a second milestone stock price for 30 consecutive days.

In June 2014 (unaudited), the CEO purchased seven automobiles from the Company for a total purchase price of $0.3 million.

Other related party transactions involving the Company’s CEO are discussed in Note 6, “Stockholders’ equity (deficit).”

Commitments, contingencies and guarantees
Commitments, contingencies and guarantees

12. Commitments, contingencies and guarantees

The following table summarizes the Company’s contractual commitments as of December 31, 2013:

 

(in thousands)    Total      1 year
(fiscal
2014)
     2-3 years
(fiscal
2015
and
2016)
     4-5 years
(fiscal
2017 and
2018)
     More than
5 years
(beyond
fiscal
2018)
 

 

 

Term loan principal and interest(1)

   $ 118,606       $ 63,652       $ 54,954       $       $   

Operating leases(2)

     32,243         7,681         13,368         10,614         580   

Sponsorship commitments(3)

     34,423         18,526         15,596         301           

License financing arrangement(4)

     3,600         3,600                           

Other contractual commitments(5)

     4,365         1,896         2,469                   

Capital equipment purchase commitments(6)

     3,607         3,607                           
  

 

 

 

Total contractual cash obligations

   $ 196,844       $ 98,962       $ 86,387       $ 10,915       $