GOPRO, INC., 10-Q filed on 8/11/2014
Quarterly Report
Document, Entity and Information Document
6 Months Ended
Jun. 30, 2014
Aug. 1, 2014
Common Class A [Member]
Aug. 1, 2014
Common Class B [Member]
Class of Stock [Line Items]
 
 
 
Entity Registrant Name
GoPro, Inc. 
 
 
Entity Central Index Key
0001500435 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Non-accelerated Filer 
 
 
Document Type
10-Q 
 
 
Document Period End Date
Jun. 30, 2014 
 
 
Document Fiscal Year Focus
2014 
 
 
Document Fiscal Period Focus
Q2 
 
 
Amendment Flag
false 
 
 
Entity Common Stock, Shares Outstanding
 
20,470,000 
105,542,238 
Condensed Consolidated Balance Sheet (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2014
Dec. 31, 2013
Current assets:
 
 
Cash
$ 104,879 
$ 101,410 
Accounts receivable, net
49,230 
122,669 
Inventory, net
80,376 
111,994 
Prepaid expenses and other current assets
65,409 
21,967 
Total current assets
299,894 
358,040 
Property and equipment, net
38,939 
32,111 
Intangible assets and goodwill
16,805 
17,365 
Other long-term assets
36,562 
32,155 
Total assets
392,200 
439,671 
Current liabilities:
 
 
Accounts payable
54,925 
126,423 
Accrued liabilities
78,819 
86,391 
Deferred revenue
8,158 
7,781 
Income taxes payable
4,366 
19,702 
Current portion of long-term debt
66,306 
60,297 
Total current liabilities
212,574 
300,594 
Long-term debt, less current portion
41,433 
53,315 
Other long-term liabilities
13,719 
13,930 
Total liabilities
267,726 
367,839 
Commitments and contingencies
   
   
Redeemable convertible preferred stock, $0.0001 par value; 36,000,000 shares authorized: 30,523,036 shares issued and outstanding as of December 31, 2013 and June 30, 2014, respectively
77,227 
77,198 
Stockholders’ equity:
 
 
Common stock, $0.0001 par value, 150,000,000 shares authorized, 81,420,040 shares issued and outstanding as of December 31, 2013
Additional paid-in capital
75,914 
14,510 
Accumulated deficit
(28,676)
(19,884)
Total stockholders’ equity (deficit)
47,247 
(5,366)
Total liabilities and stockholders’ equity (deficit)
392,200 
439,671 
Common Class A [Member]
 
 
Stockholders’ equity:
 
 
Common stock, $0.0001 par value, 150,000,000 shares authorized, 81,420,040 shares issued and outstanding as of December 31, 2013
Common Class B [Member]
 
 
Stockholders’ equity:
 
 
Common stock, $0.0001 par value, 150,000,000 shares authorized, 81,420,040 shares issued and outstanding as of December 31, 2013
$ 9 
$ 0 
Condensed Consolidated Balance Sheet (Parenthetical) (USD $)
Jun. 30, 2014
Dec. 31, 2013
Common stock, par value (in dollars per share)
    
$ 0.0001 
Common stock, shares authorized
150,000,000 
Common stock, shares issued
81,420,040 
Common stock, shares outstanding
81,420,040 
Redeemable Convertible Preferred Stock [Member]
 
 
Preferred stock, par value ( in dollars per share)
$ 0.0001 
$ 0.0001 
Preferred stock, shares authorized
36,000,000 
36,000,000 
Preferred stock, shares issued
30,523,036 
30,523,036 
Preferred stock, shares outstanding
30,523,036 
30,523,036 
Common Class A [Member]
 
 
Common stock, par value (in dollars per share)
$ 0.0001 
   
Common stock, shares authorized
150,000,000 
Common stock, shares issued
Common stock, shares outstanding
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
86,177,848 
Common stock, shares outstanding
86,177,848 
Condensed Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
Income Statement [Abstract]
 
 
 
 
Revenue
$ 244,605 
$ 177,082 
$ 480,321 
$ 432,139 
Cost of revenue
141,736 
120,242 
280,938 
285,870 
Gross profit
102,869 
56,840 
199,383 
146,269 
Operating Expenses [Abstract]
 
 
 
 
Research and development
34,663 
16,687 
63,402 
28,699 
Sales and marketing
43,701 
39,065 
85,042 
74,738 
General and administrative
41,171 
7,044 
51,049 
14,032 
Total operating expenses
119,535 
62,796 
199,493 
117,469 
Operating income (loss)
(16,666)
(5,956)
(110)
28,800 
Other income (expense), net
(1,536)
(1,697)
(3,161)
(3,391)
Income (loss) before income taxes
(18,202)
(7,653)
(3,271)
25,409 
Income tax (benefit) expense
1,639 
(2,568)
5,521 
7,459 
Net income (loss)
(19,841)
(5,085)
(8,792)
17,950 
Less: undistributed earnings allocable to: holders of preferred stock and unvested early exercised options and restricted stock
(4,964)
Undistributed net income (loss) attributable to common stockholders—basic
(19,841)
(5,085)
(8,792)
12,986 
Add: adjustments to net income for dilutive securities allocable to: holders of preferred stock and unvested early exercised options and restricted stock
680 
Undistributed net income (loss) attributable to common stockholders—diluted
$ (19,841)
$ (5,085)
$ (8,792)
$ 13,666 
Net income per share attributable to common stockholders - Basic (in dollars per share)
$ (0.24)
$ (0.06)
$ (0.11)
$ 0.16 
Net income per share attributable to common stockholders - Diluted (in dollars per share)
$ (0.24)
$ (0.06)
$ (0.11)
$ 0.14 
Weighted-average shares used to compute net income per share attributable to common stockholders - Basic (in shares)
82,936 
80,902 
82,263 
80,836 
Weighted-average shares used to compute net income per share attributable to common stockholders - Diluted (in shares)
82,936 
80,902 
82,263 
98,577 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Cash flows from operating activities:
 
 
Net income (loss)
$ (8,792)
$ 17,950 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
Depreciation and amortization
7,988 
5,416 
Deferred taxes
(799)
(1,028)
Excess tax benefit from stock-based compensation
(20,836)
(20)
Stock-based compensation
38,230 
4,627 
Provision for doubtful accounts
246 
293 
Provision for inventory obsolescence
1,316 
2,939 
Loss on disposals of fixed assets and other
298 
759 
Changes in operating assets and liabilities:
 
 
Accounts receivable, net
73,193 
26,020 
Inventory
30,301 
(51,590)
Prepaids and other assets
(39,504)
(9,786)
Accounts payable and accrued liabilities
(75,270)
2,607 
Deferred revenue
378 
(1,427)
Net cash provided by (used in) operating activities
6,749 
(3,240)
Cash flows from investing activities:
 
 
Capital expenditures
(12,657)
(7,872)
Proceeds from sale of property and equipment
288 
Cash paid for acquisition
(3,200)
Net cash used in investing activities
(15,569)
(7,872)
Cash flows from financing activities:
 
 
Proceeds from issuance of common stock
1,429 
137 
Excess tax benefit from stock-based compensation
20,836 
20 
Payment of debt issuance costs and deferred public offering costs
(3,056)
(232)
Purchase of shares and net exercise of stock options
(920)
Issuance of debt
15,000 
Repayment of debt
(6,000)
(13,000)
Net cash provided by financing activities
12,289 
1,925 
Net increase (decrease) in cash and cash equivalents
3,469 
(9,187)
Cash and cash equivalents at beginning of period
101,410 
36,485 
Cash and cash equivalents at end of period
104,879 
27,298 
Non-cash investing and financing activities:
 
 
Purchases of property and equipment included in accounts payable and accrued liabilities
5,803 
2,076 
Deferred public offering costs included in accounts payable and accrued liabilities
2,204 
366 
Exercise of selling stockholder options
$ 1,709 
$ 0 
Business Overview
Business Overview
Business overview
GoPro, Inc. (GoPro or the Company) was incorporated as Woodman Labs, Inc. in California on February 14, 2004 as an S Corporation. 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. The Company’s corporate headquarters are located in San Mateo, California with additional offices in Hong Kong and Shenzhen, China and Munich, Germany.
The Company completed its initial public offering (IPO) of 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. See Note 13, Subsequent Events for additional information.
Basis of Presentation
Basis of Presentation and Summary of Significant Accounting Policies
Basis of presentation and Summary of Significant Accounting Policies
The Company’s fiscal year ends on December 31, and its fiscal quarters end on March 31, June 30 and September 30.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary to present fairly the financial position of the Company and its results of operations and cash flow for the interim periods presented have been included. Operating results for the six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014, for any other interim period or for any other future year.
The condensed consolidated balance sheet at December 31, 2013 has been derived from the audited financial statements at that date, but does not include all of the disclosures required by GAAP. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s prospectus filed with the Securities and Exchange Commission (SEC) on June 26, 2014.
There have been no significant changes in the Company’s accounting policies from those disclosed in its prospectus filed with the SEC on June 26, 2014.
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 GoPro, Inc. 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 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.
Recent accounting pronouncements
On May 28, 2014, the Financial Accounting Standards Board (FASB) issued a new accounting standard update on revenue from contracts with customers, which supercedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. The new guidance adheres to the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this principle, the new guidance lists five steps that entities should follow, including identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract and recognizing revenue when the entity satisfies a performance obligation. The new guidance becomes effective for the Company on January 1, 2017, with retrospective application permitted. Early application is not permitted. The Company is currently assessing the impact of this new guidance.
In June 2014, the FASB issued a new accounting standard update on the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be 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 is permitted. The Company does not believe the adoption of this guidance will have a material impact on its Condensed Consolidated Financial Statements.
Correction of error
During the preparation of the accompanying condensed consolidated financial statements, 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 condensed consolidated statement of cash flows for the six month period ended June 30, 2014 and determined that this revision is not material to prior periods.
Balance Sheet Components
Balance Sheet Components
Balance sheet components
Inventory, net. Inventory, net consisted of the following:
(in thousands)
June 30,
2014
 
December 31,
2013
Components
$
3,754

 
$
8,000

Finished goods
76,622

 
103,994

Total inventory, net
$
80,376

 
$
111,994


Prepaid expenses and other current assets. Prepaid expenses and other current assets consisted of the following:
(in thousands)
June 30,
2014
 
December 31,
2013
Prepaid expenses
$
28,239

 
$
3,830

Non-trade receivables
19,963

 
144

Current deferred tax assets
14,984

 
15,173

Other current assets
2,223

 
2,820

Total prepaid expenses and other current assets
$
65,409

 
$
21,967


Property and equipment, net. Property and equipment, net consisted of the following:
(in thousands)
Useful life (in years)
 
June 30,
2014
 
December 31,
2013
Leasehold improvements
3–7
 
$
22,247

 
$
20,111

Computers, software, equipment and furniture
2–7
 
19,697

 
11,988

Tooling
1–4
 
11,317

 
8,799

Tradeshow equipment and other
2–5
 
3,759

 
3,469

Construction in progress
 
 
2,650

 
2,151

 
 
 
59,670

 
46,518

Less: Accumulated depreciation
 
 
(20,731)

 
(14,407)

 
 
 
$
38,939

 
$
32,111



Intangible Assets. Intangible asset balances are presented below:
 
 
 
 
 
 
 
Weighted
average
remaining
useful life
(in years)
 
June 30, 2014
 
(in thousands)
Gross
 
Accumulated
amortization
 
Net
 
Developed technology
$
5,330

 
$
(2,961
)
 
$
2,369

 
2.7
Other intangible assets
1,160

 
(819
)
 
341

 
1.6
 
$
6,490

 
$
(3,780
)
 
$
2,710

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

 
$
(2,517
)
 
$
2,813

 
3.2
Other intangible assets
1,160

 
(703
)
 
457

 
2.0
 
$
6,490

 
$
(3,220
)
 
$
3,270

 
 

The estimated future amortization expense of acquired intangible assets to be charged to cost of revenue and operating expenses after June 30, 2014, is as follows:
(in thousands)
Cost of
 revenue
 
Operating
expenses
 
Total
Years ending December 31,
 
 
 
 
 
2014 (remaining 6 months)
$
444

 
$
107

 
$
551

2015
888

 
197

 
1,085

2016
888

 
22

 
910

2017
149

 

 
149

 
$
2,369

 
$
326

 
$
2,695


Other long-term assets. Other long-term assets consisted of the following:
(in thousands)
June 30,
2014
 
December 31,
2013
POP displays
$
19,077

 
$
22,379

Deposits
4,999

 
2,698

Long-term licenses
4,000

 
4,000

Long-term deferred tax assets and other
2,320

 
1,683

Deferred public offering costs
6,166

 
1,395

Total other long-term assets
$
36,562

 
$
32,155



Deferred public offering costs consist principally of legal, accounting and other fees incurred through the balance sheet date that are directly related to the Company's IPO and will be recorded against the proceeds received from the sale of the common stock. As of December 31, 2013 and June 30, 2014, $0.4 million and $2.2 million, respectively, of deferred public offering costs were included in accounts payable and accrued liabilities.
 
Accrued liabilities. Accrued liabilities consisted of the following:
(in thousands)
June 30,
2014
 
December 31,
2013
Accrued payables
$
39,778

 
$
49,975

Employee related liabilities
12,571

 
11,932

Customer deposits
1,736

 
1,316

Warranty liability
4,512

 
3,691

Taxes payable
11,211

 
7,766

Accrued sponsorship expense
2,191

 
2,909

Accrued sales incentives
3,579

 
4,909

Sales commissions
1,608

 
2,454

Other
1,633

 
1,439

Total accrued liabilities
$
78,819

 
$
86,391

Redeemable Convertible Preferred Stock
Redeemable Convertible Preferred Stock
Redeemable convertible preferred stock
At December 31, 2013 and June 30, 2014, there were 36,000,000 shares of Series A preferred stock authorized and 30,523,036 of Series A preferred stock issued and outstanding. Concurrent with the close of the IPO on July 1, 2014, all shares of Series A preferred stock were converted into Class B common stock. Prior to the conversion to Class B common stock, and after giving effect to the Reclassification (defined in Note 5 below), the Series A preferred stock had the following terms:
Conversion
Each share of Series A preferred stock is convertible, at the option of the holder, into shares of Class B 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 Class B common stock on an as-if converted to common stock basis on all matters, including the election of directors.
Dividend rights
The holders of each Series A share are entitled to receive any noncumulative dividends on an equal basis with common stock, when and if declared by the Board of Directors of the Company (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.
Common Stock and Stockholders' Equity
Common Stock and Stock-based Compensation
Common stock and stock-based compensation
Common stock
At December 31, 2013, the Company had 150,000,000 shares of common stock authorized for issuance and 81,420,040 shares issued and outstanding. 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. At June 30, 2014, the Company had 150,000,000 shares of Class A common stock authorized and 150,000,000 shares of Class B common stock authorized. At June 30, 2014, 86,177,848 shares of Class B stock were issued and outstanding and no shares of Class A stock were issued and outstanding.
The Company had the following shares of common stock reserved for issuance upon the exercise or vesting of equity instruments:
(in thousands)
June 30,
2014
 
December 31,
2013
Stock options outstanding
27,294

 
26,724

Restricted stock units outstanding
3,820

 
270

Stock options, restricted stock and RSUs available for future grants
13,821

 
1,306

 
44,935

 
28,300


Equity incentive plans
2010 Equity Incentive Plan
In August 2010, the Board approved the adoption of the 2010 Equity Incentive Plan (2010 EIP). As amended, the 2010 EIP permitted the Company to grant up to 40,920,000 shares of the Company’s common stock. The 2010 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 were cancelled, forfeited or expired in accordance with the terms of the 2010 EIP were returned to the plan and became available for grant in conjunction with the issuance of new stock awards. Following the Reclassification, all shares subject to the 2010 EIP were Class B common stock. The 2010 EIP terminated with the establishment of the 2014 Equity Incentive Plan (2014 EIP), and no further grants were issued out of the 2010 EIP following termination, though outstanding awards under the 2010 EIP at the time of the plan’s termination remained outstanding in accordance with their terms.
2014 Equity Incentive Plan
In June 2014, the Board approved the adoption of the 2014 EIP, which became effective on June 26, 2014. The 2014 EIP permits the Company to grant up to 13,809,488 shares of the Company’s Class A common stock, which includes 339,259 shares of Class B common stock previously reserved but unissued under the 2010 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 2010 EIP expire or terminate unexercised.
The 2014 EIP will terminate in 2024, unless sooner terminated by the board of directors. 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.
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 2014 EIP 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 Class A common stock based on the closing price of the shares on the date of grant.
Employee Stock Purchase Plan
Concurrent with the effectiveness of the Company’s registration statement on Form S-1 on June 26, 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:
 
 
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, 2013:
 
26,724

 
$
2.47

 
 
 
 
 
7.55
 
$
367,395

Granted
 
4,635

 
17.57

 
$
9.35

 
 
 
 
 
 
Exercised
 
(3,835
)
 
0.88

 
 
 
$
80,108

 
 
 
 
Forfeited/Cancelled
 
(230
)
 
11.58

 
 
 
 
 
 
 
 
Outstanding at June 30, 2014:
 
27,294

 
$
5.18

 
 
 
 
 
7.60
 
$
965,340

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 June 30, 2014
 
18,594

 
$
1.19

 
 
 
 
 
6.90
 
$
731,810

Vested and expected to vest at June 30, 2014
 
26,076

 
$
4.84

 
 
 
 
 
7.54
 
$
931,254


The total fair value of stock options vested was $1.5 million and $2.3 million in the three months ended June 30, 2013 and June 30, 2014, respectively, and $2.5 million and $4.9 million in the six months ended June 30, 2013 and June 30, 2014, respectively.
The following is a further breakdown of the options outstanding and exercisable at June 30, 2014:
 
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
8,944

 
6.62
 
$
0.62

 
8,736

 
$
0.62

      0.76–0.76
8,752

 
6.97
 
0.76

 
8,133

 
0.76

      1.52–2.96
1,795

 
7.56
 
1.91

 
1,031

 
1.86

      8.30–8.30
513

 
8.30
 
8.30

 
218

 
8.30

  13.72–13.72
873

 
8.65
 
13.72

 
294

 
13.72

  15.40–15.40
584

 
8.94
 
15.40

 
171

 
15.40

  15.59–15.59
444

 
9.15
 
15.59

 
1

 
15.59

  16.19–16.19
797

 
9.39
 
16.19

 

 

  16.22–16.22
1,125

 
9.59
 
16.22

 

 

  16.39–16.39
651

 
9.78
 
16.39

 
10

 
16.39

  18.40–18.40
2,816

 
9.93
 
18.40

 

 

$  0.18–18.40
27,294

 
7.60
 
$
5.18

 
18,594

 
$
1.19


The amount of unearned stock-based compensation currently estimated to be expensed with respect to unvested employee options at December 31, 2013 and June 30, 2014 was $22.8 million and $53.6 million, respectively. As of December 31, 2013 and June 30, 2014, the weighted-average period over which the unearned stock-based compensation is expected to be recognized was 1.0 year and 2.0 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.
Restricted stock
The Company has granted restricted stock pursuant to the 2010 EIP. Restricted stock are share awards that, upon grant, the holder receives restricted shares of the Company’s Class B 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.
Early exercised stock options subject to repurchase
The Company has granted options that provide the right to exercise unvested options for shares of restricted stock pursuant to the 2010 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 condensed consolidated balance sheets, and reclassified to stockholders’ equity (deficit) as the Company’s repurchase right lapses.

The following table summarizes the activities of the Company’s restricted stock and early-exercised stock options subject to repurchase:
(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, 2013
487

 
$
11.03

 
$
7,628

Granted

 
 
 
 
Vested
(152
)
 
 
 
 
Non-vested shares at June 30, 2014
335

 
$
12.73

 
$
13,461



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 June 30, 2014 was 1.4 years and 1.3 years, respectively. The amount of unearned stock-based compensation currently estimated to be expensed with respect to unvested restricted stock and early-exercised stock options at December 31, 2013 and June 30, 2014 was $7.4 million and $7.2 million, respectively. The total fair value of vested restricted stock and early exercised stock options subject to repurchase was $0.2 million and $0.5 million in the three months ended June 30, 2013 and June 30, 2014, respectively, and $0.3 million and $1.1 million in the six months ended June 30, 2013 and June 30, 2014 respectively.
Restricted stock units
RSUs are share awards that, upon vesting, will deliver to the holder shares of the Company’s Class A common stock under the 2014 EIP or Class B common stock under the 2010 EIP. 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
5,050

 
16.66

Vested
(1,500
)
 
18.40

Non-vested shares at June 30, 2014
3,820

 
14.91


The balance as of June 30, 2014 included 3 million RSUs subject to a market condition. These RSUs were issued to the Chief Executive Officer (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 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 June 30, 2014 was 3.1 years. The amount of unearned stock-based compensation currently estimated to be expensed with respect to RSUs at December 31, 2013 and June 30, 2014 was $4.7 million and $54.7 million, respectively. The total fair value of RSUs vested in the three and six months ended June 30, 2014 was $27.6 million.
Sharing of proceeds from sale of securities
During the development stage of the Company, the founder and CEO entered into a verbal agreement with an 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:

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 was recorded as a stockholder contribution to additional paid-in capital;
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 option vested immediately and has a contractual life of 10 years. Stock compensation expense of $6.8 million 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, 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
In December 2011, the Company issued the employee 270,000 RSUs that vest upon a change in control of the Company.

Stock-based compensation expense. The following tables set forth the detailed allocation of the stock-based compensation expense (in thousands):
 
Three months ended
 
Six months ended
 
June 30, 2014
 
June 30, 2013
 
June 30, 2014
 
June 30, 2013
Stock-based compensation expense:
 
 
 
 
 
 
 
Cost of revenue
$
154

 
$
157

 
$
322

 
$
377

Research and development
1,657

 
556

 
3,058

 
997

Sales and marketing
1,654

 
1,454

 
3,068

 
2,658

General and administrative
30,728

 
365

 
31,782

 
595

Total stock-based compensation expense
34,193

 
2,532

 
38,230

 
4,627

Total tax benefit recognized
(11,483
)
 
(203
)
 
(11,825
)
 
(546
)
Decrease in net income
$
22,710

 
$
2,329

 
$
26,405

 
$
4,081

 
 
 
 
 
 
 
 
Stock-based compensation expense by type of award:
 
 
 
 
 
 
 
Stock options
$
3,487

 
$
2,027

 
$
6,380

 
$
3,650

RSUs
29,313

 

 
29,493

 

Restricted stock
1,352

 
505

 
2,316

 
977

ESPP
41

 

 
41

 

Total stock-based compensation expense
34,193

 
2,532

 
38,230

 
4,627

Total tax benefit recognized
(11,483
)
 
(203
)
 
(11,825
)
 
(546
)
Decrease in net income
$
22,710

 
$
2,329

 
$
26,405

 
$
4,081



Stock option valuation assumptions.

The fair value of the Company’s stock options granted to employees, officers and non-employee board members was estimated using the following weighted average assumptions:
 
Three months ended
 
Six months ended
 
June 30, 2014
 
June 30, 2013
 
June 30, 2014
 
June 30, 2013
Dividend yield
None
 
None
 
None
 
None
Expected volatility
53.9%
 
59.8%
 
53.9% - 56.0%
 
56.0% - 59.8%
Risk-free interest rate
1.7% - 1.9%
 
0.8% - 1.6%
 
1.7% - 2.0%
 
0.8% - 1.6%
Expected term (years)
5.3 - 6.1
 
5.3 - 6.1
 
5.3 - 6.3
 
5.3 - 6.1
Estimated annual forfeiture rate
6.0%
 
6.0%
 
6.0%
 
6.0%
Weighted average fair value at grant date
$9.63
 
$8.64
 
$9.35
 
$7.92

Employee Stock Purchase Plan Shares.
The fair value of the Company’s ESPP shares issued to employees was estimated using the following weighted average assumptions:
 
Three months ended
 
June 30, 2014
Dividend yield
None
Expected volatility
45.5%
Risk-free interest rate
0.1%
Expected term (years)
0.6
Weighted average fair value at purchase date
$7.04
Income Taxes (Notes)
Income Tax (Benefit) Expense
Income tax (benefit) expense
 
Three months ended
 
Six months ended
 
June 30, 2014
 
June 30, 2013
 
June 30, 2014
 
June 30, 2013
Income tax (benefit) expense
1,639

 
(2,568
)
 
5,521

 
7,459

Effective tax rate
(9.0
)%
 
33.6
%
 
(168.8
)%
 
29.4
%

Income tax expense for the three months ended June 30, 2014 was $1.6 million compared to a tax benefit of $2.6 million for the three months ended June 30, 2013. The tax expense for the three months ended June 30, 2014 was higher than for the three months ended June 30, 2013 primarily due to the impact of losses which could not be benefited in 2014 and foreign withholding taxes.
Income tax expense for the six months ended June 30, 2014 was $5.5 million compared to $7.5 million for the six months ended June 30, 2013. The tax expense for the six months ended June 30, 2014 was lower than for the six months ended June 30, 2013 primarily due to lower U.S. pre-tax income.
Net Income (Loss) per Share Attributable to Common Stockholders
Net Income (loss) per Share Attributable to Common Stockholders
Net income (loss) per share attributable to common stockholders
Basic and diluted net income (loss) per common share is presented in conformity with the two-class method required for participating securities. 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.
Basic net income (loss) per share attributable to common stockholders is computed by dividing the net income
attributable to common stockholders by the weighted-average number of common shares outstanding during the period. All participating securities are excluded from basic weighted average common shares outstanding. Diluted net income (loss) per share attributable to common stockholders is computed by dividing the net income attributable to common stockholders by the weighted-average number of common shares outstanding, including all potentially dilutive common shares, if the effect of each class of potential shares of common stock is dilutive.
The undistributed earnings are allocated based on the contractual participation rights of the Class A and Class B common shares as if the earnings for the year have been distributed. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis. Further, as the conversion of Class B common stock is assumed in the computation of the diluted net income per share of Class A common stock, the undistributed earnings are equal to net income for that computation. As of June 30, 2014, there were no Class A shares issued and outstanding.
The following table presents the calculations of basic and diluted net income (loss) per share attributable to Class B common stockholders:
 
Three months ended
 
Six months ended
(in thousands, except per share amounts)
2014
 
2013
 
2014
 
2013
Numerator:
 
 
 
 
 
 
 
Net income (loss)
$
(19,841
)
 
$
(5,085
)
 
$
(8,792
)
 
$
17,950

Less: undistributed earnings allocable to:
 
 
 
 
 
 
 
holders of preferred stock

 

 

 
(4,904)
holders of unvested early exercised options and restricted stock

 

 

 
(60
)
Undistributed net income (loss) attributable to common stockholders—basic
$
(19,841
)
 
$
(5,085
)
 
$
(8,792
)
 
$
12,986

Add: adjustments to net income (loss) for dilutive securities allocable to:
 
 
 
 
 
 
 
holders of preferred stock

 

 

 
672

holders of unvested early exercised options and restricted stock

 

 

 
8

Undistributed net income (loss) attributable to common stockholders—diluted
$
(19,841
)
 
$
(5,085
)
 
$
(8,792
)
 
$
13,666

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted-average common shares—basic
82,936

 
80,902

 
82,263

 
80,836

 
 
 
 
 
 
 
 
Effect of potentially dilutive securities:
 
 
 
 
 
 
 
Stock options and RSUs

 

 

 
17,741

Weighted-average common shares—diluted
82,936

 
80,902

 
82,263

 
98,577

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

 
$

 
$

 
$

Undistributed earnings (loss)—basic
(0.24
)
 
(0.06
)
 
(0.11
)
 
0.16

Basic net income (loss) per share
$
(0.24
)
 
$
(0.06
)
 
$
(0.11
)
 
$
0.16

Distributed earnings—diluted
$

 
$

 
$

 
$

Undistributed earnings (loss)—diluted
(0.24
)
 
(0.06
)
 
(0.11
)
 
0.14

Diluted net income (loss) per share
$
(0.24
)
 
$
(0.06
)
 
$
(0.11
)
 
$
0.14



The following potentially dilutive shares of common stock subject to options, RSUs, 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:
 
Three months ended
 
Six months ended
(in thousands)
June 30,
2014
 
June 30,
2013
 
June 30,
2014
 
June 30,
2013
Series A redeemable convertible preferred stock
30,523

 
30,523

 
30,523

 
30,523

Stock options and RSUs
29,502

 
25,296

 
28,550

 
762

Unvested stock awards and stock options
370

 
347

 
411

 
378

 
60,395

 
56,166

 
59,484

 
31,663

Financing Arrangements
Financing Arrangements
Financing Arrangements

Credit facility
On December 21, 2012, the Company entered into a $170.0 million syndicated senior secured credit facility consisting of a $120.0 million three-year term loan facility and a $50.0 million four-year revolving credit facility. The Company received net proceeds of $127.6 million, net of $2.4 million of debt issuance and lender costs. The debt issuance and lender costs were allocated between the term loan facility and the revolving credit facility based on the maximum lending commitment amounts. The debt issuance costs allocated to the term loan facility 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 being 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 amount has been classified as a current liability as of December 31, 2013 and June 30, 2014. 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 and June 30, 2014, $114.0 million and $108.0 million of the term loan were outstanding, respectively. The remaining unamortized discount was $0.4 million and $0.3 million as of December 31, 2013 and June 30, 2014, respectively. The effective interest rate on the term loan was 3.79% and 4.03% on December 31, 2013 and June 30, 2014, respectively. 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 revolving credit facility, which remains in place, 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 and June 30, 2014, 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 and June 30, 2014, the Company was in compliance with all covenants.
Related Parties
Related Parties
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 the three and six months ended June 30, 2014, the Company made payments of $3.0 million and $11.4 million, respectively, for services rendered. As of December 31, 2013 and June 30, 2014, the Company had accounts payable associated with this vendor of $3.9 million and $0.1 million, 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 June 30, 2014, the Company has paid $0.2 million related to this agreement.
In fiscal year 2013 and the first six months of fiscal year 2014, the Company incurred and expensed company related chartered aircraft fees for the use of the CEO’s private plane, for which $0.3 million was accrued as of June 30, 2014.
In May 2014, 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, 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 3-year period with the attainment of a second milestone stock price for 30 consecutive days.
In June 2014, 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 5, “Common stock and stock-based compensation.”
Commitments, Contingencies and Guarantees
Commitments Contingencies and Guarantees
Commitments, contingencies and guarantees

The following table summarizes the Company’s contractual commitments as of June 30, 2014:
(in thousands)
Total

 
1 year (remaining 6 months 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)
$
112,340

 
$
57,419

 
$
54,921

 
$

 
$

Operating leases(2)
29,459

 
4,332

 
13,829

 
10,705

 
593

Sponsorship commitments(3)
17,851

 
4,929

 
12,621

 
301

 

Other contractual commitments(4)
3,937

 
232

 
3,705

 

 

Capital equipment purchase commitments(5)
12,242

 
12,242

 

 

 

Total contractual cash obligations
$
175,829

 
$
79,154

 
$
85,076

 
$
11,006

 
$
593

(1)
See Note 8, “Financing arrangements.” Interest payments were calculated using the applicable rate as of June 30, 2014.
(2)
The Company leases its facilities under long-term operating leases, which expire at various dates through May 2019. The lease agreements frequently include leasehold improvement incentives, escalating lease payments, renewal provisions and other provisions which require the Company to pay taxes, insurance, maintenance costs or defined rent increases.
(3)
The Company sponsors sporting events and athletes as part of its marketing efforts. In many cases, the Company enters into multi-year agreements with event organizers and athletes.
(4)
The Company purchases software licenses and engages outside consultants to assist with upgrading or implementing its financial and IT systems, which require payments over multiple years.
(5)
The Company enters into contracts to acquire equipment for tooling and molds as part of its manufacturing operations. In addition, the Company incurs purchase commitments related to the manufacturing of its POP displays by third parties.
Rent expense was $0.9 million and $1.9 million for the three months ended June 30, 2013 and June 30, 2014, respectively, and $1.6 million and $3.2 million for the six months ended June 30, 2013 and June 30, 2014, respectively.
Legal proceedings
From time to time, the Company is involved in legal proceedings in the ordinary course of business. The Company believes that the outcome of any existing litigation, either individually or in the aggregate, will not have a material impact on the results of operations, financial condition or cash flows of the Company.
Indemnifications
In the normal course of business, the Company enters into agreements that contain a variety of representations and warranties and provide for general indemnification. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future, but have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. However, the Company may record charges in the future as a result of these indemnification obligations.
Product warranty
As of December 31, 2013, $3.7 million of the Company's warranty liability was recorded as an element of accrued liabilities and $0.2 million was recorded as an element of other long-term liabilities. As of June 30, 2014, $4.5 million of the warranty liability was recorded as an element of accrued liabilities and $0.2 million was recorded as an element of other long-term liabilities.
The following table summarizes the warranty liability activity:
 
Three months ended
 
Six months ended
(in thousands)
June 30,
2014
 
June 30,
2013
 
June 30,
2014
 
June 30,
2013
Beginning balances
$
2,551

 
$
2,695

 
$
3,870

 
$
1,937

Charged to cost of revenue
3,928

 
1,291

 
4,200

 
3,119

Settlements of warranty claims
(1,801
)
 
(1,169
)
 
(3,392
)
 
(2,239
)
Ending balances
$
4,678

 
$
2,817

 
$
4,678

 
$
2,817

Employee Retirement Plan (Notes)
Employee retirement plan
Employee retirement plan

The Company has established a 401(k) tax-deferred savings plan (401(k) Plan), which permits participants to make contributions by salary deduction pursuant to Section 401(k) of the Internal Revenue Code. In March 2014, the Company modified its 401(k) Plan to allow the Company to make a matching contribution up to 4% of the employees' 401(k) eligible compensation, which was made retroactive to January 1, 2014.
Concentration of Risk and Segment Information
Concentration of Risk and Segment Information
Concentrations of risk and segment information

Segment information
The Company operates as one operating segment as it only reports financial information on an aggregate and consolidated basis to its CEO, who is the Company’s chief operating decision maker.
Customer concentration
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of trade receivables. The Company believes that the credit risk in its trade receivables is mitigated by the Company’s credit evaluation process, relatively short collection terms and dispersion of its customer base. The Company generally does not require collateral and losses on trade receivables have historically been within management’s expectations.
Customers with accounts receivable equal to or greater than 10% of total accounts receivable as of December 31, 2013 and June 30, 2014 were as follows:
 
June 30,
2014
 
December 31,
2013
Customer A
20%
 
21%
Customer B
12%
 
14%
Customer C
*
 
11%

* Less than 10% of total accounts receivable for the period indicated
In the three and six months ended June 30, 2014, respectively, the Company sold accounts receivables, without recourse, of $37.9 million and $69.2 million, respectively, from a retail customer to a third-party banking institution. Factoring fees of $0.3 million and $0.6 million in the three and six months ended June 30, 2014, respectively, related to the sale of trade accounts receivable were included in interest expense.
Customers with revenue equal to or greater than 10% of total revenue for the three and six months ended June 30, 2013 and June 30, 2014 were as follows:
 
Three months ended
 
Six months ended
 
June 30,
2014
 
June 30,
2013
 
June 30,
2014
 
June 30,
2013
Customer A
17%
 
15%
 
15%
 
14%
Customer B
*
 
10%
 
*
 
*
*
Less than 10% of total revenue for the period indicated
Supplier concentration
The Company relies on third parties for the supply and manufacture of its capture devices. In instances where a supply and manufacture agreement does not exist or suppliers fail to perform their obligations, the Company may be unable to find alternative suppliers or satisfactorily deliver its products to its customers on time, if at all.
The Company also relies on third parties with whom it outsources supply chain activities related to inventory warehousing, order fulfillment, distribution and other direct sales logistics. The Company cannot be sure that these parties will perform their obligations as expected or that any cost savings, or other benefits will be derived from the efforts of these parties. If any of these parties breaches or terminates their agreement with the Company or otherwise fails to perform their obligations in a timely manner, the Company’s financial results may be adversely affected.
Geographic and other information
Revenue by geographic region, based on ship-to destinations, was as follows:
 
Three months ended
 
Six months ended
(in thousands)
June 30,
2014
 
June 30,
2013
 
June 30,
2014
 
June 30,
2013
Americas
$
152,710

 
$
102,017

 
$
277,876

 
$
235,491

Europe, Middle East and Africa
62,832

 
58,925

 
142,939

 
146,708

Asia and Pacific area countries
29,063

 
16,140

 
59,506

 
49,940

 
$
244,605

 
$
177,082

 
$
480,321

 
$
432,139


Revenue in the United States, which is included in the Americas geographic region, was $92.1 million and $132.7 million for the three months ended June 30, 2013 and June 30, 2014, respectively, and $207.6 million and $243.3 million for the six months ended June 30, 2013 and June 30, 2014, respectively.
As of December 31, 2013 and June 30, 2014, long-lived assets, which represent property and equipment, located outside the United States, primarily China, were $6.0 million and $10.8 million, respectively.
The Company does not disclose revenue by product category as it does not track sales incentives and other revenue adjustments by product category to report such data.
Subsequent Events
Subsequent Events
Subsequent events
On July 1, 2014, subsequent to the close of the Company’s second quarter ended June 30, 2014, the Company completed its IPO of 17,800,000 shares of Class A common stock, at $24.00 per share, before underwriting discounts and commissions. The Company sold 8,900,000 shares and existing stockholders sold an aggregate of 11,570,000 shares, including 2,670,000 shares as a result of the underwriters’ exercise of their option to purchase additional shares. The IPO generated net proceeds to the Company of approximately $200.8 million, after deducting underwriting discounts and commissions. Offering costs incurred by the Company were approximately $6.2 million and will be recorded against the proceeds received from the sale of the common stock. The Company did not receive any proceeds from the sale of shares by the selling stockholders.
The outstanding shares of convertible preferred stock converted into shares of the Company’s Class B common stock concurrent with the close of the IPO on July 1, 2014. Following the IPO, there were no shares of the Company’s convertible preferred stock outstanding.
Concurrent with the close of the IPO, the Company paid off, in full, the term loan balance outstanding of $108.0 million.
Basis of Presentation (Policies)
The Company’s fiscal year ends on December 31, and its fiscal quarters end on March 31, June 30 and September 30.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary to present fairly the financial position of the Company and its results of operations and cash flow for the interim periods presented have been included. Operating results for the six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014, for any other interim period or for any other future year.
The condensed consolidated balance sheet at December 31, 2013 has been derived from the audited financial statements at that date, but does not include all of the disclosures required by GAAP. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s prospectus filed with the Securities and Exchange Commission (SEC) on June 26, 2014.
There have been no significant changes in the Company’s accounting policies from those disclosed in its prospectus filed with the SEC on June 26, 2014.
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 GoPro, Inc. 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 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.
Recent accounting pronouncements
On May 28, 2014, the Financial Accounting Standards Board (FASB) issued a new accounting standard update on revenue from contracts with customers, which supercedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. The new guidance adheres to the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this principle, the new guidance lists five steps that entities should follow, including identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract and recognizing revenue when the entity satisfies a performance obligation. The new guidance becomes effective for the Company on January 1, 2017, with retrospective application permitted. Early application is not permitted. The Company is currently assessing the impact of this new guidance.
In June 2014, the FASB issued a new accounting standard update on the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be 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 is permitted. The Company does not believe the adoption of this guidance will have a material impact on its Condensed Consolidated Financial Statements.
Balance Sheet Components (Tables)
Inventory, net. Inventory, net consisted of the following:
(in thousands)
June 30,
2014
 
December 31,
2013
Components
$
3,754

 
$
8,000

Finished goods
76,622

 
103,994

Total inventory, net
$
80,376

 
$
111,994

Prepaid expenses and other current assets. Prepaid expenses and other current assets consisted of the following:
(in thousands)
June 30,
2014
 
December 31,
2013
Prepaid expenses
$
28,239

 
$
3,830

Non-trade receivables
19,963

 
144

Current deferred tax assets
14,984

 
15,173

Other current assets
2,223

 
2,820

Total prepaid expenses and other current assets
$
65,409

 
$
21,967

Property and equipment, net. Property and equipment, net consisted of the following:
(in thousands)
Useful life (in years)
 
June 30,
2014
 
December 31,
2013
Leasehold improvements
3–7
 
$
22,247

 
$
20,111

Computers, software, equipment and furniture
2–7
 
19,697

 
11,988

Tooling
1–4
 
11,317

 
8,799

Tradeshow equipment and other
2–5
 
3,759

 
3,469

Construction in progress
 
 
2,650

 
2,151

 
 
 
59,670

 
46,518

Less: Accumulated depreciation
 
 
(20,731)

 
(14,407)

 
 
 
$
38,939

 
$
32,111

Intangible Assets. Intangible asset balances are presented below:
 
 
 
 
 
 
 
Weighted
average
remaining
useful life
(in years)
 
June 30, 2014
 
(in thousands)
Gross
 
Accumulated
amortization
 
Net
 
Developed technology
$
5,330

 
$
(2,961
)
 
$
2,369

 
2.7
Other intangible assets
1,160

 
(819
)
 
341

 
1.6
 
$
6,490

 
$
(3,780
)
 
$
2,710

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

 
$
(2,517
)
 
$
2,813

 
3.2
Other intangible assets
1,160

 
(703
)
 
457

 
2.0
 
$
6,490

 
$
(3,220
)
 
$
3,270

 
 
The estimated future amortization expense of acquired intangible assets to be charged to cost of revenue and operating expenses after June 30, 2014, is as follows:
(in thousands)
Cost of
 revenue
 
Operating
expenses
 
Total
Years ending December 31,
 
 
 
 
 
2014 (remaining 6 months)
$
444

 
$
107

 
$
551

2015
888

 
197

 
1,085

2016
888

 
22

 
910

2017
149

 

 
149

 
$
2,369

 
$
326

 
$
2,695

Other long-term assets. Other long-term assets consisted of the following:
(in thousands)
June 30,
2014
 
December 31,
2013
POP displays
$
19,077

 
$
22,379

Deposits
4,999

 
2,698

Long-term licenses
4,000

 
4,000

Long-term deferred tax assets and other
2,320

 
1,683

Deferred public offering costs
6,166

 
1,395

Total other long-term assets
$
36,562

 
$
32,155

Accrued liabilities. Accrued liabilities consisted of the following:
(in thousands)
June 30,
2014
 
December 31,
2013
Accrued payables
$
39,778

 
$
49,975

Employee related liabilities
12,571

 
11,932

Customer deposits
1,736

 
1,316

Warranty liability
4,512

 
3,691

Taxes payable
11,211

 
7,766

Accrued sponsorship expense
2,191

 
2,909

Accrued sales incentives
3,579

 
4,909

Sales commissions
1,608

 
2,454

Other
1,633

 
1,439

Total accrued liabilities
$
78,819

 
$
86,391

Common Stock and Stockholders' Equity (Tables)
The Company had the following shares of common stock reserved for issuance upon the exercise or vesting of equity instruments:
(in thousands)
June 30,
2014
 
December 31,
2013
Stock options outstanding
27,294

 
26,724

Restricted stock units outstanding
3,820

 
270

Stock options, restricted stock and RSUs available for future grants
13,821

 
1,306

 
44,935

 
28,300

A summary of the Company’s stock option activity and related information is as follows:
 
 
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, 2013:
 
26,724

 
$
2.47

 
 
 
 
 
7.55
 
$
367,395

Granted
 
4,635

 
17.57

 
$
9.35

 
 
 
 
 
 
Exercised
 
(3,835
)
 
0.88

 
 
 
$
80,108

 
 
 
 
Forfeited/Cancelled
 
(230
)
 
11.58

 
 
 
 
 
 
 
 
Outstanding at June 30, 2014:
 
27,294

 
$
5.18

 
 
 
 
 
7.60
 
$
965,340

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 June 30, 2014
 
18,594

 
$
1.19

 
 
 
 
 
6.90
 
$
731,810

Vested and expected to vest at June 30, 2014
 
26,076

 
$
4.84

 
 
 
 
 
7.54
 
$
931,254

The following is a further breakdown of the options outstanding and exercisable at June 30, 2014:
 
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
8,944

 
6.62
 
$
0.62

 
8,736

 
$
0.62

      0.76–0.76
8,752

 
6.97
 
0.76

 
8,133

 
0.76

      1.52–2.96
1,795

 
7.56
 
1.91

 
1,031

 
1.86

      8.30–8.30
513

 
8.30
 
8.30

 
218

 
8.30

  13.72–13.72
873

 
8.65
 
13.72

 
294

 
13.72

  15.40–15.40
584

 
8.94
 
15.40

 
171

 
15.40

  15.59–15.59
444

 
9.15
 
15.59

 
1

 
15.59

  16.19–16.19
797

 
9.39
 
16.19

 

 

  16.22–16.22
1,125

 
9.59
 
16.22

 

 

  16.39–16.39
651

 
9.78
 
16.39

 
10

 
16.39

  18.40–18.40
2,816

 
9.93
 
18.40

 

 

$  0.18–18.40
27,294

 
7.60
 
$
5.18

 
18,594

 
$
1.19

The following table summarizes the activities of the Company’s restricted stock and early-exercised stock options subject to repurchase:
(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, 2013
487

 
$
11.03

 
$
7,628

Granted

 
 
 
 
Vested
(152
)
 
 
 
 
Non-vested shares at June 30, 2014
335

 
$
12.73

 
$
13,461

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
5,050

 
16.66

Vested
(1,500
)
 
18.40

Non-vested shares at June 30, 2014
3,820

 
14.91

Stock-based compensation expense. The following tables set forth the detailed allocation of the stock-based compensation expense (in thousands):
 
Three months ended
 
Six months ended
 
June 30, 2014
 
June 30, 2013
 
June 30, 2014
 
June 30, 2013
Stock-based compensation expense:
 
 
 
 
 
 
 
Cost of revenue
$
154

 
$
157

 
$
322

 
$