GOPRO, INC., 10-K filed on 2/16/2018
Annual Report
Document, Entity and Information (USD $)
12 Months Ended
Dec. 31, 2017
Jun. 30, 2017
Jan. 31, 2018
Common Class A [Member]
Jan. 31, 2018
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
Large Accelerated Filer 
 
 
 
Document Type
10-K 
 
 
 
Document Period End Date
Dec. 31, 2017 
 
 
 
Document Fiscal Year Focus
2017 
 
 
 
Document Fiscal Period Focus
FY 
 
 
 
Amendment Flag
false 
 
 
 
Entity Common Stock, Shares Outstanding
 
 
110,220,424 
35,964,409 
Entity Well-known Seasoned Issuer
Yes 
 
 
 
Entity Voluntary Filers
No 
 
 
 
Entity Current Reporting Status
Yes 
 
 
 
Entity Public Float
 
$ 868,700,000,000 
 
 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and cash equivalents
$ 202,504 
$ 192,114 
Marketable securities
44,886 
25,839 
Accounts receivable, net
112,935 
164,553 
Inventory
150,551 
167,192 
Prepaid expenses and other current assets
62,811 
38,115 
Total current assets
573,687 
587,813 
Property and equipment, net
68,587 
76,509 
Intangible assets, net
24,499 
33,530 
Goodwill
146,459 
146,459 
Other long-term assets
37,014 
78,329 
Total assets
850,246 
922,640 
Current liabilities:
 
 
Accounts payable
138,257 
205,028 
Accrued liabilities
213,030 
211,323 
Deferred revenue
19,244 
14,388 
Total current liabilities
370,531 
430,739 
Long-term taxes payable
21,188 
26,386 
Long-term debt
130,048 
Other long-term liabilities
29,774 
18,570 
Total liabilities
551,541 
475,695 
Commitments, contingencies and guarantees
   
   
Stockholders’ equity:
 
 
Preferred stock, $0.0001 par value, 5,000 shares authorized; none issued
Common stock and additional paid-in capital, $0.0001 par value, 500,000 Class A shares authorized, 101,034 and 104,647 shares issued and outstanding, respectively; 150,000 Class B shares authorized, 35,966 and 36,712 shares issued and outstanding, respectively
854,452 
757,226 
Treasury stock, at cost, 10,710 and 1,545 shares, respectively
(113,613)
(35,613)
Accumulated deficit
(442,134)
(274,668)
Total stockholders’ equity
298,705 
446,945 
Total liabilities and stockholders’ equity
$ 850,246 
$ 922,640 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2017
Sep. 30, 2016
Dec. 31, 2015
Preferred Stock, par value (usd per share)
 
$ 0.0001 
$ 0.0001 
Preferred Stock, Shares Authorized (shares)
 
5,000,000 
5,000,000 
Preferred Stock, Shares Issued (shares)
 
Common stock, par value (in dollars per share)
 
$ 0.0001 
$ 0.0001 
Treasury Stock, Shares (shares)
 
10,710,000 
1,545,000 
Common Class A [Member]
 
 
 
Common Stock, Shares Authorized (shares)
500,000,000 
500,000,000 
500,000,000 
Common Stock, Shares, Issued (shares)
101,034,000 
 
104,647,000 
Common stock, shares, outstanding (shares)
101,000,000 
101,034,000 
104,647,000 
Common Class B [Member]
 
 
 
Common Stock, Shares Authorized (shares)
150,000,000 
150,000,000 
150,000,000 
Common Stock, Shares, Issued (shares)
35,966,000 
 
36,712,000 
Common stock, shares, outstanding (shares)
36,000,000 
35,966,000 
36,712,000 
Condensed Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Income Statement [Abstract]
 
 
 
Revenue
$ 1,179,741 
$ 1,185,481 
$ 1,619,971 
Cost of revenue
795,211 
723,561 
946,757 
Gross profit
384,530 
461,920 
673,214 
Operating expenses:
 
 
 
Research and development
229,265 
358,902 
241,694 
Sales and marketing
236,581 
368,620 
268,939 
General and administrative
82,144 
107,367 
107,833 
Total operating expenses
547,990 
834,889 
618,466 
Operating income (loss)
(163,460)
(372,969)
54,748 
Interest expense
(13,660)
(2,992)
(1,575)
Other income (expense), net
733 
787 
(588)
Total other expense, net
(12,927)
(2,205)
(2,163)
Income (loss) before income taxes
(176,387)
(375,174)
52,585 
Income tax expense
6,486 
43,829 
16,454 
Net Income (loss)
$ (182,873)
$ (419,003)
$ 36,131 
Net income per share attributable to common stockholders - Basic (in dollars per share)
$ (1.32)
$ (3.01)
$ 0.27 
Net income per share attributable to common stockholders - Diluted (in dollars per share)
$ (1.32)
$ (3.01)
$ 0.25 
Weighted-average shares used to compute net income per share attributable to common stockholders - Basic (in shares)
138,056 
139,425 
134,595 
Weighted-average shares used to compute net income per share attributable to common stockholders - Diluted (in shares)
138,056 
139,425 
146,486 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Statement of Cash Flows [Abstract]
 
 
 
Net income (loss)
$ (182,873)
$ (419,003)
$ 36,131 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
41,478 
41,640 
28,981 
Stock-based compensation
51,255 
69,527 
80,680 
Excess tax benefit from stock-based compensation (1)
(3,463)
(29,348)
Deferred income taxes
(2,527)
38,568 
(11,468)
Non-cash restructuring charges
7,315 
17,601 
 
Non-cash interest expense
5,345 
Asset Impairment Charges
7,088 
Other
4,094 
7,574 
5,427 
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
52,278 
(18,816)
38,313 
Inventory
16,641 
21,040 
(35,005)
Prepaid expenses and other assets
9,303 
(14,618)
(23,281)
Accounts payable and other liabilities
(44,411)
142,941 
68,461 
Deferred revenue
5,249 
2,168 
(1,280)
Net cash provided by (used in) operating activities
(36,853)
(107,753)
157,611 
Investing activities:
 
 
 
Purchases of property and equipment, net
(24,061)
(43,627)
(51,245)
Purchases of marketable securities
(52,318)
(220,055)
Maturities of marketable securities
21,659 
119,918 
94,680 
Sale of marketable securities
11,623 
47,348 
30,048 
Acquisitions, net of cash acquired
(104,353)
(65,405)
Net cash provided by (used in) investing activities
(43,097)
19,286 
(211,977)
Financing activities:
 
 
 
Proceeds from issuance of common stock
9,751 
9,664 
36,775 
Payments Related to Tax Withholding for Share-based Compensation
(12,118)
(6,889)
(13,942)
Proceeds from issuance of Convertible senior notes
175,000 
 
Payments for Repurchase of Common Stock
(78,000)
(35,613)
Excess tax benefit from stock-based compensation (1)
1
3,463 1
29,348 1
Payment of deferred acquisition-related consideration
(75)
(950)
 
Payment of debt issuance costs
(5,964)
(3,333)
Payments of deferred public offering costs
(903)
Net cash provided by financing activities
88,594 
1,955 
15,665 
Effect of exchange rate changes on cash and cash equivalents
1,746 
(1,046)
(1,556)
Net increase (decrease) in cash and cash equivalents
10,390 
(87,558)
(40,257)
Cash and cash equivalents at beginning of period
192,114 
279,672 
319,929 
Cash and cash equivalents at end of period
202,504 
192,114 
279,672 
Supplemental Cash Flow disclosure:
 
 
 
Cash paid (refunded) for income taxes, net
8,370 
9,690 
(1,093)
Cash paid for interest
3,114 
Noncash Investing and Financing activities:
 
 
 
Purchases of property and equipment included in accounts payable and accrued liabilities
$ 5,785 
$ 2,258 
$ 5,153 
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) Statement (USD $)
In Thousands
Total
Common Stock Including Additional Paid in Capital [Member]
Treasury Stock [Member]
Retained Earnings [Member]
Special Termination Benefits [Member]
Special Termination Benefits [Member]
Common Stock Including Additional Paid in Capital [Member]
Beginning Balance at Dec. 31, 2014
$ 641,204 
$ 533,000 
$ 0 
$ 108,204 
 
 
Beginning Balance (shares) at Dec. 31, 2014
 
129,115 
 
 
 
 
Common stock issued under employee benefit plans, net of shares withheld for tax
36,413 
36,413 
 
 
 
 
Common stock issued under employee benefit plans, net of shares withheld for tax (shares)
 
14,249 
 
 
 
 
Taxes related to net share settlements
(13,943)
(13,943)
 
 
 
 
Retirement of common stock (shares)
 
(5,218)
 
 
 
 
Repurchase of outstanding common stock
(35,613)
 
(35,613)
 
 
 
Repurchase of outstanding common stock (shares)
 
(1,545)
 
 
 
 
Allocated share-based compensation expense
80,583 
80,583 
 
 
 
 
Excess tax benefit from stock-based compensation
27,258 
27,258 
 
 
 
 
Net income (loss)
36,131 
 
 
36,131 
 
 
Ending Balance at Dec. 31, 2015
772,033 
663,311 
(35,613)
144,335 
 
 
Ending Balance (shares) at Dec. 31, 2015
 
136,601 
 
 
 
 
Common stock issued under employee benefit plans, net of shares withheld for tax
10,103 
10,103 
 
 
 
 
Common stock issued under employee benefit plans, net of shares withheld for tax (shares)
 
3,936 
 
 
 
 
Taxes related to net share settlements
(6,889)
(6,889)
 
 
 
 
Shares issued to third-party vendor for services (Note 11)
7,297 
7,297 
 
 
 
 
Shares issued to third-party vendor for services (Note 11) (shares)
 
822 
 
 
 
 
Allocated share-based compensation expense
69,499 
69,499 
 
 
15,566 
15,566 
Excess tax benefit from stock-based compensation
(1,661)
(1,661)
 
 
 
 
Net income (loss)
(419,003)
 
 
(419,003)
 
 
Ending Balance at Dec. 31, 2016
446,945 
757,226 
(35,613)
(274,668)
 
 
Ending Balance (shares) at Dec. 31, 2016
 
141,359 
 
 
 
 
Common stock issued under employee benefit plans, net of shares withheld for tax
9,732 
9,732 
 
 
 
 
Common stock issued under employee benefit plans, net of shares withheld for tax (shares)
 
4,807 
 
 
 
 
Taxes related to net share settlements
(12,118)
(12,118)
 
 
 
 
Allocated share-based compensation expense
54,037 
54,037 
 
 
 
 
Repurchase of common stock under Prepaid Forward contract (Note 5)
(78,001)
(1)
(78,000)
 
 
 
Repurchase of common stock under Prepaid Forward contract (Note 5) (shares)
 
(9,166)
 
 
 
 
Issuance of Convertible Note (Note 5)
45,211 
45,211 
 
 
 
 
Cumulative effect of adoption of new ASU
15,772 
365 
 
15,407 
 
 
Net income (loss)
(182,873)
 
 
(182,873)
 
 
Ending Balance at Dec. 31, 2017
$ 298,705 
$ 854,452 
$ (113,613)
$ (442,134)
 
 
Ending Balance (shares) at Dec. 31, 2017
 
137,000 
 
 
 
 
Summary of business and significant accounting policies
Summary of significant accounting policies
Summary of business and significant accounting policies
GoPro is enabling the way people capture and share their lives from a perspective only achieved with a GoPro. What began as an idea to help athletes document themselves engaged in sport, GoPro has become a mobile storytelling solution that helps the world share itself through immersive content. To date, our cameras and mountable and wearable accessories have generated substantially all of our revenue. We sell our products globally through retailers, wholesale distributors, and on our website. The Company’s global corporate headquarters are located in San Mateo, California.
Basis of presentation. The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The Company’s fiscal year ends on December 31, and its fiscal quarters end on March 31, June 30 and September 30.
Principles of consolidation. These consolidated financial statements include all the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in 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. Significant estimates and assumptions made by management include those related to revenue recognition (including sales returns, implied post contract support, price protection and other sales incentives), stock-based compensation, inventory valuation, product warranty liabilities, the valuation and useful lives of long-lived assets (property and equipment, intangible assets and goodwill) and income taxes. 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. Actual results could differ materially from management’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations could be affected.
Comprehensive income (loss). For all periods presented, comprehensive income (loss) approximated net income (loss). Therefore, the consolidated statements of comprehensive income (loss) have been omitted.
Prior period reclassifications. Reclassifications of certain prior period amounts in the consolidated financial statements have been made to conform to the current period presentation.
Cash equivalents and marketable securities. Cash equivalents primarily consist of investments in money market funds with maturities of three months or less from the date of purchase. Marketable securities consist of commercial paper, U.S. agency securities, and corporate debt securities, and are classified as available-for-sale securities. The Company views these securities as available to support current operations and it has classified all available-for-sale securities as current assets. Available-for-sale securities are carried at fair value with unrealized gains and losses, if any, included in stockholders’ equity. Unrealized losses are charged against other income (expense), net, for declines in fair value below the cost of an individual investment that is deemed to be other than temporary. The Company has not identified any marketable securities as other-than-temporarily impaired for the periods presented. The cost of securities sold is based upon a specific identification method.
Accounts receivable and allowance for doubtful accounts. Accounts receivable are stated at invoice value less estimated allowances for returns and doubtful accounts. Allowances are recorded based on the Company’s assessment of various factors, such as: historical experience, credit quality of its customers, age of the accounts receivable balances, geographic related risks, economic conditions and other factors that may affect a customer’s ability to pay. The allowance for doubtful accounts as of December 31, 2017 and 2016 was $0.8 million and $1.3 million, respectively.
Inventory. Inventory consists of finished goods and component parts, which are purchased directly from suppliers or from contract manufacturers. Inventory is stated at the lower of cost or net realizable value on a first-in, first-out basis. The Company writes down its inventory for estimated obsolescence or excess inventory equal to the difference between the cost of inventory and estimated market value. The Company’s assessment of market value is based upon assumptions around market conditions and estimated future demand for its products within a specified time horizon, generally 12 months. Adjustments to reduce inventory to net realizable value are recognized in cost of revenue.
Point of purchase (POP) displays. The Company provides retailers with POP displays, generally free of charge, in order to facilitate the marketing of the Company’s products within retail stores. The POP displays contain a display that broadcasts video images taken by GoPro cameras with product placement available for cameras and accessories. POP display costs, less any fees charged, are capitalized as long-term assets and charged to sales and marketing expense over the expected period of benefit, which generally ranges from 24 to 36 months. Cash outflows and amortization related to POP displays are classified as operating activities in the consolidated statement of cash flows. Amortization was $19.2 million, $19.6 million and $16.8 million in 2017, 2016 and 2015, 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 eleven years. Leasehold improvements are amortized over the shorter of the lease term or their expected useful life. Property and equipment pending installation, configuration or qualification are classified as construction in progress. Costs of maintenance and repairs that do not improve or extend the lives of the respective assets are expensed as incurred.
Fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the reporting date. The Company estimates and categorizes the fair value of its financial assets by applying the following hierarchy:
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. The fair value of Level 2 financial instruments is obtained from an independent pricing service, which may use quoted market prices for identical or comparable instruments or model driven valuations using observable market data or inputs corroborated by observable market data.
Leases. The Company leases its office space and facilities under cancelable and non-cancelable operating leases. For leases that contain rent escalation or rent concession provisions, the Company recognizes rent expense on a straight-line basis over the term of the lease. The Company does not assume renewals in its determination of the lease term unless the renewals are deemed to be reasonably assured at lease inception. The Company also calculates a liability for costs that will continue to be incurred under a lease for its remaining term without economic benefit to the Company upon determination of a cease-use date. The fair value of the liability is determined based on remaining lease payments, estimated sublease income and the effects of any prepaid or deferred items recognized under the lease.
Goodwill and other intangible assets. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination. Acquired intangible assets other than goodwill are amortized over their useful lives unless the lives are determined to be indefinite. For intangible assets acquired in a business combination, the estimated fair values of the assets received are used to establish their recorded values. Valuation approaches consistent with the market approach, income approach and/or cost approach are used to measure fair value.
Impairment of goodwill and long-lived assets. The Company performs an annual assessment of its goodwill during the fourth quarter of each calendar year or more frequently if indicators of potential impairment exist, such as an adverse change in business climate or a decline in the overall industry demand, that would indicate it is more likely than not that the fair value of its single reporting unit is less than its carrying value. There was no impairment of goodwill recorded for any periods presented. For annual impairment testing in 2017, the Company performed a quantitative analysis and determined the fair value of its single reporting unit exceeded the carrying value. Other indefinite-lived intangible assets are assessed for impairment at least annually. If their carrying value exceeds the estimated fair value, the difference is recorded as an impairment. See Note 4 for information regarding impairment charges recorded for indefinite-lived intangible assets.
Long-lived assets, such as property and equipment and intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount to the estimated future undiscounted cash flows expected to be generated by the asset group. If it is determined that an asset group is not recoverable, an impairment charge is recognized for the amount by which the carrying amount of the asset group exceeds its fair value. There was no material impairment of long-lived assets for any periods presented.
Warranty. The Company records a liability for estimated product warranty costs at the time product revenue is recognized. The Company’s standard warranty obligation to its end-users generally provides a 12-month warranty coverage on all of its products except in the European Union where the Company provides a 2-year warranty. An extended warranty is also available for a fee. The Company’s estimate of costs to service its warranty obligations is based on its historical experience of repair and replacement of the associated products and expectations of future conditions. 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.
Revenue recognition. Revenue is primarily comprised of product revenue, net of returns and sales incentives. The Company derives substantially all of its revenue from the sale of cameras, drones, mounts and accessories and 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. For most of the Company’s revenue, these criteria are met at the time the product is shipped. For customers who purchase products directly from the Company’s website, revenue is deferred until delivery to the customer’s address because the Company retains a portion of the risk of loss on these sales during transit.
The Company's standard terms and conditions of sale for non-web based sales do not allow for 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 returns. Return trends are influenced by product life cycles, new product introductions, market acceptance of products, product sell-through, the type of customer, seasonality and other factors. Return rates may fluctuate over time, but are sufficiently predictable to allow the Company to estimate expected future product returns.
The Company’s camera sales are multiple element arrangements that generally include the following three separate units of accounting: a) a hardware component (camera, drone and/or accessories) and the embedded firmware essential to the functionality of the hardware component delivered at the time of sale, b) the implicit right to the Company's downloadable free apps and software solutions (GoPro and Quik apps), and c) the implied right for the customer to receive PCS. PCS includes the right to receive, on a when and if available basis, future unspecified firmware upgrades and features as well as bug fixes, and email and telephone support. The Company accounts for each element separately and allocates revenue based on its best estimate of the selling price (BESP). The Company’s process for determining BESP considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each deliverable, including: the level of support provided to customers, estimated costs to provide the Company’s support, the amount of time and cost that is allocated to the Company’s efforts to develop the undelivered elements, and market trends in the pricing for similar offerings.
Revenue allocated to the delivered hardware, related essential software and free 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 15 months based on historical experience. Deferred revenue also includes amounts related to the Company’s GoPro Care and GoPro Plus fee-based service offerings.
Sales incentives. The Company offers sales incentives through various programs, including cooperative advertising, marketing development funds and other incentives. Sales incentives are recorded as a reduction to revenue in the period the incentives are offered to the Company’s customers or the related revenue is recognized, whichever is later. In addition, the Company offers price protection discounts to certain customers, which are recorded as a reduction of revenue at the date of sale.
Shipping costs. Amounts billed to customers for shipping and handling are classified as revenue and the Company’s related shipping and handling costs incurred are classified as cost of revenue.
Sales taxes. Sales taxes collected from customers and remitted to respective governmental authorities are recorded as liabilities and are not included in revenue.
Advertising costs. Advertising costs consist of costs associated with print, television and e-commerce media advertisements and are expensed as incurred. The Company incurs promotional expenses resulting from payments under event, resort and athlete sponsorship contracts. These sponsorship arrangements are considered to be executory contracts and, as such, the costs are expensed 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 expensed as incurred. Prepayments made under sponsorship agreements are included in prepaid expenses or other long-term assets depending on the period to which the prepayment applies. Advertising costs were $61.3 million, $106.0 million and $64.7 million in 2017, 2016 and 2015, respectively.
Stock-based compensation. The Company accounts for stock-based compensation in accordance with accounting guidance that requires all stock-based awards granted to employees and directors to be measured at fair value and recognized as an expense. The Company primarily issues restricted stock units and accounts for forfeitures as they occur. For service-based awards, stock-based compensation is recognized on a straight-line basis over the requisite service period. For performance and market-based awards which also require a service period, the Company uses graded vesting over the longer of the derived service period or when the performance or market condition is satisfied.
Foreign currency. The U.S. dollar is the functional currency of the Company’s foreign subsidiaries. The Company remeasures monetary assets or liabilities denominated in currencies other than the U.S. dollar using exchange rates prevailing on the balance sheet date, and non-monetary assets and liabilities at historical rates. Foreign currency remeasurement and transaction gains and losses are included in other income (expense), net and have not been material for any periods presented.
Income taxes. The Company utilizes the asset and liability method for computing its income tax provision, under which deferred tax assets and liabilities are recognized for the expected future consequences of temporary differences between the financial reporting and 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, deferred tax assets and liabilities, and any valuation losses recorded against 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 recovery is not likely, establishes a valuation allowance.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. Interest and penalties related to unrecognized tax benefits are recognized within income tax expense.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (TCJA). Further information on the tax impacts of the TCJA is included in Note 9 of the Company’s consolidated financial statements.
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.
Recent accounting standards
Standard
 
Description
 
Date of adoption
 
Effect on the financial statements or other significant matters
Standards that were adopted
 
 
 
 
Stock Compensation 
Accounting Standards Update (ASU) No. 2016-09 (Topic 718)
 
This standard simplifies certain aspects of the accounting for share-based payment transactions, including income taxes, classification of awards and classification on the statement of cash flows. The new guidance also allows an entity to make a policy election to account for forfeitures as they occur.
 
January 1, 2017
 
Adoption of the standard resulted in the recognition of previously unrecognized excess tax benefits using the modified retrospective method. The Company recorded an increase to U.S. deferred tax assets of $179 million which was recorded directly against the accumulated deficit. The increased deferred tax asset allowed for an offset against long-term income tax payable of $16 million. A full valuation allowance was provided on the remaining U.S. deferred tax asset of $163 million, which was also recorded against the accumulated deficit. The net impact to equity was a decrease in the accumulated deficit of approximately $16 million. The Company elected to apply the change in presentation to the statements of cash flows prospectively and elected to account for forfeitures as they occur.
Standards not yet adopted
 
 
 
 
Revenue from Contracts with Customers
ASU No. 2014-09, 2015-14, 2016-08, 2016-10 and 2016-12 (Topic 606)
 
The updated revenue standard establishes principles for recognizing revenue and develops a common revenue standard for all industries. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard requires that entities disclose the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Early adoption is permitted, but not earlier than the first quarter of 2017. The retrospective or cumulative effect transition method is permitted.
 
January 1, 2018
 
The Company completed an analysis of the impact of the standard on its sales contract portfolio by reviewing its current accounting policies and practices to identify differences that would result from applying the requirements of the new standard to its sales contracts. The Company’s analysis of its contracts under the new standard supports the recognition of its product revenue at the time product is shipped, consistent with its current revenue policy.

As a result of the adoption of the new guidance, certain sales incentives will need to be estimated as variable consideration at the time product is shipped and included as a reduction to the transaction price. This will result in a reduction of revenue being recorded earlier than under the existing guidance. Additionally, for customers who purchase products directly from the Company's website, the new standard provides for a policy election whereby the Company will record revenue when the related product is shipped. This will result in recognition of revenue earlier than under existing guidance, under which the Company recognizes revenue upon delivery to the customer.

The Company expects the net impact of ASU 2014-09 to be less than $5 million as a reduction to retained earnings. The Company will adopt the standard on a modified retrospective basis.
Leases
ASU No. 2016-02(Topic 842)
 
This standard requires lessees to put most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. Lessees would recognize a right-to-use asset and lease liability for all leases with terms of more than 12 months. The new standard should be applied on a modified retrospective basis.
 
January 1, 2019
 
Although the Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements and related disclosures, the Company currently expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon adoption.

Income Taxes
ASU No. 2016-16 (Topic 740)
 
This standard requires entities to recognize the income tax consequences of intra-entity asset transfers when they occur. This removes the exception to postpone recognition until the asset has been sold to an outside party. The updated standard is effective in annual and interim periods in fiscal years beginning after December 15, 2017, with early adoption permitted during the first interim period of a fiscal year.

 
January 1, 2018
 
The Company intends to apply the modified retrospective approach upon adoption. The Company expects that the adoption of ASU 2016-16 on January 1, 2018 will result in a $15 million cumulative-effect increase in accumulated deficit on its consolidated financial statements and related disclosures.


Intangible - Goodwill and Other
ASU No. 2017-04 (Topic 350)

 
This standard simplifies the accounting for goodwill and removes Step 2 of the annual goodwill impairment test. Upon adoption, goodwill impairment will be determined based on the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017, and requires a prospective transition method.
 
January 1, 2020
 
The Company does not expect that the adoption of this standard will have a material impact on its consolidated financial statements and related disclosures.
Stock Compensation 
ASU No. 2017-09 (Topic 718)

 
This standard clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under this standard, modification is required only if the fair value, the vesting conditions, or the classification of an award as equity or liability changes as a result of the change in terms or conditions. The updated standard is effective in annual and interim periods in fiscal years beginning after December 15, 2017, with early adoption permitted.

 
January 1, 2018
 
The Company does not expect that the adoption of ASU 2017-09 will have a material impact to its consolidated financial statements and related disclosures. The Company will adopt the amendment on a prospective basis.

Although there are several other new accounting standards issued or proposed by the FASB, which the Company has adopted or will adopt, as applicable, the Company does not believe any of these additional accounting pronouncements has had or will have a material impact on its financial statements.
Business Acquisitions
Business acquisitions
Business Acquisitions
In 2016, the Company completed acquisitions of two privately-held mobile editing application companies for total cash consideration of approximately $104 million. The aggregate allocation of the purchase prices primarily included $17.4 million of identifiable intangible assets, $3.4 million of net deferred tax liabilities and approximately $89 million of residual goodwill. Net tangible assets acquired were not material. In addition to the amounts above, aggregate deferred cash and stock compensation of up to approximately $35 million is payable to certain continuing employees subject to meeting specified future employment conditions. This amount is being recognized as compensation expense over the requisite service periods of up to four years from the respective acquisition dates, including approximately $22 million recognized in 2016.
In 2015, the Company completed several acquisitions qualifying as business combinations for aggregate consideration of $70.2 million, the substantial majority of which was cash consideration. The aggregated allocation of the purchased prices primarily included $32.3 million of identifiable intangible assets, $4.7 million of net deferred tax liabilities and approximately $43.0 million of residual goodwill. Net liabilities assumed were not material.
Goodwill is primarily attributable to expected synergies in the technologies that can be leveraged by the Company in future product offerings related to device and software related offerings. Goodwill is not expected to be deductible for U.S. income tax purposes. The operating results of the acquired companies have been included in the Company's consolidated financial statements for 2016 and 2015 from the date of acquisition.
Actual and pro forma results of operations for these acquisitions have not been presented because they did not have a material impact to the Company's consolidated results of operations, either individually or in aggregate.
Fair value measurements
Fair Value measurements
Fair value measurements
The Company’s assets that are measured at fair value on a recurring basis within the fair value hierarchy are summarized as follows:
 
December 31, 2017
 
December 31, 2016
(in thousands)
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
 
Total
Cash equivalents (1):
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
25,251

 
$

 
$
25,251

 
$
18,024

 
$

 
$
18,024

Commercial paper
14,981

 

 
14,981

 

 

 

Corporate debt securities

 
2,500

 
2,500

 

 

 

 Agency securities
 
 
4,999

 
4,999

 

 

 

Total cash equivalents
$
40,232

 
$
7,499

 
$
47,731

 
$
18,024

 
$

 
$
18,024

Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury securities
$

 
$
4,995

 
$
4,995

 
$

 
$
8,283

 
$
8,283

Commercial paper
19,888

 

 
19,888

 

 

 

Corporate debt securities

 
20,003

 
20,003

 

 
15,226

 
15,226

Municipal securities

 

 

 

 
2,330

 
2,330

Total marketable securities
$
19,888

 
$
24,998

 
$
44,886

 
$

 
$
25,839

 
$
25,839

(1) Included in cash and cash equivalents in the accompanying consolidated balance sheets. Cash balances were $154.8 million and $174.1 million as of December 31, 2107 and 2016, respectively.
There were no transfers of financial assets between levels for the periods presented.
Cash equivalents and marketable securities are classified as Level 1 or Level 2 because the Company uses quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value. The contractual maturities of available-for-sale marketable securities as of December 31, 2017 and 2016 were all less than one year in duration. At December 31, 2017 and 2016, the Company had no financial assets or liabilities that were classified as Level 3, which are valued based on inputs supported by little or no market activity.
At December 31, 2017 and 2016, the amortized cost of the Company’s cash equivalents and marketable securities approximated their fair value and there were no material realized or unrealized gains or losses, either individually or in the aggregate.
The Company’s liabilities that are disclosed but not measured at fair value include the Convertible Senior Notes (see Note 5, Financing Arrangements). The fair value measurement is classified as Level 2 within the fair value hierarchy since it is based on quoted market prices of the Company’s instruments in markets that are not active. The Company estimated the fair value of the Notes by evaluating quoted market prices and calculating the upfront cash payment a market participant would require to assume these obligations. The upfront cash payment used in the calculations of fair value on December 31, 2017, excluding any issuance costs, is the amount that a market participant would be willing to lend at December 31, 2017 to an entity with a credit rating similar to the Company and achieve sufficient cash inflows to cover the scheduled cash outflows. The calculated fair value of the Notes, of $172.2 million, is highly correlated to the Company’s stock price and as a result, significant changes to stock price will have a significant impact on the calculated fair value of the Notes.
For certain other financial assets and liabilities, including accounts receivable, accounts payable and other current liabilities, the carrying amounts approximate their fair value due to the relatively short maturity of these balances.
Condensed consolidated financial statement details Condensed consolidated financial statement details
Consolidated financial statement details
onsolidated financial statement details
The following sections and tables provide details of selected balance sheet items.
Inventory
(in thousands)
December 31, 2017
 
December 31, 2016
Components
$
18,995

 
$
25,236

Finished goods
131,556

 
141,956

Total inventory
$
150,551

 
$
167,192


Property and equipment, net
(in thousands)
Useful life
(in years)
 
December 31, 2017
 
December 31, 2016
Leasehold improvements
1–11
 
$
67,713

 
$
48,103

Production, engineering and other equipment
4
 
47,502

 
46,328

Tooling
1–2
 
24,871

 
23,742

Computers and software
2
 
20,636

 
18,750

Furniture and office equipment
3
 
14,895

 
12,530

Tradeshow equipment and other
2–5
 
7,237

 
7,578

Construction in progress
 
 
347

 
1,870

Gross property and equipment
 
 
183,201

 
158,901

Less: Accumulated depreciation and amortization
 
 
(114,614
)
 
(82,392
)
Property and equipment, net
 
 
$
68,587

 
$
76,509


Depreciation expense was $32.4 million in 2017 and 2016, and $24.8 million in 2015. In 2017 and 2016, the Company recorded accelerated depreciation charges in connection with its plans to vacate certain leased office facilities as disclosed in Note 11.
Intangible assets
 
Useful life
(in months)
 
December 31, 2017
(in thousands)
 
 
Gross carrying value
 
Accumulated
amortization
 
Net carrying value
Purchased technology
24–72
 
$
49,901

 
$
(26,017
)
 
$
23,884

In-process research and development (IPR&D)
 
 
615

 

 
615

Total intangible assets
 
 
$
50,516

 
$
(26,017
)
 
$
24,499


 
Useful life
(in months)
 
December 31, 2016
(in thousands)
 
 
Gross carrying value
 
Accumulated
amortization
 
Net carrying value
Purchased technology
24–72
 
$
47,001

 
$
(17,086
)
 
$
29,915

IPR&D
 
 
3,615

 

 
3,615

Total intangible assets
 
 
$
50,616

 
$
(17,086
)
 
$
33,530


In 2017, the Company did not record any impairment charges for IPR&D assets. In 2016, the Company recorded impairment charges of $6.3 million to research and development expense for abandoned IPR&D assets. As of December 31, 2017, technological feasibility has not been established for the remaining IPR&D assets, which have no alternative future use and, as such, continue to be accounted for as indefinite-lived intangible assets.
Amortization expense was $9.0 million, $9.1 million and $4.2 million in 2017, 2016 and 2015, respectively. At December 31, 2017, expected amortization expense of intangible assets with definite lives for future periods is as follows:
(in thousands)
Total
Year ending December 31,
 
2018
$
9,263

2019
8,753

2020
4,998

2021
870

2022

 
$
23,884


Other long-term assets
(in thousands)
December 31, 2017
 
December 31, 2016
POP displays
$
16,451

 
$
27,592

Long-term deferred tax assets
825

 
106

Income tax receivable

 
33,425

Deposits and other
19,738

 
17,206

Other long-term assets
$
37,014

 
$
78,329



Accrued liabilities
(in thousands)
December 31, 2017
 
December 31, 2016
Accrued payables (1)
$
44,582

 
$
91,655

Employee related liabilities (1)
24,945

 
42,577

Accrued sales incentives
89,549

 
40,070

Warranty liability
9,934

 
11,456

Customer deposits
8,700

 
4,381

Income taxes payable
1,247

 
2,756

Purchase order commitments
6,162

 
4,730

Inventory received
14,470

 
3,950

Other
13,441

 
9,748

Accrued liabilities
$
213,030

 
$
211,323


(1) 
See Note 13 for amounts associated with restructuring liabilities.
Product warranty
The following table summarizes the warranty liability activity:
 
Year ended December 31,
(in thousands)
2017
 
2016
 
2015
Beginning balances
$
11,945

 
$
10,856

 
$
6,405

Charged to cost of revenue
20,139

 
19,272

 
25,377

Settlements of warranty claims
(21,711
)
 
(18,183
)
 
(20,926
)
Ending balances
$
10,373

 
$
11,945

 
$
10,856


At December 31, 2017, $9.9 million of the warranty liability was recorded as an element of accrued liabilities and $0.4 million was recorded as an element of other long-term liabilities.
Financing Arrangements
Financing Arrangements
Financing Arrangements
Credit Facility
In March 2016, the Company entered into a Credit Agreement (Credit Agreement) with certain banks which provides for a secured revolving credit facility (Credit Facility) under which the Company may borrow up to an aggregate of $250.0 million. The Company and its lenders may increase the total commitments under the Credit Facility to up to $300.0 million, subject to certain conditions. The Credit Facility will terminate and all outstanding borrowings become due and payable in March 2021.
The amount that may be borrowed under the Credit Facility is determined at periodic intervals and is based upon the Company’s inventory and accounts receivable balances. Borrowed funds accrue interest, at the Company’s election, based on an annual rate of (a) London Interbank Offered Rate (LIBOR) or (b) the administrative agent’s base rate, plus an applicable margin of between 1.50% and 2.00% for LIBOR rate loans, and between 0.50% and 1.00% for base rate loans. The Company is required to pay a commitment fee on the unused portion of the Credit Facility of 0.25% or 0.375% per annum, based on the level of utilization of the Credit Facility. Amounts owed under the Credit Agreement and related credit documents are guaranteed by the Company and its material subsidiaries. The Company and its Cayman and Netherlands subsidiaries have also granted security interests in substantially all of their assets to collateralize this obligation.
The Credit Agreement contains customary covenants, such as financial statement reporting requirements and limiting the ability of the Company and its subsidiaries to pay dividends or incur debt, create liens and encumbrances, make investments, and redeem or repurchase stock. The Company is required to maintain a minimum fixed charge coverage ratio if and when the unborrowed availability under the Credit Facility is less than the greater of $25.0 million or 10.0% of the borrowing base at such time. The Credit Agreement also contains customary events of default, such as the failure to pay obligations when due, initiation of bankruptcy or insolvency proceedings, or defaults on certain other indebtedness. Upon an event of default, the lenders may, subject to customary cure rights, require the immediate payment of all amounts outstanding and foreclose on collateral.
At December 31, 2017 and 2016, the Company could borrow up to approximately $118.0 million and $150.0 million, respectively, under the Credit Facility, and was in compliance with all financial covenants contained in the Credit Agreement. The Company has made no borrowings from the Credit Facility to date.
Convertible Notes
In April 2017, the Company issued $175.0 million aggregate principal amount of 3.50% Convertible Senior Notes due 2022 (Notes). The Notes are senior, unsecured obligations of GoPro and mature on April 15, 2022 (Maturity Date), unless earlier repurchased or converted into shares of Class A common stock under certain circumstances described below. The Notes are convertible into cash, shares of the Company’s Class A common stock, or a combination thereof, at the Company’s election, at an initial conversion rate of 94.0071 shares of Class A common stock per $1,000 principal amount of the Notes, which is equivalent to an initial conversion price of approximately $10.64 per share of common stock, subject to adjustment. The Company currently has the intent and ability to deliver cash up to the principal amount of the Notes then outstanding upon conversion. The Company will pay interest on the Notes semi-annually in arrears on April 15 and October 15 of each year.
The $175.0 million of proceeds received from the issuance of the Notes were allocated between long-term debt (the liability component) of $128.3 million and additional paid-in-capital (the equity component) of $46.7 million on the consolidated balance sheet. The fair value of the liability component was measured using rates determined for similar debt instruments without a conversion feature. The carrying amount of the equity component, representing the conversion option, was determined by deducting the fair value of the liability component from the aggregate face value of the Notes. The liability component will be accreted up to the face value of the Notes of $175.0 million, which will result in additional non-cash interest expense being recognized in the consolidated statements of operations through the Notes’ Maturity Date. The effective interest rate on the Notes, including accretion of the notes to par and debt issuance cost amortization, was approximately 10.5%. The equity component will not be remeasured as long as it continues to meet the conditions for equity classification.
The Company incurred approximately $5.7 million of issuance costs related to the issuance of the Notes, of which $4.2 million and $1.5 million were recorded to long-term debt and additional paid-in capital, respectively. The $4.2 million of issuance costs recorded as long-term debt on the consolidated balance sheet are being amortized over the five-year contractual term of the Notes using the effective interest method.
The Company may not redeem the Notes prior to the Maturity Date and no sinking fund is provided for the Notes. The Indenture includes customary terms and covenants, including certain events of default after which the Notes may be due and payable immediately.
Holders have the option to convert the Notes in multiples of $1,000 principal amount at any time prior to January 15, 2022, but only in the following circumstances:
during any calendar quarter beginning after the calendar quarter ending on September 30, 2017, if the last reported sale price of Class A common stock for at least 20 trading days (whether or not consecutive) during the last 30 consecutive trading days of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price of the Notes on each applicable trading day;
during the five-business day period following any five consecutive trading day period in which the trading price for the Notes is less than 98% of the product of the last reported sale price of Class A common stock and the conversion rate for the Notes on each such trading day; or
upon the occurrence of specified corporate events.
At any time on or after January 15, 2022 until the second scheduled trading day immediately preceding the Maturity Date of the Notes on April 22, 2022, a holder may convert its Notes, in multiples of $1,000 principal amount. Holders of the Notes who convert their Notes in connection with a make-whole fundamental change (as defined in the Indenture) are, under certain circumstances, entitled to an increase in the conversion rate. In addition, in the event of a fundamental change prior to the Maturity Date, holders will, subject to certain conditions, have the right, at their option, to require the Company to repurchase for cash all or part of the Notes at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest up to, but excluding, the repurchase date.
As of December 31, 2017, the outstanding principal on the Notes was $175.0 million, the unamortized debt discount was $41.4 million, the unamortized debt issuance cost was $3.6 million and the net carrying amount of the liability component was $130.0 million, which was recorded as long-term debt within the consolidated balance sheet. For the year ended December 31, 2017, the Company recorded interest expense of $4.4 million for contractual coupon interest, $0.6 million for amortization of debt issuance costs, and $5.3 million for amortization of the debt discount.
In connection with the offering, the Company entered into a prepaid forward stock repurchase transaction (Prepaid Forward) with a financial institution (Forward Counterparty). Pursuant to the Prepaid Forward, the Company used approximately $78.0 million of the net proceeds from the offering of the Notes to fund the Prepaid Forward. The aggregate number of shares of the Company’s Class A common stock underlying the Prepaid Forward was approximately 9.2 million. The expiration date for the Prepaid Forward is April 15, 2022, although it may be settled earlier in whole or in part. Upon settlement of the Prepaid Forward, at expiration or upon any early settlement, the Forward Counterparty will deliver to the Company the number of shares of Class A common stock underlying the Prepaid Forward or the portion thereof being settled early. The shares purchased under the Prepaid Forward are treated as treasury stock on the consolidated balance sheet (and not outstanding for purposes of the calculation of basic and diluted earnings per share), but will remain outstanding for corporate law purposes, including for purposes of any future stockholders’ votes, until the Forward Counterparty delivers the shares underlying the Prepaid Forward to the Company. The Company’s Prepaid Forward hedge transaction exposes the Company to credit risk to the extent that its counterparty may be unable to meet the terms of the transaction. The Company mitigates this risk by limiting its counterparty to a major financial institution.
Stockholders' equity
Stockholders' Equity
Stockholders’ equity
Common stock. The Company has two classes of authorized common stock: Class A common stock with 500 million shares authorized and Class B common stock with 150 million shares authorized. As of December 31, 2017, 101.0 million shares of Class A stock were issued and outstanding and 36.0 million shares of Class B stock were issued and outstanding. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting power and conversion rights. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to ten votes per share. Each share of Class B common stock is convertible at any time at the option of the stockholder into one share of Class A common stock and has no expiration date. The Class B common stock is also convertible into Class A common stock on the same basis upon any transfer, whether or not for value, except for “permitted transfers” as defined in the Company’s restated certificate of incorporation. Each share of Class B common stock will convert automatically into one share of Class A common stock upon the date when the outstanding shares of Class B common stock represent less than 10% of the aggregate number of shares of common stock then outstanding. As of December 31, 2017, the Class B stock continued to represent greater than 10% of the overall outstanding shares.
The Company had the following shares of common stock reserved for issuance upon the exercise of equity instruments as of December 31, 2017:
(in thousands)
December 31, 2017
Stock options outstanding
9,809

Restricted stock units outstanding
9,483

Common stock available for future grants
23,071

Total common stock shares reserved for issuance
42,363


Stock repurchase program. The stock repurchase program authorized by the Company’s board of directors in September 2015 to repurchase up to $300 million of the Company’s Class A common stock expired on September 30, 2016 and has not been renewed. The repurchase program did not obligate the Company to acquire any specific number of shares. Under the program, the Company repurchased approximately 1.5 million shares of its common stock at an average price of $23.05 per share, for an aggregate purchase price of approximately $35.6 million. The Company holds the repurchased shares as treasury stock.
CEO stock contributions. In the first half of 2015, the CEO contributed an aggregate 5.2 million common stock to the Company without consideration per the terms of a Contribution Agreement dated December 28, 2011, and amended on May 11, 2015.  Under the original Contribution Agreement, the CEO agreed to contribute back to the Company from time-to-time the same number of shares of common stock as are issued to a certain Company employee upon the exercise of certain stock options held by such employee.  Pursuant to this agreement, the CEO contributed back to the Company 0.5 million shares of Class B common stock from January 2015 through April 2015.  In May 2015, the CEO contributed back to the Company 4.7 million shares of Class B common stock pursuant to the amended agreement, representing all of the then remaining shares subject to the contribution obligations. All of the shares contributed by the CEO were retired during the year.
Employee benefit plans
Employee benefit plans
Employee benefit plans
Equity incentive plans. The Company has outstanding equity grants from its three stock-based employee compensation plans: the 2014 Equity Incentive Plan (2014 Plan), the 2010 Equity Incentive Plan (2010 Plan) and the 2014 Employee Stock Purchase Plan (ESPP). No new options or awards have been granted under the 2010 Plan since June 2014. Outstanding options and awards under the 2010 Plan continue to be subject to the terms and conditions of the 2010 Plan.

The 2014 Plan serves as the successor to the 2010 Plan and provides for the granting of incentive and nonqualified stock options, restricted stock awards (RSAs), restricted stock units (RSUs), stock appreciation rights, stock bonus awards and performance awards to qualified employees, non-employee directors and consultants. Options granted under the 2014 Plan generally expire within 10 years from the date of grant and generally vest over one to four years. RSUs granted under the 2014 Plan generally vest over two to four-years based upon continued service and are settled at vesting in shares of the Company’s Class A common stock.

The ESPP allows eligible employees to purchase shares of the Company’s Class A common stock through payroll deductions at a price equal to 85% of the lesser of the fair market value of the stock as of the first date or the ending date of each six month offering period. The 2014 Plan and the ESPP also provides for automatic annual increases in the number of shares reserved for future issuance.
Employee retirement plan.  The Company has a defined contribution retirement plan covering U.S. and other international full-time employees that provides for voluntary employee contributions from 1% to 100% of annual compensation, subject to a maximum limit allowed by Internal Revenue Service guidelines. The Company matches 100% of each employee’s contributions up to a maximum of 4% of the employee’s eligible compensation. The Company’s matching contributions to the plan were $5.5 million, $7.2 million and $5.5 million in 2017, 2016 and 2015, respectively.
Stock options
A summary of the Company’s stock option activity is as follows:
 
Options outstanding
 
Shares
(in thousands)
 
Weighted- average
exercise price
 
Weighted-average remaining contractual term (in years)
 
Aggregate intrinsic value
(in thousands)
Outstanding at December 31, 2016
12,379

 
$
12.17

 
5.97
 
$
32,772

Granted
1,848

 
9.28

 
 
 
 
Exercised
(1,329
)
 
1.70

 
 
 
 
Forfeited/Cancelled
(3,089
)
 
18.15

 
 
 
 
Outstanding at December 31, 2017
9,809

 
$
11.16

 
6.00
 
$
19,971

 
 
 
 
 
 
 
 
Vested and expected to vest at December 31, 2017
9,786

 
$
11.15

 
6.00
 
$
19,971

Exercisable at December 31, 2017
8,154

 
$
10.99

 
5.45
 
$
19,971


The weighted average grant date fair value of all options granted and assumed were $4.06, $4.84 and $18.40 per share in 2017, 2016 and 2015, respectively. The total fair value of all options vested was $19.5 million, $27.2 million and $26.9 million in 2017, 2016 and 2015, respectively. The aggregate intrinsic value of the stock options outstanding as of December 31, 2017 represents the value of the Company’s closing stock price on the last trading day of the year in excess of the exercise price multiplied by the number of options outstanding.
Restricted stock units
A summary of the Company’s RSU activity is as follows:
 
Shares
(in thousands)
 
Weighted- average grant date fair value
Non-vested shares at December 31, 2016
7,970

 
$
18.08

Granted
8,740

 
9.40

Vested
(3,862
)
 
14.95

Forfeited
(3,365
)
 
16.62

Non-vested shares at December 31, 2017
9,483

 
$
11.87


The weighted average grant date fair value of all RSUs granted were $9.40, $12.10 and $44.00 per share in 2017, 2016 and 2015, respectively. The total fair value of all RSUs vested was $57.7 million, $49.5 million and $34.4 million in 2017, 2016 and 2015, respectively.
In June 2014, the Company granted an award of 4.5 million RSUs covering shares of the Company’s Class B common stock to the Company’s CEO (CEO RSUs), which included 1.5 million RSUs that vested immediately upon grant and 3.0 million RSUs that were subject to both a market-based vesting condition and a three-year service-based vesting condition. The market-based condition was achieved in January 2015. Stock-based compensation expense related to the CEO RSUs was $0.6 million, $6.4 million and $29.4 million for 2017, 2016 and 2015, respectively.
Employee stock purchase plan. In 2017, 2016 and 2015, the Company issued 934,359, 668,107 and 436,924 shares under its ESPP at weighted average prices of $8.02, $9.15 and $26.88, respectively.
Fair value disclosures. The fair value of stock options granted and purchases under the Company’s ESPP is estimated using the Black-Scholes option pricing model. Expected term of stock options granted was estimated based on the simplified method. Expected stock price volatility was estimated by taking the average of our historic volatility and the historical volatility for industry peers based on daily price observations over a period equivalent to the expected term. Risk-free interest rate was based on the yields of U.S. Treasury securities with maturities similar to the expected term. Dividend yield was zero as the Company does not have any history of, nor plans to make, dividend payments.
The fair value of stock options granted was estimated as of the grant date using the following assumptions:
 
Year ended December 31,
 
2017
 
2016
 
2015
Volatility
   44%–49%
 
   44%–45%
 
   43%–54%
Expected term (years)
5.3–5.8
 
5.2–6.1
 
5.5–7.0
Risk-free interest rate
1.8%–2.1%
 
1.2%–2.0%
 
1.6%–2.0%
Dividend yield
—%
 
—%
 
—%

The fair value of stock purchase rights granted under the ESPP was estimated using the following assumptions:
 
Year ended December 31,
 
2017
 
2016
 
2015
Volatility
   33%–36%
 
   43%–54%
 
   39%–45%
Expected term (years)
0.5
 
0.5
 
0.5
Risk-free interest rate
   0.7%–1.2%
 
   0.4%–0.5%
 
   0.1%–0.2%
Dividend yield
—%
 
—%
 
—%

Stock-based compensation expense. The following table summarizes stock-based compensation included in the consolidated statements of operations:
 
Year ended December 31,
(in thousands)
2017
 
2016
 
2015
Cost of revenue
$
1,935

 
$
1,616

 
$
1,492

Research and development
24,963

 
31,365

 
18,024

Sales and marketing
10,498

 
13,883

 
13,762

General and administrative
13,859

 
22,663

 
47,402

Total stock-based compensation expense
$
51,255

 
$
69,527

 
$
80,680

The income tax benefit related to stock-based compensation expense was zero for 2017 and 2016, and $28.0 million for 2015. There is no tax benefit due to a full valuation allowance for 2017 and 2016 on the Company’s U.S. net deferred tax assets (see Note 9 below).
At December 31, 2017, total unearned stock-based compensation of $97.3 million related to stock options, RSUs and ESPP shares is expected to be recognized over a weighted average period of 2.0 years.
Net loss per share
Net loss per share
Net income (loss) per share
On April 12, 2017, the Company issued $175.0 million of 3.50% Convertible Senior Notes. The Notes mature on April 15, 2022, unless earlier repurchased or converted into shares of Class A common stock under certain circumstances as described further in Note 5, Financing Arrangements, above. The Notes are convertible into cash, shares of the Company’s Class A common stock, or a combination thereof, at the Company’s election. As the Company currently has the intent and ability to deliver cash up to the principal amount of the Notes subject to conversion, no shares associated with the Note conversion were included in the Company’s weighted-average number of common shares outstanding for any periods presented. While the Company has the intent and ability to settle any conversion in cash, the maximum number of shares issuable upon conversion of the Notes is 20.6 million shares of Class A common stock. Additionally, the calculation of weighted-average shares outstanding as of December 31, 2017 excludes approximately 6.6 million shares effectively repurchased and held in treasury stock on the consolidated balance sheet as a result of the Prepaid Forward transactions entered into in connection with the Note offering.
The rights of the holders of Class A common stock 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. 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. Class A common stock is not convertible into Class B common stock. The computation of the diluted net income (loss) per share of Class A common stock assumes the conversion of Class B common stock.
The following table presents the calculations of basic and diluted net income (loss) per share:
 
Year ended December 31,
(in thousands, except per share data)
2017
 
2016
 
2015
Numerator:
 
 
 
 
 
Net income (loss)
$
(182,873
)
 
$
(419,003
)
 
$
36,131

 
 
 
 
 
 
Denominator:
 
 
 
 
 
Weighted-average common shares—basic for Class A and Class B common stock
138,056

 
139,425

 
134,595

Effect of dilutive stock-based awards

 

 
11,891

Weighted-average common shares—diluted for Class A and Class B common stock
138,056

 
139,425

 
146,486

 
 
 
 
 
 
Net income (loss) per share
 
 
 
 
 
Basic
$
(1.32
)
 
$
(3.01
)
 
$
0.27

Diluted
$
(1.32
)
 
$
(3.01
)
 
$
0.25


The following potentially dilutive shares were not included in the calculation of diluted shares outstanding as the effect would have been anti-dilutive:
 
Year ended December 31,
(in thousands)
2017
 
2016
 
2015
Effect of anti-dilutive stock-based awards
18,994

 
21,000

 
2,681

Income taxes
Income taxes
Income taxes
Income (loss) before income taxes consisted of the following:
 
Year ended December 31,
(in thousands)
2017
 
2016
 
2015
Domestic
$
(123,325
)
 
$
(200,595
)
 
$
13,562

Foreign
(53,062
)
 
(174,579
)
 
39,023

 
$
(176,387
)
 
$
(375,174
)
 
$
52,585


Income tax expense consisted of the following:
 
Year ended December 31,
(in thousands)
2017
 
2016
 
2015
Current
 
 
 
 
 
Federal
$
(1,857
)
 
$
(2,925
)
 
$
18,548

State
240

 
(356
)
 
3,007

Foreign
10,631

 
8,542

 
6,539

Total current
9,014

 
5,261

 
28,094

Deferred
 
 
 
 
 
Federal
(248
)
 
37,573

 
(11,211
)
State

 
4,436

 
(204
)
Foreign
(2,280
)
 
(3,441
)
 
(225
)
Total deferred
(2,528
)
 
38,568

 
(11,640
)
Income tax expense
$
6,486

 
$
43,829

 
$
16,454


As of December 31, 2017, $4.5 million of earnings had been indefinitely reinvested outside the U.S., primarily in active non-U.S. business operations. We do not intend to repatriate these earnings to fund U.S. operations and, accordingly, we do not provide for U.S. state income and foreign withholding tax on these earnings. See also TCJA discussion below.
 
Year ended December 31,
 
2017
 
2016
 
2015
(dollars in thousands)
$
 
%
 
$
 
%
 
$
 
%
Reconciliation to statutory rate
 
 
 
 
 
 
 
 
 
 
 
Tax at federal statutory rate
$
(61,735
)
 
(35.0
)%
 
$
(131,311
)
 
(35.0
)%
 
$
18,405

 
35.0
 %
Change in valuation allowance
(38,016
)
 
(21.6
)
 
101,878

 
27.2

 
8,555

 
16.3

DTA rate change impact due to TCJA
74,943

 
42.5

 

 

 

 

Impact of foreign operations
34,039

 
19.3

 
84,491

 
22.5

 
6,434

 
12.2

Stock-based compensation
12,001

 
6.8

 
15,718

 
4.2

 
2,390

 
4.5

State taxes, net of federal benefit
(6,469
)
 
(3.7
)
 
(14,195
)
 
(3.8
)
 
1,454

 
2.8

Tax credits
(9,957
)
 
(5.6
)
 
(12,992
)
 
(3.5
)
 
(21,891
)
 
(41.6
)
Other
1,680

 
1.0

 
240

 
0.1

 
1,107

 
2.1

Income tax provision at effective tax rate
$
6,486

 
3.7
 %
 
$
43,829

 
11.7
 %
 
$
16,454

 
31.3
 %

The effective tax rate of 2017 resulted from a significant benefit on pre-tax book losses, offset by the valuation allowance on U.S. federal and state net deferred tax assets and by income taxes paid at lower rates in profitable foreign jurisdictions (primarily wholly owned subsidiaries in Europe). In addition, due to the U.S. enactment of the TCJA, U.S. deferred tax assets were revalued by $74.9 million at the statutory rate of 21% which will be effective January 1, 2018, with a corresponding valuation allowance adjustment. In addition, AMT credits of $0.2 million become refundable under the TCJA and $0.2 million of valuation allowance was released. The effective tax rate of 2016 resulted from a significant benefit on pre-tax book losses, offset by the establishment of a valuation allowance on all U.S. federal and state net deferred tax assets and by income taxes paid at lower rates in profitable foreign jurisdictions (primarily wholly owned subsidiaries in Europe). Overall, the provision for income taxes in each period has differed from the tax computed at U.S. federal statutory tax rates due to change in valuation allowance, the effect of non-U.S. operations, deductible and non-deductible stock-based compensation expense, states taxes, federal research and development tax credits, and other adjustments.
The lower effective tax rates of 2016 compared to 2015 resulted from a significant benefit on pre-tax book losses, offset by the establishment of a valuation allowance on all U.S. federal and state net deferred tax assets and by income taxes paid at lower rates in profitable foreign jurisdictions (primarily wholly owned subsidiaries in Europe). The provision for income taxes in each period has differed from the tax computed at U.S. federal statutory tax rates due to change in valuation allowance, the effect of non-U.S. operations, deductible and non-deductible stock-based compensation expense, states taxes, federal research and development tax credits, and other adjustments.
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:
 
Year ended December 31,
(in thousands)
2017
 
2016
Deferred tax assets:
 
 
 
Net operating loss carryforwards
$
113,378

 
$
30,193

Tax credit carryforwards
66,983

 
22,341

Stock-based compensation
13,055

 
26,656

Allowance for returns
5,452

 
6,336

Intangible assets
770

 

Accruals and reserves
18,981

 
26,587

Total deferred tax assets
218,619

 
112,113

Valuation allowance
(217,884
)
 
(110,433
)
Total deferred tax assets, net of valuation allowance
735

 
1,680

Deferred tax liabilities:
 
 
 
Depreciation and amortization
(292
)
 
(1,714
)
Intangible assets

 
(2,540
)
Total deferred tax liabilities
(292
)
 
(4,254
)
Net deferred tax assets (liabilities)
$
443

 
$
(2,574
)

Recognition of deferred tax assets is appropriate when realization of such assets is more likely than not. Based upon the weight of available evidence, the Company believes it is not more likely than not that the U.S. deferred tax assets will be realized. Accordingly, a valuation allowance has been established and maintained against U.S. deferred tax assets. The foreign deferred tax assets in each jurisdiction are minimal and are supported by taxable income or in the case of acquired companies, by the future reversal of deferred tax liabilities. It is more likely than not that the Company’s foreign deferred tax assets will be realized and thus, no valuation allowance is required on foreign deferred tax assets. The Company will continue to assess the realizability of the deferred tax assets in each of the applicable jurisdictions going forward. The Company’s valuation allowance increased by $107.5 million to $217.9 million as of December 31, 2017, primarily due to the impact of the ASU 2016-09 adoption that resulted in an increase in U.S. deferred tax assets of $163.0 million and current year movement on U.S. deferred tax assets of $36.9 million, offset by a decrease due to $17.5 million attributable to the debt discount on convertible debt, and a $74.9 million decrease due to the change in future tax rate under the enacted TCJA on December 22, 2017. As of December 31, 2016, the Company had established a valuation allowance of $110.4 million on all U.S. federal and state deferred tax assets.
As of December 31, 2017, the Company’s federal, California and other state net operating loss carryforwards for income tax purposes were $456.1 million, $210.3 million and $233.7 million, net of reserves, respectively and federal and California state tax credit carryforwards were $39.6 million and $34.4 million, net of reserves, respectively. If not utilized, federal loss, federal credit and California loss carryforwards will begin to expire from 2030 to 2037, while other state loss carryforwards will begin to expire from 2019 to 2037. California tax credits may be carried forward indefinitely.
Under the provisions of §382 of the Internal Revenue Code, a change of control may impose an annual limitation on the amount of the Company’s net operating loss and tax credit carryforwards that can be used to reduce future tax liabilities. Of the Company’s total $456.1 million federal net operating loss carryforwards, approximately $8.1 million was from one of our 2016 acquisitions. These acquired tax attributes are subject to an annual limitation of $1.7 million per year for federal purposes and will begin to expire in the year 2034, if not utilized.
Uncertain income tax positions. The Company had gross unrecognized tax benefits of $58.6 million, $56.9 million and $36.3 million, as of December 31, 2017, 2016 and 2015, respectively. For fiscal 2017, 2016 and 2015, total unrecognized income tax benefits in the amount of $19.8 million, $24.1 million and $31.0 million, respectively, if recognized, would reduce income tax expense after considering the impact of the change in valuation allowance in the U.S. A material portion of our gross unrecognized tax benefits, if recognized, would increase the Company’s net operating loss carryforward, which would be offset by a full valuation allowance based on present circumstances.
These unrecognized tax benefits relate primarily to unresolved matters with taxing authorities regarding the Company’s transfer pricing positions and tax positions based on the Company’s interpretation of certain U.S. trial and appellate court decisions, which remain subject to appeal and therefore could be overturned in future periods. Management believes events that could occur in the next 12 months and cause a material change in unrecognized tax benefits include, but are not limited to, the completion of examinations by the U.S. or foreign taxing authorities and the expiration of statute of limitations on the Company’s tax returns. Although the completion, settlement and closure of any audits is uncertain, it is reasonably possible based on the receipt of the Joint Committee approval of the federal claimed income tax refund relating to the carryback of 2014 and 2015 net operating losses on December 18, 2017, and the IRS Closing Agreement received on January 24, 2018, that over the next twelve-month period, our unrecognized tax benefits as of December 31, 2017, will decrease in the range of $15.0 million to $20.0 million, of which approximately $2.0 million to $3.0 million benefit would impact our effective tax rate. Such reduction is due to the resolution of certain issues, primarily related to transfer pricing and the R&D credit, raised in connection with our federal examination. Thus, we believe that that the total amount of unrecognized tax benefits will decrease within the next 12 months. However, for all other jurisdictions, given the number of years remaining that are subject to examination, the range of the reasonably possible change cannot be estimated reliably.
A reconciliation of the beginning and ending amount of the unrecognized income tax benefits are as follows:
 
Year ended December 31,
(in thousands)
2017
 
2016
 
2015
Gross balance at January 1
$
56,909

 
$
36,273

 
$
16,558

Gross increase related to current year tax positions
20,002

 
20,594

 
19,948

Gross decrease related to tax rate change for current year tax positions
(2,299
)
 

 

Gross increase related to prior year tax positions

 
130

 
108

Gross decrease related to prior year tax positions
(3,927
)
 
(88
)
 
(341
)
Gross decrease related to tax rate change for prior year tax positions
(12,101
)
 

 

 
$
58,584

 
$
56,909

 
$
36,273


Due to the U.S. enactment of the TCJA, U.S. unrecognized income tax benefits that reduce federal tax attributes are revalued at the statutory rate of 21%. Total gross decreases to unrecognized tax benefits were $14.4 million relating to the change in tax rates from 35% to 21%.
The Company’s policy is to account for interest and penalties related to income tax liabilities within the provision for income taxes. The balances of accrued interest and penalties recorded in the balance sheets and provision were not material for any period presented.
The Company files income tax returns in U.S. and non-U.S. jurisdictions. The Company is subject to federal, state and foreign income tax examinations for calendar tax years ending 2012 through 2016. The tax authorities could choose to audit the tax years beyond the statute of limitation period due to tax attribute carryforwards from prior years, making adjustments only to carryforward attributes. The Company has been under examination by the Internal Revenue Service for the 2012 through 2015 tax years. IRS audit fieldwork has been completed and the claimed income tax refund of approximately $32.9 million relating to the carryback of 2014 and 2015 net operating losses was approved by the Congressional Joint Committee on Taxation (JCT) on December 18, 2017. See also Note 14 Subsequent Events for additional information.
U.S. Tax Reform. The Tax Cuts and Job Act (TCJA) of 2017, enacted on December 22, 2017, contains significant changes to U.S. tax law, including lowering the U.S. corporate income tax rate to 21%, implementing a territorial tax system, and imposing a one-time tax on deemed repatriated earnings of foreign subsidiaries.
The TCJA reduces the U.S. statutory tax rate from 35% to 21%, effective January 1, 2018. During the three months ended December 31, 2017, the Company recorded a $74.9 million tax expense representing the detriment of remeasuring its U.S. deferred tax liabilities at the lower 21% statutory tax rate, as well as a corresponding full valuation allowance for the same amount resulting in no impact to our Statement of Operations.
The TCJA also implements a territorial tax system. Under the territorial tax system, in general, the Company’s foreign earnings will no longer be subject to tax in the U.S. As part of transitioning to the territorial tax system the TCJA includes a mandatory deemed repatriation of all undistributed foreign earnings that are subject to a U.S. income tax. The Company estimates that the deemed repatriation will not result in any additional U.S. income tax. This preliminary estimate may be impacted by a number of additional considerations, including, but not limited to, the issuance of final regulations and the Company's ongoing analysis of the new law.
As of December 31, 2017, the Company has approximately $4.5 million of undistributed earnings for certain non-U.S. subsidiaries that have been indefinitely reinvested outside the U.S. These undistributed earnings do not result in a one-time deemed repatriation tax due to our overall accumulated foreign deficit, however these earnings could be subject to additional foreign and state income taxes if they are repatriated. The Company has historically asserted its intent to reinvest these earnings in foreign operations indefinitely and continues to do so. We do not intend to repatriate these earnings to fund U.S. operations and, accordingly, we do not provide for U.S. state income and foreign withholding tax on these earnings.
While the TJCA provides for a territorial tax system, beginning in 2018, it includes two new U.S. tax base erosion provisions, the global intangible low-taxed income (GILTI) provisions and the base-erosion and anti-abuse tax (BEAT) provisions.
The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company does not expect that this GILTI income inclusion will result in significant U.S. tax beginning in 2018. The BEAT provisions in the TCJA eliminates the deduction of certain base-erosion payments made to related foreign corporations and impose a minimum tax if greater than regular tax. The Company does not expect that the BEAT provision will result in significant U.S. tax beginning in 2018. In addition, the Company intends to account for the GILTI taxes in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the year ended December 31, 2017.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA. The Company has recognized the provisional tax impacts related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities to the extent needed and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the TCJA. The accounting is expected to be complete when the 2017 U.S. corporate income tax return is filed in 2018.
Related party transactions
Related party transactions
Related party transactions
The Company incurs costs for Company-related chartered aircraft fees for the use of the CEO’s private plane. The Company recorded expense of $0.1 million, $0.5 million and $0.7 million in 2017, 2016 and 2015, respectively. As of December 31, 2017 and 2016, the Company had zero accounts payable associated with these aircraft fees.
In 2013, the Company entered into a three-year agreement, which was amended in July 2016 to continue through the end of 2016, with a company affiliated with the son of one of the then members of the Company’s board of directors to acquire certain naming rights to a kart racing facility. As consideration for these naming rights, the Company paid $0.6 million over the three year period. As of December 31, 2016, the Company has recorded cumulative expense of $0.6 million, and has also provided 100 GoPro cameras at no cost each year. As of December 31, 2016 and 2015, the Company had no accounts payable associated with this agreement.
In 2016, the Company obtained services from a vendor whose CEO is also one of the members of the Company’s board of directors. The Company recorded expense of zero and $0.4 million in 2017 and 2016, respectively. As of December 31, 2017 and 2016, the Company had accounts payable associated with this vendor of zero and $0.3 million, respectively.
The Company has agreements for certain contract manufacturing and engineering services with a vendor affiliated with one of the Company’s investors. The Company made payments of zero to this vendor in 2017 and 2016 and $0.2 million in 2015. As of December 31, 2017 and 2016, the Company had no accounts payable associated with this vendor.
See Note 6 and 7 above for information regarding CEO RSUs and Class B common stock contributed by the CEO back to the Company.
Commitments, contingencies and guarantees
Commitments, contingencies and guarantees
Commitments, contingencies and guarantees
(in thousands)
Total
 
2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
Operating leases (1)
$
128,228

 
$
22,177

 
$
15,056

 
$
18,244

 
$
17,817

 
$
16,693

 
$
38,241

Sponsorship commitments (2)
7,256

 
4,487

 
2,769

 

 

 

 

Other contractual commitments (3)
2,766

 
2,044

 
722

 

 

 

 

Long-term debt (4)
175,000

 

 

 

 

 
175,000

 

Total contractual cash obligations
$
313,250

 
$
28,708

 
$
18,547

 
$
18,244

 
$
17,817

 
$
191,693

 
$
38,241

(1) The Company leases its facilities under long-term operating leases, which expire at various dates through 2027.
(2) The Company enters into multi-year sponsorship agreements with event organizers, resorts and athletes as part of its marketing efforts.
(3) The Company enters into other contractual commitments, including software licenses related to the Company’s financial and IT systems which require payments over several years.
(4) The Company's convertible senior notes are due April 2022. Refer to Note 5 Financing Arrangements.
In 2017 and 2016, the Company entered into sub-lease agreements for its office facilities that decreased the Company’s total future minimum lease payments by sub-lease rentals of approximately $4.3 million which approximates the corresponding remaining lease rentals.
Rent expense was $19.1 million, $19.8 million and $12.2 million for 2017, 2016 and 2015, respectively.
Legal proceedings. From time to time, the Company is involved in legal proceedings in the ordinary course of business. Due to inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of these matters. The Company is unable at this time to determine whether the outcome of the litigation would 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. It is not possible to determine the maximum potential amount under these indemnification agreements due to the Company’s limited history with indemnification claims and the unique facts and circumstances involved in each particular agreement. As of December 31, 2017, the Company has not paid any claims nor has it 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.
Concentrations of risk and geographic information
Concentrations of risk and segment information
Concentrations of risk and geographic information
Customer concentration. Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of trade receivables. The Company believes that credit risk for accounts receivable 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 who represented 10% or more of the Company’s net accounts receivable balance were as follows:
 
December 31, 2017
 
December 31, 2016
Customer A
16%
 
15%
Customer B
32%
 
27%
Customer C
12%
 
*
Customer D
11%
 
*

The following table summarizes the Company’s accounts receivables sold, without recourse, and factoring fees paid:
 
Year ended December 31,
(in thousands)
2017
 
2016
 
2015
Accounts receivable sold
$
178,300

 
$
167,769

 
$
194,223

Factoring fees
1,630

 
1,266

 
1,566


Customers who represented 10% or more of the Company’s total revenue were as follows:
 
Year ended December 31,
 
2017
 
2016
 
2015
Customer A
15%
 
17%
 
14%
Customer B
*
 
11%
 
12%
* 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 products, some of which are sole-source suppliers. The Company believes that outsourcing manufacturing enables greater scale and flexibility. As demand and product lines change, the Company periodically evaluates the need and advisability of adding manufacturers to support its operations. 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.
Geographic information
Revenue by geographic region, based on ship-to destinations, was as follows:
 
Year ended December 31,
(in thousands)
2017
 
2016
 
2015
Americas
$
591,879

 
$
619,784

 
$
868,772

Europe, Middle East and Africa (EMEA)
334,872

 
366,352

 
535,260

Asia and Pacific (APAC)
252,990

 
199,345

 
215,939

Total revenue
$
1,179,741

 
$
1,185,481

 
$
1,619,971


Revenue in the United States, which is included in the Americas geographic region, was $528.7 million, $554.9 million and $769.2 million for 2017, 2016 and 2015, respectively. No other individual country exceeded 10% of total revenue for any period presented. 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.
As of December 31, 2017 and 2016, long-lived assets, which represent gross property and equipment, located outside the United States, primarily in Hong Kong and China, were $79.7 million and $76.6 million, respectively.
Restructuring charges
Restructuring charges
Restructuring charges
Restructuring charges for each period were as follows:
 
Twelve months ended
(in thousands)
December 31, 2017
 
December 31, 2016
Cost of revenue
$
634

 
$
497

Research and development
10,092

 
17,197

Sales and marketing
7,047

 
12,064

General and administrative
2,519

 
13,331

Total restructuring charges
$
20,292

 
$
43,089


First quarter 2017 restructuring
On March 15, 2017, the Company approved a restructuring plan to further reduce future operating expenses and further align resources around its long-term business strategy. The restructuring provided for a reduction of the Company's global workforce by approximately 270 positions, and the consolidation of certain leased office facilities. Under the first quarter 2017 restructuring plan, the Company recorded restructuring charges of $17.0 million, including $10.3 million related to severance, and $6.7 million related to accelerated depreciation and other charges. The actions associated with the first quarter 2017 restructuring plan were substantially completed by the fourth quarter of 2017. While the Company anticipates that any additional charges related to this restructuring will be immaterial, actual results may differ from current estimates as it relates to the consolidation of certain leased office facilities.
The following table provides a summary of the Company’s restructuring activities during 2017 and the related liabilities recorded in accrued liabilities on the consolidated balance sheet.
(in thousands)
Severance
 
Other
 
Total
Restructuring liability as of December 31, 2016
$

 
$

 
$

Restructuring charges
10,312

 
6,654

 
16,966

Cash paid
(9,509
)
 
(151
)
 
(9,660
)
Non-cash reductions
(803
)
 
(2,953
)
 
(3,756
)
Restructuring liability as of December 31, 2017
$

 
$
3,550

 
$
3,550


Fourth quarter 2016 restructuring
On November 29, 2016, the Company approved a restructuring plan to reduce future operating expenses. The restructuring provided for a reduction of the Company’s global workforce of approximately 15%, the closure of the Company’s entertainment group to concentrate on its core business and the consolidation of certain leased office facilities. Under the fourth quarter 2016 restructuring plan, the Company recorded restructuring charges of $40.7 million, including $3.2 million related to severance and facilities contract terminations during 2017. The actions associated with the fourth quarter 2016 restructuring plan were completed by March 31, 2017, with only small incremental charges recorded through December 31, 2017.
The following table provides a summary of the Company’s restructuring activities during 2017 and the related liabilities recorded in accrued liabilities on the consolidated balance sheet.
(in thousands)
Severance
 
Other
 
Total
Restructuring liability as of December 31, 2016
$
9,660

 
$
879

 
$
10,539

Restructuring charges
2,134

 
1,055

 
3,189

Cash paid
(11,411
)
 
(1,884
)
 
(13,295
)
Non-cash reductions
17

 

 
17

Restructuring liability as of December 31, 2017
$
400

 
$
50

 
$
450


First quarter 2016 restructuring
On January 12, 2016, the Company approved a restructuring plan that provided for a reduction in the Company’s global workforce of approximately 7%. Under the first quarter 2016 restructuring plan, the Company recorded restructuring charges of $6.5 million in the first quarter of 2016, which primarily included cash-based severance costs. The Company completed this plan at the end of the first quarter of 2016 and all costs have been paid. No charges were recorded in periods after March 31, 2016.
Valuation and Qualifying Accounts
Schedule of Valuation and Qualifying Accounts Disclosure [Text Block]
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 2017, 2016 and 2015

(in thousands)
Balance at Beginning of Year
 
Charges to Revenue
 
Charges to Expense
 
Charges to Other Accounts - Equity
 
Deductions/Write-offs
 
Balance at End of Year
Allowance for doubtful accounts receivable:
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31, 2017
$
1,281

 
$

 
$
(263
)
 
$

 
$
(268
)
 
$
750

Year ended December 31, 2016
1,400

 

 
40

 

 
(159
)
 
1,281

Year ended December 31, 2015
1,250

 

 
682

 

 
(532
)
 
1,400

Allowance for sales returns:
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31, 2017
$
20,038

 
$
55,274

 
$
(48,554
)
 
$

 
$

 
$
26,758

Year ended December 31, 2016
26,280

 
35,136

 
(41,378
)
 

 

 
20,038

Year ended December 31, 2015
25,747

 
48,182

 
(47,649
)
 

 

 
26,280

Valuation allowance for deferred tax assets:
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31, 2017
$
110,433

 
$

 
$
(38,016
)
 
$
145,467

 
$

 
$
217,884

Year ended December 31, 2016
8,555

 

 
101,878

 

 

 
110,433

Year ended December 31, 2015

 

 
8,555

 

 

 
8,555

Subsequent Events (Notes)
Subsequent Events [Text Block]
Subsequent events

On January 2, 2018, the Company approved a restructuring plan to further reduce future operating expense and better align resources around its long-term business strategy. The restructuring provided for a reduction of the Company's global workforce of approximately 21%, the closure of the Company's aerial group and the consolidation of certain leased office facilities. The Company estimates that it will incur total aggregate charges of approximately $23 million to $33 million for the restructuring. The Company expects actions associated with the restructuring will be substantially completed in the first quarter of 2018.
The Company has been under examination by the Internal Revenue Service for the 2012 through 2015 tax years. The IRS audit fieldwork has been completed and the claimed income tax refund relating to the carryback of 2014 and 2015 net operating losses was approved by the Congressional Joint Committee on Taxation (JCT) on December 18, 2017. The Closing Agreement was received on January 24, 2018. The Company received an income tax refund of approximately $32.9 million, net of IRS adjustments, in February 2018. The Company will also recognize an income tax benefit of approximately $2.0 million to $3.0 million in the first quarter of 2018.
Summary of business and significant accounting policies (Policies)
Basis of presentation.
Principles of consolidation. These consolidated financial statements include all the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in 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. Significant estimates and assumptions made by management include those related to revenue recognition (including sales returns, implied post contract support, price protection and other sales incentives), stock-based compensation, inventory valuation, product warranty liabilities, the valuation and useful lives of long-lived assets (property and equipment, intangible assets and goodwill) and income taxes. 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. Actual results could differ materially from management’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations could be affected.
Comprehensive income (loss). For all periods presented, comprehensive income (loss) approximated net income (loss). Therefore, the consolidated statements of comprehensive income (loss) have been omitted
Prior period reclassifications. Reclassifications of certain prior period amounts in the consolidated financial statements have been made to conform to the current period presentation.
Cash equivalents and marketable securities. Cash equivalents primarily consist of investments in money market funds with maturities of three months or less from the date of purchase. Marketable securities consist of commercial paper, U.S. agency securities, and corporate debt securities, and are classified as available-for-sale securities. The Company views these securities as available to support current operations and it has classified all available-for-sale securities as current assets. Available-for-sale securities are carried at fair value with unrealized gains and losses, if any, included in stockholders’ equity. Unrealized losses are charged against other income (expense), net, for declines in fair value below the cost of an individual investment that is deemed to be other than temporary. The Company has not identified any marketable securities as other-than-temporarily impaired for the periods presented. The cost of securities sold is based upon a specific identification method.
Accounts receivable and allowance for doubtful accounts. Accounts receivable are stated at invoice value less estimated allowances for returns and doubtful accounts. Allowances are recorded based on the Company’s assessment of various factors, such as: historical experience, credit quality of its customers, age of the accounts receivable balances, geographic related risks, economic conditions and other factors that may affect a customer’s ability to pay. The allowance for doubtful accounts as of December 31, 2017 and 2016 was $0.8 million and $1.3 million, respectively.
Inventory. Inventory consists of finished goods and component parts, which are purchased directly from suppliers or from contract manufacturers. Inventory is stated at the lower of cost or net realizable value on a first-in, first-out basis. The Company writes down its inventory for estimated obsolescence or excess inventory equal to the difference between the cost of inventory and estimated market value. The Company’s assessment of market value is based upon assumptions around market conditions and estimated future demand for its products within a specified time horizon, generally 12 months. Adjustments to reduce inventory to net realizable value are recognized in cost of revenue.
Point of purchase (POP) displays. The Company provides retailers with POP displays, generally free of charge, in order to facilitate the marketing of the Company’s products within retail stores. The POP displays contain a display that broadcasts video images taken by GoPro cameras with product placement available for cameras and accessories. POP display costs, less any fees charged, are capitalized as long-term assets and charged to sales and marketing expense over the expected period of benefit, which generally ranges from 24 to 36 months. Cash outflows and amortization related to POP displays are classified as operating activities in the consolidated statement of cash flows. Amortization was $19.2 million, $19.6 million and $16.8 million in 2017, 2016 and 2015, 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 eleven years. Leasehold improvements are amortized over the shorter of the lease term or their expected useful life. Property and equipment pending installation, configuration or qualification are classified as construction in progress. Costs of maintenance and repairs that do not improve or extend the lives of the respective assets are expensed as incurred.
Fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the reporting date. The Company estimates and categorizes the fair value of its financial assets by applying the following hierarchy:
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. The fair value of Level 2 financial instruments is obtained from an independent pricing service, which may use quoted market prices for identical or comparable instruments or model driven valuations using observable market data or inputs corroborated by observable market data.
Leases. The Company leases its office space and facilities under cancelable and non-cancelable operating leases. For leases that contain rent escalation or rent concession provisions, the Company recognizes rent expense on a straight-line basis over the term of the lease. The Company does not assume renewals in its determination of the lease term unless the renewals are deemed to be reasonably assured at lease inception.
Goodwill and other intangible assets. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination. Acquired intangible assets other than goodwill are amortized over their useful lives unless the lives are determined to be