GOPRO, INC., 10-K filed on 2/16/2017
Annual Report
Document, Entity and Information (USD $)
12 Months Ended
Dec. 31, 2016
Jun. 30, 2016
Jan. 31, 2017
Common Class A [Member]
Jan. 31, 2017
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, 2016 
 
 
 
Document Fiscal Year Focus
2016 
 
 
 
Document Fiscal Period Focus
FY 
 
 
 
Amendment Flag
false 
 
 
 
Entity Common Stock, Shares Outstanding
 
 
105,351,578 
36,760,415 
Entity Well-known Seasoned Issuer
Yes 
 
 
 
Entity Voluntary Filers
No 
 
 
 
Entity Current Reporting Status
Yes 
 
 
 
Entity Public Float
 
$ 1,097,400,000 
 
 
Condensed Consolidated Balance Sheets (USD $)
Dec. 31, 2016
Dec. 31, 2015
Statement of Financial Position [Abstract]
 
 
Net operating loss carryforwards
$ 467,200,000 
 
Current assets:
 
 
Cash and cash equivalents
192,114,000 
279,672,000 
Marketable securities
25,839,000 
194,386,000 
Accounts receivable, net
164,553,000 
145,692,000 
Inventory
167,192,000 
188,232,000 
Prepaid expenses and other current assets
38,115,000 
25,261,000 
Total current assets
587,813,000 
833,243,000 
Property and equipment, net
76,509,000 
70,050,000 
Intangible assets, net
33,530,000 
31,027,000 
Goodwill
146,459,000 
57,095,000 
Other long-term assets
78,329,000 
111,561,000 
Total assets
922,640,000 
1,102,976,000 
Current liabilities:
 
 
Accounts payable
205,028,000 
89,989,000 
Accrued liabilities
211,323,000 
192,446,000 
Deferred revenue
14,388,000 
12,742,000 
Total current liabilities
430,739,000 
295,177,000 
Long-term taxes payable
26,386,000 
21,770,000 
Other long-term liabilities
18,570,000 
13,996,000 
Total liabilities
475,695,000 
330,943,000 
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,104,647 and 100,596 shares issued and outstanding, respectively; 150,000 Class B shares authorized, 36,712 and 36,005 shares issued and outstanding, respectively
757,226,000 
663,311,000 
Treasury stock, at cost, 1,545 and 1,545 shares, respectively
(35,613,000)
(35,613,000)
Retained earnings (accumulated deficit)
(274,668,000)
144,335,000 
Total stockholders’ equity
446,945,000 
772,033,000 
Total liabilities and stockholders’ equity
$ 922,640,000 
$ 1,102,976,000 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
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)
1,545,000 
1,545,000 
Common Class A [Member]
 
 
Common Stock, Shares Authorized (shares)
500,000,000 
500,000,000 
Common Stock, Shares, Issued (shares)
104,647,000 
100,596,000 
Common stock, shares, outstanding (shares)
104,647,000 
100,596,000 
Common Class B [Member]
 
 
Common Stock, Shares Authorized (shares)
150,000,000 
150,000,000 
Common Stock, Shares, Issued (shares)
36,712,000 
36,005,000 
Common stock, shares, outstanding (shares)
36,712,000 
36,005,000 
Condensed Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Income Statement [Abstract]
 
 
 
Revenue
$ 1,185,481 
$ 1,619,971 
$ 1,394,205 
Cost of revenue
723,561 
946,757 
766,970 
Gross profit
461,920 
673,214 
627,235 
Operating expenses:
 
 
 
Research and development
358,902 
241,694 
151,852 
Sales and marketing
368,620 
268,939 
194,377 
General and administrative
107,367 
107,833 
93,971 
Total operating expenses
834,889 
618,466 
440,200 
Operating income (loss)
(372,969)
54,748 
187,035 
Other expense, net
(2,205)
(2,163)
(6,060)
Income (loss) before income taxes
(375,174)
52,585 
180,975 
Income tax expense
43,829 
16,454 
52,887 
Net income (loss)
(419,003)
36,131 
128,088 
Less: net income allocable to participating securities
(16,512)
Net income (loss) attributable to common stockholders—basic
(419,003)
36,131 
111,576 
Add: net income allocable to dilutive participating securities
2,277 
Net income (loss) attributable to common stockholders—diluted
$ (419,003)
$ 36,131 
$ 113,853 
Net income per share attributable to common stockholders - Basic (in dollars per share)
$ (3.01)
$ 0.27 
$ 1.07 
Net income per share attributable to common stockholders - Diluted (in dollars per share)
$ (3.01)
$ 0.25 
$ 0.92 
Weighted-average shares used to compute net income per share attributable to common stockholders - Basic (in shares)
139,425 
134,595 
104,453 
Weighted-average shares used to compute net income per share attributable to common stockholders - Diluted (in shares)
139,425 
146,486 
123,630 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Statement of Cash Flows [Abstract]
 
 
 
Net income (loss)
$ (419,003)
$ 36,131 
$ 128,088 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
41,640 
28,981 
17,945 
Stock-based compensation
69,527 
80,680 
71,399 
Excess tax benefit from stock-based compensation
(3,463)
(29,348)
(77,134)
Deferred income taxes
38,568 
(11,468)
(16,920)
Non-cash restructuring charges
17,601 
Impairment of intangible assets
7,088 
Other
7,574 
5,427 
1,865 
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(18,816)
38,313 
(61,323)
Inventory
21,040 
(35,005)
(41,033)
Prepaid expenses and other assets
(14,618)
(23,281)
(30,317)
Accounts payable and other liabilities
142,941 
68,461 
98,354 
Deferred revenue
2,168 
(1,280)
5,998 
Net cash provided by (used in) operating activities
(107,753)
157,611 
96,922 
Investing activities:
 
 
 
Purchases of property and equipment, net
(43,627)
(51,245)
(27,210)
Purchases of marketable securities
(220,055)
(103,827)
Maturities of marketable securities
119,918 
94,680 
1,083 
Sale of marketable securities
47,348 
30,048 
Acquisitions, net of cash acquired
(104,353)
(65,405)
(3,950)
Net cash provided by (used in) investing activities
19,286 
(211,977)
(133,904)
Financing activities:
 
 
 
Proceeds from issuance of common stock, net
2,775 
22,833 
300,097 
Excess tax benefit from stock-based compensation
3,463 
29,348 
77,134 
Payment of deferred acquisition-related consideration
(950)
(2,000)
Payment of credit facility issuance costs
(3,333)
Payment of deferred public offering costs
(903)
(5,730)
Repurchases of outstanding common stock
(35,613)
Repayment of debt
(114,000)
Net cash provided by financing activities
1,955 
15,665 
255,501 
Effect of exchange rate changes on cash and cash equivalents
(1,046)
(1,556)
Net increase (decrease) in cash and cash equivalents
(87,558)
(40,257)
218,519 
Cash and cash equivalents at beginning of period
279,672 
319,929 
101,410 
Cash and cash equivalents at end of period
192,114 
279,672 
319,929 
Supplementary cash flow disclosure:
 
 
 
Cash paid for interest
1,853 
Cash paid (refunded) for income taxes, net
9,690 
(1,093)
37,283 
Non-cash investing and financing activities:
 
 
 
Conversion of preferred stock to common stock, net
77,198 
Purchases of property and equipment included in accounts payable and accrued liabilities
2,258 
5,153 
2,474 
Reclass of deferred public offering costs to additional paid-in capital
$ 0 
$ 0 
$ 7,722 
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) Statement (USD $)
Share data in Thousands, unless otherwise specified
Total
Special Termination Benefits [Member]
Preferred Stock [Member]
Redeemable Convertible Preferred Stock [Member]
Common Stock and Additional Paid in Capital [Member]
Common Stock and Additional Paid in Capital [Member]
Special Termination Benefits [Member]
Treasury Stock [Member]
Retained Earnings (accumulated deficit) [Member]
Beginning Balance at Dec. 31, 2013
$ (5,366,000)
 
$ 77,198,000 
$ 14,518,000 
 
$ 0 
$ (19,884,000)
Beginning Balance (shares) at Dec. 31, 2013
 
 
30,523 
81,420 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
Issuance of common stock upon public offerings, net of offering costs
286,247,000 
 
 
286,247,000 
 
 
 
Issuance of common stock upon public offerings, net of offering costs (shares)
 
 
 
10,188 
 
 
 
Conversion of preferred stock to common stock upon initial public offering, net of issuance cost accretion
77,198,000 
 
(77,198,000)
77,198,000 
 
 
 
Conversion of preferred stock to common stock upon initial public offering, net of issuance cost accretion (shares)
 
 
(30,523)
30,523 
 
 
 
Common stock issued under employee benefit plans, net of shares withheld for tax
7,681,000 
 
 
7,681,000 
 
 
 
Common stock issued under employee benefit plans, net of shares withheld for tax (shares)
 
 
 
8,414 
 
 
 
Retirement of common stock
(1,177,000)
 
 
(1,177,000)
 
 
 
Retirement of common stock (shares)
 
 
 
(1,430)
 
 
 
Stock-based compensation expense
71,399,000 
 
 
71,399,000 
 
 
 
Excess tax benefit from stock-based compensation
77,134,000 
 
 
77,134,000 
 
 
 
Net income (loss)
128,088,000 
 
 
 
 
 
128,088,000 
Ending Balance at Dec. 31, 2014
641,204,000 
 
533,000,000 
 
108,204,000 
Ending Balance (shares) at Dec. 31, 2014
 
 
129,115 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
Common stock issued under employee benefit plans, net of shares withheld for tax
36,413,000 
 
 
36,413,000 
 
 
 
Common stock issued under employee benefit plans, net of shares withheld for tax (shares)
 
 
 
14,249 
 
 
 
Taxes paid related to net share settlements
(13,943,000)
 
 
(13,943,000)
 
 
 
Retirement of common stock (shares)
 
 
 
(5,218)
 
 
 
Repurchase of outstanding common stock
(35,613,000)
 
 
 
 
(35,613,000)
 
Repurchase of outstanding common stock (shares)
 
 
 
(1,545)
 
 
 
Stock-based compensation expense
80,583,000 
 
 
80,583,000 
 
 
 
Excess tax benefit from stock-based compensation
27,258,000 
 
 
27,258,000 
 
 
 
Net income (loss)
36,131,000 
 
 
 
 
 
36,131,000 
Ending Balance at Dec. 31, 2015
772,033,000 
 
663,311,000 
 
(35,613,000)
144,335,000 
Ending Balance (shares) at Dec. 31, 2015
 
 
136,601 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
Common stock issued under employee benefit plans, net of shares withheld for tax
10,103,000 
 
 
10,103,000 
 
 
 
Common stock issued under employee benefit plans, net of shares withheld for tax (shares)
 
 
 
3,936 
 
 
 
Taxes paid related to net share settlements
(6,889,000)
 
 
(6,889,000)
 
 
 
Shares issued to third-party vendor for services (Note 11)
7,297,000 
 
 
7,297,000 
 
 
 
Shares issued to third-party vendor for services (Note 11) (shares)
 
 
 
822 
 
 
 
Stock-based compensation expense
69,499,000 
15,566,000 
 
69,499,000 
15,566,000 
 
 
Excess tax benefit from stock-based compensation
(1,661,000)
 
 
(1,661,000)
 
 
 
Net income (loss)
(419,003,000)
 
 
 
 
 
(419,003,000)
Ending Balance at Dec. 31, 2016
$ 446,945,000 
 
$ 0 
$ 757,226,000 
 
$ (35,613,000)
$ (274,668,000)
Ending Balance (shares) at Dec. 31, 2016
 
 
141,359 
 
 
 
Summary of business and significant accounting policies
Summary of significant accounting policies
Summary of business and significant accounting policies
GoPro, Inc. (GoPro or the Company) makes mountable and wearable cameras, drones and accessories. The Company's products are sold globally through retailers, wholesale distributors and on the Company’s 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. 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, 2016 and 2015 was $1.3 million and $1.4 million, respectively.
Inventory. Inventory consists of finished goods and component parts, which are purchased directly or from contract manufacturers. Inventory is stated at the lower of cost or market 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 $19.6 million, $16.8 million and $18.0 million in 2016, 2015 and 2014, 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 ten 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 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 techniques 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 for any periods presented. For the annual impairment testing in 2016, 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 value 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 or 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 two-year warranty. 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, 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 grants limited rights to return product for certain large retailers and distributors. The Company records reductions to revenue and cost of sales for expected future product returns at the time of sale based on analyses of historical return trends by customer class. 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 two units of accounting: a) the hardware component (camera and/or accessories) and the embedded firmware essential to the functionality of the camera delivered at the time of sale, and b) 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, 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. The Company also offers several mobile and desktop applications at no charge to help users manage, edit, view and share their content. These applications are not essential to the functionality of the camera, therefore, are not accounted as a separate element of the arrangement.
Revenue allocated to the delivered hardware and the related essential software is recognized at the time of sale provided the conditions for recognition of revenue have been met. Revenue allocated to PCS is deferred and recognized on a straight-line basis over the estimated term of the support period, which is estimated to be 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, consisting primarily of cooperative advertising and marketing development fund programs. 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 when camera device models are released or repriced and the customer has remaining inventory on hand. The Company calculates price protection discounts in the period that the price reduction goes into effect, and they are recorded as a reduction of revenue, based on the evaluation of inventory currently held by the customer subject to price protection.
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 not included in revenue.
Advertising costs. Advertising costs consist of costs associated with print, television and ecommerce 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 $106.0 million, $64.7 million and $47.2 million in 2016, 2015 and 2014, 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. For service-based awards, stock-based compensation is recognized on a straight-line basis over the requisite service period, net of estimated forfeitures. For performance and market-based awards which also require a service period, the Company uses graded vesting over the longer of the derived service period or when the performance or market condition is satisfied.
The Company recognizes a benefit from stock-based compensation as additional paid-in capital if an excess tax benefit is realized by following the with-and-without approach. The indirect effects of stock-based compensation deductions are reflected in the income tax provision for purposes of measuring the excess tax benefit at settlement of awards.
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 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.
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 pronouncements
Standard
 
Description
 
Expected date of adoption
 
Effect on the financial statements or other significant matters
Standards that are not yet adopted
 
 
 
 
Revenue from Contracts with Customers
Accounting Standards Update (ASU) No. 2014-09, 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 initial analysis of the impact of the standard on its sales contract portfolio by reviewing its current accounting policies and practices to identify potential differences that would result from applying the requirements of the new standard to its sales contracts. The Company does not anticipate a material impact on its consolidated financial statements because the analysis of its contracts under the new standard supports the recognition of most of its revenue at the time product is shipped, consistent with its current revenue policy. Although the Company is continuing to review certain aspects of its policies and practices, it expects that, as a result of the adoption of the new guidance, the timing of recognizing certain sales incentives as a reduction of revenue will generally be earlier than under the existing guidance. The Company expects to utilize the modified retrospective transition method. 

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. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. 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.
Stock Compensation 
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. Early adoption is permitted for an entity in any interim or annual period.
 
January 1, 2017
 
The adoption of the standard resulted in a net cumulative-effect adjustment of $16.2 million to decrease accumulated deficit as of January 1, 2017, mostly related to the recognition of previously unrecognized excess tax benefits using the modified retrospective method. The previously unrecognized excess tax effects were recorded as a reduction to tax liabilities or an increase to deferred tax assets, which was fully offset by a valuation allowance. Without the valuation allowance, the Company’s deferred tax assets would have increased by $162.8 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.
Income Taxes
ASU No. 2016-16 (Topic 740)
 
This standard requires entities to recognize at the transaction date the income tax consequences of intra-entity asset transfers. Previous guidance requires the tax effects from intra-entity asset transfers to be deferred until that asset is sold to a third party or recovered through use. 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, and requires a modified retrospective transition method.
 
January 1, 2018
 
The Company is evaluating the impact that the adoption of this standard will have 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 is evaluating the impact that the adoption of this standard will have on its consolidated financial statements and related disclosures.
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 do 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, 2016
 
December 31, 2015
(in thousands)
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
 
Total
Cash equivalents (1):
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
18,024

 
$

 
$
18,024

 
$
51,059

 
$

 
$
51,059

Total cash equivalents
$
18,024

 
$

 
$
18,024

 
$
51,059

 
$

 
$
51,059

Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. agency securities
$

 
$
8,283

 
$
8,283

 
$

 
$
14,451

 
$
14,451

Commercial paper

 

 

 

 
2,197

 
2,197

Corporate debt securities

 
15,226

 
15,226

 

 
165,825

 
165,825

Municipal securities

 
2,330

 
2,330

 

 
11,913

 
11,913

Total marketable securities
$

 
$
25,839

 
$
25,839

 
$

 
$
194,386

 
$
194,386

(1) Included in “cash and cash equivalents” in the accompanying consolidated balance sheets. Cash balances were $174.1 million and $228.6 million as of December 31, 2016 and December 31, 2015, respectively.
There were no transfers of financial assets between levels for the periods presented.
The remaining contractual maturities of available-for-sale marketable securities are as follows:
 
December 31,
(in thousands)
2016
 
2015
Less than one year
$
25,839

 
$
122,199

Greater than one year but less than two years

 
72,187

Total
$
25,839

 
$
194,386


At December 31, 2016 and 2015, the amortized cost of the Company's cash equivalents and marketable securities approximated their fair value and there were no material unrealized gains or losses, either individually or in the aggregate.
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.
Consolidated financial statement details
Consolidated financial statement details
Consolidated financial statement details
The following sections and tables provide details of selected balance sheet items.
Inventory
 
December 31,
(in thousands)
2016
 
2015
Components
$
25,236

 
$
9,476

Finished goods
141,956

 
178,756

Total inventory
$
167,192

 
$
188,232


Property and equipment, net
 
 
 
December 31,
(in thousands)
Useful life
(in years)
 
2016
 
2015
Leasehold improvements
3–12
 
$
48,103

 
$
40,841

Production, engineering and other equipment
4
 
46,328

 
25,174

Tooling
1–2
 
23,742

 
19,537

Computers and software
2
 
18,750

 
14,581

Furniture and office equipment
3
 
12,530

 
11,389

Tradeshow equipment and other
2-5
 
7,578

 
4,136

Construction in progress
 
 
1,870

 
4,632

Gross property and equipment
 
 
158,901

 
120,290

Less: Accumulated depreciation and amortization
 
 
(82,392
)
 
(50,240
)
Property and equipment, net
 
 
$
76,509

 
$
70,050


Depreciation expense was $32.4 million, $24.8 million and $16.8 million in 2016, 2015 and 2014, respectively. The Company recorded accelerated depreciation charges in connection with plans to vacate certain leased office facilities as disclosed in Note 13.
Intangible assets and goodwill
 
December 31, 2016
(in thousands)
Gross carrying value
 
Accumulated
amortization
 
Net carrying value
Purchased technology
$
47,001

 
$
(17,086
)
 
$
29,915

In-process research and development (IPR&D)
3,615

 

 
3,615

Total intangible assets
$
50,616

 
$
(17,086
)
 
$
33,530


 
December 31, 2015
(in thousands)
Gross carrying value
 
Accumulated
amortization
 
Net carrying value
Purchased technology
$
32,952

 
$
(8,540
)
 
$
24,412

IPR&D
6,615

 

 
6,615

Total intangible assets
$
39,567

 
$
(8,540
)
 
$
31,027


A summary of the Company’s IPR&D activity during 2016 is as follows:
(in thousands)
Total
Balance at December 31, 2015
$
6,615

IPR&D assets acquired
4,460

Technological feasibility achieved
(1,150
)
Asset impairment
(6,310
)
Balance at December 31, 2016
$
3,615


Purchased technology acquired in 2016 had an estimated useful life of four years. The Company recorded impairment charges of $6.3 million to research and development expense for IPR&D assets abandoned in the third and fourth quarters of 2016. As of December 31, 2016, 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 $9.1 million, $4.2 million and $1.1 million in 2016, 2015 and 2014, respectively. At December 31, 2016, the expected amortization expense of intangible assets for future periods is as follows:
(in thousands)
Total
Year ending December 31,
 
2017
$
8,689

2018
8,297

2019
7,786

2020
4,273

2021
870

 
$
29,915

The carrying amount of goodwill was $146.5 million and $57.1 million as of December 31, 2016 and 2015, respectively. The increase in 2016 was entirely attributable to the acquisitions described above in Note 2. There was no impairment of goodwill for any periods presented.
Other long-term assets
 
December 31,
(in thousands)
2016
 
2015
POP displays
$
27,592

 
$
27,989

Long-term deferred tax assets
106

 
41,936

Income tax receivable
33,425

 
33,206

Deposits and other
17,206

 
8,430

Other long-term assets
$
78,329

 
$
111,561


Accrued liabilities
 
December 31,
(in thousands)
2016
 
2015
Accrued payables
$
91,655

 
$
60,738

Employee related liabilities(1)
42,577

 
27,535

Accrued sales incentives
40,070

 
29,298

Warranty liability
11,456

 
10,400

Customer deposits
4,381

 
8,877

Income taxes payable
2,756

 
7,536

Purchase order commitments
4,730

 
38,477

Other
13,698

 
9,585

Accrued liabilities
$
211,323

 
$
192,446


(1)
See Note 13 for amounts associated with restructuring liabilities.
Financing Arrangements
Financing Arrangements
Financing Arrangements
In March 2016, the Company entered into a Credit Agreement ("Credit Agreement") with JPMorgan Chase Bank, N.A., as administrative agent, Wells Fargo Bank, National Association, as co-agent, and the lender parties thereto. The Credit Agreement provides for a secured revolving credit facility ("Credit Facility") under which the Company may borrow up to an aggregate of $250 million and the Company and lenders may increase the total commitments under the Credit Facility to up to $300 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 based upon a borrowing base formula with respect to 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, depending on the level of utilization of the Credit Facility. 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 owing 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 these obligations.
The Credit Agreement contains customary affirmative covenants, such as financial statement reporting requirements and delivery of borrowing base certificates, as well as customary covenants that limit the ability of the Company and its subsidiaries to, among other things, pay dividends, 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 contains customary events of default, such as the failure to pay obligations when due, initiation of bankruptcy or insolvency proceedings, defaults on certain other indebtedness, change of control or breach of representations and warranties or covenants. 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.
As of December 31, 2016, the Company may borrow up to approximately $150 million under the Credit Facility and was in compliance with all financial covenants contained in the Credit Agreement. No borrowings have been made from the Credit Facility to date.
Stockholders' equity
Stockholders' equity
Stockholders' equity
Initial public offering. In July 2014, the Company completed its IPO in which the Company issued and sold 8.9 million shares of Class A common stock at a public offering price of $24.00 per share and the selling stockholders sold 11.6 million shares of Class A common stock, including 2.7 million shares upon the underwriters' option to purchase additional shares. The Company did not receive any proceeds from the sale of shares by the selling stockholders. The total net proceeds received by the Company from the IPO were $200.8 million after deducting underwriting discounts and commissions.
Follow-on offering. In November 2014, the Company completed a follow-on offering in which the Company issued and sold 1.3 million shares of Class A common stock at a public offering price of $75.00 per share and the selling stockholders sold 10.6 million shares of Class A common stock, including 1.6 million shares upon the underwriters' option to purchase additional shares. The Company did not receive any proceeds from the sale of shares by the selling stockholders. The total net proceeds received by the Company from the follow-on offering were $93.2 million after deducting underwriting discounts and commissions.
Redeemable convertible preferred stock. Prior to the Company's IPO, the Company had 30.5 million of Series A redeemable convertible preferred stock outstanding, which were convertible into shares of Class B common stock at a rate of 1-for-1. Concurrent with the close of the IPO, those outstanding shares were converted into Class B common stock.
Common stock. Following the Company's IPO, the Company had 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, 2016, 104.6 million shares of Class A stock were issued and outstanding and 36.7 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, 2016, 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, 2016:
(in thousands)
December 31, 2016
Stock options outstanding
12,379

Restricted stock units outstanding
7,970

Common stock available for future grants
20,685

Total common stock shares reserved for issuance
41,034


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). In 2014, the Company terminated the authority to grant new awards under the 2010 Plan and 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 four years and are exercisable for shares of the Company's Class A stock. Options with performance or market-based conditions are generally subject to a required service period along with the performance or market condition. RSUs granted under the 2014 Plan generally vest annually over a four year period 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 values 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 86% 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 $7.2 million, $5.5 million and $2.7 million in 2016, 2015 and 2014, respectively.
Stock options
A summary of the Company’s stock option activity in 2016 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, 2015:
13,081

 
$
11.82

 
6.70
 
$
108,846

Granted
2,573

 
11.27

 
 
 
 
Exercised
(1,733
)
 
2.05

 
 
 
 
Forfeited/Cancelled
(1,542
)
 
19.07

 
 
 
 
Outstanding at December 31, 2016:
12,379

 
$
12.17

 
5.97
 
$
32,772

 
 
 
 
 
 
 
 
Vested and expected to vest at December 31, 2016
12,245

 
$
12.12

 
5.95
 
$
32,772

Exercisable at December 31, 2016
8,952

 
$
10.37

 
5.36
 
$
32,771


The weighted average grant date fair value of all options granted and assumed were $4.84, $18.40 and $11.51 per share in 2016, 2015 and 2014, respectively. The total fair value of all options vested was $27.2 million, $26.9 million and $16.0 million in 2016, 2015 and 2014, respectively. The aggregate intrinsic value of the stock options outstanding as of December 31, 2016 represented 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 in 2016 and 2015 is as follows:
 
Shares (in thousands)
 
Weighted- average grant date fair value
Non-vested shares at December 31, 2014
4,307

 
$
21.98

Granted
2,170

 
44.00

Vested
(1,735
)
 
19.84

Forfeited
(104
)
 
63.47

Non-vested shares at December 31, 2015
4,638

 
32.15

Granted
7,354

 
12.10

Vested
(2,075
)
 
23.87

Forfeited
(1,947
)
 
22.85

Non-vested shares at December 31, 2016
7,970

 
$
18.08


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 $6.4 million, $29.4 million and $38.3 million for 2016, 2015 and 2014, respectively.
Employee stock purchase plan In 2016 and 2015, the Company issued 668,107 and 436,924 shares under its ESPP at weighted average prices of $9.15 and $26.88, respectively. The weighted-average fair value of each right to purchase shares of the Company's Class A common stock granted under the ESPP was $3.99, $15.76 and $7.16 in 2016, 2015 and 2014, 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 historic price 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,
 
2016
 
2015
 
2014
Volatility
   44%–45%
 
   43%–54%
 
   54%–56%
Expected term (years)
5.2–6.1
 
5.5–7.0
 
5.3–6.3
Risk-free interest rate
1.2%–2.0%
 
1.6%–2.0%
 
1.7%–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,
 
2016
 
2015
 
2014
Volatility
   43%–54%
 
   39%–45%
 
45.5%
Expected term (years)
0.5
 
0.5
 
0.6
Risk-free interest rate
   0.4%–0.5%
 
   0.1%–0.2%
 
0.1%
Dividend yield
—%
 
—%
 
—%

During 2014, the Company used a Monte Carlo valuation model to calculate the fair value of the CEO RSUs subject to a market condition based on the following assumptions: expected term of 10 years, expected volatility of 50.9%, risk-free interest rate of 2.69%, and a grant date fair value of $18.40 for the underlying shares.
Stock-based compensation expense. The following table summarizes stock-based compensation included in the consolidated statements of operations:
 
Year ended December 31,
(in thousands)
2016
 
2015
 
2014
Cost of revenue
$
1,616

 
$
1,492

 
$
835

Research and development
31,365

 
18,024

 
11,640

Sales and marketing
13,883

 
13,762

 
10,428

General and administrative
22,663

 
47,402

 
48,496

Total stock-based compensation expense
$
69,527

 
$
80,680

 
$
71,399

The income tax benefit related to stock-based compensation expense was zero, $28.0 million and $19.5 million for 2016, 2015 and 2014, respectively. There is no current year tax benefit due to a full valuation allowance on U.S. net deferred tax assets (see Note 9 below).
At December 31, 2016, total unearned stock-based compensation of $116.3 million related to stock options, RSUs and ESPP shares is expected to be recognized over a weighted average period of 2.6 years.
Net income (loss) per share
Net income (loss) per share
Basic net income per share attributable to common stockholders is computed by dividing the net income attributable to common stockholders by the weighted-average number of common shares outstanding during the period. All participating securities are excluded from basic weighted average common shares outstanding. The Company considers shares issued upon the early exercise of options subject to repurchase and non-vested restricted shares to be participating securities, because holders of such shares have a non-forfeitable right to dividends. Additionally, prior to the Company's IPO and their conversion, the Company considered its redeemable convertible preferred stock to be participating securities due to their non-cumulative dividend rights.
Diluted net income per share attributable to common stockholders is computed by dividing the net income attributable to common stockholders by the weighted-average number of common shares outstanding, including all potentially dilutive common shares.
Undistributed earnings are allocated based on the contractual participation rights of Class A and Class B as if the earnings for the year have been distributed. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis. The computation of the diluted net income 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)
2016
 
2015
 
2014
 
 
 
 
 
 
Numerator:
 
 
 
 
 
Allocation of net income (loss)
$
(419,003
)
 
$
36,131

 
$
128,088

Less: net income allocable to participating securities

 

 
16,512

Net income (loss) attributable to common stockholders—basic
(419,003
)
 
36,131

 
111,576

Add: net income allocable to dilutive participating securities

 

 
2,277

Net income (loss) attributable to common stockholders—diluted
$
(419,003
)
 
$
36,131

 
$
113,853

 
 
 
 
 
 
Denominator:
 
 
 
 
 
Weighted-average common shares—basic for Class A and Class B common stock
139,425

 
134,595

 
104,453

Stock options, RSU's and ESPP shares

 
11,891

 
19,177

Weighted-average common shares—diluted for Class A and Class B common stock
139,425

 
146,486

 
123,630

 
 
 
 
 
 
Net income (loss) per share attributable to common stockholders:
 
 
 
 
 
Basic
$
(3.01
)
 
$
0.27

 
$
1.07

Diluted
$
(3.01
)
 
$
0.25

 
$
0.92


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)
2016
 
2015
 
2014
Stock options, RSUs and ESPP shares
21,000

 
2,681

 
15,921

Income taxes
Income taxes
Income taxes
Income before income taxes consisted of the following:
 
Year ended December 31,
(in thousands)
2016
 
2015
 
2014
Domestic
$
(200,595
)
 
$
13,562

 
$
114,937

Foreign
(174,579
)
 
39,023

 
66,038

 
$
(375,174
)
 
$
52,585

 
$
180,975


Income tax expense consisted of the following:
 
Year ended December 31,
(in thousands)
2016
 
2015
 
2014
Current:
 
 
 
 
 
Federal
$
(2,925
)
 
$
18,548

 
$
55,846

State
(356
)
 
3,007

 
6,075

Foreign
8,542

 
6,539

 
8,219

Total current
5,261

 
28,094

 
70,140

Deferred:
 
 
 
 
 
Federal
37,573

 
(11,211
)
 
(13,551
)
State
4,436

 
(204
)
 
(3,369
)
Foreign
(3,441
)
 
(225
)
 
(333
)
Total deferred
38,568

 
(11,640
)
 
(17,253
)
Income tax expense
$
43,829

 
$
16,454

 
$
52,887


As of December 31, 2016, $3.3 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. federal income and foreign withholding tax on these earnings.
 
Year ended December 31,
 
2016
 
2015
 
2014
(in thousands, except percentage)
$
 
%
 
$
 
%
 
$
 
%
Reconciliation to statutory rate:
 
 
 
 
 
 
 
 
 
 
 
Tax at federal statutory rate
$
(131,311
)
 
(35.0
)%
 
$
18,405

 
35.0
 %
 
$
63,341

 
35.0
 %
Change in valuation allowance
101,878

 
27.2

 
8,555

 
16.3

 

 

Impact of foreign operations
84,491

 
22.5

 
6,434

 
12.2

 
(13,305
)
 
(7.4
)
Stock-based compensation
15,718

 
4.2

 
2,390

 
4.5

 
8,050

 
4.4

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

 
2.8

 
4,911

 
2.7

Tax credits
(12,992
)
 
(3.5
)
 
(21,891
)
 
(41.6
)
 
(10,616
)
 
(5.9
)
Other
240

 
0.1

 
1,107

 
2.1

 
506

 
0.4

Income tax provision at effective tax rate
$
43,829

 
11.7
 %
 
$
16,454

 
31.3
 %
 
$
52,887

 
29.2
 %

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.
The higher effective tax rate for 2015 compared to 2014 was due to higher U.S. taxable income and lower international taxable income, which resulted from incurring a higher proportion of our 2015 operating expenses in foreign jurisdictions. Additionally, the effective tax rate for 2015 was lower than the federal statutory rate of 35% primarily due to benefits from research and development tax credits.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities were as follows:
 
December 31,
(in thousands)
2016
 
2015
Deferred tax assets:
 
 
 
Net operating loss carryforwards
$
30,193

 
$
339

Tax credit carryforwards
22,341

 
9,372

Stock-based compensation
26,656

 
19,096

Allowance for returns
6,336

 
8,812

Accruals and reserves
26,587

 
20,398

Total deferred tax assets
112,113

 
58,017

Valuation allowance
(110,433
)
 
(8,555
)
Total deferred tax assets, net of valuation allowance
1,680

 
49,462

Deferred tax liabilities:
 
 
 
Depreciation and amortization
(1,714
)
 
(6,937
)
Intangible assets
(2,540
)
 
(2,904
)
Total deferred tax liabilities
(4,254
)
 
(9,841
)
Net deferred tax assets (liabilities)
$
(2,574
)
 
$
39,621


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 that not that the U.S. deferred tax assets will be realized. Accordingly, a full valuation allowance is established 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 $101.9 million to $110.4 million as of December 31, 2016, primarily due to the establishment of a full valuation allowance on all U.S. federal and state deferred tax assets. As of December 31, 2015, the Company had established a valuation allowance of $8.6 million for state research tax credits.
As of December 31, 2016, the Company’s federal, California and other state net operating loss carryforwards for income tax purposes were $467.2 million, $201.5 million and $207.3 million, respectively and federal and California state tax credit carryforwards were $32.5 million and $27.9 million, respectively. If not utilized, federal loss, federal credit and California loss carryforwards will begin to expire from 2030 to 2036, while other state loss carryforwards will begin to expire from 2019 to 2036. 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 $467.2 million federal and state net operating loss carryforwards, approximately $8 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 $56.9 million, $36.3 million and $16.6 million, as of December 31, 2016, 2015 and 2014, respectively. For fiscal 2016, 2015 and 2014, total unrecognized income tax benefits in an amount of $24.1 million, $31.0 million and $16.6 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. The Company’s existing tax positions will continue to generate an increase in unrecognized tax benefits in subsequent 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 that the total amount of unrecognized tax benefits will materially increase within the next 12 months. However, 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:
 
December 31,
(in thousands)
2016
 
2015
 
2014
Gross balance at January 1
$
36,273

 
$
16,558

 
$
9,898

Gross increase related to current year tax positions
20,594

 
19,948

 
6,401

Gross increase related to prior year tax positions
130

 
108

 
259

Gross decrease related to prior year tax positions
(88
)
 
(341
)
 

 
$
56,909

 
$
36,273

 
$
16,558


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 for income taxes were not material for any period presented.
The Company files income tax returns in the 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 2015. 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 is currently under examination by the Internal Revenue Service for the 2012 through 2015 tax years. At this time, the Company is not able to estimate the potential impact that the examination may have on income tax expense. If the examination is resolved unfavorably, there is a possibility it may have a material negative impact on the Company's results of operations.
Related 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 $0.5 million, $0.7 million and $0.6 million in 2016, 2015 and 2014, respectively. As of December 31, 2016 and 2015, the Company had accounts payable associated with these aircraft fees of zero and $0.1 million, respectively.
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 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 $0.4 million in 2016. As of December 31, 2016, the Company had accounts payable associated with this vendor of $0.3 million.
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, $0.2 million and $12.2 million to this vendor in 2016, 2015 and 2014, respectively. As of December 31, 2016 and 2015, the Company had no accounts payable associated with this vendor.
In June 2014, the CEO purchased seven automobiles from the Company for a total purchase price of $0.3 million, which was equal to the deemed fair value of the automobiles purchased. There have been no additional purchases in 2016 and 2015.
In the second quarter of 2013, the Company loaned one of its executive officers $0.2 million pursuant to a demand payment loan that did not bear interest, which was fully repaid in March, 2014.
See Notes 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
The Company enters into multi-year agreements to lease facilities, purchase sponsorships with event organizers, resorts and athletes as part of its marketing efforts; software licenses related to its financial and IT systems; and various other contractual commitments.
In May 2016, the Company entered into a 3.5 year agreement with Red Bull GmbH (Red Bull) that includes content production, distribution and cross-promotion. As part of the agreement, the Company issued unregistered restricted shares of its Class A common stock to Red Bull with a fair value of approximately $7 million, which is being expensed ratably over one-year as a component of sales and marketing expense. Over the term of the agreement, Red Bull will also receive cash consideration, which is included in the other contractual commitments section of the table below.
The following table summarizes the Company's total undiscounted future expected obligations under multi-year agreements with terms longer than one year:
(in thousands)
Total
 
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
Operating leases(1)
$
139,511

 
$
16,972

 
$
20,345

 
$
13,896

 
$
17,157

 
$
16,770

 
$
54,371

Sponsorship commitments(2)
14,500

 
7,449

 
4,134

 
2,917

 

 

 

Other contractual commitments(3)
39,189

 
11,744

 
14,723

 
12,722

 

 

 

Total contractual cash obligations
$
193,200

 
$
36,165

 
$
39,202

 
$
29,535

 
$
17,157

 
$
16,770

 
$
54,371

(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 the multi-year agreement with Red Bull, as well as software licenses related to the Company's financial and IT systems which require payments over several years.
In 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 $6 million, which approximates the corresponding remaining lease rentals.
Rent expense was $19.8 million, $12.2 million and $7.3 million for 20162015 and 2014, respectively.
Product warranty
The following table summarizes the warranty liability activity:
 
Year ended December 31,
(in thousands)
2016
 
2015
 
2014
Beginning balances
$
10,856

 
$
6,405

 
$
3,870

Charged to cost of revenue
19,272

 
25,377

 
10,268

Settlements of warranty claims
(18,183
)
 
(20,926
)
 
(7,733
)
Ending balances
$
11,945

 
$
10,856

 
$
6,405


At December 31, 2016, $11.5 million of the warranty liability was recorded as an element of accrued liabilities and $0.5 million was recorded as an element of other long-term liabilities.
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, 2016, 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's management 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,
(in thousands)
2016
 
2015
Customer A
15%
 
*
Customer B
27%
 
40%
Customer C
*
 
18%
* Less than 10% of total accounts receivable for the period indicated
The following table summarizes the Company's accounts receivables sold, without recourse, and factoring fees paid:
 
Year ended December 31,
(in thousands)
2016
 
2015
 
2014
Accounts receivable sold
$
167,769

 
$
194,223

 
$
250,437

Factoring fees
1,266

 
1,566

 
2,148


Customers who represented 10% or more of the Company's total revenue were as follows:
 
Year ended December 31,
 
2016
 
2015
 
2014
Customer A
17%
 
14%
 
20%
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's management 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)
2016
 
2015
 
2014
Americas
$
619,784

 
$
868,772

 
$
890,352

EMEA
366,352

 
535,260

 
371,197

APAC
199,345

 
215,939

 
132,656

Total revenue
$
1,185,481

 
$
1,619,971

 
$
1,394,205


Revenue in the United States, which is included in the Americas geographic region, was $554.9 million, $769.2 million and $796.0 million for 2016, 2015 and 2014, 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, 2016 and 2015 long-lived assets, which represent gross property and equipment, located outside the United States, primarily in Hong Kong and China, were $76.6 million and $47.6 million, respectively.
Restructuring charges
Restructuring charges
Restructuring charges and other exit costs
First quarter 2016 restructuring. On January 12, 2016, the Company approved a restructuring that provided for a reduction in the Company’s global workforce of approximately 7%. The Company incurred aggregate restructuring expenses of $6.5 million in the first quarter of 2016, which primarily included cash-based severance costs. The plan was substantially completed as of March 31, 2016 and all costs have been paid.
Fourth quarter 2016 restructuring
On November 29, 2016, the Company approved a restructuring to reduce future operating expenses and achieve its goal of returning to profitability. 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. The Company estimates that it will incur total aggregate charges of approximately $40 million for the restructuring. The Company expects actions associated with the restructuring will be substantially completed in the first half of 2017.
Restructuring charges of approximately $36.6 million were recorded in the fourth quarter of 2016, which was comprised of the following:
 
 
(in thousands)
Amount
Employee severance pay and related costs(1)
$
18,893

Non-cash acceleration of stock-based compensation expense(1)
15,566

Non-cancelable leases, accelerated depreciation and other charges
2,122

Total restructuring charges
$
36,581

(1)
Includes total charges of $11.4 million (including $8.8 million for accelerated equity awards) associated with the departure of the Company's former President.
The following table provides a summary of the Company's restructuring activities in the fourth quarter of 2016 and the related liabilities recorded in accrued liabilities on the consolidated balance sheet. The Company expects to pay out its restructuring liability for severance in the first half of 2017.
 
 
 
 
 
 
(in thousands)
Severance
 
Other
 
Total
Restructuring liability as of October 1, 2016
$

 
$

 
$

Restructuring charges
18,893

 
879

 
19,772

Cash paid
(8,440
)
 

 
(8,440
)
Non-cash settlements
(793
)
 

 
(793
)
Restructuring liability as of December 31, 2016
$
9,660

 
$
879

 
$
10,539


Restructuring charges
The following table summarizes total 2016 restructuring charges in the consolidated statements of operations:
 
 
(in thousands)
Amount
Cost of revenue
$
497

Research and development
17,197

Sales and marketing
12,064

General and administrative
13,331

Total restructuring charges
$
43,089


Other exit costs. In addition to the restructuring actions above, in the second and third quarters of 2016, the Company committed to plans to vacate and sublet certain leased office facilities. Changes in estimated useful life of associated leasehold improvements and office equipment are expected to result in accelerated depreciation expense of approximately $10 million, including $6.0 million recorded in 2016 and $4.0 million ratably over an estimated remaining period of 8 months.
Valuation and Qualifying Accounts
Schedule of Valuation and Qualifying Accounts Disclosure [Text Block]
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 2016, 2015 and 2014

(in thousands)
Balance at Beginning of Year
 
Charges to Revenue
 
Charges to Expense
 
Deductions/Write-offs
 
Balance at End of Year
Allowance for doubtful accounts receivable:
 
 
 
 
 
 
 
 
 
Year ended December 31, 2016
$
1,400

 
$

 
$
40

 
$
(159
)
 
$
1,281

Year ended December 31, 2015
1,250

 

 
682

 
(532
)
 
1,400

Year ended December 31, 2014
520

 

 
970

 
(240
)
 
1,250

Allowance for sales returns:
 
 
 
 
 
 
 
 
 
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

Year ended December 31, 2014
14,352

 
39,011

 
(27,616
)
 

 
25,747

Valuation allowance for deferred tax assets:
 
 
 
 
 
 
 
 
 
Year ended December 31, 2016
$
8,555

 
$

 
$
101,878

 
$

 
$
110,433

Year ended December 31, 2015

 

 
8,555

 

 
8,555

Summary of business and significant accounting policies (Policies)
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. 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.
Inventory. Inventory consists of finished goods and component parts, which are purchased directly or from contract manufacturers. Inventory is stated at the lower of cost or market 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.
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 ten 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 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 techniques 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 for any periods presented. For the annual impairment testing in 2016, 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 value 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 or 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.
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 for any periods presented. For the annual impairment testing in 2016, 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 value 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 or 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 two-year warranty. 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, 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 grants limited rights to return product for certain large retailers and distributors. The Company records reductions to revenue and cost of sales for expected future product returns at the time of sale based on analyses of historical return trends by customer class. 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 two units of accounting: a) the hardware component (camera and/or accessories) and the embedded firmware essential to the functionality of the camera delivered at the time of sale, and b) 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, 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. The Company also offers several mobile and desktop applications at no charge to help users manage, edit, view and share their content. These applications are not essential to the functionality of the camera, therefore, are not accounted as a separate element of the arrangement.
Revenue allocated to the delivered hardware and the related essential software is recognized at the time of sale provided the conditions for recognition of revenue have been met. Revenue allocated to PCS is deferred and recognized on a straight-line basis over the estimated term of the support period, which is estimated to be 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, consisting primarily of cooperative advertising and marketing development fund programs. 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 when camera device models are released or repriced and the customer has remaining inventory on hand. The Company calculates price protection discounts in the period that the price reduction goes into effect, and they are recorded as a reduction of revenue, based on the evaluation of inventory currently held by the customer subject to price protection.
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 not included in revenue.
Advertising costs. Advertising costs consist of costs associated with print, television and ecommerce 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.
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. For service-based awards, stock-based compensation is recognized on a straight-line basis over the requisite service period, net of estimated forfeitures. For performance and market-based awards which also require a service period, the Company uses graded vesting over the longer of the derived service period or when the performance or market condition is satisfied.
The Company recognizes a benefit from stock-based compensation as additional paid-in capital if an excess tax benefit is realized by following the with-and-without approach. The indirect effects of stock-based compensation deductions are reflected in the income tax provision for purposes of measuring the excess tax benefit at settlement of awards.
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 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.
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 pronouncements
Standard
 
Description
 
Expected date of adoption
 
Effect on the financial statements or other significant matters
Standards that are not yet adopted
 
 
 
 
Revenue from Contracts with Customers
Accounting Standards Update (ASU) No. 2014-09, 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 initial analysis of the impact of the standard on its sales contract portfolio by reviewing its current accounting policies and practices to identify potential differences that would result from applying the requirements of the new standard to its sales contracts. The Company does not anticipate a material impact on its consolidated financial statements because the analysis of its contracts under the new standard supports the recognition of most of its revenue at the time product is shipped, consistent with its current revenue policy. Although the Company is continuing to review certain aspects of its policies and practices, it expects that, as a result of the adoption of the new guidance, the timing of recognizing certain sales incentives as a reduction of revenue will generally be earlier than under the existing guidance. The Company expects to utilize the modified retrospective transition method. 

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. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. 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.
Stock Compensation 
ASU No. 2016-09 (Topic 718)