Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended June 30, 2017
 
 
 
OR
 
 
 ☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from ________________ to ________________

Commission file number: 001-36514
logo2a17.jpg
GOPRO, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
77-0629474
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
3000 Clearview Way
San Mateo, California
 
94402
(Address of principal executive offices)
 
(Zip Code)
(650) 332-7600
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes þ    No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes þ    No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act (Check one).
Large accelerated filer þ
Accelerated filer 
Non accelerated filer 
 
 
    (Do not check if a smaller reporting company)
Smaller reporting company 
Emerging growth company 
 

If an emerging growth company, indicated by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ

As of June 30, 2017, 107,841,904 and 36,867,151 shares of Class A and Class B common stock were outstanding, respectively.
 

1


GoPro, Inc.
Index



 
 
Page
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements:
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II. OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 



2


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

GoPro, Inc.
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands, except par values)
June 30,
2017
 
December 31,
2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
149,755

 
$
192,114

Marketable securities

 
25,839

Accounts receivable, net
95,872

 
164,553

Inventory
126,708

 
167,192

Prepaid expenses and other current assets
29,515

 
38,115

Total current assets
401,850

 
587,813

Property and equipment, net
71,833

 
76,509

Intangible assets, net
29,001

 
33,530

Goodwill
146,459

 
146,459

Other long-term assets
72,828

 
78,329

Total assets
$
721,971

 
$
922,640

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
76,208

 
$
205,028

Accrued liabilities
151,317

 
211,323

Deferred revenue
15,036

 
14,388

Total current liabilities
242,561

 
430,739

Long-term taxes payable
20,865

 
26,386

Long-term debt
125,817

 

Other long-term liabilities
19,906

 
18,570

Total liabilities
409,149

 
475,695

 
 
 
 
Commitments, contingencies and guarantees (Note 8)

 

 
 
 
 
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, 98,766 and 104,647 shares issued and outstanding, respectively; 150,000 Class B shares authorized, 36,867 and 36,712 shares issued and outstanding, respectively
827,382

 
757,226

Treasury stock, at cost, 10,710 and 1,545 shares, respectively
(113,613
)
 
(35,613
)
Accumulated deficit
(400,947
)
 
(274,668
)
Total stockholders’ equity
312,822

 
446,945

Total liabilities and stockholders’ equity
$
721,971

 
$
922,640

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


GoPro, Inc.
Condensed Consolidated Statements of Operations
(unaudited)

 
Three months ended
 
Six months ended
(in thousands, except per share data)
June 30,
2017
 
June 30,
2016
 
June 30,
2017
 
June 30,
2016
Revenue
$
296,526

 
$
220,755

 
$
515,140

 
$
404,291

Cost of revenue
190,894

 
127,753

 
340,942

 
251,575

Gross profit
105,632

 
93,002

 
174,198

 
152,716

Operating expenses:
 
 
 
 
 
 
 
Research and development
55,497

 
93,049

 
121,663

 
170,028

Sales and marketing
56,678

 
84,888

 
124,534

 
164,337

General and administrative
18,440

 
24,442

 
41,199

 
49,163

Total operating expenses
130,615

 
202,379

 
287,396

 
383,528

Operating loss
(24,983
)
 
(109,377
)
 
(113,198
)
 
(230,812
)
Other income (expense):
 
 
 
 
 
 
 
Interest expense
(3,784
)
 
(516
)
 
(4,598
)
 
(659
)
Other income, net
222

 
1,176

 
383

 
1,012

Total other income (expense), net
(3,562
)
 
660

 
(4,215
)
 
353

Loss before income taxes
(28,545
)
 
(108,717
)
 
(117,413
)
 
(230,459
)
Income tax expense (benefit)
1,991

 
(16,950
)
 
24,273

 
(31,233
)
Net loss
$
(30,536
)
 
$
(91,767
)
 
$
(141,686
)
 
$
(199,226
)
 
 
 
 
 
 
 
 
Net loss per share:
 
 
 
 
 
 
 
Basic
$
(0.22
)
 
$
(0.66
)
 
$
(1.02
)
 
$
(1.44
)
Diluted
$
(0.22
)
 
$
(0.66
)
 
$
(1.02
)
 
$
(1.44
)
 
 
 
 
 
 
 
 
Shares used to compute net loss per share:
 
 
 
 
 
 
 
Basic
136,288

 
138,942

 
139,575

 
138,243

Diluted
136,288

 
138,942

 
139,575

 
138,243

The accompanying notes are an integral part of these condensed consolidated financial statements.


4


GoPro, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
 
Six months ended
(in thousands)
June 30, 2017
 
June 30, 2016
Operating activities:
 
 
 
Net loss
$
(141,686
)
 
$
(199,226
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
23,160

 
17,804

Stock-based compensation
24,360

 
33,135

Excess tax benefit from stock-based compensation (1)

 
(917
)
Deferred income taxes
(1,894
)
 
(13,494
)
Non-cash restructuring charges
2,800

 

Non-cash interest expense
1,530

 

Other
3,763

 
1,162

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
69,321

 
80,699

Inventory
40,484

 
98,343

Prepaid expenses and other assets
6,633

 
(9,282
)
Accounts payable and other liabilities
(178,536
)
 
(85,492
)
Deferred revenue
699

 
(1,457
)
Net cash used in operating activities
(149,366
)
 
(78,725
)
 
 
 
 
Investing activities:
 
 
 
Purchases of property and equipment, net
(10,112
)
 
(12,192
)
Maturities of marketable securities
14,160

 
71,302

Sale of marketable securities
11,623

 
6,791

Acquisitions, net of cash acquired

 
(104,353
)
Net cash provided by (used in) investing activities
15,671

 
(38,452
)
 
 
 
 
Financing activities:
 
 
 
Proceeds from issuance of common stock
6,629

 
5,265

Taxes paid related to net share settlement of equity awards
(8,210
)
 
(860
)
Proceeds from issuance of convertible senior notes
175,000

 

Prepayment of forward stock repurchase transaction
(78,000
)
 

Excess tax benefit from stock-based compensation (1)

 
917

Payment of deferred acquisition-related consideration
(75
)
 
(950
)
Payment of debt issuance costs
(5,250
)
 
(3,221
)
Net cash provided by financing activities
90,094

 
1,151

Effect of exchange rate changes on cash and cash equivalents
1,242

 
(134
)
Net decrease in cash and cash equivalents
(42,359
)
 
(116,160
)
Cash and cash equivalents at beginning of period
192,114

 
279,672

Cash and cash equivalents at end of period
$
149,755

 
$
163,512

(1) Effective January 1, 2017, the Company adopted an accounting standard which addresses, among other items, updates to the presentation and treatment of excess tax benefits related to stock-based compensation. See "Recent Accounting Standards" in Note 1 below.
The accompanying notes are an integral part of these condensed consolidated financial statements.

5


GoPro, Inc.
Notes to Condensed Consolidated Financial Statements


1. 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 unaudited condensed 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. The condensed consolidated financial statements reflect all adjustments (which are normal and recurring in nature) that management believes are necessary for the fair statement of the Company's financial statements, but are not necessarily indicative of the results expected for the full fiscal year or any other future period. The condensed consolidated balance sheet at December 31, 2016 has been derived from the audited financial statements at that date, but does not include all the disclosures required by GAAP. This Quarterly Report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K (Annual Report) for the year ended December 31, 2016. There have been no significant changes in the Company’s accounting policies from those disclosed in its Annual Report.
Principles of consolidation. These condensed 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 condensed consolidated financial statements and accompanying notes. Significant estimates and assumptions made by management include those related to revenue recognition (including sales returns, implied post contract support and marketing allowances), stock-based compensation, inventory valuation, product warranty liabilities, the valuation and useful lives of long-lived assets (property and equipment, intangible assets and goodwill) and income taxes. The Company bases its estimates and assumptions on historical experience and on various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from management's estimates. To the extent there are material differences between the estimates and the actual results, future results of operations could be affected.
Comprehensive income (loss). For all periods presented, comprehensive income (loss) approximated net income (loss). Therefore, the condensed consolidated statements of comprehensive income (loss) have been omitted.
Prior period reclassifications. Reclassifications of certain prior period amounts in the condensed consolidated financial statements have been made to conform to the current period presentation.

6


GoPro, Inc.
Notes to Condensed Consolidated Financial Statements

Recent accounting standards
Standard
 
Description
 
Date of adoption
 
Effect on the financial statements or other significant matters
Standards that were adopted
 
 
 
 
Stock Compensation 
Accounting Standards Update (ASU) No. 2016-09 (Topic 718)
 
This standard simplifies certain aspects of the accounting for share-based payment transactions, including income taxes, classification of awards and classification on the statement of cash flows. The new guidance also allows an entity to make a policy election to account for forfeitures as they occur.
 
January 1, 2017
 
Adoption of the standard resulted in the recognition of previously unrecognized excess tax benefits using the modified retrospective method. The Company recorded an increase to U.S. deferred tax assets of $179 million which was recorded directly against accumulated deficit. The increased deferred tax asset allowed for an offset against long-term income tax payable of $16 million. A full valuation allowance was provided on the remaining U.S. deferred tax asset of $163 million, which was also recorded against accumulated deficit. The net impact to equity was a decrease in the accumulated deficit of approximately $16 million. The Company elected to apply the change in presentation to the statements of cash flows prospectively and elected to account for forfeitures as they occur.
Standards not yet adopted
 
 
 
 
Revenue from Contracts with Customers
ASU No. 2014-09, 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's 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 recognized approximately $19 and $42 million as a reduction to revenue for such sales incentives for the first six months of 2017 and for the full year 2016, respectively.) The Company does not expect that the adoption of ASU 2014-09 will have a material impact to the quarterly or yearly sales incentives recognized.  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. The new standard should be applied on a modified retrospective basis.
 
January 1, 2019
 
Although the Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements and related disclosures, the Company currently expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon adoption.

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

 
January 1, 2018
 
The Company is evaluating the impact that the adoption of this standard will have on its consolidated financial statements and related disclosures.

7


GoPro, Inc.
Notes to Condensed Consolidated Financial Statements

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

 
This standard simplifies the accounting for goodwill and removes Step 2 of the annual goodwill impairment test. Upon adoption, goodwill impairment will be determined based on the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017, and requires a prospective transition method.

 
January 1, 2020
 
The Company does not expect the adoption of this standard will have a material impact on its consolidated financial statements and related disclosures.
Stock Compensation 
ASU No. 2017-09 (Topic 718)

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

 
January 1, 2018
 
The Company is evaluating the impact that the adoption of this standard will have on its consolidated financial statements and related disclosures.
Although there are several other new accounting standards issued or proposed by the FASB, which the Company has adopted or will adopt, as applicable, the Company does not believe any of these additional accounting pronouncements has had or will have a material impact on its financial statements.

2. Condensed consolidated financial statement details
The following sections and tables provide details of selected balance sheet items.
Cash, cash equivalents and marketable securities
(in thousands)
June 30,
2017
 
December 31, 2016
Cash
$
57.518

 
$
174,090

Cash equivalents
92.237

 
18,024

Total cash and cash equivalents
$
149,755

 
$
192,114

Marketable securities
$

 
$
25,839

Cash and cash equivalents including money market funds that have original maturity dates of three months or less which are highly liquid. The carrying value of cash and cash equivalents approximates fair value due to the short-term nature of these investments and are classified as level 1. Refer to the audited financial statements contained in the Company's Annual Report for information regarding marketable securities as of December 31, 2016.
Inventory
(in thousands)
June 30,
2017
 
December 31, 2016
Components
$
18,828

 
$
25,236

Finished goods
107,880

 
141,956

Total inventory
$
126,708

 
$
167,192


8


GoPro, Inc.
Notes to Condensed Consolidated Financial Statements

Property and equipment, net
(in thousands)
June 30,
2017
 
December 31, 2016
Leasehold improvements
$
49,520

 
$
48,103

Production, engineering and other equipment
47,280

 
46,328

Tooling
25,506

 
23,742

Computers and software
19,834

 
18,750

Furniture and office equipment
12,909

 
12,530

Tradeshow equipment and other
7,578

 
7,578

Construction in progress
11,859

 
1,870

Gross property and equipment
174,486

 
158,901

Less: Accumulated depreciation and amortization
(102,653
)
 
(82,392
)
Property and equipment, net
$
71,833

 
$
76,509

Intangible assets
 
June 30, 2017
(in thousands)
Gross carrying value
 
Accumulated
amortization
 
Net carrying value
Purchased technology
$
47,001

 
$
(21,515
)
 
$
25,486

In-process research and development (IPR&D)
3,515

 

 
3,515

Total intangible assets
$
50,516

 
$
(21,515
)
 
$
29,001

 
December 31, 2016
(in thousands)
Gross carrying value
 
Accumulated
amortization
 
Net carrying value
Purchased technology
$
47,001

 
$
(17,086
)
 
$
29,915

IPR&D
3,615

 

 
3,615

Total intangible assets
$
50,616

 
$
(17,086
)
 
$
33,530

As of June 30, 2017, technological feasibility has not been established for the remaining IPR&D assets, which have no alternative future use and, as such, continue to be accounted for as indefinite-lived intangible assets.
Amortization expense was $4.5 million and $3.9 million in the six months ended June 30, 2017 and 2016, respectively. At June 30, 2017, expected amortization expense of intangible assets with definite lives for future periods is as follows:
(in thousands)
Total
Year ending December 31,
 
2017 (remaining 6 months)
$
4,260

2018
8,297

2019
7,786

2020
4,273

2021
870

 
$
25,486


9


GoPro, Inc.
Notes to Condensed Consolidated Financial Statements

Accrued liabilities
(in thousands)
June 30,
2017
 
December 31, 2016
Accrued payables
$
49,483

 
$
91,655

Employee related liabilities (1)
20,546

 
42,577

Accrued sales incentives
26,033

 
40,070

Warranty liability
9,613

 
11,456

Customer deposits
5,433

 
4,381

Income taxes payable
19,375

 
2,756

Purchase order commitments
4,456

 
4,730

Other
16,378

 
13,698

Accrued liabilities
$
151,317

 
$
211,323

(1) 
See Note 10 for amounts associated with restructuring liabilities.

3. Financing Arrangements
Credit Facility
In March 2016, the Company entered into a Credit Agreement (Credit Agreement) with JPMorgan Chase Bank, N.A., as administrative agent, Wells Fargo, 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 determined at periodic intervals and is based upon a borrowing base formula with respect to the Company’s inventory and accounts receivable balances. For additional information regarding the credit facility, please refer to the audited financial statements contained in our Annual Report.
At June 30, 2017 and December 31, 2016, the Company may borrow up to approximately $89 million and $150 million, respectively, 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.
Convertible Notes
On April 12, 2017, the Company issued $175.0 million aggregate principal amount of 3.50% Convertible Senior Notes due 2022 (Notes) in a private offering to qualified institutional buyers, pursuant to Rule 144A under the Securities Act of 1933, as amended (Securities Act). The Notes were issued pursuant to an Indenture, dated as of April 12, 2017, between the Company and Wells Fargo Bank, National Association, as trustee (Wells Fargo). The Notes are senior, unsecured, obligations of GoPro. The Notes mature on April 15, 2022, unless earlier repurchased or converted into shares of Class A common stock under certain circumstances described below. The Notes are convertible into cash, shares of the Company’s Class A common stock, or a combination thereof, at the Company’s election, at an initial conversion rate of 94.0071 shares of Class A common stock per $1,000 principal amount of the Notes, which is equivalent to an initial conversion price of approximately $10.64 per share of common stock, subject to adjustment. Upon conversion, the Company currently intends to deliver cash up to the principal amount of the Notes then outstanding. The Company will pay interest on the Notes semi-annually in arrears on April 15 and October 15 of each year with interest payments beginning on October 15, 2017.
The $175.0 million of proceeds received from the issuance of the Notes were allocated between long-term debt (the liability component) of $128.3 million and additional paid-in-capital (the equity component) of $46.7 million on the condensed consolidated balance sheet. The fair value of the liability component was measured using rates determined for similar debt instruments without a conversion feature. The carrying amount of the equity component, representing

10


GoPro, Inc.
Notes to Condensed Consolidated Financial Statements

the conversion option, was determined by deducting the fair value of the liability component from the aggregate face value of the Notes. The liability component will be accreted up to the face value of the Notes of $175.0 million, which will result in additional non-cash interest expense being recognized in the condensed consolidated statements of operations through the Notes maturity date. The nonconvertible borrowing rate on the Notes, including accretion of the notes to par and debt issuance cost amortization, was approximately 10.5%. The equity component will not be remeasured as long as it continues to meet the conditions for equity classification.
The Company incurred approximately $5.7 million of issuance costs related to the issuance of the Notes, of which $4.2 million and $1.5 million were recorded to long-term debt and additional paid-in capital, respectively, in proportion to the allocation of the proceeds of the Notes. The $4.2 million of issuance costs recorded as long-term debt on the condensed consolidated balance sheet is being amortized ratably over the five-year contractual term of the Notes.
The Company may not redeem the Notes prior to the maturity date and no sinking fund is provided for the Notes. The Indenture includes customary terms and covenants, including certain events of default after which the Notes may be due and payable immediately.
Holders may convert the Notes, at their option, in multiples of $1,000 principal amount at any time prior to January 15, 2022, but only in the following circumstances:
during any calendar quarter beginning after the calendar quarter ending on September 30, 2017, if the last reported sale price of Class A common stock for at least 20 trading days (whether or not consecutive) during the last 30 consecutive trading days of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price of the Notes on each applicable trading day;
during the five-business day period following any five consecutive trading day period in which the trading price for the Notes is less than 98% of the product of the last reported sale price of Class A common stock and the conversion rate for the Notes on each such trading day; or
upon the occurrence of specified corporate events.
Regardless of whether any of the foregoing circumstances occurs, a holder may convert its Notes, in multiples of $1,000 principal amount, at any time on or after January 15, 2022 until the second scheduled trading day immediately preceding the maturity date of the Notes on April 22, 2022. Holders of the Notes who convert their Notes in connection with a make-whole fundamental change (as defined in the Indenture) are, under certain circumstances, entitled to an increase in the conversion rate. In addition, in the event of a fundamental change prior to the maturity date (as defined in the Indenture), holders will, subject to certain conditions, have the right, at their option, to require the Company to repurchase for cash all or part of their notes at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the repurchase date.
As of June 30, 2017, the outstanding principal on the Notes was $175.0 million, the unamortized debt discount was $45.2 million, the unamortized debt issuance cost was $4.0 million and the net carrying amount of the liability component was $125.8 million, which was recorded as long-term debt within the condensed consolidated balance sheet. For the first half of 2017, the Company recorded interest expense of $1.2 million for contractual coupon interest, $0.2 million for amortization of debt issuance costs and $1.5 million for amortization of the debt discount.
In connection with the offering, the Company entered into a prepaid forward stock repurchase transaction (Prepaid Forward) with a financial institution (Forward Counterparty). Pursuant to the Prepaid Forward, the Company used approximately $78.0 million of the net proceeds from the offering of the Notes to fund the Prepaid Forward. The aggregate number of shares of the Company’s Class A common stock underlying the Prepaid Forward was approximately 9.2 million. The expiration date for the Prepaid Forward is April 15, 2022, although it may be settled earlier in whole or in part. Upon settlement of the Prepaid Forward, at expiration or upon any early settlement, the Forward Counterparty will deliver to the Company the number of shares of Class A common stock underlying the Prepaid Forward or the portion thereof being settled early. The shares purchased under the Prepaid Forward are treated as treasury stock on the consolidated balance sheet (and not outstanding for purposes of the calculation of basic and diluted earnings per share), but will remain outstanding for corporate law purposes, including for purposes of any future stockholders' votes, until the Forward Counterparty delivers the shares underlying the Prepaid Forward to the Company. The Company’s Prepaid Forward hedge transactions expose the Company to credit risk to the extent that its counterparties may be unable to meet the terms of the transactions. The Company mitigates this risk by limiting its counterparties to major financial institutions.

11


GoPro, Inc.
Notes to Condensed Consolidated Financial Statements

4. Employee benefit plans
Equity incentive plans. The Company has outstanding equity grants from its three stock-based employee compensation plans: the 2014 Equity Incentive Plan (2014 Plan), the 2010 Equity Incentive Plan (2010 Plan) and the 2014 Employee Stock Purchase Plan (ESPP). No new options or awards have been granted under the 2010 Plan since June 2014. Outstanding options and awards under the 2010 Plan continue to be subject to the terms and conditions of the 2010 Plan. Options granted under the 2014 Plan generally expire within 10 years from the date of grant and generally vest over one to four years. Restricted stock units (RSUs) granted under the 2014 Plan generally vest over two to four-years based upon continued service and are settled at vesting in shares of the Company's Class A common stock. The ESPP allows eligible employees to purchase shares of the Company's Class A common stock through payroll deductions at a price equal to 85% of the lesser of the fair market value of the stock as of the first date or the ending date of each six month offering period. For additional information regarding the Company's equity incentive plans, please refer to the audited financial statements contained in its 2016 Annual Report.
Stock options
A summary of the Company’s stock option activity in the six months ended June 30, 2017 is as follows:
 
Options outstanding
 
Shares (in thousands)
 
Weighted- average
exercise price
 
Aggregate
intrinsic value
(in thousands)
Outstanding at December 31, 2016:
12,379

 
$
12.17

 
$
32,772

Granted
1,747

 
9.30

 
 
Exercised
(1,113
)
 
1.45

 
 
Forfeited/Cancelled
(2,318
)
 
17.44

 
 
Outstanding at June 30, 2017:
10,695

 
11.68

 
22,769

 
 
 
 
 
 
Exercisable at June 30, 2017
8,162

 
$
11.46

 
$
22,769

The aggregate intrinsic value of the stock options outstanding as of June 30, 2017 represents the value of the Company's closing stock price on June 30, 2017 in excess of the exercise price multiplied by the number of options outstanding.
Restricted stock units
A summary of RSU activity in the six months ended June 30, 2017 is as follows:
 
Shares (in thousands)
 
Weighted- average grant date fair value
Non-vested shares at December 31, 2016:
7,970

 
$
18.08

Granted
4,036

 
9.27

Vested
(2,537
)
 
13.99

Forfeited
(2,388
)
 
17.79

Non-vested shares at June 30, 2017:
7,081

 
14.62

In June 2014, the Company granted an award of 4.5 million RSUs covering shares of the Company's Class B common stock to the Company's CEO (CEO RSUs), which included 1.5 million RSUs that vested immediately upon grant and 3.0 million RSUs that were subject to both a market-based vesting condition and a three-year service-based vesting condition. The market-based condition was achieved in January 2015. Stock-based compensation expense related to the CEO RSUs was $0.6 million and $4.2 million for the six months ended June 30, 2017 and 2016, respectively.
Employee stock purchase plan. In the six months ended June 30, 2017 and 2016, the Company issued 625,811 and 431,673 shares under its ESPP at weighted average prices of $8.02 and $8.76, respectively.

12


GoPro, Inc.
Notes to Condensed Consolidated Financial Statements

Stock-based compensation expense. The Company measures compensation expense for all stock-based payment awards based on the estimated fair values on the date of the grant. The fair value of stock options granted and ESPP issuances is estimated using the Black-Scholes option pricing model. The fair value of RSUs is determined using the Company's closing stock price on the date of grant. There have been no significant changes in the Company’s valuation assumptions from those disclosed in its 2016 Annual Report.
The following table summarizes stock-based compensation included in the condensed consolidated statements of operations:
 
Three months ended
 
Six months ended
(in thousands)
June 30,
2017
 
June 30,
2016
 
June 30,
2017
 
June 30,
2016
Cost of revenue
$
415

 
$
412

 
$
910

 
$
769

Research and development
5,390

 
7,086

 
11,072

 
13,096

Sales and marketing
1,995

 
3,679

 
4,686

 
6,883

General and administrative
3,435

 
6,227

 
7,692

 
12,387

Total stock-based compensation expense
$
11,235

 
$
17,404

 
$
24,360

 
$
33,135

The income tax benefit related to stock-based compensation expense was zero and $10.2 million for the six months ended June 30, 2017 and 2016, respectively. There was no income tax benefit in the six months ended June 30, 2017 due to a full valuation allowance on the Company's U.S. net deferred tax assets (see Note 6 below).
At June 30, 2017, total unearned stock-based compensation of $91.2 million related to stock options, RSUs and ESPP shares is expected to be recognized over a weighted average period of 2.2 years.

5. Net loss per share
Basic net loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding, including all potentially dilutive common shares. Additionally, the calculation of weighted average shares outstanding as of June 30, 2017 excludes approximately 9.2 million shares that will be repurchased as a result of the Prepaid Forward transactions.
The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to ten votes per share. Each share of Class B common stock is convertible at any time at the option of the stockholder into one share of Class A common stock and has no expiration date. Each share of Class B common stock will convert automatically into one share of Class A common stock upon the date when the outstanding shares of Class B common stock represent less than 10% of the aggregate number of shares of common stock then outstanding. Class A common stock is not convertible into Class B common stock. The computation of the diluted net loss per share of Class A common stock assumes the conversion of Class B common stock.

13


GoPro, Inc.
Notes to Condensed Consolidated Financial Statements

The following table presents the calculations of basic and diluted net loss per share:
 
Three months ended
 
Six months ended
(in thousands, except per share data)
June 30,
2017
 
June 30,
2016
 
June 30,
2017
 
June 30,
2016
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net loss
$
(30,536
)
 
$
(91,767
)
 
$
(141,686
)
 
$
(199,226
)
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted-average common shares—basic for Class A and Class B common stock
136,288

 
138,942

 
139,575

 
138,243

Effect of dilutive stock-based awards

 

 

 

Weighted-average common shares—diluted for Class A and Class B common stock
136,288

 
138,942

 
139,575

 
138,243

 
 
 
 
 
 
 
 
Net loss per share:
 
 
 
 
 
 
 
Basic
$
(0.22
)
 
$
(0.66
)
 
$
(1.02
)
 
$
(1.44
)
Diluted
$
(0.22
)
 
$
(0.66
)
 
$
(1.02
)
 
$
(1.44
)
The following potentially dilutive shares were not included in the calculation of diluted shares outstanding as the effect would have been anti-dilutive:
 
Three months ended
 
Six months ended
(in thousands)
June 30,
2017
 
June 30,
2016
 
June 30,
2017
 
June 30,
2016
Effect of anti-dilutive stock-based awards
19,474

 
21,391

 
20,235

 
19,848


6. Income taxes
The Company’s income tax expense and the resulting effective tax rate are based upon the estimated annual effective tax rates applicable for the respective period, including losses generated in countries where the Company is projecting annual losses for which a deferred tax asset is not anticipated to be recognized. In the fourth quarter of 2016, the Company recorded a full valuation allowance against its net U.S. deferred tax assets, and for the foreseeable future anticipates providing a valuation allowance against any additional deferred tax assets until such time it is more likely than not the benefit of these deferred tax assets may be recognized.
The Company's tax provision and the resulting effective tax rate for interim periods is determined based upon its estimated annual effective tax rate, adjusted for the effect of discrete items arising in that quarter. The Company also includes jurisdictions with a projected loss for the year (or year-to-date loss) where the Company cannot or does not expect to recognize a tax benefit from its estimated annual effective tax rate. The impact of such inclusions could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings or losses versus annual projections. The Company updates its estimate of the annual effective tax rate each quarter, and if the estimated annual tax rate changes, a cumulative adjustment is made in that quarter.
 
Three months ended
 
Six months ended
(dollars in thousands)
June 30,
2017
 
June 30,
2016
 
June 30,
2017
 
June 30,
2016
Income tax expense (benefit)
$
1,991

 
$
(16,950
)
 
$
24,273

 
$
(31,233
)
Effective tax rate
(7.0
)%
 
15.6
%
 
(20.7
)%
 
13.6
%

14


GoPro, Inc.
Notes to Condensed Consolidated Financial Statements

The Company recorded an income tax provision of $2.0 million for the three months ended June 30, 2017 on a pre-tax net loss of $28.5 million, which resulted in a negative effective tax rate of 7.0%. The Company recorded an income tax provision of $24.3 million for the six months ended June 30, 2017 on a pre-tax net loss of $117.4 million, which resulted in a negative effective tax rate of 20.7%. The Company’s income tax provisions in the three and six months ended June 30, 2017 were principally composed of tax expenses incurred on pre-tax income in profitable foreign jurisdictions. While the Company incurred pre-tax losses in the United States and certain lower-rate jurisdictions, the Company does not expect to recognize any tax benefits on pre-tax losses in the United States due to a full valuation allowance recorded against its U.S. deferred tax assets. The effective tax rate of 15.6% and 13.6% for the three months ended and six months ended June 30, 2016 resulted from the Company providing a net tax benefit on pre-tax losses in the United States, which was offset by income taxes at lower rates in profitable foreign jurisdictions (primarily related to the Company's wholly owned subsidiaries in Europe). Future changes in the forecast annual income (loss) projections, tax rate changes, or discrete tax items could result in significant adjustments to quarterly income tax expense (benefit) in future periods.
The Company is currently under examination by the Internal Revenue Service for the 2012 through 2015 tax years and 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. At June 30, 2017 and December 31, 2016, the Company’s gross unrecognized tax benefits were $73.5 million and $56.9 million, respectively. If recognized, $16.7 million of these unrecognized tax benefits (net of U.S. federal benefit) at June 30, 2017 would be recorded as a reduction of future income tax provision. 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.

7. 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 zero and $0.6 million in the six months ended June 30, 2017 and 2016, respectively. As of June 30, 2017 and December 31, 2016, the Company had no accounts payable associated with these aircraft fees.
The Company obtained services from a vendor whose CEO is also one of the members of the Company's board of directors. The Company recorded expense of zero and $0.1 million in the six months ended June 30, 2017 and 2016, respectively. As of June 30, 2017 and December 31, 2016, the Company had accounts payable associated with this vendor of zero and $0.3 million, respectively.
See Note 4 above for information regarding CEO RSUs.

8. Commitments, contingencies and guarantees
Facility Leases. The Company leases its facilities under long-term operating leases, which expire at various dates through 2027. As of December 31, 2016, the Company’s total future minimum lease payments under non-cancelable operating leases were $139.5 million. There have been no material changes to the Company's lease commitments during the first and second quarters of 2017. Rent expense was $10.0 million and $9.8 million for the six months ended June 30, 2017 and 2016, respectively.
Other Commitments. In the ordinary course of business, the Company enters into multi-year agreements to purchase sponsorships with event organizers, resorts and athletes as part of its marketing efforts, software licenses related

15


GoPro, Inc.
Notes to Condensed Consolidated Financial Statements

to its financial and IT systems and various other contractual commitments. As of June 30, 2017, the Company's total undiscounted future expected obligations under multi-year agreements described above with terms longer than one year was $14.1 million, composed of payments to be made of $5.2 million during the remaining six months of 2017, and $5.4 million and $3.5 million in 2018 and 2019, respectively. The decrease of $39.6 million from future expected obligations of $53.7 million at December 31, 2016 was primarily due to the termination of a 3.5-year agreement the Company entered into with Red Bull GmbH in May 2016 and the termination of a contract with a software technology development vendor that resulted in a reduction to the Company's future expected obligations. There were no other material changes during the first half of 2017.
Product warranty
The following table summarizes the warranty liability activity:
 
Three months ended
 
Six months ended
(in thousands)
June 30,
2017
 
June 30,
2016
 
June 30,
2017
 
June 30,
2016
Beginning balances
$
11,442

 
$
8,011

 
$
11,944

 
$
10,855

Charged to cost of revenue
829

 
5,871

 
2,258

 
8,541

Settlements of warranty claims
(2,297
)
 
(4,943
)
 
(4,228
)
 
(10,457
)
Ending balances
$
9,974

 
$
8,939

 
$
9,974

 
$
8,939

Legal proceedings. From time to time, the Company is involved in legal proceedings in the ordinary course of business, including the litigation matters described in Part II, Item 1 of this Quarterly Report on Form 10-Q. 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 June 30, 2017, the Company has not paid any claims nor has it been required to defend any action related to its indemnification obligations. However, the Company may record charges in the future as a result of these indemnification obligations.
9. 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:
 
June 30,
2017
 
December 31, 2016
Customer A
17%
 
15%
Customer B
32%
 
27%

16


GoPro, Inc.
Notes to Condensed Consolidated Financial Statements

The following table summarizes the Company's accounts receivables sold, without recourse, and factoring fees paid:
 
Three months ended
 
Six months ended
(in thousands)
June 30,
2017
 
June 30,
2016
 
June 30,
2017
 
June 30,
2016
Accounts receivable sold
$
41,574

 
$
43,794

 
$
78,962

 
$
64,304

Factoring fees
368

 
317

 
680

 
459

Customers who represented 10% or more of the Company's total revenue were as follows:
 
Three months ended
 
Six months ended
 
June 30,
2017
 
June 30,
2016
 
June 30,
2017
 
June 30,
2016
Customer A
17%
 
21%
 
16%
 
18%
Customer B
12%
 
14%
 
*
 
14%
* 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:
 
Three months ended
 
Six months ended
(in thousands)
June 30,
2017
 
June 30,
2016
 
June 30,
2017
 
June 30,
2016
Americas
$
157,027

 
$
124,570

 
$
252,734

 
$
209,875

Europe, Middle East and Africa ("EMEA")
80,214

 
60,714

 
148,077

 
120,992

Asia and Pacific ("APAC")
59,285

 
35,471

 
114,329

 
73,424

Total revenue
$
296,526

 
$
220,755

 
$
515,140

 
$
404,291

Revenue in the United States, which is included in the Americas geographic region, was $227.4 million and $188.2 million for the six months ended June 30, 2017 and 2016, 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 June 30, 2017 and December 31, 2016 long-lived assets, which represent gross property and equipment, located outside the United States, primarily in Hong Kong and China, were $80.4 million and $76.6 million, respectively.


17


GoPro, Inc.
Notes to Condensed Consolidated Financial Statements

10. Restructuring charges
Restructuring charges for each period were as follows:
 
Six months ended
(in thousands)
June 30,
2017
 
June 30,
2016
Cost of revenue
$
418

 
$
364

Research and development
7,381

 
2,655

Sales and marketing
5,603

 
2,678

General and administrative
1,409

 
811

Total restructuring charges
$
14,811

 
$
6,508

First quarter 2017 restructuring
On March 15, 2017, the Company approved a restructuring to further reduce future operating expenses and better align resources around its long-term business strategy. The restructuring provided for a reduction of employee headcount and open positions, eliminating a total of approximately 270 positions, as well as the consolidation of certain leased office facilities. In the first half of 2017, the Company recorded restructuring charges of $10.7 million, including $8.9 million related to severance and $1.7 million related to accelerated depreciation. The actions associated with the first quarter 2017 restructuring are expected to be substantially completed in the third quarter of 2017.
The following table provides a summary of the Company's restructuring activities for the first six months of 2017 and the related liabilities recorded in accrued liabilities on the condensed consolidated balance sheet.
(in thousands)
Severance
 
Other
 
Total
Restructuring liability as of December 31, 2016
$

 
$

 
$

Restructuring charges
8,884

 
92

 
8,976

Cash paid
(7,763
)
 
(5
)
 
(7,768
)
Non-cash settlements

 

 

Restructuring liability as of June 30, 2017
$
1,121

 
$
87

 
$
1,208

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. Under the fourth quarter 2016 restructuring, the Company has recorded cumulative charges of $40.7 million, including $4.1 million related to severance and facilities in the six months ended June 30, 2017. The fourth quarter 2016 restructuring was largely completed by March 31, 2017, with only small incremental charges recorded in the second quarter of 2017.
The following table provides a summary of the Company's restructuring activities for the first six months of 2017 and the related liabilities recorded in accrued liabilities on the condensed consolidated balance sheet.
(in thousands)
Severance
 
Other
 
Total
Restructuring liability as of December 31, 2016
$
9,660

 
$
879

 
$
10,539

Restructuring charges
2,009

 
1,025

 
3,034

Cash paid
(11,177
)
 
(1,818
)
 
(12,995
)
Non-cash settlements
17

 
20

 
37

Restructuring liability as of June 30, 2017
$
509

 
$
106

 
$
615


18


GoPro, Inc.
Notes to Condensed Consolidated Financial Statements

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 completed as of March 31, 2016 and all costs have been paid. No charges were recorded in periods after March 31, 2016.

19


GoPro, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
Our MD&A is provided in addition to the accompanying consolidated condensed financial statements and accompanying notes to assist readers in understanding our results of operations, financial condition and cash flows.
This MD&A is organized as follows:
Overview. Discussion of our business and overall analysis of financial and other highlights affecting the Company in order to provide context for the remainder of MD&A.
Results of Operations. Analysis of our financial results comparing the second quarter and first six months of 2017 to 2016.
Liquidity and Capital Resources. Analysis of changes in our balance sheets and cash flows, and discussion of our financial condition and potential sources of liquidity.
Contractual Commitments. Material changes, outside our ordinary course of business, to our contractual obligations, off-balance sheet arrangements and indemnifications from December 31, 2016.
Non-GAAP Financial Measures. A presentation of results reconciling GAAP to non-GAAP adjusted measures.
The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2016 and the condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q of GoPro, Inc. (“GoPro” or “we” or “the Company”). Our MD&A contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding guidance, industry prospects, product and marketing plans, or future results of operations or financial position, made in this Quarterly Report on Form 10-Q are forward-looking. To identify forward-looking statements, we use such words as “expect," “anticipate," “believe," "may," "will," "estimate," "continue," "intend," "target," "goal," "plan," or variations of such words and similar expressions. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their date. If any of management's assumptions prove incorrect or should unanticipated circumstances arise, the Company's actual results could materially differ from those anticipated by such forward-looking statements. The differences could be caused by a number of factors or combination of factors including, but not limited to, those factors identified and detailed in the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2016 and in “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2017. Forward-looking statements include new product offering plans and key hardware and software features, research and development plans, marketing plans, plans for international expansion, plans to reduce operating expense and drive profitability, and projections of results of operations, and any discussion of the trends and other factors that drive our business and future results in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including the discussion appearing thereunder in "Looking Ahead" and other sections of this Quarterly Report on Form 10-Q including but not limited to Item 1A Risk Factors. Readers are strongly encouraged to consider the foregoing including those factors when evaluating any forward-looking statements concerning the Company. The Company does not undertake any obligation to update any forward-looking statements in this Quarterly Report on Form 10-Q to reflect future events or developments.
Overview
GoPro, Inc. is transforming the way people capture and share their lives. What began as an idea to help athletes self-document themselves engaged in sport, GoPro has become a mobile storytelling solution that helps the world share itself through immersive content.
Helping consumers capture and share experiences is at the core of our business. We are committed to developing solutions that create an easy, seamless experience for consumers to capture, create and enjoy engaging personal content. We sell our products globally through retailers, wholesale distributors and on our website.
In Fall 2016, we launched our cloud connected HERO5 cameras, which began shipping in September 2016, and a new ecosystem of mountable, wearable and voice activated accessories. We offer many professional-grade features within our good-better-best product camera offering of HERO Session, HERO5 Session and HERO5 Black. Our HERO5 cameras feature voice control and can automatically upload photos and videos to GoPro Plus, a premium cloud-based solution that enables subscribers to easily access, edit and share content. In July 2017, we released GoPro QuikStories, a new mobile experience for HERO5 cameras that seamlessly copies your GoPro photos and

20


GoPro, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations

video clips to your smartphone and transforms them into a ready-to-share video. QuikStories makes it simple to automatically create a polished, shareable edit complete with music, effects and transitions.
Our Karma drone was available for sale in US markets in February 2017 and distribution in international markets began at the end of March 2017.
The following is a summary of measures presented in our condensed consolidated financial statements and key metrics used to evaluate our business, measure our performance, develop financial forecasts and make strategic decisions.
 
 
 
% Change
(units and dollars in thousands, except per share amounts)
Q2 2017
 
Q1 2017
 
Q2 2016
 
Q2 2017 vs. Q1 2017
 
Q2 2017 vs. Q2 2016
Revenue
$
296,526

 
$
218,614

 
$
220,755

 
36
 %
 
34
 %
Camera units shipped (1)
1,061

 
738

 
759

 
44
 %
 
40
 %
Gross margin (2)
35.6
%
 
31.4
%
 
42.1
%
 
(420) bps

 
(650) bps

Operating expenses
$
130,615

 
$
156,781

 
$
202,379

 
(17
)%
 
(35
)%
Net loss
$
(30,536
)
 
$
(111,150
)
 
$
(91,767
)
 
(73
)%
 
(67
)%
Diluted net loss per share
$
(0.22
)
 
$
(0.78
)
 
$
(0.66
)
 
(72
)%
 
(67
)%
Cash used in operations
$
(11,428
)
 
$
(137,938
)
 
$
(45,460
)
 
(92
)%
 
(75
)%
 
 
 
 
 
 
 
 
 
 
Other financial information:
 
 
 
 
 
 
 
 
 
Adjusted EBITDA (3)
$
5,120

 
$
(45,669
)
 
$
(76,757
)
 
(111
)%
 
(107
)%
Non-GAAP net loss (4)
$
(12,914
)
 
$
(62,783
)
 
$
(72,595
)
 
(79
)%
 
(82
)%
Non-GAAP loss per share
$
(0.09
)
 
$
(0.44
)
 
$
(0.52
)
 
(80
)%
 
(83
)%
(1) Represents the number of camera units that are shipped during a reporting period, including camera units that are shipped with drones, net of any returns. Camera units shipped does not include drones, mounts or accessories.
(2) One basis point (bps) is equal to 1/100th of 1%.
(3) We define adjusted EBITDA as net income (loss) adjusted to exclude the impact of: provision for income taxes, interest income, interest expense, depreciation and amortization, POP display amortization, stock-based compensation, impairment charges and restructuring costs.
(4) We define non-GAAP net income (loss) as net income (loss) adjusted to exclude stock-based compensation, acquisition-related costs, restructuring costs, non-cash interest expense and income tax adjustments. Acquisition-related costs include amortization and impairment write-downs (if applicable) of acquired intangible assets as well as third-party transaction costs for legal and other professional services.
Reconciliations of non-GAAP adjusted measures to the most directly comparable measures are presented under "Non-GAAP Financial Measures" below.
Second quarter 2017 and recent highlights
Second quarter 2017 revenue of $296.5 million increased 36% from the preceding quarter due to increased camera and Karma units shipped, partially offset by a sequential decline in accessory revenue. We shipped 1.1 million camera units in the second quarter, up 44% and 40% from the first quarter 2017 and second quarter 2016, respectively. We estimate that camera unit sell-thru in the second quarter increased globally by more than 18% sequentially, driven by Hero Session and HERO5 Black. On a year-over-year basis, estimated global camera sell-thru declined approximately 9%, while camera unit sell-thru at or above the $300 retail price point increased approximately 13%.
Gross margin of 35.6% in the second quarter of 2017 decreased from 42.1% in the second quarter of 2016. The year-over-year decline in margin was due to the transition from the HERO4 to HERO5 line of cameras, a price reduction on our HERO Session camera in the second quarter of 2017, and the introduction of our Karma drone, which was partially offset by cost savings in our supply chain. Total second quarter 2017 operating expenses of $130.6 million decreased year over year by $71.8 million, reflecting the impact of our restructuring actions and other cost-savings initiatives that we began implementing in the fourth quarter of 2016. Second quarter 2017 adjusted EBITDA of $5.1 million benefited from improved return on operations as a result of these cost-savings initiatives as well as higher camera unit sales.
As of June 30, 2017, our cash and cash equivalents of $149.8 million was up 100.0% compared to $74.9 million at March 31, 2017. The increase was primarily due to proceeds of $91.3 million from the net issuance of our convertible

21


GoPro, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations

notes, partially offset by $11.4 million in cash used in operations and $4.9 million in net purchases of property and equipment.
As of June 30, 2017, we had 1,247 employees, down 6% from 1,327 at March 31, 2017 and down 20% from 1,552 at the end of 2016.
Looking ahead
Our business outlook for the third quarter of 2017 and full year 2017 includes, where applicable, our current expectations for revenue, gross margin, operating expenses, income tax expense, adjusted EBITDA and weighted-average shares. We publish our business outlook in our quarterly earnings release. Our business outlook and any updates thereto are publicly available on our investor relations website, http://investor.gopro.com. Our business outlook and investor relations website are not incorporated by reference in this Quarterly Report on Form 10-Q.
Factors affecting performance
We believe that our future success will be dependent on many factors, including those further discussed below.  While these areas represent opportunities for us, they also represent challenges and risks that we must successfully address in order to continue the growth of our business and improve our results of operations.
Driving profitability through improved efficiency, lower costs and better execution. We incurred material operating losses in 2016 and in the first quarter of 2017. In the second quarter of 2017 we lowered operating expenses and achieved positive adjusted EBITDA. Our future success will depend in part upon our ability to continue to manage our operating expenses effectively. Our recent restructuring actions have significantly reduced our operating expenses in the first half of 2017 compared to the first half of 2016, while also providing a flatter, more efficient global organization that will allow for improved communication and alignment among our functional teams. If we are unable to generate adequate revenue growth and to manage our expenses, we may continue to incur significant losses in the future and may not be able to achieve or maintain profitability.
Investing in research and development and making the smartphone central to the GoPro experience. Our performance is significantly dependent on the investments we make in research and development, including our ability to attract and retain highly skilled and experienced research and development personnel. We expect the timing of new product releases to continue to have a significant impact on our revenue and we must continually develop and introduce innovative new cameras, drones, mobile applications and other new products and services. We plan to build upon our integrated storytelling solution in future periods, with the smartphone playing an even more central role in the GoPro experience. Our investments, including marketing and advertising expenses, may not successfully drive increased sales of our products and our users may not adopt our new offerings. If we fail to innovate and enhance our integrated storytelling solution, our brand, market position and revenue will be adversely affected. Further, we have incurred substantial research and development expenses and if our efforts are not successful, we will not recover the value of these investments.
Marketing the improved GoPro experience to our extended community. We intend to continue investing resources in our marketing, advertising and brand management efforts. Historically, our growth has largely been fueled by the adoption of our products by people looking to self-capture images of themselves participating in exciting physical activities. Our future growth depends on continuing to reach, expand and re-engage with this core demographic as well as grow it, and also to continue expanding our user base to include a broader group of consumers. We believe that consumers in many markets are not familiar with our brand and products and believe there is a significant opportunity for GoPro to expand awareness through a range of advertising and promotional programs and campaigns, including social media. Sales and marketing investments will often occur in advance of any sales benefits from these activities, and it may be difficult for us to determine if we are efficiently allocating our resources in this area.
Growing our total addressable international market. We continue to believe that international markets represent a significant growth opportunity for GoPro. Revenue from outside the United States comprised 53% of total revenue in the second quarter of 2017 and full year 2016. While the total market for digital cameras has declined in recent periods, as smartphone and tablet camera quality has improved, we continue to believe our consumers’ differentiated use of GoPro cameras, our integrated storytelling solution and our powerful brand helps insulate our business from many of the negative trends facing this category. However, we expect the markets in which we conduct our business will remain highly competitive. We plan to increase our presence globally through the active promotion of our brand,

22


GoPro, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations

the creation and cultivation of regional strategic and marketing partnerships, the introduction of localized products in international markets with region specific marketing, and an investment focus on the biggest opportunities in Europe and the Asia-Pacific region.
Expanding the GoPro experience to advanced users. Our growth also depends on expanding our total addressable market with new capture perspectives, including aerial and spherical, which are resource-intensive initiatives in highly competitive markets. Prior to the launch of our Karma drone, we had no prior experience in the consumer drone market and expect to face significant competition from incumbent companies promoting their own drones and related products. We currently plan for a limited commercial release of our new spherical camera, Fusion, by the end of 2017. If we are not successful in penetrating additional markets, we might not be able to grow our revenue and we may not recognize benefits from our investment in new areas.
Seasonality.  Historically, we have experienced the highest levels of revenue in the fourth quarter of the year, coinciding with the holiday shopping season, particularly in the United States and Europe. Timely and effective product introductions and forecasting, whether just prior to the holiday season or otherwise, are critical to our operations and financial performance.
See Item 1A. Risk Factors, for further discussion on risks that could materially and adversely affect our business, financial condition and results of operations

Results of Operations
The following table sets forth the components of our condensed consolidated statements of operations for each of the periods presented and each of the periods presented as a percentage of revenue:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
2017
 
2016
 
2017
 
2016
Revenue
$
296,526

 
100
 %
 
$
220,755

 
100
 %
 
$
515,140

 
100
 %
 
$
404,291

 
100
 %
Cost of revenue
190,894

 
64

 
127,753

 
58

 
340,942

 
66

 
251,575

 
62

Gross profit
105,632

 
36

 
93,002

 
42

 
174,198

 
34

 
152,716

 
38

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
55,497

 
19

 
93,049

 
42

 
121,663

 
24

 
170,028

 
42

Sales and marketing
56,678

 
19

 
84,888

 
38

 
124,534

 
24

 
164,337

 
41

General and administrative
18,440

 
6

 
24,442

 
12

 
41,199

 
8

 
49,163

 
12

Total operating expenses
130,615

 
44

 
202,379

 
92

 
287,396

 
56

 
383,528

 
95

Operating loss
(24,983
)
 
(8
)
 
(109,377
)
 
(50
)
 
(113,198
)
 
(22
)
 
(230,812
)
 
(57
)
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
(3,784
)
 
(1
)
 
(516
)
 

 
(4,598
)
 
(1
)
 
(659
)
 

Other income, net
222

 

 
1,176

 
1

 
383

 

 
1,012

 

Total other income (expense), net
(3,562
)
 
(1
)
 
660

 
1

 
(4,215
)
 
(1
)
 
353

 

Loss before income taxes
(28,545
)
 
(9
)
 
(108,717
)
 
(49
)
 
(117,413
)
 
(23
)
 
(230,459
)
 
(57
)
Income tax expense (benefit)
1,991

 
1

 
(16,950
)
 
(8
)
 
24,273

 
5

 
(31,233
)
 
(8
)
Net loss
$
(30,536
)
 
(10
)%
 
$
(91,767
)
 
(41
)%
 
$
(141,686
)
 
(28
)%
 
$
(199,226
)
 
(49
)%

23


GoPro, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations

Revenue
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Camera units shipped
1,061

 
759

 
40
%
 
1,799

 
1,460

 
23
%
 
 
 
 
 
 
 
 
 
 
 
 
Direct channel
$
169,672

 
$
127,942

 
33
%
 
$
284,437

 
$
211,831

 
34
%
  Percentage of revenue
57
%
 
58
%
 
 
 
55
%
 
52
%
 
 
Distribution channel
$
126,854

 
$
92,813

 
37
%
 
$
230,703

 
$
192,460

 
20
%
  Percentage of revenue
43
%
 
42
%
 
 
 
45
%
 
48
%
 
 
Total revenue
$
296,526

 
$
220,755

 
34
%
 
$
515,140

 
$
404,291

 
27
%
 
 
 
 
 
 
 
 
 
 
 
 
Americas
$
157,027

 
$
124,570

 
26
%
 
$
252,734

 
$
209,875

 
20
%
  Percentage of revenue
53
%
 
56
%
 
 
 
49
%
 
52
%
 
 
EMEA
$
80,214

 
$
60,714

 
32
%
 
$
148,077

 
$
120,992

 
22
%
  Percentage of revenue
27
%
 
28
%
 
 
 
29
%
 
30
%
 
 
APAC
$
59,285

 
$
35,471

 
67
%
 
$
114,329

 
$
73,424

 
56
%
  Percentage of revenue
20
%
 
16
%
 
 
 
22
%
 
18
%
 
 
Total revenue
$
296,526

 
$
220,755

 
34
%
 
$
515,140

 
$
404,291

 
27
%
The year-over-year increase in revenue for the second quarter and first half of 2017, compared to 2016, was primarily driven by shipments of our new HERO5 cameras, which were released in September 2016, shipments of our Karma drone, which was newly-released in February 2017, and strong accessory revenue including our Karma Grip, which was released in December 2016. Revenue increased during the second quarter and first half of 2017, compared to 2016, across all reported geographies and channels.
Estimated global unit sell-thru decreased approximately 9% for the second quarter of 2017, from the same prior year period, driven by our second quarter 2016 discounting of legacy products that drove higher than normal sales volumes partially offset by a 13% increase in unit sell-thru for cameras with price points above $300 during the second quarter of 2017.
We define the average selling price of units shipped as total revenue divided by unit shipments. The average selling price of units shipped decreased 4% year-over-year for the second quarter of 2017 due to lower priced camera offerings and lower revenue from accessories, partially offset by Karma. The average selling price of units shipped increased approximately 3% year-over-year for the first half of 2017 due to shipments of our Karma drone and accessories, which were offset by slightly lower average selling price of cameras.
Cost of revenue and gross margin
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Cost of revenue
$
189,259

 
$
127,119

 
49
%
 
$
337,184

 
$
249,998

 
35
%
Stock-based compensation
415

 
412

 
1
%
 
910

 
769

 
18
%
Acquisition-related costs
1,195

 
222

 
438
%
 
2,430

 
444

 
447
%
Restructuring costs
25

 

 
N/A

 
418

 
364

 
15
%
Total cost of revenue
$
190,894

 
$
127,753

 
49
%
 
$
340,942

 
$
251,575

 
36
%
Gross margin
35.6
%
 
42.1
%
 
 
 
33.8
%
 
37.8
%
 
 
Gross margin of 35.6% in the second quarter of 2017 decreased from 42.1% in the second quarter of 2016, or (650) bps, primarily attributable to camera mix as we transitioned from the HERO4 to HERO5 line of cameras, (570) bps,

24


GoPro, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations

and lower gross margin contribution from Karma drone sales as compared to camera sales, (250) bps, partially offset by the allocation of fixed overhead costs across higher unit shipments, 200 bps.
Gross margin of 33.8% in the first half of 2017 decreased from 37.8% in the first half of 2016, or (400) bps, primarily attributable to camera mix as we transitioned from the HERO4 to HERO5 line of cameras, (490) bps, and lower gross margin contribution from Karma drone sales as compared to camera sales, (230) bps, partially offset by the allocation of fixed overhead costs across higher unit shipments, 170 bps, and the sale of previously discontinued and written off cameras in the first half of 2017, 150 bps.
Research and development
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Research and development
$
47,459

 
$
83,745

 
(43
)%
 
$
101,128

 
$
150,774

 
(33
)%
Stock-based compensation
5,390

 
7,086

 
(24
)%
 
11,072

 
13,096

 
(15
)%
Acquisition-related costs
946

 
2,218

 
(57
)%
 
2,082

 
3,503

 
(41
)%
Restructuring costs
1,702

 

 
N/A

 
7,381

 
2,655

 
178
 %
Total research and development
$
55,497

 
$
93,049

 
(40
)%
 
$
121,663

 
$
170,028

 
(28
)%
Percentage of revenue
18.7
%
 
42.2
%
 
 
 
23.6
%
 
42.1
%
 
 
The year-over-year decrease of $37.6 million and $48.4 million, or 40% and 28%, in research and development expenses in the second quarter and first half of 2017, respectively, compared to 2016 reflected decreases in consulting and outside professional service costs of $13.8 million and $24.0 million, respectively, and decreases in material and equipment costs of $5.6 million and $10.4 million, respectively. Cash-based personnel-related costs decreased by $14.3 million and $13.7 million (excluding restructuring costs) in the second quarter and first half of 2017, respectively, driven by a 22% reduction in global research and development headcount as a result of our restructuring actions. See "Restructuring costs" below for information regarding restructuring charges recorded in 2017 and 2016. Operationally, the decrease in research and development expenses reflected the significant investments we made during 2016 to develop and build an aerial capture system along with recent cost reduction initiatives implemented by our restructuring plans.
Sales and marketing
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Sales and marketing
$
54,322

 
$
81,209

 
(33
)%
 
$
114,245

 
$
154,754

 
(26
)%
Stock-based compensation
1,995

 
3,679

 
(46
)%
 
4,686

 
6,883

 
(32
)%
Acquisition-related costs

 

 
N/A

 

 
22

 
(100
)%
Restructuring costs
361

 

 
N/A

 
5,603

 
2,678

 
109
 %
Total sales and marketing
$
56,678

 
$
84,888

 
(33
)%
 
$
124,534

 
$
164,337

 
(24
)%
Percentage of revenue
19.1
%
 
38.5
%
 
 
 
24.2
%
 
40.6
%
 
 
The year-over-year decrease of $28.2 million and $39.8 million, or 33% and 24%, in total sales and marketing expenses in the second quarter and first half of 2017, respectively, compared to 2016 was primarily attributable to decreases in advertising and promotional activity of $12.7 million and $19.9 million, respectively. Cash-based personnel-related costs decreased by $6.9 million and $10.7 million (excluding restructuring costs) in the second quarter and first half of 2017, respectively, driven by a 34% reduction in global sales and marketing headcount as a result of our restructuring actions, which included the closure of our entertainment group in the fourth quarter of 2016. See "Restructuring costs" below for information regarding restructuring charges recorded in 2017 and 2016.

25


GoPro, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations

General and administrative
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
General and administrative
$
14,736

 
$
17,980

 
(18
)%
 
$
32,120

 
$
34,861

 
(8
)%
Stock-based compensation
3,435

 
6,227

 
(45
)%
 
7,692

 
12,387

 
(38
)%
Acquisition-related costs
1

 
235

 
(100
)%
 
(22
)
 
1,104

 
(102
)%
Restructuring costs
268

 

 
N/A

 
1,409

 
811

 
74
 %
Total general and administrative expenses
$
18,440

 
$
24,442

 
(25
)%
 
$
41,199

 
$
49,163

 
(16
)%
Percentage of revenue
6.2
%

11.1
%
 
 
 
8.0
%
 
12.2
%
 
 
The year-over-year decrease of $6.0 million and $8.0 million, or 25% and 16%, in total general and administrative expenses in the second quarter and first half of 2017, respectively, compared to 2016 was primarily attributable to decreases in stock-based compensation of $2.8 million and $4.7 million, respectively, due to the timing of expense recognition attributable to the CEO RSUs (see Note 4 to the Notes to Condensed Consolidated Financial Statements above). Cash-based personnel-related costs (excluding restructuring costs) decreased by $1.2 million and $1.6 million year-over-year in the second quarter and first half of 2017 compared to 2016, respectively.
Restructuring costs
First quarter 2017 restructuring plan. On March 15, 2017, we approved a restructuring plan to further reduce future operating expenses and further align resources around our long-term business strategy. The restructuring provided for a reduction of our global workforce as well as the consolidation of certain leased office facilities. In the first half of 2017, we recorded restructuring charges of $10.7 million related to our first quarter 2017 restructuring plan, which consisted of $9.0 million for severance and related costs and $1.7 million for accelerated depreciation. The plan is substantially completed and we anticipate that any additional charges related to this restructuring will be immaterial.
Fourth quarter 2016 restructuring plan. On November 29, 2016, we approved a plan to restructure our business to reduce operating expenses and work toward achieving our goal of returning to non-GAAP profitability for 2017. The fourth quarter 2016 restructuring plan included a reduction in our global workforce of approximately 15%, the elimination of our entertainment group and the consolidation of certain leased office facilities. Associated with this plan, we recorded cumulative restructuring charges of $40.7 million, of which $4.1 million was recognized in the first half of 2017. The plan is substantially completed and we anticipate that any additional charges related to this restructuring will be immaterial.
First quarter 2016 restructuring plan. On January 12, 2016, we approved a restructuring plan that provided for a reduction in our global workforce of approximately 7%. We incurred aggregate restructuring charges of $6.5 million in the first quarter of 2016, which primarily included cash-based severance costs. We completed this plan at the end of the first quarter of 2016 and all costs have been paid.
See Note 10 to the Notes to Condensed Consolidated Financial Statements for accrued payable balance associated with our restructuring plans as of June 30, 2017.
Other income (expense)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Interest expense
$
(3,784
)
 
$
(516
)
 
633
 %
 
$
(4,598
)
 
$
(659
)
 
598
 %
Other income, net
222

 
1,176

 
(81
)%
 
383

 
1,012

 
(62
)%
Total other income (expense), net
$
(3,562
)
 
$
660

 
(640
)%
 
$
(4,215
)
 
$
353

 
(1,294
)%
Total other income (expense), net increased by $4.2 million and $4.6 million year-over-year in the second quarter and first half of 2017, respectively, compared to 2016. These increases were primarily attributed to interest expense on our outstanding debt and lower gains from hedging activities and currency related fluctuations.

26


GoPro, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations

Our interest expense will increase in 2017 and future periods due to the accretion of debt to face value and cash based interest due on the note. See Note 3 to the Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
Income taxes
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Income tax expense (benefit)
$
1,991

 
$
(16,950
)
 
(112
)%
 
$
24,273

 
$
(31,233
)
 
(178
)%
Effective tax rate
(7.0
)%
 
15.6
%
 
 
 
(20.7
)%
 
13.6
%
 
 
We recorded an income tax provision of $2.0 million for the second quarter of 2017 on a pre-tax net loss of $28.5 million, which resulted in a negative effective tax rate of 7.0%. We recorded an income tax provision of $24.3 million for the six months ended June 30, 2017, which resulted in a negative effective tax rate of 20.7%. Our income tax provision in the first half of 2017 was principally composed of tax expenses incurred on pre-tax income in profitable foreign jurisdictions. While we incurred pre-tax losses in the United States and certain lower-rate jurisdictions, we do not expect to recognize any tax benefits on pre-tax losses in the United States due to a full valuation allowance recorded against our U.S. deferred tax assets (see Note 6 to the Notes to Condensed Consolidated Financial Statements above). The effective tax rate of 15.6% and 13.6% for the second quarter and first half of 2016 resulted from providing a net tax benefit on pre-tax losses in the United States, which was offset by income taxes at lower rates in profitable foreign jurisdictions (primarily related to our wholly owned subsidiaries in Europe).
Future changes in our forecast annual income (loss) projections, tax rate changes, or discrete tax items could result in significant adjustments to quarterly income tax expense (benefit) in future periods.


27


GoPro, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations

Liquidity and Capital Resources
The following table presents selected financial information as of June 30, 2017 and December 31, 2016:
(dollars in thousands)
June 30,
2017
 
December 31,
2016
Cash and cash equivalents
$
149,755

 
$
192,114

Marketable securities

 
25,839

Total cash and investments
$
149,755

 
$
217,953

Percentage of total assets
21
%
 
24
%
Our primary source of cash is receipts from revenue. Other sources of cash are proceeds from issuance of debt, participation in the employee stock purchase plan and the exercise of employee options. The primary uses of cash are inventory procurement, payroll-related expenses, general operating expenses, including marketing and office rent, and other costs of revenue. Other uses of cash include purchases of property and equipment and business acquisitions. 
As of June 30, 2017, our cash of $149.8 million was down $68.2 million or 31.3%, compared to $218.0 million at December 31, 2016. The decrease was primarily due to a net operating loss during the period, payments on accounts payable and other liabilities primarily for inventory and severance obligations, partially offset by collections of accounts receivable and the issuance of convertible notes. We used cash in operations of $149.4 million and received proceeds of $91.8 million from issuance of convertible notes, net of the prepaid forward transaction and issuance costs. As of June 30, 2017, $52.4 million of cash was held by our foreign subsidiaries.
As of June 30, 2017, we could borrow up to approximately $89 million under the credit facility, based upon a borrowing base formula with respect to our inventory and accounts receivable balances.
Convertible Notes
On April 12, 2017, we issued $175 million aggregate principal amount of 3.50% Convertible Senior Notes due 2022 in a private placement to purchasers for resale to qualified institutional buyers. The Notes mature on April 15, 2022, unless earlier repurchased or converted into shares of Class A common stock subject to certain conditions. The Notes are convertible into cash, shares of the Class A common stock, or a combination thereof, at our election, at an initial conversion rate of 94.0071 shares of common stock per $1,000 principal amount of the Notes, which is equivalent to an initial conversion price of approximately $10.64 per share of common stock, subject to adjustment. We will pay interest on the Notes semi-annually in arrears on April 15 and October 15 of each year with interest payments beginning on October 15, 2017. Proceeds received from the issuance of the Notes was allocated between a liability component (long-term debt) and an equity component (additional paid-in capital), within the consolidated balance sheet for the second quarter of 2017. The fair value of the liability component was measured using rates determined for similar debt instruments without a conversion feature.
In connection with the offering, we entered into a prepaid forward stock repurchase transaction with a financial institution. Pursuant to the Prepaid Forward, we used approximately $78 million of the proceeds from the offering of the Notes to pay the prepayment amount. The aggregate number of our Class A common stock underlying the Prepaid Forward is approximately 9.2 million shares (based on the NASDAQ closing sale price of our Class A common stock on April 6, 2017). The expiration date for the Prepaid Forward is April 15, 2022, although it may be settled earlier in whole or in part. Upon settlement of the Prepaid Forward, at expiration or upon any early settlement, the Forward Counterparty will deliver to us the number of shares of Class A common stock underlying the Prepaid Forward or the portion thereof being settled early. The shares purchased under the Prepaid Forward were treated as treasury stock on the consolidated balance sheet (and not outstanding for purposes of the calculation of basic and diluted earnings per share), but remain outstanding for corporate law purposes, including for purposes of any future stockholders' votes, until the Forward Counterparty delivers the shares underlying the Prepaid Forward to us. We intend to use the remaining net proceeds from the offering of approximately $92 million for general corporate purposes.

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GoPro, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations

Liquidity
We believe, based on our most current projections, that our cash and cash equivalents balance, including available borrowings under our credit facility, will be sufficient to address our working capital needs, capital expenditures, outstanding commitments and other liquidity requirements for at least the next 12 months:
We expect that operating expenses and inventory purchases will constitute a material use of our cash balances. We intend to continue to manage our operating activities in line with our existing cash and available financial resources. We believe the restructuring actions and other cost saving initiatives we have taken will enable us to significantly reduce our operating expenses in 2017 compared to 2016.
We expect to spend significantly less on capital expenditures in 2017 than in 2016. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth, the timing and extent of spending on research and development efforts and other business initiatives, the timing of new product introductions, market acceptance of our products, and overall economic conditions.
In March 2016, we entered into a credit agreement with a syndicate of banks that provides for a secured revolving credit facility under which we could borrow up to an aggregate of $250 million. As of June 30, 2017, we could borrow up to approximately $89 million under the credit facility, based upon a borrowing base formula with respect to our inventory and accounts receivable balances. Our credit facility terminates in March 2021. (See Note 3 to the Notes to Condensed Consolidated Financial Statements above for additional information.)
We have completed acquisitions in the past and we may evaluate additional possible acquisitions of, or strategic investments in, businesses, products and technologies that are complementary to our business, which may require the use of cash.
We used a portion of the net proceeds from the Notes offering to pay for the Prepaid Forward and intend to use the remaining proceeds from the offering for general corporate purposes.
In the future, we may require additional funding to respond to business opportunities, challenges or unforeseen circumstances. If we are unable to obtain adequate financing under our credit facility, or other sources, when we require it, our ability to grow or support our business and to respond to business challenges could be significantly limited. In the event additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all.
Summary of Cash Flows
The following table summarizes our cash flows for the periods indicated:
 
Six months ended
(in thousands)
June 30,
2017
 
June 30,
2016
 
% Change
Net cash provided by (used in):
 
 
 
 
 
Operating activities
$
(149,366
)
 
$
(78,725
)