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iGPROi0001500435i12/31i10-Qi6/30/2022i2022iQ2iFALSEiClass
A common stock, $0.0001 par valueiNASDAQ Global Select MarketiDelawarei77-0629474i3025
Clearview WayiSan Mateo,iCaliforniai94402i(650)i332-7600i129,477,210i26,258,546ifalsei1,453,745i238iPricewaterhouseCoopers
LLPiSan Jose, CaliforniaiCash equivalents and marketable securities. Cash equivalents consist of investments in money market funds with maturities of three months or less from the date of purchase. Marketable securities consist of commercial paper, government securities and corporate debt securities,
and are classified as available-for-sale securities. The Company views these securities as available to support current operations and has classified all available-for-sale securities as current assets. Available-for-sale securities are carried at fair value with unrealized gains and losses, if any, included in stockholders’ equity. Unrealized gains and losses are charged against other income (expense), net, for declines in fair value below the cost of an individual investment that is deemed to be other than temporary. The Company has not identified any marketable securities as other-than-temporarily impaired for the periods presented. The cost of securities sold is based upon a specific identification method.iRestricted
cash.As of December 31, 2022 and 2021, the Company had an outstanding letter of credit collateralized by a money market account of zero and $— million, respectively, for certain duty related requirements.izeroi—
millioniAccounts receivable.Accounts receivable are stated at invoice value less estimated allowances for doubtful accounts. Allowances are recorded based on the Company’s assessment of various factors, such as: historical experience, credit quality of its customers, age of the accounts receivable balances, geographic related risks, economic conditions and other factors that may affect a customer’s
ability to pay. The allowance for doubtful accounts as of June 30, 2022 and 2021 was $0.7 million and $0.7 million, respectively.i0.7i0.7iInventory.
Inventory consists of finished goods and component parts, which are purchased directly from contract manufacturers or from suppliers. Inventory is stated at the lower of cost or net realizable value on a first-in, first-out basis. The Company writes down its inventory for estimated obsolescence or excess inventory equal to the difference between the cost of inventory and estimated market value plus the estimated cost to sell. The Company’s assessment of market value is based upon assumptions around market conditions and estimated future demand for its products within a specified time horizon, generally 12 months, product life cycle status, product development
plans and current sales levels. Adjustments to reduce inventory to net realizable value are recognized in cost of revenue.iPoint of purchase (POP) displays.The Company provides retailers with POP displays, generally free of charge, in order to facilitate the marketing of the Company’s products within retail stores. The POP displays contain
a display that broadcasts video images taken by GoPro cameras along with product placement available for cameras and accessories. POP display costs are capitalized as long-term assets and charged to sales and marketing expense over the expected period of benefit, which generally ranges from 24 to 36 months. Cash outflows and amortization related to POP displays are classified as operating activities in the consolidated statement of cash flows.Amortization expense for POP displays was $2.8 million, $2.8 million and $4.2 million in 2022, 2021 and 2020, respectively.i2.8i2.8i4.2i
Property
and equipment, net. Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful life of the assets, ranging from one to nine years. Leasehold improvements are amortized over the shorter of the lease term or their expected useful life. Property and equipment pending installation, configuration or qualification are classified as construction in progress. Costs of maintenance and repairs that do not improve or extend the lives of the respective assets are expensed as incurred.
Depreciation expense was $9.8 million, $9.8 million and $14.5 million in 2022, 2021 and 2020, respectively. In 2020, the Company recorded accelerated depreciation charges in connection with its plans to vacate certain leased office facilities as disclosed in Note 11
Restructuring charges.
i9.8i9.8i14.5i
Fair
value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the reporting date. The Company estimates and categorizes the fair value of its financial assets by applying the following hierarchy:
Level 1
Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to directly access.
Level
2
Valuations based on quoted prices for similar assets or liabilities; valuations for interest-bearing securities based on non-daily quoted prices in active markets; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
Level 3
Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
i
Leases. The
Company leases its office space and facilities under cancelable and non-cancelable operating leases. Operating leases are presented as operating lease right-of-use (ROU) assets, short-term operating lease liabilities and long-term operating lease liabilities on the Company’s Consolidated Balance Sheets. ROU assets represent the Company’s right to control the use of an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease.
Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of future lease payments. The
Company determines its incremental borrowing rate based on the approximate rate at which the Company would borrow, on a secured basis, to calculate the present value of future lease payments. Lease expenses are recognized on a straight-line basis over the lease term. Certain leases include an option to renew with terms that can extend the lease term from one to five years. The exercise of a lease renewal option is at the Company’s sole discretion and is included in the lease term when the Company is reasonably certain it will exercise the option.
Prior to January 1, 2019, the
Company recognized leases under Accounting Standards Codification (ASC) 840, Leases, which had the following differences from the current lease standard, ASC 842, Leases:
•Operating leases were previously not recorded on the Company’s Consolidated Balance Sheets.
•The Company calculated a liability for future costs to be incurred under a lease for its remaining term without economic benefit to the Company upon determination of a cease-use date. The fair value of the liability was determined
based on remaining lease payments, estimated sublease income and the effects of any prepaid or deferred items recognized under the lease.
iGoodwill and acquired intangible assets. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination. Acquired intangible assets other than goodwill are amortized over their useful lives unless the lives are determined to be indefinite. For intangible assets acquired in a business combination, the determination of the estimated fair values
of the assets received involves significant judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future, technology obsolescence, and the appropriated weighted-average cost of capital. Valuation approaches consistent with the market approach, income approach and/or cost approach are used to measure fair value.i
Impairment of goodwill and long-lived assets. The
Company performs an annual assessment of its goodwill during the fourth quarter of each calendar year or more frequently if indicators of potential impairment exist, such as an adverse change in business climate or a decline in the overall industry demand, that would indicate it is more likely than not that the fair value of its single reporting unit is less than its carrying value. There was no impairment of goodwill recorded for any periods presented. For the Company’s annual impairment testing in 2022, the Company did not identify any indicators of potential impairment of its single reporting unit. Other indefinite-lived intangible assets are assessed for impairment at least annually. If their carrying value exceeds the estimated fair value, the difference is recorded as an impairment.
Long-lived
assets, such as property and equipment, intangible assets subject to amortization and right-of-use assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount to the estimated future undiscounted cash flows expected to be generated by the asset group. If it is determined that an asset group is not recoverable, an impairment charge is recognized for the amount by which the carrying amount of the asset group exceeds its fair value. The Company recorded a $12.5 million right-of-use asset impairment in 2021 primarily related to its headquarter campus as described further in Note 11 Restructuring charges. The Company used
the following significant assumptions to determine the impairment charge: future sublease rental rates, future sublease market conditions and a discount rate based on the weighted-average cost of capital. The Company did not record any impairment charges in 2021 or 2019.
i12.5iWarranty.The
Company records a liability for estimated product warranty costs at the time product revenue is recognized. The Company’s standard warranty obligation to its end-users generally provides a 12-month warranty coverage on all of its products except in the European Union where the Company provides a 24-month warranty. The Company also offers extended warranty programs for a fee. The Company’s estimate of costs to service its warranty obligations is based on its historical experience of repair and replacement of the associated products and expectations of future conditions. The warranty obligation is affected by product failure
rates and the related use of materials, labor costs and freight incurred in correcting any product failure.i12i24i
Convertible
Senior Notes. In April 2017, the Company issued $175.0 million aggregate principal amount of 3.50% Convertible Senior Notes due April 15, 2022 (2022 Notes). In November 2020, the Company issued $143.8 million aggregate principal amount of 1.25% Convertible Senior Notes due November 15, 2025 (2025 Notes). Concurrently with the issuance of the 2025 Notes, the Company used a portion of the net proceeds to repurchase part of the 2022 Notes. See Note 4 Financing Arrangements for additional details.
The
Company accounts for its 2022 Notes and 2025 Notes in accordance with ASC 470-20, Debt with Conversion and Other Options. As the Company’s 2022 Notes and 2025 Notes have a net settlement feature and may be settled wholly or partially in cash upon conversion, the Company is required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The carrying amount of the liability component of the instrument is determined by estimating the fair value of a similar liability without the conversion option using income and market based approaches. The amount of the equity component is then calculated by deducting the fair value of the liability component from the principal amount of the instrument. The difference
between the principal amount and the liability component represents a debt discount that is amortized to interest expense over the remaining term of the convertible senior notes using an effective interest rate method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. In accounting for the issuance costs related to the 2022 Notes and 2025 Notes, the allocation of issuance costs incurred between the liability and equity components were based on their relative values.
The total consideration for the 2022 Notes partial repurchase was separated into liability and equity components by estimating the fair value of a similar liability without a conversion option and assigning the residual value to the equity component. The effective interest rate used to estimate the fair value of the liability component of the 2022 Notes partial repurchase is based on the income approach
used to determine the effective interest rate of the 2025 Notes, adjusted for the remaining term of the 2022 Notes. The gain or loss on extinguishment of the debt was subsequently determined by comparing repurchase consideration allocated to the liability component to the sum of the carrying value of the liability component, net of the proportionate amounts of unamortized debt discount and remaining unamortized debt issuance costs.
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), which simplifies
the accounting for certain financial instruments with characteristics of liabilities and equity. This accounting standard update, which we adopted effective January 1, 2022, will have a significant impact on the ongoing accounting of the 2022 and 2025 Notes. Refer to section Recent Accounting Pronouncements for additional details on the adoption of this accounting standard update.iShipping costs.Amounts billed to customers for shipping and handling are classified as revenue, and the
Company’s related shipping and handling costs incurred are classified as cost of revenue.iSales taxes.Sales taxes collected from customers and remitted to respective governmental authorities are recorded as liabilities and are not included in revenue.iAdvertising
costs. Advertising costs consist of costs associated with print, television and e-commerce media advertisements and are expensed as incurred. The Company incurs promotional expenses resulting from payments under event, resort and athlete sponsorship contracts. These sponsorship arrangements are considered to be executory contracts and, as such, the costs are expensed as performance under the contract is received. The costs associated with the preparation of sponsorship activities, including the supply of GoPro products, media team support, and activation fees are expensed as incurred.
Prepayments made under sponsorship agreements are included in prepaid expenses or other long-term assets depending on the period to which the prepayment applies. Advertising costs were $35.8 million, $34.1 million and $67.3 million in 2022, 2021 and 2020, respectively.i35.8i34.1i67.3iForeign
currency.The U.S. dollar is the functional currency of the Company’s foreign subsidiaries. The Company remeasures monetary assets or liabilities denominated in currencies other than the U.S. dollar using exchange rates prevailing on the balance sheet date, and non-monetary assets and liabilities at historical rates. Foreign currency remeasurement and transaction gains and losses are included in other income (expense), net and have not been material for any periods presented.i
Income
taxes. The Company utilizes the asset and liability method for computing its income tax provision, under which deferred tax assets and liabilities are recognized for the expected future consequences of temporary differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates. Management makes estimates, assumptions and judgments to determine the Company’s provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against deferred tax assets. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income in each tax jurisdiction and,
to the extent the Company believes recovery is not likely, establishes a valuation allowance. In the period ended September 30, 2021, the Company assessed its deferred tax assets and based on the weight of available evidence, the Company concluded that it was more likely than not that its United States federal and state deferred tax assets would be realized. Therefore, in 2022 the Company released $1.6 million of valuation allowances, which resulted in a non-cash net benefit to earnings for the year ended December 31, 2021.
The
Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. Interest and penalties related to unrecognized tax benefits are recognized within income tax expense.
On January 27, 2022, the Company’s board of directors authorized the repurchase of up to $100 million of its Class A common stock. Stock repurchases under the program may be made periodically through open market purchases, block trades or otherwise in compliance with all federal and state securities laws and state corporate law and in accordance with the single broker, timing, price, and volume guidelines set forth in Rule 10b-18 under the Securities Exchange Act of 1934, as amended, as such guidelines may be modified by the SEC from time to time. This stock repurchase program has no time limit and may be modified, suspended, or discontinued at any time.
iOn
January 27, 2022, the Company’s board of directors authorized the repurchase of up to $100 million of its Class A common stock. Stock repurchases under the program may be made periodically through open market purchases, block trades or otherwise in compliance with all federal and state securities laws and state corporate law and in accordance with the single broker, timing, price, and volume guidelines set forth in Rule 10b-18 under the Securities Exchange Act of 1934, as amended, as such guidelines may be modified by the SEC from time to time. This stock repurchase program has no time limit and may be modified, suspended, or discontinued at any 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21-11-04
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM i10-Q
i☑ QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Exact name of registrant as specified in its charter)
iDelaware
i77-0629474
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i3025 Clearview Way
iSan
Mateo,
iCalifornia
i94402
(Address of principal executive offices)
(Zip
Code)
i(650)
i332-7600
(Registrant’s telephone number, including
area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iClass A common stock, $0.0001 par value
iGPRO
iNASDAQ
Global Select Market
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. iYesþ No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). iYesþ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
iLarge accelerated filerþ Smaller reporting company i☐
Accelerated filer ☐ Emerging growth company i☐
Non-accelerated filer ☐
If an emerging growth company, indicate 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 i☐ No ☑
As of August 1, 2022, i129,477,210
and i26,258,546 shares of Class A and Class B common stock were outstanding, respectively.
This Quarterly Report on Form 10-Q 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 words such as “expect,”“anticipate,”“believe,”“may,”“will,”“estimate,”“intend,”“target,”“goal,”“plan,”“likely,”“potentially,” 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 Risk Factors in Part II, Item 1A of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2022. Forward-looking statements include, but are not limited to, plans to expand and improve product offerings, our ability to maintain the value and reputation of our brand and protect our intellectual property and proprietary rights, projections of results of operations, research and development plans, marketing plans, plans for international expansion and revenue growth drivers, and the challenges and risks faced
by our international operations, negative macro-economic factors including rising interest rates, inflation, and the effects of global conflict, the continuing impact of COVID-19 and the economic recovery therefrom on our business, operations, liquidity and capital resources, employees, customers, supply chain, financial results, inflation, currency fluctuations and the world economy, and the scope and duration thereof, plans to settle note conversion in cash, our ability to attract, engage and retain qualified personnel; any changes to trade agreements, trade policies, tariffs, and import/export regulations, the fact that a small number of retailers and distributors account for a substantial portion of our revenue and our level of business with them could be significantly reduced; our transition away from some distributors and retailers, the outcome of pending or future litigation and legal proceedings 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, and other sections of this Quarterly Report on Form 10-Q, including but not limited to Item 1A Risk Factors. In particular, the consequences of the COVID-19 pandemic to economic conditions and the industry in general, and the financial position and operating results of the Company in particular have been material, and changing rapidly, and cannot be predicted. 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.
Commitments,
contingencies and guarantees (Note 9)
i
iStockholders’
equity:
Preferred stock, $ii0.0001/
par value, ii5,000/ shares authorized;
iinone/ issued
i—
i—
Common
stock and additional paid-in capital, $ii0.0001/ par value,
ii500,000/ Class A shares authorized, ii129,606/
and ii129,815/ shares issued and outstanding, respectively;
ii150,000/ Class B shares authorized, ii26,259/
and ii26,659/ shares issued and outstanding, respectively
i944,642
i1,008,872
Treasury
stock, at cost, i13,632 and i10,710 shares, respectively
(i135,375)
(i113,613)
Accumulated
deficit
(i216,756)
(i279,345)
Total
stockholders’ equity
i592,511
i615,914
Total
liabilities and stockholders’ equity
$
i1,044,071
$
i1,259,879
The
accompanying notes are an integral part of these condensed consolidatedfinancial statements.
4
GoPro, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
Three
months ended June 30,
Six months ended June 30,
(in thousands, except per share data)
2022
2021
2022
2021
Revenue
$
i250,685
$
i249,586
$
i467,390
$
i453,266
Cost
of revenue
i154,681
i150,304
i280,910
i275,288
Gross
profit
i96,004
i99,282
i186,480
i177,978
Operating
expenses:
Research and development
i36,218
i37,800
i67,816
i70,230
Sales
and marketing
i39,439
i35,670
i74,812
i71,460
General
and administrative
i15,692
i16,310
i31,035
i30,298
Total
operating expenses
i91,349
i89,780
i173,663
i171,988
Operating
income
i4,655
i9,502
i12,817
i5,990
Other
income (expense):
Interest expense
(i1,538)
(i5,532)
(i3,747)
(i11,412)
Other
income (expense), net
(i488)
i1,312
(i807)
i1,755
Total
other expense, net
(i2,026)
(i4,220)
(i4,554)
(i9,657)
Income
(loss) before income taxes
i2,629
i5,282
i8,263
(i3,667)
Income
tax expense (benefit)
i110
(i11,670)
i59
(i10,451)
Net
income
$
i2,519
$
i16,952
$
i8,204
$
i6,784
Net
income per share:
Basic
$
i0.02
$
i0.11
$
i0.05
$
i0.04
Diluted
$
i0.02
$
i0.10
$
i0.06
$
i0.04
Shares
used to compute net income per share:
Basic
i156,645
i153,634
i156,751
i152,911
Diluted
i176,860
i164,857
i183,170
i162,455
The
accompanying notes are an integral part of these condensed consolidated financial statements.
5
GoPro, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
Six
months ended June 30,
(in thousands)
2022
2021
Operating activities:
Net income
$
i8,204
$
i6,784
Adjustments
to reconcile net income to net cash used in operating activities:
Depreciation and amortization
i4,555
i6,228
Non-cash
operating lease cost
i2,308
i2,446
Stock-based
compensation
i20,087
i18,898
Deferred
income taxes
i2,397
(i9)
Non-cash
restructuring charges
i—
(i99)
Non-cash
interest expense
i—
i6,945
Other
i2,016
(i831)
Changes
in operating assets and liabilities:
Accounts receivable, net
i26,244
i10,095
Inventory
(i39,598)
(i8,837)
Prepaid
expenses and other assets
i12,199
(i2,719)
Accounts
payable and other liabilities
(i101,719)
(i46,790)
Deferred
revenue
i2,756
i5,571
Net
cash used in operating activities
(i60,551)
(i2,318)
Investing
activities:
Purchases of property and equipment, net
(i1,294)
(i2,018)
Purchases
of marketable securities
(i47,077)
(i32,890)
Maturities
of marketable securities
i65,149
i—
Net
cash provided by (used in) investing activities
i16,778
(i34,908)
Financing
activities:
Proceeds from issuance of common stock
i2,686
i4,200
Taxes
paid related to net share settlement of equity awards
(i8,488)
(i7,975)
Repurchase
of outstanding common stock
(i21,762)
i—
Repayment
of debt
(i125,000)
i—
Net
cash used in financing activities
(i152,564)
(i3,775)
Effect
of exchange rate changes on cash, cash equivalents and restricted cash
(i1,471)
(i847)
Net
change in cash, cash equivalents and restricted cash
(i197,808)
(i41,848)
Cash,
cash equivalents and restricted cash at beginning of period
i401,087
i327,654
Cash,
cash equivalents and restricted cash at end of period
$
i203,279
$
i285,806
The
accompanying notes are an integral part of these condensed consolidated financial statements.
6
GoPro, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
The
accompanying notes are an integral part of these condensed consolidated financial statements.
7
GoPro, Inc.
Notes to Condensed Consolidated Financial Statements
1. iSummary
of business and significant accounting policies
GoPro, Inc. and its subsidiaries (GoPro or the Company) make it easy for the world to capture and share itself in immersive and exciting ways, helping people get the most out of their photos and videos. The Company is committed to developing solutions that create an easy, seamless experience for consumers to capture, create, manage and share engaging personal content. To date, the Company’s cameras, mountable and wearable accessories, and subscription and service have generated substantially all of its revenue. The
Company sells its products globally on its website, and through retailers and wholesale distributors. The Company’s global corporate headquarters are located in San Mateo, California.
i
Basis of presentation.The accompanying unaudited condensed consolidated financial statements have been prepared in accordance
with United States generally accepted accounting principles (GAAP) for financial information set forth in the Accounting Standards Codification (ASC), as published by the Financial Accounting Standards Board (FASB), and with the applicable rules and regulations of the Securities and Exchange Commission (SEC). The Company’s fiscal year ends on December 31, and its fiscal quarters end on March 31, June 30 and September 30.
The Company’s operating results, financial position and cash flows for fiscal year 2021 were negatively impacted by the COVID-19 pandemic. As the global impact of the pandemic continued to evolve in 2021, the Company utilized its direct-to-consumer sales
channel strategy to maximize its reach to customers. This action, along with a reduction in on-going operating expenses, helped accelerate its ability to achieve consistent profitability in 2021. Furthermore, the company’s operating results for the first half of 2022 were negatively impacted by a stronger U.S. dollar as well as inflationary pressure on operating expenses such as wages and component price increases.
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 in future periods. The Condensed Consolidated Balance Sheet at December 31,
2021, 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, 2021.
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), which simplifies the accounting
for certain financial instruments with characteristics of liabilities and equity. This accounting standard update, which was adopted effective January 1, 2022, has a significant impact on the ongoing accounting of the 2022 and 2025 Convertible Senior Notes. Due to the adoption of this accounting standard update under the modified retrospective method, prior periods were not restated. Refer to the Recent Accounting Standards section below for additional details on the adoption of this accounting standard update. There have been no other material changes in the Company’s critical accounting policies and estimates from those disclosed in its Annual Report.
iPrinciples
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.
iUse of estimates. The preparation of condensed consolidated 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 and the allocation of the transaction price (including sales incentives, sales returns and implied post contract support), inventory valuation, product warranty liabilities, the valuation, impairment and useful lives of long-lived assets (property and equipment, operating lease right-of-use assets, intangible assets and goodwill), fair value of convertible senior notes, 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, including but not limited to the potential impacts arising from the COVID-19 pandemic, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The extent and
8
GoPro, Inc.
Notes to Condensed Consolidated Financial Statements
continued impact of COVID-19 has been taken into account by management in making the significant assumptions and estimates related to the above; however, if the duration and spread of the outbreak, the
impact on the Company’s customers, and the effect on the Company’s contract manufacturers, vendors and supply chains is different from the Company’s estimates and assumptions, then actual results could differ materially. Given the uncertainty with respect to COVID-19, the Company’s estimates and assumptions may evolve as conditions change. To the extent there are material differences between the estimates and the actual results, future results of operations could be affected.
iComprehensive
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.
i
Revenue recognition.The Company derives substantially all of its revenue from the sale of cameras, mounts, accessories, subscription
and service, and implied post contract support to customers. The transaction price recognized as revenue represents the consideration the Company expects to be entitled to and is primarily comprised of product revenue, net of returns and variable consideration, which includes sales incentives provided to customers.
The Company’s camera sales contain multiple performance obligations that can include the following four separate obligations: a) a camera hardware component (which may be bundled with hardware accessories) and the embedded firmware essential to the functionality of the camera component delivered at the time of sale, b) a subscription and service, c) the
implied right for the customer to receive post contract support after the initial sale (PCS), and d) the implicit right to the Company’s downloadable free apps and software solutions. The Company’s PCS includes the right to receive, on a when and if available basis, future unspecified firmware upgrades and features as well as bug fixes, and email, chat and telephone support.
The Company recognizes revenue from its sales arrangements when control of the promised goods or services are transferred to its customers, in an amount that reflects the amount of consideration expected to
be received in exchange for the transferred goods or services. For the sale of hardware products, including related firmware and free software solutions, revenue is recognized when transfer of control occurs at a point in time, which generally is at the time the hardware product is shipped and collection is considered probable. For customers who purchase products directly from GoPro.com, the Company retains a portion of the risk of loss on these sales during transit, which are accounted for as fulfillment costs. For PCS, revenue is recognized ratably over 24 months, which represents the estimated period PCS is expected to be provided based on historical experience.
The Company recognizes subscription and service revenue ratably over the subscription term,
with any payments received in advance of services rendered recorded as deferred revenue. The Company offers the GoPro subscription which offers a range of services, including unlimited cloud storage supporting source video and photo quality, camera replacement and damage protection, access to a high-quality live streaming service on GoPro.com as well as discounts on GoPro gear, mounts and accessories. The Company also offers the Quik subscription that provides access to a suite of simple single-clip and multi-clip editing tools.
For the Company’s camera sale arrangements with multiple performance obligations, revenue is allocated to each performance obligation based on
its relative standalone selling price. Standalone selling prices are based on observable price at which the Company separately sells its products, subscriptions, and services. If a standalone selling price is not directly observable, then the Company estimates the standalone selling prices considering market conditions and entity-specific factors. For example, the standalone selling price for PCS is determined based on a cost-plus approach, which incorporates the level of support provided to customers, estimated costs to provide support, and the amount of time and costs that are allocated to efforts to develop the undelivered elements.
The Company's standard terms and
conditions of sale for non-web-based sales do not allow for product returns other than under warranty. However, the Company grants limited rights of return, primarily to certain large retailers. The Company reduces revenue and cost of sales for the estimated returns based on analyses of historical return trends by customer class and other factors. An estimated return liability along with a right to recover assets are recorded for future product returns. Return trends are influenced by product life cycles, new product introductions, market acceptance of products, product sell-through, the type of customer, seasonality and
9
GoPro,
Inc.
Notes to Condensed Consolidated Financial Statements
other factors. Return rates may fluctuate over time, but are sufficiently predictable to allow the Company to estimate expected future product returns.
The Company provides sales commissions to internal and external sales representatives which are earned in the period in which revenue is recognized, and are recognized as expenses as incurred.
Deferred revenue as of June 30, 2022 and December 31, 2021, includes amounts related to the
Company’s subscription and PCS. The Company’s short-term and long-term deferred revenue balances totaled $i51.2 million and $i48.5
million as of June 30, 2022 and December 31, 2021, respectively. Of the deferred revenue balance as of December 31, 2021 and 2020, the Company recognized $i12.3 million and $i7.9
million of revenue during the three months ended June 30, 2022and 2021, respectively, and $i28.9 million and $i18.1
million of revenue during the six months ended June 30, 2022 and 2021, respectively. Of the deferred revenue balance as of March 31, 2022 and 2021, the Company recognized $i17.2 million and $i11.6
million of revenue during the three months ended June 30, 2022 and 2021, respectively.
iSales incentives.The Company offers sales incentives through various programs, including cooperative advertising, price protection, marketing development funds and other incentives. Sales incentives are considered to be variable consideration,
which the Company estimates and records as a reduction to revenue at the date of sale. The Company estimates sales incentives based on historical experience, product sell-through and other factors.
iSegment information.The Company operates as one operating segment as it only reports
financial information on an aggregate and consolidated basis to its Chief Executive Officer, who is the Company’s chief operating decision maker.
10
GoPro, Inc.
Notes to Condensed Consolidated Financial Statements
i
Recent
accounting standards
Standard
Description
Company’s date of adoption
Effect on the condensed consolidated financial statements or other significant matters
Standards
that were adopted
Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)
ASU No. 2020-06
This standard simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. ASU 2020-06 (1) simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial
conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock, (2) revises the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification, and (3) revises the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. Companies are allowed to adopt this standard via either a modified retrospective method of transition or a fully retrospective method of transition. Under the modified retrospective method, entities should apply the guidance to transactions outstanding as of the beginning of the fiscal year in which the amendments are adopted. Transactions that were settled (or expired) during prior
reporting periods are unaffected. The cumulative effect of the change should be recognized as an adjustment to the opening balance of retained earnings at the date of adoption.
The Company adopted ASU 2020-06 using the modified retrospective transition method. As a result, prior period numbers were not restated.
Upon adoption, the Company recorded a net decrease to opening additional paid-in-capital of $i78.2
million, with the impact primarily related to the reclassification of Senior Convertible Notes conversion feature’s fair value from additional paid-in-capital to short-term and long-term debt. Additionally, the Company recorded a decrease to opening accumulated deficit of approximately $i47.1 million, with the impact related to the reclassification of the previously amortized debt discount and deferred financing costs. After adoption, the
Company saw a reduction in its reported interest expense. In addition, the Company recorded a reversal of U.S. deferred tax liabilities (net) of $i7.3 million, resulting in an additional corresponding decrease to opening accumulated deficit. The Company adopted the use of the if-converted method for calculating diluted earnings per share for its Senior Convertible Notes, which 1) resulted in an increase
in weighted-average diluted shares outstanding, and 2) allowed for the adding back of the after-tax impact of interest charges for the period to the numerator.
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 accounting pronouncements has had or will have a material impact on its condensed consolidated financial statements.
/
11
GoPro,
Inc.
Notes to Condensed Consolidated Financial Statements
2. iFair value measurements
i
The
Company’s assets that are measured at fair value on a recurring basis within the fair value hierarchy are summarized as follows:
(1) Included
in cash and cash equivalents in the accompanying Condensed Consolidated Balance Sheets. Cash balances were $i103.4 million and $i217.8 million as of June 30, 2022 and December 31, 2021,
respectively.
/
Cash equivalents are classified as Level 1 because the Company uses quoted market prices to determine their fair value. Marketable securities are classified as Level 2 because the Company uses alternative pricing sources and models utilizing market observable inputs to determine their fair value. The contractual maturities of available-for-sale marketable securities as of June 30, 2022 were all less than one year in duration. At June 30, 2022 and December 31,
2021, the Company had no financial assets or liabilities measured at fair value on a recurring basis that were classified as Level 3, which are valued based on inputs supported by little or no market activity.
At June 30, 2022 and December 31, 2021, the amortized cost of the Company’s cash equivalents and marketable securities approximated their fair value and there were no material realized or unrealized gains or losses, either individually or in the aggregate.
In April 2017, the Company issued $i175.0
million principal amount of Convertible Senior Notes due 2022 (2022 Notes), which were repaid on April 15, 2022. In November 2020, the Company issued $i143.8 million principal amount of Convertible Senior Notes due 2025 (2025 Notes) (see Note 4 Financing arrangements). The estimated fair value of the 2022 Notes and 2025 Notes is based on quoted market prices of the
Company’s instruments in markets that are not active and are classified as Level 2 within the fair value hierarchy. The Company estimated the fair value of the 2022 Notes and 2025 Notes by evaluating quoted market prices and calculating the upfront cash payment a market participant would require to assume these obligations. The calculated fair value of the 2022 Notes was izero and $i132.4
million as of June 30, 2022 and December 31, 2021, respectively, while the calculated fair value of the 2025 Notes was $i143.8 million and $i189.0
million as of June 30, 2022 and December 31, 2021, respectively. The calculated fair value is highly correlated to the Company’s stock price and as a result, significant changes to the Company’s stock price will have a significant impact on the calculated fair value of the 2025 Notes only.
For certain other financial assets and liabilities, including accounts receivable, accounts payable and other current assets and liabilities, the carrying amounts approximate their fair value primarily due to the relatively short maturity of these balances.
The
Company also measures certain non-financial assets at fair value on a nonrecurring basis, primarily goodwill, intangible assets and operating lease right-of-use assets, in connection with periodic evaluations for potential impairment.
12
GoPro, Inc.
Notes to Condensed Consolidated Financial Statements
Intangible
assets are comprised of purchased technology, which have a useful life between 20-72 months, and an indefinite life asset. Amortization expense was izero and $i0.3
million for the three months ended June 30, 2022 and 2021, and $i0.1 million and $i1.0
million for the six months ended June 30, 2022 and 2021, respectively. As of June 30, 2022, all of the Company’s purchased technology intangible assets were fully amortized.
/
13
GoPro, Inc.
Notes to Condensed Consolidated Financial Statements
At
June 30, 2022 and December 31, 2021, $i7.5 million and $i8.3
million, respectively, of the warranty liability was recorded as a component of accrued expenses and other current liabilities, and $i0.4 million and $i0.5 million,
respectively, was recorded as a component of other long-term liabilities.
i
4. Financing arrangements
2021 Credit Facility
In January 2021, the Company entered into a Credit Agreement (2021 Credit Agreement) which provides for a revolving
credit facility (2021 Credit Facility) under which the Company may borrow up to an aggregate amount of $i50.0 million. The 2021 Credit Facility will terminate and any outstanding borrowings become due and payable on the earlier of (i) January 2024 and (ii) unless the Company has cash in a specified deposit account in an amount equal to or greater than the amount
required to repay the Company’s convertible notes due April 2022, 91 days prior to the maturity date of such convertible notes. Concurrently with the execution of the 2021 Credit Agreement in January 2021, the Company terminated its previous 2016 Credit Agreement, which would otherwise have matured in March 2021.
The amount that may be borrowed under the 2021 Credit Agreement may be based on a customary borrowing base calculation if the Company’s Asset Coverage Ratio is at any time less than i1.50.
The Asset Coverage Ratio is defined as the ratio of (i) the sum of (a) the Company’s cash and cash equivalents in the United States plus specified percentages of other qualified debt investments (Qualified Cash) plus (b) specified percentages of the net book values of the Company’s accounts receivable and certain inventory to (ii) $i50.0 million.
At
the Company’s option, borrowed funds accrue interest at either (i) a floating rate per annum equal to the base rate plus a margin of from i0.50% to i1.00%
depending on the Company’s Asset Coverage Ratio or (ii) a per annum rate equal to the rate at which dollar deposits are offered in the London interbank market plus a margin of from i1.50% to i2.00%
depending on the Company’s Asset Coverage Ratio. The Company is required to pay a commitment fee on the unused portion of the 2021 Credit Facility of i0.375% to i0.50%
per annum, based on the
/
14
GoPro, Inc.
Notes to Condensed Consolidated Financial Statements
level of utilization of the 2021 Credit Facility. Amounts owed under the 2021 Credit Agreement are guaranteed by certain of the Company’s United States subsidiaries and secured by a first priority security interest in substantially all of the assets of the
Company and certain of its subsidiaries (other than intellectual property, which is subject to a negative pledge restricting grants of security interests to third parties).
The 2021 Credit Agreement contains customary representations, warranties, and affirmative and negative covenants. The negative covenants include restrictions on the incurrence of liens and indebtedness, certain investments, dividends, stock repurchases and other matters, all subject to certain exceptions. In addition, the Company is required to maintain Liquidity (the sum of unused availability under the credit facility and the Company’s Qualified Cash) of at least $i55.0
million (of which at least $i40.0 million shall be attributable to Qualified Cash), or, if the borrowing base is then in effect, minimum unused availability under the credit facility of at least $i10.0
million. The 2021 Credit Agreement also includes customary events of default that include, among other things, non-payment of principal, interest or fees, inaccuracy of representations and warranties, violation of certain covenants, cross default to certain other indebtedness, bankruptcy and insolvency events, material judgments and change of control. Upon an event of default, the lender may, subject to customary cure rights, require the immediate payment of all amounts outstanding.
At June 30, 2022, the Company was in compliance with all financial covenants contained in the 2021 Credit Agreement. The Company has made no borrowings from the 2021 Credit Facility to date, however, there is an outstanding letter
of credit of $i5.2 million for certain duty related requirements. This was not collateralized by any cash on hand.
2022 Convertible Notes
In April 2017, the Company issued $i175.0
million aggregate principal amount of i3.50% Convertible Senior Notes due 2022 (2022 Notes), which were repaid in full on April 15, 2022. The 2022 Notes were senior, unsecured obligations of the Company with a maturity date of April 15, 2022. The 2022 Notes could be converted 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 i94.0071 shares of Class A common stock per $i1,000
principal amount of the 2022 Notes, which was equivalent to an initial conversion price of approximately $i10.64 per share of common stock, subject to adjustment. The Company historically paid interest on the 2022 Notes semi-annually in arrears on April 15 and October 15 of each year.
The indenture did not allow for early redemption of the
2022 Notes by the Company, and no sinking fund was provided for the 2022 Notes. The indenture included customary terms and covenants, including certain events of default after which the 2022 Notes may be due and payable immediately.
Holders had the option to convert the 2022 Notes in multiples of $i1,000 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 was greater than or equal to i130%
of the conversion price of the 2022 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 2022 Notes was less than i98% of the product of the last reported sale price of Class A common stock and the conversion rate for the 2022 Notes on each such trading day; or
•upon the occurrence of specified corporate events.
During
the three months ended June 30, 2022and 2021, the preceding conditions allowing holders of the 2022 Notes to early convert were not met.
At any time on or after January 15, 2022 until the second scheduled trading day immediately preceding the maturity date of the 2022 Notes on April 15, 2022, a holder could convert its 2022 Notes, in multiples of $i1,000
principal amount. Holders of the 2022 Notes who converted their 2022 Notes in connection with a make-whole fundamental change (as defined in the indenture) were, under certain circumstances, entitled to an increase in the conversion rate. In addition, in the event of a fundamental change prior to the maturity date, holders would,
15
GoPro, Inc.
Notes to Condensed Consolidated Financial Statements
subject to certain conditions, have the right, at their option, to require the Company to repurchase for cash
all or part of the 2022 Notes at a repurchase price equal to 100% of the principal amount of the 2022 Notes to be repurchased, plus accrued and unpaid interest up to, but excluding, the repurchase date. These conditions allowing holders of the 2022 Notes to convert were not met by the maturity date of April 15, 2022.
Concurrently with the November 2020 issuance of the 2025 Notes, the Company used $i56.2
million of the net cash proceeds from the 2025 Notes to repurchase $i50.0 million principal amount of the 2022 Notes through an individual, privately negotiated transaction. The $i56.2
million net cash proceeds were allocated between long-term debt (liability component) of $i50.6 million and additional paid-in capital (equity component) of $i5.4
million on the Condensed Consolidated Balance Sheets, and the remaining $i0.2 million was related to the payment of interest. The fair value of the liability component was measured using rates determined for similar debt instruments without a conversion feature. The Company’s effective interest rate of i2.4%
was based on the trading details of the 2022 Notes immediately prior to the repurchase date to determine the volatility of the 2022 Notes, and their remaining term. The cash consideration allocated to the equity component was calculated by deducting the fair value of the liability component and interest payment from the total aggregate cash consideration. The difference between the fair value of the 2022 Notes repurchased and the carrying value of $i45.2 million resulted in a $i5.4
million loss on extinguishment of debt.
In connection with the 2022 Notes 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 $i78.0 million
of the net proceeds from the offering of the 2022 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 i9.2 million. The original expiration date for the Prepaid Forward was April 15, 2022, with the option for early settlement in whole or in part. Upon settlement of the Prepaid Forward, the Forward Counterparty would
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 were treated as treasury stock on the Condensed Consolidated Balance Sheets (and not outstanding for purposes of the calculation of basic and diluted income (loss) per share), but remained 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.
In the fourth quarter of 2020, i8.8
million shares out of the i9.2 million shares of Class A common stock underlying the Prepaid Forward were early settled and delivered to the Company. In April 2021, the remaining i0.4
million shares of Class A common stock underlying the Prepaid Forward were early settled and delivered to the Company. There was no financial statement impact due to the return of shares; however, shares outstanding for corporate law purposes were reduced by the early settlement.
On April 15, 2022, the Company repaid $i125.0
million of principal and $i2.2 million of accrued interest in cash to the debt holders to fully settle the 2022 Notes on the maturity date. For the three and six months ended June 30, 2022the Company’s average stock price did not exceed the initial conversion price of $i10.64
of the 2022 Notes, so there was no further dilution.
2025 Convertible Notes
In November 2020, the Company issued $i125.0 million aggregate principal amount of i1.25%
Convertible Senior Notes due 2025 and granted an option to the initial purchasers to purchase up to an additional $i18.8 million aggregate principal amount of the 2025 Notes to cover over-allotments, of which $i18.8
million was subsequently exercised during November 2020, resulting in a total issuance of $i143.8 million aggregate principal amount of the 2025 Notes. The 2025 Notes are senior, unsecured obligations of the Company and mature on November 15, 2025, unless earlier repurchased or converted into shares of Class A common stock under certain circumstances. The 2025 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 i107.1984 shares of Class A common stock per $i1,000
principal amount of the 2025 Notes, which is equivalent to an initial conversion price of approximately $i9.3285 per share of common stock, subject to adjustment. The Company pays interest on the 2025 Notes semi-annually in arrears on May 15 and November 15 of each year.
The Company may redeem all or any portion of the 2025 Notes on or after November
20, 2023 for cash if the last reported sale price of the Company’s common stock has been at least i130% of the conversion price then in effect
16
GoPro, Inc.
Notes to Condensed Consolidated
Financial Statements
for least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides the redemption notice, at a redemption price equal to 100% of the principal amount of the 2025 Notes to be redeemed, plus accrued interest and unpaid interest to, but excluding the redemption date. No sinking fund is provided for the 2025 Notes. The indenture includes customary terms and covenants, including certain events of default after which the 2025 Notes may be due and payable immediately.
Holders have the option to convert the 2025
Notes in multiples of $i1,000 principal amount at any time prior to August 15, 2025, but only in the following circumstances:
•during any calendar quarter beginning after the calendar quarter ending on March 31, 2021, 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 i130% of the conversion price of the 2025 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 2025 Notes is less than i98%
of the product of the last reported sale price of Class A common stock and the conversion rate for the 2025 Notes on each such trading day;
•if the Company calls any or all of the 2025 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately before the redemption date; or
•upon the occurrence of specified corporate events.
At any time on or after August 15, 2025 until the second scheduled trading day immediately preceding the maturity date of the 2025 Notes on November 15, 2025, a holder may convert its 2025 Notes, in multiples of $i1,000
principal amount. Holders of the 2025 Notes who convert their 2025 Notes in connection with a make-whole fundamental change (as defined in the indenture) are, under certain circumstances, entitled to an increase in the conversion rate. In addition, in the event of a fundamental change prior to the maturity date, holders will, subject to certain conditions, have the right, at their option, to require the Company to repurchase for cash all or part of the 2025 Notes at a repurchase price equal to 100% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest up to, but excluding, the repurchase date. During the three months ended June 30, 2022, the conditions allowing holders of the 2025 Notes to convert were not
met.
In connection with the offering of the 2025 Notes, the Company paid $i10.2 million to enter into privately negotiated capped call transactions with certain financial institutions (Capped Calls). The Capped Calls have an initial strike price of $i9.3285
per share, which corresponds to the initial conversion price of the 2025 Notes. The Capped Calls cover, subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the 2025 Notes, the number of Class A common stock initially underlying the 2025 Notes. The Capped Calls are generally expected to reduce potential dilution to the Company’s Class A common stock upon any conversion of the 2025 Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted 2025 Notes, as the case may be, with such reduction and/or offset subject to a cap, initially equal to $i12.0925,
and is subject to certain adjustments under the terms of the Capped Call transactions. The Capped Calls will expire in November 2025, if not exercised earlier.
The Capped Calls are subject to adjustment upon the occurrence of specified extraordinary events affecting the Company, including merger events, tender offers and announcement events. In addition, the Capped Calls are subject to certain specified additional disruption events that may give rise to a termination of the Capped Calls, including nationalization, insolvency or delisting, changes in law, failures to deliver, insolvency filings and hedging disruptions. For accounting purposes, the Capped Calls are separate transactions, and not part of the terms of the 2025 Notes. As these transactions meet certain accounting criteria, the Capped Calls are recorded in stockholders’ equity as
a reduction to additional paid-in capital and will not be remeasured as long as they continue to meet certain accounting criteria.
Accounting for the 2022 and 2025 Convertible Notes
Pre adoption of ASU 2020-06
The 2022 and 2025 Convertible Notes were separated into liability and equity components for accounting
17
GoPro, Inc.
Notes to Condensed Consolidated Financial Statements
purposes. The carrying amounts of the liability component were initially calculated by measuring the fair value of similar liabilities that do not have associated convertible
features. The carrying amounts of the equity component representing the conversion option were determined by deducting the fair value of the liability component from the par value of the respective Convertible Senior Notes. This difference represents the debt discount that was amortized to interest expense over the respective terms of the 2022 Notes and 2025 Notes using the effective interest rate method. Upon issuance, the carrying amounts of the liability component from the issuance of the 2022 Notes and the 2025 Notes of $i128.3 million and $i106.9
million, respectively were recorded in long-term debt on the Condensed Consolidated Balance Sheets. The carrying amounts of the equity component representing the conversion option was determined to be $i46.7 million and $i36.9
million for the 2022 Notes and 2025 Notes, respectively, upon issuance. The equity component was recorded in additional paid-in-capital and is not remeasured so long as it continued to meet the conditions for equity classification.
The liability component was accreted up to the face value of the 2022 Notes of $i175.0 million and 2025 Notes of $i143.8
million, which resulted in non-cash interest expense being recognized in the Condensed Consolidated Statements of Operations. The accretion of the 2022 Notes and 2025 Notes to par to long-term debt was amortized into interest expense over the term of the 2022 Note and 2025 Notes using an effective interest rate of approximately i10.5% and i7.5%,
respectively.
In accounting for the debt issuance costs of $i5.7 million and $i4.7 million related to the 2022 Notes and 2025 Notes, respectively, the
Company allocated each of the total amounts incurred to the liability and equity components of the 2022 Notes and 2025 Notes based on their relative values. Issuance costs attributable to the liability component of the 2022 Notes were $i4.2 million upon issuance and were amortized, along with the debt discount, to interest expense over the contractual term of the 2022 Notes at an effective interest rate of i10.5%.
Issuance costs attributable to the liability component of the 2025 Notes were $i3.5 million upon issuance and were amortized, along with the debt discount, to interest expense over the contractual term of the 2025 Notes at an effective interest rate of i7.5%.
Issuance costs attributable to the equity component were $i1.5 million and $i1.2 million for the 2022 Notes and 2025 Notes, respectively, and were netted against the equity component representing
the conversion option in additional paid-in-capital.
Post adoption of ASU 2020-06
On January 1, 2022, the Company adopted ASU 2020-06 based on the modified retrospective transition method. Under such transition, prior-period information has not been retrospectively adjusted. Upon adoption of ASU 2020-06, the Company is no longer recording the conversion feature of its 2022 Notes and 2025 Notes in equity. Instead, the Company combined the previously separated equity component with the liability component, which together are now classified as debt, thereby eliminating the subsequent
amortization of the debt discount as interest expense. Similarly, the portion of debt issuance costs previously allocated to equity was reclassified to debt and amortized as interest expense. Accordingly, the Company recorded a decrease to additional paid-in-capital of $i78.2 million, a decrease to accumulated deficit of $i47.1
million, and an increase to the debt balance of the 2022 Notes and 2025 Notes of $i2.3 million and $i28.8 million, respectively. In addition, the Company
recorded the reversal of U.S. deferred tax liabilities (net) of $i7.3 million associated with the 2022 Notes and 2025 Notes upon the adoption of ASU 2020-06, with a corresponding decrease to accumulated deficit for the same amount.
As of June 30, 2022 and December 31, 2021, the outstanding principal on the 2022 Notes was izero
and $i125.0 million, respectively, the unamortized debt discount was izero and $i2.4
million, respectively, the unamortized debt issuance cost was izero and $i0.2 million, respectively, and the net carrying amount of the liability was izero
and $i122.4 million, respectively, which was recorded as short-term debt within the Condensed Consolidated Balance Sheets. For the three months ended June 30, 2022, and 2021, the Company recorded interest expense of $i0.2
million and $i1.1 million, respectively, for contractual coupon interest, and izero and $i0.2
million, respectively, for amortization of debt issuance costs. For the six months ended June 30, 2022, and 2021, the Company recorded interest expense of $i1.3 million and $i2.2 million,
respectively, for contractual coupon interest, and $i0.2 million and $i0.3 million, respectively, for amortization of debt issuance costs. For the three months
ended June 30, 2022 and 2021, the Company recorded izero and $i1.9
million, respectively, for amortization of the debt discount, and for the six months ended June 30, 2022 and 2021, the Company recorded izero and $i3.8 million,
respectively, for amortization of the debt discount.
Notes to Condensed Consolidated Financial Statements
unamortized debt discount was izero and $i29.7
million, respectively, the unamortized debt issuance cost was $i3.2 million and $i2.7 million, respectively, and the net carrying amount of the liability was $i140.5
million and $i111.3 million, respectively, which was recorded as long-term debt within the Condensed Consolidated Balance Sheets. For the three months ended June 30, 2022 and 2021, the Company recorded interest expense of $i0.5
million for contractual coupon interest, and $i0.3 million and $i0.2 million, respectively, for amortization of debt issuance costs. For the six months ended
June 30, 2022 and 2021, the Company recorded interest expense of $i0.9 million for contractual coupon interest, and $i0.5 million
and $i0.4 million, respectively, for amortization of debt issuance costs. For the three months ended June 30, 2022 and 2021, the Company recorded izero
and $i1.5 million, respectively, for amortization of the debt discount, and for the six months ended June 30, 2022 and 2021, the Company recorded izero
and $i3.1 million, respectively, for amortization of the debt discount.
5. Stockholders' equity
i
Stock
Repurchase Program. On January 27, 2022, the Company’s board of directors authorized the repurchase of up to $i100 million of its Class A capital stock. Stock repurchases under the program may be made periodically using a variety of methods, including without limitation, open market purchases, block trades or otherwise in compliance with all federal and state securities laws and state corporate law and in
accordance with the single broker, timing, price, and volume guidelines set forth in Rule 10b-18 and Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, as such guidelines may be modified by the SEC from time to time. This stock repurchase program has no time limit and may be modified, suspended, or discontinued at any time. The Company currently intends to hold its repurchased shares as treasury stock.
As of June 30, 2022, the remaining amount of share repurchases under the program was $i78.2 million.
The following table summarizes share repurchases during the three and six months ended June 30, 2022. There were no share repurchases during the three and six months ended June 30, 2021.
iEquity 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 iten years from the date of grant and generally vest over one to ifour
years. Restricted stock units (RSUs) granted under the 2014 Plan generally vest over two to ifour years based upon continued service and are settled at vesting in shares of the Company’s Class A common stock. Performance stock units (PSUs) granted under the 2014 Plan generally vest over iithree
years/ based upon continued service and the Company achieving certain financial and operating targets, and are settled at vesting in shares of the Company’s Class A common stock. The Company accounts for forfeitures of stock-based payment awards in the period they occur. The ESPP allows eligible employees to purchase shares of the Company’s Class A common stock through payroll deductions at a price equal to i85% 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, refer to the 2021 Annual Report./
19
GoPro, Inc.
Notes to Condensed Consolidated Financial Statements
Stock options
i
A
summary of the Company’s stock option activity for the six months ended June 30, 2022 is as follows:
Shares
(in thousands)
Weighted-average
exercise price
Weighted-average remaining contractual term (in years)
The
aggregate intrinsic value of the stock options outstanding as of June 30, 2022 represents the value of the Company’s closing stock price on June 30, 2022 in excess of the exercise price multiplied by the number of options outstanding.
Employee
stock purchase plan. For the six months ended June 30, 2022 and 2021, the Company issued i0.3 million and i0.5
million shares under its ESPP, respectively, at weighted-average prices of $i7.70 and $i4.15,
respectively.
20
GoPro, Inc.
Notes to Condensed Consolidated Financial Statements
Stock-based compensation expense.iThe
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 issuance is estimated using the Black-Scholes option pricing model. The fair value of RSUs and PSUs are 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 2021 Annual Report.
The following table summarizes stock-based compensation expense included in the Condensed Consolidated Statements of Operations:
Three
months ended June 30,
Six months ended June 30,
(in thousands)
2022
2021
2022
2021
Cost of revenue
$
i483
$
i508
$
i930
$
i937
Research
and development
i4,405
i4,615
i8,563
i8,751
Sales
and marketing
i2,229
i2,153
i4,352
i4,018
General
and administrative
i3,134
i2,753
i6,242
i5,192
Total
stock-based compensation expense
$
i10,251
$
i10,029
$
i20,087
$
i18,898
i
The
income tax benefit related to stock-based compensation expense was $i2.3 million and $i4.4
million for the three and six months ended June 30, 2022, respectively. The income tax benefit related to stock-based compensation expense was iizero/
for the three months and six months ended June 30, 2021due to a full valuation allowance on the Company’s United States net deferred tax assets. See Note 8, Income taxes, for additional details.
At June 30, 2022, total unearned stock-based compensation of $i63.8
million related to stock options, RSUs, PSUs and ESPP shares is expected to be recognized over a weighted-average period of i1.97 years.
/
7.
Net income per share
i
The following table presents the calculations of basic and diluted net income per share:
Three
months ended June 30,
Six months ended June 30,
(in thousands, except per share data)
2022
2021
2022
2021
Numerator:
Net
income - Basic
$
i2,519
$
i16,952
$
i8,204
$
i6,784
Interest
on convertible notes, income tax effected
i715
i—
i2,236
i—
Net
income - Diluted
$
i3,234
$
i16,952
$
i10,440
$
i6,784
Denominator:
Weighted-average
common shares - basic for Class A and Class B common stock
i156,645
i153,634
i156,751
i152,911
Effect
of dilutive securities
i20,215
i11,223
i26,419
i9,544
Weighted-average
common shares - diluted for Class A and Class B common stock
i176,860
i164,857
i183,170
i162,455
Net
income per share
Basic
$
i0.02
$
i0.11
$
i0.05
$
i0.04
Diluted
$
i0.02
$
i0.10
$
i0.06
$
i0.04
/
21
GoPro,
Inc.
Notes to Condensed Consolidated Financial Statements
i
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 June 30,
Six months ended June 30,
(in thousands)
2022
2021
2022
2021
Stock-based awards
i7,843
i1,397
i6,113
i1,672
Total
anti-dilutive securities
i7,843
i1,397
i6,113
i1,672
/i
Prior
to the adoption of ASU 2020-06, the Company calculated the potential dilutive effect of its 2022 Notes and 2025 Notes under the treasury stock method. As a result, only the amount by which the conversion value exceeded the aggregate principal amount of the 2022 Notes and 2025 Notes (the conversion spread) was considered in the diluted net income (loss) per share computation. The conversion spread was dilutive in periods of net income when the average market price of the Company’s Class A common stock for a given reporting period exceeded the initial conversion prices of $i10.64
and $i9.3285 per share for the 2022 Notes and 2025 Notes, respectively. For the three months ended June 30, 2021, the conversion spread relating to both the 2022 and 2025 Notes had a dilutive effect on net income per share. For the six months ended June 30, 2021, only the conversion spread relating to the 2025 Notes had a dilutive effect on net income per share. The initial conversion price of the 2022 Notes was greater than the average market price of the
Company’s Class A Common Stock for the six months ended June 30, 2021 and as such, had no impact on anti-dilutive or dilutive share calculations. Upon conversion of the 2025 Notes, there will be no economic dilution until the average market price of the Company’s Class A common stock exceeds the cap price of $i12.0925 per share, as exercise of the Capped Calls offset any dilution from the 2025 Notes from
the initial conversion price up to the cap price. The Capped Calls are excluded from diluted net income per share as they would be anti-dilutive.
The Company’s 2022 Notes matured on April 15, 2022 and the 2025 Notes will mature on November 15, 2025, unless earlier repurchased or converted into shares of Class A common stock under certain circumstances as described further in Note 4 Financing arrangements. On April 15, 2022, the Company repaid $i125.0
million of principal and $i2.2 million of accrued interest in cash to the debt holders to fully settle the 2022 Notes on the maturity date. The repayment of the 2022 Notes did not have an impact on earnings per share for the periods ended June 30, 2022. The 2025 Notes are convertible into cash, shares of the Company’s Class A common stock, or a combination thereof, at the
Company’s election. While the Company has the intent and ability to deliver cash up to the principal amount, the maximum number of shares issuable upon conversion of the 2025 Notes is i20.8 million shares of Class A common stock.
Additionally, the calculation of weighted-average shares outstanding for the three and six months ended June 30,
2021 excludes approximately ii9.2/
million shares effectively repurchased and held in treasury stock on the Condensed Consolidated Balance Sheets as a result of the Prepaid Forward transaction entered into in connection with the 2022 Note offering.
Upon the adoption of ASU 2020-06 on January 1, 2022, the Company calculated the potential dilutive effect of its 2022 Notes and 2025 Notes under the if-converted method. Under the if-converted method, diluted net income (loss) per share was determined by assuming all of the 2022 Notes and the 2025 Notes were converted into shares of the Company’s common stock at the beginning of the reporting period. In addition, interest charges on the 2022 Notes and 2025 Notes, which includes both coupon interest
and the amortization of debt issuance costs, were added back to the numerator on an after-tax effected basis.
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 ione vote per share and each share of Class B common stock is entitled to iten 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 ione 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.
/
22
GoPro,
Inc.
Notes to Condensed Consolidated Financial Statements
The computation of the diluted net income (loss) per share of Class A common stock assumes the conversion of Class B common stock.
i
8. Income taxes
The Company’s
income tax expense (benefit) 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 deferred tax assets are not anticipated to be recognized, if any.
i
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. When applicable, the Company also excludes 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. In each quarter, the Company updates its estimate of the annual effective tax rate, and if the estimated annual tax rate
changes, a cumulative adjustment is made in that quarter.
Three months ended June 30,
Six months ended June 30,
(dollars in thousands)
2022
2021
2022
2021
Income
tax expense (benefit)
$
i110
$
(i11,670)
$
i59
$
(i10,451)
/
The
Company recorded an income tax expense of $i0.1 million for the three months ended June 30, 2022 on pre-tax net income of $i2.6
million. The Company’s income tax expense for the three months ended June 30, 2022 was composed of $i0.6 million of tax expense incurred on pre-tax income, and discrete items that primarily included $i0.2
million of net excess tax benefit for employee stock-based compensation and $i0.2 million of tax benefit related to the foreign provision to income tax return adjustments. The Company recorded an income tax expense of $i0.1
million for the six months ended June 30, 2022 on pre-tax net income of $i8.3 million. The Company’s income tax expense for the six months ended June 30, 2022 was composed of $i1.9
million of tax expense incurred on pre-tax income, and discrete items that primarily included $i1.6 million of net excess tax benefit for employee stock-based compensation and $i0.3
million of tax benefit related to the foreign provision to income tax return adjustments.
For the three months ended June 30, 2021, the Company recorded an income tax benefit of $i11.7 million on pre-tax net income of $i5.3 million.
The Company’s income tax benefit for the three months ended June 30, 2021 was composed of $i1.0 million of tax expense incurred on pre-tax income, and discrete items that primarily included a $i12.6
million tax benefit due to the release of a portion of the Company’s uncertain tax positions as a result of a lapse in the statute of limitations in certain jurisdictions, $i1.0 million of net excess tax benefit for employee stock-based compensation, $i0.2
million of tax benefit related to restructuring charges and $i0.2 million of tax benefit related to the foreign provision to income tax return adjustments, partially offset by a net increase in the valuation allowance of $i1.3
million. The Company recorded an income tax benefit of $i10.5 million for the six months ended June 30, 2021 on a pre-tax net loss of $i3.7
million. The Company’s income tax benefit for the six months ended June 30, 2021 was composed of $i2.3 million of tax expense incurred on pre-tax income, and discrete items that primarily included a $12.6 million tax benefit due to the release of a portion of the Company’s uncertain tax positions as a result of a lapse in the statute
of limitations in certain jurisdictions, $i2.8 million of net excess tax benefit for employee stock-based compensation, $i0.4
million of tax benefit related to restructuring charges and $i0.4 million of tax benefit related to the foreign provision to income tax return adjustments, partially offset by a net increase in the valuation allowance of $i3.3
million.
At June 30, 2022 and December 31, 2021, the Company’s gross unrecognized tax benefits were $i22.2 million and $i21.3
million, respectively. If recognized, $i8.7 million of these unrecognized tax benefits (net of United States federal benefit) at June 30, 2022 would reduce income tax expense. The unrecognized tax benefits relate primarily to unresolved matters with taxing authorities regarding the Company’s transfer pricing positions. While it is often difficult to predict the final outcome
or the timing of resolution of any particular uncertain tax position, the Company believes that its reserves reflect the more likely outcome. The Company believes, due to statute of limitations expiration, that within the next 12 months, it is possible that up to $i0.5 million of uncertain tax position
/
23
GoPro, Inc.
Notes to Condensed Consolidated Financial Statements
could be released. It is also reasonably possible that additional uncertain tax positions will be added. It is not reasonably possible at this time to quantify the net effect.
9. Commitments, contingencies and guarantees
i
Facility
Leases. The Company leases its facilities under long-term operating leases, which expire at various dates through 2027.
iThe components of net lease cost, which were recorded in operating expenses, were as follows:
Three
months ended June 30,
Six months ended June 30,
(in thousands)
2022
2021
2022
2021
Operating lease cost (1)
$
i2,477
$
i2,892
$
i5,327
$
i5,988
Sublease
income
(i730)
(i100)
(i1,461)
(i233)
Net
lease cost
$
i1,747
$
i2,792
$
i3,866
$
i5,755
(1) Operating
lease cost includes variable lease costs, which are immaterial.
Supplemental cash flow information related to leases was as follows:
Six months ended June 30,
(in thousands)
2022
2021
Cash
paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
$
i7,479
$
i7,493
Right-of-use
assets obtained in exchange for operating lease liabilities
i873
i1,018
Supplemental
balance sheet information related to leases was as follows:
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 to its financial
and IT systems; debt agreements; and various other contractual commitments. As of June 30, 2022, the Company’s total undiscounted future expected obligations under multi-year agreements described above with terms longer than one year was $i251.7 million.
/
24
GoPro,
Inc.
Notes to Condensed Consolidated Financial Statements
Legal proceedings and investigations. On January 5, 2015, Contour LLC filed a complaint against the Company in federal court in Utah alleging, among other things, patent infringement in relation to certain GoPro cameras. GoPro filed an inter partes review (IPR) at the United States Patent and Trademark Office. On November 30, 2015, Contour dismissed the Utah action, and Contour IP Holdings LLC (CIPH), a non-practicing entity, re-filed a similar complaint in Delaware. The case was transferred to the Northern District of California in July 2017 (case 3:17-cv-04738) and was stayed pending the IPR proceedings. Upon
conclusion of the IPRs, the District Court lifted the stay on October 1, 2019. Due to COVID-19 delays, the trial was delayed several times. Separately, on March 26, 2021, CIPH filed a new lawsuit against Company in the same court (case 3:21-cv-02143), asserting the same patents against certain GoPro products. On March 4, 2022, the Court granted the Company’s motion for summary judgment that the asserted patents are invalid under 35 U.S.C. 101 for claiming unpatentable subject matter, and entered judgment in favor of the Company and against CIPH on March 15,
2022. CIPH filed a notice of appeal on April 13, 2022, and its opening brief is due August 16, 2022. The Company believes that the appeal lacks merit, and intends to vigorously defend against CIPH's appeal.
The Company regularly evaluates the associated developments of the legal proceedings described above, as well as other legal proceedings that arise in the ordinary course of business. While litigation is inherently uncertain, based on the currently available information, the Company is unable to determine a loss or a range of loss, and does not believe the ultimate
cost to resolve these matters will have a material adverse effect on its business, financial condition, cash flows or results of operations.
Indemnifications. The Company has entered into indemnification agreements with its directors and executive officers which requires the Company to indemnify its directors and executive officers against liabilities that may arise by reason of their status or service. In addition, 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, 2022, 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.
10. iConcentrations of risk and geographic information
Concentration of risk. Financial instruments which potentially subject the Company to concentration
of credit risk includes cash and cash equivalents, marketable securities, accounts receivable, and derivative instruments, including the Capped Calls associated with the 2025 Notes. The Company places cash and cash equivalents with high-credit-quality financial institutions; however, the Company maintains cash balances in excess of the FDIC insurance limits. The Company believes that credit risk for accounts receivable is mitigated by the Company’s credit evaluation process, relatively short collection terms and dispersion of its customer base. The
Company generally does not require collateral and losses on trade receivables have historically been within the Company’s expectations. The Company believes its counterparty credit risk related to its derivative instruments is mitigated by transacting with major financial institutions with high credit ratings.
25
GoPro, Inc.
Notes to Condensed Consolidated Financial Statements
i
Customers
who represented 10% or more of the Company’s net accounts receivable balance were as follows:
*
Less than 10% of total revenue for the period indicated.
/
Supplier concentration. The Company relies on third parties forthe supply and manufacture of its products, some of which are sole-source suppliers. The Company believes that outsourcing manufacturing enables greater scale and flexibility. As demand and product lines change, the Company periodically evaluates the need and advisability of adding manufacturers to support its operations.
In instances where a supply and manufacture agreement does not exist or suppliers fail to perform their obligations, the Company may be unable to find alternative suppliers or satisfactorily deliver its products to its customers on time, if at all. The Company also relies on third parties with whom it outsources supply chain activities related to inventory warehousing, order fulfillment, distribution and other direct sales logistics. In instances where an outsourcing agreement does not exist or these third parties fail to perform their obligations, the Company may be unable to find alternative partners or satisfactorily deliver its products to its customers on time.
Geographic
information
i
Revenue by geographic region was as follows:
Three
months ended June 30,
Six months ended June 30,
(in thousands)
2022
2021
2022
2021
Americas
$
i126,377
$
i146,600
$
i228,960
$
i253,238
Europe,
Middle East and Africa (EMEA)
i71,691
i61,190
i133,222
i110,993
Asia
and Pacific (APAC)
i52,617
i41,796
i105,208
i89,035
Total
revenue
$
i250,685
$
i249,586
$
i467,390
$
i453,266
/
Revenue
from the United States, which is included in the Americas geographic region, was $i108.0 million and $i131.4 million for the three months ended June 30, 2022 and 2021,
respectively, and $i193.2 million and $ii224.7/
million for the six months ended June 30, 2022 and 2021. 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.
26
GoPro, Inc.
Notes to Condensed Consolidated Financial Statements
As of June 30, 2022 and December 31,
2021, long-lived assets, which represent net property and equipment, located outside the United States, primarily in Hong Kong and mainland China, were $i4.7 million and $i5.7 million, respectively.
27
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)
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the related notes and the discussion under the heading Management's Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2021 included in our Annual Report on Form 10-K filed with the SEC. This discussion, particularly information
with respect to our future results of operations or financial condition, business strategy and plans, and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading Special Note About Forward-Looking Statements in this Quarterly Report on Form 10-Q. You should review the disclosure under the heading Risk Factors in this Quarterly Report on Form 10-Q for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements. Our MD&A is provided in addition to the accompanying condensed consolidated 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 2022 to 2021.
•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.
•Critical Accounting Policies and Estimates. Accounting estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported
financial results and forecasts.
•Non-GAAP Financial Measures. A reconciliation and discussion of our GAAP to non-GAAP financial measures.
Overview
GoPro helps the world capture and share itself in immersive and exciting ways. We are committed to developing solutions that create an easy, seamless experience for consumers to capture, create, and share engaging personal content. When consumers use our products and services, they often generate and share content that organically increases awareness for GoPro, driving a virtuous cycle and a self-reinforcing demand for our products. We believe revenue growth may be driven by the introduction of new cameras,
accessories, lifestyle gear, and software and subscription offerings. We believe new camera features drive a replacement cycle among existing users and attract new users, expanding our total addressable market. Our investments in image stabilization, mobile app editing and sharing solutions, modular accessories, auto-upload capabilities, local language user-interfaces and voice recognition in more than 12 languages drive the expansion of our global market.
In the Fall of 2021, we began shipping our HERO10 Black flagship camera that includes our new high-performance GP2 processor. The camera's highest video resolution of 5.3K at 60 frames per second delivers 91% more pixel resolution than 4K at 30 frames per second and 665% more pixel resolution than 1080p HD at 60 frames per second, allowing for fluid playback and 2X slow motion. 4K video can be captured at 120 frames per second (4X slow motion) and 2.7K video can be captured
at 240 frames per second (8X slow motion). The new GP2 processor also enables HyperSmooth 4.0 video stabilization. HERO10 Black's in-camera horizon leveling feature benefits from an increased tilt limit of 45° in high-performance settings. The new GP2 processor combined with the ultra-high resolution 23.6 megapixel (MP) sensor enables life-like image quality. In addition to 23MP photos, HERO10 Black enables 19.6MP video stills to be pulled from 5K 4:3 video at 30 frames per second and 15.8MP video stills from 5.3K video at 60 frames per second, which is ideal for capturing still images of sports and fast-paced activities. The HERO10 Black is also cloud connected while being charged and will automatically upload recently captured footage to the user’s GoPro cloud account. Additionally, the HERO10 Black continues to
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
build off HERO9 Black features, including Power Tools, TimeWarp 3.0, front-facing and rear touch displays, and camera Mod compatibility.
In March 2022, we introduced the HERO10 Black Creator Edition, which is an all-in-one content capturing bundle, featuring a versatile hand grip, all-day charge and one-hand control that makes vlogging, filmmaking and live streaming easier than ever. Creator Edition combines the HERO10 Black, Volta Battery and Remote control Grip, Media Mod, and Light Mod to create professional-quality video. Also in March 2022, we expanded our software solutions with the launch of our new GoPro Player + ReelSteady desktop app, which provides industry-leading video stabilization and 360-reframing tools in a single post-production
app.
In April 2022, we introduced and began shipping the HERO10 Black Bones, a specifically built FPV (First Person View) drone camera which includes our GP2 processor, HyperSmooth 4.0, and the ReelSteady desktop app. The camera delivers the same image quality and video frame rates as the HERO10 Black.
Our HERO10 Black, HERO9 Black, HERO8 Black and MAX cameras are compatible with our ecosystem of mountable and wearable accessories.
We offer our GoPro subscription, which includes unlimited cloud storage supporting source video and photo quality, camera replacement and damage protection, access to a high-quality live streaming service on GoPro.com as well as discounts on GoPro gear, mounts and accessories.
In addition to GoPro subscription, we offer the Quik subscription which makes it easy for users
to get the most out of their favorite photos and videos no matter which phone or camera is used to capture the footage. We believe the launch of the Quik subscription is an important step in expanding our total addressable market to those who value organizing the visual moments of their lives. We also offer Open GoPro, an open API initiative that makes it easy for third-party developers to integrate their HERO camera into their own development efforts.
The COVID-19 pandemic is continuing to have widespread, evolving, and unpredictable impacts on global societies, economies, financial markets, supply chains and business practices. In the first quarter of 2020, we closed all of our offices and required most of our employees to work remotely and have continued to focus on being a remote first company. In the second quarter of 2022 we supported limited capacity office re-openings and encourage our employees to continue to work remotely.
At this point, the duration and impact, if any, of these and any additional operational changes we may implement is uncertain, but the changes we have implemented have not affected and are not expected to affect our ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures. See Item 1A Risk Factors for further discussion of the possible impact of the COVID-19 pandemic on our business.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 2022
Q1 2022
Q2 2021
Q2 2022 vs. Q1 2022
Q2 2022 vs. Q2 2021
Revenue
$
250,685
$
216,705
$
249,586
16
%
0.4
%
Camera
units shipped (1)
640
523
724
22
%
(12)
%
Gross margin (2)
38.3
%
41.8
%
39.8
%
(350)
bps
(150)
bps
Operating
expenses
$
91,349
$
82,314
$
89,780
11
%
2
%
Net income
$
2,519
$
5,685
$
16,952
(56)
%
(85)
%
Diluted
net income per share
$
0.02
$
0.04
$
0.10
(50)
%
(80)
%
Cash provided by (used in) operations
$
12,856
$
(73,407)
$
23,174
(118)
%
(45)
%
Other
financial information:
Adjusted EBITDA (3)
$
16,891
$
20,649
$
25,065
(18)
%
(33)
%
Non-GAAP
net income (4)
$
12,790
$
15,196
$
19,862
(16)
%
(36)
%
Non-GAAP diluted net income per share
$
0.08
$
0.09
$
0.12
(11)
%
(33)
%
(1)
Represents the number of camera units that are shipped during a reporting period, net of any returns.
(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, point of purchase (POP) display amortization, stock-based compensation, intangible asset impairment charges, loss on extinguishment of debt, and restructuring and other costs, including right-of-use asset impairment charges.
(4) We define non-GAAP net income as net income (loss) adjusted to exclude stock-based compensation, acquisition-related costs, restructuring and other costs, including right-of-use
asset impairment charges, non-cash interest expense, and income tax adjustments. Acquisition-related costs include the amortization of acquired intangible assets and impairment charges (if applicable), as well as third-party transaction costs for legal and other professional services.
Reconciliations of non-GAAP adjusted measures to the most directly comparable GAAP measures are presented under Non-GAAP Financial Measures.
Second quarter 2022 financial performance
Revenue was $250.7 million for the second quarter of 2022 or a 0.4% increase from the same period in 2021. The slight year-over-year revenue improvement was driven by sales of our cameras at higher price points, which was positively impacted by a $50 increase in MSRP on our latest flagship camera. Our average selling price, which is defined as total revenue divided by camera units
shipped, for the second quarter of 2022 was $392, or a 13.5% year-over-year increase, primarily due to greater than 90% of our camera revenue mix being derived from cameras with a suggested retail price equal to or greater than $400, as well as an increase in subscription and service revenue. These improvements to revenue were partially offset by a decrease in the camera units shipped in the second quarter of 2022 to 640 thousand, compared to 724 thousand camera units for the same period of 2021, and the strengthening of the U.S. dollar. Subscription and service revenue grew to $20.1 million in the second quarter of 2022, or a 71% increase year-over-year. We had approximately 1.91 million GoPro subscribers as of June 30, 2022, a 65% increase year-over-year. GoPro.com revenue increased 8.5% year-over-year to $95.3 million in the second quarter of 2022, primarily driven by an increase in subscription and service revenue.
GoPro.com revenue represented 38.0% and 35.2% of total revenue for the second quarter of 2022 and 2021, respectively, while retail revenue represented 62.0% and 64.8% of total revenue for the second quarter of 2022 and 2021, respectively.
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The gross margin percentage for the second quarter of 2022 was 38.3%, down from 39.8% in the second quarter of 2021 primarily due to the strengthening of the U.S. dollar. Overall, our second quarter of 2022 revenue and operating income were negatively impacted by approximately $8 million due to the strengthening of
the U.S. dollar. Net income for the second quarter of 2022 was $2.5 million compared to net income of $17.0 million generated in the same period in 2021. The year-over-year change in net income was primarily driven by an $11.8 million decrease in income tax benefit in 2021. Adjusted EBITDA for the second quarter of 2022 was $16.9 million, compared to $25.1 million for the same period in 2021.
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 operate our business and improve our results of operations.
Driving profitability through improved efficiency, lower costs and better execution. We generated
positive operating income for the second quarter of 2022, for the first half of 2022, and for the full year 2021, and we continue to make strategic decisions to create sustainable growth and profitability in our business. Prior to fiscal year 2021, we incurred operating losses during fiscal years 2020, 2019 and 2018. Our prior restructuring actions, along with continued effective cost management, has allowed us to scale our on-going operating expenses based on our growth strategies, resulting in a more efficient global organization that has allowed for improved communication and better alignment among our functional teams. As a result of the COVID-19 pandemic, we accelerated a shift in our sales channel strategy to reduce the number of distributors and retailers to focus more on direct-to-consumer sales through GoPro.com, while also continuing to cultivate the partnerships with our remaining distributors and retailers, in order to continue to grow both sales channels
concurrently.
If we are unable to generate adequate revenue growth, particularly in light of the continued impact of the COVID-19 pandemic, successfully sustain our direct-to-consumer and business-to-business sales models and our current revenue growth rate, and continue to effectively manage our expenses, we may incur significant losses in the future and may not be able to maintain profitability.
Investing in research and development and enhancing our customer 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, mobile applications
and other new offerings. We plan to further build upon our integrated mobile and cloud-based storytelling solutions, and subscription offerings. Our investments, including those for marketing and advertising, may not successfully drive increased revenue and our customers may not accept our new offerings. If we fail to innovate and enhance our brand, our products, our mobile app experience, the value proposition of our subscriptions, our 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 may not recover the value of these investments.
Improving Profitability. We believe that our continued focus on growing our direct-to-consumer sales and subscription and service will accelerate our ability to become consistently profitable due to an improved margin structure and lower operating expenses.
As a result of this strategic focus on direct sales, we believe we can become consistently profitable with lower overall unit sales. In addition, we continue to work closely with our remaining distributors and retailer partners to grow the business-to-business sales channel. We believe that there is additional growth available through this sales channel, which will also be a driver to achieve consistent profitability.
We continue to believe that international markets represent a significant opportunity to achieve continued profitability. While the total market for digital cameras has continued to decline as smartphone and tablet camera quality has improved, we continue to believe that our consumers’ differentiated use of GoPro cameras, our mobile app and cloud solutions, our continued innovation of product features desired by our users, and our brand, all help support our business from many of the negative trends facing this
market. However, we expect that the markets in which we conduct our business will remain highly competitive as we face new product introductions from competitors. We will continue to leverage our brand recognition to increase our global presence through
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
GoPro.com with the active promotion of our brand, the expansion of localized products in international markets with region-specific marketing, and a focus on the biggest investment opportunities.
Our consistent profitability also depends on expanding our subscription and service offerings.
If we are not successful with our direct-to-consumer sales model, expanding our product and subscription and service offerings and increasing our paid subscriber base through both GoPro.com and retail aftermarket mobile attach, we might not be able to become consistently profitable and we may not recognize benefits from our investment in new areas.
Marketing the improved GoPro experience.We intend to focus our marketing resources to increase traffic to GoPro.com, improve the consumer experience on GoPro.com, and further improve brand recognition. 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 goal of sustaining profitability depends on continuing to reach, expand and re-engage with this core user base in alignment with our strategic priorities.
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.
Seasonality. Historically, we have experienced the highest levels of total revenue in the fourth quarter of the year, coinciding with the holiday shopping season, particularly in the United States and Europe. While we have implemented operational changes aimed at reducing the impact of fourth quarter seasonality on full year performance, timely and effective product introductions and forecasting, whether just prior to the holiday season or otherwise, are critical to our operations and financial performance. As it relates to our subscriptions, we have historically experienced the highest retail subscription attach rates in the first quarter of the year, following the fourth quarter gift giving season.
Macroeconomic
Risks. Macroeconomic conditions affecting the level of consumer spending includes general market conditions, fluctuations in foreign exchange rates and interest rates, and inflation. Although the majority of our retail sales occur in U.S. dollars, we sell in local currency through our GoPro.com channel, which subjects us to exchange rate fluctuations that create inherent risks for us and may cause us to adjust pricing which may make our products more or less attractive to the consumer. If sales denominated in foreign currencies increase in the future, fluctuations in foreign exchange rates could have a material impact on our future operating results. Some product costs have become subject to inflationary pressure and we may not be able to fully offset such higher costs through price increases; our inability or failure to adjust pricing could harm our business, financial condition, and operating results.
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Management’s Discussion and Analysis of 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 component as a percentage of revenue:
Three
months ended June 30,
Six months ended June 30,
(dollars in thousands)
2022
2021
2022
2021
Revenue
$
250,685
100
%
$
249,586
100
%
$
467,390
100
%
$
453,266
100
%
Cost
of revenue
154,681
62
150,304
60
280,910
60
275,288
61
Gross
profit
96,004
38
99,282
40
186,480
40
177,978
39
Operating
expenses:
Research and development
36,218
14
37,800
15
67,816
15
70,230
15
Sales
and marketing
39,439
16
35,670
14
74,812
16
71,460
16
General
and administrative
15,692
6
16,310
7
31,035
7
30,298
7
Total
operating expenses
91,349
36
89,780
36
173,663
38
171,988
38
Operating
income
4,655
2
9,502
4
12,817
2
5,990
1
Other
income (expense):
Interest expense
(1,538)
(1)
(5,532)
(2)
(3,747)
(1)
(11,412)
(3)
Other
income (expense), net
(488)
—
1,312
—
(807)
—
1,755
—
Total
other expense, net
(2,026)
(1)
(4,220)
(2)
(4,554)
(1)
(9,657)
(3)
Income
(loss) before income taxes
2,629
1
5,282
2
8,263
1
(3,667)
(2)
Income
tax expense (benefit)
110
—
(11,670)
(5)
59
—
(10,451)
(3)
Net
income
$
2,519
1
%
$
16,952
7
%
$
8,204
1
%
$
6,784
1
%
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
Revenue
(camera
units and dollars in thousands, except average selling price)
Revenue
was $250.7 million for the second quarter of 2022 or a 0.4% increase from the same period in 2021. Revenue in the first half of 2022 was $467.4 million, or a 3.1% increase from the same period in 2021. The year-over-year revenue improvements were driven by sales of our cameras at higher price points, which was positively impacted by a $50 increase in MSRP on our latest flagship camera. Our average selling price, which is defined as total revenue divided by camera units shipped, increased 13.5% year-over-year to $392 for the second quarter of 2022 and increased 13.4% year-over-year to $402 for the first half of 2022. The increases in our average selling price was primarily due to greater than 90% of our camera revenue mix being derived from cameras with a suggested retail price equal to or greater than $400, as well as an increase in subscription and service revenue. These improvements to revenue were partially offset by a 12% and 9% year-over-year decrease in units shipped
in the second quarter and first half of 2022, respectively. The strengthening of the U.S. dollar also negatively impacted revenue in the second quarter and first half of 2022 by approximately $8 million and $12 million, respectively. Subscription and service revenue grew to $20.1 million in the second quarter of 2022, or a 71% increase year-over-year. We had approximately 1.91 million GoPro subscribers as of June 30, 2022, a 65% increase year-over-year. GoPro.com revenue increased 8.5% year-over-year to $95.3 million in the second quarter of 2022, primarily driven by an increase in subscription and service revenue.
Cost of revenue and gross margin
Three
months ended June 30,
Six months ended June 30,
(dollars in thousands)
2022
2021
% Change
2022
2021
% Change
Cost
of revenue
$
154,188
$
149,491
3
%
$
279,905
$
273,307
2
%
Stock-based
compensation
483
508
(5)
930
937
(1)
Acquisition-related costs
—
288
(100)
47
1,011
(95)
Restructuring
costs
10
17
(41)
28
33
(15)
Total cost of revenue
$
154,681
$
150,304
3
%
$
280,910
$
275,288
2
%
Gross
margin
38.3
%
39.8
%
39.9
%
39.3
%
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
Gross margin of 38.3% in the second quarter of 2022 decreased from 39.8% in the same period of 2021, or 150 bps. The primary driver for the year-over-year decrease was the effect of foreign exchange rate fluctuations on sales, which was 185 bps or approximately $8 million. In addition, we experienced higher camera costs relative to our average selling price growth, 101 bps or approximately $2 million, partially offset by increased margin contribution from subscription and service revenue, 136 bps or approximately $6 million.
Gross margin of 39.9% in the first half of 2022 increased from 39.3% in the same period of 2021, or 60 bps. This was primarily due to increased margin contribution from subscription and service revenue, 123 bps or approximately
$12 million, increased average selling price growth relative to higher camera costs, 49 bps or approximately $7 million, and lower acquisition related costs, 39 bps or approximately $1 million, partially offset by the effect of foreign exchange rate fluctuations on sales, 150 bps or approximately $12 million.
Research and development
Three
months ended June 30,
Six months ended June 30,
(dollars in thousands)
2022
2021
% Change
2022
2021
% Change
Research
and development
$
31,726
$
33,045
(4)
%
$
59,014
$
61,192
(4)
%
Stock-based
compensation
4,405
4,615
(5)
8,563
8,751
(2)
Restructuring
costs
87
140
(38)
239
287
(17)
Total research and development
$
36,218
$
37,800
(4)
%
$
67,816
$
70,230
(3)
%
Percentage
of revenue
14.4
%
15.1
%
14.5
%
15.5
%
The year-over-year decrease of $1.6 million, or 4%, in total research and development expenses in the second quarter of 2022 compared
to the same period of 2021 reflected a decrease of $0.9 million in cash based personnel-related costs, a $0.2 million decrease in stock based compensation, a $0.2 million decrease in allocated facilities, depreciation and other supporting overhead expenses, and a $0.2 million decrease in consulting and professional service costs.
The year-over-year decrease of $2.4 million, or 3%, in total research and development expenses in the first half of 2022 compared to the same period of 2021 reflected a decrease of $1.0 million in cash based personnel-related costs, a $0.6 million decrease in allocated facilities, depreciation and other supporting overhead expenses, a $0.3 million decrease related to a one time foreign research and development tax credit received in 2021, and a $0.2 million decrease in stock based compensation.
Sales and marketing
Three
months ended June 30,
Six months ended June 30,
(dollars in thousands)
2022
2021
% Change
2022
2021
% Change
Sales
and marketing
$
37,161
$
33,378
11
%
$
70,326
$
67,241
5
%
Stock-based
compensation
2,229
2,153
4
4,352
4,018
8
Restructuring costs
49
139
(65)
134
201
(33)
Total
sales and marketing
$
39,439
$
35,670
11
%
$
74,812
$
71,460
5
%
Percentage
of revenue
15.7
%
14.3
%
16.0
%
15.8
%
The year-over-year increase of $3.8 million, or 11%, in total sales and marketing expenses in the second quarter of 2022 compared to
the same period of 2021 reflected a $2.2 million increase in overall advertising and marketing expenses attributable to online campaigns and marketing events, a $0.8 million increase in subscription related service provider fees, a $0.3 million increase in cash based personnel-related costs and a $0.3 million increase in allocated facilities, depreciation and other supporting overhead expenses.
The year-over-year increase of $3.4 million, or 5%, in total sales and marketing expenses in the first half of 2022 compared to the same period of 2021 reflected a $3.3 million increase in overall advertising and marketing expenses attributable to online campaigns and marketing events, and a $1.2 million increase in cash based personnel-related costs, partially offset by a $1.7 million decrease in subscription related service provider fees.
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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)
2022
2021
% Change
2022
2021
% Change
General
and administrative
$
12,531
$
13,505
(7)
%
$
24,717
$
24,997
(1)
%
Stock-based
compensation
3,134
2,753
14
6,242
5,192
20
Restructuring
costs
27
52
(48)
76
109
(30)
Total general and administrative
$
15,692
$
16,310
(4)
%
$
31,035
$
30,298
2
%
Percentage
of revenue
6.3
%
6.5
%
6.6
%
6.7
%
The year-over-year decrease of $0.6 million, or 4%, in total general and administrative expenses in the second quarter of 2022 compared
to the same period of 2021 reflected a $1.0 million decrease in litigation expenses, partially offset by a $0.4 million increase in stock based compensation.
The year-over-year increase of $0.7 million, or 2%, in total general and administrative expenses in the first half of 2022 compared to the same period of 2021 reflected a $1.1 million increase in stock-based compensation, a $0.4 million increase in cash-based personnel-related costs, partially offset by a $0.8 million decrease in litigation expenses.
Other income (expense)
Three
months ended June 30,
Six months ended June 30,
(dollars in thousands)
2022
2021
% Change
2022
2021
% Change
Interest
expense
$
(1,538)
$
(5,532)
(72)
%
$
(3,747)
$
(11,412)
(67)
%
Other
income (expense), net
(488)
1,312
(137)
(807)
1,755
(146)
Total other expense, net
$
(2,026)
$
(4,220)
(52)
%
$
(4,554)
$
(9,657)
(53)
%
Total
other expense, net, decreased $2.2 million in the second quarter of 2022 compared to the same period of 2021, and decreased $5.1 million in the first half of 2022 compared to the same period of 2021. The decreases were primarily due to a decrease in non-cash interest expense related to our 2022 Notes and 2025 Notes. As part of the adoption of ASU 2020-06 in fiscal year 2022, the requirement to recognize a debt discount related to the debt conversion feature of our 2022 Notes and 2025 Notes under the prior authoritative accounting guidance for convertible debt was eliminated, and as a result there was no non-cash interest expense recognized during any period in 2022. We repaid the remaining principal amount of $125.0 million of the 2022 Notes at maturity on April 15, 2022.
Income taxes
Three
months ended June 30,
Six months ended June 30,
(dollars in thousands)
2022
2021
% Change
2022
2021
% Change
Income
tax expense (benefit)
$
110
$
(11,670)
(101)
%
$
59
$
(10,451)
(101)
%
We
recorded an income tax expense of $0.1 million for the three months ended June 30, 2022 on pre-tax net income of $2.6 million. Our income tax expense for the three months ended June 30, 2022 primarily related to $0.6 million of tax expense incurred on pre-tax income, and discrete items that primarily included $0.2 million of net excess tax benefit for employee stock-based compensation and $0.2 million of tax benefit related to the foreign provision to income tax return adjustments.
We recorded an income tax expense of $0.1 million for the six months ended June 30, 2022, on pre-tax net income of $8.3 million. Our income tax expense for the six months ended June 30, 2022 primarily related to $1.9 million of tax expense incurred on
pre-tax income, and discrete items that primarily included $1.6 million of net excess tax benefit for employee stock-based compensation and $0.3 million tax benefit related to the foreign provision to income tax return adjustments.
36
GoPro, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Beginning in 2022, the Tax Cuts and Jobs Act of 2017 requires the capitalization and amortization of research and development expenses, which we expect will accelerate the utilization of our net operating losses. We estimate that if there is no change in legislation, it will have a material impact on our cash flows beginning in 2024.
See
Note 8 Income taxes, to the Notes to Condensed Consolidated Financial Statements for additional information.
Total cash, cash equivalents and marketable securities
$
322,451
$
538,917
Percentage
of total assets
31
%
43
%
Our primary source of cash is receipts from sales of our products and services. Other sources of cash are from proceeds from the issuance of convertible notes, employee participation in the employee stock purchase plan, the exercise of employee stock options, tax refunds and facility subleases. The uses of cash are for inventory procurement, payroll-related expenses, general operating expenses, including advertising, marketing, office rent, purchases of property and equipment, other costs of revenue, share repurchases, repurchases of convertible notes, interest, and taxes.
Our liquidity position has been historically impacted
by seasonality, which is primarily driven by higher revenues during the second half of the year as compared to the first half. For example, net cash provided by operating activities during the second half of 2021 was $231.5 million, which represented more than 100% of the total cash provided by operating activities for the full year 2021.
As of June 30, 2022, our cash, cash equivalents and marketable securities totaled $322.5 million. Our cash, net of the outstanding principal balance of the 2025 Notes, as of June 30, 2022 was $178.7 million. The overall cash used in operating activities of $60.6 million for the six months ended June 30, 2022 was primarily attributable to net cash outflows from changes in our working capital of $100.1 million, partially offset by net cash inflows
from other non-cash expenses of $29.0 million, deferred income tax expense of $2.4 million, and net income of $8.2 million. Working capital changes for the six months ended June 30, 2022 of $100.1 million were the result of a decrease in accounts payable and other liabilities of $101.7 million and an increase in inventory of $39.6 million, partially offset by a decrease in accounts receivable of $26.2 million, a decrease in prepaid expenses and other assets of $12.2 million, and an increase in deferred revenue of $2.8 million. As of June 30, 2022, $11.0 million of cash was held by our foreign subsidiaries.
Convertible Notes
In April 2017, we issued $175.0 million aggregate principal amount of the
2022 Notes in a private placement to purchasers for resale to qualified institutional buyers. The 2022 Notes were senior, unsecured obligations with a maturity date of April 15, 2022. The 2022 Notes could be converted 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 2022 Notes, which is equivalent to an initial conversion price of approximately $10.64 per share of common stock, subject to adjustment. We have paid interest on the 2022 Notes semi-annually in arrears on April 15 and October 15 of each year.
On April 15, 2022, we repaid $125.0 million of principal and $2.2 million of accrued interest in cash to the debt holders to fully settle the 2022 Notes on the maturity date. Since our average
stock price did not exceed the initial conversion price of $10.64 of the 2022 Notes, there was no further dilution.
In connection with the 2022 Notes offering, we entered into a prepaid forward stock repurchase transaction agreement (Prepaid Forward) with a financial institution. Pursuant to the Prepaid Forward, we used approximately
37
GoPro, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
$78.0 million of the proceeds from the offering of the 2022 Notes to pay the prepayment amount. The aggregate number of shares of our Class A common stock underlying the Prepaid Forward was approximately
9.2 million shares. The original expiration date for the Prepaid Forward was April 15, 2022, with the option for early settlement in whole or in part. Upon settlement of the Prepaid Forward, the Forward Counterparty would 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 Condensed Consolidated Balance Sheets (and not outstanding for purposes of the calculation of basic and diluted income (loss) per share), but remained outstanding for corporate law purposes, including for purposes of any future stockholders’ votes, until the Forward Counterparty delivered the shares underlying the Prepaid Forward to us. The net proceeds from the 2022 Convertible Senior Notes offering of approximately $91 million were used for general corporate purposes.
In
the fourth quarter of 2020, 8.8 million shares out of the 9.2 million shares of Class A common stock underlying the Prepaid Forward were early settled and delivered to us. In April 2021, the remaining 0.4 million shares of Class A common stock underlying the Prepaid Forward were early settled and delivered to us. There was no financial statement impact due to the return of shares; however, shares outstanding for corporate law purposes were reduced by the early settlement.
In November 2020, we issued $143.8 million aggregate principal amount of 2025 Notes in a private placement to purchasers for resale to qualified institutional buyers. The 2025 Notes mature on November 15, 2025, unless earlier repurchased or converted into shares of Class A common stock subject to certain conditions. The 2025 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 107.1984 shares of common stock per $1,000 principal amount of the 2025 Notes, which is equivalent to an initial conversion price of approximately $9.3285 per share of common stock, subject to adjustment. We pay interest on the 2025 Notes semi-annually, which is due on May 15 and November 15.
In connection with the offering of the 2025 Notes, we entered into privately negotiated capped call transactions with certain financial institutions (Capped Calls). We used $10.2 million of the net proceeds from the sale of the 2025 Notes to purchase the Capped Calls and $56.2 million of the net proceeds to repurchase $50.0 million of aggregate principal amount of the 2022 Notes. The remaining net proceeds were used for general corporate purposes.
See Note 4 Financing arrangements for a discussion of our 2022 and 2025 Notes, and Note 9
Commitments, contingencies and guarantees, for a discussion regarding facility leases and other contractual commitments in the Notes to Condensed Consolidated Financial Statements.
There have been no significant changes to our contractual obligations and commitments disclosed in our 2021 Annual Report.
Liquidity
Based on our most current projections, we believe that our cash, cash equivalents, marketable securities and amounts available under our credit facility, will be sufficient to address our working capital needs, capital expenditures, outstanding commitments and other liquidity requirements for at least one year from the issuance of these financial statements.
•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.
•In January 2021, we entered into a Credit Agreement which provides for a revolving credit facility under which we may borrow up to an aggregate amount of $50.0 million. Our credit facility will terminate and any outstanding borrowings become due and payable on the earlier of (i) January 2024 and (ii) unless we have cash in a specified deposit account in an amount equal to or greater than the amount required to repay our convertible notes due April 2022, 91 days prior to the maturity date of such convertible notes. No borrowings have been made from the credit facility to date (See Note 4 Financing arrangements, in the Notes to Condensed Consolidated Financial Statements for additional information).
38
GoPro,
Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
•The $125.0 million aggregate principal amount of the 2022 Notes matured on April 15, 2022. We repaid $127.2 million on April 15, 2022 to the debt holders of the 2022 Notes, which represented the full outstanding principal balance plus accrued interest as of the maturity date.
In the future, we may require additional financing to respond to business opportunities, challenges or unforeseen circumstances. If we are unable to obtain adequate debt or equity financing when we require it or on terms acceptable to us, especially in light of the market volatility and uncertainty as a result of the continuing COVID-19 pandemic, our
ability to grow or support our business, repay debt and respond to business challenges could be significantly limited. Although we believe we have adequate sources of liquidity over the long term, the success of our operations and the global economic outlook, in each case, in light of the market volatility and uncertainty as a result of the COVID-19 pandemic, among other factors, could impact our business and liquidity.
Summary of Cash Flow
The following table summarizes our cash flows for the periods indicated:
Six
months ended June 30,
(in thousands)
2022
2021
% Change
Net cash provided by (used in):
Operating
activities
$
(60,551)
$
(2,318)
2,512
%
Investing activities
$
16,778
$
(34,908)
(148)
%
Financing
activities
$
(152,564)
$
(3,775)
3,941
%
Cash flows from operating activities
Cash used in operating activities of $60.6 million for the six months ended June 30, 2022,
was primarily attributable to net cash outflows from changes in our working capital of $100.1 million, partially offset by net cash inflows from other non-cash expenses of $29.0 million, deferred income tax expense of $2.4 million, and net income of $8.2 million. Working capital changes for the six months ended June 30, 2022 of $100.1 million were the result of a decrease in accounts payable and other liabilities of $101.7 million and an increase in inventory of $39.6 million, partially offset by a decrease in accounts receivable of $26.2 million, a decrease in prepaid expenses and other assets of $12.2 million, and an increase in deferred revenue of $2.8 million. The changes in working capital for the six months ended June 30, 2022 reflect a change in the presentation of inventory components related to one of our contract
manufacturers from prepaid expenses to inventory, due to changes in the contractual arrangement. This presentation change did not have a net impact on cash used in operating activities.
Cash flows from investing activities
Cash provided by investing activities of $16.8 million for the six months ended June 30, 2022, was primarily attributable to maturities of marketable securities of $65.1 million, partially offset by purchases of marketable securities of $47.1 million and net purchases of property and equipment of $1.3 million.
Cash flows from financing activities
Cash used in financing activities of $152.6 million for the six months ended June 30, 2022, was primarily attributable to the repayment
of our 2022 Notes of $125.0 million, $21.8 million in repurchases of our outstanding common stock and $8.5 million in tax payments for net restricted stock unit (RSU) settlements, partially offset by $2.7 million inflows from stock purchases made through our employee stock purchase plan and employee stock option exercises.
Indemnifications
We have entered into indemnification agreements with our directors and executive officers which require us to indemnify our directors and executive officers against liabilities that may arise by reason of their status or service. In addition, in the normal course of business, we enter into agreements that contain a variety of representations and warranties, and provide for general indemnification. Our exposure under these agreements is unknown
39
GoPro,
Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
because it involves claims that may be made against us 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 our limited history with indemnification claims and the unique facts and circumstances involved in each particular agreement. As of June 30, 2022, we have not paid any claims, nor has it been required to defend any action related to its indemnification obligations. However, we may record charges in the future as a result of these indemnification obligations.
Critical
Accounting Policies and Estimates
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. This accounting standard update, which we adopted effective January 1, 2022, has a significant impact on the ongoing accounting of the 2022 and 2025 Notes. Refer to Note 1, Summary of business and significant accounting policies, in our Notes to Condensed Consolidated Financial
Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional details on the adoption of this accounting standard update.
There have been no other material changes to our critical accounting policies and estimates from those disclosed in our 2021 Annual Report.
Non-GAAP Financial Measures
We report net income (loss) and diluted net income (loss) per share in accordance with United States generally accepted accounting principles (GAAP) and on a non-GAAP basis. Additionally, we report non-GAAP adjusted EBITDA. We use non-GAAP financial measures to help us understand and evaluate our core operating performance and trends, to prepare and approve our annual
budget, and to develop short-term and long-term operational plans. Our management uses, and believes that investors benefit from referring to these non-GAAP financial measures in assessing our operating results. These non-GAAP financial measures should not be considered in isolation from, or as an alternative to, the measures prepared in accordance with GAAP, and are not based on any comprehensive set of accounting rules or principles. We believe that these non-GAAP measures, when read in conjunction with our GAAP financials, provide useful information to investors by facilitating:
•the comparability of our on-going operating results over the periods presented;
•the ability to identify trends in our underlying business; and
•the comparison of our operating results against
analyst financial models and operating results of other public companies that supplement their GAAP results with non-GAAP financial measures.
These non-GAAP financial measures have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP. Some of these limitations are:
•adjusted EBITDA does not reflect tax payments that reduce cash available to us;
•adjusted EBITDA excludes depreciation and amortization and, although these are non-cash charges, the property and equipment being depreciated and amortized often will have to be replaced in the future, and adjusted EBITDA does not reflect any cash capital expenditure requirements for such replacements;
•adjusted
EBITDA excludes the amortization of point of purchase (POP) display assets because it is a non-cash charge, and is treated similarly to depreciation of property and equipment and amortization of acquired intangible assets;
•adjusted EBITDA and non-GAAP net income (loss) exclude restructuring and other related costs which primarily include severance-related costs, stock-based compensation expenses, facilities consolidation charges recorded in connection with restructuring actions, including right-of-use asset impairment charges, and the related ongoing operating lease cost of those facilities recorded under ASC 842, Leases. These
40
GoPro, Inc.
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
expenses do not reflect expected future operating expenses and do not contribute to a meaningful evaluation of current operating performance or comparisons to the operating performance in other periods;
•adjusted EBITDA and non-GAAP net income (loss) exclude stock-based compensation expense related to equity awards granted primarily to our workforce. We exclude stock-based compensation expense because we believe that the non-GAAP financial measures excluding this item provide meaningful supplemental information regarding operational performance. In particular, we note that companies calculate stock-based compensation expense for the variety of award types that they employ using different valuation methodologies and subjective assumptions. These non-cash charges are not factored into
our internal evaluation of net income (loss) as we believe their inclusion would hinder our ability to assess core operational performance;
•non-GAAP net income (loss) excludes acquisition-related costs including the amortization of acquired intangible assets (primarily consisting of acquired technology), the impairment of acquired intangible assets (if applicable), as well as third-party transaction costs incurred for legal and other professional services. These costs are not factored into our evaluation of potential acquisitions, or of our performance after completion of the acquisitions, because these costs are not related to our core operating performance or reflective of ongoing operating results in the period, and the frequency and amount of such costs vary significantly based on the timing and magnitude of our acquisition transactions and the maturities of the businesses being acquired. Although
we exclude the amortization of acquired intangible assets from our non-GAAP net income (loss), management believes that it is important for investors to understand that such intangible assets were recorded as part of purchase accounting and contribute to revenue generation. Additionally, in connection with the adoption of ASU 2020-06 on January 1, 2022, we add back the tax effected cash interest expense associated with our 2022 Notes and 2025 Notes, as if converted at the beginning of the period, if the impact is dilutive;
•non-GAAP net income (loss) excludes non-cash interest expense. Prior to the adoption of ASU 2020-06 in fiscal year 2022, we were required to recognize non-cash interest expense related to the amortization of a debt discount associated with our 2022 Notes and 2025 Notes in accordance with the prior authoritative accounting guidance for
convertible debt that may be settled in cash. From fiscal year 2022 and onwards, this debt discount accounting requirement was removed, and as a result, non-cash interest expense will no longer be a reconciling item between GAAP and non-GAAP net income (loss);
•non-GAAP net income (loss) includes income tax adjustments. We utilize a cash-based non-GAAP tax expense approach (based upon expected annual cash payments for income taxes) for evaluating operating performance as well as for planning and forecasting purposes. This non-GAAP tax approach eliminates the effects of period specific items, which can vary in size and frequency and does not necessarily reflect our long-term operations. Historically, we computed a non-GAAP tax rate based on non-GAAP pre-tax income on a quarterly basis, which considered the income tax effects of the adjustments above;
•GAAP
and non-GAAP net income (loss) per share includes the dilutive, tax effected cash interest expense associated with our 2022 Notes and 2025 Notes, as if converted at the beginning of the period in connection with the adoption of ASU 2020-06 on January 1, 2022; and
•other companies may calculate these non-GAAP financial measures differently than we do, limiting their usefulness as comparative measures.
41
GoPro, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table presents a reconciliation of net income to
adjusted EBITDA:
* Reflects the use of the if-converted method for our convertible notes, effective January 1,
2022 due to the adoption of ASU 2020-06.
42
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In addition to market risk that is created by the uncertainties and the global market disruptions resulting from the COVID-19 pandemic, we are exposed to market risks in the ordinary course of our business. These risks primarily include foreign currency and interest rate risks as follows:
Foreign currency risk. Revenue
generated from GoPro.com, which has increased as a result of our focus on our direct-to-consumer sales strategy, is denominated in U.S. dollars and various foreign currencies. To the extent that revenue from foreign currency transactions increases, our foreign currency risk will also increase. However, to date, the majority of our product sales and inventory purchases have been denominated in U.S. dollars. We therefore have had limited foreign currency risk associated with these two activities. The functional currency of all of our entities is the U.S. dollar. Our operations outside of the United States hold foreign denominated cash balances and incur a majority of their operating expenses in foreign currencies, principally the Euro, British pound, Singaporean Dollar, Australian Dollar, and Canadian Dollar. Our results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates. However, we believe that the exposure
to foreign currency fluctuation from operating expenses is immaterial at this time and do not constitute a significant portion of our total expenses. As we continue to focus on the growth of our direct-to-consumer business and expand our operations, if foreign currency exchange rates continue to be volatile, or if foreign currency held increases our exposure to foreign currency risk could become more significant. To date, we have not entered into any material foreign currency exchange contracts and we will continue to reassess our approach to manage our risk relating to fluctuations in currency rates. For assets and liabilities denominated in other currencies, we do not believe that the effects of a 10% shift in exchange rates between those currencies and the U.S. dollar would have a material effect on our results of operations from such a shift.
Interest
rate risk. Our exposure to market risk for changes in interest rates primarily relates to our cash and cash equivalents and marketable securities. Our cash equivalents and marketable securities are comprised of money market funds, commercial paper, government securities and corporate debt securities. The primary objectives of our investment activities are to preserve principal and provide liquidity without significantly increasing risk. Our cash and cash equivalents are held for working capital purposes. We do not enter into investments for trading or speculative purposes. Due to the nature of our investment portfolio, we do not believe that an immediate 10% shift in interest rates would have a material effect on the fair value of our investment portfolio.
The fair value of our 2025 Convertible Senior Notes (2025 Notes) is subject to interest rate risk, market risk and other factors due to the conversion
feature. The capped call that was entered into concurrently with the issuance of our 2025 Notes were completed to reduce the potential dilution from the conversion of the 2025 Notes. The fair value of the 2025 Notes will generally increase as interest rates fall and decrease as interest rates rise. In addition, the fair value of the 2025 Notes will generally increase as our Class A common stock price increases and will generally decrease as the common stock price declines. The interest and market value changes affect the fair value of the 2025 Notes but do not impact our financial position, cash flows or results of operations due to the fixed nature of the debt obligation.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The
Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (Exchange Act)), as of June 30, 2022. Based on such evaluation, the Company’s principal executive officer and principal financial officer have concluded that, as of June 30,
2022, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
43
Changes
in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three months ended June 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We continue to monitor and assess any impact on the design and operating effectiveness of our internal control over financial reporting as a result of the COVID-19 pandemic.
PART II
Item
1. Legal Proceedings
Refer to Legal proceedings and investigations included in Part I, Item 1, Note 9 Commitments, contingencies and guarantees, to the Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for the three months ended June 30, 2022.
Item 1A. Risk Factors
The risks described in Risk Factors in our 2021 Annual Report, and as supplemented below, could materially and adversely affect our business, financial condition and results of operations. The risk factors below do not identify all risks that we face; our operations could also be affected by factors that are not presently known to
us or that we currently consider to be immaterial to our operations. In that event, the trading price of our shares may decline, and you may lose part or all of your investment.
Risk Factor Summary
•We may not be able to achieve revenue growth or profitability in the future, and if revenue growth or profitability is achieved, we may not be able to sustain it.
•Our goal to grow revenue and be profitable relies upon our ability to grow our direct-to-consumer sales mix and grow our subscriptions. If we do not effectively grow our direct-to-consumer revenue and subscriptions, our results of operations and profitability could be harmed.
•An economic downturn or economic uncertainty in our key United States and international markets,
as well as inflation or fluctuations in currency exchange rates may adversely affect consumer discretionary spending and demand for our products.
•We rely on third-party suppliers, some of which are sole-source suppliers, to provide services and components for our products which may lead to supply shortages and other services, long lead times for components, and supply changes, any of which could disrupt our supply chain or our operations and may increase our costs.
•If we do not successfully coordinate or if we encounter issues with our manufacturers, suppliers, or supply chain, business, brand, and results of operations could be harmed and we could lose sales.
•The COVID-19 outbreak has had a material impact on the United States and global economies and could have a
material adverse impact on our employees, suppliers, customers and end consumers, which could adversely and materially impact our business, financial condition and results of operations.
•If our sales fall below our forecasts, especially during the holiday season, our overall financial condition and results of operations could be adversely affected.
•Our future growth depends in part on further penetrating our total addressable market, and we may not be successful in doing so.
44
•To remain competitive and stimulate consumer demand, we must effectively manage product introductions, product transitions, product pricing
and marketing.
•We depend on sales of our cameras, mounts and accessories for substantially all of our revenue, and any decrease in the sales or change in sales mix of these products could harm our business.
•Security and data breaches and cyberattacks could disrupt our web platform, products, services, internal operations, or information technology systems, and any such disruption could reduce our expected revenue, increase our expenses, damage our reputation, and cause our stock price to decline significantly.
•We operate in a highly competitive market and the size and resources of some of our competitors may allow them to compete more effectively than we can. New entrants also enter the digital imaging market category from time-to-time. These
market factors could result in a loss of our market share and a decrease in our revenue and profitability.
•We depend on key personnel and qualified personnel to operate our business. If we are unable to attract, engage and retain qualified personnel, our ability to develop, transform and successfully operate our business could be harmed.
•Our gross margin can vary significantly depending on multiple factors, which can result in unanticipated fluctuations in our operating results.
•Changes to trade agreements, trade policies, tariffs and import/export regulations may have an adverse effect on our business and results of operations.
•We face substantial risks related to inventory,
purchase commitments and long-lived assets, and we could incur material charges related to these items that adversely affect our operating results.
•If we fail to manage our operating expenses effectively, our financial performance may suffer.
•Our international operations account for a significant portion of our revenue and operating expenses and are subject to challenges and risks.
•A small number of retailers and distributors account for a substantial portion of our revenue, and if our relationships with any of these retailers or distributors were to be terminated or the level of business with them significantly reduced, our business could be harmed.
•Our success depends on our ability to maintain the
value and reputation of our brand.
•Consumers may be injured while engaging in activities with our products, and we may be exposed to claims, or regulations could be imposed, which could adversely affect our brand, operating results and financial condition.
•We may be subject to warranty claims that could result in significant direct or indirect costs, or we could experience greater returns from retailers than expected, which could harm our business and operating results.
•We may grow our business in part through acquisitions, joint ventures, investments and partnerships, which could require significant management attention, disrupt our business, dilute stockholder value and adversely affect our operating results.
•Catastrophic
events or political instability could disrupt and cause harm to our business.
•Our intellectual property and proprietary rights may not adequately protect our products and services, and our business may suffer, if third parties infringe our rights.
•We have been, and in the future may be, sued by third parties for alleged infringement of their intellectual property and proprietary rights.
45
Risks related to our business and industry
We may not be able
to achieve revenue growth or profitability in the future, and if revenue growth or profitability is achieved, we may not be able to sustain it.
Our cumulative GAAP income from the past three years may not be sustainable in future periods. We may not be able to achieve our forecast, sustain revenue growth or profitability, and our operating results may fluctuate unpredictably. For example, our annual revenue showed significant growth from 2020 to 2021 from $891.9 million to $1.16 billion, respectively. In 2020, annual revenue of $891.9 million was negatively impacted by COVID-19. In addition, we incurred operating income of $113.2 million, operating losses of $36.8 million and $2.3 million for the full year in 2021, 2020, and 2019, respectively. In future periods, we could experience declines in revenue, or revenue could remain flat or grow more slowly than we expect, which could have a material negative effect on our future
operating results.
Lower levels of revenue or higher levels of operating expense in future periods may result in losses or limited profitability. We may experience such lower levels of revenue or higher levels of operating expenses for a variety of reasons, including, among other factors: investments in product innovation, advertising and marketing; increasing freight rates; shipping delays; increased supply chain costs; failure to maintain higher average sales pricing for our cameras; or a recession or other sustained adverse market event that materially impacts consumer purchases of discretionary items, such as our products.
Additionally, since the fourth quarter of 2016, we implemented four company-wide restructurings of our business resulting in a reduction in our global workforce and the elimination of certain open positions, consolidation of certain leased office facilities,
as well as the elimination of several high-cost initiatives, in order to focus our resources on cameras, accessories, software and subscription and service. We may not realize further or sustain cost savings from these previous actions. We may continue to experience fluctuating revenue, expenses and profitability for a number of reasons, including other risks described in this Quarterly Report on Form 10-Q and in our 2021 Annual Report, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors.
Our goal to grow revenue and be profitable relies upon our ability to grow our direct-to-consumer sales mix and grow our subscriptions. If we do not effectively grow our direct-to-consumer revenue and subscriptions, our results of operations and profitability could be harmed.
Our ability to grow revenue and be profitable
relies on several factors, including but not limited to, our ability to successfully implement certain strategic go to market initiatives. For example, some of our key strategic initiatives include expanding our direct-to-consumer sales through GoPro.com and our software and subscription and service, and continuing to work with key retail partners and distributors globally.
We have invested significant resources in our direct-to-consumer sales channel, primarily through our website, and our future growth relies, in part, on our continued ability to attract consumers to this channel, which has and will require significant expenditures in marketing, software development and infrastructure. If we are unable to continue to drive traffic to, and increase sales through our website,
our business and results of operations could be harmed.
We have converted portions of our distributors’ business into direct sales and believe growing sales directly to our consumers will allow us to provide a best-in-class experience for online purchases. As we continue to convert distribution to direct sales, we might not be successful in that transition. Additionally, any reduction in sales or decreases in revenue by our current distributors and retailers or loss of key distributors or retailers could adversely affect our revenue, operating results and financial condition.
We depend on retailers to provide adequate and attractive space for our products and point of purchase displays in their stores and acquiesce to our policies and to effectively sell our products. We continue to look for opportunities to optimize our retail channel. Based on our strategic initiative to increase
our direct-to-consumer sales through GoPro.com, our retailers may decide not to adequately display our products, choose to reduce the
46
space for our products and POP displays in their stores, or choose not to carry some or all of our products or promote competitors’ products over ours and as a result, our sales could decrease and impact our plan to become more profitable.
We may not be able to transition away from some distributor agreements as quickly as we would like as a result of contractual, regulatory or other restrictions and may encounter difficulties in the transition to a more focused direct-to-consumer model. Further, our distributors build inventory in anticipation of future sales, and if such sales do not occur as
rapidly as they anticipate, our distributors may decrease the size of their future product orders.
An economic downturn or economic uncertainty in our key United States and international markets, as well as inflation or fluctuations in currency exchange rates may adversely affect consumer discretionary spending and demand for our products.
Factors affecting the level of consumer spending include general market conditions, macroeconomic conditions, tax rates, inflation, fluctuations in foreign exchange rates and interest rates, and other factors such as consumer confidence, the availability and cost of consumer credit, levels of unemployment and a reduction in consumer spending or disposable income that may affect us more significantly than companies in other industries and companies with more diversified products.
The majority of our sales
occur in U.S. dollars and an increase in the value of the dollar against the Euro and other currencies could increase the real cost to consumers of our products in those markets outside the United States. For example, in countries where we sell in local currency, we are subject to exchange rate fluctuations that create inherent risks for us and may cause us to adjust pricing which may make our products more or less favorable to the consumer. If global economic conditions are volatile or if economic conditions deteriorate, consumers may delay or reduce purchases of our products resulting in consumer demand for our products that may not reach our sales targets. Some product costs have become subject to inflationary pressure and we may not be able to fully offset any such higher costs through price increases; our inability or failure to offset any such higher costs as necessary could harm our business, financial condition, and operating results. Strengthening of the U.S.
dollar and/or weakness in the economies of Euro zone countries could adversely impact sales of our products in the European region, which would have a material negative impact on our future operating results. Our sensitivity to economic cycles and any related fluctuation in consumer demand could adversely affect our business, financial condition and operating results.
Additionally, the withdrawal of the United Kingdom from the European Union (Brexit) and the war in Ukraine has created economic and political uncertainty, including volatility in global financial markets and the value of foreign currencies. The impact of Brexit and the war in Ukraine may not be fully realized for several years.
We rely on third-party suppliers, some of which are sole-source suppliers, to provide services and components for our products which may lead to supply shortages and other
services, long lead times for components, and supply changes, any of which could disrupt our supply chain or our operations and may increase our costs.
Our ability to meet customer demand depends, in part, on our ability to obtain timely and adequate delivery of components for our products. We do not have internal manufacturing capabilities and rely on several contract manufacturers, located primarily in China to manufacture our products and all of the components that go into the manufacturing of our cameras and accessories are sourced from third-party suppliers. We do not control our contract manufacturers or suppliers, including their labor, environmental or other practices.
Some of the key components
used to manufacture our products come from a limited or single source of supply, or by a supplier that could potentially become a competitor. Our contract manufacturers generally purchase these components on our behalf from approved suppliers. We are subject to the risk of shortages and long lead times in the supply of these components and the risk that our suppliers discontinue or modify components used in our products. In addition, the lead times associated with certain components are lengthy and preclude rapid changes in quantities and delivery schedules and could increase as a result of the continuing impact of COVID-19 and its impact on the global supply chain, global conflicts, or other factors. We have in the past experienced and may in the future experience component shortages, and the availability of these components may be unpredictable, including as a result of global
conflict and the COVID-19 pandemic.
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If we lose access to components from a particular supplier or experience a significant disruption in the supply of products and components from a current supplier, we may be unable to locate alternative suppliers of comparable quality at an acceptable price, or at all, and our business could be materially and adversely affected. In addition, if we experience a significant increase in demand for our products, our suppliers might not have the capacity or elect not to meet our needs as they allocate components to other customers. Developing suitable alternate sources of supply for these components may be time-consuming, difficult and costly, and we may not be able to source these components on terms that are acceptable to us, or at all,
which may adversely affect our ability to meet our development requirements or to fill our orders in a timely or cost-effective manner.
We also rely on third-party distribution facilities and logistics operators for substantially all of our product distribution to distributors, retailers, and to consumers. Our distribution facilities include computer controlled and automated equipment, which means their operations may be vulnerable to computer viruses or other security risks, the proper operation of software and hardware, electronic or power interruptions or other system failures.
Our reliance on single source, or a small number of suppliers involves a number of additional risks, including risks related to supplier capacity constraints, component availability, price increases, timely delivery, component quality, failure of a key supplier to remain in business and adjust to market conditions,
delays in, or the inability to execute on, a supplier roadmap for components and technologies, and natural disasters, fire, acts of terrorism, global conflicts, pandemics, including the COVID-19 pandemic, or other catastrophic events.
In particular, for our camera designs we incorporate system on chips, sensors, lens, batteries and memory solutions that critically impact the performance of our products. These components have unique performance profiles, and as a result, it is not commercially practical to support multiple sources for these components for our products. For example, we incorporate the GP1 system on chip in MAX as well as our HERO9 and HERO8 Black cameras and the GP2 system on chip in our HERO10 Black and HERO10 Black Bones cameras and rely on a single supplier as the primary supplier of our system on chips.
Additionally, we rely on third parties to provide software and
enterprise services. For example, we host our software applications and firmware upgrades for our cameras using Amazon Web Services (AWS). A prolonged AWS service disruption affecting our subscription products would negatively impact our ability to serve our consumers and could damage our reputation with current and potential consumers, expose us to liability, cause us to lose consumers, or otherwise harm our business. In the event that our AWS service agreements are terminated, or there is a lapse of service, elimination of AWS services or features that we use, interruption of internet service provider connectivity, or damage to such facilities, we could experience interruptions in access to the GoPro or Quik subscriptions as well as significant delays and additional expense in arranging or creating new facilities and services and/or re-architecting our solutions for deployment on a different cloud infrastructure service provider, which could materially adversely affect
our business, results of operations and financial condition.
If we do not successfully coordinate or if we encounter issues with our manufacturers, suppliers, or supply chain, business, brand, and results of operations could be harmed and we could lose sales.
Our business requires us to coordinate the manufacture and distribution of our products. The continued COVID-19 pandemic and global conflicts have resulted in industry-wide global supply chain challenges, including manufacturing, transportation and logistics.If we do not successfully coordinate with our service providers, we may have insufficient supply of products to meet customer demand, we could lose sales, incur additional costs, and our financial performance may be adversely affected.
The effect of seasonal demand fluctuations on supply
chains, transportation costs, fuel costs, labor unrest, natural disasters, global conflicts, regional or global pandemics, and other adverse effects on our ability, timing and cost of delivering products can increase our inventory, decrease our margins, adversely affect our relations with distributors and other customers and otherwise adversely affect our results of operations and financial condition.
Environmental regulations or changes in the supply, demand or available sources of natural resources may affect the availability and cost of goods and services necessary to run our business. We require our contract manufacturers and suppliers to comply with our formal supplier code of conduct and relevant standards and have ongoing audit programs in place to assess our suppliers’ compliance with our requirements. We periodically conduct
audits of our contract manufacturers’ and suppliers’ compliance with our code of conduct, applicable laws and good industry practices. However, these audits may not be frequent or thorough enough to detect non-
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compliance. Deliberate violations of labor, environmental or other laws by our contract manufacturers or suppliers, or a failure of these parties to follow ethical business practices, could lead to negative publicity and harm our reputation or brand.
As a company engaged in manufacturing and distribution, we are subject to the risks inherent
in such activities, including disruptions or delays in supply chain. During the course of the COVID-19 pandemic and as a result of governmental responses to the COVID-19 pandemic among other macro-economic factors, certain of our suppliers and manufacturers have experienced disruptions, resulting in supply shortages and costs increases, and similar disruptions could occur in the future. Any increases in the costs of goods and services for our business may also adversely affect our profit margins particularly if we are unable to achieve higher price increases or otherwise increase cost or operational efficiencies to offset the higher costs.
The COVID-19 outbreak has had a material impact on the United States and global economies and could have a material adverse impact on our employees, suppliers, customers and end consumers, which could adversely and materially impact our business, financial condition and results of operations.
In March 2020, the World Health Organization declared the outbreak of the novel coronavirus, COVID-19, a pandemic and public health emergency of international concern. Many federal, state and local governments, and private entities have mandated various restrictions, including travel restrictions, restrictions on public gatherings, stay at home orders and advisories, and quarantining of people who may have been exposed to the virus. At this point, we cannot reasonably estimate the duration and severity of this pandemic, including multiple waves of increased infections or variants of the coronavirus, which in 2020 had a material adverse impact on our business, results of operations, financial position and cash flows. Our 2020 annual revenue of $891.9 million was negatively impacted by COVID-19.
As a result of the COVID-19 pandemic, we accelerated a shift in our sales channel strategy
to focus more on direct-to-consumer sales through GoPro.com, and implemented a restructuring plan in April 2020 (the 2020 Restructuring Plan) to realign our workforce to areas of growth combined with certain cost saving measures. The 2020 Restructuring Plan reduced our operating expenses in 2020 as a result of a 20% reduction of our global workforce and the consolidation of certain leased office facilities.
The global COVID-19 pandemic continues to evolve. Certain jurisdictions have begun re-opening only to return to restrictions due to increases in new COVID-19 cases and the emergence of new variant strains of COVID-19. Even in areas where “stay-at-home” restrictions have been lifted and the number of cases of COVID-19 has declined, many individuals remain cautious about resuming activities. Additionally, the emergence of new variant strains of COVID-19 in regions that have reopened has led to, and may continue to lead
to, in some areas, renewed government restrictions.
The pandemic may adversely affect our customers, our employees and our employee productivity. It may also impact the ability of our contract manufacturers, vendors and suppliers to operate and fulfill their contractual obligations, and result in an increase in costs, tariffs, delays or disruptions in performance. These supply chain effects, the direct effect of the virus and the disruption on our employees and operations, may negatively impact both our ability to meet customer demand and our revenue and profit margins.
We might experience changes in consumer demand, particularly if our users are restricted from participating in travel, adventure and sports activities that are often the subject of their use of our products and services. Additionally,
the pandemic’s impact on local and global economies could materially impact consumer purchases of discretionary items, such as our products, which tend to decline during recessionary periods when disposable income is lower or during other periods of economic instability or uncertainty and may slow our growth more than we anticipate. Both the health and economic aspects of the COVID-19 virus are highly fluid, and the future course of each is uncertain and subject to change.
If our sales fall below our forecasts, especially during the holiday season, our overall financial condition and results of operations could be adversely affected.
Seasonal consumer shopping patterns significantly affect our business. We have traditionally experienced greater revenue in the fourth quarter of each year due to demand related to the holiday season, and in some years, including 2021,
greater demand associated with the launch of new products heading into the holiday season.
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Fourth quarter revenue comprised 34%, 40% and 44% of our 2021, 2020 and 2019 revenue, respectively. Given the strong seasonal nature of our sales, appropriate forecasting is critical to our operations. We anticipate that this seasonal impact is likely to continue and any shortfalls in expected fourth quarter revenue due to macroeconomic conditions, any impact on consumer spending due to COVID-19, product release patterns, a decline in the effectiveness of our promotional activities, product mix, charges incurred against new products to support promotional activities, pricing pressures, supply chain disruptions, shipping delays, or for any other reason, including the fact that some retail locations
may not be open for consumers due to COVID-19 restrictions, could cause our annual results of operations to suffer significantly.
In addition, we typically experience lower revenue in the first half of the year as a percentage of total revenue for the year, as compared to second half revenue. First half revenue comprised 39%, 28% and 45% of our annual 2021, 2020 and 2019 revenue, respectively.
Our future growth depends in part on further penetrating our total addressable market, and we may not be successful in doing so.
Historically, the majority of our growth has been fueled by the adoption of our products by people looking to self-capture images of themselves participating in exciting physical activities. We believe that our future growth depends on continuing to reach and expand our core community of users, followers and fans, and then
utilizing that energized community as brand ambassadors to an extended community.
We may not be able to acquire and retain subscribers and cannot be certain that these efforts will be successful, and as a result, we may not be able to increase our total addressable market. We may not be able to expand our market through this strategy on a timely basis, or at all, or recognize the benefits of our investments in this strategy, and we may not be successful in providing tools that our users adopt or believe are easy to use, which will negatively affect our future growth.
Our growth also depends on expanding the market with new capture perspectives with our 360-degree camera, MAX, our FPV (first person view) lightweight camera HERO10 Black Bones, and our all-in-one vlogging and filmmaking camera, HERO10 Black Creative Edition which are initiatives in highly competitive
markets, and by adding versatility to our products with expansion mods for HERO9 Black and HERO10 Black. We cannot be assured that we will be successful in expanding the market with new capture perspectives or by adding new versatility to our products. 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.
To remain competitive and stimulate consumer demand, we must effectively manage product introductions, product transitions, product pricing and marketing.
We believe that we must continually develop and introduce new products, enhance our existing products, and effectively stimulate consumer demand for new and upgraded products and services to maintain or increase our revenue. The markets for our products and services are characterized by intense competition, evolving
distribution models, disruptive technology developments, short product life cycles, customer price sensitivity and frequent product introductions. Additionally, increasing concern over climate change could also result in shifting customer preferences with respect to our products.
The success of new product introductions, such as the HERO10 Black, HERO10 Black Creator Edition and HERO10 Black Bones depends on a number of factors including, but not limited to, timely and successful research and development of next generation systems, pricing, market and consumer acceptance, the ability to successfully identify and originate product trends, effective forecasting and management of product demand, purchase commitments and inventory levels, availability of products in appropriate quantities to meet anticipated demand, ability to obtain timely and adequate delivery of components for our
new products from third-party suppliers, management of any changes in major component suppliers, management of manufacturing and supply costs, management of risks associated with new product production ramp-up issues, and the risk that new products may have quality issues or other defects or bugs in the early stages of introduction including testing of new parts and features.
Additionally, as a result of the macro-economic environment, including inflation and the COVID-19 pandemic, we may not be able to accurately forecast consumer demand and inventory requirements and appropriately manage inventory to meet demand. With respect to management and supply costs, we may be impacted by heightened
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demand for specialty memory, components
and batteries that are not supported by our manufacturing partners. Such supply shortages may affect our ability to manage appropriate supply levels of our products and pricing pressures may negatively affect our gross margins.
In addition, the introduction or announcement of new products or product enhancements may shorten the life cycle of our existing products or reduce demand for our current products, thereby offsetting any benefits of successful product introductions and potentially lead to challenges in managing inventory of existing products.
Additionally, our brand and product marketing efforts are critical to stimulating consumer demand. We market our products globally through a range of advertising and promotional programs and campaigns, including social media. If we do not successfully market our products or plan the right promotions for the right products at the right time,
the lack of success or increased costs of promotional programs could have an adverse effect on our business, financial condition and results of operations.
We depend on sales of our cameras, mounts and accessories for substantially all of our revenue, and any decrease in the sales or change in sales mix of these products could harm our business.
We expect to derive the majority of our revenue from sales of cameras, mounts and accessories for the foreseeable future and an increasing amount of revenue attributable from our subscription products. A decline in the price or unit demand for these products, whether due to a strategic shift in sales channel strategy and macroeconomic conditions, including variable tariff rates, competition or otherwise, or our inability to increase sales of higher price point products, would harm our business and operating results more seriously than it would
if we derived significant revenue from a variety of product lines and services. In particular, a decline in the price or unit demand of our HERO camera line or MAX camera, or our inability to increase sales of these products, could materially harm our business and operating results. Further, any delays or issues with our new product launches could have a material adverse effect on our business, financial condition and results of operations.
Our research and developmentefforts are complex and require us to incur substantial expenses to support the development of our next generation cameras, editing applications and other products and services. Our research and development expenses were $141.5 million, $131.6 million and $142.9 million for 2021, 2020 and 2019, respectively. We expect that our research and development expenses will continue to be substantial in 2022 as we develop
innovative technologies. Unanticipated problems in developing products could also divert substantial resources, which may impair our ability to develop new products and enhancements of existing products, and could further increase our costs. We may not be able to achieve an acceptable return, if any, on our research and development efforts, and our business may be adversely affected. As we continually seek to enhance our products, we will incur additional costs to incorporate new or revised features. We might not be able to, or determine that it is not in our interests to, raise prices to compensate for any additional costs.
Security and data breaches and cyberattacks could disrupt our web platform, products, services, internal operations, or information technology systems, and any such disruption could reduce our expected revenue, increase our expenses, damage our reputation, and cause our stock price to decline significantly.
We
are increasingly dependent on information systems to process transactions, manage our supply chain and inventory, ship goods on a timely basis, maintain cost-efficient operations, complete timely and accurate financial reporting, operate GoPro.com and respond to customer inquiries.
Our products, services and operating systems may contain unknown security vulnerabilities. For example, the firmware and software that are installed on our products may be susceptible to hacking or misuse, or we may experience disruptions to our GoPro.com platform. In addition, we offer a comprehensive online cloud management service through our GoPro subscription. If malicious actors compromise our products and services, including without limitation hacking or breach of such products and services, our business and our reputation will be harmed.
In the ordinary
course of our business, we electronically maintain sensitive data, including intellectual property, our proprietary business information and that of our customers and suppliers, and personally identifiable information of our customers and employees. We store and collect user data uploaded by users through the GoPro subscription and the Quik app and through certain marketing activities. For all of the foregoing, we collect
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and store that information in our or our third-party providers’ electronic systems. These systems may be targets of attacks, such as viruses, malware or phishing attempts by cyber criminals or other wrongdoers seeking to steal our users’ content or data, or our customer’s information for financial gain or to harm our business operations or reputation.
Any
security breach, unauthorized access or usage, virus or similar breach or disruption of our systems, or the systems of third parties on which we rely including web hosting services, billing and payment processing, or software could result in a disruption to our business or the loss of confidential information, costly investigations, remediation efforts and costly notification to affected consumers. If such content were accessed by unauthorized third parties or deleted inadvertently by us or third parties, our brand and reputation could be adversely affected. Cyberattacks could also adversely affect our operating results, consume internal resources and result in litigation or potential liability for us and otherwise harm our business and our reputation.
While we maintain industry standard cybersecurity insurance, our insurance may be insufficient for a particular incident or may not cover all liabilities incurred by any such
attacks. We also cannot be certain that our insurance coverage will be adequate for data handling or data security liabilities actually incurred, that insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, litigation to pursue claims under our insurance policies or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, or denials of coverage, could have a material adverse effect on our business, reputation, operating results and financial condition. The increase in remote working due to the COVID-19 pandemic may also result in heightened risks related to consumer privacy, network security and fraud. System disruptions, failures and slowdowns, whether
caused by cyberattacks, update failures or other causes, could affect our financial systems and operations. This could cause delays in our supply chain or cause information, including data related to customer orders, to be lost or delayed which could result in delays in the delivery of merchandise to our stores and customers or lost sales, especially if the disruption or slowdown occurred during our seasonally strong fourth quarter.
We operate in a highly competitive market and the size and resources of some of our competitors may allow them to compete more effectively than we can. New entrants also enter the digital imaging market category from time-to-time. These market factors could result in a loss of our market share and a decrease in our revenue and profitability.
The digital imaging market is highly competitive. Further, competition has intensified in digital imaging as new
market entrants and existing competitors have introduced new products and more competitive offerings into our markets. Increased competition, tariffs, and changing consumer preferences may result in pricing pressures, reduced profit margins and may impede our ability to continue to increase the sales of our products or cause us to lose market share, any of which could substantially harm our business and results of operations.
We compete against established, well-known camera manufacturers such as Canon Inc. and Nikon Corporation, as well as large, diversified electronics companies such as Samsung Electronics Co. and Sony Corporation, and specialty companies such as Garmin Ltd., the Ricoh Company, Ltd., Shenzhen Arashi Vision Co., Ltd. and SZ DJI Technology Co., Ltd. Many of our competitors have substantial market share, diversified product lines, well-established supply and distribution systems, strong worldwide brand recognition
and greater financial, marketing, research and development and other resources than we do. Additionally, many of our existing and potential competitors enjoy substantial competitive advantages, such as longer operating histories; the capacity to leverage their sales efforts and marketing expenditures across a broader portfolio of products; broader distribution and established relationships with channel partners or vertically integrated business units; access to larger established customer bases; greater resources to make acquisitions; larger intellectual property portfolios; and the ability to bundle competitive offerings with other products and services. Further, new companies may emerge and offer competitive products directly in our category. We are aware that certain companies have developed cameras designed and packaged to appear similar to our products, which may confuse consumers or distract consumers from purchasing GoPro products.
Moreover,
smartphones and tablets with photo and video functionality have significantly displaced the market for traditional cameras, and the makers of those devices also have mobile and other content editing applications and
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storage for content captured with those devices. Our software application, and GoPro and Quik subscription products may not be as compelling as those offered by other companies, such as Apple, Adobe or Google, although the Quik application supports content from other platforms including content from iOS and Android. Manufacturers of smartphones and tablets, such as Apple, Google and Samsung may continue to design their products for use in a range of conditions, including challenging physical environments and waterproof capabilities, or develop products with
features similar to ours.
We depend on key personnel and qualified personnel to operate our business. If we are unable to attract, engage and retain qualified personnel, our ability to develop, transform and successfully operate our business could be harmed.
We believe that our future success is highly dependent on the contributions of our CEO and our executive officers, as well as our ability to attract and retain highly skilled and experienced research and development, and other personnel in the United States and abroad. All of our employees, including our executive officers, are free to terminate their employment relationship with us at any time, and their knowledge of our business and industry may be difficult to replace.
Since the fourth quarter of 2016, we implemented four global reductions-in-force and restructuring actions to reduce
our operating expenses. These changes, and any future changes, in our operations and management team could be disruptive to our operations. Our restructuring actions and any future restructuring actions could have an adverse effect on our business as a result of decreases in employee morale and the failure to meet operational targets due to the loss of employees. If key employees leave, we may not be able to fully integrate new personnel or replicate the prior working relationships, and our operations could suffer as a result.
Qualified individuals are in high demand, and we may incur significant costs to attract and retain them including circumstances beyond our control, including increased wages due to inflation, increasing competition among employers in the prevailing labor market, and labor market constraints. We have limited control over these factors. Competition for qualified personnel is intense generally and particularly
in the San Francisco Bay Area, where our headquarters are located. In particular, we compete with many other companies for skilled positions and we may not be successful in attracting and retaining the professionals we need. While we utilize competitive salary, bonus and long-term incentive packages to recruit new employees, many of the companies with which we compete for experienced personnel also have greater resources to do so.
We have from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Additionally, the shift to a work from home environment may impact our ability to attract and retain our highly skilled employees.
Further, job candidates and existing employees often consider the value of the equity awards they receive in connection with their employment. Fluctuations
in the price of our Class A common stock may make it more difficult or costly to use equity compensation to motivate, incentivize and retain our employees. For example, during 2021, our closing stock price ranged from a high of $13.54 to a low of $7.45, which occurred in the first quarter. If we are unable to attract and retain highly skilled personnel, we may not be able to achieve our strategic objectives, and our business, financial condition and operating results could be adversely affected.
Our gross margin can vary significantly depending on multiple factors, which can result in unanticipated fluctuations in our operating results.
Our gross margin can vary due to consumer demand, competition, product pricing, product lifecycle, product mix, new product introductions, GoPro.com sales mix, subscription activation, renewals, and cancellations, commodity costs, supply chain, logistics
costs and shipping costs, currency exchange rates, trade policy and tariffs, and the complexity and functionality of new product innovations and other factors. For example, our gross margin was 41.1%, 35.3% and 34.6% for 2021, 2020 and 2019, respectively. In particular, if we are not able to introduce new products in a timely manner at the product cost we expect, or if consumer demand for our products is less than we anticipate, or if cancellation rates for GoPro subscriptions is higher than expected, or if there are product pricing, marketing and other initiatives by our competitors to which we need to react or that are initiated by us to drive sales that lower our margins, then our overall gross margin will be less than we project.
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As we innovate with new products, we
may have lower gross margins that do not deliver a sufficient return on investment. In addition, depending on competition or consumer preferences, we may face higher up-front investments in development to compete or market our products, and increased inventory write-offs. If we are unable to offset these potentially lower margins by enhancing the margins in our product categories, our profitability may be adversely affected.
The impact of these factors on gross margin can create unanticipated fluctuations in our operating results, which may cause volatility in the price of our shares.
Changes to trade agreements, trade policies, tariffs and import/export regulations may have an adverse effect on our business and results of operations.
The United States and other countries in which our products are produced or sold internationally have imposed
and may impose additional quotas, duties, tariffs, or other restrictions or regulations, or may adversely adjust prevailing quota, duty, tariff levels, or export or other licensing requirements. Countries impose, modify and remove tariffs and other trade restrictions in response to a diverse array of factors, including global and national economic and political conditions, which make it impossible for us to predict future developments regarding tariffs and other trade restrictions. Trade restrictions, including tariffs, quotas, embargoes, safeguards and customs restrictions, could increase the cost or reduce the supply of products, including components and materials, available to us or may require us to modify our supply chain organization or other current business practices, any of which could harm our business, financial condition and results of operations. We are dependent on international trade agreements and regulations. If the United States were to withdraw from
or materially modify certain international trade agreements, our business and operating results could be materially and adversely affected.
We do not have internal manufacturing capabilities and rely on several contract manufacturers, including component vendors, located in China and in other countries to manufacture our products. Our contract manufacturer locations expose us to risks associated with doing business globally, including risks related to changes in tariffs or other export and import restrictions, and increased security costs. Additionally, the current United States administration continues to signal that it may continue to alter global trade agreements and terms. For example, the United States imposed additional tariffs on imports
from China and continues to potentially impose other restrictions on exports from China to the United States. In 2018, the Office of the United States Trade Representative (USTR) identified certain Chinese imported goods for additional tariffs to address China’s trade policies and practices. Any announcement by the USTR to impose tariffs on GoPro cameras could have a material adverse effect on our United States bound production, business and results of our United States operations. If these duties are imposed on our cameras, we may be required to raise our prices, which may result in the loss of customers and harm our business and results of operations, or we may choose to pay for these tariffs without raising prices which may negatively impact our results of operations and profitability. Sales of our products in China are material to our business and represent a significant portion of our revenue. This revenue stream from China is at risk in the event China imposes
retaliatory tariffs impacting in-bound sales of our products or imposes any other export restrictions on our products.
We continue to monitor manufacturing capabilities outside of China and currently manufacture certain cameras in Thailand and Mexico to mitigate risks of additional tariffs, duties or other restrictions on our products destined for the United States and may choose to transition more manufacturing outside of China.
We face substantial risks related to inventory, purchase commitments and long-lived assets, and we could incur material charges related to these items that adversely affect our operating results.
To ensure adequate inventory supply and meet the demands of our retailers and distributors, we must forecast inventory needs and place orders with our contract
manufacturers and component suppliers based on our estimates of future demand for particular products as well as accurately track the level of product inventory in the channel to ensure we are not in an over or under supply situation. To the extent we discontinue the manufacturing and sales of any products or services, we must manage the inventory liquidation, supplier commitments and customer expectations.
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No assurance can be given that we will not incur additional charges in future periods related to our inventory management or that we will not underestimate or overestimate forecasted sales in a future period. Our ability to accurately forecast demand for our products is affected by many factors, including product introductions by us and our competitors, channel inventory
levels, unanticipated changes in general market demand, macroeconomic conditions and consumer confidence. If we do not accurately forecast customer demand for our products, we may in future periods be unable to meet consumer, retailer or distributor demand for our products, or may be required to incur higher costs to secure the necessary production capacity and components, and our business and operating results could be adversely affected.
If we fail to manage our operating expenses effectively, our financial performance may suffer.
Our success will depend in part upon our ability to manage our operating expenses, including but not limited to our cash management, effectively. We incurred significant operating losses in 2021 and 2020 and, as of June 30, 2022, we had an accumulated deficit of $216.8 million. Beginning in the fourth quarter
of 2016 through the second quarter of 2020, we implemented four global reductions-in-force and other restructuring actions to reduce our operating expenses. We may not realize the cost savings expected from cost reduction actions.
We will need to continue to improve our operational, financial and management controls, reporting processes and procedures, and financial and business information systems. We are also investing in areas we believe will grow revenue and our operating expenses might increase as a result of these investments. If we are unable to operate efficiently and manage our costs, we may continue to incur significant losses in the future and may not be able to maintain or achieve profitability.
Our international operations account for a significant portion of our revenue and operating expenses and are subject to challenges and risks.
Revenue
from outside the United States comprised 55%, 52% and 64% of our revenue in 2021, 2020 and 2019, respectively, and we expect international revenue to continue to be significant in the future. Further, we currently have foreign operations in Australia, China, France, Germany, Hong Kong, Japan, Netherlands, Philippines, Romania, United Kingdom and a number of other countries in Europe and Asia. Operating in foreign countries requires significant resources and considerable management attention, and we may enter new geographic markets where we have limited or no experience in marketing, selling, and deploying our products. International expansion has required and will continue to require us to invest significant funds and other resources and we cannot be assured our efforts will be successful. International sales and operations may be subject to risks such as:
•difficulties
in staffing and managing foreign operations;
•burdens of complying with a wide variety of laws and regulations, including environmental, packaging and labeling;
•delays or disruptions in our supply chain;
•adverse tax effects and foreign exchange controls making it difficult to repatriate earnings and cash;
•changes to the taxation of undistributed foreign earnings;
•the effect of foreign currency exchange rates and interest rates, including any fluctuations caused by uncertainties relating to Brexit, inflation or the strengthening of the U.S. dollar, and the weakening of the Euro;
•political,
economic instability, or social unrest in a specific country or region in which we operate, including, for example, the effects of Brexit, which could have an adverse impact on our operations in that location;
•organized crime activity;
•terrorist activities, acts of war, natural disasters, and pandemics, including the COVID-19 pandemic;
•wars and global conflicts, including the war in Ukraine;
•quarantines or other disruptions to our operations resulting from pandemics or other widespread public health problems;
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•trade
restrictions;
•the effects of climate change;
•differing employment practices and laws and labor disruptions;
•the imposition of government controls;
•lesser degrees of intellectual property protection;
•tariffs and customs duties and the classifications of our goods by applicable governmental bodies;
•a legal system subject to undue influence or corruption; and
•a business culture in which illegal sales practices may be prevalent.
The occurrence of any of these
risks could negatively affect our international business and consequently our business, operating results and financial condition.
A small number of retailers and distributors account for a substantial portion of our revenue, and if our relationships with any of these retailers or distributors were to be terminated or the level of business with them significantly reduced, our business could be harmed.
Our ten largest third-party customers, measured by the revenue we derive from them, accounted for 46%, 44% and 42% of our revenue in 2021, 2020 and 2019, respectively. One retailer accounted for 11%, 10% and11% of our revenue for 2021, 2020 and 2019, respectively. The loss of a small number of our large customers, or the reduction in business with one or more of our large customers, could have a significant adverse effect on our operating
results. In addition, we may choose to temporarily or permanently stop shipping product to customers who do not follow the policies and guidelines in our sales agreements, which could have a material negative effect on our revenues and operating results. Our sales agreements with these large customers do not require them to purchase any meaningful amount of our products annually and we grant limited rights to return product to some of these large customers.
Our success depends on our ability to maintain the value and reputation of our brand.
Our success depends on the value and reputation of our brand, including our primary trademarks “GOPRO,”“HERO,” and the GoPro logos. The GoPro brand is integral to the growth of our business and expansion into new markets. Maintaining, promoting and positioning our brand will largely depend on the success of our marketing and merchandising
efforts, including through establishing relationships with high profile sporting and entertainment events, venues, sports leagues and sports associations, athletes and celebrity personalities, our ability to provide consistent, high quality products and services, and our consumers’ satisfaction with the technical support and software updates we provide. Failure to grow and maintain our brand or negative publicity related to our products, our consumers’ user-generated content, the athletes we sponsor, the celebrities we are associated with, or the labor policies of any of our suppliers or manufacturers could adversely affect our brand, business and operating results. Maintaining and enhancing our brand also requires substantial financial investments, although there is no guarantee that these investments will increase sales of our products or positively affect our operating results
Consumers may be injured while engaging in activities
with our products, and we may be exposed to claims, or regulations could be imposed, which could adversely affect our brand, operating results and financial condition.
Consumers use our cameras, and their associated mounts and accessories to self-capture their participation in a wide variety of physical activities, including extreme sports, which in many cases carry the risk of significant injury or death. We may be subject to claims that users have been injured or harmed by or while using our products, including false claims or erroneous reports relating to safety, security or privacy issues. Although we maintain insurance to help protect us from the risk of such claims, such insurance may not be sufficient or may not apply to all situations. Similarly, proprietors of establishments at which consumers engage in challenging physical activities could seek to ban the use of our products in their facilities to limit their own liability.
In addition, if lawmakers or governmental agencies were to determine that the use of our products increased the risk of injury or harm to all or a subset of our users or should otherwise be restricted to protect consumers, they may pass laws or adopt
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regulations that limit the use of our products or increase our liability associated with the use of our products. Any of these events could adversely affect our brand, operating results and financial condition.
We may be subject to warranty claims that could result in significant direct or indirect costs, or we could experience greater returns from retailers than expected, which could harm our business and operating results.
We
generally provide a 12-month warranty on all of our cameras, except in the European Union, or EU, where we provide a two-year warranty on all of our cameras. For certain mounts and accessories, where permitted, we provide a lifetime warranty. The occurrence of any material defects in our products could make us liable for damages and warranty claims in excess of our current reserves. In addition, we could incur significant costs to correct any defects, warranty claims or other problems, including costs related to product recalls. Any negative publicity related to the perceived quality and safety of our products could affect our brand image, decrease retailer, distributor and consumer confidence and demand, and adversely affect our operating results and financial condition. Also, while our warranty is limited to repairs and returns, warranty claims may result in litigation, the occurrence of which could adversely affect our business and operating results. Based on our
historical experience with our camera products, we have an established methodology for estimating warranty liabilities with respect to cameras and accessories.
We may grow our business in part through acquisitions, joint ventures, investments and partnerships, which could require significant management attention, disrupt our business, dilute stockholder value and adversely affect our operating results.
We have completed several acquisitions and may evaluate additional acquisitions of, or strategic investments in, other companies, products or technologies that we believe are complementary to our business. Negotiating these transactions can be time-consuming, difficult and expensive, and our ability to close these transactions may be subject to third-party or government approvals, which are beyond our control. Consequently, we can make no assurance that these transactions, once undertaken
and announced, will close.
If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, and any acquisitions we complete could be viewed negatively by users or investors. In addition, if we encounter difficulties assimilating or integrating the businesses, technologies, products, personnel, or operations of acquired companies, particularly if the key personnel of the acquired business choose not to work for us, or we have difficulty retaining the customers of any acquired business, the revenue and operating results of the combined company could be adversely affected. Acquisitions may disrupt our ongoing operations, divert management from their primary responsibilities, subject us to additional liabilities, increase our expenses and adversely affect our business, financial condition, operating results and cash flows. In addition, our original estimates and assumptions used in
assessing any transaction may be inaccurate, including estimates of accounting charges. We have recorded significant goodwill and intangible assets in connection with our acquisitions, and in the future, if our acquisitions do not yield expected revenue, we may be required to take material impairment charges that could adversely affect our results of operations.
We may have to pay cash, incur debt or issue equity securities to enter into any such acquisition, joint venture, strategic alliances or partnership, which could affect our financial condition or the value of our capital stock. Furthermore, acquisitions may require large one-time charges and can result in increased debt or contingent liabilities, adverse tax consequences, additional stock-based compensation expense and the recording and subsequent amortization or impairments of amounts related to certain purchased intangible assets, any of which could negatively affect
our future results of operations. We cannot assure investors that the anticipated benefits of any acquisition or investment will be realized.
Catastrophic events or political instability could disrupt and cause harm to our business.
Our headquarters are located in the San Francisco Bay Area of California, an area susceptible to earthquakes. A major earthquake or other natural disaster, fire, threat of fire, act of terrorism, public health issues or other catastrophic event in California or elsewhere that results in the destruction or disruption of any of our critical business operations or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our future operating results could be harmed. Our key manufacturing, supply and distribution partners have global operations including China, Thailand, Hong Kong, Japan, Mexico,
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Netherlands, Singapore, Taiwan and the United States. Political instability, public health issues or other catastrophic events in any of those countries including as a result of climate change, could adversely affect our business in the future, our financial condition and operating results.
Risks related to our intellectual property and technology licenses
Our intellectual property and proprietary rights may not adequately protect our products and services, and our business may suffer, if third parties infringe our rights.
We own patents, trademarks, copyrights, trade secrets, and other intellectual property (collectively “intellectual property”)
related to aspects of our products, software, services and designs. Our commercial success may depend in part on our ability to obtain, maintain and protect these rights in the United States and abroad.
We regularly file patent applications to protect innovations arising from our research, development and design as we deem appropriate. We may fail to apply for patents on important products, services, technologies or designs in a timely fashion, or at all. We may not have sufficient intellectual property rights in all countries where unauthorized third-party copying or use of our proprietary technology occurs and the scope of our intellectual property might be more limited in certain countries. Our existing and future patents may not be sufficient to protect our products, services, technologies or designs and/or may not prevent others from developing competing products, services, technologies or designs. We cannot predict the
validity and enforceability of our patents and other intellectual property with certainty.
We have registered, applied to register, and/or used certain of our trademarks in several jurisdictions worldwide. In some of those jurisdictions, third-party registrations, filings, or common law use exist for the same, similar or otherwise related products or services, which could block the registration of or ability to use our marks. Even if we are able to register our marks, competitors may adopt or file similar marks to ours, seek to cancel our trademark registrations, register domain names that mimic or incorporate our marks, or otherwise infringe upon or harm our trademark rights. Although we police our trademark rights carefully, there can be no assurance that we are aware of all third-party uses or that we will prevail in enforcing our rights in all such instances. Any of these negative outcomes could affect the strength, value
and effectiveness of our brand, as well as our ability to market our products. We have also registered domain names for websites, or URLs, that we use in our business, such as GoPro.com, as well as social media handles. If we are unable to protect our domain names or social media handles, our brand, business, and operating results could be adversely affected. Domain names or social media handles similar to ours have already been registered in the United States and elsewhere, and we may not be able to prevent third parties from acquiring and using domain names or social media handles that infringe, are similar to, or otherwise decrease the value of, our trademarks. In addition, we might not be able to, or may choose not to, acquire or maintain trademark registrations, domain names, social media handles or other related rights in certain jurisdictions.
Litigation may be necessary to enforce our intellectual property rights. Initiating infringement proceedings against third parties can be expensive, take significant time, and divert management’s attention from other business concerns. We may not prevail in litigation to enforce our intellectual property against unauthorized use.
We have been, and in the future may be, sued by third parties for alleged infringement of their intellectual property and proprietary rights.
Third parties, including competitors and non-practicing entities, have brought intellectual property infringement claims against us, including the matter described in Note 9 Commitments, contingencies and guarantees in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q. While we will defend ourselves vigorously against any such existing
and future legal proceedings, we may not prevail against all such allegations, including the matter described in Note 9 Commitments, contingencies and guarantees in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q. We may seek licenses from third parties where appropriate, but they could refuse to grant us a license or demand commercially unreasonable terms. Further, an adverse ruling in an intellectual property infringement proceeding could force us to suspend or permanently cease the production or sale of products/services, face a temporary or permanent injunction, redesign our products/services, rebrand our products/services, pay significant settlement costs, pay third-party license fees or damage awards or give up some of our intellectual property. The occurrence of any of these events may materially and adversely affect our business, financial condition, operating results or cash flows.
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If
we are unable to maintain or acquire rights to include intellectual property owned by others in the content distributed by us, our marketing, sales or future business strategy could be affected or we could be subject to lawsuits relating to our use of this content.
The distribution of GoPro content helps to market our brand and our products. If we cannot continue to acquire rights to distribute user-generated content or acquire rights to use and distribute music, athlete and celebrity names and likenesses or other content for our original productions or third-party entertainment distribution channels or for our software products, our marketing efforts could be diminished, our sales could be harmed and our future content strategy could be adversely affected. In addition, third-party content providers or owners may allege that we have violated their intellectual property rights. If we are unable to obtain sufficient rights, successfully
defend our use of or otherwise alter our business practices on a timely basis in response to claims of infringement, misappropriation, misuse or other violation of third-party intellectual property rights, our business may be adversely affected. As a user and distributor of content, we face potential liability for rights of publicity and privacy, as well as copyright, or trademark infringement or other claims based on the nature and content of materials that we distribute. If we are found to violate such third-party rights, then our business may suffer.
We use open source software in our platform that may subject our technology to general release or require us to re-engineer our solutions, which may cause harm to our business.
We use open source software in connection with our products and services. From time to time, companies that incorporate open source software into their products
or services have faced claims challenging the ownership of open source software and/or compliance with open source license terms. Therefore, we could be subject to suits by parties claiming ownership of what we believe to be open source software or noncompliance with open source licensing terms. Some open source software licenses require users who distribute or make available open source software as part of their software to publicly disclose all or part of the source code to such software or make available any derivative works of the open source code on unfavorable terms or at no cost. While we monitor our use of open source software and try to ensure that none is used in a manner that would require us to disclose the source code or that would otherwise breach the terms of an open source agreement, such use could nevertheless occur and we may be required to release our proprietary source code, pay damages for breach of contract,
re-engineer our applications, discontinue sales in the event re-engineering cannot be accomplished on a timely basis or take other remedial action that may divert resources away from our development efforts, any of which could adversely affect our business, financial condition or operating results.
Risks related to regulatory compliance
We are subject to governmental regulation and other legal obligations, particularly related to privacy, data protection and information security, and our actual or perceived failure to comply with such obligations could adversely affect our business and operating results.
Personal privacy, data protection and information security are significant issues in the United States and the other jurisdictions where we offer our products and services. The regulatory framework for privacy and security issues worldwide
is rapidly evolving and is likely to remain uncertain for the foreseeable future. Our handling of data is subject to a variety of laws and regulations, including regulation by various government agencies, including the United States Federal Trade Commission (FTC) and various state, local and foreign bodies and agencies. Our agreements with certain customers and business partners may also subject us to certain requirements related to our processing of personal information, including obligations to use industry-standard or reasonable security measures to safeguard personal information.
The United States federal and various state and foreign governments have adopted or proposed limitations on the collection, distribution, use and storage of personal information of individuals, including end-customers and employees. In the United States, the FTC and many state attorneys general are applying federal and state consumer protection
laws to the online collection, use, processing, storage, deletion and dissemination of data. Further, all states have enacted laws requiring companies to notify individuals, regulatory authorities and others of security breaches involving personal information.
We also expect that there will continue to be new proposed laws, regulations and industry standards concerning privacy, data protection and information security in the United States, the European Union and other jurisdictions, and we cannot yet determine the impact of such future laws, regulations and standards may have on our
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business. We expect that existing laws, regulations and standards may be interpreted differently in the future. For example, in November 2020, the
California ballot initiative known as the Consumer Privacy Rights Act (CPRA) was passed. CPRA will come into effect in January 2023 (except for the CPRA’s right of access which will come into effect in January 2022), and will supersede the California Consumer Privacy Act (CCPA). Compliance with the new obligations imposed by the CPRA depends in part on how particular regulators interpret and apply them. If we fail to comply with the CCPA or CPRA or if regulators assert that we have failed to comply with the CCPA or CPRA, we may be subject to certain fines, sanctions, or other penalties, as well as litigation.
Further, some observers have noted that the CCPA and CPRA could mark the beginning of a trend toward more stringent privacy legislation in the U.S. and prompt a number of proposals for new federal and state-level privacy legislation. For example, in 2021, Virginia passed the Virginia Data Protection Act, or CDPA (enacted
March 2021, effective January 1, 2023) and Colorado passed the Colorado Privacy Act, or CPA (enacted July 2021, effective July 1, 2023). We cannot fully predict the impact of the CCPA, CPRA, CDPA, CPA, or other similar laws or regulations on our business or operations, but they may require us to modify our data processing practices and policies and to incur substantial costs and expense in an effort to comply.
Additionally, many foreign countries and governmental bodies, including Australia, the European Union (EU), India, Japan and numerous other jurisdictions in which we operate or conduct our business, have laws and regulations concerning the collection, use, processing, storage and deletion of personal information obtained from their residents or by businesses operating within their jurisdiction. These laws and regulations
often are more restrictive than those in the United States.
For example, in the EU, the General Data Protection Regulation (GDPR) imposes more stringent EU data protection requirements, provides an enforcement authority, and imposes large penalties for noncompliance. Compliance with the obligations imposed by the GDPR depends in part on how particular regulators interpret and apply them, which may require us to comply with varying, and at times conflicting, standards across the EU jurisdictions where we operate. If we fail to comply with the GDPR or if regulators assert that we have failed to comply with the GDPR, we may be subject to fines of up to 4% of our worldwide annual revenue.
Among other requirements, the GDPR regulates transfers of personal data outside of the EU to countries that have not been found to provide adequate protection to personal data, including the United States,
requiring that certain steps are taken to legitimize those transfers. We have undertaken certain efforts to conform transfers of personal data from the EU to the United States and other jurisdictions based on our understanding of current regulatory obligations and the guidance of data protection authorities. Despite this, we may be unsuccessful in establishing or maintaining conforming means of transferring such data from the European Economic Area, or EEA, particularly as a result of continued legal and legislative activity within the EU that has challenged or called into question the legal basis for existing means of data transfers to countries that have not been found to provide adequate protection for personal data.
Further, the United Kingdom (U.K.) exited the EU on January 31, 2020 (Brexit), which has created additional uncertainty with regard to the regulation of data
protection in the U.K. and could lead to further legislative and regulatory changes. The UK has implemented the Data Protection Act that contains provisions, including its own derogations for how GDPR is applied in the U.K. legislation that substantially implements the GDPR, with penalties for noncompliance of up to the greater of £17.5 million (€20 million) or four percent of worldwide revenues. These changes will lead to additional costs as we try to ensure compliance with new privacy legislation and will increase our overall risk exposure.
In addition to government regulation, privacy advocates and industry groups may propose new and different self-regulatory standards that may apply to us. One example of such a self-regulatory standard is the Payment Card Industry Data Security Standard, or PCI DSS, which relates to the processing of payment card information. In the event we are required to comply with the PCI DSS but fail
to do so, fines and other penalties could result, and we may suffer reputational harm and damage to our business.
Future laws, regulations, standards and other obligations, as well as changes in the interpretation of existing laws, regulations, standards and other obligations could impair our ability to collect, use or disclose information relating to individuals, which could decrease demand for our products, require us to restrict our business operations, increase our costs and impair our ability to maintain and grow our customer base and increase our revenue.
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Any inability to adequately address privacy and security concerns, even if unfounded, or comply with applicable laws, regulations, policies, industry standards, contractual
obligations or other legal obligations could result in additional cost and liability to us, damage our reputation, inhibit sales, and adversely affect our business and operating results.
We could be adversely affected by violations of the United States Foreign Corrupt Practices Act, the United Kingdom Bribery Act or similar anti-bribery laws in other jurisdictions in which we operate.
The global nature of our business and the significance of our international revenue create various domestic and local regulatory challenges and subject us to risks associated with our international operations. The United States Foreign Corrupt Practices Act, or FCPA, the United Kingdom Bribery Act 2010, or the U.K. Bribery Act, and similar anti-bribery and anti-corruption laws in other jurisdictions generally prohibit United States based companies and their intermediaries from making improper payments
to non-United States officials for the purpose of obtaining or retaining business, directing business to another, or securing an advantage. In addition, United States public companies are required to maintain records that accurately and fairly represent their transactions and have an adequate system of internal accounting controls. Under the FCPA, United States companies may be held liable for the corrupt actions taken by directors, officers, employees, agents, or other strategic or local partners or representatives. As such, if we or our intermediaries fail to comply with the requirements of the FCPA or similar legislation, governmental authorities in the United States and elsewhere could seek to impose substantial civil and/or criminal fines and penalties which could have a material adverse effect on our business, reputation, operating results and financial condition.
We operate in areas of the world that experience corruption
by government officials to some degree and, in certain circumstances, compliance with anti-bribery and anti-corruption laws may conflict with local customs and practices. Our global operations require us to import and export to and from several countries, which geographically expands our compliance obligations. In addition, changes in such laws could result in increased regulatory requirements and compliance costs which could adversely affect our business, financial condition and results of operations. We cannot be assured that our employees or other agents will not engage in prohibited conduct and render us responsible under the FCPA or the U.K. Bribery Act. While we have compliance programs, they may not be effective to prevent violations from occurring and employees may engage in prohibited conduct nonetheless. If we are found to be in violation of the FCPA, the U.K. Bribery Act or other anti-bribery or anti-corruption laws (either due to acts or inadvertence of our
employees, or due to the acts or inadvertence of others), we could suffer criminal or civil penalties or other sanctions, which could have a material adverse effect on our business.
If we fail to comply with environmental regulations and conflict minerals disclosures, our business, financial condition, operating results and reputation could be adversely affected.
We are subject to various federal, state, local and international environmental laws and regulations including laws regulating the manufacture, import, use, discharge and disposal of hazardous materials, labeling and notice requirements relating to potential consumer exposure to certain chemicals, and laws relating to the collection of and recycling of electrical and electronic equipment and their packaging.
We are also subject to the SEC’s conflict minerals rule which requires disclosure
by public companies of the origin, source and chain of custody of specified minerals, known as conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured. We have and will continue to incur costs associated with complying with the rule, such as costs related to sourcing of certain minerals (or derivatives thereof), the determination of the origin, source and chain of custody of the minerals used in our products, the adoption of conflict minerals-related governance policies, processes and controls, and possible changes to products or sources of supply as a result of such activities. Within our supply chain, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the data collection and due diligence procedures that we implement, which may harm our reputation.
Although we have policies and procedures in
place requiring our contract manufacturers and major component suppliers to comply with applicable federal, state, local and international requirements, we cannot confirm that our manufacturers and suppliers consistently comply with these requirements. In addition, if there are changes to these or other laws (or their interpretation) or if new similar laws are passed in other jurisdictions, we may be
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required to re-engineer our products to use components compatible with these regulations. This re-engineering and component substitution could result in additional costs to us or disrupt our operations or logistics.
Changes in interpretation
of any federal, state, local or international regulation may cause us to incur costs or have additional regulatory requirements to meet in the future in order to comply, or with any similar laws adopted in other jurisdictions. Our failure to comply with past, present and future similar laws could result in reduced sales of our products, substantial product inventory write-offs, reputational damage, penalties and other sanctions, which could harm our business and financial condition.
We also expect that our products will be affected by new environmental laws and regulations, including but not limited to laws and regulations focused on climate change, on an ongoing basis. Climate change has had significant legislative and regulatory effects on a global basis, and there are expected to be additional changes to the regulations in these areas. These changes could directly increase the cost of energy, which may have an impact on
the way we manufacture products or utilize energy to produce our products. We may also become subject to regulations resulting in increased disclosure obligations with respect to our greenhouse gas emissions. In addition, any new regulations or laws in the environmental area might increase the cost of raw materials we use in our products and the cost of compliance, or could cause disruptions in the manufacture of our products and result in increased procurement, production, and distribution costs. Our reputation and brand could be harmed if we fail, or are seen as having failed, to respond responsibly and effectively to changes in legal and regulatory measures adopted to address climate change. Other regulations in the environmental area may require us to continue to monitor and ensure proper disposal or recycling of our products. Since we operate on a global basis, this is a complex process that requires continual monitoring.
To
date, our expenditures for environmental compliance have not had a material effect on our results of operations or cash flows and, although we cannot predict the future effect of such laws or regulations, they will likely result in additional costs and may increase penalties associated with violations or require us to change the content of our products or how they are manufactured, which could have a material adverse effect on our business and financial condition.
We are subject to governmental export and import controls and economic sanctions laws that could subject us to liability and impair our ability to compete in international markets.
The United States and various foreign governments have imposed controls, export license requirements and restrictions on the import or export of some technologies. Our products are subject to United States export controls, and exports of our products
must be made in compliance with various economic and trade sanctions laws. Furthermore, United States export control laws and economic sanctions prohibit the provision of products and services to countries, governments and persons targeted by United States sanctions. Even though we take precautions to prevent our products from being provided to targets of United States sanctions, our products, including our firmware updates, could be provided to those targets or provided by our customers. Any such provision could have negative consequences, including government investigations, penalties and reputational harm. Our failure to obtain required import or export approval for our products could harm our international and domestic sales and adversely affect our revenue.
We could be subject to future enforcement action with respect to compliance with governmental export and import controls and economic sanctions laws that result in penalties,
costs, and restrictions on export privileges that could have a material effect on our business and operating results.
Risks related to our need for additional capital
We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs.
In the future, we may require additional capital to respond to business opportunities, challenges, acquisitions or unforeseen circumstances and may determine to engage in equity or debt financings or enter into credit facilities for other reasons. We may not be able to timely secure additional financing on favorable terms, or at all, due to among other things, general macroeconomic conditions, including rising interest rates and inflation. Additionally, our current credit facilities contain restrictive covenants relating to our capital raising activities and other
financial and operational matters, and any debt financing obtained by us in the future could involve further restrictive
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covenants, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. Further, even if we are able to obtain additional financing, we may be required to use such proceeds to repay a portion of our debt. If we raise additional funds through the issuance of equity or convertible debt or other equity-linked securities, our existing stockholders could suffer significant dilution. If we are unable to obtain adequate financing under our credit facility, or alternative 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.
Risks related to ownership of our Class A common stock
Our stock price has been and will likely continue to be volatile.
Since shares of our Class A common stock were sold in our IPO in July 2014 at a price of $24.00 per share, our closing stock price has ranged from $2.01 to $93.85 per share through June 30, 2022. Our stock price may fluctuate in response to a number of events and factors, such as quarterly operating results; changes in our financial projections provided to the public or our failure to meet those projections; the public’s reaction to our press
releases, other public announcements and filings with the SEC; significant transactions, or new features, products or services offered by us or our competitors; changes in our business lines and product lineup; changes in financial estimates and recommendations by securities analysts; media coverage of our business and financial performance; the operating and stock price performance of, or other developments involving, other companies that investors may deem comparable to us; trends in our industry; any significant change in our management; and general economic conditions. These factors, as well as the volatility of our Class A common stock, could also affect the price of our convertible senior notes.
In addition, the stock market in general, and the market prices for companies in our industry, have experienced volatility that often has been unrelated to operating performance. These broad market and industry fluctuations
may adversely affect the price of our stock, regardless of our operating performance. Price volatility over a given period may cause the average price at which we repurchase our own stock to exceed the stock’s price at a given point in time. Volatility in our stock price also affects the value of our equity compensation, which affects our ability to recruit and retain employees. In addition, some companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We have been subject to past shareholder class action lawsuits as well as derivative lawsuits and may continue to be a target for such litigation in the future. Securities litigation against us could result in substantial costs and liability and divert our management’s attention from other business concerns, which could harm our business. See Note 9 Commitments, contingencies and guarantees, in the
Notes to Condensed Consolidated Financial Statements for a discussion on legal proceedings.
If we fail to meet expectations related to future growth, profitability, or other market expectations, our stock price may decline significantly, which could have a material adverse effect on investor confidence and employee retention. A sustained decline in our stock price and market capitalization could lead to impairment charges.
The dual class structure of our common stock has the effect of concentrating voting control with our CEO and we cannot predict the effect our dual class structure may have on our stock price or our business.
Our Class B common stock has 10 votes per share, and our Class A common stock has one vote per share. Stockholders who hold shares of Class B common stock hold approximately 67.0% of the voting
power of our outstanding capital stock as of June 30, 2022 with Mr. Woodman, our Chairman and CEO, holding approximately 63.9% of the outstanding voting power. Mr. Woodman is able to control all matters submitted to our stockholders, including the election of directors, amendments of our organizational documents and any merger, consolidation, sale of all or substantially all of our assets or other major corporate transaction. This concentrated control could delay, defer, or prevent a change of control, merger, consolidation, or sale of all or substantially all of our assets that our other stockholders support, or conversely this concentrated control could result in the consummation of such a transaction that our other stockholders do not support. This concentrated control could also discourage a potential investor from acquiring our Class A common stock due to the limited voting power of such stock relative to the Class
B common stock and might harm the trading price of our Class A common stock.
In addition, we cannot predict whether our dual class structure, combined with the concentrated control by Mr. Woodman, will result in a lower or more volatile market price of our Class A common stock or in adverse publicity
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or other adverse consequences. For example, certain index providers, including FTSE Russell and S&P Dow Jones, have announced restrictions on including companies with multiple-class share structures in certain of their indexes. Because of our dual class structure, we may be excluded from these indexes and we cannot assure you that other stock indexes will not take similar actions. Given the sustained flow of investment funds into
passive strategies that seek to track certain indexes, exclusion from stock indexes would likely preclude investment by many of these funds and could make our Class A common stock less attractive to other investors. As a result, the market price of our Class A common stock could be adversely affected.
Delaware law and provisions in our restated certificate of incorporation and amended and restated bylaws could make a merger, tender offer or proxy contest difficult, thereby depressing the trading price of our Class A common stock.
Our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting
us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change in control would be beneficial to our existing stockholders. In addition, our restated certificate of incorporation and amended and restated bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors, or otherwise adversely affect the rights of the holders of our Class A and Class B common stock.
Risks related to our indebtedness and capped call transactions
We have indebtedness
in the form of convertible senior notes.
In November 2020, we completed an offering of $143.8 million aggregate principal amount of 1.25% convertible senior notes due 2025 (2025 Notes). As a result of the 2025 Notes, we incurred an additional $143.8 million principal amount of indebtedness, the principal amount of which we may be required to pay at maturity in 2025.
In April 2017, we completed an offering of $175.0 million aggregate principal amount of 3.50% convertible senior notes due 2022 (2022 Notes). We repurchased $50.0 million aggregate principal amount of the 2022 Notes in November 2020, and we repaid the remaining principal amount of $125.0 million at maturity in April 2022.
Holders of the 2025 Notes will have the right to require us to repurchase their 2025 Notes upon the occurrence of a fundamental change at a purchase price equal
to 100% of the principal amount of the 2025 Notes to be purchased, plus accrued and unpaid interest, if any. In addition, the indentures for the 2025 Notes provides that we are required to repay amounts due under such indenture in the event that there is an event of default for the 2025 Notes that results in the principal, premium, if any, and interest, if any, becoming due prior to maturity date for the 2025 Notes. There can be no assurance that we will be able to repay our indebtedness when due, or that we will be able to refinance our indebtedness, all or in part, on acceptable terms. In addition, our indebtedness could, among other things:
•heighten our vulnerability to adverse general economic conditions and heightened competitive
pressures;
•require us to dedicate a larger portion of our cash flow from operations to interest payments, limiting the availability of cash for other purposes;
•limit our flexibility in planning for, or reacting to, changes in our business and industry; and
•impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes.
In addition, our ability to purchase the 2025 Notes or repay prior to maturity any accelerated amounts under the 2025 Notes upon an event of default or pay cash upon conversions of the 2025 Notes may be limited by law, by regulatory authority or by agreements governing our indebtedness outstanding at the time, including
our credit facility. Our credit facility restricts our ability to repurchase the 2025 Notes for cash or repay prior to maturity any accelerated amounts under the 2025 Notes upon an event of default or pay cash upon conversion of the 2025 Notes, to the extent that on the date of such repurchase, repayment or conversion, as the case may be, we do not meet certain financial criteria set forth in the credit facility.
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Any of our future indebtedness may contain similar restrictions. Our failure to repurchase the 2025 Notes at a time when the repurchase is required by the indentures (whether upon a fundamental change or otherwise under the indentures)
or pay cash payable on future conversions of the 2025 Notes as required by the indentures would constitute a default under the indentures. A default under the indentures or the fundamental change itself could also lead to a default under agreements governing our existing or future indebtedness, including our credit facility. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness, repurchase the 2025 Notes or make cash payments upon conversions thereof.
Our credit facility imposes restrictions on us that may adversely affect our ability to operate
our business.
Our credit facility contains restrictive covenants relating to our capital raising activities and other financial and operational matters which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, our credit facility contains, and the agreements governing the 2025 Notes will contain, a cross-default provision whereby a default under one agreement would likely result in cross defaults under agreements covering other borrowings. The occurrence of a default under any of these borrowing arrangements would permit the holders of the 2025 Notes or the lenders under our credit facility to declare all amounts outstanding under those borrowing arrangements to be immediately due and payable. If the 2025 Note holders or the trustee under the indentures
governing the 2025 Notes or the lenders under our credit facility accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay those borrowings.
Conversion of the 2025 Notes will, to the extent we deliver shares upon conversion of such 2025 Notes, dilute the ownership interest of existing stockholders, including holders who had previously converted their 2025 Notes, or may otherwise depress our stock price or may adversely affect our financial condition.
The conversion of some or all of the 2025 Notes will dilute the ownership interests of existing stockholders to the extent we deliver shares upon conversion of any of the 2025 Notes. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the 2025 Notes may encourage
short selling by market participants because the conversion of the 2025 Notes could be used to satisfy short positions, or anticipated conversion of the 2025 Notes into shares of our common stock could depress our stock price.
In the event the conditional conversion feature of the 2025 Notes is triggered, holders of the 2025 Notes will be entitled to convert the 2025 Notes at any time during specified periods at their option. If one or more holders elect to convert their 2025 Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than cash in lieu of any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders of the 2025 Notes do not elect to convert their 2025 Notes, we could be required under applicable accounting rules to reclassify
all or a portion of the outstanding principal of the 2025 Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
The accounting method for convertible debt securities that may be settled in cash, such as the 2025 Notes, may have a material effect on our reported financial results.
Under current GAAP effective January 1, 2022, the treasury stock method for convertible instruments has been eliminated and instead the application of the “if-converted” method is required for the determination of diluted net income (loss) per share on a GAAP and non-GAAP basis. Under the if-converted method, diluted net income (loss) per share for GAAP and non-GAAP would generally be calculated assuming that all of the 2025 Notes were converted solely into shares of Class A common
stock at the beginning of the reporting period, unless the result would be anti-dilutive, which would negatively affect diluted net income (loss) per share. The expected impact from the “if converted” method would add 15 million shares to the diluted share count. Under the if-converted method, some of the expected incremental dilution is offset as we are able to add back the after tax effected interest expense from the 2025 Notes, to the extent the result would not be anti-dilutive.
In addition, if the conditional conversion feature of the 2025 Notes is triggered, even if holders do not elect to convert their 2025 Notes, we could be required under applicable accounting rules to reclassify all or a portion of
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the outstanding
principal of the 2025 Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
The Capped Call transactions may affect the value of the 2025 Notes and our Class A Common Stock and we are subject to counterparty risk with respect to Capped Call transactions.
In connection with the pricing of the 2025 Notes, we entered into privately negotiated capped call transactions, or Capped Calls, with one or more financial institutions. The Capped Calls are expected generally to reduce the potential economic dilution to holders of our Class A common stock upon any conversion of the 2025 Notes, with such reduction and/or offset subject to a cap.
The capped call counterparties and/or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives
with respect to our Class A common stock and/or purchasing or selling our Class A common stock or other securities of ours in secondary market transactions prior to the maturity of the 2025 Notes (and are likely to do so during any observation period related to a conversion of the 2025 Notes or following an repurchase of the 2025 Notes by the Company on any fundamental change repurchase date or otherwise). This activity could also cause or avoid an increase or a decrease in the market price of our Class A common stock or the 2025 Notes.
The potential effect, if any, of these transactions and activities on the trading price of our Class A common stock or the 2025 Notes will depend in part on market conditions. Any of these activities could adversely affect the trading price of our Class A common stock or the 2025 Notes.
Additionally,
we will be subject to the risk that the capped call counterparties might default under the Capped Calls. Our exposure to the credit risk of the capped call counterparties is not secured by any collateral. Global economic conditions have in the recent past resulted in, and may again result in, the actual or perceived failure or financial difficulties of many financial institutions. If the capped call counterparties become subject to insolvency proceedings, we will become an unsecured creditor in those proceedings, with a claim equal to our exposure at that time under our transactions with the capped call counterparties. Our exposure will depend on many factors, but, generally, an increase in our exposure will be correlated to an increase in the market price of our Class A common stock. In addition, upon a default by the capped call counterparties, we may suffer more dilution than we currently anticipate with respect to our Class A common
stock. We can provide no assurances as to the financial stability or viability of the capped call counterparties to the Capped Calls.
General Risk Factors
Our effective tax rate and the intended tax benefits of our corporate structure and intercompany arrangements depend on the application of the tax laws of various jurisdictions and on how we operate our business.
We are subject to income taxes in the United States and various jurisdictions outside the United States. Our effective tax rate could fluctuate due to changes in the mix of earnings and losses in countries with differing statutory tax rates. For example, our effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates. Our tax
expense could also be affected by changes in non-deductible expenses, changes in excess tax benefits related to exercises and vesting of stock-based expense, and the applicability of withholding taxes.
Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. Our future effective tax rate could be unfavorably affected by changes in the tax rates in jurisdictions where our income is earned, by changes in, or our interpretation, of tax rules and regulations in the jurisdictions in which we do business, by unanticipated decreases in the amounts of jurisdictional earnings, or by changes in the valuation of our deferred tax assets and liabilities. The United States, the European Commission, countries in the European Union, Australia, and other countries where we do business have been considering changes in relevant tax, accounting and other laws, regulations and interpretations,
including changes to tax laws applicable to corporate multinationals. These potential changes could adversely affect our effective tax rates or result in additional tax expense and other costs to us.
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In addition, we are subject to the examination of our income tax returns by the United States Internal Revenue Service (IRS) and other domestic and foreign tax authorities. These tax examinations are expected to focus on our intercompany transfer pricing practices as well as other matters. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and other taxes and have reserved for adjustments that may result from the current examinations. We cannot provide assurance that the final determination
of any of these examinations will not have an adverse effect on our operating results and financial position.
Our reported financial results may be negatively impacted by the changes in the accounting principles generally accepted in the United States.
Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board (FASB), the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and may even affect the reporting of transactions completed before the announcement or effectiveness of a change. Other companies in our industry may apply these accounting principles differently than we do, which may affect the comparability of our condensed consolidated financial statements.
If
our estimates or judgments relating to our critical accounting policies and estimates prove to be incorrect, our operating results could be adversely affected.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the 2021 Annual Report in the section titled Management's Discussion and Analysis of Financial Condition and Results of Operations. The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Our operating results may be adversely affected if
our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in our stock price. Significant estimates and assumptions made by management include those related to revenue recognition (including sales incentives, sales returns and implied post contract support), inventory valuation, product warranty liabilities, the valuation, impairment and useful lives of long-lived assets (property and equipment, operating lease right-of-use assets, intangible assets and goodwill), the fair value of our convertible senior notes, and income taxes.
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Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities and Use of Proceeds
None.
Issuer Purchase of Equity Securities
Share repurchase activity for our Class A and Class B common stock during the three months ended June 30, 2022 was as follows (in thousands, except per share amounts):
Period
Total
Number of Shares Repurchased (1)
Average Price Paid per Share (2)
Total Number of Shares Purchased as Part of Publicly Announced Plans
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans (1)
April 1 - 30, 2022
—
$
—
—
$
90,000
May
1 -31, 2022
1,500
$
6.67
1,500
$
80,000
June 1 -30, 2022
302
$
5.83
302
$
78,238
Total
1,802
$
6.53
1,802
(1)
Represents shares repurchased pursuant to the stock repurchase program approved by our board of directors on January 27, 2022, authorizing the Company to repurchase up to $100.0 million of common stock.
(2) Represents the average price paid per share, inclusive of commissions.
Inline XBRL For the cover page of this Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Document Set
X
‡ As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Quarterly Report on Form 10-Q and are not deemed filed with the SEC and are not incorporated by reference
in any filing of GoPro, Inc. under the Securities Act of 1933 or the Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in such filings.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
