Edgar Filing: GoPro, Inc.

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________

Commission file number: 001-36514

GOPRO, INC.

(Exact name of registrant as specified in its charter)



Delaware		77-0629474
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
3000 Clearview Way San Mateo, California		94402
(Address of principal executive offices)		(Zip Code)

(650) 332-7600

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one).



Large accelerated filer þ	Accelerated filer ☐	Non-accelerated filer ☐
		(Do not check if a smaller reporting company)
Smaller reporting company ☐	Emerging growth company ☐

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

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

As of July 31, 2018, 112,834,367 and 35,956,784 shares of Class A and Class B common stock were outstanding, respectively.

GoPro, Inc.

Index



		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	40

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66
Item 3.	Defaults Upon Senior Securities	66
Item 4.	Mine Safety Disclosures	66
Item 5.	Other Information	66
Item 6.	Exhibits	67
	Signatures	68

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

GoPro, Inc.

Condensed Consolidated Balance Sheets

(unaudited)



(in thousands, except par values)	June 30, 2018			December 31, 2017
Assets
Current assets:
Cash and cash equivalents	$	114,843		$	202,504
Marketable securities	24,951			44,886
Accounts receivable, net	116,573			112,935
Inventory	86,095			150,551
Prepaid expenses and other current assets	37,657			62,811
Total current assets	380,119			573,687
Property and equipment, net	56,566			68,587
Intangible assets, net	18,511			24,499
Goodwill	146,459			146,459
Other long-term assets	23,900			37,014
Total assets	$	625,555		$	850,246

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	110,415		$	138,257
Accrued liabilities	129,854			213,030
Deferred revenue	15,279			19,244
Total current liabilities	255,548			370,531
Long-term taxes payable	19,448			21,188
Long-term debt	134,416			130,048
Other long-term liabilities	28,428			29,774
Total liabilities	437,840			551,541

Commitments, contingencies and guarantees (Note 9)

Stockholders’ equity:
Preferred stock, $0.0001 par value, 5,000 shares authorized; none issued	—			—
Common stock and additional paid-in capital, $0.0001 par value, 500,000 Class A shares authorized, 103,548 and 101,034 shares issued and outstanding, respectively; 150,000 Class B shares authorized, 35,958 and 35,966 shares issued and outstanding, respectively	874,939			854,452
Treasury stock, at cost, 10,710 and 10,710 shares, respectively	(113,613		)	(113,613		)
Accumulated deficit	(573,611		)	(442,134		)
Total stockholders’ equity	187,715			298,705
Total liabilities and stockholders’ equity	$	625,555		$	850,246

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

GoPro, Inc.

Condensed Consolidated Statements of Operations

(unaudited)



	Three months ended June 30,						Six months ended June 30,
(in thousands, except per share data)	2018			2017			2018			2017
Revenue	$	282,677		$	296,526		$	485,023		$	515,140
Cost of revenue	199,308			190,894			356,738			340,942
Gross profit	83,369			105,632			128,285			174,198
Operating expenses:
Research and development	38,225			55,497			89,204			121,663
Sales and marketing	60,256			56,678			109,426			124,534
General and administrative	15,724			18,440			35,230			41,199
Total operating expenses	114,205			130,615			233,860			287,396
Operating loss	(30,836		)	(24,983		)	(105,575		)	(113,198		)
Other income (expense):
Interest expense	(4,621		)	(3,784		)	(9,188		)	(4,598		)
Other income, net	(1,106		)	222			(929		)	383
Total other expense, net	(5,727		)	(3,562		)	(10,117		)	(4,215		)
Loss before income taxes	(36,563		)	(28,545		)	(115,692		)	(117,413		)
Income tax (benefit) expense	706			1,991			(2,076		)	24,273
Net loss	$	(37,269	)	$	(30,536	)	$	(113,616	)	$	(141,686	)

Net loss per share:
Basic	$	(0.27	)	$	(0.22	)	$	(0.82	)	$	(1.02	)
Diluted	$	(0.27	)	$	(0.22	)	$	(0.82	)	$	(1.02	)

Shares used to compute net loss per share:
Basic	139,166			136,288			138,515			139,575
Diluted	139,166			136,288			138,515			139,575

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

GoPro, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)



	Six months ended June 30,
(in thousands)	2018			2017
Operating activities:
Net loss	$	(113,616	)	$	(141,686	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	18,080			23,160
Stock-based compensation	20,834			24,360
Deferred income taxes	(625		)	(1,894		)
Non-cash restructuring charges	3,256			2,800
Non-cash interest expense	3,952			1,530
Other	(567		)	3,763
Changes in operating assets and liabilities:
Accounts receivable, net	(3,936		)	69,321
Inventory	64,456			40,484
Prepaid expenses and other assets	23,475			6,633
Accounts payable and other liabilities	(111,011		)	(178,536		)
Deferred revenue	(2,458		)	699
Net cash used in operating activities	(98,160		)	(149,366		)

Investing activities:
Purchases of property and equipment, net	(6,878		)	(10,112		)
Purchases of marketable securities	(14,896		)	—
Maturities of marketable securities	35,000			14,160
Sale of marketable securities	—			11,623
Net cash provided by investing activities	13,226			15,671

Financing activities:
Proceeds from issuance of common stock	3,425			6,629
Taxes paid related to net share settlement of equity awards	(3,752		)	(8,210		)
Proceeds from issuance of convertible senior notes	—			175,000
Prepayment of forward stock repurchase transaction	—			(78,000		)
Payment of deferred acquisition-related consideration	(2,450		)	(75		)
Payment of debt issuance costs	—			(5,250		)
Net cash provided by (used in) financing activities	(2,777		)	90,094
Effect of exchange rate changes on cash and cash equivalents	50			1,242
Net decrease in cash and cash equivalents	(87,661		)	(42,359		)
Cash and cash equivalents at beginning of period	202,504			192,114
Cash and cash equivalents at end of period	$	114,843		$	149,755

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

GoPro, Inc.

Notes to Condensed Consolidated Financial Statements

1. Summary of business and significant accounting policies

GoPro, Inc. and its subsidiaries (GoPro or the Company) is enabling the way people capture and share their lives from a perspective only achieved with a GoPro. What began as an idea to help athletes document themselves engaged in sport, GoPro has become a mobile storytelling solution that helps the world share itself through immersive content. To date, the Company’s cameras and mountable and wearable accessories have generated substantially all of its revenue. The Company sells its products globally through retailers, wholesale distributors and on its website. The Company’s global corporate headquarters are located in San Mateo, California.

Basis of presentation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The Company’s fiscal year ends on December 31, and its fiscal quarters end on March 31, June 30 and September 30. The condensed consolidated financial statements reflect all adjustments, which are normal and recurring in nature, that management believes are necessary for the fair statement of the Company's financial statements, but are not necessarily indicative of the results expected for the full fiscal year or any other future period. The condensed consolidated balance sheet at December 31, 2017 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, 2017. Except for accounting policies related to revenue recognition and income tax impacts of intra-entity asset transfers that were updated as a result of adopting Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, and ASU 2016-16, Income Taxes — Intra-Entity Transfers of Assets Other Than Inventory, there have been no significant changes in the Company’s accounting policies from those disclosed in its Annual Report.

Principles of consolidation. These condensed consolidated financial statements include all the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of estimates. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the Company’s condensed consolidated financial statements and accompanying notes. Significant estimates and assumptions made by management include those related to revenue recognition (including sales incentives, sales returns and implied post contract support (PCS)), stock-based compensation, inventory valuation, product warranty liabilities, the valuation and useful lives of long-lived assets (property and equipment, intangible assets and goodwill) and income taxes. The Company bases its estimates and assumptions on historical experience and on various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from management’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations could be affected.

Comprehensive income (loss). For all periods presented, comprehensive income (loss) approximated net income (loss). Therefore, the condensed consolidated statements of comprehensive income (loss) have been omitted.

Accounts receivable and allowance for doubtful accounts. 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, 2018 and December 31, 2017 was $0.6 million and $0.8 million, respectively.

Warranty. The Company records a liability for estimated product warranty costs at the time product revenue is recognized. The Company’s standard warranty obligation to its end-users generally provides a 12-month warranty coverage on all of its products except in the European Union where the Company provides a 2-year warranty. 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

GoPro, Inc.

Notes to Condensed Consolidated Financial Statements

and expectations of future conditions. The warranty obligation is affected by product failure rates and the related use of materials, labor costs and freight incurred in correcting any product failure.

Revenue recognition. Revenue is primarily comprised of product revenue, net of returns and variable consideration, including sales incentives provided to customers. The Company derives substantially all of its revenue from the sale of cameras, drones, mounts and accessories and the related implied post contract support to customers. The Company recognizes revenue when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. For most of the Company’s revenue, revenue is recognized at the time products are delivered and when collection is deemed probable. For customers who purchase products directly from the Company’s website, the Company retains a portion of the risk of loss on these sales during transit, which are accounted for as fulfillment costs. The Company provides sales commissions to internal and external sales representatives which are earned in the period in which revenue is recognized. As a result, the Company expenses such costs as incurred under ASU 2014-19.

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 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 refund 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 other factors. Return rates may fluctuate over time but are sufficiently predictable to allow the Company to estimate expected future product returns.

The Company’s camera and drone sales contain multiple performance obligations that generally include the following three separate obligations: a) a hardware component (camera or drone) and the embedded firmware essential to the functionality of the hardware component delivered at the time of sale, b) the implicit right to the Company's downloadable free apps and software solutions, and c) the implied right for the customer to receive support after the initial sale (post contract support or PCS). 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 and telephone support. The Company allocates the transaction price to PCS based on a cost-plus method. The transaction price is allocated to the remaining performance obligations on a residual value method. The Company’s process to allocate the transaction price considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each deliverable, including: the level of support provided to customers, estimated costs to provide the Company’s support, the amount of time and cost that is allocated to the Company’s efforts to develop the undelivered elements and market trends in the pricing for similar offerings.

The transaction prices allocated to the delivered hardware, related embedded firmware and free software solutions are recognized as revenue at the time of sale provided the conditions for recognition of revenue have been met. The transaction price allocated to PCS is deferred and recognized as revenue on a straight-line basis over the estimated term of the support period, which is estimated to be 15 months based on historical experience. Deferred revenue as of June 30, 2018 and December 31, 2017 also included immaterial amounts related to the Company’s GoPro Care and GoPro Plus fee-based service offerings. The Company’s deferred revenue balance related to PCS was $13.8 million as of June 30, 2018 and the Company recognized $5.2 million and $10.7 million of related revenue during the three and six months ended June 30, 2018.

Sales 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.

Sales taxes. Sales taxes collected from customers and remitted to respective governmental authorities are recorded as liabilities and are not included in revenue.

GoPro, Inc.

Notes to Condensed Consolidated Financial Statements

Segment information. The Company operates as one operating segment as it only reports financial information on an aggregate and consolidated basis to its Chief Executive Officer, who is the Company’s chief operating decision maker.

GoPro, Inc.

Notes to Condensed Consolidated Financial Statements

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
Income Taxes ASU No. 2016-16 (Topic 740)	This standard requires entities to recognize the income tax consequences of intra-entity asset transfers when they occur, which removes the exception to postpone recognition until the asset has been sold to an outside party.	January 1, 2018	Adoption of the standard resulted in the recognition of previously unrecognized deferred charges using a modified retrospective method. The Company recorded a reversal of $15.0 million of deferred charges, an increase to U.S. deferred tax assets of $1.2 million with a corresponding U.S. valuation allowance of $1.2 million. The net impact to equity was an increase in the accumulated deficit of approximately $15.0 million upon adoption.
Stock Compensation ASU No. 2017-09 (Topic 718)	This standard clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under this standard, modification accounting is required only if the fair value, the vesting conditions or the classification of an award as equity or liability changes as a result of the change in terms or conditions.	January 1, 2018	The Company adopted ASU 2017-09 which did not impact its condensed consolidated financial statements and related disclosures. The Company adopted the amendment on a prospective basis.
Revenue from Contracts with Customers ASU No. 2014-09, 2015-14, 2016-08, 2016-10 and 2016-12 (Topic 606)	The updated revenue standard establishes principles for recognizing revenue and develops a common revenue standard for all industries. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard requires that entities disclose the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.	January 1, 2018	Under the updated revenue standard, the recognition of product revenue at the time the product is delivered, and PCS revenue on a straight-line basis remains consistent with the Company’s previous revenue policy. Sales incentives are considered variable consideration under the new standard and are accounted for as a reduction to the transaction price. This change resulted in a reduction of revenue being recorded earlier than under the previous guidance. As a result of the adoption of the new standard, the Company recorded a $2.9 million increase to its accumulated deficit on January 1, 2018, of which $4.9 million related to certain estimated sales incentives which would have been recognized at the time the product was shipped in the prior period. Additionally, for customers who purchased products directly from the Company’s website, the new standard provides for a policy election whereby the Company has recorded revenue when the related product was shipped. This change resulted in recognition of revenue earlier than under previous guidance. Upon adoption, the Company’s accumulated deficit decreased by $2.0 million related to revenue that would have been recognized in the prior period from the Company’s website sales that had shipped but had not been delivered as of December 31, 2017. In addition, the Company recorded a $1.0 million increase to deferred tax assets and a corresponding $1.0 million increase in valuation allowance. Additionally, under the new standard, the Company reclassed its refund liability from an offset to accounts receivable to an increase in accrued liabilities, which increased the Company’s days sales outstanding. The Company adopted the standard using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Prior periods were not retrospectively adjusted. Refer below for the impact on each financial statement line item as of and for the three and six months ended June 30, 2018 due to the adoption of the standard.

GoPro, Inc.

Notes to Condensed Consolidated Financial Statements

The cumulative effect of the changes made to the Company’s condensed consolidated January 1, 2018 balance sheet for the adoption of ASU 2014-09, Revenue from Contracts with Customers and ASU 2016-16, Income Taxes — Intra-Entity Transfers of Assets Other Than Inventory, were as follows:



(in thousands)	Balance at December 31, 2017			Adjustment due to ASU 2014-09			Adjustment due to ASU 2016-16			Balance at January 1, 2018
Accumulated deficit	$	(442,134	)	$	(2,872	)	$	(14,990	)	$	(459,996	)

As mentioned above, the adoption of ASU 2014-09 impacted the timing of revenue recognized related to certain sales incentives and sales from the Company’s website, which impacted the revenue and current deferred revenue financial statement line items. Additionally, under ASU 2014-09, the Company presents an estimated refund liability along with a right to recover asset for future product returns, which impacts the accounts receivable, net, inventory, net, prepaid expenses and other assets, and accrued liabilities financial statement line items resulting in an increase in the Company’s accounts receivable days sales outstanding (DSO) calculation. The above adjustments do not impact net cash used in operating activities, however, they do impact the changes in operating assets and liabilities for the related accounts within the disclosure of operating activities on the statement of cash flow. Refer to the tables below for the quantitative impact to the Company’s financial statements for the periods ended June 30, 2018 due to the adoption of ASU 2014-09 (ASC 606).



	Three months ended June 30, 2018							Six months ended June 30, 2018
(in thousands)	As Reported Under ASC 606		Effect of Change			Balance Under ASC 605		As Reported Under ASC 606		Effect of Change		Balance Under ASC 605
Revenue	$	282,677	$	(3,691	)	$	278,986	$	485,023	$	3,265	$	488,288



	As of June 30, 2018
(in thousands)	As Reported Under ASC 606		Effect of Change			Balance Under ASC 605
Accounts receivable, net	$	116,573	$	(21,673	)	$	94,900
Inventory, net	86,095		9,903			95,998
Prepaid expenses and other current assets	37,657		(9,903		)	27,754
Accrued liabilities	129,854		(21,673		)	108,181
Current deferred revenue	15,279		1,122			16,401

GoPro, Inc.

Notes to Condensed Consolidated Financial Statements



Standard	Description	Expected date of adoption	Effect on the condensed consolidated financial statements or other significant matters
Standards not yet adopted
Leases ASU No. 2016-02(Topic 842)	This standard requires lessees to put most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. Lessees would recognize a right-to-use asset and lease liability for all leases with terms of more than 12 months. The new standard should be applied on a modified retrospective basis or cumulative effect transition method.	January 1, 2019	The Company is currently in the process of identifying the population of potential lease arrangements and evaluating these arrangements in the context of the new guidance. The Company expects that most of its operating lease commitments will result in the recognition of a right-of-use asset and lease liability, which will increase total assets and liabilities on the Company’s condensed consolidated financial statements.
Intangible - Goodwill and Other ASU No. 2017-04 (Topic 350)	This standard simplifies the accounting for goodwill and removes Step 2 of the annual goodwill impairment test. Upon adoption, goodwill impairment will be determined based on the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017, and requires a prospective transition method.	January 1, 2020	The Company does not expect that the adoption of this standard will have a material impact on its condensed consolidated financial statements and related disclosures.

Although there are several other new accounting standards issued or proposed by the FASB, which the Company has adopted or will adopt, as applicable, the Company does not believe any of these additional accounting pronouncements has had or will have a material impact on its financial statements.

2. Fair value measurements

The Company’s assets that are measured at fair value on a recurring basis within the fair value hierarchy are summarized as follows:



	June 30, 2018						December 31, 2017
(in thousands)	Level 1		Level 2		Total		Level 1		Level 2		Total
Cash equivalents ⁽¹⁾:
Money market funds	$	38,289	$	—	$	38,289	$	25,251	$	—	$	25,251
Commercial paper	—		—		—		14,981		—		14,981
Corporate debt securities	—		—		—		—		2,500		2,500
Agency securities	—		—		—		—		4,999		4,999
Total cash equivalents	$	38,289	$	—	$	38,289	$	40,232	$	7,499	$	47,731
Marketable securities:
U.S. treasury securities	$	—	$	—	$	—	$	—	$	4,995	$	4,995
Commercial paper	12,465		—		12,465		19,888		—		19,888
Corporate debt securities	—		12,486		12,486		—		20,003		20,003
Total marketable securities	$	12,465	$	12,486	$	24,951	$	19,888	$	24,998	$	44,886

⁽¹⁾ Included in cash and cash equivalents in the accompanying condensed consolidated balance sheets. Cash balances were $76.6 million and $154.8 million as of June 30, 2018 and December 31, 2017, respectively.

There were no transfers of financial assets between levels for the periods presented.

Cash equivalents and marketable securities are classified as Level 1 or Level 2 because the Company uses quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine

GoPro, Inc.

Notes to Condensed Consolidated Financial Statements

their fair value. The contractual maturities of available-for-sale marketable securities as of June 30, 2018 and December 31, 2017 were all less than one year in duration. At June 30, 2018 and December 31, 2017, the Company had no financial assets or liabilities that were classified as Level 3, which are valued based on inputs supported by little or no market activity.

At June 30, 2018 and December 31, 2017, 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 $175.0 million principal amount of Convertible Senior Notes due 2022 (Notes) (see Note 4, Financing Arrangements). The estimated fair value of the 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 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 Notes, of $159.3 million, 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 Notes.

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.

3. Condensed consolidated financial statement details

The following sections and tables provide details of selected balance sheet items.

Inventory



(in thousands)	June 30, 2018		December 31, 2017
Components	$	21,349	$	18,995
Finished goods	64,746		131,556
Total inventory	$	86,095	$	150,551

Property and equipment, net



(in thousands)	June 30, 2018			December 31, 2017
Leasehold improvements	$	66,847		$	67,713
Production, engineering and other equipment	47,911			47,502
Tooling	25,059			24,871
Computers and software	20,822			20,636
Furniture and office equipment	15,132			14,895
Tradeshow equipment and other	7,319			7,237
Construction in progress	531			347
Gross property and equipment	183,621			183,201
Less: Accumulated depreciation and amortization	(127,055		)	(114,614		)
Property and equipment, net	$	56,566		$	68,587

GoPro, Inc.

Notes to Condensed Consolidated Financial Statements

Intangible assets



	June 30, 2018
(in thousands)	Gross carrying value		Accumulated amortization			Net carrying value
Purchased technology	$	49,901	$	(32,005	)	$	17,896
In-process research and development (IPR&D)	615		—			615
Total intangible assets	$	50,516	$	(32,005	)	$	18,511



	December 31, 2017
(in thousands)	Gross carrying value		Accumulated amortization			Net carrying value
Purchased technology	$	49,901	$	(26,017	)	$	23,884
IPR&D	615		—			615
Total intangible assets	$	50,516	$	(26,017	)	$	24,499

For the three and six months ended June 30, 2018 and 2017, the Company did not record any impairment charges for in-process research and development (IPR&D) assets. As of June 30, 2018, technological feasibility has not been established for the remaining IPR&D assets, which have no alternative future use and as such, continue to be accounted for as indefinite-lived intangible assets.

Amortization expense was $3.3 million and $2.2 million for the three months ended June 30, 2018 and 2017, respectively, and $6.0 million and $4.5 million for the six months ended June 30, 2018 and 2017, respectively. At June 30, 2018, expected amortization expense of intangible assets with definite lives for future periods is as follows:



(in thousands)	Total
Year ending December 31,
2018 (remaining 6 months)	$	5,326
2019	7,458
2020	4,242
2021	870
2022	—
	$	17,896

Other long-term assets



(in thousands)	June 30, 2018		December 31, 2017
Point of purchase (POP) displays	$	13,844	$	16,451
Long-term deferred tax assets	1,239		825
Deposits and other	8,817		19,738
Other long-term assets	$	23,900	$	37,014

GoPro, Inc.

Notes to Condensed Consolidated Financial Statements

Accrued liabilities



(in thousands)	June 30, 2018		December 31, 2017
Accrued payables ⁽¹⁾	$	31,294	$	44,582
Employee related liabilities ⁽¹⁾	14,186		24,945
Accrued sales incentives	34,398		89,549
Refund liability	21,673		—
Warranty liability	10,230		9,934
Customer deposits	2,622		8,700
Income taxes payable	188		1,247
Purchase order commitments	4,899		6,162
Inventory received	4,702		14,470
Other	5,662		13,441
Accrued liabilities	$	129,854	$	213,030


⁽¹⁾	See Note 11 Restructuring charges, for amounts associated with restructuring liabilities.

Product warranty

The following table summarizes the warranty liability activity:



	Three months ended June 30,						Six months ended June 30,
(in thousands)	2018			2017			2018			2017
Beginning balance	$	9,407		$	11,442		$	10,373		$	11,945
Charged to cost of revenue	7,108			3,181			13,108			7,407
Settlement of warranty claims	(5,823		)	(4,649		)	(12,789		)	(9,378		)
Ending balance	$	10,692		$	9,974		$	10,692		$	9,974

4. Financing Arrangements

Credit Facility

In March 2016, the Company entered into a Credit Agreement (Credit Agreement) with certain banks which provides for a secured revolving credit facility (Credit Facility) under which the Company may borrow up to an aggregate amount of $250.0 million. The Company and its lenders may increase the total commitments under the Credit Facility to up to an aggregate amount of $300.0 million, subject to certain conditions. The Credit Facility will terminate and any outstanding borrowings become due and payable in March 2021.

The amount that may be borrowed under the Credit Facility is determined at periodic intervals and is based upon the Company’s inventory and accounts receivable balances. Borrowed funds accrue interest, at the Company’s election, based on an annual rate of (a) London Interbank Offered Rate (LIBOR) or (b) the administrative agent’s base rate, plus an applicable margin of between 1.50% and 2.00% for LIBOR rate loans, and between 0.50% and 1.00% for base rate loans. The Company is required to pay a commitment fee on the unused portion of the Credit Facility of 0.25% or 0.375% per annum, based on the level of utilization of the Credit Facility. Amounts owed under the Credit Agreement and related credit documents are guaranteed by GoPro, Inc. and its material subsidiaries. GoPro, Inc. and its Cayman and Netherlands subsidiaries have also granted security interests in substantially all of their assets to collateralize this obligation.

The Credit Agreement contains customary covenants, such as financial statement reporting requirements and limiting the ability of the Company and its subsidiaries to pay dividends or incur debt, create liens and encumbrances, make investments, and redeem or repurchase stock. The Company is required to maintain a

GoPro, Inc.

Notes to Condensed Consolidated Financial Statements

minimum fixed charge coverage ratio if and when the unborrowed availability under the Credit Facility is less than the greater of $25.0 million or 10.0% of the borrowing base at such time. The Credit Agreement also contains customary events of default, such as the failure to pay obligations when due, initiation of bankruptcy or insolvency proceedings, or defaults on certain other indebtedness. Upon an event of default, the lenders may, subject to customary cure rights, require the immediate payment of all amounts outstanding and foreclose on collateral.

At June 30, 2018 and December 31, 2017, the Company could borrow up to approximately $59.1 million and $118.0 million, respectively, under the Credit Facility, and was in compliance with all financial covenants contained in the Credit Agreement. The Company has made no borrowings from the Credit Facility to date.

Convertible Notes

In April 2017, the Company issued $175.0 million aggregate principal amount of 3.50% Convertible Senior Notes due 2022 (Notes). The Notes are senior, unsecured obligations of GoPro and mature on April 15, 2022 (Maturity Date), unless earlier repurchased or converted into shares of Class A common stock under certain circumstances. The Notes are convertible into cash, shares of the Company’s Class A common stock, or a combination thereof, at the Company’s election, at an initial conversion rate of 94.0071 shares of Class A common stock per $1,000 principal amount of the Notes, which is equivalent to an initial conversion price of approximately $10.64 per share of common stock, subject to adjustment. Based on current and projected liquidity, the Company has the intent and ability to deliver cash up to the principal amount of the Notes then outstanding upon conversion. The Company pays interest on the Notes semi-annually in arrears on April 15 and October 15 of each year.

The $175.0 million of proceeds received from the issuance of the Notes were allocated between long-term debt (liability component) of $128.3 million and additional paid-in-capital (equity component) of $46.7 million on the condensed consolidated balance sheet. The fair value of the liability component was measured using rates determined for similar debt instruments without a conversion feature. The carrying amount of the equity component, representing the conversion option, was determined by deducting the fair value of the liability component from the aggregate face value of the Notes. The liability component will be accreted up to the face value of the Notes of $175.0 million, which will result in additional non-cash interest expense being recognized in the condensed consolidated statements of operations through the Notes’ Maturity Date. The accretion of the Notes to par and debt issuance cost is amortized into interest expense over the term of the Note using an effective interest rate of approximately 10.5%. The equity component will not be remeasured as long as it continues to meet the conditions for equity classification.

The Company incurred approximately $5.7 million of issuance costs related to the issuance of the Notes, of which $4.2 million and $1.5 million were recorded to long-term debt and additional paid-in capital, respectively. The $4.2 million of issuance costs recorded as long-term debt on the condensed consolidated balance sheet are being amortized over the five-year contractual term of the Notes using the effective interest method.

The Company may not redeem the Notes prior to the Maturity Date and no sinking fund is provided for the Notes. The Indenture includes customary terms and covenants, including certain events of default after which the Notes may be due and payable immediately.

Holders have the option to convert the Notes in multiples of $1,000 principal amount at any time prior to January 15, 2022, but only in the following circumstances:


•	during any calendar quarter beginning after the calendar quarter ending on September 30, 2017, if the last reported sale price of Class A common stock for at least 20 trading days (whether or not consecutive) during the last 30 consecutive trading days of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price of the Notes on each applicable trading day;


•	during the five-business day period following any five consecutive trading day period in which the trading price for the Notes is less than 98% of the product of the last reported sale price of Class A common stock and the conversion rate for the Notes on each such trading day; or


•	upon the occurrence of specified corporate events.

At any time on or after January 15, 2022 until the second scheduled trading day immediately preceding the Maturity Date of the Notes on April 15, 2022, a holder may convert its Notes, in multiples of $1,000 principal

GoPro, Inc.

Notes to Condensed Consolidated Financial Statements

amount. Holders of the Notes who convert their Notes in connection with a make-whole fundamental change (as defined in the Indenture) are, under certain circumstances, entitled to an increase in the conversion rate. In addition, in the event of a fundamental change prior to the Maturity Date, holders will, subject to certain conditions, have the right, at their option, to require the Company to repurchase for cash all or part of the Notes at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest up to, but excluding, the repurchase date.

As of June 30, 2018, the outstanding principal on the Notes was $175.0 million, the unamortized debt discount was $37.4 million, the unamortized debt issuance cost was $3.2 million and the net carrying amount of the liability component was $134.4 million, which was recorded as long-term debt within the condensed consolidated balance sheet. For the three months ended June 30, 2018 and 2017, the Company recorded interest expense of $1.5 million and $1.2 million, respectively, for contractual coupon interest, $0.2 million for amortization of debt issuance costs, and $2.0 million and $1.5 million, respectively, for amortization of the debt discount. For the six months ended June 30, 2018 and 2017, the Company recorded interest expense of $3.1 million and $1.2 million, respectively, for contractual coupon interest, $0.4 million and $0.2 million, respectively, for amortization of debt issuance costs, and $4.0 million and $1.5 million, respectively, for amortization of the debt discount.

In connection with the offering, the Company entered into a prepaid forward stock repurchase transaction (Prepaid Forward) with a financial institution (Forward Counterparty). Pursuant to the Prepaid Forward, the Company used approximately $78.0 million of the net proceeds from the offering of the Notes to fund the Prepaid Forward. The aggregate number of shares of the Company’s Class A common stock underlying the Prepaid Forward was approximately 9.2 million. The expiration date for the Prepaid Forward is April 15, 2022, although it may be settled earlier in whole or in part. Upon settlement of the Prepaid Forward, at expiration or upon any early settlement, the Forward Counterparty will deliver to the Company the number of shares of Class A common stock underlying the Prepaid Forward or the portion thereof being settled early. The shares purchased under the Prepaid Forward are treated as treasury stock on the condensed consolidated balance sheet (and not outstanding for purposes of the calculation of basic and diluted earnings per share), but will remain outstanding for corporate law purposes, including for purposes of any future stockholders’ votes, until the Forward Counterparty delivers the shares underlying the Prepaid Forward to the Company. The Company’s Prepaid Forward hedge transaction exposes the Company to credit risk to the extent that its counterparty may be unable to meet the terms of the transaction. The Company mitigates this risk by limiting its counterparty to a major financial institution.

5. Employee benefit plans

Equity incentive plans. The Company has outstanding equity grants from its three stock-based employee compensation plans: the 2014 Equity Incentive Plan (2014 Plan), the 2010 Equity Incentive Plan (2010 Plan) and the 2014 Employee Stock Purchase Plan (ESPP). No new options or awards have been granted under the 2010 Plan since June 2014. Outstanding options and awards under the 2010 Plan continue to be subject to the terms and conditions of the 2010 Plan. Options granted under the 2014 Plan generally expire within ten years from the date of grant and generally vest over one to four years. Restricted stock units (RSUs) granted under the 2014 Plan generally vest over two to four years based upon continued service and are settled at vesting in shares of the Company’s Class A common stock. Performance stock units (PSUs) granted under the 2014 Plan generally vest over three years based upon continued service and the Company achieving certain revenue targets, and are settled at vesting in shares of the Company’s Class A common stock. The ESPP allows eligible employees to purchase shares of the Company’s Class A common stock through payroll deductions at a price equal to 85% of the lesser of the fair market value of the stock as of the first date or the ending date of each six month offering period. For additional information regarding the Company’s equity incentive plans, refer to the audited financial statements contained in the 2017 Annual Report.

GoPro, Inc.

Notes to Condensed Consolidated Financial Statements

Stock options

A summary of the Company’s stock option activity for the six months ended June 30, 2018 is as follows:



	Shares (in thousands)		Weighted- average exercise price		Weighted-average remaining contractual term (in years)	Aggregate intrinsic value (in thousands)
Outstanding at December 31, 2017	9,809		$	11.16	6.00	$	19,971
Granted	1,166		5.75
Exercised	(542	)	0.75
Forfeited/Cancelled	(1,412	)	14.79
Outstanding at June 30, 2018	9,021		$	10.52	4.09	$	14,367

Vested and expected to vest at June 30, 2018	9,011		$	10.52	4.08	$	14,367
Exercisable at June 30, 2018	7,287		$	11.19	2.84	$	13,558

The aggregate intrinsic value of the stock options outstanding as of June 30, 2018 represents the value of the Company’s closing stock price on June 30, 2018 in excess of the exercise price multiplied by the number of options outstanding.

Restricted stock units

A summary of the Company’s RSU activity for the six months ended June 30, 2018 is as follows:



	Shares (in thousands)		Weighted- average grant date fair value
Non-vested shares at December 31, 2017	9,483		$	11.87
Granted	945		5.82
Vested	(1,996	)	10.95
Forfeited	(2,527	)	12.00
Non-vested shares at June 30, 2018	5,905		$	11.16

In June 2014, the Company granted an award of 4.5 million RSUs covering shares of the Company’s Class B common stock to the Company’s CEO (CEO RSUs), which included 1.5 million RSUs that vested immediately upon grant and 3.0 million RSUs that were subject to both a market-based vesting condition and a three year service-based vesting condition. The market-based condition was achieved in January 2015. Stock-based compensation expense related to the CEO RSUs was zero and $0.1 million, respectively, for the three months ended June 30, 2018 and 2017, and zero and $0.6 million, respectively, for the six months ended June 30, 2018 and 2017, respectively.

GoPro, Inc.

Notes to Condensed Consolidated Financial Statements

Performance stock units

In May 2018, the Company granted PSUs to certain executives and employees. PSUs are subject to both a one year performance-based vesting condition and a three year service-based vesting condition. The performance-based condition is related to the Company achieving certain revenue targets.

A summary of the Company’s PSU activity for the six months ended June 30, 2018 is as follows:



	Shares (in thousands)	Weighted- average grant date fair value
Non-vested shares at December 31, 2017	—	$	—
Granted	265	5.74
Vested	—	—
Forfeited	—	—
Non-vested shares at June 30, 2018	265	$	5.74

Employee stock purchase plan. For the six months ended June 30, 2018 and 2017, the Company issued 632,046 and 625,811 shares under its ESPP, respectively, at weighted average prices of $4.78 and $8.02, respectively.

Stock-based compensation expense. The Company measures compensation expense for all stock-based payment awards based on the estimated fair values on the date of the grant. The fair value of stock options granted and ESPP 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. The Company accounts for forfeitures of stock-based payment awards in the period they occur. There have been no significant changes in the Company’s valuation assumptions from those disclosed in its 2017 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)	2018		2017		2018		2017
Cost of revenue	$	490	$	415	$	872	$	910
Research and development	4,960		5,390		9,965		11,072
Sales and marketing	2,313		1,995		5,060		4,686
General and administrative	2,248		3,435		4,937		7,692
Total stock-based compensation expense	$	10,011	$	11,235	$	20,834	$	24,360

The income tax benefit related to stock-based compensation expense was zero for the three and six months ended June 30, 2018 and 2017 due to a full valuation allowance on the Company’s U.S. net deferred tax assets (see Note 7 Income taxes, below).

At June 30, 2018, total unearned stock-based compensation of $56.7 million related to stock options, RSUs, PSUs and ESPP shares is expected to be recognized over a weighted average period of 1.9 years.

GoPro, Inc.

Notes to Condensed Consolidated Financial Statements

6. Net loss per share

The following table presents the calculations of basic and diluted net loss per share:



	Three months ended June 30,						Six months ended June 30,
(in thousands, except per share data)	2018			2017			2018			2017
Numerator:
Net loss	$	(37,269	)	$	(30,536	)	$	(113,616	)	$	(141,686	)

Denominator:
Weighted-average common shares—basic for Class A and Class B common stock	139,166			136,288			138,515			139,575
Effect of dilutive stock-based awards	—			—			—			—
Weighted-average common shares—diluted for Class A and Class B common stock	139,166			136,288			138,515			139,575

Net loss per share
Basic	$	(0.27	)	$	(0.22	)	$	(0.82	)	$	(1.02	)
Diluted	$	(0.27	)	$	(0.22	)	$	(0.82	)	$	(1.02	)

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)	2018	2017	2018	2017
Effect of anti-dilutive stock-based awards	15,233	19,474	16,411	20,235

The Company’s Notes mature on April 15, 2022, unless earlier repurchased or converted into shares of Class A common stock under certain circumstances as described further in Note 4, Financing Arrangements, above. The Notes are convertible into cash, shares of the Company’s Class A common stock, or a combination thereof, at the Company’s election. Based on the Company’s current and projected liquidity, the Company has the intent and ability to deliver cash up to the principal amount of the Notes subject to conversion. As such, no shares associated with the Note conversion were included in the Company’s weighted-average number of common shares outstanding for any periods presented. While the Company has the intent and ability to deliver cash up to the principal amount, the maximum number of shares issuable upon conversion of the Notes is 20.6 million shares of Class A common stock. Additionally, the calculation of weighted-average shares outstanding for the three months ended June 30, 2018 and 2017 excludes approximately 9.2 million shares and 8.1 million shares, respectively, and for the six months ended June 30, 2018 and 2017, excludes approximately 9.2 million shares and 4.1 million shares, respectively, effectively repurchased and held in treasury stock on the condensed consolidated balance sheet as a result of the Prepaid Forward transaction entered into in connection with the Note offering.

The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to ten votes per share. Each share of Class B common stock is convertible at any time at the option of the stockholder into one share of Class A common stock and has no expiration date. Each share of Class B common stock will convert automatically into one share of Class A common stock upon the date when the outstanding shares of Class B common stock represent less than 10% of the aggregate number of shares of common stock then outstanding. Class A common stock is not convertible into Class B common stock. The computation of the diluted net loss per share of Class A common stock assumes the conversion of Class B common stock.

GoPro, Inc.

Notes to Condensed Consolidated Financial Statements

7. Income taxes

The Company’s income tax expense and the resulting effective tax rate are based upon the estimated annual effective tax rates applicable for the respective period, including losses generated in countries where the Company is projecting annual losses for which deferred tax assets are not anticipated to be recognized. In the fourth quarter of 2016, the Company recorded a full valuation allowance against its net U.S. deferred tax assets, and for the foreseeable future anticipates providing a valuation allowance against any additional deferred tax assets until such time it is more likely than not the benefit of these deferred tax assets may be recognized.

The Company’s tax provision and the resulting effective tax rate for interim periods is determined based upon its estimated annual effective tax rate, adjusted for the effect of discrete items arising in that quarter. The Company also includes jurisdictions with a projected loss for the year (or year-to-date loss) where the Company cannot or does not expect to recognize a tax benefit from its estimated annual effective tax rate. The impact of such inclusions could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings or losses versus annual projections. 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)	2018			2017			2018			2017
Income tax (benefit) expense	$	706		$	1,991		$	(2,076	)	$	24,273
Effective tax rate	(1.9		)%	(7.0		)%	1.8		%	(20.7		)%

The Company recorded an income tax expense of $0.7 million for the three months ended June 30, 2018 on a pre-tax net loss of $36.6 million, which resulted in a negative effective tax rate of 1.9%. The Company’s income tax expense for the three months ended June 30, 2018 was composed of $0.5 million of tax expense incurred on pre-tax income in profitable foreign jurisdictions, and $1.5 million of net non-deductible equity tax expense, partially offset by a $1.3 million net decrease in the valuation allowance. The Company recorded an income tax benefit of $2.1 million for the six months ended June 30, 2018 on a pre-tax net loss of $115.7 million, which resulted in an effective tax rate of 1.8%. The Company’s income tax benefit for the six months ended June 30, 2018 was composed of $0.9 million of tax expenses incurred on pre-tax income in profitable foreign jurisdictions, one-time items that included $10.9 million of tax benefit primarily relating to the conclusion of the IRS audit and the release of uncertain tax positions, $4.4 million of tax benefit relating to restructuring expenses, $2.6 million of net non-deductible equity tax expense, and $0.3 million tax expense relating to other items, partially offset by $9.4 million net increase in the valuation allowance.

For the three months ended June 30, 2017, the Company recorded an income tax provision of $2.0 million on a pre-tax net loss of $28.5 million, which resulted in a negative effective tax rate of 7.0%. The Company recorded an income tax provision of $24.3 million for the six months ended June 30, 2017 on a pre-tax net loss of $117.4 million, which resulted in a negative effective tax rate of 20.7%. The Company’s income tax provision for the three and six months ended June 30, 2017 were principally composed of tax expenses incurred on pre-tax income in profitable foreign jurisdictions. Due to certain tax structure changes effective January 1, 2018, including the planned liquidation of the Company’s subsidiary, Woodman Labs Cayman, Inc., the Company’s tax provision and resulting effective tax rate for interim periods in 2018 and future years is expected to be subject to less volatility and fluctuation quarter over quarter than in 2017. Further, for both 2018 and 2017, while the Company incurred pre-tax losses in the United States and certain lower-rate jurisdictions, the Company does not expect to recognize any tax benefits on pre-tax losses in the United States due to a full valuation allowance recorded against its U.S. deferred tax assets.

During the six months ended June 30, 2018, the Internal Revenue Service concluded its audit for the 2012 through 2015 tax years. The Closing Agreement was received on January 24, 2018 and the Company received an income tax refund of approximately $32.9 million, net of IRS adjustments, in February 2018. As a result, the Company recognized a reduction in gross unrecognized tax benefits of $26.0 million and an income tax benefit, net of valuation allowance, of approximately $2.6 million.

GoPro, Inc.

Notes to Condensed Consolidated Financial Statements

At June 30, 2018 and December 31, 2017, the Company’s gross unrecognized tax benefits were $33.7 million and $58.6 million, respectively. If recognized, $16.9 million of these unrecognized tax benefits (net of U.S. federal benefit) at June 30, 2018 would be recorded as a reduction of future income tax provision. These unrecognized tax benefits relate primarily to unresolved matters with taxing authorities regarding tax positions based on the Company’s interpretation of certain U.S. trial and appellate court decisions, which remain subject to appeal and therefore could be overturned in future periods and tax positions on IP transfers. Although the completion, settlement and closure of any audits is uncertain, it is reasonably possible that the total amount of unrecognized tax benefits will not materially increase within the next 12 months. However, given the number of years remaining that are subject to examination, the range of the reasonably possible change cannot be estimated reliably.

U.S. Tax Reform. The Tax Cuts and Jobs Act (TCJA) of 2017, enacted on December 22, 2017, reduced the U.S. statutory tax rate from 35% to 21%, effective January 1, 2018. The TCJA also implemented a territorial tax system. Under the territorial tax system, in general, the Company’s foreign earnings would no longer be subject to tax in the U.S. As part of transitioning to the territorial tax system, the TCJA includes a mandatory deemed repatriation of all undistributed foreign earnings that are subject to a U.S. income tax. The Company estimates that the deemed repatriation will not result in any additional U.S. income tax. This estimate may be impacted by a number of additional considerations, including, but not limited to, the issuance of final regulations and the Company's ongoing analysis of the new law.

While the TJCA provides for a territorial tax system, beginning in 2018, it includes two new U.S. tax base erosion provisions, the global intangible low-taxed income (GILTI) provisions and the base-erosion and anti-abuse tax (BEAT) provisions. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The BEAT provisions in the TCJA eliminate the deduction of certain base-erosion payments made to related foreign corporations and impose a minimum tax if greater than regular tax. The BEAT or GILTI provisions did not result in significant additional U.S. tax beginning in 2018.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA. The Company has recognized the provisional tax impacts related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities to the extent needed and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the TCJA. The accounting is expected to be complete when the 2017 U.S. corporate income tax return is filed in 2018.

8. Related party transactions

The Company incurs costs for Company-related chartered aircraft fees for the use of the CEO’s private plane. The Company recorded a $0.2 million expense in the three and six months ended June 30, 2018 and zero expense in the three and six months ended June 30, 2017. As of June 30, 2018 and December 31, 2017, the Company had $0.1 million and zero accounts payable associated with these aircraft fees, respectively.

9. Commitments, contingencies and guarantees

Facility Leases. The Company leases its facilities under long-term operating leases, which expire at various dates through 2027. As of June 30, 2018, the Company’s total future minimum lease payments under non-cancelable operating leases were $116.3 million. There have been no material changes to the Company’s lease commitments since December 31, 2017. Rent expense was $3.3 million and $4.8 million for the three months ended June 30, 2018 and 2017, respectively, and $6.7 million and $10.0 million for the six months ended June 30, 2018 and 2017, respectively.

GoPro, Inc.

Notes to Condensed Consolidated Financial Statements

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, 2018, the Company’s total undiscounted future expected obligations under multi-year agreements described above with terms longer than one year was $182.4 million. There have been no material changes to the Company’s other commitments since December 31, 2017.

Legal proceedings. From time to time, the Company is involved in legal proceedings in the ordinary course of business, including the litigation matters described in Part II, Item 1 of this Quarterly Report on Form 10-Q. Due to inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of these matters. The Company is unable at this time to determine whether the outcome of the litigation would have a material impact on the results of operations, financial condition or cash flows of the Company.

Indemnifications. In the normal course of business, the Company enters into agreements that contain a variety of representations and warranties and provide for general indemnification. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future, but have not yet been made. It is not possible to determine the maximum potential amount under these indemnification agreements due to the Company’s limited history with indemnification claims and the unique facts and circumstances involved in each particular agreement. As of June 30, 2018, 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. Concentrations of risk and geographic information

Customer concentration. Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of trade receivables. The Company believes that credit risk for accounts receivable is mitigated by the Company’s credit evaluation process, relatively short collection terms and dispersion of its customer base. The Company generally does not require collateral and losses on trade receivables have historically been within management’s expectations.

Customers who represented 10% or more of the Company’s net accounts receivable balance were as follows:



	June 30, 2018	December 31, 2017
Customer A	18%	16%
Customer B	20%	32%
Customer C	*	12%
Customer D	*	11%

The following table summarizes the Company’s accounts receivables sold, without recourse, and factoring fees paid:



	Three months ended June 30,				Six months ended June 30,
(in thousands)	2018		2017		2018		2017
Accounts receivable sold	$	33,858	$	41,574	$	52,454	$	78,962
Factoring fees	434		368		655		680

Customers who represented 10% or more of the Company’s total revenue were as follows:



	Three months ended June 30,		Six months ended June 30,
	2018	2017	2018	2017
Customer A	16%	17%	15%	16%
Customer B	*	12%	11%	*

* Less than 10% of total revenue for the period indicated

GoPro, Inc.

Notes to Condensed Consolidated Financial Statements

Supplier concentration. The Company relies on third parties for the supply and manufacture of its products, some of which are sole-source suppliers. The Company believes that outsourcing manufacturing enables greater scale and flexibility. As demand and product lines change, the Company periodically evaluates the need and advisability of adding manufacturers to support its operations. In instances where a supply and manufacture agreement does not exist or suppliers fail to perform their obligations, the Company may be unable to find alternative suppliers or satisfactorily deliver its products to its customers on time, if at all. The Company also relies on third parties with whom it outsources supply chain activities related to inventory warehousing, order fulfillment, distribution and other direct sales logistics.

Geographic information

Revenue by geographic region, based on ship-to destinations, was as follows:



	Three months ended June 30,				Six months ended June 30,
(in thousands)	2018		2017		2018		2017
Americas	$	131,580	$	157,027	$	222,052	$	252,734
Europe, Middle East and Africa (EMEA)	90,841		80,214		153,151		148,077
Asia and Pacific (APAC)	60,256		59,285		109,820		114,329
Total revenue	$	282,677	$	296,526	$	485,023	$	515,140

Revenue in the United States, which is included in the Americas geographic region, was $113.6 million and $140.6 million for the three months ended June 30, 2018 and 2017, respectively, and $192.5 million and $227.4 million for the six months ended June 30, 2018 and 2017, respectively. No other individual country exceeded 10% of total revenue for any period presented. The Company does not disclose revenue by product category as it does not track sales incentives and other revenue adjustments by product category to report such data.

As of June 30, 2018 and December 31, 2017, long-lived assets, which represent gross property and equipment, located outside the United States, primarily in Hong Kong and China, were $80.5 million and $79.7 million, respectively.

11. Restructuring charges

Restructuring charges for each period were as follows:



	Six months ended June 30,
(in thousands)	2018		2017
Cost of revenue	$	1,242	$	418
Research and development	9,744		7,381
Sales and marketing	3,847		5,603
General and administrative	2,677		1,409
Total restructuring charges	$	17,510	$	14,811

GoPro, Inc.

Notes to Condensed Consolidated Financial Statements

First quarter 2018 restructuring

On January 2, 2018, the Company approved a restructuring plan to further reduce future operating expense and better align resources around its long-term business strategy. The restructuring provided for a reduction of the Company's global workforce of approximately 18%, the closure of the Company's aerial group and the consolidation of certain leased office facilities. Under the first quarter 2018 restructuring plan, the Company recorded restructuring charges of $15.2 million, including $12.2 million related to severance and $3.0 million related to other charges.

The following table provides a summary of the Company’s restructuring activities for the six months ended June 30, 2018 and the related liabilities recorded in accrued liabilities on the condensed consolidated balance sheet.



(in thousands)	Severance			Other			Total
Restructuring liability as of December 31, 2017	$	—		$	—		$	—
Restructuring charges	12,243			2,983			15,226
Cash paid	(11,470		)	(835		)	(12,305		)
Non-cash reductions	(485		)	(1,136		)	(1,621		)
Restructuring liability as of June 30, 2018	$	288		$	1,012		$	1,300

First quarter 2017 restructuring

On March 15, 2017, the Company approved a restructuring plan to reduce future operating expenses and further align resources around its long-term business strategy. The restructuring provided for a reduction of the Company’s global workforce by approximately 270 positions, and the consolidation of certain leased office facilities. Under the first quarter 2017 restructuring plan, the Company recorded restructuring charges of $19.1 million, including $10.3 million related to severance, and $8.8 million related to accelerated depreciation and other charges. The actions associated with the first quarter 2017 restructuring plan were substantially completed by the fourth quarter of 2017. While the Company anticipates that any additional charges related to this restructuring will be immaterial, actual results may differ from current estimates as it relates to the consolidation of certain leased office facilities.



(in thousands)	Severance		Other			Total
Restructuring liability as of December 31, 2017	$	—	$	3,550		$	3,550
Restructuring charges	—		2,139			2,139
Cash paid	—		(1,638		)	(1,638		)
Non-cash charges	—		324			324
Restructuring liability as of June 30, 2018	$	—	$	4,375		$	4,375

Fourth quarter 2016 restructuring

On November 29, 2016, the Company approved a restructuring plan to reduce future operating expenses. The restructuring provided for a reduction of the Company’s global workforce of approximately 15%, the closure of the Company’s entertainment group to concentrate on its core business and the consolidation of certain leased office facilities. Under the fourth quarter 2016 restructuring plan, the Company recorded restructuring charges of $39.9 million, including $36.7 million related to severance, and $3.2 million related to accelerated depreciation and other charges. The actions associated with the fourth quarter 2016 restructuring plan were completed by March 31, 2017, with only small incremental charges recorded through June 30, 2018.

GoPro, Inc.

Notes to Condensed Consolidated Financial Statements



(in thousands)	Severance			Other		Total
Restructuring liability as of December 31, 2017	$	400		$	50	$	450
Restructuring charges	147			—		147
Cash paid	(244		)	—		(244		)
Restructuring liability as of June 30, 2018	$	303		$	50	$	353

First quarter 2016 restructuring

On January 12, 2016, the Company approved a restructuring plan that provided for a reduction in the Company’s global workforce of approximately 7%. Under the first quarter 2016 restructuring plan, the Company recorded restructuring charges of $6.5 million in the first quarter of 2016, which primarily included cash-based severance costs. The Company completed this plan at the end of the first quarter of 2016 and all costs have been paid. No charges were recorded in periods after March 31, 2016.

GoPro, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)

Our MD&A is provided in addition to the accompanying 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 2018 to 2017.


•	Liquidity and Capital Resources. Analysis of changes in our balance sheets and cash flows, and discussion of our financial condition and potential sources of liquidity.


•	Contractual Commitments. Overview of our contractual obligations, including expected payment schedule and indemnifications as of June 30, 2018.


•	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 presentation of our results reconciling GAAP to non-GAAP adjusted measures.

The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2017 and the condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q of GoPro, Inc. and its subsidiaries (GoPro or we or the Company). Our MD&A contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding guidance, industry prospects, product and marketing plans, or future results of operations or financial position, made in this Quarterly Report on Form 10-Q are forward-looking. To identify forward-looking statements, we may use such words as “expect,” “anticipate,” “believe,” “may,” “will,” “estimate,” “continue,” “intend,” “target,” “goal,” “plan,” or variations of such words and similar expressions. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their date. If any of management's assumptions prove incorrect or should unanticipated circumstances arise, the Company's actual results could materially differ from those anticipated by such forward-looking statements. The differences could be caused by a number of factors or combination of factors including, but not limited to, those factors identified and detailed in Risk Factors in Part II, Item 1A of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2018. Forward-looking statements include new product offering plans and key hardware and software features, research and development plans, marketing plans, plans for international expansion and revenue growth drivers, plans to reduce operating expense and drive profitability, plans to settle note conversion in cash and projections of results of operations, and any discussion of the trends and other factors that drive our business and future results in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and other sections of this Quarterly Report on Form 10-Q including but not limited to Item 1A Risk Factors. Readers are strongly encouraged to consider the foregoing including those factors when evaluating any forward-looking statements concerning the Company. The Company does not undertake any obligation to update any forward-looking statements in this Quarterly Report on Form 10-Q to reflect future events or developments.

Overview

GoPro is enabling the way people capture and share their lives from a perspective only achieved with a GoPro. What began as an idea to help athletes document themselves engaged in sport, GoPro has become a mobile storytelling solution that helps the world share itself through immersive content.

Helping people capture, share experiences and manage content is at the core of our business. We are committed to developing solutions that create an easy, seamless experience for consumers to capture, create, enjoy and store engaging personal content. When consumers use our products and services, those products and services

GoPro, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

enable compelling, authentic 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, offerings, accessories and software applications. We believe new camera features and related services drive a replacement cycle and attract new users. Our investments in mobile editing and sharing solutions, auto-upload capabilities, local language user-interfaces and voice recognition in multiple languages drive the expansion of our total addressable market.

In the first quarter of 2018, we began shipping our newest cloud connected entry-level camera, HERO, which features image stabilization, cloud connectivity, voice control and a touch display. We also launched an updated GoPro PLUS subscription service in the United States which includes our “You Break It, We Replace It” camera replacement program. Our flagship HERO6 Black camera, powered by GoPro’s custom designed GP1 processor, is the most powerful and performance featured GoPro camera to date. We offer many professional-grade features with our current good-better-best camera offering with HERO, HERO5 Black and HERO6 Black. Our cameras are compatible with our ecosystem of mountable and wearable accessories, and feature automatic uploading capabilities for photos and videos to GoPro Plus, our premium cloud-based solution that enables subscribers to easily access, edit, store and share their content. All of our cameras are also compatible with GoPro QuikStories, our mobile experience that seamlessly uploads a user’s GoPro photos and video clips to his or her smartphone and transforms them into a ready-to-share video. GoPro QuikStories makes it simple to automatically create shareable video edits complete with music, effects and transitions.

Our product offerings also include our waterproof 360-degree spherical camera, Fusion, and our drone and stabilization solution, Karma.

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 2018			Q1 2018			Q2 2017			Q2 2018 vs. Q1 2018		Q2 2018 vs. Q2 2017
Revenue	$	282,677		$	202,346		$	296,526		40	%	(5	)%
Camera units shipped ⁽¹⁾	1,071			758			1,061			41	%	1	%
Gross margin⁽²⁾	29.5		%	22.2		%	35.6		%	730 bps		(610) bps
Operating expenses	$	114,205		$	119,655		$	130,615		(5	)%	(13	)%
Net loss	$	(37,269	)	$	(76,347	)	$	(30,536	)	(51	)%	22	%
Diluted net loss per share	$	(0.27	)	$	(0.55	)	$	(0.22	)	(51	)%	23	%
Cash used in operations	$	(1,048	)	$	(97,112	)	$	(11,428	)	(99	)%	(91	)%

Other financial information:
Adjusted EBITDA ⁽³⁾	$	(8,697	)	$	(34,537	)	$	5,120		(75	)%	(270	)%
Non-GAAP net loss ⁽⁴⁾	$	(20,843	)	$	(47,364	)	$	(12,914	)	(56	)%	61	%
Non-GAAP loss per share	$	(0.15	)	$	(0.34	)	$	(0.09	)	(56	)%	67	%

⁽¹⁾Represents the number of camera units that are shipped during a reporting period, including camera units that are shipped with drones, net of any returns. Camera units shipped does not include drones sold without a camera, mounts or accessories.

⁽²⁾One basis point (bps) is equal to 1/100th of 1%.

⁽³⁾We define adjusted EBITDA as net loss adjusted to exclude the impact of: provision for income taxes, interest income, interest expense, depreciation and amortization, POP display amortization, stock-based compensation, impairment charges and restructuring costs.

⁽⁴⁾We define non-GAAP net loss as net loss adjusted to exclude stock-based compensation, acquisition-related costs, restructuring costs, non-cash interest expense and income tax adjustments. Acquisition-related costs include amortization and impairment write-downs of acquired intangible assets (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 below.

GoPro, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Second quarter 2018 financial performance

Revenue for the second quarter of 2018 was $282.7 million, a 5% decrease year-over-year from $296.5 million in the same period of 2017 primarily attributable to a decrease in drone and accessories revenue. Camera units shipped in the second quarter of 2018 of 1.07 million units was slightly up compared to 1.06 million units in the same period of 2017. Gross margin in the second quarter of 2018 was 29.5%, down from 35.6% a year ago, primarily attributable to an increase in sales of low margin cameras at $299 and below price points as compared to 2017. Our second quarter operating expenses of $114.2 million decreased 13% year-over-year, despite the doubling of our advertising expenses to $21.7 million, resulting from our continued focus on cost management and the financial benefits recognized from our restructuring actions.

Net loss in the second quarter of 2018 was $37.3 million, or $0.27 per share, an increase of $6.7 million, or 22.0%, when compared to 2017. For the second quarter of 2018, non-GAAP net loss was $20.8 million, or $0.15 per share, and adjusted EBITDA decreased to negative $8.7 million. Non-GAAP net loss excludes, where applicable, the effects of stock-based compensation, acquisition-related costs, restructuring costs, non-cash interest expense and the tax impact of these items. See Results of Operations and Non-GAAP Financial Measures below for additional information.

Factors affecting performance

We believe that our future success will be dependent on many factors, including those further discussed below. While these areas represent opportunities for us, they also represent challenges and risks that we must successfully address in order to continue the growth of our business and improve our results of operations.

Driving profitability through improved efficiency, lower costs and better execution. We incurred material operating losses in 2016, 2017 and in the first half of 2018. Our restructuring actions have significantly reduced our operating expenses in 2017 and the first half of 2018 resulting in a flatter, more efficient global organization that has allowed for improved communication and alignment among our functional teams. If we are unable to generate adequate revenue growth, and continue to manage our expenses, we may incur significant losses in the future and may not be able to achieve profitability. Refer to our Risk Factors in Part II, Item 1A of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2018.

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 products and services. We plan to further build upon our integrated mobile and cloud-based storytelling solutions and subscription offerings in future periods. Our investments, including marketing and advertising expenses, may not successfully drive increased revenue and our users may not adopt our new offerings. If we fail to innovate and enhance our brand, our products, our integrated storytelling solution and 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.

Growing our total addressable market globally. We continue to believe that international markets represent a significant growth opportunity for GoPro. Revenue from outside the United States comprised 60% of total revenue in the first half of 2018. While the total market for digital cameras has declined in recent periods, as smartphone and tablet camera quality has improved, we continue to believe our consumers’ differentiated use of GoPro cameras, our integrated storytelling solution and our brand helps insulate our business from many of the negative trends facing this category. However, we expect that the markets in which we conduct our business will remain highly competitive. We plan to increase our presence internationally through the active promotion of our brand, the creation and cultivation of regional strategic and marketing partnerships, the continued introduction of localized products in international markets with region specific marketing, and an investment focus on the biggest opportunities in both Europe and the Asia Pacific region.

Our growth also depends on expanding our total addressable market with our updated subscription service, Plus, as well as other services and capture solutions, including spherical, which are all resource intensive initiatives in

GoPro, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

highly competitive markets. If we are not successful in penetrating additional markets, we might not be able to grow revenue and we may not recognize benefits from our investment in new areas.

Marketing the improved GoPro experience to our extended community. We intend to continue investing resources in our marketing, advertising and brand management efforts. Historically, our growth has largely been fueled by the adoption of our products by people looking to self-capture images of themselves participating in exciting physical activities. Our future growth depends on continuing to reach, expand and re-engage with this core demographic and grow it. In addition, we need to expand our user base to include a broader group of consumers. We believe that consumers in many markets are not familiar with our brand and products and believe there is an opportunity for GoPro to expand awareness through a range of advertising and promotional programs and campaigns, including social media. Sales and marketing investments will often occur in advance of any sales benefits from these activities, and it may be difficult for us to determine if we are efficiently allocating our resources in this area.

Seasonality. Historically, we have experienced the highest levels of revenue in the fourth quarter of the year, coinciding with the holiday shopping season, particularly in the United States and Europe. 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.

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)	2018					2017					2018					2017
Revenue	$	282,677		100	%	$	296,526		100	%	$	485,023		100	%	$	515,140		100	%
Cost of revenue	199,308			71		190,894			64		356,738			74		340,942			66
Gross profit	83,369			29		105,632			36		128,285			26		174,198			34
Operating expenses:
Research and development	38,225			14		55,497			19		89,204			18		121,663			24
Sales and marketing	60,256			21		56,678			19		109,426			23		124,534			24
General and administrative	15,724			5		18,440			6		35,230			7		41,199			8
Total operating expenses	114,205			40		130,615			44		233,860			48		287,396			56
Operating loss	(30,836		)	(11	)	(24,983		)	(8	)	(105,575		)	(22	)	(113,198		)	(22	)
Other income (expense):
Interest expense	(4,621		)	(2	)	(3,784		)	(1	)	(9,188		)	(2	)	(4,598		)	(1	)
Other income, net	(1,106		)	—		222			—		(929		)	—		383			—
Total other expense, net	(5,727		)	(2	)	(3,562		)	(1	)	(10,117		)	(2	)	(4,215		)	(1	)
Loss before income taxes	(36,563		)	(13	)	(28,545		)	(9	)	(115,692		)	(24	)	(117,413		)	(23	)
Income tax (benefit) expense	706			—		1,991			1		(2,076		)	—		24,273			5
Net loss	$	(37,269	)	(13	)%	$	(30,536	)	(10	)%	$	(113,616	)	(24	)%	$	(141,686	)	(28	)%

GoPro, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Revenue



	Three months ended June 30,								Six months ended June 30,
(camera units and dollars in thousands)	2018			2017			% Change		2018			2017			% Change
Camera units shipped	1,071			1,061			1	%	1,829			1,799			2	%

Direct channel	$	145,323		$	169,672		(14	)%	$	245,026		$	284,437		(14	)%
Percentage of revenue	51		%	57		%			51		%	55		%
Distribution channel	$	137,354		$	126,854		8	%	$	239,997		$	230,703		4	%
Percentage of revenue	49		%	43		%			49		%	45		%
Total revenue	$	282,677		$	296,526		(5	)%	$	485,023		$	515,140		(6	)%

Americas	$	131,580		$	157,027		(16	)%	$	222,052		$	252,734		(12	)%
Percentage of revenue	47		%	53		%			46		%	49		%
Europe, Middle East and Africa (EMEA)	$	90,841		$	80,214		13	%	$	153,151		$	148,077		3	%
Percentage of revenue	32		%	27		%			31		%	29		%
Asia and Pacific (APAC)	$	60,256		$	59,285		2	%	$	109,820		$	114,329		(4	)%
Percentage of revenue	21		%	20		%			23		%	22		%
Total revenue	$	282,677		$	296,526		(5	)%	$	485,023		$	515,140		(6	)%

Our camera units shipped during the second quarter of 2018 was slightly up at 1.07 million units compared to 1.06 million units in the same period in 2017. However, the year-over-year decrease in revenue for the second quarter of 2018 was primarily attributable to lower drone and accessories revenue and the result of a higher product sales mix of lower price point cameras, compared to the same period in 2017. Drone shipments, which have a higher average selling price compared to our standalone camera offerings, have decreased as we have continued to sell through our remaining Karma drone inventory following the announcement of our exit of the aerial business in the first quarter of 2018. Our average selling price decreased 6% year-over-year primarily due to the decrease in Karma drone shipments and a shift in camera mix to lower priced cameras.

The year-over-year decrease in revenue for the first half of 2018 was primarily attributable to lower accessories and drone revenue, and higher sales incentives when compared to the same period in 2017.

Cost of revenue and gross margin



	Three months ended June 30,								Six months ended June 30,
(dollars in thousands)	2018			2017			% Change		2018			2017			% Change
Cost of revenue	$	195,481		$	189,259		3	%	$	348,635		$	337,184		3	%
Stock-based compensation	490			415			18	%	872			910			(4	)%
Acquisition-related costs	3,334			1,195			179	%	5,989			2,430			146	%
Restructuring costs	3			25			(88	)%	1,242			418			197	%
Total cost of revenue	$	199,308		$	190,894		4	%	$	356,738		$	340,942		5	%
Gross margin	29.5		%	35.6		%			26.4		%	33.8		%

Gross margin of 29.5% in the second quarter of 2018 decreased from 35.6% in 2017, or (610) bps, reflecting an increase in camera units shipped with price points lower than $399, which carry lower margins, (480) bps, and an increase in operational expenses, (70) bps.

Gross margin of 26.4% in the first half of 2018 decreased from 33.8% in the first half of 2017, or (740) bps, reflecting our product sales mix, which included a higher proportion of lower priced, lower margin cameras when

GoPro, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

compared to 2017, (480) bps, an increase in operational expenses, (230) bps, partially offset by the sale of previously written off cameras in the first half of 2017, 110 bps.

Research and development



	Three months ended June 30,								Six months ended June 30,
(dollars in thousands)	2018			2017			% Change		2018			2017		% Change
Research and development	$	33,120		$	47,459		(30	)%	$	69,495		$	101,128	(31	)%
Stock-based compensation	4,960			5,390			(8	)%	9,965			11,072		(10	)%
Acquisition-related costs	—			946			(100	)%	—			2,082		(100	)%
Restructuring costs	145			1,702			(91	)%	9,744			7,381		32	%
Total research and development	$	38,225		$	55,497		(31	)%	$	89,204		$	121,663	(27	)%
Percentage of revenue	13.5		%	18.7		%			18.4		%	23.6