Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements, related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements as a result of a variety of factors, including but not limited to, those discussed in Risk Factors and elsewhere in this Annual Report on Form 10-K. 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.
•Components of Our Results of Operations. Description of the items contained in each revenue, cost of revenue and operating expense caption in the consolidated statements of operations.
•Results of Operations. Analysis of our financial results comparing 2021 to 2020 is presented below. An analysis of our financial results comparing 2020 to 2019 can be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 12, 2021, which is available free of charge on the SEC’s website at www.sec.gov and our Investor Relations website at https://investor.gopro.com.
•Liquidity and Capital Resources. Analysis of changes in our balance sheets and cash flows, and discussion of our financial condition and potential sources of liquidity.
•Critical Accounting Policies and Estimates. Accounting estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.
•Non-GAAP Financial Measures. A reconciliation and discussion of our GAAP to non-GAAP financial measures.
Overview
GoPro helps the world capture and share itself in immersive and exciting ways. We are committed to developing solutions that create an easy, seamless experience for consumers to capture, create, and share engaging personal content. When consumers use our products and services, they often generate and share content that organically increases awareness for GoPro, driving a virtuous cycle and a self-reinforcing demand for our products. We believe revenue growth may be driven by the introduction of new cameras, accessories, lifestyle gear, and software and subscription offerings. We believe new camera features drive a replacement cycle among existing users and attract new users, expanding our total addressable market. Our investments in image stabilization, mobile app editing and sharing solutions, modular accessories, auto-upload capabilities, local language user-interfaces and voice recognition in more than 12 languages drive the expansion of our global market.
In the Fall of 2021, we began shipping our HERO10 Black flagship camera that features our new high-performance GP2 processor, which delivers blistering video frame rates. The camera's highest video resolution of 5.3K at 60 frames per second delivers 91% more pixel resolution than 4K at 30 frames per second and 665% more pixel resolution than 1080p HD at an impressive 60 frames per second, allowing for fluid playback and 2X slow motion. 4K video can be captured at 120 frames per second (4X slow motion) and 2.7K video can be captured at 240 frames per second (8X slow motion). The new GP2 processor also enables HyperSmooth 4.0 video stabilization, ensuring that HERO10 Black smooths out even the most shake-ladened experiences. HERO10 Black's in-camera horizon leveling feature benefits from an increased tilt limit of 45° in high-performance settings, making even the most chaotic video footage look professionally smooth and steady. The new GP2 processor combined with the ultra-high resolution 23.6MP sensor enables life-like image quality. In addition to 23 megapixel photos, HERO10 Black enables 19.6 megapixel video stills to be pulled from 5K 4:3 video at 30 frames per second and 15.8 megapixel video stills from 5.3K video at 60 frames per second, which is ideal for capturing
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still images of sports and fast-paced activities. The HERO10 Black is also cloud connected while being charged and will automatically upload recently captured footage to the user’s GoPro cloud account. Additionally, the HERO10 Black continues to build off the noteworthy HERO9 Black features, including Power Tools, TimeWarp 3.0, front-facing and rear touch displays, and camera Mod compatibility. Our HERO10 Black, HERO9 Black, HERO8 Black and MAX cameras are compatible with our ecosystem of mountable and wearable accessories. We also sell our GoPro subscription, which includes unlimited cloud storage supporting source video and photo quality, camera replacement and damage protection, access to a high-quality live streaming service on GoPro.com as well as discounts on GoPro gear, mounts and accessories.
In March 2021, we launched a refresh of our mobile app, Quik, which makes it easy for users to get the most out of their favorite photos and videos no matter which phone or camera is used to capture the footage. We believe the launch of Quik and the new Quik subscription is an important step in expanding our total addressable market to those who value organizing the visual moments of their lives. Quik users can conveniently share their favorite photos or videos to the Quik app where those special “keeper” photos or videos will be added to a private “Mural” feed within the app. Quik also features a suite of powerful yet simple editing tools which allows users to edit photos or videos themselves. In June 2021, we announced Open GoPro, an open API initiative that makes it easy for third-party developers to integrate their HERO camera into their own development efforts.
The COVID-19 pandemic is continuing to have widespread, rapidly evolving, and unpredictable impacts on global societies, economies, financial markets, supply chains and business practices. During the year ended December 31, 2021, sales improved compared to 2020 through both our e-commerce platform on GoPro.com as well as our retail channel in certain regions. In the first quarter of 2020, we closed all of our offices and required most of our employees to work remotely. These changes remained largely in effect in the fourth quarter of 2021. We expect our offices to remain closed at least through the second quarter of 2022. At this point, the duration and impact, if any, of these and any additional operational changes we may implement is uncertain, but changes we have implemented have not affected and are not expected to affect our ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures. See Item 1A Risk Factors for further discussion of the possible impact of the COVID-19 pandemic on our business.
The following is a summary of measures presented in our consolidated financial statements and key metrics used to evaluate our business, measure our performance, develop financial forecasts and make strategic decisions.
Other financial information:
(1) Represents the number of camera units that are shipped during a reporting period, net of any returns.
(2) One basis point (bps) is equal to 1/100th of 1%.
(3) We define adjusted EBITDA as net income (loss) adjusted to exclude the impact of provision for income taxes, interest income, interest expense, depreciation and amortization, point of purchase (POP) display amortization, stock-based compensation, intangible asset impairment charges, loss on extinguishment of debt, and restructuring and other costs, including right-of-use asset impairment charges.
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(4) We define non-GAAP net income as net income (loss) adjusted to exclude stock-based compensation, acquisition-related costs, restructuring and other costs, including right-of-use asset impairment charges, non-cash interest expense, loss on extinguishment of debt and income tax adjustments. Acquisition-related costs include the amortization of acquired intangible assets and impairment charges (if applicable), as well as third-party transaction costs for legal and other professional services.
Reconciliations of non-GAAP adjusted measures to the most directly comparable GAAP measures are presented under Non-GAAP Financial Measures.
Full Year and Fourth quarter 2021 financial performance
Revenue was $1.16 billion for the full year 2021 compared to $891.9 million in 2020. The year-over-year improvement in revenue was driven by sales of our cameras at higher price points, which was positively impacted by a $50 increase in the manufacturer’s suggested retail price (MSRP) on our latest flagship camera from 2020 to 2021. In addition to sales of our cameras at higher price points, the year-over-year improvement in revenue was positively impacted by direct-to-consumer sales and subscriptions and services, as well as sales through our retail channel as stores began to reopen. Retail revenue for the full year 2021 was $769.0 million, an increase of 26% year-over-year from $609.4 million in 2020, driven by overall growth across all regions. Revenue from our retail channel represented 66.2% and 68.3% of total revenue for 2021 and 2020, respectively. The year-over-year improvement in revenue was also driven by our continued focus on direct-to-consumer sales through GoPro.com. GoPro.com revenue for the full year 2021 was $392.1 million, which was a 39% increase year-over-year from $282.6 million in 2020. GoPro.com revenue represented 33.8% and 31.7% of total revenue for 2021 and 2020, respectively. We shipped 3,145,000 camera units for the full year 2021, compared to 2,820,000 camera units for the full year 2020, representing a 12% camera unit growth year-over-year. Our average selling price, which is defined as total revenue divided by camera units shipped, for the full year 2021 was $369, or a 17% year-over-year increase, primarily due to 97% of our camera revenue mix being derived from cameras with a suggested retail price equal to or greater than $300, along with growth in GoPro subscribers. We had approximately 1.6 million GoPro subscribers as of December 31, 2021, or a 107% increase year-over-year. Subscription revenue for the full year 2021 was $52.9 million, or an increase of 131% year-over-year. The gross margin percentage for 2021 was 41.1%, up from 35.3% in 2020. The 580 bps year-over-year increase in gross margin was primarily driven by sales of cameras at higher price points, growth in direct-to-consumer sales, and growth in our high margin subscription revenue. Operating expenses for the full year 2021 were $363.9 million, a 4% increase year-over-year, primarily due to increases in personnel-related expenses and costs to support the growth of our direct-to-consumer business on GoPro.com. Net income for the full year 2021 was $371.2 million, an improvement of $437.9 million, when compared to a net loss of $66.8 million for the full year 2020. The full year 2021 benefitted from the release of our tax valuation allowances which contributed $284.6 million. Adjusted EBITDA for the full year 2021 was $167.8 million, or 15% of revenue compared to $43.2 million for the full year 2020, or 5% of revenue.
Revenue for the fourth quarter of 2021 was $391.1 million, or a 9% increase from the same period in 2020. The year-over-year increase was primarily driven by sales of our cameras at higher price points, which was positively impacted by a $50 increase in MSRP on our latest flagship camera from 2020 to 2021. In addition to sales of our cameras at higher price points, the year-over-year improvement in revenue was positively impacted by direct-to-consumer sales and subscriptions and services, and strong sales through our retail channel as stores began to reopen. Retail revenue for the fourth quarter of 2021 was $263.4 million, an increase of 9.1% year-over-year from $241.3 million during the same period in 2020, primarily driven by Europe. Revenue from our retail channel represented 67.3% and 67.5% of total revenue for the fourth quarter of 2021 and 2020, respectively. The year-over-year improvement in revenue was also driven by our continued focus on direct-to-consumer sales through GoPro.com. GoPro.com revenue for the fourth quarter of 2021 was $127.8 million, which was a 9.8% increase year-over-year from $116.4 million during the same period in 2020. GoPro.com revenue represented 32.7% and 32.5% of total revenue for the fourth quarter of 2021 and 2020, respectively. Our average selling price, which is defined as total revenue divided by camera units shipped, for the fourth quarter of 2021 was $379, or a 17.2% increase from the same period in 2020, primarily due to 100% of our camera revenue mix being derived from cameras with a suggested retail price equal to or greater than $300 and growth in GoPro subscribers. We shipped 1,033,000 camera units during the fourth quarter of 2021, compared to 1,108,000 camera units for the same period in 2020, or a decline of 7% year-over-year. Subscription revenue for the fourth quarter of 2021 was $16.8 million, or an increase of 118% from the same period in 2020. The gross margin percentage for the fourth quarter of 2021 was 41.2%, up from 38.0% in the fourth quarter of 2020. The 320 bps increase in gross margin year-over-
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year was primarily driven by sales of cameras at higher price points, growth in direct-to-consumer sales, and growth in our high margin subscription revenue. Operating expenses for the fourth quarter of 2021 were $102.4 million, a 27% increase year-over-year, primarily due to increases in personnel-related expenses, advertising expenses, and costs to support the growth of our direct-to-consumer business on GoPro.com. Net income for the fourth quarter of 2021 was $52.6 million, an 18.5% increase compared to net income of $44.4 million generated in the same period in 2020. Adjusted EBITDA for the fourth quarter of 2021 was a positive $71.6 million, compared to a positive $67.7 million for the same period in 2020.
Factors affecting performance
We believe that our future success will be dependent on many factors, including those further discussed below. While these areas represent opportunities for us, they also represent challenges and risks that we must successfully address in order to operate our business and improve our results of operations.
Driving profitability through improved efficiency, lower costs and better execution. We generated positive operating income for the year ended December 31, 2021, and we continue to make strategic decisions to create sustainable growth and profitability in our business. Prior to fiscal year 2021, we incurred operating losses during fiscal years 2020, 2019, and 2018. Our restructuring actions have significantly reduced our on-going operating expenses, resulting in a flatter, more efficient global organization that has allowed for improved communication and better alignment among our functional teams. Primarily as a result of the impact of the COVID-19 pandemic, we took additional restructuring actions in April 2020 to further reduce our operating expenses in marketing, sales, and general and administrative functions, and to reduce our global facility footprint. Operating expense reductions related to research and development were minor in order to protect our product roadmap and innovation. Additionally, in response to the COVID-19 pandemic, we accelerated a shift in our sales channel strategy to reduce the number of distributors and retailers that we work with to focus more on direct-to-consumer sales through GoPro.com.
If we are unable to generate adequate revenue growth, particularly in light of the impact of the COVID-19 pandemic, successfully sustain our direct-to-consumer sales model and current revenue growth rate, or continue to manage our expenses, we may incur significant losses in the future and may not be able to achieve profitability.
Investing in research and development and enhancing our customer experience. Our performance is significantly dependent on the investments we make in research and development, including our ability to attract and retain highly skilled and experienced research and development personnel. We expect the timing of new product releases to continue to have a significant impact on our revenue and we must continually develop and introduce innovative new cameras, mobile applications and other new offerings. We plan to further build upon our integrated mobile and cloud-based storytelling solutions, and subscription offerings. Our investments, including those for marketing and advertising, may not successfully drive increased revenue and our customers may not accept our new offerings. If we fail to innovate and enhance our brand, our products, our integrated storytelling solutions, the value proposition of our subscriptions, our market position and revenue will be adversely affected. Further, we have incurred substantial research and development expenses and if our efforts are not successful, we may not recover the value of these investments.
Improving Profitability. We believe that our continued focus on growing our direct-to-consumer sales and subscription services will accelerate our ability to become consistently profitable due to an improved margin structure and lower operating expenses to support this shift in channel, particularly in light of the impact of the COVID-19 pandemic. As a result of this shift toward direct sales, we believe we can become consistently profitable with lower overall unit sales. We continue to believe that international markets represent a significant opportunity to achieve continued profitability. While the total market for digital cameras has continued to decline as smartphone and tablet camera quality has improved, we continue to believe that our consumers’ differentiated use of GoPro cameras, our integrated storytelling solutions, our continued innovation of product features desired by our users, and our brand, all help support our business from many of the negative trends facing this market. However, we expect that the markets in which we conduct our business will remain highly competitive as we face new product introductions from competitors. We will continue to leverage the brand recognition of our Company to increase our global presence through GoPro.com with the active promotion of our brand, the expansion of localized products in international markets with region-specific marketing, and a focus on the biggest investment opportunities.
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Our profitability also depends on expanding our subscription service offerings. If we are not successful in our shift to a direct-to-consumer sales model, expanding our product and subscription offerings and increasing our paid subscriber base, we might not be able to become consistently profitable and we may not recognize benefits from our investment in new areas.
Marketing the improved GoPro experience.We intend to focus our marketing resources to increase traffic to GoPro.com, improve the consumer experience on GoPro.com, and further improve brand recognition. Historically, our growth has largely been fueled by the adoption of our products by people looking to self-capture images of themselves participating in exciting physical activities. Our goal of sustaining profitability depends on continuing to reach, expand and re-engage with this core user base in alignment with our strategic priorities. Sales and marketing investments will often occur in advance of any sales benefits from these activities, and it may be difficult for us to determine if we are efficiently allocating our resources in this area.
Seasonality. Historically, we have experienced the highest levels of 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.
Components of our Results of Operations
Revenue.Our revenue is primarily comprised of product sales and subscription services, net of returns and sales incentives. Revenue is derived from the sale of our cameras and accessories directly to retailers, through our network of domestic and international distributors, and on GoPro.com. See Critical Accounting Policies and Estimates and Note 1 Summary of business and significant accounting policies, to the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K for information regarding revenue recognition.
Cost of revenue.Our cost of revenue primarily consists of product costs, including costs of contract manufacturing for production, third-party logistics and procurement costs, warranty repair costs, tooling and equipment depreciation, excess and obsolete inventory write-downs, amortization of acquired developed technology, license fees, tariffs and certain allocated costs related to our manufacturing team, facilities, including right-of-use asset impairment charges, and personnel-related expenses.
Operating expenses.We classify our operating expenses into three categories: research and development, sales and marketing, and general and administrative.
Research and development. Our research and development expense consists primarily of personnel-related costs, including salaries, stock-based compensation and employee benefits. Research and development expense also includes consulting and outside professional services costs, materials, and allocated facilities, restructuring, including right-of-use asset impairment charges, depreciation and other supporting overhead expenses associated with the development of our product and service offerings.
Sales and marketing. Our sales and marketing expense consists primarily of advertising and marketing promotions of our products and services, and personnel-related costs, including salaries, stock-based compensation and employee benefits. Sales and marketing expense also includes point of purchase (POP) display expenses and related amortization, sales commissions, webstore and subscription provider fees, trade show and event costs, sponsorship costs, consulting and contractor expenses, and allocated facilities, restructuring, including right-of-use asset impairment charges, depreciation and other supporting overhead expenses.
General and administrative.Our general and administrative expense consists primarily of personnel-related costs, including salaries, stock-based compensation and employee benefits for our finance, legal, human resources, information technology and administrative personnel. The expense also includes professional service costs related to accounting, tax, legal services, and allocated facilities, restructuring, including right-of-use asset impairment charges, depreciation and other supporting overhead expenses.
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Results of Operations
The following table sets forth the components of our Consolidated Statements of Operations for each of the periods presented, and each component as a percentage of revenue:
Year ended December 31,
Operating expenses:
Other income (expense):
Revenue
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2021 Compared to 2020. Revenue was $1.16 billion for the full year 2021 compared to $891.9 million in 2020. The year-over-year improvement in revenue was driven by sales of our cameras at higher price points, which was positively impacted by a $50 increase in MSRP on our latest flagship camera from 2020 to 2021. In addition to sales of our cameras at higher price points, the year-over-year improvement in revenue was positively impacted by direct-to-consumer sales and subscriptions and services, as well as sales through our retail channel as stores began to reopen. Retail revenue for the full year 2021 was $769.0 million, an increase of 26% year-over-year from $609.4 million in 2020, driven by overall growth across all regions. Revenue from our retail channel represented 66.2% and 68.3% of total revenue for 2021 and 2020, respectively. The year-over-year improvement in revenue was also driven by our continued focus on direct-to-consumer sales through GoPro.com. GoPro.com revenue for the full year 2021 was $392.1 million, which was a 39% increase year-over-year from $282.6 million in 2020. GoPro.com revenue represented 33.8% and 31.7% of total revenue for 2021 and 2020, respectively. We shipped 3,145,000 camera units for the full year 2021, compared to 2,820,000 camera units for the full year 2020. Our average selling price, which is defined as total revenue divided by camera units shipped, for the full year 2021 was $369, or a 17% year-over-year increase, primarily due to 97% of our camera revenue mix being derived from cameras with a suggested retail price equal to or greater than $300, along with growth in GoPro subscribers. We had approximately 1.6 million GoPro subscribers as of December 31, 2021, or a 107% increase year-over-year. Subscription revenue for the full year 2021 was $52.9 million, or an increase of 131% year-over-year.
Cost of revenue and gross margin
2021 Compared to 2020. Gross margin of 41.1% in 2021 increased from 35.3% in 2020, or 580 bps, primarily due to camera sales at higher price points, 475 bps, increased margin contribution from subscriptions, 58 bps, and better leverage on fixed costs and operational expenses, 47 bps.
Research and development
2021 Compared to 2020. The year-over-year increase of $9.9 million, or 8%, in total research and development expenses in 2021 compared to 2020 reflected a $13.6 million increase in cash-based personnel-related costs due to an increase in R&D headcount and a $3.8 million increase in stock-based compensation, partially offset by a $7.5 million decrease in restructuring costs.
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Sales and marketing
2021 Compared to 2020. The year-over-year increase of $5.3 million, or 4%, in total sales and marketing expenses in 2021 compared to 2020 reflected a $13.8 million increase in webstore and subscription provider fees, a $1.8 million increase in cash-based personnel-related costs and a $2.3 million increase in stock-based compensation, partially offset by a $10.3 million decrease in restructuring costs, and a $3.2 million decrease in allocated facilities, depreciation and other supporting overhead expenses.
General and administrative
Percentage of revenue 5.7 % 7.7 % 5.5 %
2021 Compared to 2020. The year-over-year decrease of $2.7 million, or 4%, in total general and administrative expenses in 2021 compared to 2020 reflected a $5.3 million decrease in restructuring costs, a $3.6 million decrease in legal consulting fees, and a $2.4 million decrease in allocated facilities and other supporting overhead expenses, partially offset by a $5.9 million increase in cash-based personnel-related costs and $2.3 million increase in stock-based compensation.
Restructuring costs
Second quarter 2020 restructuring. On April 14, 2020, we approved a restructuring that provided for a reduction of our global workforce by approximately 20% and the consolidation of certain leased office facilities. Under the second quarter 2020 restructuring, we recorded restructuring charges of $29.0 million to date, including a $12.5 million right-of-use asset impairment primarily related to our headquarter campus, $7.4 million related to severance, and $9.1 millionrelated to accelerated depreciation and other charges. The right-of-use asset impairment charge was recorded as a restructuring expense, primarily in the operating expense financial statement line items in the Consolidated Statements of Operations.
We ceased using a portion of our headquarters campus in the third quarter of 2020 as part of the second quarter 2020 restructuring. The unused portion of our headquarters campus has its own identifiable expenses and is not dependent on other parts of our business, and thus was considered its own asset group. As a result, we impaired a part of the carrying value of the related right-of-use asset to its estimated fair value using the discounted future cash flows method. The discounted future cash flows were based on future sublease rental rates, future sublease market conditions and a discount rate based on the weighted-average cost of capital. Based on the results of our assessment, we recognized a $12.3 million impairment. On October 2021, the Company entered into a fully executed and consented sublease agreement for this previously ceased-use portion of our headquarters campus. The sublease term will extend through December 2026.
First quarter 2017 restructuring. On March 15, 2017, we approved a restructuring that provided for a reduction of our workforce by approximately 17% and the consolidation of certain leased office facilities. Under the first quarter
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2017 restructuring, we recorded restructuring charges of $23.5 million to date, including $10.3 million related to severance and $13.2 million related to accelerated depreciation and other charges. The actions associated with the first quarter 2017 restructuring were substantially completed by the fourth quarter of 2017.
See Note 11 Restructuring charges, to the Notes to Consolidated Financial Statements.
Other income (expense)
2021 Compared to 2020. Total other expense, net, decreased $2.0 million in 2021 compared to 2020, primarily due to a $5.4 million loss on the partial extinguishment of our 2022 Notes in 2020 which did not occur in 2021, which was partially offset by a $3.8 million increase in non-cash interest expense related to the amortization of the debt discount of our 2022 and 2025 Notes.
Income taxes
We recorded an income tax benefit of $281.1 million for the year ended December 31, 2021, on a pre-tax net income of $90.1 million. Our income tax benefit for the year ended December 31, 2021, primarily resulted from a tax expense on pre-tax book income, offset by the income tax benefit from the full release of valuation allowances on United States federal and state deferred tax assets and the release of a portion of our uncertain tax positions as a result of a lapse of the statute of limitations in certain jurisdictions, as well as income tax benefits from stock-based compensation and federal and California research and development credits.
Our 2020 negative effective tax rate of 7.8% was primarily related to a significant benefit on pre-tax book losses, offset by the valuation allowance on United States federal and state deferred tax assets and by income taxes paid or accrued in profitable foreign jurisdictions (primarily wholly owned subsidiaries in Europe).
See Note 8 Income taxes, to the Notes to Consolidated Financial Statements for additional information.
Quarterly results of operations
The following table sets forth our unaudited quarterly consolidated results of operations for each of the eight quarterly periods in the two-year period ended December 31, 2021.
Three months ended
Net income (loss) per share:
(1) Included in operating expenses were restructuring charges of $13.7 million for the quarter ended September 30, 2020, and $11.0 million
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for the quarter ended June 30, 2020.
Liquidity and Capital Resources
The following table presents selected financial information as of December 31, 2021 and December 31, 2020:
Marketable securities 137,830 —
Total cash, cash equivalents and marketable securities $ 538,917 $ 325,654
Percentage of total assets 43 % 42 %
Our primary source of cash is receipts from sales of our products and services. Other sources of cash are from proceeds from the issuance of convertible notes, employee participation in the employee stock purchase plan, the exercise of employee stock options, tax refunds and facility subleases. The primary uses of cash are for inventory procurement, payroll-related expenses, general operating expenses, including advertising, marketing and office rent, purchases of property and equipment, other costs of revenue, repurchases of convertible notes, interest, and taxes.
Our liquidity position has historically been impacted by seasonality, which is primarily driven by higher revenues during the second half of the year as compared to the first half. Net cash provided by operating activities during the second half of 2021 and 2020 was $231.5 million and $205.8 million, respectively, which represents more than 100% of the total cash provided by operating activities for each respective year.
As of December 31, 2021, our cash, cash equivalents and marketable securities totaled $538.9 million, a $211.3 million increase from 2020. Our cash, net of the outstanding principal balance of the 2022 and 2025 Notes, as of December 31, 2021 was $270.1 million. The overall cash provided by operating activities of $229.2 million for the year ended December 31, 2021 was attributable to net income of $371.2 million, net cash inflows from changes in our working capital of $61.3 million, net cash inflows from other non-cash expenses of $70.2 million, partially offset by a non-cash tax benefit of $273.5 million. The non-cash tax benefit of $273.5 million was primarily related to the release of tax valuation allowances against deferred tax assets that we consider is more likely than not to be realized against future income. Working capital changes during the year ended December 31, 2021, of $61.3 million was the result of a decrease in inventory of $11.5 million, an increase in accounts payable and other liabilities of $56.3 million, and an increase in deferred revenue of $19.2 million, partially offset by an increase in accounts receivable of $8.1 million and an increase in prepaid expenses and other assets of $17.5 million. As of December 31, 2021, $11.5 million of cash was held by our foreign subsidiaries.
Convertible Notes
In April 2017, we issued $175.0 million aggregate principal amount of the 2022 Notes in a private placement to purchasers for resale to qualified institutional buyers. The 2022 Notes mature on April 15, 2022, unless earlier repurchased or converted into shares of Class A common stock subject to certain conditions. The 2022 Notes are convertible into cash, shares of the Class A common stock, or a combination thereof, at our election, at an initial conversion rate of 94.0071 shares of common stock per $1,000 principal amount of the 2022 Notes, which is equivalent to an initial conversion price of approximately $10.64 per share of common stock, subject to adjustment. We pay interest on the 2022 Notes semi-annually, which has historically been due on April 15 and October 15 of each year. We have one interest payment remaining, which will be due on April 15, 2022. Proceeds received from the issuance of the 2022 Notes are allocated between a liability component (short-term debt) and an equity component (additional paid-in capital). The fair value of the liability component was measured using rates determined for similar debt instruments without a conversion feature.
In connection with the 2022 Notes offering, we entered into a prepaid forward stock repurchase transaction agreement (Prepaid Forward) with a financial institution. Pursuant to the Prepaid Forward, we used approximately $78.0 million of the proceeds from the offering of the 2022 Notes to pay the prepayment amount. The aggregate
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number of shares of our Class A common stock underlying the Prepaid Forward is approximately 9.2 million shares. The expiration date for the Prepaid Forward is April 15, 2022, although it may be settled earlier in whole or in part. Upon settlement of the Prepaid Forward, at expiration or upon any early settlement, the forward counterparty will deliver to us the number of shares of Class A common stock underlying the Prepaid Forward or the portion thereof being settled early. The shares purchased under the Prepaid Forward were treated as treasury stock on the Consolidated Balance Sheets (and not outstanding for purposes of the calculation of basic and diluted income (loss) per share), but remain outstanding for corporate law purposes, including for purposes of any future stockholders’ votes, until the forward counterparty delivers the shares underlying the Prepaid Forward to us. The net proceeds from the 2022 Convertible Senior Notes offering of approximately $91 million were used for general corporate purposes.
In the fourth quarter of 2020, 8.8 million shares out of the 9.2 million shares of Class A common stock underlying the Prepaid Forward entered into as part of our 2022 Notes were early settled and delivered to us. In April 2021, the remaining 0.4 million shares of Class A common stock underlying the Prepaid Forward were early settled and delivered to us. There was no financial statement impact due to the return of shares; however, shares outstanding for corporate law purposes were reduced by the early settlement.
In November 2020, in connection with the offering of the 2025 Notes, we repurchased $50.0 million of aggregate principal amount of the April 2022 Notes reducing the amount owed on the 2022 Notes to $125 million.
In November 2020, we issued $143.8 million aggregate principal amount of 2025 Notes in a private placement to purchasers for resale to qualified institutional buyers. The 2025 Notes mature on November 15, 2025, unless earlier repurchased or converted into shares of Class A common stock subject to certain conditions. The 2025 Notes are convertible into cash, shares of the Class A common stock, or a combination thereof, at our election, at an initial conversion rate of 107.1984 shares of common stock per $1,000 principal amount of the 2025 Notes, which is equivalent to an initial conversion price of approximately $9.3285 per share of common stock, subject to adjustment. We pay interest on the 2025 Notes semi-annually, which is due on May 15 and November 15. Proceeds received from the issuance of the 2025 Notes are allocated between a liability component (long-term debt) and an equity component (additional paid-in capital). The fair value of the liability component was measured using rates determined for similar debt instruments without a conversion feature.
In connection with the offering of the 2025 Notes, we entered into privately negotiated capped call transactions with certain financial institutions (Capped Calls). We used $10.2 million of the net proceeds from the sale of the 2025 Notes to purchase the Capped Calls and $56.2 million of the net proceeds to repurchase $50.0 million of aggregate principal amount of the 2022 Notes. The remaining net proceeds were used for general corporate purposes.
The following table summarizes our contractual obligations related to the 2022 and 2025 Convertible Notes as of December 31, 2021 and the expected timing of those payments:
(in thousands) Total Next 12 Months Beyond 12 Months
(1)Our convertible senior notes are due in April 2022 and November 2025. The balances include accrued and unpaid interest as of December 31, 2021. Refer to Note 4 Financing arrangements, for additional discussion regarding our 2022 and 2025 Notes.
Other Contractual Commitments
In the ordinary course of business, we enter into multi-year agreements to purchase sponsorships with event organizers, resorts and athletes as part of our marketing efforts; software licenses related to our financial and IT systems; operating lease arrangements to support our operations in the US and international locations; and various other contractual commitments. The following table summarizes our other contractual obligations as of December 31, 2021, and the expected timing of those payments:
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GoPro, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(in thousands) Total Next 12 Months Beyond 12 Months
(1)Operating lease obligations exclude cash inflows from existing contractual facility subleases thru the end of 2026 as of December 31, 2021.
See Note 9 Commitments, contingencies and guarantees, for a discussion regarding facility leases and other contractual commitments in the Notes to Consolidated Financial Statements.
Liquidity
Based on our most current projections, we believe that our cash, cash equivalents, marketable securities and amounts available under our credit facility, will be sufficient to address our working capital needs, capital expenditures, outstanding commitments and other liquidity requirements for at least one year from the issuance of these financial statements.
•The $125.0 million aggregate principal amount of the 2022 Notes matures on April 15, 2022, unless earlier repurchased or converted into shares of Class A common stock subject to certain conditions. We intend to deliver cash up to the principal amount of the 2022 Notes.
•We expect that operating expenses and inventory purchases will constitute a material use of our cash balances. We intend to continue to manage our operating activities in line with our existing cash and available financial resources.
•In January 2021, we entered into a Credit Agreement which provides for a revolving credit facility under which we may borrow up to an aggregate amount of $50.0 million. Our credit facility will terminate and any outstanding borrowings become due and payable on the earlier of (i) January 2024 and (ii) unless we have cash in a specified deposit account in an amount equal to or greater than the amount required to repay our convertible notes due April 2022, 91 days prior to the maturity date of such convertible notes. No borrowings have been made from the credit facility to date. (See Note 4 Financing arrangements, in the Notes to Consolidated Financial Statements for additional information.)
In the future, we may require additional financing to respond to business opportunities, challenges or unforeseen circumstances. If we are unable to obtain adequate debt or equity financing when we require it or on terms acceptable to us, especially in light of the market volatility and uncertainty as a result of the COVID-19 pandemic, our ability to grow or support our business, repay debt and respond to business challenges could be significantly limited. Although we believe we have adequate sources of liquidity over the long term, the success of our operations and the global economic outlook, in each case, in light of the market volatility and uncertainty as a result of the COVID-19 pandemic, among other factors, could impact our business and liquidity.
In January 2022, our board of directors authorized the repurchase of up to $100 million of its Class A common stock. Share repurchases under the program may be made from time-to-time through open market purchases, block trades or otherwise in compliance with all federal and state securities laws and state corporate law and in accordance with the single broker, timing, price and volume guidelines set forth in Rule 10b‐18 under the Securities Exchange Act of 1934, as amended, as such guidelines may be modified by the SEC from time to time. We expect to fund repurchases through cash generated from operations. This stock repurchase program has no time limit and may be modified, suspended, or discontinued at any time.
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GoPro, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Summary of Cash Flow
The following table summarizes our cash flows for the periods indicated:
Net cash provided by (used in):
Cash flows from operating activities
Cash provided by operating activities of $229.2 million for the year ended December 31, 2021 was attributable to net income of $371.2 million, net cash inflows from changes in our working capital of $61.3 million, net cash inflows from other non-cash expenses of $70.2 million, partially offset by a non-cash tax benefit of $273.5 million. The non-cash tax benefit of $273.5 million was primarily related to the release of tax valuation allowances against deferred tax assets that we consider is more likely than not to be realized against future income. Working capital changes during the year ended December 31, 2021, of $61.3 million was the result of a decrease in inventory of $11.5 million, an increase in accounts payable and other liabilities of $56.3 million, and an increase in deferred revenue of $19.2 million, partially offset by an increase in accounts receivable of $8.1 million and an increase in prepaid expenses and other assets of $17.5 million.
Cash flows from investing activities
Cash used in investing activities of $143.7 million for the year ended December 31, 2021, was primarily attributable to purchases of marketable securities of $146.5 million and net purchases of property and equipment of $5.5 million, partially offset by maturities of marketable securities of $8.3 million.
Cash flows from financing activities
Cash used in financing activities of $9.9 million for the year ended December 31, 2021, was primarily attributable to $17.4 million in tax payments for net restricted stock unit (RSU) settlements, partially offset by $7.5 million received from stock purchases made through our employee stock purchase plan and employee stock option exercises.
Indemnifications
We have entered into indemnification agreements with our directors and executive officers which require us to indemnify our directors and executive officers against liabilities that may arise by reason of their status or service. In addition, in the normal course of business, we enter into agreements that contain a variety of representations and warranties, and provide for general indemnification. Our exposure under these agreements is unknown because it involves claims that may be made against us in the future, but have not yet been made. It is not possible to determine the maximum potential amount under these indemnification agreements due to our limited history with indemnification claims and the unique facts and circumstances involved in each particular agreement. As of December 31, 2021, we have not paid any claims, nor has it been required to defend any action related to its indemnification obligations. However, we may record charges in the future as a result of these indemnification obligations.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates, assumptions and judgments that can significantly impact the amounts we report as assets, liabilities, revenue, costs and expenses and the related disclosures. Note 1Summary of business and significant accounting policies, to the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K describes the significant accounting policies and
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GoPro, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
methods used in the preparation of the consolidated financial statements. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances. Our actual results could differ significantly from these estimates. We believe that the accounting policies discussed below are critical to understanding our historical and future performance as these policies involve a greater degree of judgment and complexity. Our senior management has reviewed these critical accounting policies and related disclosures with the Audit Committee of our board of directors.
Revenue recognition
We derive substantially all of our revenue from the sale of cameras, mounts, accessories, subscriptions and services, and the related implied post contract support to customers. We recognize revenue when control of the promised goods or services are transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. The transaction price we expect to be entitled to is primarily comprised of product revenue, net of returns and variable consideration, which includes sales incentives provided to customers.
For most of our revenue, revenue is recognized at the time the product is delivered and when collection is considered probable. For the Company’s subscription services, revenue is recognized on a ratable basis over the subscription term, with payments received in advance of services being rendered recorded in deferred revenue. For customers who purchase products directly from GoPro.com, we retain a portion of the risk of loss on these sales during transit, which are accounted for as fulfillment costs.
Our camera sales contain multiple performance obligations that can include the following four separate obligations: a) a camera hardware component (which may be bundled with hardware accessories) and the embedded firmware essential to the functionality of the camera component delivered at the time of sale, b) the implicit right to our downloadable free apps and software solutions, c) the implied right for the customer to receive post contract support after the initial sale (PCS), and d) a subscription service. PCS includes the right to receive, on a when and if available basis, future unspecified firmware upgrades and features as well as bug fixes, and email, chat and telephone support. Judgment is required to properly identify the units of accounting for our camera sales arrangements.
For our camera sale arrangements with multiple performance obligations, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are based on observable prices at which we separately sell our products, subscriptions, and services. If a standalone selling price is not directly observable, then we estimate the standalone selling prices considering market conditions and entity-specific factors. For example, the standalone selling price for PCS is determined based on a cost-plus approach, which incorporates the level of support provided to customers, estimated costs to provide our support, and the amount of time and cost that is allocated to our efforts to develop the undelivered elements. While changes in the allocation of the transaction price among the performance obligations will not affect the amount of total revenue ultimately recognized for a particular camera sales arrangement, any significant change in these allocations could impact the timing of revenue recognition, which could have a material effect on our financial condition and results of operations.
Our standard terms and conditions for non-web based sales do not allow for product returns other than under warranty. However, we grant limited rights to return product for certain large retailers. Estimates of expected future product returns are recognized at the time of sale based on analyses of historical return trends by customer class and other factors. An estimated return liability along with a right to recover assets are recorded for future product returns. Return trends are influenced by product life cycles, new product introductions, market acceptance of products, product sell-through, the type of customer, seasonality and other factors. Return rates may fluctuate over time, but are sufficiently predictable to allow us to estimate expected future product returns. Actual returns in any future period could differ from our estimates, which could impact the revenue that we report.
We provide our customers with sales incentives through various programs, including cooperative advertising, marketing development funds and other incentives. Sales incentives are considered to be variable consideration, which we estimate and record as a reduction to revenue at the date of sale. Sales incentives are influenced by historical experience, product sell-through and other factors. Actual sales incentives and their impact on reported revenue could differ from our estimates.
52
GoPro, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Inventory valuation
Inventory consists of finished goods and component parts, and is stated at the lower of cost or net realizable value on a first-in, first-out basis. Our inventory balances were $86.4 million and $97.9 million as of December 31, 2021 and 2020, respectively. Our assessment of market value requires the use of estimates regarding the net realizable value of our inventory balances, including an assessment of excess or obsolete inventory. We determine excess or obsolete inventory based on multiple factors, including market conditions, an estimate of the future demand for our products within a specified time horizon, generally 12 months, product life cycle status, product development plans and current sales levels.
Warranty
We establish a liability for estimated product warranty costs at the time product revenue is recognized. We generally provide a 12-month warranty coverage on all of our products except in the European Union where we provide a 24-month warranty. The Company also offers extended warranty programs for a fee. Our estimate of costs to service our warranty obligations are based on historical experience of repair and replacement of the associated products and expectations of future conditions. The warranty obligation is affected by product failure rates and the related use of materials, labor costs and freight incurred in correcting any product failure. Should actual product failure rates, use of materials or other costs differ from our estimates, additional warranty liabilities could be required, which could materially affect our results of operations.
Income taxes
We are subject to income taxes in the United States and multiple foreign jurisdictions. Our effective tax rates differ from the United States federal statutory rate, primarily due to changes in our valuation allowance, the effect of non-United States operations, deductible and non-deductible stock-based compensation expense, state taxes, federal and state research and development tax credits and other adjustments. Our effective tax rate was negative 312.0%, negative 7.8% and positive 23.2% in 2021, 2020 and 2019, respectively. The calculation of our provision for income taxes involves the use of estimates, assumptions and judgments while taking into account current tax laws, our interpretation of current tax laws and possible outcomes of future tax audits. We review our tax positions quarterly and adjust the balances as new information becomes available. Our income tax rate is primarily affected by the tax rates that apply to our foreign earnings.
Each quarter we assess the recoverability of our existing deferred tax assets under ASC Topic 740. We assess available positive and negative evidence to estimate whether sufficient future taxable income will be generated to use our existing deferred tax assets. In the assessment for the period ended September 30, 2021, we concluded it was more likely than not that our deferred tax assets related to future United States federal and state income taxes will be realizable. Therefore, in 2021 the United States federal and state valuation allowances were released, which resulted in a $284.6 million non-cash net benefit to earnings for the year ended December 31, 2021. Our Company’s foreign deferred tax assets in each jurisdiction are supported by taxable income or in the case of acquired companies, by the future reversal of deferred tax liabilities. It is more likely than not that our Company’s foreign deferred tax assets will be realized and thus, a valuation allowance is not required on its foreign deferred tax assets. We will continue to assess the realizability of the deferred tax assets in each of the applicable jurisdictions going forward.
Uncertain tax positions. We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. We file annual income tax returns in multiple taxing jurisdictions around the world and a number of years may elapse before an uncertain tax position is audited by the relevant tax authorities and finally resolved. We have established reserves to address potential exposures related to tax positions that could be challenged by tax authorities. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position and we can provide no assurance that the final tax outcome of these matters will not be materially different, we believe that we have adequately reserved for our uncertain tax positions.
Our future effective tax rates could be adversely affected if actual earnings are different than our estimates, by changes in the valuation of our deferred tax assets or liabilities, outcomes resulting from income tax examinations, or by changes or interpretations in tax laws, regulations or accounting principles.
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GoPro, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Impairment of goodwill and long-lived assets. We perform an annual assessment of our goodwill during the fourth quarter of each calendar year or more frequently if indicators of potential impairment exist, such as an adverse change in business climate or a decline in the overall industry demand, that would indicate it is more likely than not that the fair value of our single reporting unit would be less than its carrying value. If we determine that it is more likely than not that the fair value of our single reporting unit is less than its carrying value, we measure the amount of impairment as the amount the carrying value of our single reporting entity exceeds the fair value. As of December 31, 2021, we determined that no impairment of the carrying value of goodwill was required.
Long-lived assets, such as property and equipment, intangible assets subject to amortization and right-of-use assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount to the estimated future undiscounted cash flows expected to be generated by the asset group. If it is determined that an asset group is not recoverable, an impairment charge is recognized for the amount by which the carrying amount of the asset group exceeds its fair value. We recorded a $12.5 million right-of-use asset impairment in 2020 primarily related to our headquarters campus. We used the following significant assumptions to determine the impairment charge: future sublease rental rates, future sublease market conditions and a discount rate based on the weighted-average cost of capital.
Convertible Senior Notes
We account for our convertible senior notes in accordance with ASC 470-20, Debt with Conversion and Other Options. As our 2022 Notes and 2025 Notes have a net settlement feature and may be settled wholly or partially in cash upon conversion, we are required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The carrying amount of the liability component of the instrument is determined by estimating the fair value of a similar liability without the conversion option using income and market based approaches. For the income-based approach, we use a convertible bond pricing model that includes several assumptions such as volatility and the risk-free rate. For the market-based approach, we evaluate issuances of convertible debt securities by other companies at the time of issuance. The amount of the equity component is then calculated by deducting the fair value of the liability component from the principal amount of the instrument. The difference between the principal amount and the liability component represents a debt discount that is amortized to interest expense over the respective terms of the 2022 Notes and 2025 Notes using an effective interest rate method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. In accounting for the issuance costs related to the 2022 Notes and 2025 Notes, the allocation of issuance costs incurred between the liability and equity components were based on their relative values. Similarly, in accordance with ASC 470-20, transactions involving contemporaneous exchanges of cash between the same debtor and creditor in connection with the issuance of a new debt obligation and satisfaction of an existing debt obligation by the debtor, such as the contemporaneous 2022 Notes partial repurchase and issuance of the 2025 Notes, should be evaluated as a modification or an exchange transaction depending on whether the exchange is determined to have substantially different terms. The 2022 Notes partial repurchase and issuance of the 2025 Notes were deemed to have substantially different terms due to the significant difference between the value of the conversion option immediately prior to and after the exchange, and consequently, we accounted for the 2022 Notes partial repurchase as a debt extinguishment. The total consideration for the 2022 Notes partial repurchase was separated into liability and equity components by estimating the fair value of a similar liability without a conversion option and assigning the residual value to the equity component. The effective interest rate used to estimate the fair value of the liability component of the 2022 Notes partial repurchase is based on the income approach used to determine the effective interest rate of the 2025 Notes, adjusted for the remaining term of the 2022 Notes. The gain or loss on extinguishment of the debt is subsequently determined by comparing repurchase consideration allocated to the liability component to the sum of the carrying value of the liability component, net of the proportionate amounts of unamortized debt discount and remaining unamortized debt issuance costs.
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GoPro, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Recent Accounting Pronouncements
Refer to Recent Accounting Pronouncements in Note 1 Summary of business and significant accounting policies, to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Non-GAAP Financial Measures
We report net income (loss) and diluted net income (loss) per share in accordance with United States generally accepted accounting principles (GAAP) and on a non-GAAP basis. Additionally, we report non-GAAP adjusted EBITDA. We use non-GAAP financial measures to help us understand and evaluate our core operating performance and trends, to prepare and approve our annual budget, and to develop short-term and long-term operational plans. Our management uses, and believes that investors benefit from referring to these non-GAAP financial measures in assessing our operating results. These non-GAAP financial measures should not be considered in isolation from, or as an alternative to, the measures prepared in accordance with GAAP, and are not based on any comprehensive set of accounting rules or principles. We believe that these non-GAAP measures, when read in conjunction with our GAAP financials, provide useful information to investors by facilitating:
•the comparability of our on-going operating results over the periods presented;
•the ability to identify trends in our underlying business; and
•the comparison of our operating results against analyst financial models and operating results of other public companies that supplement their GAAP results with non-GAAP financial measures.
These non-GAAP financial measures have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP. Some of these limitations are:
•adjusted EBITDA does not reflect tax payments that reduce cash available to us;
•adjusted EBITDA excludes depreciation and amortization and, although these are non-cash charges, the property and equipment being depreciated and amortized often will have to be replaced in the future, and adjusted EBITDA does not reflect any cash capital expenditure requirements for such replacements;
•adjusted EBITDA excludes the amortization of point of purchase (POP) display assets because it is a non-cash charge, and is treated similarly to depreciation of property and equipment and amortization of acquired intangible assets;
•adjusted EBITDA and non-GAAP net income (loss) exclude restructuring and other related costs which primarily include severance-related costs, stock-based compensation expenses, facilities consolidation charges recorded in connection with restructuring actions announced in the fourth quarter of 2016, first quarter of 2017, first quarter of 2018 and second quarter of 2020, including right-of-use asset impairment charges, and the related ongoing operating lease cost of those facilities recorded under ASC 842, Leases. These expenses do not reflect expected future operating expenses and do not contribute to a meaningful evaluation of current operating performance or comparisons to the operating performance in other periods;
•adjusted EBITDA and non-GAAP net income (loss) exclude stock-based compensation expense related to equity awards granted primarily to our workforce. We exclude stock-based compensation expense because we believe that the non-GAAP financial measures excluding this item provide meaningful supplemental information regarding operational performance. In particular, we note that companies calculate stock-based compensation expense for the variety of award types that they employ using different valuation methodologies and subjective assumptions. These non-cash charges are not factored into our internal evaluation of net income (loss) as we believe their inclusion would hinder our ability to assess core operational performance;
•adjusted EBITDA and non-GAAP net income (loss) exclude the loss on extinguishment of debt because it is not reflective of ongoing operating results in the period, and such losses vary in the frequency and amount;
•non-GAAP net income (loss) excludes acquisition-related costs including the amortization of acquired intangible assets (primarily consisting of acquired technology), the impairment of acquired intangible assets (if applicable), as well as third-party transaction costs incurred for legal and other professional services. These costs are not factored into our evaluation of potential acquisitions, or of our performance after completion of
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GoPro, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
the acquisitions, because these costs are not related to our core operating performance or reflective of ongoing operating results in the period, and the frequency and amount of such costs vary significantly based on the timing and magnitude of our acquisition transactions and the maturities of the businesses being acquired. Although we exclude the amortization of acquired intangible assets from our non-GAAP net income (loss), management believes that it is important for investors to understand that such intangible assets were recorded as part of purchase accounting and contribute to revenue generation;
•non-GAAP net income (loss) excludes non-cash interest expense. In connection with the issuance of the Convertible Senior Notes in April 2017 and November 2020, we are required to recognize non-cash interest expense, such as the amortization of debt discounts, in accordance with the authoritative accounting guidance for convertible debt that may be settled in cash;
•non-GAAP net income (loss) includes income tax adjustments. We utilize a cash-based non-GAAP tax expense approach (based upon expected annual cash payments for income taxes) for evaluating operating performance as well as for planning and forecasting purposes. This non-GAAP tax approach eliminates the effects of period specific items, which can vary in size and frequency and does not necessarily reflect our long-term operations. Historically, we computed a non-GAAP tax rate based on non-GAAP pre-tax income on a quarterly basis, which considered the income tax effects of the adjustments above; and
•other companies may calculate these non-GAAP financial measures differently than we do, limiting their usefulness as comparative measures.
The following tables present a reconciliation of net income (loss) to adjusted EBITDA:
Three months ended December 31,
Income tax expense (benefit) (392) 116
Depreciation and amortization 2,363 3,570
POP display amortization 737 708
Loss on extinguishment of debt — 5,389
Restructuring and other costs 113 69
Year ended December 31,
Loss on extinguishment of debt — 5,389 — — —
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GoPro, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following tables present a reconciliation of net income (loss) to non-GAAP net income (loss):
Three months ended December 31,
(in thousands, except per share data) 2021 2020
Acquisition-related costs 71 723
Restructuring and other costs 113 69
Loss on extinguishment of debt — 5,389
Income tax adjustments (759) (585)
GAAP diluted net income per share $ 0.32 $ 0.28
Non-GAAP diluted net income per share $ 0.41 $ 0.39
GAAP and non-GAAP shares for diluted net income per share 162,742 156,464
Year ended December 31,
Loss on extinguishment of debt — 5,389 — — —
Gain on sale and license of intellectual property — — — (5,000) —
Add: effect of dilutive shares — 3,096 1,580 — —
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
In addition to market risk that is created by the uncertainties and the global market disruptions resulting from the COVID-19 pandemic, we are exposed to market risks in the ordinary course of our business. These risks primarily include foreign currency and interest rate risks as follows:
Foreign currency risk. Revenue generated from GoPro.com, which has increased as a result of our focus on our direct-to-consumer sales strategy, is denominated in U.S. dollars and various foreign currencies. To the extent that revenue from foreign currency transactions increases, our foreign currency risk will also increase. However, to date, the majority of our product sales and inventory purchases have been denominated in U.S. dollars. We therefore have had limited foreign currency risk associated with these two activities. The functional currency of all of our entities is the U.S. dollar. Our operations outside of the United States hold foreign denominated cash balances and incur a majority of their operating expenses in foreign currencies, principally the Euro, British pound, Canadian dollar, Singaporean dollar and Romanian leu. Our results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates. However, we believe that the exposure to foreign currency fluctuation from operating expenses is immaterial at this time and do not constitute a significant portion of our total expenses. As we continue to focus on the growth of our direct-to-consumer business and expand our operations, if foreign currency exchange rates become volatile, or if foreign currency held in our foreign entities increases, our exposure to foreign currency risk could become more significant. To date, we have not entered into any material foreign currency exchange contracts. For assets and liabilities denominated in other currencies, we do not believe that the effects of a 10% shift in exchange rates between those currencies and the U.S. dollar would have a material effect on our results of operations from such a shift.
Interest rate risk. Our exposure to market risk for changes in interest rates primarily relates to our cash and cash equivalents and marketable securities. Our cash equivalents and marketable securities are comprised of money market funds, commercial paper, government securities and corporate debt securities. The primary objectives of our investment activities are to preserve principal and provide liquidity without significantly increasing risk. Our cash and cash equivalents are held for working capital purposes. We do not enter into investments for trading or speculative purposes. Due to the nature of our investment portfolio, we do not believe that an immediate 10% shift in interest rates would have a material effect on the fair value of our investment portfolio.
The fair value of our 2022 Convertible Senior Notes (2022 Notes) and 2025 Convertible Senior Notes (2025 Notes) are subject to interest rate risk, market risk and other factors due to the conversion feature. The capped call that was entered into concurrently with the issuance of our 2025 Notes were completed to reduce the potential dilution from the conversion of the 2025 Notes. The fair value of the 2022 Notes and 2025 Notes will generally increase as interest rates fall and decrease as interest rates rise. In addition, the fair value of the 2022 Notes and 2025 Notes will generally increase as our Class A common stock price increases and will generally decrease as the common stock price declines. The interest and market value changes affect the fair value of the 2022 Notes and 2025 Notes but do not impact our financial position, cash flows or results of operations due to the fixed nature of the debt obligation.
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Item 8. Financial Statements and Supplementary Data
GoPro, Inc.
Index to consolidated financial statements
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID: 238) 60
Consolidated Balance Sheets 63
Consolidated Statements of Operations 64
Consolidated Statements of Stockholders’ Equity 65
Consolidated Statements of Cash Flows 66
Notes to Consolidated Financial Statements 68
The supplementary financial information required by this Item 8, is included in Part II, Item 7 under the caption Results of Operations, which is incorporated herein by reference.
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Report of Independent Registered Public Accounting Firm
To theBoard of Directors and Stockholders of GoPro, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of GoPro, Inc. and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2021, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
60
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Realizability of Deferred Tax Assets
As described in Notes 1 and 8 to the consolidated financial statements, management assesses the likelihood that the Company’s deferred tax assets will be recovered from future taxable income in each tax jurisdiction and, to the extent management believes recovery is not likely, establishes a valuation allowance. Each quarter, management assesses the recoverability of the existing deferred tax assets under ASC Topic 740. Management assesses available positive and negative evidence and uses judgment regarding past and future events, including operating results to estimate whether sufficient future taxable income will be generated to use the existing deferred tax assets. In the assessment for the period ended September 30, 2021, management concluded it was more likely than not that the deferred tax assets related to United States federal and state income taxes will be realizable. Therefore, in 2021 the United States federal and state valuation allowances were fully released and resulted in a $284.6 million non-cash net benefit to earnings for the year ended December 31, 2021. The determination to release the valuation allowances was based, in part, on the Company’s cumulative GAAP income from the past three years and projections of GAAP income in future years.
The principal considerations for our determination that performing procedures relating to the realizability of deferred tax assets is a critical audit matter are the high degree of auditor subjectivity and effort in performing procedures and evaluating the available positive and negative evidence to support management’s conclusion that it is more likely than not that the deferred tax assets related to United States federal and state income taxes will be realizable.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s assessment of the realizability of deferred tax assets, including controls over management’s assessment of all available positive and negative evidence. These procedures also included, among others (i) testing the calculation of cumulative GAAP income from the past three years; (ii) testing the completeness and appropriateness of available positive and negative evidence regarding past and future events, including operating results; and (iii) evaluating management’s conclusion that it is more likely than not that the Company’s deferred tax assets related to United States federal and state income taxes will be realizable.
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/s/ PricewaterhouseCoopers LLP
San Jose, California
February 11, 2022
We have served as the Company’s auditor since 2011.
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GoPro, Inc.
Consolidated Balance Sheets
(in thousands, except par values) December 31, 2021 December 31, 2020
Assets
Current assets:
Restricted cash — 2,000
Marketable securities 137,830 —
Prepaid expenses and other current assets 42,311 23,872
Intangible assets, net 62 1,214
Liabilities and Stockholders’ Equity
Current liabilities:
Accrued expenses and other current liabilities 128,572 113,776
Short-term operating lease liabilities 9,819 9,369
Long-term operating lease liabilities 43,025 51,986
Commitments, contingencies and guarantees (Note 8)
Stockholders’ equity:
Preferred stock, $0.0001 par value, 5,000 shares authorized; none issued — —
The accompanying notes are an integral part of these consolidatedfinancial statements.
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GoPro, Inc.
Consolidated Statements of Operations
Year ended December 31,
Operating expenses:
Other income (expense):
Net income (loss) per share:
Shares used to compute net income (loss) per share:
The accompanying notes are an integral part of these consolidated financial statements.
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GoPro, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands) Shares Amount Amount
Taxes paid related to net share settlements — (6,618) — — (6,618)
Stock-based compensation expense — 37,185 — — 37,185
Cumulative effect of adoption of new accounting standards — — — (61) (61)
Taxes paid related to net share settlements — (6,207) — — (6,207)
Stock-based compensation expense — 29,963 — — 29,963
Taxes paid related to net share settlements — (17,380) — — (17,380)
Stock-based compensation expense (Note 5) — 38,651 — — 38,651
The accompanying notes are an integral part of these consolidated financial statements.
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GoPro, Inc.
Consolidated Statements of Cash Flows
Year ended December 31,
Operating activities:
Non-cash restructuring charges (99) 5,242 (199)
Impairment of right-of-use assets — 12,460 —
Loss on extinguishment of debt — 5,389 —
Changes in operating assets and liabilities:
Investing activities:
Purchases of property and equipment, net (5,545) (4,881) (8,348)
Sale of marketable securities — — 17,867
Asset acquisition — (438) —
Financing activities:
Proceeds from issuance of 2025 convertible senior notes — 143,750 —
Payment of debt issuance costs — (4,752) —
Purchase of Capped Calls related to 2025 convertible senior notes — (10,249) —
Payments for 2022 convertible senior notes partial repurchase — (56,000) —
Net cash provided by (used in) financing activities (9,889) 71,977 (1,044)
Net change in cash, cash equivalents and restricted cash 73,433 177,353 (1,794)
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Supplementary cash flow disclosure:
Cash paid for income taxes, net $ 810 $ 2,237 $ 176
Non-cash investing and financing activities:
The accompanying notes are an integral part of these consolidated financial statements.
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GoPro, Inc.
Notes to Consolidated Financial Statements
1. Summary of business and significant accounting policies
GoPro, Inc. and its subsidiaries (GoPro or the Company) make it easy for the world to capture and share itself in immersive and exciting ways, helping people get the most out of their photos and videos. The Company is committed to developing solutions that create an easy, seamless experience for consumers to capture, create, manage and share engaging personal content. To date, the Company’s cameras, mountable and wearable accessories, and subscription services have generated substantially all of its revenue. The Company sells its products globally on its website, and through retailers and wholesale distributors. The Company’s global corporate headquarters are located in San Mateo, California.
Basis of presentation.The accompanying Consolidated Financial Statements have been prepared in accordance with United States generally accepted accounting principles (GAAP) for financial information set forth in the Accounting Standards Codification (“ASC”), as published by the Financial Accounting Standards Board (“FASB”), and with the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). The Company’s fiscal year ends on December 31, and its fiscal quarters end on March 31, June 30 and September 30.
The Company’s operating results, financial position and cash flows for fiscal years 2021 and 2020 were negatively impacted by the COVID-19 pandemic. As the global impact of the pandemic began to emerge in the first quarter of 2020, the Company accelerated a shift in its sales channel strategy to focus more on direct-to-consumer sales through GoPro.com, and implemented a restructuring plan in April 2020, which primarily impacted the Company’s global workforce, sales and marketing expenses, and leased facilities. These actions were reflected in the Company’s financial results starting in the second quarter of 2020 by reducing on-going operating expenses and helped accelerate its ability to achieve profitability in the second half of 2020. In 2020, the Company also issued additional convertible senior notes and entered into a new credit facility.
The 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 any other future period.
Principles of consolidation. These consolidated financial statements include all the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of estimates. The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the Company’s consolidated financial statements and accompanying notes. Significant estimates and assumptions made by management include those related to revenue recognition and the allocation of the transaction price (including sales incentives, sales returns and implied post contract support), inventory valuation, product warranty liabilities, the valuation, impairment and useful lives of long-lived assets (property and equipment, operating lease right-of-use assets, intangible assets and goodwill), fair value of convertible senior notes, and income taxes. The Company bases its estimates and assumptions on historical experience and on various other factors that it believes to be reasonable under the circumstances, including but not limited to the potential impacts arising from the COVID-19 pandemic, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The extent and continued impact of COVID-19 has been taken into account by management in making the significant assumptions and estimates related to the above; however, if the duration and spread of the outbreak, the impact on our customers, and the effect on our contract manufacturers, vendors and supply chains is different from the Company’s estimates and assumptions, then actual results could differ materially. Given the uncertainty with respect to COVID-19, the Company’s estimates and assumptions may evolve as conditions change. To the extent there are material differences between the estimates and the actual results, future results of operations could be affected.
Comprehensive income (loss).For all periods presented, comprehensive income (loss) approximated net income (loss). Therefore, the Consolidated Statements of Comprehensive Income (Loss) have been omitted.
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GoPro, Inc.
Notes to Consolidated Financial Statements
Cash equivalents and marketable securities. Cash equivalents consist of investments in money market funds with maturities of three months or less from the date of purchase. Marketable securities consist of commercial paper, government securities and corporate debt securities, and are classified as available-for-sale securities. The Company views these securities as available to support current operations and has classified all available-for-sale securities as current assets. Available-for-sale securities are carried at fair value with unrealized gains and losses, if any, included in stockholders’ equity. Unrealized gains and losses are charged against other income (expense), net, for declines in fair value below the cost of an individual investment that is deemed to be other than temporary. The Company has not identified any marketable securities as other-than-temporarily impaired for the periods presented. The cost of securities sold is based upon a specific identification method.
Restricted cash.As of December 31, 2021 and 2020, the Company had an outstanding letter of credit collateralized by a money market account of zero and $2.0 million, respectively, for certain duty related requirements.
Accounts receivable.Accounts receivable are stated at invoice value less estimated allowances for doubtful accounts. Allowances are recorded based on the Company’s assessment of various factors, such as: historical experience, credit quality of its customers, age of the accounts receivable balances, geographic related risks, economic conditions and other factors that may affect a customer’s ability to pay. The allowance for doubtful accounts as of December 31, 2021 and 2020 was $0.7 million and $0.5 million, respectively.
Inventory. Inventory consists of finished goods and component parts, which are purchased directly from contract manufacturers or from suppliers. Inventory is stated at the lower of cost or net realizable value on a first-in, first-out basis. The Company writes down its inventory for estimated obsolescence or excess inventory equal to the difference between the cost of inventory and estimated market value plus the estimated cost to sell. The Company’s assessment of market value is based upon assumptions around market conditions and estimated future demand for its products within a specified time horizon, generally 12 months, product life cycle status, product development plans and current sales levels. Adjustments to reduce inventory to net realizable value are recognized in cost of revenue.
Point of purchase (POP) displays.The Company provides retailers with POP displays, generally free of charge, in order to facilitate the marketing of the Company’s products within retail stores. The POP displays contain a display that broadcasts video images taken by GoPro cameras along with product placement available for cameras and accessories. POP display costs are capitalized as long-term assets and charged to sales and marketing expense over the expected period of benefit, which generally ranges from 24 to 36 months. Cash outflows and amortization related to POP displays are classified as operating activities in the consolidated statement of cash flows.
Property and equipment, net. Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful life of the assets, ranging from one to nine years. Leasehold improvements are amortized over the shorter of the lease term or their expected useful life. Property and equipment pending installation, configuration or qualification are classified as construction in progress. Costs of maintenance and repairs that do not improve or extend the lives of the respective assets are expensed as incurred.
Fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the reporting date. The Company estimates and categorizes the fair value of its financial assets by applying the following hierarchy:
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GoPro, Inc.
Notes to Consolidated Financial Statements
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Leases. The Company leases its office space and facilities under cancelable and non-cancelable operating leases. Operating leases are presented as operating lease right-of-use (ROU) assets, short-term operating lease liabilities and long-term operating lease liabilities on the Company’s Consolidated Balance Sheets. ROU assets represent the Company’s right to control the use of an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease.
Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of future lease payments. The Company determines its incremental borrowing rate based on the approximate rate at which the Company would borrow, on a secured basis, to calculate the present value of future lease payments. Lease expenses are recognized on a straight-line basis over the lease term. Certain leases include an option to renew with terms that can extend the lease term from one to five years. The exercise of a lease renewal option is at the Company’s sole discretion and is included in the lease term when the Company is reasonably certain it will exercise the option.
Prior to January 1, 2019, the Company recognized leases under Accounting Standards Codification (ASC) 840, Leases, which had the following differences from the current lease standard, ASC 842, Leases:
•Operating leases were previously not recorded on the Company’s Consolidated Balance Sheets.
•The Company calculated a liability for future costs to be incurred under a lease for its remaining term without economic benefit to the Company upon determination of a cease-use date. The fair value of the liability was determined based on remaining lease payments, estimated sublease income and the effects of any prepaid or deferred items recognized under the lease.
Goodwill and acquired intangible assets. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination. Acquired intangible assets other than goodwill are amortized over their useful lives unless the lives are determined to be indefinite. For intangible assets acquired in a business combination, the determination of the estimated fair values of the assets received involves significant judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future, technology obsolescence, and the appropriated weighted-average cost of capital. Valuation approaches consistent with the market approach, income approach and/or cost approach are used to measure fair value.
Impairment of goodwill and long-lived assets. The Company performs an annual assessment of its goodwill during the fourth quarter of each calendar year or more frequently if indicators of potential impairment exist, such as an adverse change in business climate or a decline in the overall industry demand, that would indicate it is more likely than not that the fair value of its single reporting unit is less than its carrying value. There was no impairment of goodwill recorded for any periods presented. For the Company’s annual impairment testing in 2021, the Company did not identify any indicators of potential impairment of its single reporting unit. Other indefinite-lived intangible assets are assessed for impairment at least annually. If their carrying value exceeds the estimated fair value, the difference is recorded as an impairment.
Long-lived assets, such as property and equipment, intangible assets subject to amortization and right-of-use assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount to the estimated future undiscounted cash flows expected to be generated by the asset group. If it is determined that an asset group is not recoverable, an impairment charge is recognized for the amount by which the carrying amount of the asset group exceeds its fair value. The Company recorded a $12.5 million right-of-use asset impairment in 2020 primarily related to its headquarter campus as described further in Note 11 Restructuring charges. The Company used the following significant assumptions to determine the impairment charge: future sublease rental rates, future sublease market conditions and a discount rate based on the weighted-average cost of capital. The Company did not record any impairment charges in 2021 or 2019.
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 24-month warranty.
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GoPro, Inc.
Notes to Consolidated Financial Statements
The Company also offers extended warranty programs for a fee. The Company’s estimate of costs to service its warranty obligations is based on its historical experience of repair and replacement of the associated products and expectations of future conditions. The warranty obligation is affected by product failure rates and the related use of materials, labor costs and freight incurred in correcting any product failure.
Convertible Senior Notes. In April 2017, the Company issued $175.0 million aggregate principal amount of 3.50% Convertible Senior Notes due April 15, 2022 (2022 Notes). In November 2020, the Company issued $143.8 million aggregate principal amount of 1.25% Convertible Senior Notes due November 15, 2025 (2025 Notes). Concurrently with the issuance of the 2025 Notes, the Company used a portion of the net proceeds to repurchase part of the 2022 Notes. See Note 4 Financing Arrangements for additional details.
The Company accounts for its 2022 Notes and 2025 Notes in accordance with ASC 470-20, Debt with Conversion and Other Options. As the Company’s 2022 Notes and 2025 Notes have a net settlement feature and may be settled wholly or partially in cash upon conversion, the Company is required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The carrying amount of the liability component of the instrument is determined by estimating the fair value of a similar liability without the conversion option using income and market based approaches. The amount of the equity component is then calculated by deducting the fair value of the liability component from the principal amount of the instrument. The difference between the principal amount and the liability component represents a debt discount that is amortized to interest expense over the remaining term of the convertible senior notes using an effective interest rate method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. In accounting for the issuance costs related to the 2022 Notes and 2025 Notes, the allocation of issuance costs incurred between the liability and equity components were based on their relative values.
The total consideration for the 2022 Notes partial repurchase was separated into liability and equity components by estimating the fair value of a similar liability without a conversion option and assigning the residual value to the equity component. The effective interest rate used to estimate the fair value of the liability component of the 2022 Notes partial repurchase is based on the income approach used to determine the effective interest rate of the 2025 Notes, adjusted for the remaining term of the 2022 Notes. The gain or loss on extinguishment of the debt was subsequently determined by comparing repurchase consideration allocated to the liability component to the sum of the carrying value of the liability component, net of the proportionate amounts of unamortized debt discount and remaining unamortized debt issuance costs.
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. This accounting standard update, which we adopted effective January 1, 2022, will have a significant impact on the ongoing accounting of the 2022 and 2025 Notes. Refer to section “Recent Accounting Pronouncements” for additional details on the adoption of this accounting standard update.
Revenue recognition.The Company derives substantially all of its revenue from the sale of cameras, mounts, accessories, subscription and services, and implied post contract support to customers. The transaction price recognized as revenue represents the consideration the Company expects to be entitled to and is primarily comprised of product revenue, net of returns and variable consideration, which includes sales incentives provided to customers.
The Company’s camera sales contain multiple performance obligations that can include the following four separate obligations: a) a camera hardware component (which may be bundled with hardware accessories) and the embedded firmware essential to the functionality of the camera component delivered at the time of sale, b) the implicit right to the Company’s downloadable free apps and software solutions, c) the implied right for the customer to receive post contract support after the initial sale (PCS), and d) a subscription service. The Company’s PCS includes the right to receive, on a when and if available basis, future unspecified firmware upgrades and features as well as bug fixes, and email, chat and telephone support.
The Company recognizes revenue from its sales arrangements when control of the promised goods or services are transferred to its customers, in an amount that reflects the amount of consideration expected to be received in
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GoPro, Inc.
Notes to Consolidated Financial Statements
exchange for the transferred goods or services. For the sale of hardware products, including related firmware and free software solutions, revenue is recognized when transfer of control occurs at a point in time, which generally is at the time the hardware product is delivered and collection is considered probable. For customers who purchase products directly from GoPro.com, the Company retains a portion of the risk of loss on these sales during transit, which are accounted for as fulfillment costs. For PCS, revenue is recognized ratably over 24 months, which represents the estimated service period based on historical experience. For subscriptions, revenue is recognized ratably over the subscription term, with any payments received in advance of services rendered are recorded as deferred revenue.
For the Company’s camera sale arrangements with multiple performance obligations, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are based on observable prices at which the Company separately sells its products, subscriptions, and services. If a standalone selling price is not directly observable, then the Company estimates the standalone selling prices considering market conditions and entity-specific factors. For example, the standalone selling price for PCS is determined based on a cost-plus approach, which incorporates the level of support provided to customers, estimated costs to provide support, and the amount of time and cost that is allocated to efforts to develop the undelivered elements.
The Company's standard terms and conditions of sale for non-web-based sales do not allow for product returns other than under warranty. However, the Company grants limited rights of return, primarily to certain large retailers. The Company reduces revenue and cost of sales for the estimated returns based on analyses of historical return trends by customer class and other factors. An estimated return liability along with a right to recover assets are recorded for future product returns. Return trends are influenced by product life cycles, new product introductions, market acceptance of products, product sell-through, the type of customer, seasonality and other factors. Return rates may fluctuate over time, but are sufficiently predictable to allow the Company to estimate expected future product returns.
The Company provides sales commissions to internal and external sales representatives which are earned in the period in which revenue is recognized. As a result, the Company expenses such costs as incurred.
Deferred revenue as of December 31, 2021 and 2020 includes amounts related to the Company’s subscriptions and services. The Company’s short-term and long-term deferred revenue balances totaled $48.5 million and $29.3 million as of December 31, 2021 and 2020, respectively. During the year ended December 31, 2021, the Company recognized $27.6 million of revenue that was included in the deferred revenue balance as of December 31, 2020. During the year ended December 31, 2020, the Company recognized $15.4 million of revenue that was included in the deferred revenue balance as of December 31, 2019.
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.
Shipping costs.Amounts billed to customers for shipping and handling are classified as revenue, and the Company’s related shipping and handling costs incurred are classified as cost of revenue.
Sales taxes.Sales taxes collected from customers and remitted to respective governmental authorities are recorded as liabilities and are not included in revenue.
Advertising costs. Advertising costs consist of costs associated with print, television and e-commerce media advertisements and are expensed as incurred. The Company incurs promotional expenses resulting from payments under event, resort and athlete sponsorship contracts. These sponsorship arrangements are considered to be executory contracts and, as such, the costs are expensed as performance under the contract is received. The costs associated with the preparation of sponsorship activities, including the supply of GoPro products, media team support, and activation fees are expensed as incurred. Prepayments made under sponsorship agreements are included in prepaid expenses or other long-term assets depending on the period to which the prepayment applies. Advertising costs were $35.8 million, $34.1 million and $67.3 million in 2021, 2020 and 2019, respectively.
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GoPro, Inc.
Notes to Consolidated Financial Statements
Stock-based compensation. Stock-based awards granted to qualified employees, non-employee directors and consultants are measured at fair value and recognized as an expense. The Company primarily issues restricted stock units and accounts for forfeitures as they occur. For service-based awards, stock-based compensation is recognized on a straight-line basis over the requisite service period. For performance and market-based awards which also require a service period, the Company uses graded vesting over the longer of the derived service period or when the performance or market condition is satisfied.
Foreign currency.The U.S. dollar is the functional currency of the Company’s foreign subsidiaries. The Company remeasures monetary assets or liabilities denominated in currencies other than the U.S. dollar using exchange rates prevailing on the balance sheet date, and non-monetary assets and liabilities at historical rates. Foreign currency remeasurement and transaction gains and losses are included in other income (expense), net and have not been material for any periods presented.
Income taxes. The Company utilizes the asset and liability method for computing its income tax provision, under which deferred tax assets and liabilities are recognized for the expected future consequences of temporary differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates. Management makes estimates, assumptions and judgments to determine the Company’s provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against deferred tax assets. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income in each tax jurisdiction and, to the extent the Company believes recovery is not likely, establishes a valuation allowance. In the period ended September 30, 2021, the Company assessed its deferred tax assets and based on the weight of available evidence, the Company concluded that it was more likely than not that its United States federal and state deferred tax assets would be realized. Therefore, in 2021 the Company released $284.6 million of valuation allowances, which resulted in a non-cash net benefit to earnings for the year ended December 31, 2021.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. Interest and penalties related to unrecognized tax benefits are recognized within income tax expense.
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.
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GoPro, Inc.
Notes to Consolidated Financial Statements
Recent accounting standards
Standards that were adopted
Standards not yet adopted
Although there are several other new accounting standards issued or proposed by the FASB, which the Company has adopted or will adopt, as applicable, the Company does not believe any of these accounting pronouncements has had or will have a material impact on its consolidated financial statements.
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GoPro, Inc.
Notes to Consolidated 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:
(in thousands) Level 1 Level 2 Total Level 1 Level 2 Total
Cash equivalents (1):
Marketable securities:
Total marketable securities $ — $ 137,830 $ 137,830 $ — $ — $ —
(1) Included in cash and cash equivalents in the accompanying Consolidated Balance Sheets. Cash balances were $217.8 million as of December 31, 2021 and $308.2 million, including $2.0 million of restricted cash, as of December 31, 2020.
Cash equivalents are classified as Level 1 because the Company uses quoted market prices to determine their fair value. Marketable securities are classified as Level 2 because the Company uses alternative pricing sources and models utilizing market observable inputs to determine their fair value. The contractual maturities of available-for-sale marketable securities as of December 31, 2021 were all less than one year in duration. At December 31, 2021 and 2020, the Company had no financial assets or liabilities measured at fair value on a recurring basis that were classified as Level 3, which are valued based on inputs supported by little or no market activity.
At December 31, 2021 and 2020, 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 (2022 Notes). In November 2020, the Company issued $143.8 million principal amount of Convertible Senior Notes due 2025 (2025 Notes) (see Note 4 Financing arrangements). The estimated fair value of the 2022 Notes and 2025 Notes is based on quoted market prices of the Company’s instruments in markets that are not active and are classified as Level 2 within the fair value hierarchy. The Company estimated the fair value of the 2022 Notes and 2025 Notes by evaluating quoted market prices and calculating the upfront cash payment a market participant would require to assume these obligations. The calculated fair value of the 2022 Notes was $132.4 million and $146.0 million as of December 31, 2021 and 2020, respectively, while the calculated fair value of the 2025 Notes was $189.0 million and $166.8 million as of December 31, 2021 and 2020, respectively. The calculated fair value is highly correlated to the Company’s stock price and as a result, significant changes to the Company’s stock price will have a significant impact on the calculated fair value of the 2022 Notes and 2025 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.
The Company also measures certain non-financial assets at fair value on a nonrecurring basis, primarily goodwill, intangible assets and operating lease right-of-use assets, in connection with periodic evaluations for potential impairment.
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GoPro, Inc.
Notes to Consolidated Financial Statements
3. Consolidated financial statement details
The following sections and tables provide details of selected balance sheet items.
Inventory
Property and equipment, net
(in thousands) Useful life (in years) December 31, 2021 December 31, 2020
Production, engineering and other equipment 4 45,641 48,908
Construction in progress 480 22
Less: Accumulated depreciation and amortization (102,774) (112,594)
(1) Refer to Note 11 Restructuring charges, for details of operating lease right-of-use asset impairment charges recorded in 2020.
Depreciation expense was $9.8 million, $14.5 million and $18.5 million in 2021, 2020 and 2019, respectively. In 2020, the Company recorded accelerated depreciation charges in connection with its plans to vacate certain leased office facilities as disclosed in Note 11 Restructuring charges.
Intangible assets
Useful life (in months) December 31, 2021
(in thousands) Gross carrying value Accumulated amortization Net carrying value
Useful life (in months) December 31, 2020
(in thousands) Gross carrying value Accumulated amortization Net carrying value
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GoPro, Inc.
Notes to Consolidated Financial Statements
Amortization expense was $1.1 million, $4.6 million and $7.8 million in 2021, 2020 and 2019, respectively. At December 31, 2021, expected amortization expense of intangible assets with definite lives for future periods was as follows:
(in thousands) Total
Year ending December 31,
Other long-term assets
Point of purchase (POP) displays $ 2,509 $ 3,612
Amortization expense for POP displays was $2.8 million, $4.2 million and $7.5 million in 2021, 2020 and 2019, respectively.
Accrued expenses and other current liabilities
Accrued expenses and other current liabilities $ 128,572 $ 113,776
(1)See Note 11 Restructuring charges for amounts associated with restructuring liabilities.
Product warranty
Year ended December 31,
At December 31, 2021 and 2020, $8.3 million and $8.0 million, respectively, of the warranty liability was recorded as a component of accrued expenses and other current liabilities, and $0.5 million was recorded as a component of other long-term liabilities for both periods.
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4. Financing arrangements
2021 Credit Facility
In January 2021, the Company entered into a Credit Agreement (2021 Credit Agreement) which provides for a revolving credit facility (2021 Credit Facility) under which the Company may borrow up to an aggregate amount of $50.0 million. The 2021 Credit Facility will terminate and any outstanding borrowings become due and payable on the earlier of (i) January 2024 and (ii) unless the Company has cash in a specified deposit account in an amount equal to or greater than the amount required to repay the Company’s convertible notes due April 2022, 91 days prior to the maturity date of such convertible notes. Concurrently with the execution of the 2021 Credit Agreement in January 2021, the Company terminated its previous 2016 Credit Agreement, which would otherwise have matured in March 2021.
The amount that may be borrowed under the 2021 Credit Agreement may be based on a customary borrowing base calculation if the Company’s Asset Coverage Ratio is at any time less than 1.50. The Asset Coverage Ratio is defined as the ratio of (i) the sum of (a) the Company’s cash and cash equivalents in the United States plus specified percentages of other qualified debt investments (Qualified Cash) plus (b) specified percentages of the net book values of the Company’s accounts receivable and certain inventory to (ii) $50.0 million.
At the Company’s option, borrowed funds accrue interest at either (i) a floating rate per annum equal to the base rate plus a margin of from 0.50% to 1.00% depending on the Company’s Asset Coverage Ratio or (ii) a per annum rate equal to the rate at which dollar deposits are offered in the London interbank market plus a margin of from 1.50% to 2.00% depending on the Company’s Asset Coverage Ratio. The Company is required to pay a commitment fee on the unused portion of the 2021 Credit Facility of 0.375% to 0.50% per annum, based on the level of utilization of the 2021 Credit Facility. Amounts owed under the 2021 Credit Agreement are guaranteed by certain of the Company’s United States subsidiaries and secured by a first priority security interest in substantially all of the assets of the Company and certain of its subsidiaries (other than intellectual property, which is subject to a negative pledge restricting grants of security interests to third parties).
The 2021 Credit Agreement contains customary representations, warranties, and affirmative and negative covenants. The negative covenants include restrictions on the incurrence of liens and indebtedness, certain investments, dividends, stock repurchases and other matters, all subject to certain exceptions. In addition, the Company is required to maintain Liquidity (the sum of unused availability under the credit facility and the Company’s Qualified Cash) of at least $55.0 million (of which at least $40.0 million shall be attributable to Qualified Cash), or, if the borrowing base is then in effect, minimum unused availability under the credit facility of at least $10.0 million. The 2021 Credit Agreement also includes customary events of default that include, among other things, non-payment of principal, interest or fees, inaccuracy of representations and warranties, violation of certain covenants, cross default to certain other indebtedness, bankruptcy and insolvency events, material judgments and change of control. Upon an event of default, the lender may, subject to customary cure rights, require the immediate payment of all amounts outstanding.
At December 31, 2021, the Company was in compliance with all financial covenants contained in the 2021 Credit Agreement. The Company has made no borrowings from the 2021 Credit Facility to date, however, there is an outstanding letter of credit of $5.2 million for certain duty related requirements. This was not collateralized by any cash on hand.
2022 Convertible Notes
In April 2017, the Company issued $175.0 million aggregate principal amount of 3.50% Convertible Senior Notes due 2022 (2022 Notes). The 2022 Notes are senior, unsecured obligations of GoPro and mature on April 15, 2022, unless earlier repurchased or converted into shares of Class A common stock under certain circumstances. The 2022 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 2022 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 2022 Notes then outstanding upon conversion. The Company has historically paid interest on the 2022 Notes semi-annually in arrears on April 15 and October 15 of each year. There is one interest payment remaining, which will be due on April 15, 2022.
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Notes to Consolidated Financial Statements
The $175.0 million of proceeds received from the issuance of the 2022 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 Consolidated Balance Sheets. 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 2022 Notes.
The liability component will be accreted up to the face value of the 2022 Notes of $175.0 million, which will result in additional non-cash interest expense being recognized in the Consolidated Statements of Operations. The accretion of the 2022 Notes to par and debt issuance cost recorded to long-term debt is amortized into interest expense over the term of the 2022 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 2022 Notes, of which $4.2 million and $1.5 million were recorded to long-term debt and additional paid-in capital, respectively. The $4.2 million of issuance costs recorded as long-term debt on the Consolidated Balance Sheets are being amortized over the five-year contractual term of the 2022 Notes using the effective interest method.
The Company may not redeem the 2022 Notes prior to the maturity date and no sinking fund is provided for the 2022 Notes. The indenture includes customary terms and covenants, including certain events of default after which the 2022 Notes may be due and payable immediately.
Holders have the option to convert the 2022 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 2022 Notes on each applicable trading day;
•during the five-business day period following any five consecutive trading day period in which the trading price for the 2022 Notes is less than 98% of the product of the last reported sale price of Class A common stock and the conversion rate for the 2022 Notes on each such trading day; or
•upon the occurrence of specified corporate events.
At any time on or after January 15, 2022 until the second scheduled trading day immediately preceding the maturity date of the 2022 Notes on April 15, 2022, a holder may convert its 2022 Notes, in multiples of $1,000 principal amount. Holders of the 2022 Notes who convert their 2022 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 2022 Notes at a repurchase price equal to 100% of the principal amount of the 2022 Notes to be repurchased, plus accrued and unpaid interest up to, but excluding, the repurchase date. During the year ended December 31, 2021, the conditions allowing holders of the 2022 Notes to convert were not met.
Concurrently with the November 2020 issuance of the 2025 Notes, the Company used $56.2 million of the net cash proceeds from the 2025 Notes to repurchase $50.0 million principal amount of the 2022 Notes through an individual, privately negotiated transaction. The $56.2 million net cash proceeds were allocated between long-term debt (liability component) of $50.6 million and additional paid-in capital (equity component) of $5.4 million on the Consolidated Balance Sheets, and the remaining $0.2 million was related to the payment of interest. The fair value of the liability component was measured using rates determined for similar debt instrument without a conversion feature. The Company’s effective interest rate of 2.4% was based on the trading details of the 2022 Notes immediately prior to the repurchase date to determine the volatility of the 2022 Notes, and their remaining term. The cash consideration allocated to the equity component was calculated by deducting the fair value of the liability component and interest payment from the total aggregate cash consideration. The difference between the fair value of the 2022 Notes repurchased and the carrying value of $45.2 million resulted in a $5.4 million loss on extinguishment of debt.
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GoPro, Inc.
Notes to Consolidated Financial Statements
As of December 31, 2021 and 2020, the outstanding principal on the 2022 Notes was $125.0 million, the unamortized debt discount was $2.4 million and $10.2 million, respectively, the unamortized debt issuance cost was $0.2 million and $0.8 million, respectively, and the net carrying amount of the liability component was $122.4 million and $114.0 million, respectively, which was recorded as short-term debt and long-term debt, respectively, within the Consolidated Balance Sheets. For the year ended December 31, 2021, 2020 and 2019, the Company recorded interest expense of $4.4 million, $5.9 million and $6.1 million. respectively, for contractual coupon interest, and $7.8 million, $9.6 million and $9.0 million, respectively, for amortization of the debt discount. For the year ended December 31, 2021, 2020 and 2019, the Company recorded $0.6 million, $0.8 million and $0.8 million for amortization of debt issuance costs, respectively.
In connection with the 2022 Notes offering, the Company entered into a prepaid forward stock repurchase transaction (Prepaid Forward) with a financial institution (Forward Counterparty). Pursuant to the Prepaid Forward, the Company used approximately $78.0 million of the net proceeds from the offering of the 2022 Notes to fund the Prepaid Forward. The aggregate number of shares of the Company’s Class A common stock underlying the Prepaid Forward was approximately 9.2 million. The expiration date for the Prepaid Forward is April 15, 2022, although it may be settled earlier in whole or in part. Upon settlement of the Prepaid Forward, at expiration or upon any early settlement, the Forward Counterparty will deliver to the Company the number of shares of Class A common stock underlying the Prepaid Forward or the portion thereof being settled early. The shares purchased under the Prepaid Forward are treated as treasury stock on the Consolidated Balance Sheets (and not outstanding for purposes of the calculation of basic and diluted income (loss) 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.
In the fourth quarter of 2020, 8.8 million shares out of the 9.2 million shares of Class A common stock underlying the Prepaid Forward entered into as part of the Company’s 2022 Notes were early settled and delivered to the Company. In April 2021, the remaining 0.4 million shares of Class A common stock underlying the Prepaid Forward were early settled and delivered to the Company. There was no financial statement impact due to the return of shares; however, shares outstanding for corporate law purposes were reduced by the early settlement.
The Company adopted ASU 2020-06 on January 1, 2022 under the modified retrospective method, which will have a significant impact on the aforementioned accounting of the 2022 Convertible Notes starting in fiscal year 2022. See Footnote 1 Summary of business and significant accounting policies for additional details.
2025 Convertible Notes
In November 2020, the Company issued $125.0 million aggregate principal amount of 1.25% Convertible Senior Notes due 2025 and granted an option to the initial purchasers to purchase up to an additional $18.8 million aggregate principal amount of the 2025 Notes to cover over-allotments, of which $18.8 million was subsequently exercised during November 2020, resulting in a total issuance of $143.8 million aggregate principal amount of the 2025 Notes. The 2025 Notes are senior, unsecured obligations of GoPro and mature on November 15, 2025, unless earlier repurchased or converted into shares of Class A common stock under certain circumstances. The 2025 Notes are convertible into cash, shares of the Company’s Class A common stock, or a combination thereof, at the Company’s election, at an initial conversion rate of 107.1984 shares of Class A common stock per $1,000 principal amount of the 2025 Notes, which is equivalent to an initial conversion price of approximately $9.3285 per share of common stock, subject to adjustment. Based on current and projected liquidity, the Company has the intent and ability to deliver cash up to the principal amount of the 2025 Notes then outstanding upon conversion. The Company pays interest on the 2025 Notes semi-annually in arrears on May 15 and November 15 of each year.
The $143.8 million of proceeds received from the issuance of the 2025 Notes were allocated between long-term debt (liability component) of $106.9 million and additional paid-in-capital (equity component) of $36.9 million on the Consolidated Balance Sheets. 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
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aggregate face value of the 2025 Notes.
The liability component will be accreted up to the face value of the 2025 Notes of $143.8 million, which will result in additional non-cash interest expense being recognized in the Consolidated Statements of Operations. The accretion of the 2025 Notes to par and debt issuance cost recorded to long-term debt is amortized into interest expense over the term of the 2025 Note using an effective interest rate of approximately 7.5%. The equity component will not be remeasured as long as it continues to meet the conditions for equity classification.
The Company incurred approximately $4.7 million of issuance costs related to the issuance of the 2025 Notes, of which $3.5 million and $1.2 million were recorded to long-term debt and additional paid-in capital, respectively. The $3.5 million of issuance costs recorded as long-term debt on the Consolidated Balance Sheets are being amortized over the five-year contractual term of the 2025 Notes using the effective interest method.
The Company may redeem all or any portion of the 2025 Notes on or after November 20, 2023 for cash if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides the redemption notice, at a redemption price equal to 100% of the principal amount of the 2025 Notes to be redeemed, plus accrued interest and unpaid interest to, but excluding the redemption date. No sinking fund is provided for the 2025 Notes. The indenture includes customary terms and covenants, including certain events of default after which the 2025 Notes may be due and payable immediately.
Holders have the option to convert the 2025 Notes in multiples of $1,000 principal amount at any time prior to August 15, 2025, but only in the following circumstances:
•during any calendar quarter beginning after the calendar quarter ending on March 31, 2021, if the last reported sale price of Class A common stock for at least 20 trading days (whether or not consecutive) during the last 30 consecutive trading days of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price of the 2025 Notes on each applicable trading day;
•during the five-business day period following any five consecutive trading day period in which the trading price for the 2025 Notes is less than 98% of the product of the last reported sale price of Class A common stock and the conversion rate for the 2025 Notes on each such trading day;
•if the Company calls any or all of the 2025 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately before the redemption date; or
•upon the occurrence of specified corporate events.
At any time on or after August 15, 2025 until the second scheduled trading day immediately preceding the maturity date of the 2025 Notes on November 15, 2025, a holder may convert its 2025 Notes, in multiples of $1,000 principal amount. Holders of the 2025 Notes who convert their 2025 Notes in connection with a make-whole fundamental change (as defined in the indenture) are, under certain circumstances, entitled to an increase in the conversion rate. In addition, in the event of a fundamental change prior to the maturity date, holders will, subject to certain conditions, have the right, at their option, to require the Company to repurchase for cash all or part of the 2025 Notes at a repurchase price equal to 100% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest up to, but excluding, the repurchase date. During the year ended December 31, 2021, the conditions allowing holders of the 2025 Notes to convert were not met.
As of December 31, 2021 and 2020, the outstanding principal on the 2025 Notes was $143.8 million, the unamortized debt discount was $29.7 million and $36.1 million, respectively, the unamortized debt issuance cost was $2.7 million and $3.4 million, respectively, and the net carrying amount of the liability component was $111.3 million and $104.2 million, respectively, which was recorded as long-term debt within the Consolidated Balance Sheets. For the year ended December 31, 2021 and 2020, the Company recorded interest expense of $1.8 million and $0.2 million for contractual coupon interest, $0.7 million and $0.1 million for amortization of debt issuance costs, and $6.4 million and $0.8 million for amortization of the debt discount.
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GoPro, Inc.
Notes to Consolidated Financial Statements
In connection with the offering of the 2025 Notes, the Company paid $10.2 million to enter into privately negotiated capped call transactions with certain financial institutions (Capped Calls). The Capped Calls have an initial strike price of $9.3285 per share, which corresponds to the initial conversion price of the 2025 Notes. The Capped Calls cover, subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the 2025 Notes, the number of Class A common stock initially underlying the 2025 Notes. The Capped Calls are generally expected to reduce potential dilution to the Company’s Class A common stock upon any conversion of the 2025 Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted 2025 Notes, as the case may be, with such reduction and/or offset subject to a cap, initially equal to $12.0925, and is subject to certain adjustments under the terms of the Capped Call transactions. The Capped Calls will expire in November 2025, if not exercised earlier.
The Capped Calls are subject to adjustment upon the occurrence of specified extraordinary events affecting the Company, including merger events, tender offers and announcement events. In addition, the Capped Calls are subject to certain specified additional disruption events that may give rise to a termination of the Capped Calls, including nationalization, insolvency or delisting, changes in law, failures to deliver, insolvency filings and hedging disruptions. For accounting purposes, the Capped Calls are separate transactions, and not part of the terms of the 2025 Notes. As these transactions meet certain accounting criteria, the Capped Calls are recorded in stockholders’ equity as a reduction to additional paid-in capital and will not be remeasured as long as they continue to meet certain accounting criteria.
The Company adopted ASU 2020-06 on January 1, 2022 under the modified retrospective method, which will have a significant impact on the aforementioned accounting of the 2025 Convertible Notes starting in fiscal year 2022. See Footnote 1 Summary of business and significant accounting policies for additional details.
5. Stockholders’ equity
Common stock. The Company has two classes of authorized common stock: Class A common stock with 500 million shares authorized and Class B common stock with 150 million shares authorized. As of December 31, 2021, 129.8 million shares of Class A stock were issued and outstanding and 26.7 million shares of Class B stock were issued and outstanding. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting power and conversion rights. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to ten votes per share. Each share of Class B common stock is convertible at any time at the option of the stockholder into one share of Class A common stock and has no expiration date. The Class B common stock is also convertible into Class A common stock on the same basis upon any transfer, whether or not for value, except for “permitted transfers” as defined in the Company’s restated certificate of incorporation. Each share of Class B common stock will convert automatically into one share of Class A common stock upon the date when the outstanding shares of Class B common stock represent less than 10% of the aggregate number of shares of common stock then outstanding. As of December 31, 2021, the Class B stock continued to represent greater than 10% of the overall outstanding shares.
The Company had the following shares of common stock reserved for issuance upon the exercise of equity instruments as of December 31, 2021:
(in thousands) December 31, 2021
Stock options outstanding 3,080
Restricted stock units outstanding 8,714
Performance stock units outstanding 967
Common stock available for future grants 36,577
Total common stock shares reserved for issuance 49,338
6. 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
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Notes to Consolidated Financial Statements
Plan since June 2014. Outstanding options and awards under the 2010 Plan continue to be subject to the terms and conditions of the 2010 Plan.
The 2014 Plan serves as a successor to the 2010 Plan and provides for the granting of incentive and non-qualified stock options, restricted stock awards (RSAs), restricted stock units (RSUs), stock appreciation rights, stock bonus awards and performance awards to qualified employees, non-employee directors and consultants. Options granted under the 2014 Plan generally expire within 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 financial and operating targets, and are settled at vesting in shares of the Company’s Class A common stock. The Company accounts for forfeitures of stock-based payment awards in the period they occur.
The ESPP allows eligible employees to purchase shares of the Company’s Class A common stock through payroll deductions at a price equal to 85% of the lesser of the fair market value of the stock as of the first date or the ending date of each six-month offering period. The 2014 Plan and the ESPP also provide for automatic annual increases in the number of shares reserved for future issuance.
Employee retirement plan. The Company has a defined contribution retirement plan covering the United States and other international full-time employees that provides for voluntary employee contributions from 1% to 100% of annual compensation, subject to a maximum limit allowed by Internal Revenue Service guidelines. The Company matched 100% of each employee’s contributions up to a maximum of 4% of the employee’s eligible compensation until May 2020, at which point the Company suspended matching contributions in certain locations. The Company’s matching contributions to the plan were $0.8 million, $1.4 million and $4.0 million in 2021, 2020 and 2019, respectively.
Stock options
A summary of the Company’s stock option activity is as follows:
The weighted-average grant date fair value of all options granted was $4.62, $2.03 and $3.70 share in 2021, 2020 and 2019, respectively. The total fair value of all options vested was $1.5 million, $1.7 million and $3.5 million in 2021, 2020 and 2019, respectively. The aggregate intrinsic value of the stock options outstanding as of December 31, 2021 represents the value of the Company’s closing stock price on December 31, 2021 in excess of the exercise price multiplied by the number of options outstanding.
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GoPro, Inc.
Notes to Consolidated Financial Statements
Restricted stock units
A summary of the Company’s RSU activity is as follows:
Shares(in thousands) Weighted-average grant date fair value
The weighted-average grant date fair value of all RSUs granted was $8.83, $4.59 and $5.70 per share in 2021, 2020 and 2019, respectively. The total fair value of all RSUs vested was $28.5 million, $23.9 million and $34.9 million in 2021, 2020 and 2019, respectively.
Performance stock units
A summary of the Company’s PSU activity is as follows:
Shares(in thousands) Weighted-average grant date fair value
The weighted-average grant date fair value of all PSUs granted was $7.93, $4.05 and $7.51 in 2021, 2020 and 2019, respectively. The total fair value of all PSUs vested was $3.0 million and $1.9 million in 2021 and 2020. No PSUs vested in 2019.
Employee stock purchase plan. In 2021, 2020 and 2019, the Company issued 0.8 million, 1.0 million and 958 thousand shares under its ESPP, respectively, at weighted-average prices of $5.28, $3.42 and $4.13, respectively.
Fair value disclosures. 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 RSUs and PSUs are determined using the Company’s closing stock price on the date of grant. The Company recognizes compensation expense for PSUs when it is probable that the vesting conditions will be met. The fair value of stock options granted and purchases under the Company’s ESPP is estimated using the Black-Scholes option pricing model. Expected term of stock options granted was estimated based on the simplified method. Expected stock price volatility was estimated by taking the Company’s average historic volatility and if applicable, the historical volatility for industry peers based on daily price observations over a period equivalent to the expected term. Risk-free interest rate was based on the yields of U.S. Treasury securities with maturities similar to the expected term. Dividend yield was zero as the Company does not have any history of, nor plans to make, dividend payments.
The fair value of stock options granted was estimated as of the grant date using the following assumptions:
Year ended December 31,
Dividend yield —% —% —%
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GoPro, Inc.
Notes to Consolidated Financial Statements