0001500435-19-000059.txt : 20191108 0001500435-19-000059.hdr.sgml : 20191108 20191107174133 ACCESSION NUMBER: 0001500435-19-000059 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 75 CONFORMED PERIOD OF REPORT: 20190930 FILED AS OF DATE: 20191108 DATE AS OF CHANGE: 20191107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GoPro, Inc. CENTRAL INDEX KEY: 0001500435 STANDARD INDUSTRIAL CLASSIFICATION: PHOTOGRAPHIC EQUIPMENT & SUPPLIES [3861] IRS NUMBER: 770629474 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-36514 FILM NUMBER: 191201508 BUSINESS ADDRESS: STREET 1: 3000 CLEARVIEW WAY CITY: SAN MATEO STATE: CA ZIP: 94402 BUSINESS PHONE: 650-332-7600 MAIL ADDRESS: STREET 1: 3000 CLEARVIEW WAY CITY: SAN MATEO STATE: CA ZIP: 94402 FORMER COMPANY: FORMER CONFORMED NAME: Woodman Labs, Inc. DATE OF NAME CHANGE: 20100901 10-Q 1 gpro2019-09x3010xq.htm 10-Q Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________


Commission file number: 001-36514
goprologoa23.jpg
GOPRO, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
77-0629474
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
3000 Clearview Way
 
 
San Mateo,
California
 
94402
(Address of principal executive offices)
 
(Zip Code)
(650)
332-7600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock
GPRO
NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes þ    No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes þ    No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filerþ                        Smaller reporting company        ☐
Accelerated filer             ☐                        Emerging growth company        ☐
Non-accelerated filer        ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
As of November 4, 2019, 126,859,037 and 28,896,866 shares of Class A and Class B common stock were outstanding, respectively.
 

1


GoPro, Inc.
Index


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


2


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GoPro, Inc.
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands, except par values)
September 30, 2019
 
December 31, 2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
43,016

 
$
152,095

Marketable securities
35,960

 
45,417

Accounts receivable, net
71,977

 
129,216

Inventory
250,032

 
116,458

Prepaid expenses and other current assets
24,023

 
30,887

Total current assets
425,008

 
474,073

Property and equipment, net
39,727

 
46,567

Operating lease right-of-use assets
52,512

 

Intangible assets, net
7,111

 
13,065

Goodwill
146,459

 
146,459

Other long-term assets
16,528

 
18,195

Total assets
$
687,345

 
$
698,359

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
140,271

 
$
148,478

Accrued expenses and other current liabilities
159,475

 
135,892

Short-term operating lease liabilities
8,890

 

Deferred revenue
11,966

 
15,129

Total current liabilities
320,602

 
299,499

Long-term taxes payable
18,408

 
19,553

Long-term debt
146,249

 
138,992

Long-term operating lease liabilities
62,554

 

Other long-term liabilities
7,973

 
28,203

Total liabilities
555,786

 
486,247

 
 
 
 
Commitments, contingencies and guarantees (Note 8)


 

 
 
 
 
Stockholders’ equity:
 
 
 
Preferred stock, $0.0001 par value, 5,000 shares authorized; none issued

 

Common stock and additional paid-in capital, $0.0001 par value, 500,000 Class A shares authorized, 117,435 and 105,170 shares issued and outstanding, respectively; 150,000 Class B shares authorized, 28,897 and 35,897 shares issued and outstanding, respectively
924,725

 
894,755

Treasury stock, at cost, 10,710 and 10,710 shares, respectively
(113,613
)
 
(113,613
)
Accumulated deficit
(679,553
)
 
(569,030
)
Total stockholders’ equity
131,559

 
212,112

Total liabilities and stockholders’ equity
$
687,345

 
$
698,359

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

3


GoPro, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands, except per share data)
2019
 
2018
 
2019
 
2018
Revenue
$
131,169

 
$
285,936

 
$
666,306

 
$
770,959

Cost of revenue
102,737

 
194,904

 
455,342

 
551,642

Gross profit
28,432

 
91,032

 
210,964

 
219,317

Operating expenses:
 
 
 
 
 
 
 
Research and development
34,940

 
41,157

 
111,215

 
130,361

Sales and marketing
48,848

 
55,871

 
148,273

 
165,297

General and administrative
15,842

 
15,358

 
49,909

 
50,588

Total operating expenses
99,630

 
112,386

 
309,397

 
346,246

Operating loss
(71,198
)
 
(21,354
)
 
(98,433
)
 
(126,929
)
Other income (expense):
 
 
 
 
 
 
 
Interest expense
(4,623
)
 
(4,616
)
 
(14,032
)
 
(13,804
)
Other income (expense), net
738

 
661

 
1,503

 
(268
)
Total other expense, net
(3,885
)
 
(3,955
)
 
(12,529
)
 
(14,072
)
Loss before income taxes
(75,083
)
 
(25,309
)
 
(110,962
)
 
(141,001
)
Income tax (benefit) expense
(273
)
 
1,780

 
(500
)
 
(296
)
Net loss
$
(74,810
)
 
$
(27,089
)
 
$
(110,462
)
 
$
(140,705
)
 
 
 
 
 
 
 
 
Basic and diluted net loss per share
$
(0.51
)
 
$
(0.19
)
 
$
(0.77
)
 
$
(1.01
)
 
 
 
 
 
 
 
 
Weighted-average number of shares outstanding, basic and diluted
145,617

 
140,072

 
144,306

 
139,028

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


4


GoPro, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
 
Nine months ended September 30,
(in thousands)
2019
 
2018
Operating activities:
 
 
 
Net loss
$
(110,462
)
 
$
(140,705
)
Adjustments to reconcile net loss to net cash used in operating activities:

 

Depreciation and amortization
19,823

 
27,773

Non-cash operating lease cost
7,599

 

Stock-based compensation
30,160

 
31,171

Deferred income taxes
13

 
(987
)
Non-cash restructuring charges
(199
)
 
5,788

Non-cash interest expense
6,633

 
5,988

Other
(779
)
 
(301
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
57,160

 
(36,812
)
Inventory
(133,574
)
 
27,302

Prepaid expenses and other assets
8,136

 
32,203

Accounts payable and other liabilities
6,481

 
(38,917
)
Deferred revenue
(3,686
)
 
(3,350
)
Net cash used in operating activities
(112,695
)
 
(90,847
)
 
 
 
 
Investing activities:
 
 
 
Purchases of property and equipment, net
(6,310
)
 
(8,204
)
Purchases of marketable securities
(43,636
)
 
(14,896
)
Maturities of marketable securities
51,738

 
55,000

Sale of marketable securities
1,889

 

Net cash provided by investing activities
3,681

 
31,900

 
 
 
 
Financing activities:
 
 
 
Proceeds from issuance of common stock
5,574

 
5,131

Taxes paid related to net share settlement of equity awards
(5,798
)
 
(5,388
)
Net cash used in financing activities
(224
)
 
(257
)
Effect of exchange rate changes on cash and cash equivalents
159

 
(54
)
Net change in cash and cash equivalents
(109,079
)
 
(59,258
)
Cash and cash equivalents at beginning of period
152,095

 
202,504

Cash and cash equivalents at end of period
$
43,016

 
$
143,246


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

5


GoPro, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(unaudited)
 
Common stock and additional paid-in capital
 
Treasury stock
 
Accumulated
deficit
 
Stockholders’ equity
(in thousands)
Shares
Amount
 
Amount
 
 
Balances at December 31, 2017
137,000

$
854,452

 
$
(113,613
)
 
$
(442,134
)
 
$
298,705

Common stock issued under employee benefit plans, net of shares withheld for tax
1,673

3,186

 

 

 
3,186

Taxes paid related to net share settlements

(2,402
)
 

 

 
(2,402
)
Stock-based compensation expense

10,797

 

 

 
10,797

Cumulative effect of adoption of new accounting standards


 

 
(17,862
)
 
(17,862
)
Net loss


 

 
(76,347
)
 
(76,347
)
Balances at March 31, 2018
138,673

866,033

 
(113,613
)
 
(536,343
)
 
216,077

Common stock issued under employee benefit plans, net of shares withheld for tax
833

249

 

 

 
249

Taxes paid related to net share settlements

(1,350
)
 

 

 
(1,350
)
Stock-based compensation expense

10,008

 

 

 
10,008

Net loss


 

 
(37,269
)
 
(37,269
)
Balances at June 30, 2018
139,506

874,940

 
(113,613
)
 
(573,612
)
 
187,715

Common stock issued under employee benefit plans, net of shares withheld for tax
1,077

1,721

 

 

 
1,721

Taxes paid related to net share settlements

(1,636
)
 

 

 
(1,636
)
Stock-based compensation expense

11,335

 

 

 
11,335

Net loss


 

 
(27,089
)
 
(27,089
)
Balances at September 30, 2018
140,583

$
886,360

 
$
(113,613
)
 
$
(600,701
)
 
$
172,046

 
 
 
 
 
 
 
 
 
Balances at December 31, 2018
141,067

$
894,755

 
$
(113,613
)
 
$
(569,030
)
 
$
212,112

Common stock issued under employee benefit plans, net of shares withheld for tax
3,293

3,761

 

 

 
3,761

Taxes paid related to net share settlements

(2,673
)
 

 

 
(2,673
)
Stock-based compensation expense

9,782

 

 

 
9,782

Cumulative effect of adoption of new accounting standard


 

 
(61
)
 
(61
)
Net loss


 

 
(24,365
)
 
(24,365
)
Balances at March 31, 2019
144,360

905,625

 
(113,613
)
 
(593,456
)
 
198,556

Common stock issued under employee benefit plans, net of shares withheld for tax
528

144

 

 

 
144

Taxes paid related to net share settlements

(1,324
)
 

 

 
(1,324
)
Stock-based compensation expense

10,606

 

 

 
10,606

Net loss


 

 
(11,287
)
 
(11,287
)
Balances at June 30, 2019
144,888

915,051

 
(113,613
)
 
(604,743
)
 
196,695

Common stock issued under employee benefit plans, net of shares withheld for tax
1,443

1,706

 

 

 
1,706

Taxes paid related to net share settlements

(1,801
)
 

 

 
(1,801
)
Stock-based compensation expense (Note 5)

9,769

 

 

 
9,769

Net loss


 

 
(74,810
)
 
(74,810
)
Balances at September 30, 2019
146,331

$
924,725

 
$
(113,613
)
 
$
(679,553
)
 
$
131,559

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

6


GoPro, Inc.
Notes to Condensed Consolidated Financial Statements


1. Summary of business and significant accounting policies
GoPro, Inc. and its subsidiaries (GoPro or the Company) helps its consumers capture and share their experiences in immersive and exciting ways. The Company is committed to developing solutions that create an easy, seamless experience for consumers to capture, create 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 through retailers, wholesale distributors and on its website. The Company’s global corporate headquarters are located in San Mateo, California.
Basis of presentation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (GAAP). The Company’s fiscal year ends on December 31, and its fiscal quarters end on March 31, June 30 and September 30. The condensed consolidated financial statements reflect all adjustments, which are normal and recurring in nature, that management believes are necessary for the fair statement of the Company's financial statements, but are not necessarily indicative of the results expected for the full fiscal year or any other future period. The condensed consolidated balance sheet at December 31, 2018 has been derived from the audited financial statements at that date, but does not include all the disclosures required by GAAP. This Quarterly Report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K (Annual Report) for the year ended December 31, 2018. Except for the accounting policy related to leases that was updated as a result of adopting Accounting Standards Codification (ASC) 842, Leases, there have been no material changes in the Company’s critical accounting policies and estimates from those disclosed in its Annual Report.
Principles of consolidation. These condensed consolidated financial statements include all the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of estimates. The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the Company’s condensed consolidated financial statements and accompanying notes. Significant estimates and assumptions made by management include those related to revenue recognition (including sales incentives, sales returns and implied post contract support), stock-based compensation, inventory valuation, product warranty liabilities, the valuation and useful lives of long-lived assets (property and equipment, operating lease right-of-use assets, intangible assets and goodwill) and income taxes. The Company bases its estimates and assumptions on historical experience and on various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from management’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations could be affected.
Comprehensive income (loss). For all periods presented, comprehensive income (loss) approximated net income (loss). Therefore, the condensed consolidated statements of comprehensive income (loss) have been omitted.
Prior period reclassifications. Reclassifications of certain prior period amounts in the condensed consolidated financial statements, including a refinement in methodology for revenue by geography, have been made to conform to the current period presentation.
Leases. The Company leases its office space and facilities under cancelable and non-cancelable operating leases. Beginning January 1, 2019, operating leases are presented in operating lease right-of-use (ROU) assets, short-term operating lease liabilities and long-term operating lease liabilities on the Company’s condensed 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 information

7


GoPro, Inc.
Notes to Condensed Consolidated Financial Statements

available at lease commencement date 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 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 condensed 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.
Revenue recognition. The Company derives substantially all of its revenue from the sale of cameras, mounts and accessories, the related implied post contract support to customers, and subscription services. The Company recognizes revenue when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The transaction price the Company expects to be entitled to is primarily comprised of product revenue, net of returns and variable consideration, including sales incentives provided to customers. For most of the Company’s revenue, revenue is recognized at the time products are 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 advanced of services being rendered recorded in deferred revenue. For customers who purchase products directly from the Company’s website, the Company retains a portion of the risk of loss on these sales during transit, which are accounted for as fulfillment costs. The Company provides sales commissions to internal and external sales representatives which are earned in the period in which revenue is recognized. As a result, the Company expenses such costs as incurred.
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 refund liability along with a right to recover assets are recorded for future product returns. Return trends are influenced by product life cycles, new product introductions, market acceptance of products, product sell-through, the type of customer, seasonality and other factors. Return rates may fluctuate over time but are sufficiently predictable to allow the Company to estimate expected future product returns.
The Company’s camera sales contain multiple performance obligations that generally include the following three separate obligations: a) a hardware component (camera) and the embedded firmware essential to the functionality of the hardware component delivered at the time of sale, b) the implicit right to the Company's downloadable free apps and software solutions, and c) the implied right for the customer to receive support after the initial sale (post contract support or PCS). The Company’s PCS includes the right to receive on a when and if available basis, future unspecified firmware upgrades and features as well as bug fixes, and email and telephone support. The Company allocates the transaction price to PCS based on a cost-plus method. The transaction price is allocated to the remaining performance obligations on a residual value method. The Company’s process to allocate the transaction price considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each deliverable, including: the level of support provided to customers, estimated costs to provide the Company’s support, the amount of time and cost that is allocated to the Company’s efforts to develop the undelivered elements and market trends in the pricing for similar offerings.
The transaction prices allocated to the delivered hardware, related embedded firmware and free software solutions are recognized as revenue at the time of sale, provided the conditions for recognition of revenue have been met. The transaction price allocated to PCS is deferred and recognized as revenue on a straight-line basis over the estimated term of the support period, which is estimated to be 15 months based on historical experience.

8


GoPro, Inc.
Notes to Condensed Consolidated Financial Statements

Deferred revenue as of September 30, 2019 and December 31, 2018 also included immaterial amounts related to the Company’s GoPro Care and GoPro Plus fee-based service offerings. The Company’s deferred revenue balance was $12.3 million and $16.1 million as of September 30, 2019 and December 31, 2018, respectively. During the three months ended September 30, 2019 and 2018, revenue of $5.5 million and $6.1 million, respectively, was recognized that was included in the deferred revenue balances at the beginning of each period. During the nine months ended September 30, 2019 and 2018, revenue of $12.9 million and $14.6 million, respectively, was recognized that was included in the deferred revenue balances at the beginning of each period.
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.
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.
Recent accounting standards
Standard
 
Description
 
Company’s date of adoption
 
Effect on the condensed consolidated financial statements or other significant matters
Standards that were adopted
 
 
 
 
Leases
ASU No.
2016-02,
2018-10,
2018-11, 2019-01, (ASC 842)
 
This standard replaces existing lease guidance for lessees and requires operating leases to be recognized on the balance sheet. Under the new standard, lessees recognize a lease liability for the present value of future lease payments and a corresponding right-to-use asset.

 
January 1, 2019
 
The new standard was applied using a modified retrospective approach. Prior periods were not retrospectively adjusted.
The Company completed its analysis of the impact of the standard by reviewing its lease agreements to identify changes resulting from applying the requirements of the new standard. The Company elected to utilize a package of practical expedients, which among other things, allowed the Company to maintain its existing classification of its current leases. The Company also elected the hindsight practical expedient to determine a reasonably certain lease term for existing leases. Additionally, the Company made a policy election to maintain its previous lease accounting for leases with an initial term of 12 months or less. Furthermore, the Company made the policy election to not separate non-lease components from lease components. The Company’s analysis of its lease agreements under the new standard resulted in the recognition of lease liabilities of $88.3 million and lease assets of $60.1 million on its condensed consolidated balance sheet as of January 1, 2019. The new standard did not have a material impact on the Company’s condensed consolidated income statement and condensed consolidated statement of cash flows.


9


GoPro, Inc.
Notes to Condensed Consolidated Financial Statements

The cumulative effect of the changes made to the Company’s condensed consolidated January 1, 2019 balance sheet for the adoption of ASC 842, Leases were as follows:
(in thousands)
Balance at
December 31, 2018
 
Adjustment due to ASC 842
 
Balance at
January 1, 2019
Operating lease right-of-use assets
$

 
$
60,111

 
$
60,111

Property and equipment, net (1)
46,567

 
(57
)
 
46,510

Accrued expenses and other current liabilities (2)
135,892

 
(4,332
)
 
131,560

Short-term operating lease liabilities

 
10,812

 
10,812

Long-term operating lease liabilities

 
77,545

 
77,545

Other long-term liabilities (2)
28,203

 
(23,900
)
 
4,303

Accumulated deficit
(569,030
)
 
(61
)
 
(569,091
)

(1) 
Represents the reclassification of leasehold acquisition costs to operating lease right-of-use assets.
(2) 
Represents the reclassification of deferred rent, tenant incentives and accrued cease-use charges to operating lease right-of-use assets.
Standard
 
Description
 
Expected date of adoption
 
Effect on the condensed consolidated financial statements or other significant matters
Standards not yet adopted
 
 
 
 
Intangible - Goodwill and Other
ASU No. 2017-04 (Topic 350)

 
This standard simplifies the accounting for goodwill and removes Step 2 of the annual goodwill impairment test. Upon adoption, goodwill impairment will be determined based on the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017, and requires use of a prospective transition method.
 
January 1, 2020
 
The Company does not expect that the adoption of this standard will have a material impact on its condensed consolidated financial statements and related disclosures.
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments
ASU No. 2016-13
(Topic 326)
 
The standard changes the impairment model for most financial assets and replaces the existing incurred loss model with a current expected credit loss (CECL) model. The standard should be applied on a modified retrospective approach.
 
January 1, 2020
 
The Company’s allowance for doubtful accounts and valuation of available-for-sale securities are subject to this standard. The Company is in the process of quantifying the impact on its condensed consolidated financial statements and related disclosures, but does not expect the impact to be material.

The Company will evaluate its available-for-sale securities for impairment under Topic 326 upon adoption of this standard. The Company does not expect the results of its evaluation of available-for-sale securities for impairment to have a material impact on its condensed consolidated financial statements and related disclosures.

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


10


GoPro, Inc.
Notes to Condensed 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:
 
September 30, 2019
 
December 31, 2018
(in thousands)
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
 
Total
Cash equivalents (1):
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
3,412

 
$

 
$
3,412

 
$
10,901

 
$

 
$
10,901

Commercial paper

 

 

 
7,577

 

 
7,577

Total cash equivalents
$
3,412

 
$

 
$
3,412

 
$
18,478

 
$

 
$
18,478

Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury securities
$

 
$
8,265

 
$
8,265

 
$

 
$
6,336

 
$
6,336

Commercial paper

 
7,694

 
7,694

 
20,657

 

 
20,657

Corporate debt securities

 
20,001

 
20,001

 

 
18,424

 
18,424

Total marketable securities
$

 
$
35,960

 
$
35,960

 
$
20,657

 
$
24,760

 
$
45,417

(1) 
Included in cash and cash equivalents in the accompanying condensed consolidated balance sheets. Cash balances were $39.6 million and $133.6 million as of September 30, 2019 and December 31, 2018, respectively.
Cash equivalents and marketable securities are classified as Level 1 or Level 2 because the Company uses quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value. The contractual maturities of available-for-sale marketable securities as of September 30, 2019 and December 31, 2018 were all less than one year in duration. At September 30, 2019 and December 31, 2018, the Company had no financial assets or liabilities that were classified as Level 3, which are valued based on inputs supported by little or no market activity.
At September 30, 2019 and December 31, 2018, the amortized cost of the Company’s cash equivalents and marketable securities approximated their fair value and there were no material realized or unrealized gains or losses, either individually or in the aggregate.
In April 2017, the Company issued $175.0 million principal amount of Convertible Senior Notes due 2022 (Notes) (see Note 4 Financing Arrangements). The estimated fair value of the Notes is based on quoted market prices of the Company’s instruments in markets that are not active and are classified as Level 2 within the fair value hierarchy. The Company estimated the fair value of the Notes by evaluating quoted market prices and calculating the upfront cash payment a market participant would require to assume these obligations. The calculated fair value of the Notes of $168.0 million, is highly correlated to the Company’s stock price and as a result, significant changes to the Company’s stock price will have a significant impact on the calculated fair value of the Notes.
For certain other financial assets and liabilities, including accounts receivable, accounts payable and other current assets and liabilities, the carrying amounts approximate their fair value primarily due to the relatively short maturity of these balances.

3. Condensed consolidated financial statement details
The following sections and tables provide details of selected balance sheet items.
Inventory
(in thousands)
September 30, 2019
 
December 31, 2018
Components
$
32,996

 
$
19,205

Finished goods
217,036

 
97,253

Total inventory
$
250,032

 
$
116,458



11


GoPro, Inc.
Notes to Condensed Consolidated Financial Statements

Property and equipment, net
(in thousands)
September 30, 2019
 
December 31, 2018
Leasehold improvements
$
50,709

 
$
66,198

Production, engineering and other equipment
45,578

 
43,019

Tooling
19,190

 
17,808

Computers and software
21,085

 
20,865

Furniture and office equipment
10,837

 
14,969

Tradeshow equipment and other
7,009

 
7,009

Construction in progress
81

 
80

Gross property and equipment
154,489

 
169,948

Less: Accumulated depreciation and amortization
(114,762
)
 
(123,381
)
Property and equipment, net
$
39,727

 
$
46,567


Intangible assets
 
September 30, 2019
(in thousands)
Gross carrying value
 
Accumulated amortization
 
Net carrying value
Purchased technology
$
50,501

 
$
(43,405
)
 
$
7,096

Domain name
15

 

 
15

Total intangible assets
$
50,516

 
$
(43,405
)
 
$
7,111


 
December 31, 2018
(in thousands)
Gross carrying value
 
Accumulated amortization
 
Net carrying value
Purchased technology
$
50,501

 
$
(37,451
)
 
$
13,050

Domain name
15

 

 
15

Total intangible assets
$
50,516

 
$
(37,451
)
 
$
13,065


Amortization expense was $1.9 million and $3.4 million for the three months ended September 30, 2019 and 2018, respectively, and $6.0 million and $9.4 million for the nine months ended September 30, 2019 and 2018, respectively. At September 30, 2019, expected amortization expense of intangible assets with definite lives for future periods was as follows:
(in thousands)
Total
Year ending December 31,
 
2019 (remaining 3 months)
$
1,864

2020
4,363

2021
869

2022

2023

 
$
7,096



12


GoPro, Inc.
Notes to Condensed Consolidated Financial Statements

Other long-term assets
(in thousands)
September 30, 2019
 
December 31, 2018
Point of purchase (POP) displays
$
8,351

 
$
9,130

Long-term deferred tax assets
819

 
945

Deposits and other
7,358

 
8,120

Other long-term assets
$
16,528

 
$
18,195


Accrued expenses and other current liabilities
(in thousands)
September 30, 2019
 
December 31, 2018
Accrued sales incentives
$
43,051

 
$
40,918

Accrued payables (1)
34,573

 
34,696

Employee related liabilities (1)
16,520

 
19,775

Refund liability
5,445

 
13,100

Warranty liability
9,072

 
9,604

Inventory received
25,057

 
5,061

Customer deposits
20,125

 
3,105

Purchase order commitments
613

 
2,015

Income taxes payable
1,261

 
1,948

Other
3,758

 
5,670

Accrued expenses and other current liabilities
$
159,475

 
$
135,892


(1) 
See Note 10 Restructuring charges for amounts associated with restructuring liabilities.
Product warranty
 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Beginning balance
$
12,850

 
$
10,692

 
$
10,971

 
$
10,373

Charged to cost of revenue
1,610

 
5,055

 
12,013

 
18,163

Settlement of warranty claims
(3,981
)
 
(5,878
)
 
(12,505
)
 
(18,667
)
Warranty liability
$
10,479

 
$
9,869

 
$
10,479

 
$
9,869

At September 30, 2019 and December 31, 2018, $9.1 million and $9.6 million, respectively, of the warranty liability was recorded as an element of accrued expenses and other current liabilities, and $1.4 million was recorded as an element of other long-term liabilities.

4. Financing Arrangements
Credit Facility
In March 2016, the Company entered into a Credit Agreement (Credit Agreement) with certain banks which provides for a secured revolving credit facility (Credit Facility) under which the Company may borrow up to an aggregate amount of $250.0 million. The Company and its lenders may increase the total commitments under the Credit Facility to up to an aggregate amount of $300.0 million, subject to certain conditions. The Credit Facility will terminate and any outstanding borrowings become due and payable in March 2021.
The amount that may be borrowed under the Credit Facility is determined at periodic intervals and is based upon the Company’s inventory and accounts receivable balances. Borrowed funds accrue interest based on an annual rate of (a) London Interbank Offered Rate (LIBOR) or (b) the administrative agent’s base rate, plus an applicable

13


GoPro, Inc.
Notes to Condensed Consolidated Financial Statements

margin of between 1.50% and 2.00% for LIBOR rate loans, and between 0.50% and 1.00% for base rate loans. The Company is required to pay a commitment fee on the unused portion of the Credit Facility of 0.25% or 0.375% per annum, based on the level of utilization of the Credit Facility. Amounts owed under the Credit Agreement and related credit documents are guaranteed by GoPro, Inc. and its material subsidiaries. GoPro, Inc. and its Netherlands subsidiary have also granted security interests in substantially all of their assets to collateralize this obligation.
The Credit Agreement contains customary covenants, such as financial statement reporting requirements and limiting the ability of the Company and its subsidiaries to pay dividends or incur debt, create liens and encumbrances, make investments, and redeem or repurchase stock. The Company is required to maintain a minimum fixed charge coverage ratio if and when the unborrowed availability under the Credit Facility is less than the greater of $25.0 million or 10.0% of the borrowing base at such time. The Credit Agreement also contains customary events of default, such as the failure to pay obligations when due, initiation of bankruptcy or insolvency proceedings, or defaults on certain other indebtedness. Upon an event of default, the lenders may, subject to customary cure rights, require the immediate payment of all amounts outstanding and foreclose on collateral.
At September 30, 2019 and December 31, 2018, the Company was in compliance with all financial covenants contained in the Credit Agreement. The Company has made no borrowings from the Credit Facility to date.
Convertible Notes
In April 2017, the Company issued $175.0 million aggregate principal amount of 3.50% Convertible Senior Notes due 2022 (Notes). The Notes are senior, unsecured obligations of GoPro and mature on April 15, 2022 (Maturity Date), unless earlier repurchased or converted into shares of Class A common stock under certain circumstances. The Notes are convertible into cash, shares of the Company’s Class A common stock, or a combination thereof, at the Company’s election, at an initial conversion rate of 94.0071 shares of Class A common stock per $1,000 principal amount of the Notes, which is equivalent to an initial conversion price of approximately $10.64 per share of common stock, subject to adjustment. Based on current and projected liquidity, the Company has the intent and ability to deliver cash up to the principal amount of the Notes then outstanding upon conversion. The Company pays interest on the Notes semi-annually in arrears on April 15 and October 15 of each year.
The $175.0 million of proceeds received from the issuance of the Notes were allocated between long-term debt (liability component) of $128.3 million and additional paid-in-capital (equity component) of $46.7 million on the condensed consolidated balance sheet. The fair value of the liability component was measured using rates determined for similar debt instruments without a conversion feature. The carrying amount of the equity component, representing the conversion option, was determined by deducting the fair value of the liability component from the aggregate face value of the Notes. The liability component will be accreted up to the face value of the Notes of $175.0 million, which will result in additional non-cash interest expense being recognized in the condensed consolidated statements of operations through the Notes’ Maturity Date. The accretion of the Notes to par and debt issuance cost recorded to long-term debt is amortized into interest expense over the term of the Note using an effective interest rate of approximately 10.5%. The equity component will not be remeasured as long as it continues to meet the conditions for equity classification.
The Company incurred approximately $5.7 million of issuance costs related to the issuance of the Notes, of which $4.2 million and $1.5 million were recorded to long-term debt and additional paid-in capital, respectively. The $4.2 million of issuance costs recorded as long-term debt on the condensed consolidated balance sheet are being amortized over the five-year contractual term of the Notes using the effective interest method.
The Company may not redeem the Notes prior to the Maturity Date and no sinking fund is provided for the Notes. The indenture includes customary terms and covenants, including certain events of default after which the Notes may be due and payable immediately.
Holders have the option to convert the Notes in multiples of $1,000 principal amount at any time prior to January 15, 2022, but only in the following circumstances:
during any calendar quarter beginning after the calendar quarter ending on September 30, 2017, if the last reported sale price of Class A common stock for at least 20 trading days (whether or not consecutive) during the last 30 consecutive trading days of the immediately preceding fiscal quarter is greater than or

14


GoPro, Inc.
Notes to Condensed Consolidated Financial Statements

equal to 130% of the conversion price of the Notes on each applicable trading day;
during the five-business day period following any five consecutive trading day period in which the trading price for the Notes is less than 98% of the product of the last reported sale price of Class A common stock and the conversion rate for the Notes on each such trading day; or
upon the occurrence of specified corporate events.
At any time on or after January 15, 2022 until the second scheduled trading day immediately preceding the Maturity Date of the Notes on April 15, 2022, a holder may convert its Notes, in multiples of $1,000 principal amount. Holders of the Notes who convert their Notes in connection with a make-whole fundamental change (as defined in the indenture) are, under certain circumstances, entitled to an increase in the conversion rate. In addition, in the event of a fundamental change prior to the Maturity Date, holders will, subject to certain conditions, have the right, at their option, to require the Company to repurchase for cash all or part of the Notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest up to, but excluding, the repurchase date.
As of September 30, 2019 and December 31, 2018, the outstanding principal on the Notes was $175.0 million, the unamortized debt discount was $26.6 million and $33.3 million, respectively, the unamortized debt issuance cost was $2.1 million and $2.7 million, respectively, and the net carrying amount of the liability component was $146.2 million and $139.0 million, respectively, which was recorded as long-term debt within the condensed consolidated balance sheets. For the three months ended September 30, 2019 and 2018, the Company recorded interest expense of $1.5 million for contractual coupon interest, $0.2 million for amortization of debt issuance costs, and $2.2 million and $2.0 million, respectively, for amortization of the debt discount. For the nine months ended September 30, 2019 and 2018, the Company recorded interest expense of $4.6 million for contractual coupon interest, $0.6 million for amortization of debt issuance costs, and $6.6 million and $6.0 million, respectively, for amortization of the debt discount.
In connection with the offering, the Company entered into a prepaid forward stock repurchase transaction (Prepaid Forward) with a financial institution (Forward Counterparty). Pursuant to the Prepaid Forward, the Company used approximately $78.0 million of the net proceeds from the offering of the Notes to fund the Prepaid Forward. The aggregate number of shares of the Company’s Class A common stock underlying the Prepaid Forward was approximately 9.2 million. The expiration date for the Prepaid Forward is April 15, 2022, although it may be settled earlier in whole or in part. Upon settlement of the Prepaid Forward, at expiration or upon any early settlement, the Forward Counterparty will deliver to the Company the number of shares of Class A common stock underlying the Prepaid Forward or the portion thereof being settled early. The shares purchased under the Prepaid Forward are treated as treasury stock on the condensed consolidated balance sheet (and not outstanding for purposes of the calculation of basic and diluted 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.

5. Employee benefit plans
Equity incentive plans. The Company has outstanding equity grants from its three stock-based employee compensation plans: the 2014 Equity Incentive Plan (2014 Plan), the 2010 Equity Incentive Plan (2010 Plan) and the 2014 Employee Stock Purchase Plan (ESPP). No new options or awards have been granted under the 2010 Plan since June 2014. Outstanding options and awards under the 2010 Plan continue to be subject to the terms and conditions of the 2010 Plan. Options granted under the 2014 Plan generally expire within ten years from the date of grant and generally vest over one to four years. Restricted stock units (RSUs) granted under the 2014 Plan generally vest over two to four years based upon continued service and are settled at vesting in shares of the Company’s Class A common stock. Performance stock units (PSUs) granted under the 2014 Plan generally vest over three years based upon continued service and the Company achieving certain revenue targets, and are settled at vesting in shares of the Company’s Class A common stock. The Company accounts for forfeitures of

15


GoPro, Inc.
Notes to Condensed Consolidated Financial Statements

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. For additional information regarding the Company’s equity incentive plans, refer to the 2018 Annual Report.
Stock options
A summary of the Company’s stock option activity for the nine months ended September 30, 2019 is as follows:
 
Shares
(in thousands)
 
Weighted-average
exercise price
 
Weighted-average remaining contractual term (in years)
 
Aggregate intrinsic value
(in thousands)
Outstanding at December 31, 2018
5,993

 
$
7.28

 
5.44
 
$
7,897

Granted
527

 
7.42

 
 
 
 
Exercised
(2,159
)
 
0.75

 
 
 
 
Forfeited/Cancelled
(225
)
 
18.62

 
 
 
 
Outstanding at September 30, 2019
4,136

 
$
10.09

 
6.99
 
$
488

 
 
 
 
 
 
 
 
Vested and expected to vest at September 30, 2019
4,136

 
$
10.09

 
6.99
 
$
488

Exercisable at September 30, 2019
2,927

 
$
11.41

 
6.19
 
$
475


The aggregate intrinsic value of the stock options outstanding as of September 30, 2019 represents the value of the Company’s closing stock price on September 30, 2019 in excess of the exercise price multiplied by the number of options outstanding.
Restricted stock units
A summary of the Company’s RSU activity for the nine months ended September 30, 2019 is as follows:
 
Shares
(in thousands)
 
Weighted-average grant date fair value
Non-vested shares at December 31, 2018
7,217

 
$
8.15

Granted
5,293

 
5.88

Vested
(3,231
)
 
8.95

Forfeited
(670
)
 
7.61

Non-vested shares at September 30, 2019
8,609

 
$
6.49


Performance stock units
A summary of the Company’s PSU activity for the nine months ended September 30, 2019 is as follows:
 
Shares
(in thousands)
 
Weighted-average grant date fair value
Non-vested shares at December 31, 2018
300

 
$
5.76

Granted
819

 
7.51

Forfeited
(300
)
 
5.76

Non-vested shares at September 30, 2019
819

 
$
7.51


Employee stock purchase plan. For the nine months ended September 30, 2019 and 2018, the Company issued 958,000 and 981,000 shares under its ESPP, respectively, at weighted-average prices of $4.13 and $4.78, respectively.

16


GoPro, Inc.
Notes to Condensed Consolidated Financial Statements

Stock-based compensation expense. The Company measures compensation expense for all stock-based payment awards based on the estimated fair values on the date of the grant. The fair value of stock options granted and ESPP issuance is estimated using the Black-Scholes option pricing model. The fair value of RSUs and PSUs are determined using the Company’s closing stock price on the date of grant. There have been no significant changes in the Company’s valuation assumptions from those disclosed in its 2018 Annual Report.
The following table summarizes stock-based compensation expense included in the condensed consolidated statements of operations:
 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Cost of revenue
$
448

 
$
534

 
$
1,483

 
$
1,406

Research and development
4,507

 
4,977

 
14,068

 
14,942

Sales and marketing
2,084

 
2,429

 
6,518

 
7,489

General and administrative
2,730

 
2,397

 
8,091

 
7,334

Total stock-based compensation expense
$
9,769

 
$
10,337

 
$
30,160

 
$
31,171

The income tax benefit related to stock-based compensation expense was zero for the three and nine months ended September 30, 2019 and 2018 due to a full valuation allowance on the Company’s United States net deferred tax assets (see Note 7 Income taxes).
At September 30, 2019, total unearned stock-based compensation of $54.3 million related to stock options, RSUs, PSUs and ESPP shares is expected to be recognized over a weighted-average period of 2.3 years.

6. Net loss per share
The following table presents the calculations of basic and diluted net loss per share:
 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands, except per share data)
2019
 
2018
 
2019
 
2018
Numerator:
 
 
 
 
 
 
 
Net loss
$
(74,810
)
 
$
(27,089
)
 
$
(110,462
)
 
$
(140,705
)
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted-average common shares—basic and diluted for Class A and Class B common stock
145,617

 
140,072

 
144,306

 
139,028

 
 
 
 
 
 
 
 
Basic and diluted net loss per share
$
(0.51
)
 
$
(0.19
)
 
$
(0.77
)
 
$
(1.01
)

The following potentially dilutive shares were not included in the calculation of diluted shares outstanding as the effect would have been anti-dilutive:
 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Anti-dilutive stock-based awards
13,168

 
15,075

 
13,064

 
15,965


The Company has the intent and ability to deliver cash up to the principal amount of the Notes subject to conversion, based on the Company’s current and projected liquidity. As such, no shares associated with the Note conversion were included in the Company’s weighted-average number of common shares outstanding for any periods presented. The Company’s Notes mature on April 15, 2022, unless earlier repurchased or converted into shares of Class A common stock under certain circumstances as described further in Note 4 Financing

17


GoPro, Inc.
Notes to Condensed Consolidated Financial Statements

Arrangements. The Notes are convertible into cash, shares of the Company’s Class A common stock, or a combination thereof, at the Company’s election. While the Company has the intent and ability to deliver cash up to the principal amount, the maximum number of shares issuable upon conversion of the Notes is 20.6 million shares of Class A common stock. Additionally, the calculation of weighted-average shares outstanding for the three and nine months ended September 30, 2019 and 2018 excludes approximately 9.2 million shares effectively repurchased and held in treasury stock on the condensed consolidated balance sheets as a result of the Prepaid Forward transaction entered into in connection with the Note offering.
The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to ten votes per share. Each share of Class B common stock is convertible at any time at the option of the stockholder into one share of Class A common stock and has no expiration date. Each share of Class B common stock will convert automatically into one share of Class A common stock upon the date when the outstanding shares of Class B common stock represent less than 10% of the aggregate number of shares of common stock then outstanding. Class A common stock is not convertible into Class B common stock. The computation of the diluted net loss per share of Class A common stock assumes the conversion of Class B common stock.

7. Income taxes
The Company’s income tax expense and the resulting effective tax rate are based upon the estimated annual effective tax rates applicable for the respective period, including losses generated in countries where the Company is projecting annual losses for which deferred tax assets are not anticipated to be recognized.
The Company’s tax provision and the resulting effective tax rate for interim periods is determined based upon its estimated annual effective tax rate, adjusted for the effect of discrete items arising in that quarter. The Company also includes jurisdictions with a projected loss for the year (or year-to-date loss) where the Company cannot or does not expect to recognize a tax benefit from its estimated annual effective tax rate. The impact of such inclusions could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings or losses versus annual projections. In each quarter, the Company updates its estimate of the annual effective tax rate, and if the estimated annual tax rate changes, a cumulative adjustment is made in that quarter.
 
Three months ended September 30,
 
Nine months ended September 30,
(dollars in thousands)
2019
 
2018
 
2019
 
2018
Income tax (benefit) expense
$
(273
)
 
$
1,780

 
$
(500
)
 
$
(296
)
Effective tax rate
0.4
%
 
(7.0
)%
 
0.5
%
 
0.2
%

The Company recorded an income tax benefit of $0.3 million for the three months ended September 30, 2019 on a pre-tax net loss of $75.1 million, which resulted in an effective tax rate of 0.4%. The Company’s income tax benefit for the three months ended September 30, 2019 was primarily composed of $0.3 million of tax expense incurred on pre-tax income, and discrete items that included a $1.6 million of net non-deductible equity tax expense for employee stock-based compensation, $0.3 million of tax benefit relating to foreign provision to income tax returns adjustments and a $0.4 million tax benefit for other items, partially offset by a net decrease in the valuation allowance of $1.5 million. The Company recorded an income tax benefit of $0.5 million for the nine months ended September 30, 2019 on a pre-tax net loss of $111.0 million, which resulted in an effective tax rate of 0.5%. The Company’s income tax benefit for the nine months ended September 30, 2019 was primarily composed of $1.2 million of tax expense incurred on pre-tax income, and discrete items that included $1.2 million of tax benefit relating to foreign provision to income tax returns adjustments, $0.7 million of net non-deductible equity tax expense for employee stock-based compensation, $0.5 million of tax benefits relating to restructuring charges, and $0.3 million of tax benefits for the release of uncertain tax positions primarily attributable to the expiration of tax statute of limitations, partially offset by a $0.2 million net decrease in the valuation allowance and a $0.2 million tax benefit related to other items.

18


GoPro, Inc.
Notes to Condensed Consolidated Financial Statements

For the three months ended September 30, 2018, the Company recorded an income tax expense of $1.8 million on a pre-tax net loss of $25.3 million, which resulted in a negative effective tax rate of 7.0%. The Company’s income tax expense for the three months ended September 30, 2018 was composed of $1.5 million of tax expense incurred on pre-tax income in profitable foreign jurisdictions, discrete items that included $7.0 million of net non-deductible equity tax expense, and $0.4 million of tax expense related to foreign provision to return adjustments, partially offset by a $1.1 million tax benefit relating to restructuring expense and a $6.3 million net decrease in the valuation allowance. The Company recorded an income tax benefit of $0.3 million for the nine months ended September 30, 2018 on a pre-tax net loss of $141.0 million, which resulted in an effective tax rate of 0.2%. The Company’s income tax benefit for the nine months ended September 30, 2018 was composed of $2.4 million of tax expenses incurred on pre-tax income in profitable foreign jurisdictions, discrete items that included $10.9 million of tax benefit primarily relating to the conclusion of the IRS audit and the release of uncertain tax positions, $9.6 million of net non-deductible equity tax expense, $5.4 million of tax benefit relating to restructuring expenses, $0.6 million of uncertain tax position interest expense and $0.3 million tax expense related to foreign provision to return adjustments, partially offset by a $3.1 million net increase in the valuation allowance. Further, for both 2019 and 2018, while the Company incurred pre-tax losses in the United States, the Company does not expect to recognize any tax benefits on pre-tax losses in the United States due to a full valuation allowance recorded against its United States deferred tax assets.
At September 30, 2019 and December 31, 2018, the Company’s gross unrecognized tax benefits were $31.5 million and $32.6 million, respectively. If recognized, $17.1 million of these unrecognized tax benefits (net of United States federal benefit) at September 30, 2019 would reduce income tax expense after considering the impact of the change in the valuation allowance in the United States. A material portion of the Company’s gross unrecognized tax benefits, if recognized, would increase the Company’s net operating loss carryforward, which would be offset by a full valuation allowance based on present circumstances. These unrecognized tax benefits relate primarily to unresolved matters with taxing authorities regarding the Company’s transfer pricing positions and tax positions based on the Company’s interpretation of certain United States trial and appellate court decisions, which remain subject to appeal and therefore could be overturned in future periods. Although the completion, settlement and closure of any audits is uncertain, it is reasonably possible that the total amount of unrecognized tax benefits may change in a range of up to $5.0 million within the next 12 months. However, given the number of years remaining that are subject to examination, the range of the reasonably possible change cannot be estimated reliably beyond the next 12 months.

8. Commitments, contingencies and guarantees
Facility Leases. The Company leases its facilities under long-term operating leases, which expire at various dates through 2027.
The components of net lease cost, which were recorded in operating expenses, were as follows:
 
 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)