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Devonshire Capital Funds - GoPro's Intellectual Property Analysis

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"Should GoPro's Price Be Even Lower?" - asks a Boston-based hedge fund. Presentation details intellectual property that powers GoPro's devices. It rests on months of extensive research in which Devonshire Capital Funds analyzed GoPro's existing intellectual property portfolio as well as individual patents that seem to be the foundation of its technology. Presentation argues that GoPro's valuation is grossly inflated. It warns of potential impact on the share price and subsequently on company's market cap in case of patent litigation.

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Devonshire Capital Funds - GoPro's Intellectual Property Analysis

  1. 1. Devonshire Capital Funds: Fund I An analysis of GoPro January 2015 For Public Release
  2. 2. -For Public Release- Disclaimer For Public Release 2 Full Legal Disclaimer As of the publication date of this report, Devonshire Capital LLC ("Devonshire") has a short position in the stock of the company covered herein (GoPro, Inc.) and stands to realize gains in the event that the price of the stock declines. Following publication of the report, Devonshire may transact in the securities of the company covered herein. All content in this report represent the opinions of Devonshire. Devonshire has obtained all information herein from sources it believes to be accurate and reliable. However, such information is presented “as is”, without warranty of any kind – whether express or implied. Devonshire makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results obtained from its use. All expressions of opinion are subject to change without notice, and Devonshire does not undertake to update or supplement this report or any information contained herein. This document is for informational purposes only and it is not intended as an official confirmation of any transaction. All market prices, data and other information are not warranted as to completeness or accuracy and are subject to change without notice. The information included in this document is based upon selected public market data and reflects prevailing conditions and Devonshire’s views as of this date, all of which are accordingly subject to change. Devonshire’s opinions and estimates constitute a best efforts judgment and should be regarded as indicative, preliminary and for illustrative purposes only. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This report’s estimated fundamental value only represents a best efforts estimate of the potential fundamental valuation of a specific security, and is not expressed as, or implied as, assessments of the quality of a security, a summary of past performance, or an actionable investment strategy for an investor. This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein or of any of the affiliates of Devonshire. Also, this document does not in any way constitute an offer or solicitation of an offer to buy or sell any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction. To the best of Devonshire’s abilities and beliefs, all information contained herein is accurate and reliable. Devonshire reserves the rights for its affiliates, officers, and employees to hold cash or derivative positions in any company discussed in this document at any time. As of the original publication date of this document, investors should assume that Devonshire is short shares of GoPro, Inc. and stands to potentially realize gains in the event that the market valuation of the company’s common equity is lower than prior to the original publication date. These affiliates, officers, and individuals shall have no obligation to inform any investor about their historical, current, and future trading activities. In addition, Devonshire may benefit from any change in the valuation of any other companies, securities, or commodities discussed in this document. The information contained in this document may include, or incorporate by reference, forward looking statements, which would include any statements that are not statements of historical fact. Any or all of Devonshire’s forward-looking assumptions, expectations, projections, intentions or beliefs about future events may turn out to be wrong. These forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and other factors, most of which are beyond Devonshire’s control. Investors should conduct independent due diligence, with assistance from professional financial, legal and tax experts, on all securities, companies, and commodities discussed in this document and develop a stand-alone judgment of the relevant markets prior to making any investment decision.
  3. 3. -For Public Release- Fears over Apple entering GoPro’s market, backed up by IP filings, sent GoPro shares tumbling 12.17% on Tuesday For Public Release 3  US 8934045 B2 (2015): Digital camera system having remote control  Original applicant: Eastman Kodak  Inventors: Kazuhiro Joza, Marc Krolczyk, Keith Stoll Karn  A digital camera system contains an image capture module, which consists of an image capture system and a wireless communication system, and a remote control module, which includes a battery, status display elements, user controls, a wireless communication system, and a power management system Basic info Description Exemplary claims  (1) A digital camera system, comprising:  An image capture module including:  A first image capture system including:  A first image sensor for capturing a digital image; and  A first optical system for forming an image of a first portion of a scene onto the first image sensor; and  A first wireless communication system; and  a remote control module including:  A remote control status display including one or more remote control status display elements for displaying status information pertaining to the image capture module;  A battery-operated power supply;  One or more remote control user controls;  A second wireless communication system for communicating with the first wireless communication system using a wireless interface; and  A power management system providing a normal-power state where the remote control status display and the second wireless communication system are active and a low-power state where the remote control status display and the second wireless system are inactive  Wherein when none of the remote control user controls have been activated for a predefined first time interval the power management system sets the remote control module to operate in the low-power state;  And wherein when a user activates one of the remote control user controls while the remote control module is in the low-power state:  The power management system sets the remote control module to operate in the normal-power state:  The remote control module sends a status inquiry to the image capture module using the second wireless communication system, and in response the image capture module sends status information back to the remote control module using the first wireless communication system; and  The status information is displayed using the remote control status display elements of the remote control status dusplay Other bibliometric data  Patent application that resulted in this patent was re-assigned from Eastman Kodak to Apple on February 11, 2013  Cites over 56 patents, including previous work by Ricoh, Canon, Kodak, Minolta and other leading electronics and camera companies on camera remote controls, image sensors, low-power capture modes, etc.; out of the 56 foundational camera and electronics patents that Apple cites, only one is also cited by GoPro’s portfolio of 50 granted patents
  4. 4. -For Public Release- One patent erased $880 million dollars from GoPro’s market cap in six-and-a-half hours For Public Release 4 $48.00 $49.00 $50.00 $51.00 $52.00 $53.00 $54.00 $55.00 $56.00 $57.00 $58.00 20150113T153001 20150113T153431 20150113T153843 20150113T154358 20150113T155335 20150113T155955 20150113T160429 20150113T161017 20150113T161735 20150113T162319 20150113T162628 20150113T163424 20150113T163851 20150113T164431 20150113T164843 20150113T165404 20150113T170015 20150113T170736 20150113T171652 20150113T172135 20150113T172817 20150113T174151 20150113T174535 20150113T175016 20150113T175417 20150113T175808 20150113T180321 20150113T180730 20150113T181041 20150113T181403 20150113T182001 20150113T182343 20150113T182701 20150113T183031 20150113T183209 20150113T183330 20150113T183435 20150113T183553 20150113T183742 20150113T184031 20150113T184330 20150113T184647 20150113T185038 20150113T185704 20150113T190318 20150113T191242 20150113T192006 20150113T192844 20150113T193640 20150113T194218 20150113T194749 20150113T195312 20150113T195617 20150113T200122 20150113T200607 20150113T201114 20150113T201332 20150113T201541 20150113T201726 20150113T201946 20150113T202247 20150113T202500 20150113T202735 20150113T203037 20150113T203458 20150113T203924 20150113T204357 20150113T204708 20150113T205157 20150113T205631 20150113T210152 20150113T210958 20150113T211819 20150113T212632 20150113T213304 20150113T213950 20150113T214539 20150113T214950 20150113T215227 20150113T215621 20150113T215909 GoPro Share Price (01/13/2015, by tick) 15.47% How many other patents exist that can do the same?
  5. 5. -For Public Release- For Public Release 5 GoPro has soared upwards from an initial share price of $24 during its June IPO, propelled by impressive revenue growth and a wave of investor enthusiasm 1 Executive Summary
  6. 6. -For Public Release- ForecastEstimated Go-Pro offers an example of a traditional consumer electronics growth revenue curve For Public Release 6 0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000 0 200 400 600 800 1000 1200 1400 1600 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 R&D stage Consumer electronics co. Media co.? Nick Woodman founds GoPro as Woodman Labs after he is unable to find suitable camera gear for a surf trip Digital HERO 5 is released, the first with a 170-degree view angle, ultra-wide lens (December 2008) GoPro releases its first HD camera, the HD HERO, shooting in 1080p at up to 60fps GoPro introduces its first digital camera, the Digital HERO, with 10-seconds of recording capability GoPro releases the HERO3, with Wi-Fi connectivity and the ability to shoot in 4k resolution GoPro sells 17.8M shares in its IPO, valuing it at $2.95B (June 2014) Company releases its first product, a camera system using 35mm film, in September 2004 Units soldRevenue $
  7. 7. -For Public Release- Within four years, GoPro has found a way to successfully turn a profit and to grow its earnings Income Statement; For the Fiscal Period Ending Dec-31-2010 Dec-31-2011 Dec-31-2013 Dec-31-2013 LTM Restated Sep-30-2014 Revenue $64.5 $234.2 $526.0 $985.7 $1,121.7 Total Revenue 64.5 234.2 526.0 985.7 1,121.7 Cost of Goods Sold 31.7 111.7 298.5 624.0 646.8 Gross Profit 32.7 122.6 227.5 361.8 474.9 SG&A Expense 19.5 74.8 137.8 189.0 259.5 Selling and Marketing 13.2 64.4 116.9 157.8 not available General and Administrative 6.3 10.8 20.9 31.6 not available R&D Expense 1.4 8.6 36.1 73.7 131.2 Other Operating Expense, Total 20.9 83.5 173.9 262.8 390.7 Operating Income 11.9 39.1 53.6 99.0 84.2 Net Income $11.6 $24.6 $32.3 $60.6 $49.6 GPRO is 94th percentile in the NASDAQ in 1-year revenue growth, and 98th percentile in 3-year revenue growth GoPro has managed to keep its gross margin over 35%, and as high as 50 Faced with stronger competition from HTC, Polaroid, and Sony, GPRO has raised R&D exp. from 2% of revenue to 12% Balance Sheet; As of Dec-31-2010 Dec-31-2011 Dec-31-2013 Dec-31-2013 Sep-30-2014 Cash And Equivalents $ - $29.1 $36.5 $101.4 $237.7 Short Term Investments - - 1.2 2.0 1.6 Total Cash & ST Investments - 29.1 37.3 103.5 239.3 Total Assets - 104.4 246.7 439.7 589.1 Total Liabilities $ - $37.4 $249.3 $367.8 $238.4 Net Debt not available $(28.7) $91.7 $10.2 $(239.3) Quick Ratio not available 1.5x 0.9x 0.8x 1.5x Inventory Turnover not available not available 7.6x 7.2x 5.8x GoPro’s large cash holdings have been bolstered by its recent secondary offering 1.5x quick ratio underscores GoPro’s strong cash position; it could pay off all liabilities with its cash and short-term investments GoPro may take advantage of its low long-term debt to make acquisitions in the near-term For Public Release 3
  8. 8. -For Public Release- For Public Release 8 GoPro has soared upwards from an initial share price of $24 during its June IPO, propelled by impressive revenue growth and a wave of investor enthusiasm 1 Executive Summary GoPro’s publicity engine has hyped the stock ever since its IPO, but some investors and activists remain concerned 2
  9. 9. -For Public Release- GoPro’s valuation in December was abnormally high, especially when looking at companies with comparable PE/PB ratios For Public Release 9 P/E (LTM Norm.): 214x P/E (NTM): 74.69x P/BV: 80x Revenue $6,500 1-Yr Rev. Growth 11.3% Net Income ($43) Revenue $985.7 1-Yr Rev. Growth 87.4% Net Income $60.6 Revenue $14,474 1-Yr Rev. Growth 45.8% Net Income ($964) Revenue $3,022 1-Yr Rev. Growth 24.2% Net Income $90 Revenue $2,300 1-Yr Rev. Growth 27.1% Net Income $162 Revenue $8,155 1-Yr Rev. Growth 8.7% Net Income ($169) Revenue $17,857 1-Yr Rev. Growth 6.9% Net Income $162 Multiples based on avg. for quarter ending 12/8/2014 Revenue $2,972 1-Yr Rev. Growth 8.8% Net Income $804 Revenue $5,591 1-Yr Rev. Growth (0.5%) Net Income $558 Revenue $6,170 1-Yr Rev. Growth 5% Net Income $913 Revenue, net income from 2013 ($M)  Owns, operates, or leases 298 leading entertainment and other venues globally; 150M+ ticket sales per year  Leading international cable company, with 14x GoPro’s revenue and impressive revenue growth  Key rating institution with over $839M in levered FCF in 2013 and $2.1B in cash  4th-largest cable provider in US, with 27.6M subscribers and $961M in operating income  Largest provider of wireless infrastructure in US; signed large tower leasing agreement with AT&T in 2013  Leading American consumer and products brand with $5.6B in revenue and consistent 40+% gross margins  Major South Korean conglomerate with holdings across an impressive span of industries  Ascendant athletic wear company with major long-term supply deals and a significant addressable market  British multination clothing, footwear, and home products retailer with sold net income and $6B in revenue
  10. 10. -For Public Release- In December, GoPro’s market cap ($9.2B*) placed it alongside the world’s largest consumer goods, media, and tech companies For Public Release 10 Revenue ($M) Net income ($M) Rev. growth, 1-yr.Company & Mkt. Cap* Description $74,488 ($3,100) (2.45%)  Europe’s second-largest car manufacturer by volume; global deliveries of 2.82 million  Rapidly expanding in Chinese market $19,800 ($1,790) 0.09%  French telecommunications equipment company  Industry Group Leader for Technology Hardware in Dow Jones Sustainability Indices review  One of Top 100 Global Innovators for 4th year in a row $23,100 $620 (5.19%)  Office supply chain with 2,000 stores worldwide and over 90,000 employees $8,500 $449 (3.57%)  American multinational media company  Holds Down Jones & Co., the NY Post, Harper Collins, and other publishing and newspaper assets Earned off of its broad content and media holdings $7,500 $449 18.8%  Manufactures and sells automation equipment and systems and medical equipment  One of Top 100 Global Innovators in 2013, per Thomson Reuters Leading technology innovator $55,070 $167 5.48%  Multinational manufacturer of consumer, home, and automotive electronics  Ranked in top 50 Most Innovative Companies in 2014 by BCG One of world’s top electronics brands *all market caps as of 12/5/2014 $10.14B $9.55B $9.87B $9.18B $9.2B $10.34B
  11. 11. -For Public Release- Analysts have hyped GoPro’s stock since its IPO, but skeptics have raised doubts For Public Release 11 What GoPro’s media hype engine says… …what critics say about GoPro’s situation GoPro has continued to see stellar revenue growth; GoPros should be among the key gifts this holiday season, as it has top billing at Amazon and Best Buy  GoPro will need to ship 15M to 20M devices annually to grow into valuation; long-term projections of annual GoPro sales are closer to 10M to 12M  Unlike Apple’s iPod, GoPro cameras appeal to a much smaller addressable market, which is already showing signs of saturation GoPro’s intended shift towards a media / content company means it should be valued as such; it has one of the top 10 YouTube brand channels  GoPro has yet to generate any significant revenue from its YouTube channel or media efforts, yet it has the same market cap as News Corp  GoPro doesn’t necessarily own content shot on its devices GoPro’s cameras feature industry-leading technology that its competitors can’t match, which will allow it to sustain margins  GoPro’s cameras are not significantly better than those of its competitors, nor are its chipsets differentiated or particularly unique  In fact, GoPro faces increasingly intense competition from Sony, HTC, and Polaroid, among others GoPro offers 4% net profit margins and $110M in positive levered free cash flow generated each year; momentum / enthusiasm of retail investors keeps bumping it higher  Picking and choosing out of a basket of metrics is dangerous; any look at the fundamentals should focus on its sky-high price-to- book, forward P/E, and price-to-sales ratios; mob mentality is not a long-term viable valuation method GoPro plans to release its own line of consumer drones in late 2015, expanding its product offering into what may be the next hot consumer product  Leading drone manufacturers have already begun selling drones with cameras sourced in-house  GoPro is four years behind industry leaders, and may be shooting itself in the foot since many drone manufacturers market their drones for use with GoPro cameras Google may look to acquire GoPro in 2015  The majority of proposed synergies benefit GoPro above all; GoPro’s specialization is not near-term relevant to Google Glass  Google paid $9.5B for Motorola and received 4,500 patents and was able to bolster Android; $9B for a camera company with limited IP appears high
  12. 12. -For Public Release- For Public Release 12 GoPro has soared upwards from an initial share price of $24 during its June IPO, propelled by impressive revenue growth and a wave of investor enthusiasm 1 Executive Summary The crest of this wave of Wall Street hype is evident in frothy media coverage of GoPro and surprising, if not outright worrying, valuations metrics 2 But as the valuations have grown, so have questions about GoPro’s future success3
  13. 13. -For Public Release- Not everyone believes the hype surrounding GoPro, and some have made their opinions known For Public Release 13 Copperfield Research Citron Research Kerrisdale Capital  “GoPro is a tech hardware company. Yet it has spun a story, which is a very convenient fiction, for Wall Street to parrot: that it can become a ‘media company’. Why? Because users are uploading some of their videos to YouTube?”  “The clearest comparison to GoPro is Beats Headphones…Apple bought Beats for 2x revenue…At the time of the acquisition, much of the media opined that 2x sales was high for a product in a commoditized industry.”  “We have never seen analysts on consumer electronics gear company resort to social media ‘eyeballs’ metrics to justify valuations…In Wall Street’s compulsion to fabricate a story where a story does not exist, you see its fingerprints on GoPro media.  “We believe $GPRO has used accounting gimmickry to overstate EBITDA by at least 10%. Very aggressive”  “$GPRO is not what it seems. Great product, great chart…but accounting has yet to be fleshed out well.”  Media strategy is unlikely to bear fruit; although GoPro has millions of YouTube subscribers and hundreds of millions of views of its videos, the idea of the company obtaining significant amounts of revenue from YouTube or a cable TV station is “ludicrous”  Some investors have compared GoPro’s camera to Apple’s iPod, but unlike the iPod it does not have an ecosystem and is not “materially superior” to its competition Accounting issues Wall Street market-making Weak fundamentals
  14. 14. -For Public Release- Is GoPro the next Flip Cam? For Public Release 14 History Previous hype surrounding Flip  Flip Video cameras were a popular product line sold from 2006 to 2011 by Pure Digital Technologies  Hailed as “the future of journalism video”, Flip Cams were one of the “most significant electronics products of [2008]”, according to New York Times tech writer David Pogue  Over seven million were sold between 2006 and 2011; at times it represented over 35% of the camcorder market  In 2011, however, Cisco, which had acquired Flip for $590M, shuttered the business, seeking to exit the low-margin, increasingly competitive consumer camera market while retaining Flip’s valuable intellectual property portfolio Introduction  Flip is “looking at a younger audience, 14-25 or 28, who’ll just slip it into their pocket…This particular product is a subsector we’re creating” Ray Sangster, Flip Video’s European president  “e-tailers moved very quickly…they’re the guys with the fingers on the pulse.” Ray Sangster, Flip Video’s European president  “Pure Digital reveals YouTube-friendly Flip Video Ultra” Engadget  The Flip Ultra is part of the “modern reporter’s toolkit” Rory Cellan-Jones, BBC tech correspondent  “A Reporter’s Toolbag: Reduced to Two – Flip Camera and iPhone…The Flip video camera’s simple, one-red-button design makes it perfect for capturing quick video pieces” Nieman Reports The Flip Ultra was released on September 12, 2007, quickly becoming the best-selling camcorder on Amazon; within a year it had captured 13% of the camcorder market The Flip Mino HD, Pure Digital’s first HD camera, was released on November 11, 2008 Cisco Systems acquired Pure Digital on May 21, 2009 for $590M in stock On April 12, 2011, Cisco announced it was shuttering Flip, laying off 550 employees and “writing off” its $590M purchase; the unit was “considered a drag on margins” and was “facing increased competition from traditional camcorder players” Cameras are still a rapidly commoditizing, replaceable piece of consumer electronics 340 400400 150 50 219421 20042002 2003 2005 201020092006 20082007 2011 Flip Sales ($M)¹ ¹Estimated on analyst consensus
  15. 15. -For Public Release- For Public Release 15 GoPro has soared upwards from an initial share price of $24 during its June IPO, propelled by impressive revenue growth and a wave of investor enthusiasm 1 Executive Summary The crest of this wave of Wall Street hype is evident in frothy media coverage of GoPro and surprising, if not outright worrying, valuations metrics 2 But as the valuations have grown, so have questions about GoPro’s future success3 While many of the previous points are concerning, we are asking a more fundamental question: how much technology does GoPro actually own? 4
  16. 16. -For Public Release- 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000 60,000 65,000 70,000 75,000 80,000 2.0 0.6 0.4 0.2 0.0 0.8 1.8 1.6 1.4 1.0 2.6 2.4 4.0 4.6 4.8 3.2 3.8 2.2 4.2 1.2 4.4 3.6 3.4 3.0 2.8 Canon Toshiba JVC Panasonic FUJIFILM Nikon GoPro Olympus Polaroid² Sony HTC Garmin Most analysts, whether long or short, value GoPro as a technology company…but how much technology does GoPro own? For Public Release 16¹ Within last 20 years; US/Europe/JP INPADOC families ² Conservative estimates based on point of last certainty R&Dspending,latestannual,$B Revenue, FY2013, $M Direct Competitors in Action Cam Market Leading Digital Camera Manufacturers Size scales with patent portfolio¹ Examining camera-specific patent portfolios of leading manufacturers Among leading camera makers, GoPro has the lowest R&D spend and the 2nd –smallest patent portfolio Garmin has a small camera IP portfolio, but it also has 350 other patent families covering its core products
  17. 17. -For Public Release- GoPro CEO Nick Woodman and S-1 filings have hinted at this problem before, as recently as August 2014 For Public Release 17¹ Source: Bloomberg phone call, August 2014 “We relied on the engineering departments of our contract manufacturers for innovation – at their pace of innovation. [But now] we’ve got a ton of brilliant products in the pipeline, and we’ve developed a ton of brilliant intellectual property” Nick Woodman, GoPro Founder and CEO¹ Risk factors Many of our existing and potential competitors enjoy substantial competitive advantages, such as…  larger intellectual property portfolios … Our intellectual property rights and proprietary rights may not adequately protect our products. … Our business may suffer if it is alleged or determined that our technology or another aspect of our business infringes the intellectual property rights of others. … If we are unable to maintain or acquire rights to include intellectual property owned by others in the content distributed by us, our marketing, sales or future business strategy could be affected or we could be subject to lawsuits relating to our use of this content. GoPro S-1
  18. 18. -For Public Release- For Public Release 18 GoPro has soared upwards from an initial share price of $24 during its June IPO, propelled by impressive revenue growth and a wave of investor enthusiasm 1 Executive Summary The crest of this wave of Wall Street hype is evident in frothy media coverage of GoPro and surprising, if not outright worrying, valuations metrics 2 But as the valuations have grown, so have questions about GoPro’s future success3 While many of these attacks are concerning, none of them are the attack we are presenting today; GoPro’s core problem is far more significant…it hardly owns any technology 4 GoPro appears to have gone to market with a technology product before it owned any technology 5
  19. 19. -For Public Release- In January 2014, GoPro was granted its 5th patent family, but had already sold over 8.1 million cameras – this matters For Public Release 19 35 U.S. Code § 283 The several courts having jurisdiction of cases under this title may grant injunctions in accordance with the principles of equity to prevent the violation of any right secured by patent, on such terms as the court deems reasonable. 35 U.S. Code § 284 Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court. When the damages are not found by a jury, the court shall assess them. In either event the court may increase the damages up to three times the amount found or assessed. 35 U.S. Code § 286 Except as otherwise provided by law, no recovery shall be had for any infringement committed more than six years prior to the filing of the complaint or counterclaim for infringement in the action. 35 U.S. Code § 281 A patentee shall have remedy by civil action for infringement of his patent. If you infringe and sell products in the past, you can be held liable in the future:
  20. 20. -For Public Release- Potential for “lookback” Potential for “lookback” Potential for “lookback” 134 197 132 78 0 50 100 150 200 250 2005 2011 201220062004 2008 20092007 2010 2013 2014 10 54 14 10 0 5 10 15 20 25 30 35 40 1.0 0.0 0.4 0.6 0.2 0.8 1.2 1.4 2014 24 2013 15 2012 6 2 2011 5 3 2 2010200920082007200620052004 10 54 14 10 0 5 10 15 20 25 30 35 40 3 2 0 1 4 5 2004 2005 2006 2012 2 6 2014 5 2011 2 3 200920082007 2010 15 24 2013 Design Patents Utility Patents Revenue Design Patents Utility Patents Units Sold Recapping GoPro’s revenue and unit sales timeline underscores that its products predate its granted patents For Public Release 20 ¹ US/Europe/JP grants ² Units sold est. 2004-2010, proj. 2014 ³ Revenue est. 2007-2008, proj. 2014 GoPro Patenting¹ vs. Sales² GoPro Patenting¹ vs. Revenue³ GoPro Revenue³ / Utility Patent¹ ($M) Revenue / Utility Patent GrantedPatents UnitsSold(M) GrantedPatents Revenue($M) Revenue/utilitypatent GoPro had sold almost two million cameras before it had a single US granted patent
  21. 21. -For Public Release- Each successive iteration of GoPro has introduced new features reliant on new technology – but does GoPro own the technology its cameras utilize? 21 Digital HERO Digital HERO 3 Digital HERO 5 HD HERO HD HERO 960 HD HERO2 HERO3 HERO3+ HERO4 Digital Video with audio HD 4K Key feature Storage medium Internal / external flash memory 170º lens External SDHC flash 120 fps Wi-Fi Power source AAA batteries 1,100 mAh Li-ion battery + optional Battery BacPac (not compatible with HD HERO 960) Resol- ution 512x384 1080p 960p 1080p 4k Frame- rate 30fps Internal flash memory 60fps 120fps 240fps Water- proofto 30’ 100’ 197’ 131’ For Public Release
  22. 22. -For Public Release- Covers existing GoPro case shape Majority of the IP that GoPro owns appears to cover the design of its products, not its core technology… For Public Release 22 Design Patents Battery Camera Housings Expansion Modules Lens Covers / Windows / Adapters USD682778S1 Ornamental design for a GoPro lithium ion battery USD646313S1 Describes housing for GoPro’s Hero cases USD657808S1 Design for a camera housing USD674429S1 Design for camera housing with three lens windows USD702276S1 Design for square camera housing with latch USD702747S1 Design for housing with square lens cover USD699277S1 Design for housing for Dual Hero system USD674428S1 Design for housing for Dual Hero system USD699276S1 Design for a square camera housing USD702277S1 Design for a square camera housing USD710922S1 Design for a square camera housing with LCD viewing pane in back USD710921S1 Design for a camera housing with square lens cover USD698791S1 Ornamental design for a BacPac expansion module USD691608S1 Ornamental design for a GoPro Battery BacPac USD698790S1 Ornamental design for a BacPac expansion module USD691609S1 Ornamental design for a GoPro Battery BacPac, with fewer ports USD692472S1 Design for a lens adapter USD699275S1 Design for a lens adapter USD702755S1 Design for a cylindrical lens cover USD702754S1 Design for lens cover with cover for button as well USD657811S1 Design for spherical lens window on GoPro’s waterproof cases USD644679S1 Covers the specific design of the lens window of GoPro’s waterproof cases USD689537S1 Design for a flat lens camera assembly; resembles “Dive Housing” USD688726S1 Design for a suction cup mount USD698851S1 Design for a suction cup mount USD677748S1 Design of a mounting system for a “sports board” USD687112S1 Design of a mounting system for a “sports board” USD697570S1 Design of a mounting system for a “sports board” Important to note that, surprisingly, many of GoPro’s competitors have used very different design language in their offerings Mounts These cover form, not function Some prior art surrounding suction mount iterations Covers design, not function of mounting system Important to note that most GoPro competitors have waterproof bodies, not cases Are lens covers a core GoPro accessory? Interchangeable lenses seem to be mostly pushed by external brands Utilize GoPro’s proprietary port to protect copycats Protects Blackout Housing in multiple iterations Covers existing GoPro case shape Could protect stereoscopic camera housing designs Covers existing GoPro case shape Doesn’t appear to map to current product Covers basic battery design
  23. 23. -For Public Release- …while GoPro’s utility patents predominantly focus on various housings, mounts, and harnesses For Public Release 23 Utility Patents US8606073B2 Method for managing multiple video streams of a broadcast US8837928B1 Housing with laterally-mounted latch mechanisms US8325270B2 Camera housing with integrated expansion module and cable from module to camera US8638392B2 Camera housing with integrated expansion module and cable from module to camera US8199251B2 Camera housing with integrated expansion module and cable from module to camera US8644629B2 Decompression of images captured by Bayer-style camera US8718390B1 Two operating modes of accessing and decoding image plane data US8538143B2 Compressing RGB images from single-sensor imager by separating into planes US8345969B2 Method of compressing color imagery of video from Bayer sensor US8879861B2 A method of accessing / decoding image planes to re-construct an image US8014597B1 Separating image into independent color channels and encoding / compressing them, storing them, and re-combining into full-color display US8830367B1 Image sensor, frame controller, and processor system to reduce rolling shutter US8879858B1 Storing compressed image data in multiple band states US8687086B1 A method of compressing image data before sending to a digital signal processor US8014656B2 Two-piece mount for attaching camera to sports board US8870475B1 Detachable buckle component for mounting on a sports board US8857775B1 System with a spring clamp for mounting a camera to various equipment US8150248B1 Two-piece mount for attaching camera to sports board EP2341389B1 Strap that allows for two secured positions of camera US8079501B2 Harness for attaching camera to a human user EP2357525B1 Strap that allows for two secured positions of camera EP1611480B1 Strap that allows for two secured positions of camera Some of these patents refer to technology for which prior patenting and prior art records are extensive Broadcasting Camera Housings Compression / Image Manipulation Mounts / Harnesses Given prior patenting and potential prior art, these may not survive IPR Post-Alice decision, these patents deserve further examination Much extant IP in this area May be susceptible to prior art Not applicable to existing business model; prior use? Certain of these appear to be susceptible to prior art / practice; while this family has received consistent attention from GoPro, questions about its strength remain Potential for high throughput apps Deserving of prior art search; narrow? Use of frame buffer predates this Important concerns over decades of prior art in this field; relatively narrow claim construction Superseded by new mounts How limited is applicability / use? How limited is applicability / use? Language may have workarounds
  24. 24. -For Public Release- The heart of GoPro’s IP is the process of mounting cameras onto surfboards For Public Release 24 ‘Over the years, [Preston ‘Pete’ Peterson] got interested in photography. In a direct line from Tom Blake to Doc Ball, Pete produced several prototype camera housings for his own use and experimentation. His most notable experiment was “an underwater housing that George Downing mounted on his board and on his back like a butt pack,” wrote Craig Lockwood, based on what Pete’s son John told him. “Shot at Makaha in the mid-1950s, these may be the first-ever shots of a board taking off underwater.”’¹ Footage likely shot at Sunset Beach on Oahu, no later than 1962; TV show Adventures in Paradise aired on ABC from 1959 to 1962² ¹ Source: Legendary Surfers, Malcolm Gault-William ² Retrieved from YouTube
  25. 25. -For Public Release- For Public Release 25 GoPro has soared upwards from an initial share price of $24 during its June IPO, propelled by impressive revenue growth and a wave of investor enthusiasm 1 Executive Summary The crest of this wave of Wall Street hype is evident in frothy media coverage of GoPro and surprising, if not outright worrying, valuations metrics 2 But as the valuations have grown, so have questions about GoPro’s future success3 While many of these attacks are concerning, none of them are the attack we are presenting today; GoPro’s core problem is far more significant…it hardly owns any technology 4 In fact, GoPro made a name for itself as a tech company well before it had one, single granted patent 5 Does GoPro have necessary technology it needs to drive its ambitious future growth strategies? 6
  26. 26. -For Public Release- GoPro’s corporate strategy, outlined in its reports and calls, references many technology areas with significant IP activity For Public Release 26 Manufacture and sell consumer drones Become a media company Pursue image stabilization Improve waterproof cases/bodies Add GPS location to camera GoPro patenting Industry patenting 0 0 5 3 0 ~1,400 ~2,600 ~15,900 ~300 ~860 Forward-looking GoPro strategies
  27. 27. -For Public Release-GrantedPatents¹ Enthusiasm over GoPro’s strategy to enter drones should be tempered by competitors’ patenting levels For Public Release 27 207207 173 115 8681 65576251424948 2924 13211314111 0 50 100 150 200 250 2007 2009 20102003 20082006 2011 20122005200419961994 1995 2000 2001 200219981997 1999 2013 2014 Patenting on UAVs ¹ US/JP/EP grants, ’94 to ‘14 UAV / UAS Patenting Early work led by American defense corporations Foundational work re. hobbyist drones is from early 1990s Small clusters of inventorship have started to appear, although citation network is still fledgling Parrot SA, which jumpstarted consumer drone market, has a strong portfolio Honeywell has a particularly strong portfolio around the use of cameras with drones Assignee network
  28. 28. -For Public Release- GoPro’s competitors own the software, hardware, and methods of content management and distribution For Public Release 28 GrantedPatents¹ 1,186 1,1191,097 1,220 1,346 1,148 942919897 755 684628 548532566603563 397356346 21 0 200 400 600 800 1,000 1,200 1,400 19971996 2000 2004 20061999 200520031998 200220011994 1995 2007 2011 201320092008 201420122010 Patenting on broadcast communications ¹ US/JP/EP grants, ’94 to ‘14 Key GoPro competitor Sony rests at the center of the broadcast communication citation network, with well over 1,100 patents Nielsen Co also boasts a strong portfolio, unsurprisingly Google’s portfolio includes estimating demographic compositions, data collection on users and dynamic data delivery HTC, another GoPro HERO competitor, has a strong portfolio on handling and managing multimedia broadcasts GoPro does not appear on this citation network, which only features portfolios of over eight patents Digimarc also shows well in this space, with key watermarking technology, image processing, and second screen IP Broadcast Communications Patenting Assignee network
  29. 29. -For Public Release- Attempts by GoPro to include image stabilization in its products may be hemmed in by its competitors’ (especially Sony’s) patenting For Public Release 29 GrantedPatents¹ 252 272 255 223235 214 168153151 88 121 103101 444536 82 48 33 172 0 50 100 150 200 250 300 20132007 2011 20122009 20102008 20141994 1999 2000 2005 2006200420022001 20031998199719961995 Patenting on image stabilization ¹ US/JP/EP grants, ’94 to ‘14 Image Stabilization Patenting Nikon and Canon represent the center of image stabilization patenting, with consistent transfer of knowledge between the two Small group of Irish / European optics and photography companies Sony Corp has a strong, relatively distinct, portfolio; this is no surprise given the success of its image- stabilized action cameras Even smaller competitors, such as Minolta and Casio, have strong portfolios surrounding image stabilization Assignee network
  30. 30. -For Public Release- Kodak, Sony, and Ricoh have been patenting around waterproof cameras since the mid- to late-90s For Public Release 30 GrantedPatents¹ 86 79 72 6161 53 47 3939 25 33 4041 2932 40 2421 15 22 1 0 20 40 60 80 100 1998 20021997199619951994 1999 2001 201420132012201120102009200820032000 20062005 20072004 Patenting on waterproof cameras ¹ US/JP/EP grants, ’94 to ‘14 Waterproof Camera Patenting Very isolated citation network; little work between secondary players Key cluster includes Kodak, Ricoh, Sony, Olympus, Fuji, and Minolta with research occurring predominantly from 1994 to 2004US Navy and US Army have each contributed to the field, focusing on underwater cameras for submarine detection Assignee network
  31. 31. -For Public Release- GoPro has located a niche in the GPS / camera space, but its application is narrow For Public Release 31 GrantedPatents¹ 4749 36 26 32 17 20 9 14 7 10 557754221 0 10 20 30 40 50 2000 2001 2002 2003 2004 2005 2006 2007 20081999199819971996 201220112010 2013 2014200919951994 Patenting on GPS in cameras ¹ US/JP/EP grants, ’94 to ‘14 GPS and Camera Patenting Nokia (5) and Sony Ericsson (13) both have portfolios surrounding this technology GoPro / Woodman Labs claims an integrated expansion module that may include a GPS unit (it is not internal to the camera) Apple and Samsung both have patents in this technology space, with Apple focusing more heavily on the camera side Digimarc uses GPS to digitally watermark images and videos with location data Fujifilm describes image capturing devices with maps and an apparatus for identifying images Assignee network
  32. 32. -For Public Release- For Public Release 32 GoPro has soared upwards from an initial share price of $24 during its June IPO, propelled by impressive revenue growth and a wave of investor enthusiasm 1 Executive Summary The crest of this wave of Wall Street hype is evident in frothy media coverage of GoPro and surprising, if not outright worrying, valuations metrics 2 But as the valuations have grown, so have questions about GoPro’s future success3 While many of these attacks are concerning, none of them are the attack we are presenting today; GoPro’s core problem is far more significant…it hardly owns any technology 4 In fact, GoPro made a name for itself as a tech company well before it had one, single granted patent 5 Despite its recent attempts to improve its IP, GoPro still does not have the intellectual property it needs to control its future 6 If GoPro has infringed others’ technology, it may be liable for hundreds of millions of dollars in damages looking backward and hundreds of millions of dollars in royalties looking forward 7
  33. 33. -For Public Release- Past companies have demonstrated how costly technology can be to acquire retroactively For Public Release 33  Marvell Technology was found in December 2012 to have intentionally infringed two Carnegie Mellon University patents and was ordered to pay $1.17 billion dollars in damages  Marvell has chosen instead to continue to appeal; in the meantime, as of April 2014, the verdict has reached $1.54 billion dollars ($1,540M)  DuPont was ordered to pay Monsanto $1 billion dollars after losing a patent verdict in August 2012  This was followed by a new licensing deal in March 2013 that threw out the earlier verdict but required DuPont to make at least $1.75 billion dollars in royalty payments over the next several years ($1,750M)  In late 2002, RIM was found guilty of infringing NTP’s patents on wireless email and ordered to pay $53 million dollars  Instead, RIM continued to appeal until March 2006 when, hit with a stern warning from the presiding judge, it agreed to pay NTP $612.5 million dollars ($612M)  Intel faced the music several times in the early 2000s, paying Intergraph Corp $300 million dollars in April 2002 for infringing Intergraph’s patents with its Pentium chips, an additional $150 million dollars for infringing with its Itanium chips, and following those up with a March 2004 settlement of $225 million dollars to close all outstanding patent litigation between the two companies ($675M)  EchoStar Corporation settled its patent litigation with TiVo in May 2011, signing a license deal and agreeing to pay TiVo $500 million dollars ($500M)  SAP was found in 2009 to infringe a business method patent held by Versata Software and was ordered to pay $139 million dollars; after a new trial, this amount grew to $391 million dollars ($391M)  After a 2010 verdict, Microsoft agreed to pay VirnetX Holding Corp $200 million dollars to license its patents on secure network communications ($200M)  W.L. Gore & Associates was ordered by the Federal Circuit in January 2015 to pay C.R. Bard Inc. $1.06 billion dollars after it willfully infringed Bard’s blood vessel graft patent ($1,059M)
  34. 34. -For Public Release- Canary in the coal mine? Some companies think GoPro is infringing their IP For Public Release 34 Z-Dimensional, LLC VStream Technologies, LLC AccusedproductsPatentsinsuitCaseinformation  Hero  Hero2  Hero 3  Hero3+ Black Edition  Dual / 3D Hero System  Jaws flex clamp  Digital video cameras US5,742,737 – “Method For Recording Voice Messages On Flash Memory In A Hand Held Recorder” Venue: CA Southern District Filed: 12/5/2012 Latest Docket Entry: 1/27/2014 Status: Open in Scheduling US7,729,530 – “Method and Apparatus for 3-D Data Input to a Personal Computer with a Multimedia Oriented Operating System Venue: TX Eastern District Filed: 4/15/2014 Latest Docket Entry: 11/5/2014 Status: Closed in Initial Pleadings US8,602,662 – “Camera and Accessories Clamping Mount” Venue: Colorado District Court Filed: 1/21/2014 Latest Docket Entry: 11/19/2014 Status: Closed in Claim Construction (Settled) US6,690,731; US8,179,971; US6,850,647; US7,627,183; US7,489,824 – Five patents relating to compression / decompression of video data Venue: CA Southern District Filed: 12/5/2012 Latest Docket Entry: 1/27/2014 Status: Open in Scheduling  As a direct result of its relationship with Dinkum, GoPro became intimately aware of the ActionPod Products, including product components and the manufacturing process, and Dinkum’s desire to grow its business through sales of these products  In October 2013, GoPro release the Jaws Flex Clamp, a clamping monopod mount as an accessory to its camera line that is substantially similar to the ActionPod Products  Upon information and belief, GoPro developed the Jaws Flex Clamp at the same time it was promoting the ActionPod Products  Upon information and belief, GoPro intentionally kept secret from Dinkum its development of the Jaws Flex Clamp  By copying the ActionPod Products to create the Jaws Flex Clamp, GoPro misappropriated the skill and labor of Dinkum
  35. 35. -For Public Release- Many of GoPro’s key features appear to be referenced by earlier patents assigned to competitors For Public Release 35 US5481303A – Nikon US6002240A– Dell US7327122B2– Mathews Associates US7123935B2– Canon US5475539A – Casio US5438363A– Nikon US6624842B2– Diversified Patent US6864911B1– HP US6285471B1– Siemens US6987527B2 – Philip Kossin US7714925B2 – Samsung US6462508B1– Kinpo Electronics US6574433B1– Frank Stuempfl US7924323B2– Walker Digital These are just a few of the patents that engineering analyses commissioned by Devonshire Capital Funds suggest GoPro may infringe
  36. 36. -For Public Release- Many companies with strong track records of defending IP appear to hold patents related to GoPro products For Public Release 36
  37. 37. -For Public Release- Thank you For Public Release 37 Matt Stack, Fund Manager Devonshire Capital Fund info@devonshirecapitalfunds.com
  38. 38. -For Public Release- For Public Release 38 Full Legal Disclaimer As of the publication date of this report, Devonshire Capital LLC ("Devonshire") has a short position in the stock of the company covered herein (GoPro, Inc.) and stands to realize gains in the event that the price of the stock declines. Following publication of the report, Devonshire may transact in the securities of the company covered herein. All content in this report represent the opinions of Devonshire. Devonshire has obtained all information herein from sources it believes to be accurate and reliable. However, such information is presented “as is”, without warranty of any kind – whether express or implied. Devonshire makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results obtained from its use. All expressions of opinion are subject to change without notice, and Devonshire does not undertake to update or supplement this report or any information contained herein. This document is for informational purposes only and it is not intended as an official confirmation of any transaction. All market prices, data and other information are not warranted as to completeness or accuracy and are subject to change without notice. The information included in this document is based upon selected public market data and reflects prevailing conditions and Devonshire’s views as of this date, all of which are accordingly subject to change. Devonshire’s opinions and estimates constitute a best efforts judgment and should be regarded as indicative, preliminary and for illustrative purposes only. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This report’s estimated fundamental value only represents a best efforts estimate of the potential fundamental valuation of a specific security, and is not expressed as, or implied as, assessments of the quality of a security, a summary of past performance, or an actionable investment strategy for an investor. This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein or of any of the affiliates of Devonshire. Also, this document does not in any way constitute an offer or solicitation of an offer to buy or sell any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction. To the best of Devonshire’s abilities and beliefs, all information contained herein is accurate and reliable. Devonshire reserves the rights for its affiliates, officers, and employees to hold cash or derivative positions in any company discussed in this document at any time. As of the original publication date of this document, investors should assume that Devonshire is short shares of GoPro, Inc. and stands to potentially realize gains in the event that the market valuation of the company’s common equity is lower than prior to the original publication date. These affiliates, officers, and individuals shall have no obligation to inform any investor about their historical, current, and future trading activities. In addition, Devonshire may benefit from any change in the valuation of any other companies, securities, or commodities discussed in this document. The information contained in this document may include, or incorporate by reference, forward looking statements, which would include any statements that are not statements of historical fact. Any or all of Devonshire’s forward-looking assumptions, expectations, projections, intentions or beliefs about future events may turn out to be wrong. These forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and other factors, most of which are beyond Devonshire’s control. Investors should conduct independent due diligence, with assistance from professional financial, legal and tax experts, on all securities, companies, and commodities discussed in this document and develop a stand-alone judgment of the relevant markets prior to making any investment decision.

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