LeapFrog 2015 Annual Report Download - page 14

Retailers and distributors purchase our products in advance, for pickup from our manufacturers in Asia, or
through orders placed to our U.S. or international warehouses where we maintain inventories to meet expected
short-term demand. Products are generally shipped through free-on-board terms, and their titles pass to
customer when they are loaded on board at the port of shipment. Customers pay through pre-established
letters of credit or upon payment terms, which are usually based on the date of shipment. Generally, we do
not provide rights of return or extended payment terms to our customers, except for industry standard terms
surrounding the return of defective merchandise.
Intellectual Property and Licenses
We rely on a combination of patent, trademark, copyright and trade secret laws in the U.S. and other
jurisdictions as well as confidentiality procedures and contractual provisions to protect our brand, characters,
and proprietary technology and information.
We maintain an active program to protect our investment in technology and brands by attempting to secure
patent rights, trademark registrations and other intellectual property registrations. We have filed and obtained
a number of patents in the U.S. and abroad. We believe that the duration of the applicable patents we are
granted is adequate relative to the expected lives of our products. While our patents are an important element
of the protection of our intellectual property, our business as a whole is not materially dependent on any one
patent.
For a discussion of how our intellectual property rights may not be sufficient to prevent other companies from
using similar or identical technology, see Part I, Item 1A. — Risk Factors — ‘‘If we are unable to maintain or
acquire licenses to include intellectual property owned by others in our products, our operating results could
suffer.’’ For a discussion of how our intellectual property rights may not insulate us from claims of
infringement by third parties, see Part I, Item 1A. — Risk Factors — ‘‘We may not succeed in protecting or
enforcing our intellectual property rights and third parties may claim that we are infringing their intellectual
property rights.’’
In addition to proprietary materials we have developed, we use various licensed technologies in some of our
key products, such as LeapTV, LeapPad, Leapster and LeapReader. Our continued use of these rights is
dependent on our continued compliance with applicable license terms. Any failure to do so could interrupt our
supply chain and require us to modify our products or business plans. Please see Part I, Item 1A. — Risk
Factors — ‘‘If we are unable to maintain or acquire licenses to include intellectual property owned by others
in our products, our operating results could suffer’’ for further discussion of the risks we face in relying on
third-party technology licenses for our products.
Seasonality
Our business is highly seasonal with a significant portion of our revenue occurring in the two quarters
ending September 30 and December 31. Given relatively low sales volumes in the six months ending June 30
and the fixed nature of many of our operating expenses, which occur fairly evenly throughout the year, our
results of operations have historically been stronger in our quarter ending September 30 and quarter ending
December 31 relative to our quarter ending March 31 and quarter ending June 30. Conversely, our cash
flow from operations tends to be highest in the March quarter when we collect a majority of our accounts
receivable related to sales made in the preceding December quarter. Cash flow from operations is generally
lowest in our September quarter, as accounts receivable collections taper off and we build our inventory levels
in preparation for the holiday season in the succeeding December quarter. The reduction in cash flow in the
September quarter generally means that our available cash is at its lowest point for the year in the first month
of the December quarter.
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