LeapFrog 2015 Annual Report Download - page 84

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
18. Related Party Transactions − (continued)
For the quarter ended March 31, 2013 and the year ended December 31, 2012, the Company purchased
software products and support services totaling $1,146 and $2,912, respectively, from Oracle Corporation on
terms the Company believes are comparable to those it would obtain in an arm’s-length agreement.
19. Concentrations of Credit Risk and Certain Other Risks
Financial instruments that subject the Company to concentrations of credit risk include cash equivalents,
foreign exchange transactions and trade receivables. Cash equivalents are money market funds. Foreign
exchange transactions consist primarily of short-term forward foreign currency contracts with highly-rated
financial institutions.
LeapFrog manufactures and sells its products primarily to national and regional mass-market retailers. Credit
is extended based on an evaluation of the customers’ financial condition; generally, collateral is not required.
Allowances for credit losses are provided for in the consolidated financial statements at the time of sale. Four
major retailers accounted for 71% and 65% of gross accounts receivable at March 31, 2015 and 2014,
respectively. Should any of these four retailers experience difficulties paying their debts to LeapFrog, this
could have a significant negative impact on the Company’s statement of operations and cash flows.
Seasonality of Sales
Sales of LeapFrog’s products have historically been highly seasonal with a substantial majority of the sales
occurring during the quarters ended September 30 and December 31. Failure to predict accurately and respond
appropriately to changes in retailer and consumer demand may cause LeapFrog to produce excess inventory,
which could adversely affect operating results and financial condition. Conversely, if a product achieves
greater success than anticipated, the Company may not have sufficient inventory to meet customer demand,
which could adversely impact LeapFrog’s relations with its customers.
Manufacturing Vendor Concentration
LeapFrog’s manufacturing and operations strategy is designed to maximize the use of outsourced services,
particularly with respect to the actual production and physical distribution of its products. The Company
believes that its outsourcing strategy enhances the scalability of the manufacturing process. Since the
Company does not have its own manufacturing facilities, it is dependent on close working relationships with
its contract manufacturers for the supply and quality of its products and the computer chips contained in these
products. LeapFrog uses contract manufacturers located in Asia, primarily in China, to manufacture its
finished products. Given the highly seasonal nature of its business, any unusual delays or quality control
problems could have a material adverse effect on LeapFrog’s operating results and financial condition.
LeapFrog’s top three vendors supplied a total of 79%, 78%, 79% and 73% of LeapFrog’s products for the
year ended March 31, 2015, the three months ended March 31, 2014, and the years ended December 31, 2013
and 2012, respectively. LeapFrog’s largest individual vendor, WKK Technology Limited, located in China,
supplied 61%, 49%, 60% and 40% of LeapFrog’s products for the year ended March 31, 2015, the
three months ended March 31, 2014, and the years ended December 31, 2013 and 2012, respectively. The
Company expects to continue to use a limited number of contract manufacturers and fabricators.
Customer Concentration
A limited number of customers historically have accounted for a substantial portion of the Company’s gross
sales. For the year ended March 31, 2015, the three months ended March 31, 2014 and the years ended
December 31, 2013 and 2012, the Company’s top four customers have been Wal-Mart Stores, Inc.
(‘‘Wal-Mart’’), Toys ‘‘R’’ Us, Inc. (‘‘Toys ‘‘R’’ Us’’), Target Corporation (‘‘Target’’) and Amazon.com, Inc.
(‘‘Amazon’’). The relative percentage of gross sales to the top four customers to total Company gross sales
were as follows for the periods shown below:
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