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SKULLCANDY, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.
(Edgar Glimpses Via Acquire Media NewsEdge)
The following discussion and analysis of the financial condition and results of
our operations should be read together with our condensed consolidated financial
statements and the related notes included in Part I of this Quarterly Report on
Form 10-Q and with our audited consolidated financial statements and the related
notes included in our 2011 10-K filed with the Securities and Exchange
Commission on March 23, 2012.
Cautionary Statement Regarding Forward-Looking Statements
This quarterly report contains forward-looking statements. The words "may,"
"will," "plan," "believe," "expect," "anticipate," "intend," "estimate" and
other expressions that are predictions of or indicate future events and trends
and that do not relate to historical matters identify forward-looking
statements. Although forward-looking statements reflect our current views,
reliance should not be placed on forward-looking statements because they involve
known and unknown risks, uncertainties and other factors, which may cause the
actual results, performance or achievements to differ materially from
anticipated future results, performance or achievements expressed or implied by
such forward-looking statements. Forward-looking statements speak only as of the
date the statements are made. We undertake no obligation to publicly update or
revise any forward-looking statement, whether as a result of new information,
future events, changed circumstances or otherwise. These forward-looking
statements are subject to numerous risks and uncertainties, including the risks
and uncertainties described under "Risk Factors" in Part II of this quarterly
report and in our 2011 10-K filed with the Securities and Exchange Commission on
March 23, 2012, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and elsewhere in this quarterly report. Moreover, we
operate in an evolving environment. New risk factors and uncertainties emerge
from time to time and it is not possible for our management to predict all risk
factors and uncertainties, nor can we assess the impact of all factors on our
business or the extent to which any factor, or combination of factors may cause
actual results to differ materially from those contained in any forward-looking
statement. We qualify all of our forward-looking statements by these cautionary
statements.
Overview
Skullcandy became one of the world's most distinct audio brands by bringing
color, character and performance to an otherwise monochromatic space and helped
revolutionize the audio arena by introducing headphones, earbuds and other audio
and wireless lifestyle products that possess unmistakable style and exceptional
performance. From the award-winning, optic-inspired Roc Nation Aviator
headphones to the evolutionary fitting FIX earbuds and a roster of some of the
world's finest athletes, musicians and artists, Skullcandy continues to redefine
world-class audio performance and style. The Skullcandy name and distinctive
logo have rapidly become icons and contributed to our leading market position,
robust net sales growth and strong profitability.
Our net sales are derived primarily from the sale of headphones and audio
accessories. We pioneered the distribution of headphones in specialty retailers
focused on action sports and the youth lifestyle, such as Zumiez, Tilly's and
hundreds of independent snow, skate and surf retailers. Through this channel we
reach consumer influencers, individuals who help establish and maintain the
credibility and authenticity of our brand. Building on this foundation, we have
successfully expanded our distribution to select consumer electronics, mass,
sporting goods and mobile phone retailers such as Best Buy, Target, Dick's
Sporting Goods and AT&T Wireless. Skullcandy products are sold in the United
States and in more than 70 other countries around the world, with international
sales representing approximately 20.5% and 21.1% of our net sales for three
months ended March 31, 2012 and 2011, respectively. Sales to our former European
distributor, 57 North, represented more than 10% of our net sales in the three
months ended March 31, 2011. We reacquired the rights to European distribution
in August 2011 by purchasing Kungsbacka 57 AB, a subsidiary of 57 North. We also
offer products through our websites, with online sales representing
approximately 8.9% and 8.5% of our net sales for three months ended March 31,
2012 and 2011, respectively.
A number of industry trends have facilitated our growth to date, and we expect
these trends to continue. The increasing use of portable media devices, such as
Apple's iPod, and smartphones with integrated music and video capabilities, such
as Apple's iPhone and third-party Android-based phones, has driven growth in the
headphones and audio accessories markets. Our brand also benefits from the
increasing popularity of action sports, particularly within the youth culture.
Our consumer influencers are teens and young adults that associate themselves
with skateboarding, snowboarding, surfing and other action sports. These
consumers influence a broader consumer base that identifies with authentic
action sports lifestyle brands. In addition, music is an integral part of the
youth action sports lifestyle, and headphones have become an accessory worn to
express individuality. We believe these trends provide us with an expanding
consumer base for our products. Furthermore, we believe that these trends in
preferences and lifestyles are not unique to the United States and are prevalent
in a number of markets around the world.
We face potential challenges that could limit our ability to take advantage of
these opportunities, including, among others, the risk that we may not be able
to effectively extend the recognition and reputation of our brand or continue to
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develop innovative and popular products. We also face the risk that we may not
be able to sustain our past growth or manage our anticipated future growth. In
addition, we rely on Target and Best Buy for a significant portion of our net
sales. During 2011, Best Buy accounted for more than 10% of our net sales.
Target and Best Buy each accounted for more than 10% of our net sales for the
three months ended March 31, 2012. Moreover, we expect to experience growth
internationally, which will require significant additional operating
expenditures and increase our exposure to the risks inherent in international
operations. Furthermore, our industry is very competitive and we cannot assure
you that we will be able to compete effectively. See "Risk Factors" in Part II
of this quarterly report and in our 2011 10-K filed with the Securities and
Exchange Commission on March 23, 2012 for a more complete discussion of the
risks facing our business. Historically, we have experienced greater net sales
in the second half of the year than those in the first half due to a
concentration of shopping during the fall and holiday seasons. We anticipate
that this seasonal impact on our net sales is likely to continue. Accordingly,
our results of operations for any particular quarter are not indicative of the
results we expect for the full year.
Segment Information
We operate exclusively in the consumer products category in which we develop and
distribute headphones and other audio accessories. Prior to our acquisition of
Kungsbacka 57 AB on August 26, 2011, we operated in one business segment.
Following that acquisition we began to operate in two segments -North America
and Europe. The North America segment primarily consists of Skullcandy and Astro
Gaming product sales from customers in the United States, Canada and Mexico
(through our joint venture). The European segment primarily includes Skullcandy
product sales generated from customers in Europe that are served by our European
operations.
Basis of Presentation
Our net sales are derived primarily from the sale of headphones and audio
accessories under the Skullcandy brand name. Amounts billed to retailers for
shipping and handling are included in net sales. Sales are reported net of
estimated product returns and pricing adjustments. Domestic net sales are
derived primarily from sales to our retailers, while our international net sales
are primarily attributable to sales to our retailers and distributors.
Gross profit is influenced by cost of goods sold, which consists primarily of
product costs, packaging, freight, duties and warehousing. We are experiencing
higher product costs due to increasing labor and other costs in China. If we are
unable to pass along these costs to our retailers and distributors or shift our
sales mix to higher margin products, our gross profit as a percentage of net
sales, or gross margin, may decrease.
Our selling, general and administrative expenses consist primarily of wages and
related payroll and employee benefit expenses, including stock-based
compensation, marketing and advertising expense, commissions to outside sales
representatives, legal and professional fees, travel expenses, utilities, other
facility related costs, such as rent and depreciation and amortization, and
consulting expenses. The primary components of our marketing and advertising
expenses include in-store advertising, brand building fixtures, sponsorship of
trade shows and events, promotional products and sponsorships for athletes, DJs,
musicians and artists. We expect our selling, general and administrative
expenses to increase in absolute dollars as we hire additional personnel and
incur increased costs related to the growth of our business and our operation as
a public company.
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Results of Operations
The following table sets forth selected items in our statements of operations in
dollars (in thousands) and as a percentage of net sales for the periods
presented:
Three Months Ended March 31,
2012 2011
Net sales $ 53,280 100.0 % $ 36,018 100.0 %
Cost of goods sold 27,296 51.2 17,703 49.2
Gross profit 25,984 48.8 18,315 50.8
Selling, general and administrative expenses 24,500 46.0 14,399 40.0
Income from operations 1,484 2.8 3,916 10.9
Other expense (48 ) (0.1 ) (13 ) -
Interest expense 124 0.2 1,998 5.5
Income before income taxes and noncontrolling
interests 1,408 2.6 1,931 5.4
Income taxes 267 0.5 852 2.4
Net income $ 1,141 2.1 $ 1,079 3.0
Noncontrolling interests (24 ) - - -
Preferred dividends - - (9 ) -
Net income attributable to Skullcandy, Inc. $ 1,117 2.1 % $ 1,070 3.0 %
Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011
Net Sales
Net sales increased $17.3 million, or 47.9%, to $53.3 million for the three
months ended March 31, 2012 from $36.0 million for the three months ended
March 31, 2011.
Domestic net sales increased $11.8 million, or 46.5%, to $37.2 million, or 69.8%
of our net sales for the three months ended March 31, 2012 from $25.3 million,
or 70.4% of our net sales for the three months ended March 31, 2011. This
increase primarily reflects increased volume to existing retailers.
International net sales, which consist primarily of net sales in Europe and
Canada, increased $3.3 million, or 44.1%, to $10.9 million, or 20.5% of our net
sales for the three months ended March 31, 2012 from $7.6 million, or 21.1% of
our net sales for the three months ended March 31, 2011. This increase was
primarily attributable to a $2.2 million increase in net sales in Europe,
primarily based on our transition to a direct model. On August 26, 2011, we
completed the purchase of all outstanding stock of Kungsbacka 57 AB, a
subsidiary of 57 North, for $18.6 million. Kungsbacka 57 AB previously held an
exclusive distribution agreement for Skullcandy products in Europe through
November of 2013. As part of the acquisition, we acquired certain key employees
and customer lists. The acquisition has enabled us to take direct control of our
European business, which we expect will allow us to capture revenue that would
otherwise have been earned by 57 North and accelerate our growth in this region.
Online net sales increased $2.1 million, or 69.4%, to $5.2 million, or 9.7% of
our net sales for the three months ended March 31, 2012 from $3.1 million, or
8.5% of our net sales for the three months ended March 31, 2011. The increase in
online net sales is primarily due to the acquisition of Astro Gaming, Inc. on
April 21, 2011, which sells products through the site astrogaming.com. Net sales
for Astro Gaming included in online net sales were $2.4 million for the three
months ended March 31, 2012.
Gross Profit
Gross profit increased $7.7 million, or 41.9%, to $26.0 million for the three
months ended March 31, 2011 from $18.3 million for the three months ended
March 31, 2011. Gross profit as a percentage of net sales, or gross margin, was
48.8% for the three months ended March 31, 2012 compared to 50.8% for the three
months ended March 31, 2011. The decrease in gross margin was due primarily to
lower margin sales to the closeout channel in connection with our transition to
an updated product and packaging collection, which will launch in retail stores
in the second quarter of 2012 and be rolled out over the course of 2012.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $10.1 million, or 70.2%,
to $24.5 million for the three months ended March 31, 2012 from $14.4 million
for the three months ended March 31, 2011. The increase was primarily the result
of $4.1 million in additional payroll-related expenses, $1.8 million in
additional marketing and advertising expenses and $1.0 million in additional
depreciation and amortization based on increased investments in property and
equipment and the acquisition of certain intangible assets in August 2011. We
continue to make critical investments in the business to support long-term
growth. These investments include additional personnel in key areas of our
business, product development, point-of-sale merchandising, international
expansion and development of our gaming platform. Legal expenses increased $0.9
million primarily due to $0.7 million of legal expenses related to a lawsuit
with Monster Cable Products, Inc., or Monster, that was settled on February 15,
2012. No further expenses related to the Monster lawsuit will be incurred in
subsequent periods. As a percentage of net sales, selling, general and
administrative expenses increased 6.0 percentage points to 46.0% for the three
months ended March 31, 2012 from 40.0% for the three months ended March 31,
2011.
Income from Operations
As a result of the factors above, income from operations decreased $2.4 million,
or 62.1%, to $1.5 million for the three months ended March 31, 2012 from $3.9
million for the three months ended March 31, 2011. Income from operations as a
percentage of net sales decreased 8.1 percentage points to 2.8% for the three
months ended March 31, 2012 from 10.9% for the three months ended March 31,
2011.
Other Expense
Other expense was immaterial for the three months ended March 31, 2012 and 2011.
Interest Expense
Interest expense decreased $1.9 million to $0.1 million for the three months
ended March 31, 2012 from $2.0 million for the three months ended March 31,
2011. All long-term debt was repaid with the IPO proceeds or was converted to
common stock. In addition, as of March 31, 2012 there were no meaningful
borrowings outstanding on the revolving credit facility compared to $9.0 million
outstanding as of March 31, 2011.
Income Taxes
Income taxes were $0.3 million for the three months ended March 31, 2012
compared to $0.9 million for the three months ended March 31, 2011. Our
effective tax rate for the three months ended March 31, 2012 and March 31, 2011
was 19.3% and 44.1%, respectively. Our effective tax rate for the three months
ended March 31, 2012 decreased, and was lower than the United States federal
statutory rate of 35%, as a result of disqualifying dispositions of incentive
stock options, as well as higher earnings in countries that have lower statutory
rates than the United States. All earnings for the three months ended March 31,
2011 were recognized in the United States for income tax purposes. We expect our
effective tax rate will continue to fluctuate significantly on a quarterly basis
depending upon the proportionate levels of income in countries with lower
statutory rates versus countries with higher statutory rates.
Net Income
As a result of the factors above, net income was $1.1 million for the three
months ended March 31, 2012 and 2011.
Noncontrolling Interest
We entered into a joint venture in Mexico in September 2011 to facilitate
distribution of our products in Mexico. We own a majority of the joint venture
and the voting rights and control the day-to-day operations.
Noncontrolling interest for the three months ended March 31, 2012 consists of
income from our Mexico joint venture that is attributable to the other partner
in the joint venture.
Preferred Dividends
Preferred dividends were immaterial for the three months ended March 31, 2011.
Subsequent to July 2011, there have been no preferred dividends. All shares of
the Company's preferred stock outstanding automatically converted into 4,507,720
shares of common stock upon the closing of our IPO.
Net Income Attributable to Skullcandy, Inc.
As a result of the factors above, net income attributable to Skullcandy, Inc.
was $1.1 million for the three months ended March 31, 2012 and 2011.
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Segment Information
Net sales for the three months ended March 31, 2012 in North America and Europe
were $46.2 million and $7.1 million, respectively. Gross profit in North America
and Europe was $22.1 million and $3.9 million, respectively. Gross margin in
North America and Europe was 47.9% and 54.4%, respectively. The higher gross
margin in Europe is due to a sales mix of higher margin products and more
favorable pricing with certain retailers. Income (loss) from operations in North
America and Europe was ($0.1 million) and $1.6 million, respectively. For
further discussion of the changes in net sales, gross profit and income from
operations, see Management's Discussion and Analysis of Financial Condition and
Results of Operations above.
Liquidity and Capital Resources
Our primary cash needs are working capital and capital expenditures.
Historically, we have generally financed these needs with operating cash flows,
sales of equity securities and borrowings under our credit facility. These
sources of liquidity may be impacted by fluctuations in demand for our products,
ongoing investments in our infrastructure and expenditures on marketing and
advertising.
The following table sets forth, for the periods indicated, our beginning balance
of cash, net cash flows provided by and used in operating, investing and
financing activities and our ending balance of cash (in thousands):
Three Months Ended
March 31,
2012 2011
Cash and cash equivalents at beginning of period $ 23,302 $ 6,462
Net cash provided by (used in) operating activities (1,643 ) 9,492
Net cash used in investing activities (1,350 ) (1,105 )
Net cash used in financing activities (9,493 ) (8,884 )
Effect of exchange rate changes on cash and cash equivalents 97 -
Cash and cash equivalents at end of period $ 10,913 $ 5,965
Net Cash Provided by (Used in) Operating Activities. Cash from operating
activities consists primarily of net income adjusted for certain non-cash items
including depreciation and amortization expense, provision for doubtful
accounts, deferred income taxes, non-cash interest expense, stock-based
compensation expense and the effect of changes in working capital and other
activities. For the three months ended March 31, 2012, net cash used in
operating activities was $1.6 million and consisted of net income of $1.1
million plus $2.2 million for non-cash items, less $5.0 million for working
capital and other activities. Working capital and other activities consisted
primarily of a decrease in accounts receivable of $11.3 million, a decrease in
prepaid expenses and other current assets of $3.2 million, offset by increases
in inventory of $7.1 million and decreases in accounts payable of $1.5 million,
income taxes payable of $5.9 million and accrued liabilities of $5.2 million.
For the three months ended March 31, 2011, net cash provided by operating
activities was $9.5 million and consisted of net income of $1.1 million plus
$2.4 million for non-cash items, plus $6.0 million for working capital and other
activities. Working capital and other activities consisted primarily of a
decrease in accounts receivable of $20.5 million, partially offset by an
increase in inventory of $6.3 million, and decreases in accrued liabilities of
$5.1 million and accounts payable of $2.1 million.
Net Cash Used in Investing Activities. Net cash used in investing activities
relates almost entirely to capital expenditures. Net cash used in investing
activities was $1.4 million and $1.1 million for the three months ended
March 31, 2012 and 2011, respectively.
Net Cash Used in Financing Activities. Net cash used in financing activities was
$9.5 million and $8.9 million for the three months ended March 31, 2012 and
2011, respectively, which primarily resulted from repayment of debt.
We believe that our cash, cash flow from operating activities, available
borrowings under our credit facility will be sufficient to meet our capital
requirements for at least the next twelve months.
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Indebtedness
On August 31, 2010, we entered into a revolving credit and security agreement,
or the credit facility, with PNC Bank and UPS Capital Corporation, as lenders.
The credit facility provides for revolving loans and letters of credit of up to
$28.8 million (which may be increased to up to $50.0 million upon our request
subject to certain conditions) and expires on August 31, 2013. The credit
facility is secured by substantially all of our assets. The total amount of
available borrowings is subject to limitations based on specified percentages of
the value of eligible receivables and inventory. At March 31, 2012, there were
$1 thousand in outstanding borrowings and we had $28.4 million of additional
availability under the credit facility. We may request up to two increases in
the total maximum available amount of the credit facility from the existing
lenders, each in an amount not to exceed $10.6 million, such that the aggregate
amount of the facility does not exceed $50.0 million. We are required to pay a
commitment fee on any unused credit facility commitments at a per annum rate of
0.50%. The credit facility includes restrictions on, among other things, our
ability to incur additional indebtedness, pay dividends or make other
distributions, make investments, make loans and make capital expenditures, and
requires that we maintain a Fixed Charge Coverage Ratio (as defined in the
credit facility) of not less than 1.15 to 1.0, measured on a trailing 12-month
basis. At March 31, 2012, we were in compliance with all financial covenants.
In October 2011, we entered into a first amendment and waiver to revolving
credit and security agreement, or the amendment. The amendment increased the
amount of allowable capital expenditures to $6.0 million annually and waived any
past non-compliance with the capital expenditure covenant. Under the amendment,
we may select from two interest rate options for borrowings under the credit
facility: (i) Alternate Base Rate (as defined in the credit facility) plus 1.0%
or (ii) Eurodollar Rate (as defined in the credit facility) plus 1.5%. The
amendment also allows us to enter into foreign currency contracts with the
lenders to hedge our foreign currency risk.
On March 6, 2012, we entered into a second amendment to our revolving credit and
security agreement. The amendment provides for an increase in the permitted
aggregate annual capital expenditures to $12.0 million.
Contractual obligations
In the three months ended March 31, 2012, there were no material changes to our
contractual obligations as discussed in our annual report on Form 10-K for the
year ended December 31, 2011.
Off Balance Sheet Arrangements
We currently do not have any off-balance sheet arrangements or financing
activities with special-purpose entities.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. To prepare
these financial statements, we must make estimates and assumptions that affect
the reported amounts of assets and liabilities. These estimates also affect our
reported net sales and expenses. Judgments must also be made about the
disclosure of contingent liabilities. Actual results could be significantly
different from these estimates. We believe that the following discussion
addresses the accounting policies that are necessary to understand and evaluate
our reported financial results.
Revenue Recognition and Sales Returns and Allowances
Net sales are recognized when title and risk of loss pass to the retailer or
distributor and when collectability is reasonably assured. Generally, we extend
credit to our retailers and distributors and do not require collateral. Our
payment terms are typically net-30 with terms up to net-120 for certain
international customers. We recognize revenue net of estimated product returns
and pricing adjustments. Further, we provide for product warranties in
accordance with the contract terms given to various retailers and end users by
accruing estimated warranty costs at the time of revenue recognition. We have
entered into contracts with various retailers granting a conditional right of
return allowance with respect to defective products. The contracts with each
retailer specify the defective allowance percentage of gross sales. We have
executed an open return program with a major retailer allowing for an unlimited
amount of returns. Estimates for these items are based on actual experience and
are recorded as a reduction of revenue at the time of recognition or when
circumstances change resulting in a change in estimated returns.
Accounts Receivable
Throughout the year, we perform credit evaluations of our retailers and
distributors, and we adjust credit limits based on payment history and the
retailer's or distributor's current creditworthiness. We continuously monitor
our collections and maintain an allowance for doubtful accounts based on our
historical experience and any specific customer collection issues that have been
identified. Bad debt expense is reported as a component of selling, general and
administrative expenses. Historically, our losses associated with uncollectible
accounts have been consistent with our estimates, but there can be no assurance
that we will continue to experience the same credit loss rates that we have
experienced in the past. Unforeseen, material financial difficulties of our
retailers or distributors could have an adverse impact on our profits.
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Inventories
We value inventories at the lower of the cost or the current estimated market
value of the inventory. Substantially all of our inventory is comprised of
finished goods. We regularly review our inventory quantities on hand and adjust
inventory values for excess and obsolete inventory based primarily on estimated
forecasts of product demand and market value. Demand for our products could
fluctuate significantly. The demand for our products could be negatively
affected by many factors, including the following:
• unanticipated changes in consumer preferences;
• weakening economic conditions;
• terrorist acts or threats;
• reduced consumer confidence in the retail market; and
• unseasonable weather.
Some of these factors could also interrupt the production and importation of our
products or otherwise increase the cost of our products. As a result, our
operations and financial performance could be negatively affected. Additionally,
our estimates of product demand and market value could be inaccurate, which
could result in excess and obsolete inventory.
Long-Lived Assets Including Goodwill and Intangible Assets
We review property, plant and equipment and certain identifiable intangibles,
excluding goodwill, for impairment. Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. Recoverability of these assets is
measured by comparison of their carrying amounts to future undiscounted cash
flows the assets are expected to generate. If property and equipment and certain
identifiable intangibles are considered to be impaired, the impairment to be
recognized equals the amount by which the carrying value of the assets exceeds
its fair market value. We did not record any impairments during the three months
ended March 31, 2012 or 2011.
Prior to the acquisitions of Astro Gaming, Inc. in April 2011 and Kungsbacka 57
AB in August 2011, we did not have goodwill. We do not amortize goodwill and
intangible assets with indefinite useful lives, rather such assets are required
to be tested for impairment at least annually or sooner whenever events or
changes in circumstances indicate that the assets may be impaired. We perform
our goodwill and intangible asset impairment tests in the fourth quarter of each
fiscal year. We did not record any impairments during the three months ended
March 31, 2012 or 2011.
We amortize our intangible assets with definite lives over their estimated
useful lives and review these assets for impairment. We are currently amortizing
our acquired intangible assets with definite lives over periods ranging between
three to ten years.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
income tax assets and liabilities are established for temporary differences
between the financial reporting basis and the tax basis of our assets and
liabilities at tax rates expected to be in effect when such assets or
liabilities are realized or settled. Deferred income tax assets are reduced by
valuation allowances when necessary.
Assessing whether deferred tax assets are realizable requires significant
judgment. We consider all available positive and negative evidence, including
historical operating performance and expectations of future operating
performance. The ultimate realization of deferred tax assets is often dependent
upon future taxable income and therefore can be uncertain. To the extent we
believe it is more likely than not that all or some portion of the asset will
not be realized, valuation allowances are established against our deferred tax
assets, which increase income tax expense in the period when such a
determination is made.
Income taxes include the largest amount of tax benefit for an uncertain tax
position that is more likely than not to be sustained upon audit based on the
technical merits of the tax position. Settlements with tax authorities, the
expiration of statutes of limitations for particular tax positions, or obtaining
new information on particular tax positions may cause a change to the effective
tax rate. We recognize accrued interest and penalties related to unrecognized
tax benefits in the provision for income taxes on the consolidated statements of
operations.
Stock-Based Compensation
We account for all stock-based compensation awards to employees using a
fair-value method and recognize the fair value of each award as an expense over
the requisite service period. Option awards issued to non-employees (excluding
non-employee directors) are recorded at their fair value as determined in
accordance with authoritative guidance, are periodically revalued at each
reporting date, and are recognized as expense over the related service period.
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For purposes of calculating stock-based compensation, we estimate the fair value
of stock options using a Black-Scholes-Merton valuation model, which requires
the use of certain subjective assumptions including expected term, volatility,
expected dividend, risk-free interest rate, forfeiture rate and the fair value
of our common stock. These assumptions generally require significant judgment.
We estimate the expected term of employee options using the average of the
time-to-vesting and the contractual term. We derive our expected volatility from
the historical volatilities of several unrelated public companies within our
industry because we have little information on the volatility of the price of
our common stock since we have no trading history prior to our IPO on July 19,
2011. When making the selections of our industry peer companies to be used in
the volatility calculation, we also considered the stage of development, size
and financial leverage of potential comparable companies. These historical
volatilities are weighted based on certain qualitative factors and combined to
produce a single volatility factor. Our expected dividend rate is zero, as we
have never paid any dividends on our common stock and do not anticipate any
dividends in the foreseeable future. We base the risk-free interest rate on the
U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury
notes with maturities approximately equal to each grant's expected life.
We estimate our forfeiture rate based on an analysis of our actual forfeitures
and will continue to evaluate the appropriateness of the forfeiture rate based
on actual forfeiture experience, analysis of employee turnover behavior and
other factors. Quarterly changes in the estimated forfeiture rate can have a
significant effect on reported stock-based compensation expense, as the
cumulative effect of adjusting the rate for all expense amortization is
recognized in the period the forfeiture estimate is changed. If a revised
forfeiture rate is higher than the previously estimated forfeiture rate, an
adjustment is made that will result in a decrease to the stock-based
compensation expense recognized in the consolidated financial statements. If a
revised forfeiture rate is lower than the previously estimated forfeiture rate,
an adjustment is made that will result in an increase to the stock-based
compensation expense recognized in the consolidated financial statements.
If factors change and we employ different assumptions, stock-based compensation
expense may differ significantly from what we have recorded in the past. If
there is a difference between the assumptions used in determining stock-based
compensation expense and the actual factors which become known over time, we may
change the input factors used in determining stock-based compensation costs for
future grants. These changes, if any, may materially impact our results of
operations in the period such changes are made. We expect to continue to grant
stock options in the future, and to the extent that we do, our actual
stock-based compensation expense recognized in future periods will likely
increase.
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been talked about, while available solutions remain
vertically integrated in spite of a growing industry of
standards-based individual components...
NEW SSOA - SIP Service Oriented Architecture™:
Cloud and large enterprise communications
and collaboration infrastructure: This eBook introduces eZuce's SIP Service Oriented
Architecture (SSOA). SSOA is a 'carrier-class'
system that offers the demanding global enterprise
a modern built-for-the-cloud and highly
scalable...
NEW Benefits of Broadvox VAR Partner Program: We built our Partner Program to work for you. We understand that different
types of partners have different needs, and we don't play favorites. When
you partner with Broadvox, every member of our team stands behind you
and your customers 100%... 
What's New?
