SKULLCANDY, INC. - FORM 10-Q

SKULLCANDY, INC. - FORM 10-Q - August 5, 2014

Attached files

Attached files

SKULLCANDY, INC. Reports

file	filename
EXCEL - IDEA: XBRL DOCUMENT - SKULLCANDY, INC.	Financial_Report.xls
EX-31.1 - EXHIBIT - SKULLCANDY, INC.	exhibit-311x2014630.htm
EX-10.1 - EXHIBIT - SKULLCANDY, INC.	exhibit-101x2014630xdarling.htm
EX-10.5 - EXHIBIT - SKULLCANDY, INC.	exhibit-105x2014630xraffone.htm
EX-10.2 - EXHIBIT - SKULLCANDY, INC.	exhibit-102x2014630xhodell.htm
EX-10.3 - EXHIBIT - SKULLCANDY, INC.	exhibit-103x2014630xpaschel.htm
EX-32.1 - EXHIBIT - SKULLCANDY, INC.	exhibit-321x2014630.htm
EX-31.2 - EXHIBIT - SKULLCANDY, INC.	exhibit-312x2014630.htm
EX-10.4 - EXHIBIT - SKULLCANDY, INC.	exhibit-104x2014630xgrosso.htm
EX-10.6 - EXHIBIT - SKULLCANDY, INC.	exhibit-106x2014630xdarlin.htm
EX-10.7 - EXHIBIT - SKULLCANDY, INC.	exhibit-107x2014630xleasea.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-35240

SKULLCANDY, INC.

(Exact name of registrant as specified in its charter)



Delaware		56-2362196
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
1441 West Ute Boulevard, Suite 250 Park City, Utah		84098
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (435) 940-1545

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of July 31, 2014, 28,086,682 shares of the registrant’s common stock were outstanding.

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SKULLCANDY, INC.

INDEX TO FORM 10-Q



		Page
PART I. FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets (Unaudited) as of June 30, 2014 and December 31, 2013	2
	Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended June 30, 2014 and 2013	3
	Condensed Consolidated Statements of Comprehensive Loss (Unaudited) for the three and six months ended June 30, 2014	4
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the three and six months ended June 30, 2014	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	26
Item 4.	Controls and Procedures	27
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 6.	Exhibits	28
Signatures		30

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PART I

Item 1. Condensed Consolidated Financial Statements

SKULLCANDY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands of dollars)

(unaudited)



	June 30, 2014			December 31, 2013
Assets
Current assets:
Cash and cash equivalents	$	44,065		$	38,835
Accounts receivable, net	43,796			57,549
Inventories	50,826			40,284
Prepaid expenses and other current assets	7,389			4,663
Deferred taxes	3,507			4,097
Total current assets	149,583			145,428
Property and equipment, net	9,464			10,021
Intangibles	9,528			10,979
Goodwill	13,867			13,867
Deferred financing fees	41			224
Deferred taxes	2,499			2,395
Total assets	$	184,982		$	182,914
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	19,854		$	16,565
Accrued liabilities	20,237			22,838
Deferred taxes	490			55
Total current liabilities	40,581			39,458
Deferred taxes	1,575			1,742
Stockholders’ equity:
Preferred stock	—			—
Common stock	3			3
Treasury stock	(43,294		)	(43,294		)
Additional paid-in capital	134,265			131,428
Accumulated other comprehensive loss	(84		)	(171		)
Retained earnings	51,291			53,182
Total Skullcandy stockholders’ equity	142,181			141,148
Noncontrolling interests	645			566
Total stockholders’ equity	142,826			141,714
Total liabilities and stockholders’ equity	$	184,982		$	182,914

See Accompanying Notes to Condensed Consolidated Financial Statements

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SKULLCANDY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands of dollars, except share and per share information)

(unaudited)



	Three months ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
Net sales	$	53,861		$	50,789		$	92,941		$	87,839
Cost of goods sold	29,632			28,004			50,549			48,568
Gross profit	24,229			22,785			42,392			39,271
Selling, general and administrative expenses	22,928			23,951			45,008			50,262
Income (loss) from operations	1,301			(1,166		)	(2,616		)	(10,991		)
Other (income) expense	(375		)	(249		)	(205		)	290
Interest expense	181			111			192			214
Income (loss) before income taxes and noncontrolling interests	1,495			(1,028		)	(2,603		)	(11,495		)
Income tax benefit	(85		)	(339		)	(791		)	(3,726		)
Net income (loss)	1,580			(689		)	(1,812		)	(7,769		)
Net income (loss) attributable to noncontrolling interests	(8		)	54			(79		)	87
Net income (loss) attributable to Skullcandy, Inc.	$	1,572		$	(635	)	$	(1,891	)	$	(7,682	)
Net loss per common share attributable to Skullcandy, Inc.
Basic	$	0.06		$	(0.02	)	$	(0.07	)	$	(0.28	)
Diluted	0.06			(0.02		)	(0.07		)	(0.28		)
Weighted average common shares outstanding
Basic	28,041,146			27,719,081			27,940,219			27,709,974
Diluted	28,506,538			27,719,081			27,940,219			27,709,974

See Accompanying Notes to Condensed Consolidated Financial Statements

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SKULLCANDY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands of dollars)

(unaudited)



	Three Months Ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
Net income (loss)	$	1,580		$	(689	)	$	(1,812	)	$	(7,769	)
Unrealized gain (loss) on foreign currency cash flow hedges, net of tax (benefit) expense of $0 and ($8) for the three and six months ended June 30, 2014 and ($13) and $88 for the three and six months ended June 30, 2013, respectively	63			(70		)	113			284
Foreign currency translation adjustment	(1		)	(47		)	(25		)	46
Comprehensive income (loss)	1,642			(806		)	(1,724		)	(7,439		)
Comprehensive income (loss) attributable to noncontrolling interests	(8		)	54			(79		)	87
Comprehensive income (loss) attributable to Skullcandy, Inc.	$	1,634		$	(752	)	$	(1,803	)	$	(7,352	)

See Accompanying Notes to Condensed Consolidated Financial Statements

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SKULLCANDY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands of dollars)

(unaudited)



	Six months ended June 30,
	2014			2013
Operating activities
Net loss	$	(1,812	)	$	(7,769	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation of fixed assets and amortization of intangible assets	4,615			4,394
Loss on disposal of property and equipment and intangible assets	690			1,979
Provision for doubtful accounts	716			1,076
Deferred income taxes	754			(995		)
Noncash interest expense	184			120
Amortization of stock-based compensation expense	1,415			2,059
Changes in operating assets and liabilities:
Accounts receivable	13,014			33,257
Inventories	(10,519		)	(9,555		)
Prepaid expenses and other current assets	(1,315		)	2,681
Accounts payable	3,268			(6,933		)
Accrued liabilities	(3,890		)	(8,200		)
Net cash provided by operating activities	7,120			12,114
Investing activities
Purchase of property and equipment	(3,297		)	(1,890		)
Purchase of intangible assets	—			(17		)
Net cash used in investing activities	(3,297		)	(1,907		)
Financing activities
Proceeds from exercise of stock options	1,728			115
Income tax benefit (detriment) from stock option exercises and expirations	(316		)	5
Net cash provided by financing activities	1,412			120
Effect of exchange rate changes on cash and cash equivalents	(5		)	36
Net increase in cash and cash equivalents	5,230			10,363
Cash and cash equivalents, beginning of period	38,835			19,345
Cash and cash equivalents, end of period	$	44,065		$	29,708
Supplemental cash flow information:
Cash paid for interest	—			1
Cash paid for income tax	1,365			5,803

See Accompanying Notes to Condensed Consolidated Financial Statements

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SKULLCANDY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(1) Description of Business

Skullcandy, Inc., a Delaware corporation (the “Company”), is a global designer, marketer and distributor of performance and gaming audio and other accessory related products under the Skullcandy, Astro Gaming and 2XL brands.

(2) Basis of Presentation

The accompanying condensed consolidated balance sheets as of June 30, 2014 and December 31, 2013 and the condensed consolidated statements of operations for the three and six months ended June 30, 2014 and 2013 and the condensed consolidated statements of comprehensive loss for the three and six months ended June 30, 2014 and 2013 and cash flows for the six months ended June 30, 2014 and 2013 are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (all of which are considered of normal recurring nature) considered necessary to present fairly the Company’s financial position, results of operations for the three and six months ended June 30, 2014 and cash flows for the six months ended June 30, 2014 and 2013. The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. Historically, the Company has 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. The Company anticipates that this seasonal impact on net sales is likely to continue. Accordingly, the Company’s results of operations for any particular quarter are not indicative of the results the Company expects for the full year.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2014. The December 31, 2013 condensed consolidated balance sheet included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by GAAP for complete financial statements.

The Company entered into a joint venture in Mexico on September 19, 2011. The Company has the majority ownership and voting rights and controls the day-to-day operations of the entity. Accordingly, it has consolidated the results of the joint venture operations in its condensed consolidated financial statements. The noncontrolling interests, which reflect the portion of the earnings (losses) of operations which are applicable to the other noncontrolling partner, have been classified as noncontrolling interests in the accompanying financial statements.

Reclassifications to consolidated balance sheet

Subsequent to the filing of the financial statements in Form 10-K as of and for the year ended December 31, 2013, the Company determined that certain deferred tax amounts were improperly combined by jurisdiction and by current and non-current classification on the consolidated balance sheet at December 31, 2013. As a result, current deferred tax assets were overstated by $598,000, non-current deferred tax assets were understated by $2,395,000, current deferred tax liabilities were understated by $55,000 and non-current deferred tax liabilities were understated by $1,742,000. The improper classification has been corrected by reclassifying these amounts on the consolidated balance sheet. The improper classification was not considered material to the consolidated balance sheet, and had no effect on the consolidated statement of operations, the consolidated statement of comprehensive income (loss), the consolidated statement of redeemable convertible preferred stock and stockholders’ equity (deficit), or the consolidated statements of cash flows as of and for the year ended December 31, 2013.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries as well as the results of the Company's joint venture in Mexico. All significant intercompany balances and transactions have been eliminated in the condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued ASU No. 2014-09, "Revenue from Contracts with Customers." Under the new standard, revenue is recognized at the time a good or service is transferred to a customer for the amount of consideration received for that specific good or service. It is effective for annual reporting periods beginning after

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December 15, 2016, including interim reporting periods, and early adoption is not permitted. Entities may use a full retrospective approach or report the cumulative effect as of the date of adoption. We are currently evaluating the impact, if any, the adoption of this standard will have on our Consolidated Financial Statements.

(3) Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and trade accounts receivable. Credit is extended to customers based on an evaluation of the customer’s financial condition and collateral is not required. One customer accounted for a significant portion of net sales, which is as follows:



	Three Months Ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
Net Sales of Customer	13.8	%	18.3	%	13.9	%	18.0	%

The customer above accounted for 14% and 28% of the Company’s accounts receivable as of June 30, 2014 and December 31, 2013, respectively. No other customer accounted for greater than 10% of the Company's accounts receivable for the presented periods. The Company maintains its cash balances at various financial institutions. At times such balances may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash.

(4) Allowance for Doubtful Accounts and Sales Returns

The following is a roll forward of the allowance for doubtful accounts and for sales returns and allowances, which are classified as a reduction of accounts receivable and in accrued liabilities, respectively:



	Doubtful Accounts			Sales Returns & Allowances
	(in thousands)
Balance, December 31, 2013	$	1,881		$	7,010
Provision	716			(13,464		)
Deductions	(80		)	12,725
Balance, June 30, 2014	$	2,517		$	6,271

(5) Product Warranty Obligations

The Company provides for product warranties in accordance with the contract terms given to various customers and end users by accruing estimated warranty costs at the time of revenue recognition. Warranties are generally fulfilled by replacing defective products with new products.

Activity in the warranty accrual balance, which is included in accrued liabilities on the condensed consolidated balance sheets, was as follows:



	Warranty Accrual
	(in thousands)
Balance at December 31, 2013	$	1,582
Warranty Claims	(548		)
Warranty Costs Accrued	154
Balance at June 30, 2014	$	1,188

(6) Property and Equipment, Net

Property and equipment, net, consisted of the following:

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SKULLCANDY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

(unaudited)



	June 30, 2014			December 31, 2013
	(in thousands)
Cost:
Leasehold improvements	$	3,042		$	3,025
Furniture and fixtures	8,887			8,246
Other equipment	8,401			5,754
Computer equipment and software	5,986			6,134
Vehicles	324			195
	26,640			23,354
Less accumulated depreciation	(17,176		)	(13,333		)
Property and equipment, net	$	9,464		$	10,021

(7) Net Income (loss) per Share

Basic net income (loss) per common share is computed by dividing the net loss attributable to Skullcandy, Inc. for the reporting period by the weighted average number of shares of common stock outstanding during the same period. Diluted net income (loss) per share reflects the effects of potentially dilutive securities, which consist of unvested awards.

A reconciliation of the numerator and denominator used in the calculation of basic and diluted net income (loss) per common share is as follows:



	Three Months Ended June 30,					Six months ended June 30,
	2014		2013			2014			2013
	(in thousands)
Numerator
Net income (loss) attributable to Skullcandy, Inc.	$	1,572	$	(635	)	$	(1,891	)	$	(7,682	)
Denominator
Weighted average common stock outstanding for basic net income per common share	28,041		27,719			27,940			27,710
Effect of dilutive securities—unvested restricted stock and stock options	466		—			—			—
Weighted average common shares and dilutive securities outstanding	28,507		27,719			27,940			27,710

The following shares were excluded from the calculation of diluted shares outstanding as their effect would have been anti-dilutive (in thousands):



	Three Months Ended June 30,		Six months ended June 30,
	2014	2013	2014	2013
	(in thousands)
Stock options and restricted stock awards	1,968	3,392	1,968	3,336

(8) Debt

Credit Facility

On August 19, 2013, the Company entered into a credit agreement and revolving line of credit, or the credit facility, with Wells Fargo Bank, National Association, as lender, which provided a line of credit of up to $50,000,000. As a subfeature, the credit facility provided for letters of credit up to $10,000,000. The credit facility is secured with a first-priority lien against substantially all of the assets of the Company.

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SKULLCANDY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

(unaudited)

The credit facility required the Company to be in compliance with specified affirmative financial covenants, including (a) total liabilities divided by tangible net worth not greater than 1.5 to 1.0 as of the last day of each fiscal quarter; (b) asset ratio not less than 1.35 to 1.00 as of the last day of each fiscal quarter; (c) net income attributable to the Company, measured on a rolling 4-quarter basis for each fiscal quarter set forth in the table below, determined as of the last day of each such fiscal quarter, not less than the amount set forth opposite the relevant fiscal quarter:



Fiscal Quarter	Net income attributable to Skullcandy, Inc.
The fiscal quarters ending March 31, 2014, June 30, 2014 and September 30, 2014	$	2,500,000
The fiscal quarters ending December 31, 2014, March 31, 2015, June 30, 2015 and September 30, 2015	5,000,000
The fiscal quarters ending December 31, 2015, March 31, 2016, June 30, 2016 and September 30, 2016	7,500,000
The fiscal quarters ending December 31, 2016 and each fiscal quarter thereafter	$	10,000,000

(d) net income attributable to the Company, measured on a rolling 4-quarter basis for each fiscal quarter ending after August 19, 2013 and on or prior to December 31, 2013 in which an advance under the Line of Credit is made, determined as of the last day of each such fiscal quarter, not less than zero.

The Company’s credit facility also contains certain financial covenants and other restrictions that limit the Company’s ability, among other things, to: (a) make fixed asset purchases in any fiscal year greater than $12 million in aggregate; (b) incur operating lease expenses in any fiscal year greater than $3 million in aggregate; and (c) create, incur, assume or permit to exist any indebtedness or liabilities resulting from borrowings, loans or advances, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, except (1) the liabilities of the Company and each of its subsidiaries to Wells Fargo, (2) permitted investments, (3) uncapped permitted indebtedness, and (4) capped permitted indebtedness up to $2,000,000 in the aggregate outstanding at any one time. Additional covenants and other restrictions exist that limit the Company’s ability, among other things, to: undergo a merger or consolidation, sell certain assets, create liens, guarantee certain obligations of third parties, make certain investments or acquisitions, and declare dividends or make distributions.

On April 29, 2014 the Company entered into an amendment of its credit agreement and revolving line of credit which reduced the line of credit to $10,000,000 and letters of credit to $5,000,000 and also included the following changes to the financial covenants:

1.Removed the net income requirement;

2.Revised the total liabilities divided by tangible net worth ratio to not greater than 1.0 to 1.0 as of the last day of each fiscal quarter;

3.Revised the current ratio to not less than 2.0 to 1.0 as of the last day of each fiscal quarter; and

4.Included an EBITDA coverage ratio of not less than 2.0 to 1.0 as of the last day of each quarter.

At June 30, 2014, the Company was in compliance with all applicable covenants in its credit facility.

In association with the amended credit agreement, the Company proportionally wrote off approximately $167,000 of previously capitalized deferred financing fees.

(9) Segments

On June 30, 2014, the Company began certain organizational changes to align with how its Chief Operating Decision Makers ("CODM") review performance and make decisions in managing the Company. The Company manages its business in two operating segments which are comprised of Domestic and International. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the CODM in deciding how to allocate resources and in assessing performance. The Company's operating segments and reporting segments are the same. Historically, the Company's segments were comprised of the North American and International segments, with the North America segment including sales to customers in Canada and Mexico. The Domestic segment primarily consists of Skullcandy and Astro Gaming product sales to customers in the United States. The International segment primarily includes Skullcandy product sales to customers in Europe, Asia, Canada, Mexico (through the Company’s joint venture), and all other geographic areas outside the United States that are served by the Company’s International operations. The Company operates exclusively in

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SKULLCANDY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

(unaudited)

the consumer products category in which the Company develops and distributes headphones and other audio accessories. All intercompany revenues, expenses, payables and receivables are eliminated in consolidation and are not reviewed when evaluating segment performance. Each segment’s performance is evaluated based on net sales, gross profit and operating income (loss). As set forth below, prior periods have been restated to conform to the current presentation. Information related to the Company’s segments is as follows:



	Three Months Ended June 30,					Six months ended June 30,
	2014		2013			2014			2013
	(in thousands)
Net sales
Domestic	$	39,458	$	37,216		$	65,581		$	63,443
International	14,403		13,573			27,360			24,396
Consolidated	53,861		50,789			92,941			87,839
Gross profit
Domestic	17,519		16,845			29,934			28,496
International	6,710		5,940			12,458			10,775
Consolidated	24,229		22,785			42,392			39,271
Income (loss) from operations
Domestic	1,062		(2,570		)	(2,956		)	(12,566		)
International	239		1,404			340			1,575
Consolidated	$	1,301	$	(1,166	)	$	(2,616	)	$	(10,991	)



	June 30,		December 31,
	2014		2013
	(in thousands)
Identifiable assets
Domestic	$	118,607	$	119,981
International	66,375		62,933
Consolidated	184,982		182,914
Long-lived assets
Domestic	8,009		8,446
International	1,455		1,575
Consolidated	9,464		10,021
Goodwill
Domestic	6,805		6,805
International	7,062		7,062
Consolidated	$	13,867	$	13,867

(10) Stock-Based Compensation

The Company has an incentive award plan that provides for the grant of incentive and nonqualified options to purchase the Company’s common stock, performance-based restricted stock units (“PSUs”) and restricted stock units (“RSUs”) to selected officers, other key employees and directors. Options are granted at a price not less than the fair market value on the date of grant and generally become exercisable between one and four years after the date of grant in accordance with an applicable vesting schedule, and generally expire ten years from the date of grant. The Company has not recorded a material amount of stock-based compensation expense on its PSUs as the Company does not believe that it is probable that the performance criteria will be met for the majority of the outstanding awards.

RSUs granted to members of the Board of Directors vest annually subject to continued service on the Board.

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SKULLCANDY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

(unaudited)

Stock Options

The following table summarizes stock option activity under the Company’s stock option plans for the six months ended June 30, 2014:



	Options Outstanding		Price Range	Weighted- Average Price	Weighted- Average Contractual Term (in years)	Aggregate Intrinsic Value (1)
Balance at December 31, 2013	2,532,449		0.37 – 20.00	8.06
Granted	372,664		9.11	9.11
Exercised	(232,877	)	7.42	7.42
Canceled or Forfeited	(145,066	)	5.07 – 12.42	6.44
Balance at June 30, 2014	2,527,170		0.37 – 20.00	8.37	6.38	2,584,512
Vested and Exercisable	1,143,907		0.37 – 20.00	10.33	3.05	728,552
Unvested	1,383,263		5.07 – 20.00	6.74	9.14	1,855,960

(1) The aggregate intrinsic value is equal to the difference between the exercise price of the underlying stock option awards and the fair value of the Company’s common stock as of June 30, 2014.

Performance-Based Restricted Stock Units

The following table summarizes PSU activity under the Company’s incentive award plan for the six months ended June 30, 2014:



	PSUs Outstanding		Weighted- Average Grant Date Fair Value
Balance at December 31, 2013	112,132		$	12.42
Granted	7,042		7.10
Vested	—		—
Forfeited	(26,824	)	9.88
Balance at June 30, 2014	92,350		$	12.04

Restricted Stock Units

The following table summarizes RSU activity under the Company’s incentive award plan for the six months ended June 30, 2014:



	RSUs Outstanding		Weighted- Average Grant Date Fair Value
Balance at December 31, 2013	781,271		$	5.28
Granted	365,946		8.53
Vested	(75,557	)	5.56
Forfeited	(176,291	)	5.61
Balance at June 30, 2014	895,369		$	6.52

Summary of Stock-Based Compensation

The Company recorded stock-based compensation expense related to stock options and RSUs of $1.4 million and $2.1 million for the six months ended June 30, 2014 and 2013, respectively. Stock-based compensation is recorded in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. The unrecognized compensation cost of stock-based compensation as of June 30, 2014 was $6.6 million which is expected to be recognized over the weighted average remaining vesting period of 3.10 years.

(11) Financial Derivatives and Hedging Activities

As part of the Company’s overall risk management practices, the Company enters into financial derivatives primarily designed to either hedge foreign currency risks associated with forecasted international sales transactions – “cash flow hedges”; or to mitigate the impact that changes in currency exchange rates have on the amounts due from foreign currency denominated receivables – “foreign currency hedges.”

The Company records all derivatives on the condensed consolidated balance sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting.

The effective portion of the gain or loss on derivative instruments designated and qualifying as a hedge of the exposure to variability in expected future cash flows related to forecasted transactions is deferred and reported as a component of accumulated other comprehensive income (loss). Deferred gains or losses are reclassified to the Company’s condensed consolidated statements of operations at the time the hedged forecasted transaction is recorded in the condensed consolidated statements of operations. The effectiveness of cash flow hedges is assessed at inception and quarterly thereafter. If the instrument becomes ineffective or it becomes probable that the originally-forecasted transaction will not occur, the related change in fair value of the derivative instrument is also reclassified from accumulated other comprehensive income (loss) and recognized in earnings. The Company does not offset fair value amounts recognized for derivative instruments.

Credit risk related to derivative activity arises in the event a counterparty fails to meet its obligations to the Company. This exposure is generally limited to the amounts, if any, by which the counterparty’s obligations exceed the Company’s obligation to them. The Company’s policy is to enter into contracts only with financial institutions which meet certain minimum credit ratings.

Derivatives Designated as Hedging Instruments—Cash Flow Hedges

The Company uses currency forward contracts as cash flow hedges to manage its exposure to fluctuations in the Euro (EUR) to U.S. Dollar (USD) and Great British Pound (GBP) to U.S. Dollar exchange rates on a portion of forecasted international sales. Currency forward contracts involve fixing the exchange rate for delivery of a specified amount of foreign currency on a specified date.

The effective portion of changes in the fair value of derivatives designated, and that qualify as cash flow hedges of foreign exchange risk, is deferred as a component of accumulated other comprehensive income (loss) in the accompanying condensed consolidated balance sheets and is subsequently reclassified into earnings in the period that the hedged forecasted sales transactions effect earnings. The ineffective portion of the changes in fair value of derivatives designated as cash flow hedges are recognized directly to earnings and reflected in the accompanying condensed consolidated statements of operations.

As of June 30, 2014, the Company had the following outstanding derivatives that were used to hedge foreign exchange risks associated with forecasted transactions and designated as hedging instruments (in thousands, except for the number of instruments):



	Number of Instruments	Sell Notional Value		Buy Notional Value
Sell EUR/Buy USD Forward Contract	6	€	5,286	$	7,176
Sell GBP/Buy USD Forward Contract	6	£	4,330	$	7,343
	12			$	14,519

These contracts have maturities of three months or less.

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SKULLCANDY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

(unaudited)

The following table summarizes the amount of income recognized from derivative instruments for the periods indicated and the line items in the accompanying statements of operations where the results are recorded for cash flow hedges (in thousands):



	Amount of Loss Recognized in OCI on Derivative (Effective Portion) Three months ended					Location of Gain Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain Reclassified from Accumulated OCI into Income (Effective Portion) Three months ended					Location of Gain Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Loss Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) Three months ended
	June 30, 2014			June 30, 2013			June 30, 2014			June 30, 2013			June 30, 2014		June 30, 2013
Sell EUR/Buy USD Forward Contract	$	(55	)	$	9	Net sales	$	(47	)	$	61	Net sales	$	—	$	(1	)
Sell GBP/Buy USD Forward Contract	(74		)	129		Net sales	(86		)	155		Net sales	—		—
	$	(129	)	$	138		$	(133	)	$	216		$	—	$	(1	)

The Company expects all of the amounts recorded as a component of accumulated other comprehensive income (loss), deferred losses of $(129,000) will be realized in the consolidated statements of operations within the next three months and the amount will vary depending on market rates.

Derivatives Not Designated as Hedging Instruments—Foreign Currency Derivatives

The Company also enters into forward foreign exchange contracts to mitigate the impact changes in currency exchange rates have on balance sheet monetary assets and liabilities. None of these contracts are designated as hedges for accounting purposes and, accordingly, changes in value of the foreign exchange forward contracts, and in the offsetting underlying on-balance-sheet transactions, are reflected in the accompanying consolidated statements of operations under the caption “Other expense ” As of June 30, 2014, the Company had the following outstanding derivatives that were not designated as hedging instruments (in thousands, except for the number of instruments):



	Number of Instruments	Sell Notional Value		Buy Notional Value
Sell EUR/Buy USD Forward Contract	2	€	673	$	915
Sell GBP/Buy USD Forward Contract	2	£	616	1,040
	4			$	1,955

These contracts generally have maturities of approximately one month from the trade date.

The following table summarizes the amount of income from derivative instruments recognized for the periods indicated and the accounts in the accompanying consolidated statements of operations where the results are recorded for economic foreign currency hedges (in thousands):

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SKULLCANDY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

(unaudited)



	Location of Loss Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivatives						Amount of Gain (Loss) Recognized in Income on Derivatives
		Three Months Ended June 30,						Six months ended June 30,
		2014			2013			2014			2013
Forecasted sales hedges
Sell EUR/Buy USD Forward Contract	Other expense (income)	$	22		$	15		$	(22	)	$	51
Sell GBP/Buy USD Forward Contract	Other expense (income)	(17		)	(22		)	18			25
		$	5		$	(7	)	$	(4	)	$	76
Accounts receivable hedges
Sell EUR/Buy USD Forward Contract	Net sales	$	(15	)	$	(79	)	$	(16	)	$	(25	)
Sell GBP/Buy USD Forward Contract	Net sales	(29		)	—			19			45
		$	(44	)	$	(79	)	$	3		$	20

The impact of derivatives not designated as hedging instruments was substantially all offset by the remeasurement of the underlying on-balance sheet item.

Fair Value Measurements

The following table summarizes the fair values of derivative instruments as of the periods indicated and the line items in the accompanying consolidated balance sheets where the instruments are recorded (in thousands):



	Derivative Assets				Derivative Liabilities
	June 30, 2014		December 31, 2013		June 30, 2014		December 31, 2013
Derivatives designated as cash flow hedges
Balance Sheet Location	Prepaid expenses and other current assets		Prepaid expenses and other current assets		Accrued liabilities		Accrued liabilities
Sell EUR/Buy USD Forward Contract	$	—	$	—	$	66	$	109
Sell GBP/Buy USD Forward Contract	—		—		60		100
	$	—	$	—	$	126	$	209
Derivatives not designated as hedging instruments
Balance Sheet Location	Prepaid expenses and other current assets		Prepaid expenses and other current assets		Accrued liabilities		Accrued liabilities
Sell EUR/Buy USD Forward Contract	$	—	$	—	$	7	$	25
Sell GBP/Buy USD Forward Contract	—		—		14		22
	$	—	$	—	$	21	$	47

The amounts set forth in the table above represent the net asset or liability giving effect to rights of offset with each counterparty.

The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

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SKULLCANDY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

(unaudited)

Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3—Inputs that are both significant to the fair value measurement and unobservable.

The following table shows the derivatives by level within the fair value hierarchy (in thousands):



	Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total Fair Value As of
	June 30, 2014		December 31, 2013		June 30, 2014		December 31, 2013		June 30, 2014		December 31, 2013		June 30, 2014		December 31, 2013
Assets
Derivative Financial Instruments	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Liabilities
Derivative Financial Instruments	$	—	$	—	$	148	$	256	$	—	$	—	$	148	$	256

The fair values of the foreign exchange forward contracts are considered to be Level 2. Foreign currency forward contracts are valued using readily available foreign currency forward and interest rate curves. The fair value of each contract is determined by comparing the contract rate to the forward rate and discounting to the present value. Contracts in a gain position are recorded in the consolidated balance sheet under the caption “Prepaid expenses and other current assets” and the value of contracts in a loss position is recorded under the caption “Accrued liabilities.”

(12) Income Taxes

In order to determine the quarterly provision for income taxes, the Company uses an estimated annual effective tax rate, which is based on expected annual income and statutory tax rates in the various jurisdictions in which the Company operates. To the extent that application of the estimated annual effective tax rate is not representative of the quarterly portion of actual tax expense expected to be recorded for the year, the Company determines the quarterly provision for income taxes based on actual year-to-date income (loss). Certain significant or unusual items are separately recognized in the quarter during which they occur and can be a source of variability in the effective tax rates from quarter to quarter.

Income tax benefit for the three months ended June 30, 2014 and 2013 was $85,000 and $339,000, respectively, or approximately (5.7)% and 33.0% of pre-tax income (loss). Although pre-tax income increased for the three months ended June 30, 2014, the effective rate decreased on a quarterly basis due to a discrete income tax benefit related to a statutory tax basis impairment loss that resulted from an investment in our Swedish entity. In addition, the exchange offer of incentive stock options, or ISO's, in the quarter ended September 30, 2013 reduced the permanent difference for stock compensation in 2014, causing further decrease of the effective tax rate between these comparative quarters. Income tax benefit for the six months ended June 30, 2014 and 2013 was $791,000 and $3.7 million, respectively, or approximately 30.4% and 32.4% of pre-tax income (loss), respectively, which decreased on a quarterly basis due to proportionately higher levels of income in countries with lower statutory tax rates. The Company’s effective tax rate at June 30, 2014 will differ from the United States Federal Statutory rate of 34%, due to state taxes, permanent items, and lower tax rates associated with certain earnings from the Company's operations in Switzerland and other foreign jurisdictions. All earnings at foreign locations are considered to be permanently reinvested for tax purposes.

The Company is subject to income taxes in the United States and various foreign jurisdictions and to continual examination by tax authorities. Significant judgment is required in evaluating the Company’s uncertain tax positions and determining its provision for income taxes. As of June 30, 2014 and December 31, 2013, the Company had uncertain tax

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liabilities of $368,000 and $368,000, respectively. The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. The Company did not incur any material interest or penalties related to income taxes in any of the periods presented. The Company does not anticipate any significant events or circumstances that would cause a material change to these uncertainties during the ensuing year.

The Company files U.S., state and foreign income tax returns in jurisdictions with various statutes of limitations. The Company’s consolidated federal tax return and any significant state or foreign tax returns are not currently under examination.

(13) Commitments and Contingencies

The Company is subject to various claims, complaints and legal actions in the normal course of business from time to time. The Company does not believe it has any currently pending litigation for which the outcome could have a material adverse effect on its operations or financial position.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission on March 14, 2014.

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 Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission on March 14, 2014, Form 10-Q for the quarter ended March 31, 2014 filed with the SEC on May 9, 2014, “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

We are the original performance and lifestyle audio brand inspired by the creativity and irreverence of youth culture. We design, market and distribute audio and gaming headphones, earbuds, speakers and other accessories under the Skullcandy, Astro Gaming and 2XL brands. We launched in 2003 and quickly became an international audio brand by bringing innovation, bold color, character and performance to an otherwise monochromatic audio space. Our products are sold and distributed through a variety of channels in the U.S. and approximately 80 countries worldwide. We offer a wide array of styles and price points and are expanding into complementary audio products and categories such as sports performance, women's and wireless offerings, as well as partnerships with leading manufacturers to license our brand and enhance audio quality.

We pioneered the distribution of headphones and audio products in specialty retailers focused on action sports and the youth lifestyle with 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 leading consumer electronics, sporting goods, mobile phone and big box retailers such as Best Buy, Dick’s Sporting Goods, AT&T Wireless and Target.

We also produce and market gaming headphones. We acquired Astro Gaming in April 2011 as part of our strategy to position ourselves in the premium end of the gaming category with a leading, authentic brand. Astro Gaming is based in San Francisco, California and develops and markets high-performance, feature-rich products to dedicated gamers, through both the direct-to-consumer channel and through a growing global network of retailers.

We were incorporated in Delaware in 2003. Our principal executive offices are located at 1441 West Ute Boulevard, Suite 250, Park City, Utah 84098, and our telephone number is (435) 940-1545. Our principal website address is www.skullcandy.com. Information contained on our website does not constitute part of, and is not incorporated by reference into, this annual report.

Segment Information

On June 30, 2014, we began certain organizational changes to align with how our Chief Operating Decision Makers ("CODM") review performance and make decisions in managing the Company. We manage our business in two operating

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segments which are comprised of Domestic and International. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the CODM in deciding how to allocate resources and in assessing performance. Our operating segments and reporting segments are the same. Historically, our segments were comprised of the North American and International segments, with the North America segment including sales to customers in Canada and Mexico. The Domestic segment primarily consists of Skullcandy and Astro Gaming product sales to customers in the United States. The International segment primarily includes Skullcandy product sales to customers in Europe, Asia, Canada, Mexico (through the Company’s joint venture), and all other geographic areas outside the United States that are served by our International operations. We operate exclusively in the consumer products category in which we develop and distribute headphones and other audio accessories. All intercompany revenues, expenses, payables and receivables are eliminated in consolidation and are not reviewed when evaluating segment performance. Each segment’s performance is evaluated based on net sales, gross profit and operating income (loss). As set forth below, prior periods have been restated to conform to the current presentation. Information related to our segments is as follows:



	Three Months Ended June 30,					Six months ended June 30,
	2014		2013			2014			2013
	(in thousands)
Net sales
Domestic	$	39,458	$	37,216		$	65,581		$	63,443
International	14,403		13,573			27,360			24,396
Consolidated	53,861		50,789			92,941			87,839
Gross profit
Domestic	17,519		16,845			29,934			28,496
International	6,710		5,940			12,458			10,775
Consolidated	24,229		22,785			42,392			39,271
Income (loss) from operations
Domestic	1,062		(2,570		)	(2,956		)	(12,566		)
International	239		1,404			340			1,575
Consolidated	$	1,301	$	(1,166	)	$	(2,616	)	$	(10,991	)



	June 30,		December 31,
	2014		2013
	(in thousands)
Identifiable assets
Domestic	$	118,607	$	119,981
International	66,375		62,933
Consolidated	184,982		182,914
Long-lived assets
Domestic	8,009		8,446
International	1,455		1,575
Consolidated	9,464		10,021
Goodwill
Domestic	6,805		6,805
International	7,062		7,062
Consolidated	$	13,867	$	13,867

Basis of Presentation

Our net sales are derived primarily from the sale of audio and gaming headphones and other accessory related products under the Skullcandy, Astro Gaming and 2XL brands. Amounts billed to retailers and distributors for shipping and handling are included in net sales. Sales are reported net of estimated product returns and pricing adjustments.

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Gross profit is influenced by cost of goods sold, which consists primarily of product costs, packaging, freight, duties warehousing, warranty costs and depreciation on tooling assets held at our contract manufacturers.

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, legal and professional fees, depreciation and amortization, travel expenses, information technology expenses, commissions to outside sales representatives, research and development expenses, utilities and other facility related costs, such as rent. The primary components of our marketing and advertising expenses include in-store advertising, point of sale fixtures, sponsorship of trade shows and events, promotional products and relationships with athletes, DJs, musicians and artists.

Results of Operations

The following table sets forth selected items in our statements of operations in dollars and as a percentage of net sales for the periods presented:



	Three months ended June 30,										Six months ended June 30,
	2014					2013					2014					2013
Net sales	$	53,861		100.0	%	$	50,789		100.0	%	$	92,941		100.0	%	$	87,839		100.0	%
Cost of goods sold	29,632			55.0	%	28,004			55.1	%	50,549			54.4	%	48,568			55.3	%
Gross profit	24,229			45.0	%	22,785			44.9	%	42,392			45.6	%	39,271			44.7	%
Selling, general and administrative expenses	22,928			42.6	%	23,951			47.2	%	45,008			48.4	%	50,262			57.2	%
Income (loss) from operations	1,301			2.4	%	(1,166		)	(2.3	)%	(2,616		)	(2.8	)%	(10,991		)	(12.5	)%
Other (income) expense	(375		)	(0.7	)%	(249		)	(0.5	)%	(205		)	(0.2	)%	290			0.3	%
Interest expense	181			0.3	%	111			0.2	%	192			0.2	%	214			0.2	%
Income (loss) before income taxes and noncontrolling interests	1,495			2.8	%	(1,028		)	(2.0	)%	(2,603		)	(2.8	)%	(11,495		)	(13.1	)%
Income tax benefit	(85		)	(0.2	)%	(339		)	(0.7	)%	(791		)	(0.9	)%	(3,726		)	(4.2	)%
Net income (loss)	1,580			2.9	%	(689		)	(1.4	)%	(1,812		)	(1.9	)%	(7,769		)	(8.8	)%
Net income (loss) attributable to noncontrolling interests	(8		)	—	%	54			0.1	%	(79		)	(0.1	)%	87			0.1	%
Net income (loss) attributable to Skullcandy, Inc.	$	1,572		2.9	%	$	(635	)	(1.3	)%	$	(1,891	)	(2.0	)%	$	(7,682	)	(8.7	)%

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

Net sales

The following table reflects our net sales for the three months ended June 30, 2014 and 2013 (in thousands):



	Three months ended June 30,
	2014		2013		$ Change		% Change
Net sales
Domestic	$	39,458	$	37,216	$	2,242	6.0	%
International	14,403		13,573		830		6.1	%
Total net sales	$	53,861	$	50,789	$	3,072	6.0	%

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Total net sales increased primarily due to increased sales across both segments, which included gaming product sales and sales of our wireless speakers. Domestic net sales increased primarily due to sales of earbuds, wireless speakers and opening a new account. International net sales increased primarily due to increased sales in Canada, and to a lesser extent Mexico and China.

Gross profit and gross margin

Our overall gross margins fluctuate based on our sales volume mix between our segments, changes in customer pricing, including competitive pricing; inventory management decisions, sales coupons and promotions, product mix of sales, and operational and fulfillment costs.

The following table reflects our gross profit and gross margin for the three months ended June 30, 2014 and 2013 (in thousands):



	Three months ended June 30,
	2014			2013			$ Change		% Change
Gross profit
Domestic	$	17,519		$	16,845		$	674	4.0	%
International	6,710			5,940			770		13.0	%
Total gross profit	$	24,229		$	22,785		$	1,444	6.3	%

	Three months ended June 30,
	2014			2013			% Change
Gross margin %
Domestic %	44.4		%	45.3		%	(90) bps
International %	46.6		%	43.8		%	280 bps
Total gross margin %	45.0		%	44.9		%	10 bps

Total gross margin was consistent with prior year while Domestic gross margin decreased due to higher sales of our lower margin wireless speakers. International gross margin increased due to a shift in product sales mix into higher margin products.

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Selling, general and administrative expenses

The following table reflects our selling, general and administrative expenses for the three months ended June 30, 2014 and 2013 (in thousands):



	Three months ended June 30,
	2014			2013			$ Change			% Change
Selling, general and administrative expenses	$	22,928		$	23,951		$	(1,023	)	(4.3	)%
Selling, general and administrative expenses as a percent of net sales	42.6		%	47.2		%

The decrease in SG&A expenses is primarily due to a decrease in personnel expenses, licensing royalties and co-op retailer spending.

We expect to continue to make critical investments in the business to support long-term growth. In particular, we will continue to invest in marketing and demand creation efforts at the same level or higher compared to the same quarter of the prior year, with an increased focus on in-store displays, fixtures and presence; while also continuing to invest in increased amounts for research and development efforts.

Other Income

Other income was $375,000 and $249,000 for the three months ended June 30, 2014 and 2013, respectively, which primarily related to foreign currency transaction gains.

Interest Expense

Interest expense was $181,000 and $111,000 for the three months ended June 30, 2014 and 2013, respectively, which primarily includes the amortization of deferred financing fees, write downs for debt modifications and unused line fees associated with our credit facility.

Income Taxes

The income tax benefit was $85,000 and $339,000 for the three months ended June 30, 2014 and 2013, respectively. Our effective tax rate for the three months ended June 30, 2014 and 2013 was (5.7)% and 33.0%, respectively. Although pre-tax income increased for the three months ended June 30, 2014, the effective rate decreased on a quarterly basis due to a discrete income tax benefit related to a statutory tax basis impairment loss that resulted from an investment in our Swedish entity. In addition, the exchange offer of incentive stock options, or ISO's, in the quarter ended September 30, 2013 reduced the permanent difference for stock compensation in 2014, causing further decrease of the effective tax rate between these comparative quarters. Our effective tax rate may fluctuate significantly on a quarterly basis dependent on our levels of taxable income in the countries with lower statutory tax rates versus countries with higher statutory tax rates, which is difficult to predict.

Noncontrolling Interest

We have a joint venture in Mexico 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 June 30, 2014 and 2013 consists of income (losses) from our Mexico joint venture that are attributable to the other partner in the joint venture.

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Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

Net sales

The following table reflects our net sales for the six months ended June 30, 2014 and 2013 (in thousands):



	Six months ended June 30,
	2014		2013		$ Change		% Change
Net sales
Domestic	$	65,581	$	63,443	$	2,138	3.4	%
International	27,360		24,396		2,964		12.1	%
Total net sales	$	92,941	$	87,839	$	5,102	5.8	%

Total net sales increased due to increased sales across both segments. Domestic net sales increased primarily due to sales of earbuds, wireless speakers and opening a new account. International net sales increased primarily due to increased sales in Canada, and to a lesser extent Mexico and China.

Gross profit and gross margin

The following table reflects our gross profit and gross margin for the six months ended June 30, 2014 and 2013 (in thousands):



	Six months ended June 30,
	2014			2013			$ Change		% Change
Gross profit
Domestic	$	29,934		$	28,496		$	1,438	5.0	%
International	12,458			10,775			1,683		15.6	%
Total gross profit	$	42,392		$	39,271		$	3,121	7.9	%

	Six months ended June 30,
	2014			2013			% Change
Gross margin %
Domestic %	45.6		%	44.9		%	70 bps
International %	45.5		%	44.2		%	130 bps
Total gross margin %	45.6		%	44.7		%	90 bps

Total gross margin increased primarily due to a shift in product sales mix into higher margin products, decreases in shipping related costs and reductions in warranty related costs. Domestic gross margin increased primarily due to reductions in warranty related costs and decreases in shipping related costs. International gross margin increased primarily due to a shift in product sales mix into lower margin products.

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Selling, general and administrative expenses

The following table reflects our selling, general and administrative expenses for the six months ended June 30, 2014 and 2013 (in thousands):



	Six months ended June 30,
	2014			2013			$ Change			% Change
Selling, general and administrative expenses	$	45,008		$	50,262		$	(5,254	)	(10.5	)%
Selling, general and administrative expenses as a percent of net sales	48.4		%	57.2		%

The decrease in SG&A expenses is primarily due to a decrease in write-downs of tooling, fixtures and furniture, reduced severance, licensing royalties, co-op retail spending and a reduction in personnel expenses.

Other Expense (Income)

Other expense (income) was $(205,000) and $290,000 for the six months ended June 30, 2014 and 2013, respectively, which related to foreign currency transaction gains and losses.

Interest Expense

Interest expense was $192,000 and $214,000 for the six months ended June 30, 2014 and 2013, respectively, which primarily includes the amortization of deferred financing fees, write downs for debt modifications and unused line fees associated with our credit facility.

Income Taxes

The income tax benefit was $791,000 and $3.7 million for the six months ended June 30, 2014 and 2013, respectively. Our effective tax rate for the six months ended June 30, 2014 and June 30, 2013 was 30.4% and 32.4%, respectively, which decreased on a quarterly basis due to proportionately higher levels of income in countries with lower statutory tax rates. In addition, the exchange offer of incentive stock options, or ISO's, in the quarter ended September 30, 2013 reduced the permanent difference for stock compensation in 2014, causing further decrease of the effective tax rate between these comparative quarters. Our effective tax rate may fluctuate significantly on a quarterly basis dependent on our levels of taxable income in the countries with lower statutory tax rates versus countries with higher statutory tax rates, which is difficult to predict.

Noncontrolling Interest

We have a joint venture in Mexico in 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 six months ended June 30, 2014 and 2013 consists of income (losses) from our Mexico joint venture that are attributable to the other partner in the joint venture.

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. This source of liquidity may be impacted by fluctuations in demand for our products, ongoing investments in our infrastructure and expenditures on marketing and advertising.

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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):



	Six months ended June 30,
	2014			2013
Cash and cash equivalents at beginning of period	$	38,835		$	19,345
Net cash provided by operating activities	7,120			12,114
Net cash used in investing activities	(3,297		)	(1,907		)
Net cash provided by financing activities	1,412			120
Effect of exchange rate changes on cash and cash equivalents	(5		)	36
Cash and cash equivalents at end of period	$	44,065		$	29,708

Net Cash Provided by Operating Activities. Cash from operating activities consists primarily of net loss adjusted for certain non-cash items including depreciation and amortization expense, loss on disposal of property and equipment, provision for doubtful accounts, deferred income taxes, non-cash interest expense, amortization of stock-based compensation expense and the effect of changes in working capital and other activities.

For the six months ended June 30, 2014, net cash provided by operating activities was $7.1 million and consisted of a net loss of $1.8 million, offset by $8.4 million of non-cash items, plus $0.6 million of working capital and other activities. Working capital and other activities consisted primarily of a decrease in accounts receivable of $13.0 million, an increase in prepaid expenses and other current assets of $1.3 million, offset by an increase in inventory of $10.5 million and an increase in accounts payable of $3.3 million and accrued liabilities of $3.9 million.

Net Cash Used in Investing Activities. Net cash used in investing activities relates to capital expenditures. Net cash used in investing activities was $3.3 million and $1.9 million for the six months ended June 30, 2014 and 2013, respectively.

Net Cash Provided by Financing Activities. Net cash provided by financing activities primarily related to proceeds from exercise of stock options for the six months ended June 30, 2014.

We believe that our cash, cash flow from operating activities and available borrowings under our credit facility will be sufficient to meet our capital requirements for at least the next twelve months.

Indebtedness

On August 19, 2013, we entered into a credit agreement and revolving line of credit, or the credit facility, with Wells Fargo Bank, National Association, as lender, which provided a line of credit of up to $50 million. As a subfeature, the credit facility provided for letters of credit up to $10.0 million. The credit facility is secured with a first-priority lien against substantially all of our Company assets.

The credit facility required us to be in compliance with specified affirmative financial covenants, including (a) total liabilities divided by tangible net worth not greater than 1.5 to 1.0 as of the last day of each fiscal quarter; (b) asset ratio not less than 1.35 to 1.00 as of the last day of each fiscal quarter; (c) net income attributable to the Company, measured on a rolling 4-quarter basis for each fiscal quarter set forth in the table below, determined as of the last day of each such fiscal quarter, not less than the amount set forth opposite the relevant fiscal quarter:



Fiscal Quarter	Net income attributable to Skullcandy, Inc.
The fiscal quarters ending March 31, 2014, June 30, 2014 and September 30, 2014	$	2,500,000
The fiscal quarters ending December 31, 2014, March 31, 2015, June 30, 2015 and September 30, 2015	5,000,000
The fiscal quarters ending December 31, 2015, March 31, 2016, June 30, 2016 and September 30, 2016	7,500,000
The fiscal quarters ending December 31, 2016 and each fiscal quarter thereafter	$	10,000,000

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Our credit facility also contains certain financial covenants and other restrictions that limit the our ability, among other things, to: (a) make fixed asset purchases in any fiscal year greater than $12 million in aggregate; (b) incur operating lease expenses in any fiscal year greater than $3 million in aggregate; and (c) create, incur, assume or permit to exist any indebtedness or liabilities resulting from borrowings, loans or advances, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, except (1) the liabilities of the Company and each of its subsidiaries to Wells Fargo, (2) permitted investments, (3) uncapped permitted indebtedness, and (4) capped permitted indebtedness up to $2 million in the aggregate outstanding at any one time. Additional covenants and other restrictions exist that limit our ability, among other things, to: undergo a merger or consolidation, sell certain assets, create liens, guarantee certain obligations of third parties, make certain investments or acquisitions, and declare dividends or make distributions.

The credit facility carries interest based on the 3-month LIBOR, resetting daily (floating), plus applicable margin. Applicable margin is determined by our (total liabilities / tangible net worth) quarterly as follows: (a) < 0.25:1.00 Applicable Margin to be 1.30%; (b) > = 0.25:1.00 Applicable Margin to be 1.50%. We may borrow, partially or wholly repay our outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions of the note, during the term of the note. The credit facility expires on August 19, 2018. At June 30, 2014 and December 31, 2013 we had no borrowings outstanding. To the extent that our rolling four quarter net income is less than the threshold stated in the covenants above, our ability to draw upon the line of credit may be limited.

On April 29, 2014 we entered into an amendment of its credit agreement and revolving line of credit on April 29, 2014. The amendment reduced the line of credit to $10,000,000 and letters of credit to $5,000,000 and also included the following changes to the financial covenants:


1.	Removed the net income requirement;

2.Revised the total liabilities divided by tangible net worth ratio to not greater than 1.0 to 1.0 as of the last day of each fiscal quarter;

3.Revised the current ratio to not less than 2.0 to 1.0 as of the last day of each fiscal quarter; and

4.Included an EBITDA coverage ratio of not less than 2.0 to 1.0 as of the last day of each quarter.

At June 30, 2014, the Company was in compliance with all applicable covenants in its credit facility.

In association with the amended credit agreement, we proportionally wrote off approximately $167,000 of previously capitalized deferred financing fees.

Contractual obligations

In the three and six months ended June 30, 2014, 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, 2013.

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 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 based on historical experience. We have entered into contracts with various retailers granting a conditional right of return allowance with respect to

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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, maintain credit insurance, and have an allowance for doubtful accounts based on our historical experience and any specific customer collection issues that have been identified. The Company records a specific reserve for individual accounts when the Company becomes aware of a customer’s likely inability to meet its financial obligations, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position. If circumstances related to customer change, the Company would further adjust estimates of the recoverability of receivables. 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.

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.

Long-Lived Assets Including Goodwill and Intangible Assets

We review property and equipment and certain identifiable intangible assets, 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, plant 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.

Prior to the acquisitions of Astro Gaming 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 recognize any goodwill impairment charges in the six months ended June 30, 2014. We did record a $688,000 impairment charge related to our indefinite lived intangible trademarks and domain names in the six months ended June 30, 2014.

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 eight 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

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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.

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 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.

Performance-based restricted stock units, or PSUs, vest subject to the achievement of certain predetermined performance goals and employment over the requisite service period. If a performance goal is not met or is not expected to be met, we do not recognize expense on the number of the PSUs that are not expected to vest, and we reverse any previously recognized compensation expense on those PSUs in the period that expectations change.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

At June 30, 2014 we maintained a credit facility which was amended during the period and provided for revolving loans of a line of credit of up to $10 million. As a subfeature, the credit facility provided for letters of credit up to $5 million. At June 30, 2014, there were no borrowings outstanding. We currently do not engage in any interest rate hedging activity. Based on the average interest rate on the credit facility during the six months ended June 30, 2014, and to the extent that borrowings were outstanding, we do not believe that a 10% change in the interest rate would have a material effect on our results of operations or financial condition.

Foreign Currency Risk

In the normal course of business, we are exposed to foreign currency exchange rate risks that could impact our results of operations. We are exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to certain sales and expenses of our international subsidiaries that are denominated in currencies other than their functional currencies. We are exposed to gains and losses resulting from the effect that fluctuations in foreign currency exchange rates have on the reported results in our consolidated financial statements due to the translation of the operating results and financial position of our international subsidiaries. Changes in foreign currency rates affect our consolidated statement of operations and distort comparisons between periods. For example, when the U.S. dollar strengthens compared to the Euro, there is a negative effect on our reported results from our European operation because it takes more profits in Euro to generate the same amount of

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profits in stronger U.S. dollars. We do not enter into foreign currency exchange contracts to hedge the translation of operating results and financial position of our international subsidiaries.

We use various foreign currency exchange contracts as part of our overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates. On the date we enter into a derivative contract, we designate the derivative as a hedge of the identified exposure. We formally document all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for entering into various hedge transactions. We identify in this documentation the asset, liability, firm commitment, or forecasted transaction that has been designated as a hedged item and indicate how the hedging instrument is expected to hedge the risks related to the hedged item. We formally measure effectiveness of our hedging relationships both at the hedge inception and on a quarterly basis in accordance with our risk management policy. Derivatives that do not qualify or are no longer deemed effective to qualify for hedge accounting but are used by management to mitigate exposure to currency risks are marked to fair value with corresponding gains or losses recorded in earnings. We enter into forward exchange and other derivative contracts with major banks and are exposed to foreign currency losses in the event of nonperformance by these banks. We anticipate, however, that these banks will be able to fully satisfy their obligations under the contracts. Accordingly, we do not obtain collateral or other security to support the contracts.

The net fair value of foreign currency forward contracts (including adjustments for credit risk) as of June 30, 2014 was a liability of $0.1 million compared to a liability of $0.2 million as of December 31, 2013. The potential decrease in fair value of foreign currency forward contracts (excluding adjustments for credit risk), assuming a 10% adverse change in the underlying foreign currency exchange rates versus the U.S. Dollar, would be immaterial as of June 30, 2014, and $0.8 million as of December 31, 2013. If adjustments for credit risk were to be included, the decrease would be smaller.

Inflation

Inflationary factors, such as increases in the cost of our product and overhead costs, may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net sales if the selling prices of our products do not increase with these increased costs.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports we file pursuant to the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that the information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent or detect all error and all fraud. While our disclosure controls and procedures are designed to provide reasonable assurance of their effectiveness, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Skullcandy, Inc. have been detected.

Changes in Internal Control Over Financial Reporting

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There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. Legal Proceedings.

We are subject to various claims, complaints and legal actions in the normal course of business from time to time. We do not believe we have any currently pending litigation for which the outcome could have a material adverse effect on our operations or financial position.

Item 1A. Risk Factors.

We operate in a rapidly changing environment that involves a number of risks that could materially and adversely affect our business, financial condition, prospects, operating results or cash flows. For a detailed discussion of the risks that affect our business, please refer to the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 14, 2014 and Form 10-Q for the quarter ended March 31, 2014. There have been no material changes to the risks discussed in our 10-K or 10-Q other than those outlined below.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

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Exhibit No.	Description of Exhibit

10.1	Employment Agreement, dated March 27, 2014, by and between Skullcandy, Inc. and S. Hoby Darling (updated)

10.2	Employment Agreement, dated March 27, 2014, by and between Skullcandy, Inc. and Jason Hodell (updated)

10.3	Employment Agreement, dated March 27, 2014, by and between Skullcandy, Inc. and Sam Paschel (updated)

10.4	Employment Agreement, dated March 27, 2014, by and between Skullcandy, Inc. and Patrick Grosso (updated)

10.5	Employment Agreement, dated July 18, 2014, by and between Skullcandy, Inc. and David Raffone

10.6	Form of Performance-Vesting Restricted Stock Unit Award Agreement by and between Skullcandy, Inc. and S. Hoby Darling

10.7	Lease Addendum No.6 by and between Cottonwood Newpark One, L.C., and Skullcandy, Inc.

31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101	The following materials from Skullcandy, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Comprehensive Income (iv) Condensed Consolidated Statements of Cash Flows; and (v) Notes to Condensed Consolidated Financial Statements.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.




	Skullcandy, Inc.

Date: August 5, 2014	By:	/s/ JASON HODELL
		Jason Hodell
		Chief Financial Officer
		(Principal Financial Officer and Duly Authorized Signatory)

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