Turtle Beach Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. The company sells gaming headsets under Turtle Beach and directional-audio products under HyperSound. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $29.4 | $22.6 | $53.4 | $42.3 |
| Gross profit | $5.1 | $3.4 | $8.5 | $6.5 |
| Gross margin | 17.4% | 15.0% | 15.9% | 15.4% |
| Operating loss | $(40.5) | $(12.6) | $(50.3) | $(25.1) |
| Net loss | $(42.6) | $(9.9) | $(54.6) | $(20.5) |
| Adjusted EBITDA, non-GAAP | $(6.3) | $(8.2) | $(12.6) | $(18.0) |
- Q2 diluted loss per share was $0.86, compared with $0.23 a year earlier; six-month diluted loss per share was $1.14 versus $0.49.
- For the six months, the cash flow statement reports operating cash provided of $18.2 million, investing cash used of $1.6 million, and financing cash used of $22.5 million. Cash declined from $7.1 million at year-end to $1.2 million at June 30.
- Carrying-value debt totaled $38.3 million: $7.2 million on the revolving facility, $14.5 million in term loans, and $16.6 million in related-party subordinated notes. Series B redeemable preferred stock was separately reported at $16.8 million.
- Working capital was $13.3 million, based on current assets of $53.1 million and current liabilities of $39.8 million. The company reported approximately $4.9 million of excess borrowing availability and compliance with amended financial covenants at quarter-end.
Changes versus the prior comparable periods
- Q2 revenue rose 29.4%; six-month revenue rose 25.6%. Headset revenue was $29.1 million in Q2 and $52.9 million for the half, driven by new-generation products and North American and European sales.
- Headset gross margin improved to 24.5% from 16.1% in Q2 and to 22.5% from 16.5% for the half. Management attributed improvement to product mix, operational efficiencies, stronger domestic channel mix, and fewer promotional credits; the half-year result also included $1.6 million of additional reserves on certain older-generation and refurbished inventory.
- Net losses widened substantially, principally because of a $31.2 million noncash goodwill impairment charge for HyperSound. Adjusted EBITDA losses narrowed versus 2015, including an adverse foreign-currency impact of $0.7 million in Q2 and $1.1 million for the half.
- Interest expense increased, which the company attributed to the 2019 term loan and subordinated notes. The February public offering and concurrent private placement issued 6.7 million shares at $1.00 per share and produced approximately $6.0 million net proceeds, applied to the working-capital credit line.
Outlook, commentary, risks and unusual items
- Management said available cash, revolving-credit availability, financing and expected operating cash flows should fund working capital and capital expenditures for at least the next 12 months, subject to assumptions including no material adverse developments. The filing gives no quantitative revenue or earnings guidance.
- HyperSound generated $0.2 million of Q2 revenue and $0.5 million for the half. Management cited slower-than-expected sales because the audiologist channel requires substantial training and resources. The company is exploring strategic options, including channel changes, licensing partnerships, or a sale; further impairment of HyperSound intangible assets remains possible.
- The headset business is seasonal, with historically more than half of annual revenue generated September through December. Key risks include consumer demand and console transitions, customer and supplier concentration, product returns and inventory, borrowing-base availability and covenant compliance, and foreign-exchange exposure. The company also cited uncertainty following the UK Brexit vote.
- The company reported ongoing shareholder litigation and a Series B preferred-stock redemption dispute. The redemption complaint was dismissed without prejudice for improper venue; the company disputes that redemption is owed. No contingent-loss accrual was recorded because losses were considered possible but not probable and the range was not reasonably estimable.
- A voluntary recall of certain XO FOUR Stealth headsets continued following reports of mold on ear pads. The company said it had received no recall-related lawsuits as of the report date and was seeking reimbursement from its contract manufacturer.
- Disclosure controls were not effective at June 30 because a previously identified material weakness involving review of assumptions in the annual goodwill impairment assessment had not been fully remediated.
Most important facts for investors to verify
- Reconcile the cash-flow discussion: the cash-flow statement reports $18.2 million of operating cash provided, while MD&A describes $18.2 million as cash used. Confirm the correct interpretation and the working-capital drivers.
- Track seasonal headset sales, gross margins, inventory reserves and returns through the September–December peak period.
- Monitor HyperSound strategic-review progress, cash requirements, sales performance and potential impairment of remaining intangible assets.
- Review liquidity headroom, borrowing-base availability, covenant amendments and the company’s ability to meet debt service; quarter-end cash was $1.2 million and excess availability was about $4.9 million.
- Assess progress remediating the material weakness and developments in the shareholder litigation, preferred-stock claim and product recall.