LeapFrog Reports Second Quarter Fiscal Year 2016 Financial Results And Other Actions

Nov 09, 2015, 16:05 ET from LeapFrog Enterprises, Inc.

EMERYVILLE, Calif., Nov. 9, 2015 /PRNewswire/ -- LeapFrog Enterprises, Inc. (NYSE: LF) today announced financial results for the second quarter fiscal year 2016. The Company's fiscal year covers the twelve-month period ending March 31, 2016.

Summary of financial results for the quarter ended September 30, 2015 compared to the quarter ended September 30, 2014:

  • Consolidated net sales were $67.2 million, down 41%. U.S. segment net sales were down 41%, and international segment net sales were down 39%.
  • Net loss per basic and diluted share was $0.48 compared to prior year net loss per basic and diluted share of $0.03.
  • Cash and cash equivalents were $52.6 million as of September 30, 2015 compared to $111.3 million a year ago.
  • Total impact of foreign currency exchange rates on net sales was $2.3 million, or negative 2%.

"Our second quarter financial results fell significantly short of our expectations. Our sales were impacted by a far tougher retail landscape around the world than last year, with many of our key retail partners managing their inventories very tightly, resulting in more conservative and later placement of their up-front holiday orders. These challenges were compounded by reduced retail space support for our line and tough prior year comparisons from large shipments of clearance tablets and LeapBand last year. Our revenues were also reduced by significant markdown allowances to support our promotion plans for LeapTV over the holidays and our strategic move to tiered pricing on cartridge content. Our International sales continue to be impacted by the closure of Target in Canada, inventory issues with one of our key overseas distributors and the strength of the dollar versus last year. Operating losses were higher due to the reduction in sales, the above markdown allowances, lower of cost or market charges on LeapTV on-hand inventory, plus higher expenses associated with our recent ERP implementation and on-going litigation. While there's still a lot of work ahead of us, we continue to make progress against our strategic initiatives. In October, we initiated additional cost cutting measures, including a second round of headcount reductions of 150 positions, or 26% of our work force," said John Barbour, Chief Executive Officer.

"We remain committed to turning the company around as quickly as we can to position LeapFrog for long-term growth and leadership in educational entertainment. We recently launched our Leap Ahead integrated marketing campaign which we expect to build consumer demand for our products over the all-important holiday season and are focusing our efforts on a number of key opportunities to turnaround our financial performance. We continue to be a leader in the children's tablet market with the introduction of our two new feature-filled tablets – the LeapFrog Epic Android-based Kid's Tablet available in the Consumer Electronic sections and the LeapFrog Platinum Tablet available in the Early Learning Aisles. Sales of these premium tablets should also build demand for our extensive portfolio of fun educational content, which includes new games, books and videos. In addition, new strategic price drops on our LeapTV console and content will be featured in major retailer holiday catalogs and should help drive consumer demand for this award winning platform," continued Mr. Barbour.

Strategy Review

The Board of Directors and the management team continue to explore all financial, strategic and structural alternatives available to the Company. "We determined that it was appropriate to undertake this comprehensive review and execute those actions that have the best prospects of realizing improved shareholder value," said Bill Chiasson, the Chairman of LeapFrog's Board of Directors. "This continues to be an important undertaking, and reinforces our commitment to shareholders as well as the commitment of the entire team to meeting the needs of our customers and continuing to provide them with award-winning learning solutions that combine educational expertise, innovative technology and a child's love for fun. We remain focused on innovating and expanding our exceptional product portfolio while executing on the strategic and operational initiatives we announced earlier this year."

Financial Overview for the Second Quarter Fiscal Year 2016 Ended September 30, 2015 Compared to the Quarter Ended September 30, 2014

Second fiscal quarter net sales were $67.2 million, down 41% compared to $113.6 million last year, and included a 2% negative impact from changes in currency exchange rates. In the U.S. segment, net sales were $45.4 million, down 41% compared to $77.6 million last year. In the International segment, net sales were $21.8 million, down 39% compared to $36.1 million last year, and included a 7% negative impact from changes in currency exchange rates.

Operating expenses for the second fiscal quarter were $40.3 million, relatively flat compared to $40.2 million last year due to higher legal, audit and consulting fees. Results of the headcount reductions implemented in the fourth quarter fiscal year 2015 yielded $2.5 million in savings this quarter, or 14% year-over-year. However, those savings were partially offset by current year retention bonus accruals of $1.1 million and a $1.3 million reversal of prior period incentive compensation accruals. Loss from operations was $34.0 million, compared to prior year's loss of $3.1 million due to sales and gross margin declines.

Net loss for the second fiscal quarter was $34.1 million, or $0.48 per basic and diluted share compared to prior year net loss of $2.0 million, or $0.03 per basic and diluted share.

Non-GAAP adjusted EBITDA1 for the quarter was negative $26.4 million compared to EBITDA of $6.3 million a year ago.

Fiscal 2016 Financial Outlook

"We are very focused on significantly reducing the cost base of our business" said Ray Arthur, Chief Financial Officer. "As a result of ongoing cost reduction efforts and two major restructuring actions taken this calendar year, we expect operating expenses, excluding impairments and depreciation to be down approximately $20 million to $25 million in the second half of our fiscal year 2016, compared to the prior year."

The Company's updated outlook for fiscal year 2016 is for net sales to contract considerably relative to the prior year, and operating losses, excluding goodwill and impairments to be greater than fiscal year 2015 losses.

Conference Call and Webcast

LeapFrog will hold a conference call on November 9, 2015, at 2:00 p.m. Pacific Time (5:00 p.m. Eastern Time). The conference call will be webcast live and can be accessed at LeapFrog's investor relations web site at www.leapfroginvestor.com. An archive of the webcast will be available on the web site approximately three hours after completion of the call. In addition, more information about LeapFrog, including this press release and other financial and investor information, is also available on the investor relations web site.

To participate in the call, please dial (844) 732-6283 and request conference ID 66660326. A telephonic replay of the call will be available for one month. To access the replay, please dial (404) 537-3406 and use conference ID 66660326.

About LeapFrog

LeapFrog Enterprises, Inc. is the leader in educational entertainment for children. For 20 years, LeapFrog has created award-winning learning solutions that combine educational expertise, innovative technology and a child's love for fun. With experiences that are personalized to each child's level, LeapFrog helps children achieve their potential through LeapFrog's proprietary learning tablets, its innovative new active video gaming system LeapTV, learn to read and write systems, interactive learning toys and more, all designed or approved by LeapFrog's full-time in-house team of learning experts. LeapFrog's Learning Path, the ultimate guide for parents on early childhood, is designed specifically to help support and guide their child's learning with personalized ideas and feedback, fun activities and expert advice. LeapFrog is based in Emeryville, California, and was founded in 1995 by a father who revolutionized technology-based learning solutions to help his child learn how to read. Learn more at www.leapfrog.com.  

TM & © 2015 LeapFrog Enterprises, Inc. All rights reserved.

Use of Non-GAAP Financial Information

This press release includes non-GAAP financial measures, specifically adjusted EBITDA. 

Adjusted EBITDA is defined as earnings (or net income (loss)) before interest, income taxes, depreciation and amortization, goodwill impairment, impairment of long-lived assets, other expenses (income) and stock-based compensation. As required by SEC rules, we have provided an attached schedule with a reconciliation of adjusted EBITDA to the most directly comparable GAAP measure, net income. 

Management believes adjusted EBITDA is one of the appropriate measures for evaluating the operating performance of the Company because it reflects the resources available for strategic opportunities including, among others, to invest in the business, strengthen the balance sheet and make strategic acquisitions.

However, these non-GAAP measures should be considered in addition to, not as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP as more fully discussed in the Company's financial statements and filings with the SEC. Additionally, these non-GAAP measures may not be comparable to similarly-titled measures used by other companies. As used herein, "GAAP" refers to accounting principles generally accepted in the United States of America.

Forward-Looking Statements

This news release contains forward-looking statements that involve risks and uncertainties, including statements regarding our progress against our strategic initiatives, operating expense reduction from headcount reductions, our marketing campaign's ability to build consumer demand for our products, sales of premium tablets building demand for our content, price reductions driving consumer demand for LeapTV, the level of operating expenses in the second half of our 2016 fiscal year and our financial outlook for the 2016 fiscal year. Our actual results may differ materially from those expressed or implied by such forward-looking statements. The risks that could cause our results to differ include, without limitation, our ability to correctly predict highly changeable consumer preferences and product trends, our ability to continue to develop new products and services, our ability to maintain adequate inventory levels, our reliance on a small group of retailers for the majority of our gross sales, the sufficiency of our liquidity, deterioration of global economic conditions, the effectiveness of our marketing and advertising efforts, our ability to compete effectively with competitors, our ability to attract and retain highly skilled personnel, our ability to maintain or acquire licenses, the impact of potential impairment charges or valuation allowances, the seasonality of our business, significant changes in the cost or availability of our components and raw materials, our reliance on a limited number of manufacturers, system failures in our digital services, our ability to protect or enforce our intellectual property rights, defects in our products, the risks associated with international operations, costs or changes associated with compliance with laws and regulations, negative political developments, changes in trade relations, armed hostilities, terrorism, labor strikes, natural disasters or public health issues, failure to successfully implement new strategic operating initiatives, impacts from acquisitions, mergers or dispositions, continued ownership by a few stockholders of a significant percentage of the voting power in the Company, our ability to regain compliance with NYSE listing requirements and the volatility of our stock price. These risks and others are discussed under "Risk Factors" in our filings with the U.S. Securities and Exchange Commission, including our most recent Form 10-K and Form 10-Q. All information provided in this release is as of the date hereof, and we undertake no obligation to update this information. 

Contact Information

Investors:

Media:

Nancy Lee

Katie Zeiser

Investor Relations

Public Relations

(510) 420-5150

(510) 420-5331

 

1 Adjusted EBITDA is a non-GAAP financial measure. It is described below and reconciled to its comparable GAAP measure in the accompanying financial tables.

 

 LEAPFROG ENTERPRISES, INC. 

 CONSOLIDATED STATEMENTS OF OPERATIONS 

 (In thousands, except per share data) 

 (Unaudited) 

 Three Months Ended September 30, 

 Six Months Ended September 30, 

2015

2014

2015

2014

Net sales

$ 67,245

$113,645

$105,920

$160,622

Cost of sales

60,987

76,635

92,430

114,779

Gross profit

6,258

37,010

13,490

45,843

Operating expenses:

Selling, general and administrative

23,070

20,321

44,953

41,365

Research and development

8,755

7,363

16,538

14,974

Advertising

6,686

9,717

8,111

12,758

Impairment of long-lived assets

1,114

-

3,884

-

Depreciation and amortization

634

2,758

1,086

5,600

Total operating expenses

40,259

40,159

74,572

74,697

Loss from operations

(34,001)

(3,149)

(61,082)

(28,854)

Other income (expense):

Interest income

29

26

63

61

Interest expense

-

-

(2)

-

Other, net

95

124

(417)

(230)

Total other income (expense), net

124

150

(356)

(169)

Loss before income taxes

(33,877)

(2,999)

(61,438)

(29,023)

Provision for (benefit from) income taxes

189

(973)

(47)

(10,629)

Net loss 

$(34,066)

$   (2,026)

$ (61,391)

$ (18,394)

Net loss per share:

 Class A and B - basic and diluted 

$    (0.48)

$    (0.03)

$    (0.87)

$    (0.26)

Weighted average shares used to calculate net loss

per share:

 Class A and B - basic and diluted 

70,817

70,052

70,732

69,906

 

LEAPFROG ENTERPRISES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)

September 30,

March 31, 

2015

2014

2015

ASSETS

Current assets:

Cash and cash equivalents

$  52,604

$111,344

$ 127,176

Accounts receivable, net of allowances for doubtful accounts of 1,341, $402 and $854, respectively

60,504

98,965

19,618

Inventories

75,715

108,197

71,927

Prepaid expenses and other current assets

9,600

12,380

10,012

Deferred income taxes

964

23,708

553

     Total current assets

199,387

354,594

229,286

Deferred income taxes

780

63,232

1,792

Property and equipment, net

702

36,769

1,676

Capitalized content costs, net

21,870

22,235

22,510

Goodwill

-

19,549

-

Other intangible assets, net

2,722

4,220

3,453

Other assets

751

1,365

1,475

     Total assets

$226,212

$501,964

$ 260,192

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable

$  37,792

$  56,967

$   16,578

Accrued liabilities 

25,442

26,914

21,582

Deferred revenue

11,501

12,405

11,921

Deferred income taxes

530

-

1,630

Income taxes payable

465

298

267

     Total current liabilities

75,730

96,584

51,978

Long-term deferred income taxes              

452

-

323

Other long-term liabilities

444

459

1,365

     Total liabilities

76,626

97,043

53,666

Stockholders' equity:

Class A Common Stock, par value $0.0001; Authorized - 139,500 shares; Outstanding: 66,559, 65,764 and 66,084, respectively

7

7

7

Class B Common Stock, par value $0.0001; Authorized - 40,500 shares; Outstanding: 4,394, 4,396 and 4,394, respectively

-

-

-

Treasury stock

(185)

(185)

(185)

Additional paid-in capital 

439,673

428,546

434,728

Accumulated other comprehensive loss 

(5,944)

(1,251)

(5,450)

Accumulated deficit

(283,965)

(22,196)

(222,574)

     Total stockholders' equity 

149,586

404,921

206,526

     Total liabilities and stockholders' equity 

$226,212

$501,964

$ 260,192

 

LEAPFROG ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 Three Months Ended September 30, 

 Six Months Ended September 30, 

2015

2014

2015

2014

Operating activities:

Net loss 

$(34,066)

$   (2,026)

$(61,391)

$ (18,394)

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

4,056

6,957

8,003

13,233

Impairment of long-lived assets

1,114

-

3,884

-

Deferred income taxes

(197)

(833)

(379)

(10,840)

Stock-based compensation expense

2,454

2,449

5,116

5,680

Allowance for doubtful accounts

401

176

497

518

Other changes in operating assets and liabilities:

Accounts receivable, net

(36,048)

(68,300)

(41,635)

(70,590)

Inventories

1,488

(45,904)

(3,735)

(57,464)

Prepaid expenses and other current assets

2,943

(218)

518

(2,212)

Other assets

113

52

721

103

Accounts payable

20,388

25,246

21,765

39,570

Accrued liabilities

5,926

4,428

4,158

2,104

Deferred revenue

(209)

84

(412)

(341)

Other long-term liabilities

240

(553)

363

(650)

Income taxes payable

172

(150)

195

(387)

Net cash used in operating activities

(31,225)

(78,592)

(62,332)

(99,670)

Investing activities:

Purchases of property and equipment and other intangible assets

(2,268)

(7,484)

(5,194)

(15,066)

Capitalization of content and website development costs

(1,640)

(3,952)

(6,545)

(8,164)

Net cash used in investing activities

(3,908)

(11,436)

(11,739)

(23,230)

Financing activities:

Proceeds from stock option exercises and employee stock purchase plan

146

1,085

146

1,479

Cash paid for payroll taxes on restricted stock unit releases

(17)

(147)

(317)

(841)

Common stock repurchased

-

-

-

(38)

Excess tax benefits from stock-based compensation

-

-

-

11

Net cash provided by (used in) financing activities

129

938

(171)

611

Effect of exchange rate changes on cash

(633)

1,214

(330)

1,645

Net change in cash and cash equivalents

(35,637)

(87,876)

(74,572)

(120,644)

Cash and cash equivalents, beginning of period

88,241

199,220

127,176

231,988

Cash and cash equivalents, end of period

$ 52,604

$111,344

$ 52,604

$111,344

 

 LEAPFROG ENTERPRISES, INC. 

 SUPPLEMENTAL FINANCIAL INFORMATION 

 (In thousands) 

 (Unaudited) 

 Three Months Ended September 30, 

 Six Months Ended September 30, 

2015

2014

2015

2014

Net sales

$ 67,245

$113,645

$105,920

$160,622

Cost of sales (1)

60,987

76,635

92,430

114,779

Gross profit

6,258

37,010

13,490

45,843

Operating expenses: (2)

Selling, general and administrative

23,070

20,321

44,953

41,365

Research and development

8,755

7,363

16,538

14,974

Advertising

6,686

9,717

8,111

12,758

Impairment of long-lived assets

1,114

-

3,884

-

Depreciation and amortization

634

2,758

1,086

5,600

Total operating expenses

40,259

40,159

74,572

74,697

Loss from operations

(34,001)

(3,149)

(61,082)

(28,854)

Other income (expense):

Interest income

29

26

63

61

Interest expense

-

-

(2)

-

Other, net

95

124

(417)

(230)

Total other income (expense), net

124

150

(356)

(169)

Loss before income taxes

(33,877)

(2,999)

(61,438)

(29,023)

Provision for (benefit from) income taxes

189

(973)

(47)

(10,629)

Net Loss

$(34,066)

$   (2,026)

$ (61,391)

$ (18,394)

(1)

Includes depreciation and amortization

3,422

4,199

6,917

7,633

(2)

Includes stock-based compensation as follows:

Selling, general and administrative

2,127

2,090

4,442

4,928

Research and development

327

359

674

752

Segment data:

Net sales:

U.S. segment

45,399

77,558

73,458

108,266

International segment

21,846

36,087

32,462

52,356

Income (loss) from operations*:

U.S. segment

(36,507)

(8,865)

(63,101)

(34,155)

International segment

2,506

5,716

2,019

5,301

__________

*

Certain corporate-level operating expenses associated with sales and marketing, product support, human resources, legal, finance, information technology, corporate development, procurement activities, research and development, legal settlements and other corporate costs are charged entirely to our U.S. segment, rather than being allocated between the U.S. and International segments.

 

LEAPFROG ENTERPRISES, INC.

SUPPLEMENTAL DISCLOSURE REGARDING NON-GAAP FINANCIAL INFORMATION

RECONCILIATION OF GAAP FINANCIAL MEASURES TO NON-GAAP FINANCIAL MEASURES

(In thousands, except per share data)

(Unaudited)

The following table presents a reconciliation of net loss, a GAAP measure, to adjusted EBITDA, a non-GAAP measure. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization, impairment of long-lived assets, other expenses (income), and stock-based compensation.

Three Months Ended September 30,

Six Months Ended September 31,

2015

2014

2015

2014

Net loss - GAAP

$(34,066)

$(2,026)

$(61,391)

$(18,394)

(Less) add:

Interest income

(29)

(26)

(63)

(61)

Interest expense

-

-

2

-

Provision for (benefit from) income taxes

189

(973)

(47)

(10,629)

Depreciation and amortization

4,056

6,957

8,003

13,233

Impairment of long-lived assets

1,114

-

3,884

-

Other expense (income), net

(95)

(124)

417

230

Stock-based compensation

2,454

2,449

5,116

5,680

Adjusted EBITDA - Non-GAAP

$(26,377)

$ 6,257

$(44,079)

$  (9,941)

 

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SOURCE LeapFrog Enterprises, Inc.



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