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Section 1: 8-K (CURRENT REPORT)

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

 

 

FORM 8-K

 

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

Date of Report (Date of earliest event reported):  May 10, 2016

 

ZAGG Inc

(Exact name of registrant as specified in its charter)

 

Nevada   001-34528   20-2559624
(State or other jurisdiction of
incorporation)
  (Commission File Number)   (I.R.S. Employer
Identification No.)

 

3855 South 500 West, Suite J

Salt Lake City, Utah

 

 

84115

(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code:   (801) 263-0699

 

     
 

(Former name or former address, if changed since last report)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
   
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
   
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
   
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 

 

 

 

Item 2.02 Results of Operations and Financial Condition.

 

On May 10, 2016, ZAGG Inc (the “Registrant”) issued a press release announcing the results of operations for the three months ended March 31, 2016, and made publicly available certain supplemental financial information, including commentary on results of operations from Brad Holiday, Chief Financial Officer (“CFO”). The supplemental financial information is furnished with this report as Exhibit 99.1, the press release is furnished with this report as Exhibit 99.2, and the CFO commentary is furnished with this report as Exhibit 99.3.

 

The Registrant also will hold its earnings conference call on May 10, 2016.

 

The information contained in Item 2.02 and 9.01 of this Current Report on Form 8-K, including Exhibits 99.1, 99.2, and 99.3 shall not be deemed to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, nor shall they be deemed incorporated by reference in any registration statement or other filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in any such filing.

 

Item 9.01 Financial Statements and Exhibits.

  

Exhibit No.   Description
99.1   Supplemental Financial Information for the Three Months Ended March 31, 2016
99.2   Results of Operations Press Release dated May 10, 2016
99.3   CFO Commentary on First Quarter 2016 Financial Results

 

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SIGNATURES

 

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

 

  ZAGG Inc
     
Date: May 10, 2016 By: /s/ BRADLEY J. HOLIDAY
    Bradley J. Holiday
    Chief Financial Officer

 

 

 

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Section 2: EX-99.1 (SUPPLEMENTAL FINANCIAL INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2016)

Exhibit 99.1

 

ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(Unaudited)

 

   March 31,   December 31, 
   2016   2015 
         
ASSETS        
         
Current assets        
Cash and cash equivalents  $6,162   $13,002 
Accounts receivable, net of allowances of $679 in 2016 and $568 in 2015   53,170    57,647 
Inventories   83,755    45,912 
Prepaid expenses and other current assets   2,258    3,142 
Income tax receivable   11,879    1,158 
Deferred income tax assets   36,725    10,840 
Total current assets   193,949    131,701 
Property and equipment, net of accumulated depreciation of $12,053 in 2016 and $10,539 in 2015   21,640    8,309 
Goodwill   14,092    - 
Intangible assets, net of accumulated amortization of $44,571 in 2016 and $41,803 in 2015   65,739    23,045 
Deferred income tax assets   -    15,386 
Other assets   2,346    1,100 
Total assets  $297,766   $179,541 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
Current liabilities          
Accounts payable  $54,495   $33,846 
Accrued liabilities   12,297    5,068 
Accrued wages and wage related expenses   2,890    2,244 
Deferred revenue   25    17 
Sales returns liability   20,773    7,849 
Current portion of long-term debt, net of deferred loan costs of $64 in 2016   6,186    - 
Revolving line of credit   50,545    - 
Total current liabilities   147,211    49,024 
Noncurrent portion of long-term debt, net of deferred loan costs of $187 in 2016   18,563    - 
Deferred income tax liabilities   2,593    - 
Other noncurrent liabilities   513    - 
Total liabilities   168,880    49,024 
           
Stockholders' equity          
Common stock, $0.001 par value; 100,000 shares authorized; 33,812 and 33,219 shares issued in 2016 and 2015, respectively   34    33 
Additional paid-in capital   90,322    88,983 
Accumulated other comprehensive loss   (1,278)   (1,597)
Treasury stock, 5,679 and 5,679 common shares in 2016 and 2015 respectively, at cost   (35,194)   (35,194)
Retained earnings   75,002    78,292 
           
Total stockholders' equity   128,886    130,517 
Total liabilities and stockholders' equity  $297,766   $179,541 

 

 

 

 

ZAGG INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)

 

   Three Months Ended 
   March 31, 2016   March 31, 2015 
         
Net sales  $62,432   $57,216 
Cost of sales   38,703    34,258 
           
Gross profit   23,729    22,958 
           
Operating expenses:          
Advertising and marketing   2,914    2,631 
Selling, general and administrative   19,755    12,754 
Transaction costs   2,017    - 
Amortization of definite-lived intangibles   2,746    2,134 
           
Total operating expenses   27,432    17,519 
           
Income (loss) from operations   (3,703)   5,439 
           
Other (expense) income:          
Interest expense   (188)   (27)
Other (expense) income   (200)   80 
           
Total other (expense) income   (388)   53 
           
Income (loss) before provision for income taxes   (4,091)   5,492 
           
Income tax benefit (provision)   801    (2,292)
           
Net (loss) income  $(3,290)  $3,200 
           
Earnings (loss) per share:          
Basic earnings (loss) per share  $(0.12)  $0.11 
Diluted earnings (loss) per share  $(0.12)  $0.11 

 

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ZAGG INC AND SUBSIDIARIES

RECONCILIATION OF NON-GAAP FINANCIAL INFORMATION TO GAAP

(Unaudited)

 

Unaudited Supplemental Data

 

The following are not financial measures under generally accepted accounting principals (GAAP). In addition, they should not be construed as alternative to any other measures of performance determined in accordance with GAAP, or as an indicator of our operating performance, liquidity or cash flows generated by operating, investing and financing activities as there may be significant factors or trends that it fails to address. We present this financial information because we believe that it is helpful to some investors as a measure of our operations. We caution investors that non-GAAP financial information, by its nature, departs from traditional accounting conventions; accordingly, its use can make it difficult to compare our results with our results from other reporting periods and with the results of other companies.

 

Adjusted EBITDA Reconciliation  Three months ended 
   March 31, 2016   March 31, 2015 
         
Net income (loss) in accordance with GAAP  $(3,290)  $3,200 
           
Adjustments:          
           
a.     Stock based compensation expense   1,336    876 
b.     Depreciation and amortization   4,263    2,940 
c.     Other (income) expense   388    (53)
d.     mophie transaction costs   2,017    - 
e.     mophie fair value inventory write-up related to acquisition   1,156    - 
f.     Provision for income taxes   (801)   2,292 
           
Adjusted EBITDA  $5,069   $9,255 

 

Adjusted Net Income (Loss) Reconciliation - Three Months Ended March 31, 2016 and 2015  Three months ended 
   March 31, 2016   March 31, 2015 
         
Net income (loss) in accordance with GAAP  $(3,290)  $3,200 
           
Adjustments:          
           
a.     Amortization of mophie acquired intangibles   819    - 
b.     mophie transaction costs   2,017    - 
c.     mophie fair value inventory write-up related to acquisition   1,156    - 
d.     Income tax effects   (1,527)*   - 
           
Adjusted net income (loss)  $(825)  $3,200 
           
Adjusted diluted earnings (loss) per share  $(0.03)  $0.11 
           
Weighted average number of shares outstanding - diluted   27,710    29,678 

 

 * For comparative purposes, we applied an annualized statutory tax rate of 38.25% in 2016.

 

 

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Section 3: EX-99.2 (RESULTS OF OPERATIONS PRESS RELEASE DATED MAY 10, 2016)

Exhibit 99.2

 

May 10, 2016

 

ZAGG First Quarter 2016 Sales Up 9%; Maintains Annual Guidance

 

SALT LAKE CITY, May 10, 2016 (GLOBE NEWSWIRE) -- ZAGG Inc (NASDAQ: ZAGG), a leading global mobile lifestyle company, today announced financial results for the first quarter ending March 31, 2016. First quarter results include the financials of mophie from the transaction date of March 3, 2016 through March 31, 2016.

 

Highlights (Comparisons versus first quarter of 2015)

 

·Net sales grew 9% to $62.4 million as compared to $57.2 million
·Screen protection sales +14%; audio +20%; power management +383%
·International sales +67%; internet sales +95%
·Gross margin of $23.7 million (38% of net sales) compared to $23.0 million (40% of net sales); ZAGG (ex-mophie margins) increased to 42% compared to 40%
·mophie integration moving forward ahead of original plan
·Maintains 2016 overall annual guidance; net sales and Adjusted EBITDA potentially at the low end of the range

 

“We are very pleased with our overall results for the first quarter,” commented Randy Hales, President and Chief Executive Officer of ZAGG Inc. “It has been an extremely busy and productive quarter as we continued to focus on building a strong company while finalizing the mophie acquisition and initiating integration activities.”

 

“These integration efforts with mophie are ahead of plan. We are working to improve inventory management, optimize our teams, and align processes within the company with a focus on quickly ramping up their supply chain capacity,” continued Mr. Hales. “We are maintaining our 2016 annual guidance of $460 million to $500 million for net sales and $60 million to $65 million for Adjusted EBITDA, with the potential that results could be at the lower end of the range due to the delays with the supply chain ramp-up.”

 

Company Completes Merger with mophie

 

On March 3, 2016 the Company completed its previously announced acquisition of mophie inc. Results stated in this release reflect contribution from mophie as of the closing date through the end of the first quarter. After the acquisition date, several key integration initiatives commenced, including the following: optimization of the sales organizations to leverage cross selling opportunities and maximize sales potential; initiating collaborative product development efforts; implementing sales forecasting and supply chain management processes; and aligning resources across finance/accounting, HR and IT.

 

  
 

 

2016 First Quarter Results

 

(in millions, except per share amounts)  March 31,
2016
   March 31,
2015
 
Net Sales  $62.4   $57.2 
Gross Profit (Gross Profit %)  $23.7 (38%)  $23.0 (40%)
Net Income (Loss)  ($3.3)  $3.2 
Diluted Earnings (Loss) per Share  ($0.12)  $0.11 
Adjusted EBITDA (EBITDA %)  $5.1 (8%)  $9.3 (16%)
Adjusted Net Income (Loss)*  ($0.8)   - 
Adjusted Earnings (Loss) per Share*  ($0.03)   - 

 

* Reflects add back of costs incurred directly related to the mophie acquisition, net of tax, including: (1) $2.0 million of transaction costs, (2) $1.2 million in cost of goods sold impact related to the fair value write-up of mophie inventory at acquisition, and (3) $0.8 million in amortization from mophie acquired intangibles. There is no impact on 2015 as all charges occurred during 2016.

 

First Quarter Results (Comparisons versus first quarter of 2015)

 

Net sales for the first quarter grew 9% to $62.4 million compared to $57.2 million, primarily due to sales from mophie of $7.6 million from the March 3, 2016 acquisition date to the end of the quarter, as well as higher sales of screen protection, audio, power management, and power cases. These increases were partially offset by a decline in tablet keyboards sales due to overall softness in the tablet market and significant tablet keyboard sell-in at key retailers during the first quarter of 2015 that did not recur in 2016.

 

Gross profit was $23.7 million, or 38% of net sales, compared to $23.0 million, or 40% of net sales. This decline was due to $1.2 million in expense recorded through cost of sales related to the sale of acquired mophie inventory that was recorded at fair value through purchase accounting, and the impact of mophie gross profit margins, which were lower than the Company’s historical gross profit margins. ZAGG (excluding mophie) gross margin increased to 42% compared to 40% in 2015.

 

The Company recorded a net loss for the quarter of ($3.3) million, compared to net income of $3.2 million, with fully diluted loss per share of ($0.12) (on 27.7 million shares) compared to $0.11 (on 29.7 million shares). The decline in earnings was due to the gross margin pressure described above, as well as acquisition expenses of $2.0 million, the inclusion of mophie operating expenses from the date of the acquisition to the end of the quarter, increases in salaries and benefits, and increased stock-based compensation expenses.

 

Additional Non-GAAP Financial Information – Adjusted EBITDA and Adjusted Net Loss

 

Adjusted EBITDA was $5.1 million or 8% of net sales, compared to $9.3 million or 16% of net sales. 

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This is the first reported quarter since the closing of the mophie acquisition. The Company incurred expenses and charges related to the acquisition, and has added an additional non-GAAP metric, Adjusted Net Loss, which adjusts for the effect of transaction related expenses and the fair value write-up of mophie inventory related to the acquisition.

 

Adjusted Net Loss was ($0.8) million or ($0.03) per diluted share.

 

2016 Business Outlook (reflecting 10 months of mophie contribution)

 

The Company maintains overall guidance at this time, while updating the forecast for net sales and Adjusted EBITDA to be at the low end of the range due to a slower start to mophie sales related to supply chain constraints.

 

The Company’s annual guidance for 2016 is as follows:

 

Net sales of $460 - $500 million
Gross profit margin (as a % of net sales) in a range of low to mid 30’s
Adjusted EBITDA of $60 - $65 million
Annual effective tax rate of approximately 40%

 

About Non-GAAP Financial Information

 

Readers are cautioned that the Adjusted EBITDA (earnings before interest, taxes, depreciation, amortization, stock-based compensation expense, other income (expense), mophie transaction costs, and mophie fair value inventory write-up) and Adjusted Net Loss (earnings before mophie transaction costs, mophie fair value inventory write-up, and amortization from acquired intangibles – all net of tax) contained in this commentary are not financial measures under US generally accepted accounting principles (GAAP). In addition, this financial information should not be construed as an alternative to any other measure of performance determined in accordance with GAAP, or as indicators of operating performance, liquidity or cash flows generated by operating, investing and financing activities, as there may be significant factors or trends that they fail to address. We present Adjusted EBITDA and Adjusted Net Loss because we believe that they are helpful to some investors as a measure of performance. We caution readers that non-GAAP financial information, by its nature, departs from traditional accounting conventions. Accordingly, its use can make it difficult to compare current results with results from other reporting periods and with the financial results of other companies.

 

Conference Call

 

A conference call will be held today at 5:00 p.m. EST to review these results. Interested parties may access via the Internet on the Company's website at: investors.zagg.com.

 

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Safe Harbor Statement

 

In addition to the historical information contained in this press release, this release contains (and oral communications made by ZAGG may contain) statements that relate to future events and expectations and, as such, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, outlook, assumptions, or future events or performance, often, but not always, through the use of words or phrases such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "projects," "targets," or similar expressions, are not statements of historical facts and may be forward-looking. Readers are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events, or results to differ materially from those projected in the forward-looking statements. In addition to any assumptions and other factors and matters referred to specifically in connection with such forward-looking statements, factors that could cause actual results or outcomes to differ materially from those contained in forward-looking statements include the following: (a) the ability to design, produce, and distribute the creative product solutions required to retain existing customers and to attract new customers; (b) building and maintaining marketing and distribution functions sufficient to gain meaningful international market share for ZAGG's products; (c) the ability to respond quickly with appropriate products after the adoption and introduction of new mobile devices by major manufacturers like Samsung and Apple; (d) changes or delays in announced launch schedules for new mobile devices by major manufacturers like Samsung and Apple; (e) the ability to successfully integrate new operations or acquisitions, including mophie inc., (f) the impact of inconsistent quality or reliability of new product offerings; (g) the impact of lower profit margins in certain new and existing product categories; (h) the impacts of changes in economic conditions, including on customer demand; (i) managing inventory in light of constantly shifting consumer demand; (j) the failure of information systems or technology solutions or the failure to secure information system data, failure to comply with privacy laws, security breaches, or the effect on the company from cyber-attacks, terrorist incidents, or the threat of terrorist incidents; and (k) adoption of or changes in accounting policies, principles, or estimates. Any forward-looking statement speaks only as of the date on which such statement is made. New factors emerge from time to time and it is not possible for management to predict all such factors, nor can it assess the impact of any such factor on the business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. Readers should also review the risks and uncertainties listed in ZAGG's most recent Annual Report on Form 10-K and other reports the company files with the U.S. Securities and Exchange Commission, including (but not limited to) Item 1A - "Risk Factors" in the Form 10-K and Management's Discussion and Analysis of Financial Condition and Results of Operations and the risks described therein from time to time. ZAGG disclaims any obligation to update publicly any forward-looking information, whether in response to new information, future events, or otherwise, except as required by applicable law.

 

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About ZAGG Inc

 

ZAGG is a global leader in accessories and technologies that empower mobile lifestyles. Widely acclaimed for product innovation, the Company has a diverse, award-winning portfolio sold under the ZAGG®, mophie®, InvisibleShield®, and iFrogz® brands. The Company’s brands can be found at leading retailers worldwide. ZAGG has operations in the United States, Ireland, Netherlands, and China. For more information, please visit the company’s websites at www.zagg.com and www.mophie.com.

 

CONTACT:

 

Investor Relations:

 

ZAGG Inc

Kim Rogers

801-506-7008

kim.rogers@zagg.com 

 

Press Inquiries:

 

Lorraine Woodcheke

Edelman

415-486-3284

Lorraine.Woodcheke@Edelman.com

 

 

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Section 4: EX-99.3 (CFO COMMENTARY ON FIRST QUARTER 2016 FINANCIAL RESULTS)

Exhibit 99.3

 

 

CFO Commentary on First Quarter 2016 Financial Results

 

May 10, 2016

 

Related Information

The commentary in this document can be referenced in the financial information found in the earnings release issued earlier today. The release can be found at investors.ZAGG.com, or in the Form 8-K furnished to the Securities and Exchange Commission website at sec.gov.

 

Conference Call

The Company will hold a conference call at 5:00 p.m. Eastern Standard Time on May 10, 2016, to review first quarter 2016 results. Randy Hales, Chief Executive Officer, and Brad Holiday, Chief Financial Officer, will participate in the call. The conference call will be available to interested parties through a live audio Internet broadcast accessible at investors.ZAGG.com. A podcast of the conference call will also be archived at investors.ZAGG.com for one year.

 

Summary

The Company reported net sales for the first quarter of 2016 of $62.4 million, an increase of 9% from $57.2 million in the prior year, reflecting a contribution of $7.6 million from mophie. Gross profit margin for the quarter was 38.0% and operating expense was 43.9% of net sales. The Company reported a net loss of ($3.3) million, ($0.12) per diluted share, compared to net income of $3.2 million, $0.11 per diluted share, in the prior year.

 

The Company maintains overall annual guidance (inclusive of the operations of mophie after the March 3, 2016 transaction date), while updating the forecast for net sales and Adjusted EBITDA to potentially be at the lower end of the range, reflecting a slower start to mophie sales related to supply chain capacity issues, partially offset by increased ZAGG net sales and anticipated merger efficiencies leading to reduced expense for the remainder of the year.

 

The Company’s annual guidance for 2016 is as follows:

 

Net sales of $460 - $500 million
   
Gross profit margin (as a % of net sales) in a range of low to mid 30’s
   
Adjusted EBITDA of $60 - $65 million
   
Annual effective tax rate of approximately 40%

 

 

 

 

Please refer to the 2016 Business Outlook on page 4 for additional details.

 

2016 First Quarter Results

(All income statement and non-GAAP comparisons are versus first quarter 2015, unless noted.)

 

Net Sales

Net sales were $62.4 million, an increase of 9% compared to $57.2 million. The increase in net sales was due to (1) mophie net sales of $7.6 million from the March 3, 2016 acquisition date to the end of the quarter and (2) a 14% increase in screen protection sales to $40.8 million, and (3) a 20% increase in audio sales to $5.1 million. These increases were partially offset by a decline in keyboard sales due to overall softness in the tablet market and the sell-in of keyboards at key retailers that occurred in the prior year quarter that did not recur in 2016.

 

International

International sales increased 67% to $7.5 million or 12% of net sales, compared to $4.5 million or 8% of net sales, due to expanded retail distribution in Europe. The impact of foreign exchange rates were negligible in the quarter at ($0.1) million.

 

Online

Website sales increased by 95% to $5.6 million or 9% of net sales compared to $2.9 million or 5% of net sales, due to increased optimization of the ZAGG website and the contribution of sales from the mophie website of $1.0 million.

 

Product Categories

Screen protection increased 14% to $40.8 million or 65% of net sales, compared to $35.9 million or 63% of net sales. Screen protection sales grew versus the prior year quarter primarily due to increased distribution of glass InvisibleShield screen protection at wireless retailers.

 

Tablet keyboard sales decreased to $7.4 million or 12% of net sales, compared to $13.9 million or 24% of net sales. The decrease was due to overall softness in the tablet market and significant tablet keyboard sell-in at key retailers during the first quarter of 2015 that did not recur in 2016.

 

Power management (external batteries) grew to $6.1 million or 10% of net sales, an increase from $1.3 million or 2% of net sales. The increase was primarily due to the impact of mophie product sales.

 

Audio sales increased 20% to $5.1 million or 8% of net sales, from $4.2 million or 7% of net sales, primarily due to an increase in retail distribution.

 

Power cases sales were $2.4 million or 4% of net sales. The emergence of this category during the first quarter of 2016 was solely due to sales under the mophie brand.

 

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Gross Margin

Gross profit margin was 38.0% ($23.7 million) compared to 40.1% ($23.0 million). The decrease was primarily due to $1.2 million in expense recorded through cost of sales related to the sale of acquired mophie inventory that was recorded at fair value through purchase accounting, and the impact of mophie gross profit margins, which were lower than the Company’s historical gross profit margins. ZAGG (excluding mophie) gross margin increased to 42% compared to 40% in 2015.

 

Operating Expense

Operating expense was 43.9% of net sales or $27.4 million, compared to 30.6% of net sales or $17.5 million in 2015. The increase was due primarily to transaction costs of $2.0 million, the inclusion of mophie operating expenses from the date of the acquisition to the end of the quarter (including $0.8 million of amortization of intangibles associated with the acquisition), increases in salaries and benefits, and increased stock-based compensation expenses.

 

Income Tax Expense

The effective tax rate for the quarter was 19.6% compared to 41.7%. The decrease in the effective tax rate was primarily due a decrease in the state rate used for deferred taxes caused by the acquisition of mophie and the resulting change in the mix of state apportionment factors, which resulted in a discrete item being recognized during 2016, and reduced losses from foreign jurisdictions that are taxed at a 0% rate. The Company’s effective tax rate will generally differ from the U.S. Federal statutory rate of 35%, due to state taxes, permanent items, and the Company’s global tax strategy.

 

Net Income (Loss)

Net loss for the first quarter was ($3.3) million, or diluted loss per share of ($0.12) (on 27.7 million shares), compared to net income $3.2 million, or diluted earnings per share of $0.11 (on 29.7 million shares).

 

Unaudited Supplemental Data: Adjusted EBITDA and Adjusted Net Loss

Adjusted EBITDA for the quarter was $5.1 million (8% of net sales) compared to $9.3 million (16% of net sales).

 

In conjunction with the completion of the acquisition of mophie in the quarter, the Company incurred transaction expenses and accounting charges. Adjusted Net Income (Loss) adjusts for the effect of transaction expenses and the fair value write-up of mophie inventory related to the acquisition.

 

Adjusted Net Loss was ($0.8) million or ($0.03) per diluted share.

 

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Balance Sheet (as of March 31, 2016)

(All balance sheet comparisons are versus December 31, 2015, unless noted.)

 

Cash and Cash Equivalents

The cash and cash equivalents balance was $6.2 million compared to $13.0 million, a decrease of $6.8 million. The decrease in cash is largely the result of cash used for the purchase of mophie, cash used for working capital requirements, and purchases of fixed assets; these decreases were partially offset by strong cash collections during the first quarter of 2016 from accounts receivable outstanding at year end 2015.

 

Account Receivables

Accounts receivable decreased to $53.2 million compared to $57.6 million, a decrease of $4.4 million. The decrease was due to strong cash collections from accounts receivable outstanding at year end 2015, but was partially offset by the addition of accounts receivable from the mophie acquisition. Day’s sales outstanding (DSO) for ZAGG (excluding mophie) increased to 68 days compared to 67 days. The Company will report consolidated DSO starting in the second quarter of 2016 when a full quarter of mophie operations are available.

 

Inventory

Inventories were $83.8 million as compared to $45.9 million. The increase in inventory is primarily due to the addition of mophie inventory ($41.5 million at March 31, 2016).

 

Debt

Concurrent with the close of the merger with mophie on March 3, 2016, the Company entered into a Credit and Security Agreement (the “Agreement”) with KeyBank National Association; the prior credit agreement with Wells Fargo was terminated. The Agreement provides an $85.0 million revolving line of credit with a maturity date of March 2, 2021. Borrowings under the line of credit are subject to a borrowing base limit, which is calculated from outstanding accounts receivable and inventory. Interest on the line of credit accrues at the prime rate plus 0.50% or LIBOR plus 1.50%. The Agreement also provides a $25.0 million term loan commitment. Payments on the term loan began April 1, 2016 and continue until it is paid in full on March 2, 2020. Interest on the term loan will accrue at the base rate plus 1.0% or at a rate of LIBOR plus 2.0%.

 

At the end of the first quarter, the Company had a balance on the line of credit of $50.5 million, and a balance on the term loan of $25.0 million.

 

2016 Business Outlook

The table below details 2016 net sales and Adjusted EBITDA guidance for ZAGG, 10 months of contribution for mophie, and consolidated guidance for the year. At this time, the Company is guiding to the low end of the range for net sales and Adjusted EBITDA.

 

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(in millions)  Net Sales       Adjusted EBITDA 
   Low   High       Low   High 
ZAGG   $295   $315               
mophie   $165   $185               
Consolidated*   $460   $500   Margin %   $60   $65 
                  13%   13%

 

* Reflects full year ZAGG results and mophie 10 month results from the March 3, 2016 closing.

 

Non-GAAP Financial Disclosure

ZAGG regularly discloses Adjusted EBITDA and Adjusted Net Loss, non-GAAP metrics, in its financial releases. Readers should refer to the non-GAAP financial disclosures at the end of this document for information on the limitations of non-GAAP disclosures. An explanation of ZAGG's use of this non-GAAP financial measure and the reconciliation between GAAP and non-GAAP measures required by SEC Regulation G is included in ZAGG's press release today, which can be found at investors.ZAGG.com.

 

Readers are cautioned that the Adjusted EBITDA (earnings before interest, taxes, depreciation, amortization, stock-based compensation expense, other income (expense), mophie transaction costs, and mophie fair value inventory write-up) and Adjusted Net Loss (earnings before mophie transaction costs, mophie fair value inventory write-up, and amortization from acquired intangibles – all net of tax) contained in this commentary are not financial measures under US generally accepted accounting principles (GAAP). In addition, this financial information should not be construed as an alternative to any other measure of performance determined in accordance with GAAP, or as indicators of operating performance, liquidity or cash flows generated by operating, investing and financing activities, as there may be significant factors or trends that they fail to address. We present Adjusted EBITDA and Adjusted Net Loss because we believe that they are helpful to some investors as a measure of performance. We caution readers that non-GAAP financial information, by its nature, departs from traditional accounting conventions. Accordingly, its use can make it difficult to compare current results with results from other reporting periods and with the financial results of other companies.

 

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Safe Harbor Statement

In addition to the historical information contained in this press release, this release contains (and oral communications made by ZAGG may contain) statements that relate to future events and expectations and, as such, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, outlook, assumptions, or future events or performance, often, but not always, through the use of words or phrases such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "projects," "targets," or similar expressions, are not statements of historical facts and may be forward-looking. Readers are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events, or results to differ materially from those projected in the forward-looking statements. In addition to any assumptions and other factors and matters referred to specifically in connection with such forward-looking statements, factors that could cause actual results or outcomes to differ materially from those contained in forward-looking statements include the following: (a) the ability to timely design, produce, and distribute the creative product solutions required to retain existing customers and to attract new customers; (b) building and maintaining marketing and distribution functions sufficient to gain meaningful international market share for ZAGG's products; (c) the ability to respond quickly with appropriate products after the adoption and introduction of new mobile devices by major manufacturers like Samsung and Apple; (d) changes or delays in announced launch schedules for new mobile devices by major manufacturers like Samsung and Apple; (e) the ability to successfully integrate new operations or acquisitions, including mophie inc.; (f) the impact of inconsistent quality or reliability of new product offerings; (g) the impact of lower profit margins in certain new and existing product categories; (h) the impacts of changes in economic conditions, including on customer demand; (i) managing inventory in light of constantly shifting consumer demand; (j) the failure of information systems or technology solutions or the failure to secure information system data, failure to comply with privacy laws, security breaches, or the effect on the company from cyber-attacks, terrorist incidents, or the threat of terrorist incidents; and (k) adoption of or changes in accounting policies, principles, or estimates. Any forward-looking statement speaks only as of the date on which such statement is made. New factors emerge from time to time and it is not possible for management to predict all such factors, nor can it assess the impact of any such factor on the business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. Readers should also review the risks and uncertainties listed in ZAGG's most recent Annual Report on Form 10-K and other reports the company files with the U.S. Securities and Exchange Commission, including (but not limited to) Item 1A - "Risk Factors" in the Form 10-K and Management's Discussion and Analysis of Financial Condition and Results of Operations and the risks described therein from time to time. ZAGG disclaims any obligation to update publicly any forward-looking information, whether in response to new information, future events, or otherwise, except as required by applicable law.

 

 

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