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Section 1: 8-K (8-K)

Document


UNITED STATES
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): August 6, 2019
ZAGG INC
(Exact name of registrant as specified in its charter)
Delaware001-3452820-2559624
(State or other jurisdiction of incorporation)(Commission
File Number)
(IRS Employer
Identification No.)

910 West Legacy Center Way, Suite 500
Midvale, Utah 84047
(Address of principal executive offices; Zip Code)
(801) 263-0699
(Registrant's telephone number, including area code)
Not applicable
(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:
o            Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o            Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o            Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o            Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.001 par valueZAGGThe Nasdaq Stock Market, LLC
(Title of each class)(Trading Symbol(s))(Name of each exchange on which registered)
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Item 2.02 Results of Operations and Financial Condition.
On August 6, 2019, ZAGG Inc, a Delaware corporation (the “Company”) issued a press release announcing the results of operations for the three and six months ended June 30, 2019, and made publicly available certain supplemental financial information, including commentary on results of operations from Taylor D. Smith, Chief Financial Officer (“CFO”). The supplemental financial information - financial tables is furnished with this report as Exhibit 99.1, the press release is furnished with this report as Exhibit 99.2, and the supplemental financial information - CFO commentary is furnished with this report as Exhibit 99.3.
The Company will also hold its earnings conference call on August 6, 2019. The conference call will be available to interested parties through a live audio Internet broadcast accessible at investors.ZAGG.com under the events tab. A podcast of the conference call will be archived at investors.ZAGG.com for one year. The URLs are included here as inactive textual references. Information contained on, or accessible through, our websites is not a part of, and is not incorporated by reference into, this report.
Item 9.01 Financial Statements and Exhibits.
(d) Exhibits.
     The following are filed as Exhibits to this Current Report on Form 8-K:
Exhibit No.Description
The information contained in Item 2.02 and Item 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.
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
Dated: August 6, 2019/s/ TAYLOR D. SMITH
Taylor D. Smith
Chief Financial Officer
(Principal financial and accounting officer)


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Section 2: EX-99.1 (EX-99.1)

Document

ZAGG INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except par value amounts)
(Unaudited)
June 30, 2019December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents$12,885 $15,793 
Accounts receivable, net of allowances of $431 and $885102,578 156,667 
Income tax receivable 3,427 375 
Inventories110,565 82,919 
Prepaid expenses and other current assets 6,393 5,473 
Total current assets235,848 261,227 
Property and equipment, net of accumulated depreciation of $13,860 and $11,84417,714 16,118 
Intangible assets, net of accumulated amortization of $87,692 and $78,62770,542 52,054 
Deferred income tax assets15,396 19,403 
Operating lease right of use assets 10,380 — 
Goodwill 43,560 27,638 
Other assets1,315 1,571 
Total assets$394,755 $378,011 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$70,988 $80,908 
Sales returns liability 37,522 54,432 
Accrued wages and wage related expenses 6,665 6,624 
Accrued liabilities9,511 13,723 
Current portion of operating lease liabilities 2,154 — 
Total current liabilities126,840 155,687 
Line of credit95,363 58,363 
Operating lease liabilities11,889 — 
Other long-term liabilities7,913 5,470 
Total liabilities242,005 219,520 
Stockholders’ equity:
Common stock, $0.001 par value; 100,000 shares authorized; 36,140 and 34,457 shares issued 36 34 
Treasury stock, 7,055 and 6,983 common shares at cost (50,455)(49,733)
Additional paid-in capital111,279 96,486 
Accumulated other comprehensive loss(1,425)(1,410)
Retained earnings93,315 113,114 
Total stockholders’ equity152,750 158,491 
Total liabilities and stockholders’ equity$394,755 $378,011 




ZAGG INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in thousands, except per share amounts)
(Unaudited)
For the Three Months EndedFor the Six Months Ended
June 30, 2019June 30, 2018June 30, 2019June 30, 2018
Net sales$106,796 $118,565 $185,546 $230,631 
Cost of sales69,037 80,908 123,965 155,381 
Gross profit37,759 37,657 61,581 75,250 
Operating expenses:
Advertising and marketing4,514 2,638 9,099 5,233 
Selling, general and administrative34,491 27,035 66,075 51,342 
Transaction costs374 18 621 18 
Amortization of intangible assets4,599 2,773 9,065 5,545 
Total operating expenses43,978 32,464 84,860 62,138 
(Loss) income from operations(6,219)5,193 (23,279)13,112 
Other income (expense):
Interest expense(1,103)(346)(2,113)(846)
Other income (expense)1,192 (681)676 (186)
Total other income (expense)89 (1,027)(1,437)(1,032)
(Loss) income before provision for income taxes(6,130)4,166 (24,716)12,080 
Income tax benefit (provision)794 (950)4,956 (1,835)
Net (loss) income$(5,336)$3,216 $(19,760)$10,245 
(Loss) earnings per share attributable to stockholders:
Basic (loss) earnings per share$(0.18)$0.11 $(0.68)$0.36 
Diluted (loss) earnings per share$(0.18)$0.11 $(0.68)$0.36 




ZAGG INC AND SUBSIDIARIES
RECONCILIATION OF NON-U.S. GAAP FINANCIAL INFORMATION TO U.S. GAAP
(Amounts in thousands)
(Unaudited)
UNAUDITED SUPPLEMENTAL DATA
The following information are not financial measures prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In addition, they should not be construed as an alternative to any other measures of performance determined in accordance with U.S. 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 these measures are helpful to some investors as a measure of our operations. We caution investors that non-U.S. 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 RECONCILIATIONThree Months EndedSix Months Ended
June 30, 2019June 30, 2018June 30, 2019June 30, 2018
Net (loss) income in accordance with U.S. GAAP$(5,336)$3,216 $(19,760)$10,245 
Adjustments:
a.Stock-based compensation expense1,475 807 2,660 1,408 
b.Depreciation and amortization6,199 4,200 12,256 9,230 
c.Other (income) expense, net(89)1,027 1,437 1,032 
d.Transaction costs374 18 621 18 
e.BRAVEN employee retention bonus46 — 93 — 
f.Former CFO retention bonus— — 110 — 
g.Inventory step-up amount in connection with acquisition of 2018 and 2019142 — 573 — 
h.Consulting fee to former CEO— 700 — 700 
iRestructuring expenses407 — 407 — 
jIncome tax (benefit) provision(794)950 (4,956)1,835 
Total Adjustments7,760 7,702 13,201 14,223 
Adjusted EBITDA$2,424 $10,918 $(6,559)$24,468 




ZAGG INC AND SUBSIDIARIES
RECONCILIATION OF NON-U.S. GAAP FINANCIAL INFORMATION TO U.S. GAAP
(Amounts in thousands, except per share amounts)
(Unaudited)

DILUTED OPERATING (LOSS) EARNINGS PER SHARE RECONCILIATIONThree Months EndedSix Months Ended
June 30, 2019June 30, 2018June 30, 2019June 30, 2018
Net (loss) income in accordance with U.S. GAAP$(5,336)$3,216 $(19,760)$10,245 
Adjustments:
a.Amortization expense related to 2018 and 2019 acquisitions 2,047 — 3,951 — 
b.Transaction costs related to 2018 and 2019 acquisitions 374 — 621 — 
c.Inventory step-up amortization related to 2018 and 2019 acquisitions142 — 573 — 
d.BRAVEN employee retention bonus 46 — 93 — 
e.Restructuring expenses 407 — 407 — 
f.Share-based compensation issued as retention690 — 690 — 
Total adjustments before tax3,706 — 6,335 — 
Tax effect 1
(1,002)— (1,713)— 
Adjustments, net of tax 2,704 — 4,622 — 
Adjusted net (loss) income$(2,632)$3,216 $(15,138)$10,245 
Diluted shares outstanding29,064 28,666 28,974 28,679 
Diluted operating (loss) earnings per share$(0.09)$0.11 $(0.52)$0.36 
1 Income tax effect calculated using the estimated 2019 statutory rate of 27.04%

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Section 3: EX-99.2 (EX-99.2)

Document

August 6, 2019
ZAGG Reports Second Quarter 2019 Results
ZAGG to Consider Strategic Alternatives to Maximize Shareholder Value
SALT LAKE CITY, August 6, 2019 (GLOBE NEWSWIRE) – ZAGG Inc (Nasdaq: ZAGG), a leading global mobile lifestyle company, today announced financial results for the second quarter ended June 30, 2019.
Second Quarter 2019 Review (Comparisons versus Second Quarter 2018)
Net sales of $106.8 million compared to $118.6 million
Gross profit of 35% compared to 32%
Net loss of $(5.3) million compared to net income of $3.2 million
Diluted loss per share of $(0.18) compared to diluted earnings per share of $0.11
Adjusted EBITDA of $2.4 million compared to $10.9 million
Year-to-Date 2019 Review (Comparisons versus Year-to-Date 2018)
Net sales of $185.5 million compared to $230.6 million
Gross profit of 33% compared to 33%
Net loss of $(19.8) million compared to net income of $10.2 million
Diluted loss per share of $(0.68) compared to diluted earnings per share of $0.36
Adjusted EBITDA of $(6.6) million compared to $24.5 million
Chris Ahern, chief executive officer, commented, “Our second quarter results were in-line with our recent expectations and on a year-over-basis reflect the impact of our three recent acquisitions, which are heavily back half-weighted in terms of sales, combined with an increasingly challenging domestic selling environment for our core business. We continue to make good progress capitalizing on the growth prospects for our newly acquired brands and we remain confident that Gear4, HALO and BRAVEN are on track to exceed the growth targets we established at the start of the year. Unfortunately, their combined performance is not enough to offset the pressure we are experiencing in our core business as the result of a decline in consumer demand for smartphone devices the market has experienced this year. While our brands continue to maintain industry leading positions, retail sell-through for screen protection and our other categories has continued to slow following a difficult start to 2019. Based on current market trends and the additional tariffs recently announced, along with a softer market view on smartphone unit sales in the near-term, we have taken a more conservative outlook for the remainder of 2019.”
“Although we're confident in our long-term strategy, we are disappointed with the way 2019 is unfolding,” continued Ahern. “In response to the headwinds we are currently facing, we are implementing a series of cost savings initiatives in order to help preserve profitability. These initiatives include headcount reductions of approximately 10% of our global headcount, acceleration of cost synergies from recent acquisitions into 2019, and the reduction of a number of discretionary operating expense categories. Despite the step back in earnings we are taking this year, we are confident that ZAGG is well positioned to profitably grow its share of the mobile lifestyle accessory market in the U.S and overseas in the years ahead. Our confidence is rooted in the strength of our brand portfolio, product teams and distribution relationships combined with our ability to capitalize on the market opportunities created by the upcoming industry roll-out of 5G technology.”
“While we remain very excited about our future and prospects, we have determined it is appropriate to announce at this time that the Company has retained BofA Merrill Lynch to assist the Company in exploring strategic alternatives to maximize stockholder value. We do not expect to comment further on this process until we have made a decision and are prepared to announce its final outcome.”
Second Quarter Results
(Amounts in millions, except per share amounts)
For the Three Months Ended
June 30, 2019June 30, 2018
Net sales$106.8 $118.6 
Gross profit$37.8 $37.7 
Gross profit margin35 %32 %
Net (loss) income$(5.3)$3.2 
Diluted (loss) earnings per share$(0.18)$0.11 
Diluted operating (loss) earnings per share$(0.09)$0.11 
Adjusted EBITDA$2.4 $10.9 
Net sales decreased 10% to $106.8 million, compared to $118.6 million. The decrease in net sales was primarily attributable to (1) a decrease in sales of screen protection products due to a pull forward of shipments into the fourth quarter of 2018 ahead of a potential tariff increase and (2) decreased sales of mophie power management due to challenging sell-in comparisons during the second quarter of 2019 compared to the same period last year. Decreases in mophie power management were offset by HALO product sales. In addition, decreases in net sales were partially offset by (1) increased sales of Gear4 cases, and (2) a reduction of credits and discounts.
Gross profit was $37.8 million (35% of net sales) compared to $37.7 million (32% of net sales). The increase in gross profit margin was primarily attributable to an increase in sales of Gear4 brand cases, HALO branded power products, and InvisibleShield VisionGuard products, all which have a higher margin than historical averages.
Operating expenses increased 35% to $44.0 million (41% of net sales) compared to $32.5 million (27% of net sales). The increase in operating expenses was primarily attributable to (1) additional selling, general and administrative expense associated with the newly acquired BRAVEN, Gear4 and HALO brands, (2) increased marketing investments to support our growing portfolio of brands and products, (3) increased selling, general and administrative expense to support online channel and international geographic expansion, and (4) higher amortization of long-lived intangibles related to the BRAVEN, Gear4 and HALO acquisitions.
Net loss was $(5.3) million, or $(0.18) per diluted share compared to net income of $3.2 million, or $0.11 per diluted share.
Adjusted EBITDA was $2.4 million compared to $10.9 million.
Year-to-Date Results
(Amounts in millions, except per share amounts)
For the Six Months Ended
June 30, 2019June 30, 2018
Net sales$185.5 $230.6 
Gross profit$61.6 $75.3 
Gross profit margin33 %33 %
Net (loss) income$(19.8)$10.2 
Diluted (loss) earnings per share$(0.68)$0.36 
Diluted operating (loss) earnings per share$(0.52)$0.36 
Adjusted EBITDA$(6.6)$24.5 
Net sales decreased 20% to $185.5 million, compared to $230.6 million. The decrease in net sales was primarily attributable to (1) a decrease in sales of screen protection products due to a pull forward of shipments into the fourth quarter of 2018 ahead of a then-expected tariff increase and (2) decreased sales of mophie power management due to challenging sell-in comparisons during the first half of 2019. Decreases in mophie power management were offset by HALO product sales. In addition, decreases in net sales were partially offset by increased sales of Gear4 cases.
Gross profit was 61.6 million (33% of net sales) compared to 75.3 million (33% of net sales). Gross profit margin has not changed significantly due to decreases in our screen protection sales offset by (1) a reduction of credits and discounts, and (2) an increase in sales of Gear4 brand cases, HALO branded power products, and InvisibleShield VisionGuard products, all which have a higher margin than historical averages.
Operating expenses increased 37% to $84.9 million (46% of net sales) compared to $62.1 million (27% of net sales). The increase in operating expenses was primarily attributable to (1) additional selling, general and administrative expense associated with the newly acquired BRAVEN, Gear4 and HALO brands, (2) increased marketing investments to support our growing portfolio of brands and products, (3) increased selling, general and administrative expense to support online channel and international geographic expansion, and (4) higher amortization of long-lived intangibles related to the BRAVEN, Gear4 and HALO acquisitions.
Net loss was $(19.8) million, or $(0.68) per diluted share compared to net income of $10.2 million, or $0.36 per diluted share.
Adjusted EBITDA was $(6.6) million compared to $24.5 million.
Restructuring
In response to 2019 profitability headwinds and to position the Company for long-term profitable growth, the Company initiated a restructuring plan during the second quarter of 2019 and which extended into the third quarter of 2019. These initiatives include headcount reductions of approximately 10% of our global headcount, acceleration of cost synergies from recent acquisitions into 2019, and the reduction of a number of discretionary operating expense categories.
It is expected that 2019 results will include one-time severance restructuring charges totaling approximately $1.9 million, of which $0.4 million was recorded in the second quarter and the remaining will be recorded in the third quarter of 2019. These amounts have been incorporated into the guidance ranges provided. The headcount reductions are expected to provide gross annualized savings of approximately $8.0 million.
2019 Business Outlook
For the full year of 2019, the Company now expects:
Net sales of $520 to $550 million
Gross profit margin as a percentage of net sales in the mid 30's range
Adjusted EBITDA of $52 million to $62 million
Diluted operating earnings per share of $0.75 to $1.00.
Conference Call
A conference call will be held today, August 6, 2019, at 5:00 p.m. Eastern to review these results. Interested parties may access via the Internet on the Company's website at: investors.zagg.com (the URLs are included here in this exhibit as inactive textual references and information contained on, or accessible through, our websites is not a part of, and is not incorporated by reference into, this report).
About Non-U.S. GAAP Financial Information
This press release includes Adjusted EBITDA and Diluted Operating Earnings Per Share, which are not financial measures prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Readers are cautioned that (1) Adjusted EBITDA (earnings before stock-based compensation expense, depreciation and amortization, other income (expense), net, transaction costs, BRAVEN employee retention bonus, former CFO retention bonus, inventory step-up in conjunction with 2018 and 2019 acquisitions, consulting fee to former CEO, restructuring expenses and income tax (benefit) provision) and (2) Diluted Operating (Loss) Earnings Per Share (diluted (loss) earnings per share excluding the impact of transaction costs, inventory step-up, and amortization expense – all in conjunction with the BRAVEN, Gear4 and HALO acquisitions, BRAVEN employee retention bonus, restructuring expenses and share-based compensation issued as retention) are not financial measures under U.S. GAAP. In addition, this financial information should not be construed as an alternative to any other measure of performance determined in accordance with U.S. GAAP, or as an indicator of 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. As such, it should be read only in conjunction with our consolidated financial statements prepared in accordance with U.S. GAAP. We present Adjusted EBITDA and Diluted Operating Earnings Per Share because we believe that these measures are helpful to some investors as a measure of performance and to normalize the impact of acquisitions. We caution readers that non-U.S. 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. We have provided a reconciliation of Adjusted EBITDA and Diluted Operating Earnings Per Share to the most directly comparable U.S. GAAP measures in the supplemental financial information attached to this press release.
Cautionary Note Regarding Forward-Looking Statements
This press release contains (and oral communications made by us may contain) “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “predict,” “project,” “target,” “future,” “seek,” “likely,” “strategy,” “may,” “should,” “will” and similar references to future periods. Examples of forward-looking statements include, among others, statements we make regarding our outlook for the Company and statements that estimate or project future results of operations or the performance of the Company.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, 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 our products;
c.the ability to respond quickly with appropriate products after the adoption and introduction of new mobile devices by major manufacturers like Apple®, Samsung®, and Google®;
d.changes or delays in announced launch schedules for (or recalls or withdrawals of) new mobile devices by major manufacturers like Apple, Samsung, and Google;
e.the ability to successfully integrate new operations or acquisitions;
f.the impacts of inconsistent quality or reliability of new product offerings;
g.the impacts of lower profit margins in certain new and existing product categories, including certain mophie products;
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;
k.changes in U.S. and international trade policy and tariffs, including the possible effect of recent U.S. tariff proposals on selected materials used in the manufacture of products sold by the Company which are sourced from China;
l.adoption of or changes in accounting policies, principles, or estimates; and
m.changes in the law, economic and financial conditions, including the effect of enactment of US tax reform or other tax law changes.
Any forward-looking statement made by us in this press release 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 our most recent Annual Report on Form 10-K and other reports we file 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. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise. The forward-looking statements contained in this press release are intended to qualify for the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
About ZAGG Inc
ZAGG Inc (NASDAQ:ZAGG) is a global leader in accessories and technologies that empower mobile lifestyles. The Company has an award-winning product portfolio that includes screen protection, mobile keyboards, power management solutions, social tech, and personal audio sold under the ZAGG®, mophie®, InvisibleShield®, IFROGZ®, BRAVEN®, Gear4® and HALO® brands. ZAGG has operations in the United States, Ireland, and China. ZAGG products are available worldwide, and can be found at leading retailers including Best Buy, Verizon, AT&T, Sprint, T-Mobile, Walmart, Target, and Amazon.com. For more information, please visit the Company’s websites at www.ZAGG.com, www.mophie.com, www.Gear4.com, and www.BestHALO.com and follow us on Facebook, Twitter and Instagram.
# # #
CONTACT:
Investor Relations:
ICR Inc.
Brendon Frey
203-682-8216
brendon.frey@icrinc.com
Company:
ZAGG Inc
Jeff DuBois
801-506-7336
jeff.dubois@ZAGG.com

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Section 4: EX-99.3 (EX-99.3)

Document

August 6, 2019
ZAGG Supplemental Financial Information - CFO Commentary
Document reference information
The commentary in this document can be referenced in the financial information found in the press release announcing the results of operations for the three and six months ended June 30, 2019, and 2018, including certain supplemental financial information, 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 (the URLs are included here in this exhibit as inactive textual references and information contained on, or accessible through, our websites is not a part of, and is not incorporated by reference into, this report).
Three Months Ended June 30, 2019 and 2018 Summary Results
(Amounts in millions, except per share amounts)
For the Three Months Ended
Summary of quarter-to-date financial resultsJune 30, 2019June 30, 2018
Net sales$106.8 $118.6 
Gross profit$37.8 $37.7 
Gross profit margin35 %32 %
Net (loss) income$(5.3)$3.2 
Diluted (loss) earnings per share$(0.18)$0.11 
Diluted operating (loss) earnings per share$(0.09)$0.11 
Adjusted EBITDA$2.4 $10.9 
Diluted shares outstanding29.1 28.7 

For the Three Months Ended
June 30, 2019June 30, 2018
Net sales by category
(%)
($)
(%)
($)
Protection (screen protection and cases)54 %$57.6 55 %$65.1 
Power (power management and power cases)34 %$35.6 34 %$39.9 
Audio%$3.7 %$4.9 
Productivity (keyboards and other)%$9.9 %$8.7 

For the Three Months Ended
June 30, 2019June 30, 2018
Net sales by channel
(%)
($)
(%)
($)
Indirect channel85 %$90.7 88 %$104.3 
Website10 %$10.5 %$9.6 
Franchisees%$5.6 %$4.7 

For the Three Months Ended
June 30, 2019June 30, 2018
Net sales by region
(%)
($)
(%)
($)
Domestic74 %$78.6 85 %$100.5 
International26 %$28.2 15 %$18.1 
2019 Second Quarter Results Discussion
(All comparisons are 2019 consolidated versus 2018 consolidated, unless otherwise noted)
Net sales
399077497_exh993-netsalesimageq21.jpg
Net sales for the three months ended June 30, 2019, were $106.8 million, compared to net sales of $118.6 million for the three months ended June 30, 2018, a decrease of $11.8 million, or approximately 10%. The $11.8 million decrease in net sales was primarily attributable to (1) a decrease in sales of screen protection products due to a pull forward of shipments into the fourth quarter of 2018 ahead of a potential tariff increase and (2) decreased sales of mophie power management due to challenging sell-in comparisons during the second quarter of 2019 compared to the same period last year. Decreases in mophie power management were offset by HALO product sales. In addition, decreases in net sales were partially offset by (1) increased sales of Gear4 cases, and (2) a reduction of credits and discounts.
Gross profit
Gross profit for the three months ended June 30, 2019, was $37.8 million, or approximately 35% of net sales, compared to gross profit of $37.7 million, or approximately 32% of net sales for the three months ended June 30, 2018. The increase in gross profit margin was primarily attributable to an increase in sales of Gear4 brand cases, HALO branded power products, and InvisibleShield VisionGuard products, all which have a higher margin than historical averages.
Operating expense
Operating expenses for the three months ended June 30, 2019, were $44.0 million, compared to operating expenses of $32.5 million for the three months ended June 30, 2018, an increase of $11.5 million, or approximately 35%. The $11.5 million increase in operating expenses was primarily attributable to (1) additional selling, general and administrative expense associated with the newly acquired BRAVEN, Gear4 and HALO brands, (2) increased marketing investments to support our growing portfolio of brands and products, (3) increased selling, general and administrative expense to support online channel and international geographic expansion, and (4) higher amortization of long-lived intangibles related to the BRAVEN, Gear4 and HALO acquisitions.
Net (loss) income
As a result of the factors noted above, we reported net loss of $(5.3) million, or diluted loss per share of $(0.18), for the three months ended June 30, 2019, compared to net income of $3.2 million, or diluted earnings per share of $0.11, for the three months ended June 30, 2018.
Adjusted EBITDA
Adjusted EBITDA decreased to $2.4 million compared to $10.9 million.
Six Months Ended June 30, 2019 and 2018 Summary Results
(Amounts in millions, except per share amounts)

For the Six Months Ended
Summary of year-to-date financial resultsJune 30, 2019June 30, 2018
Net sales$185.5 $230.6 
Gross profit$61.6 $75.3 
Gross profit margin33 %33 %
Net (loss) income$(19.8)$10.2 
Diluted (loss) earnings per share$(0.68)$0.36 
Diluted operating (loss) earnings per share$(0.52)$0.36 
Adjusted EBITDA$(6.6)$24.5 
Diluted shares outstanding29.0 28.7 

For the Six Months Ended
June 30, 2019June 30, 2018
Net sales by category
(%)
($)
(%)
($)
Protection (screen protection and cases)56 %$103.9 52 %$121.0 
Power (power management and power cases)32 %$58.7 36 %$83.9 
Audio%$7.4 %$11.1 
Productivity (keyboards and other)%$15.5 %$14.6 

For the Six Months Ended
June 30, 2019June 30, 2018
Net sales by channel
(%)
($)
(%)
($)
Indirect channel82 %$152.8 88 %$203.0 
Website12 %$21.5 %$18.9 
Franchisees%$11.2 %$8.7 

For the Six Months Ended
June 30, 2019June 30, 2018
Net sales by region
(%)
($)
(%)
($)
Domestic72 %$134.3 83 %$191.8 
International28 %$51.2 17 %$38.8 
2019 Year-to-Date Results Discussion
(All comparisons are 2019 consolidated versus 2018 consolidated, unless otherwise noted)
Net sales
399077497_exh993-netsalesimageq2.jpg
Net sales for the six months ended June 30, 2019, were $185.5 million, compared to net sales of $230.6 million for the six months ended June 30, 2018, a decrease of $45.1 million, or approximately 20%. The $45.1 million decrease in net sales was primarily attributable to (1) a decrease in sales of screen protection products due to a pull forward of shipments into the fourth quarter of 2018 ahead of a then-expected tariff increase and (2) decreased sales of mophie power management due to challenging sell-in comparisons during the first half of 2019. Decreases in mophie power management were offset by HALO product sales. In addition, decreases in net sales were partially offset by increased sales of Gear4 cases.
Gross profit
Gross profit for the six months ended June 30, 2019, was $61.6 million, or approximately 33% of net sales, compared to gross profit of $75.3 million, or approximately 33% of net sales for the six months ended June 30, 2018. Gross profit margin has not changed significantly due to decreases in our screen protection sales offset by (1) a reduction of credits and discounts, and (2) an increase in sales of Gear4 brand cases, HALO branded power products, and InvisibleShield VisionGuard products, all which have a higher margin than historical averages.
Operating expense
Operating expenses for the six months ended June 30, 2019, were $84.9 million, compared to operating expenses of $62.1 million for the six months ended June 30, 2018, an increase of $22.7 million, or approximately 37%. The $22.7 million increase in operating expenses was primarily attributable to (1) additional selling, general and administrative expense associated with the newly acquired BRAVEN, Gear4 and HALO brands, (2) increased marketing investments to support our growing portfolio of brands and products, (3) increased selling, general and administrative expense expense to support online channel and international geographic expansion, and (4) higher amortization of long-lived intangibles related to the BRAVEN, Gear4 and HALO acquisitions.
Net (loss) income
As a result of the factors noted above, we reported net loss of $(19.8) million, or diluted loss per share of $(0.68), for the six months ended June 30, 2019, compared to net income of $10.2 million, or diluted earnings per share of $0.36, for the six months ended June 30, 2018.
Adjusted EBITDA
Adjusted EBITDA decreased to $(6.6) million compared to $24.5 million.
Balance Sheet Highlights (as of June 30, 2019, December 31, 2018, and June 30, 2018)
June 30, 2019December 31, 2018June 30, 2018
Cash and cash equivalents$12.9 $15.8 $18.6 
Accounts receivable, net of allowances$102.6 $156.7 $84.0 
Inventories$110.6 $82.9 $69.7 
Line of credit$95.4 $58.4 $20.0 
Net debt (Total debt less cash)$82.5 $42.6 $1.4 
QTD Days sales outstanding (DSOs)87 87 65 
Inventory turns*5.0x 6.8x7.8x
* Inventory turns defined as trailing 12-month sales divided by period-end inventory. For year-over-year comparison purposes, June 30, 2019 and December 31, 2018 exclude the impact of 2018 and 2019 acquisitions.
Market Share Information
Screen Protection
From the first quarter of 2014 to the second quarter of 2019, InvisibleShield cellphone screen protection quarterly dollar market share increased from 29% to 45%. Despite several steady periods of decline over the last several years, it appears that market share losses have stabilized at 45%. Screen protection has experienced headwinds over the last few years as competition has increased at several retail outlets. To address this competitive threat, (1) we’ll be launching additional innovation into our screen protection line during the second half of 2019 to further bolster our InvisibleShield VisionGuard products and (2) launching a segmentation strategy across a number of retail customers that will allow us to address lower MSRP price points with less feature-rich products.
399077497_exh993-cellphonespq219.jpg
(Source: The NPD Group / Retail Tracking Service for each quarterly period; NPD data refers to dollar share and pertains only to U.S. retail sales)
Portable Power
Portable power dollar market share increased from 19% to 22% from the fourth quarter 2016 to second quarter 2019. The quarterly increases in the fourth quarters of 2017 and 2018 is driven primarily by on-air sales of HALO products. As new products are released into the market this Fall under the mophie, HALO and iFrogz brands, we expect to compete at all price bands and grow our overall market share.
399077497_exh993-portablebattery.jpg
(Source: The NPD Group / Retail Tracking Service for each quarterly period; NPD data refers to dollar share and pertains only to U.S. retail sales)
Battery Cases
From the fourth quarter of 2016 to the fourth quarter of 2018, mophie branded battery cases dollar market share increased from 44% to 67%. Quarterly battery case dollar market share decreased from 67% to 25% from the fourth quarter of 2018 to the first quarter of 2019 due to the launch of Apple branded battery cases during the first quarter of 2019. However, the Company announced the launch of the juice pack access during the first quarter of 2019 and loaded units into retail at the end of the quarter. As such, the quarterly battery case dollar market share increased to 36% in the second quarter of 2019. In addition, the monthly market share in the month of June exceeded 50%, securing the number one market share position in the most recent month NPD data was available. The Company expects battery case market share to increase throughout the second half as the juice pack access products will be launched closer to the release date of Fall OEM device launches than ever before in our history.
399077497_exh993-cellphonebatter.jpg
(Source: The NPD Group / Retail Tracking Service for each quarterly period; NPD data refers to dollar share and pertains only to U.S. retail sales)
Restructuring
In response to 2019 profitability headwinds and to position the Company for long-term profitable growth, the Company initiated a restructuring plan during the second quarter of 2019 and which extended into the third quarter of 2019. These initiatives include headcount reductions of approximately 10% of our global headcount, acceleration of cost synergies from recent acquisitions into 2019, and the reduction of a number of discretionary operating expense categories.
It is expected that 2019 results will include one-time severance restructuring charges totaling approximately $1.9 million, of which $0.4 million was recorded in the second quarter and the remaining will be recorded in the third quarter of 2019. These amounts have been incorporated into the guidance ranges provided. The headcount reductions are expected to provide gross annualized savings of approximately $8.0 million.
2019 Business Outlook
For the full year 2019, the Company now expects:
Net sales of $520 million to $550 million
Gross profit margin as a percentage of net sales in the mid 30's range
Adjusted EBITDA of $52 million to $62 million
Diluted operating earnings per share of $0.75 to $1.00
About Non-U.S. GAAP Financial Information
This Supplemental Financial Information - CFO Commentary (“CFO Commentary”) includes Adjusted EBITDA and Diluted Operating Earnings Per Share, which are not financial measures prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Readers are cautioned that (1) Adjusted EBITDA (earnings before stock-based compensation expense, depreciation and amortization, other income (expense), net, transaction costs, BRAVEN employee retention bonus, former CFO retention bonus, inventory step-up in conjunction with 2018 and 2019 acquisitions, consulting fee to former CEO, restructuring expenses and income tax (benefit) provision) and (2) Diluted Operating Earnings Per Share (diluted earnings per share excluding the impact of transaction costs, inventory step-up, and amortization expense – all in conjunction with the BRAVEN, Gear4 and HALO acquisitions, BRAVEN employee retention bonus, restructuring expenses and share-based compensation issued as retention) are not financial measures under U.S. GAAP. In addition, this financial information should not be construed as an alternative to any other measure of performance determined in accordance with U.S. GAAP, or as an indicator of 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. As such, it should be read only in conjunction with our consolidated financial statements prepared in accordance with U.S. GAAP. We present Adjusted EBITDA and Diluted Operating Earnings Per Share because we believe that these measures are helpful to some investors as a measure of performance and to normalize the impact of acquisitions. We caution readers that non-U.S. 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. We have provided a reconciliation of Adjusted EBITDA and Diluted Operating Earnings Per Share to the most directly comparable U.S. GAAP measures in the supplemental financial information attached to the press release to which this CFO Commentary is also attached.
Cautionary Note Regarding Forward-Looking Statements
This CFO Commentary contains (and oral communications made by us may contain) “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “predict,” “project,” “target,” “future,” “seek,” “likely,” “strategy,” “may,” “should,” “will” and similar references to future periods. Examples of forward-looking statements include, among others, statements we make regarding our outlook for the Company and statements that estimate or project future results of operations or the performance of the Company.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, 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 our products;
c.the ability to respond quickly with appropriate products after the adoption and introduction of new mobile devices by major manufacturers like Apple®, Samsung®, and Google®;
d.changes or delays in announced launch schedules for (or recalls or withdrawals of) new mobile devices by major manufacturers like Apple, Samsung, and Google;
e.the ability to successfully integrate new operations or acquisitions;
f.the impacts of inconsistent quality or reliability of new product offerings;
g.the impacts of lower profit margins in certain new and existing product categories, including certain mophie products;
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;
k.changes in U.S. and international trade policy and tariffs, including the possible effect of recent U.S. tariff proposals on selected materials used in the manufacture of products sold by the Company which are sourced from China;
l.adoption of or changes in accounting policies, principles, or estimates; and
m.changes in the law, economic and financial conditions, including the effect of enactment of US tax reform or other tax law changes.
Any forward-looking statement made by us in this CFO Commentary 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 our most recent Annual Report on Form 10-K and other reports we file 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. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise. The forward-looking statements contained in this CFO Commentary are intended to qualify for the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

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