ZAGG Inc (Nasdaq: ZAGG) (the “Company”), a leading global mobile
lifestyle company, today announced financial results for the first
quarter ended March 31, 2020.
First Quarter 2020 Review (Comparisons versus First
Quarter 2019)
- Net sales of $91.0 million, an increase of 16% compared to
$78.8 million
- Gross profit margin of (21%) compared to 30%
- Gross profit margin of 28%, excluding $44.8 million
non-cash March 2020 inventory write-down
- Net loss, inclusive of a $44.8 million non-cash March 2020
inventory write-down, $18.6 million non-cash impairment on
goodwill and $3.7 million non-cash loss on disposal of
intangible assets and equipment was $(75.6) million compared to
$(14.4) million
- Diluted loss per share of $(2.54) compared to of $(0.50)
- Adjusted EBITDA of $(7.5) million compared to $(9.0)
million
- Cash provided by operating activities of $5.8 million compared
to cash used in operating activities of $(12.1) million
- Instituted proactive measures in response to COVID-19 pandemic
to preserve liquidity, reduce costs, and focus the business
- Implemented restructuring plans that
include• Discontinuing the BRAVEN audio
brand,• Exiting the battery case category,
and• Simplifying our iFrogz audio, ZAGG keyboard and
mophie power station businesses.
Chris Ahern, Chief Executive Officer, commented, “Our first
quarter started off well and we were tracking to deliver a
meaningful year-over-year improvement in our bottom line through
mid-March when the outbreak of COVID-19 started to significantly
disrupt our business. Our thoughts are with everyone affected by
this pandemic and we want to express our gratitude to everyone on
the front lines working to keep our communities safe. As many of
our wholesale partners began closing their stores and reducing
hours in response to state and local guidelines, we took immediate
actions to reduce our go-forward operating costs and further
enhance our financial flexibility during this period of great
uncertainty. While certain regions of the country and the world
have started to ease COVID-19 related lockdown restrictions, the
overall impact on the global economy and our industry remains
unclear at this point. In addition to the cost saving measures we
implemented in 2019, we have taken additional steps to better
position ZAGG for long-term profitable growth. This includes
discontinuing certain lower margin brands and product categories,
further headcount reductions, and simplifying other core lines of
business. We believe our current plan will result in a more nimble
company that can better serve its key retail partners and core
consumers, and generate increased value for its shareholders.”
COVID-19 Response
The Company and its Board of Directors have
taken the following proactive measures to provide enhanced
financial flexibility during the COVID-19 pandemic:
- Closed on an amendment to the Company's secured revolving
credit facility to increase available borrowings by $19.8 million
through March 2021.
- Closed on a Small Business Administration loan under the U.S.
CARES Act of approximately $9.4 million.
- Implemented furloughs or lay-offs of approximately 20% of U.S.
employees and reduced the Company's Europe and Asia Pacific staff,
excluding China, by approximately 20%. Employees on furlough retain
their health insurance coverage throughout the furlough.
- Temporarily reduced salaries, including a 15% reduction for the
Chief Executive Officer, 10% reductions for the rest of the
executive team and 5% reductions for senior management.
- Temporarily reduced the cash portion of the Board of Directors’
compensation by 15% and replaced such compensation with stock-based
compensation.
- Deferred or cancelled spending on all non-essential
projects.
- Implemented a host of additional global cost reduction
initiatives.
- Cancelled or delayed purchase orders to align with adjusted
demand forecast.
The headwinds presented by COVID-19 also caused
the Company to critically assess the long-term profitability of all
brands and product lines, including a review of the recoverability
of inventory on hand due to the decline in demand brought on by
COVID-19. As a result of this strategic review and to position the
Company for long-term profitable growth, the Company initiated a
restructuring plan during the first quarter of 2020 (the “Strategic
Review”). These actions included:
- Discontinuing the BRAVEN audio brand,
- Exiting the battery case category, and
- Simplifying our iFrogz audio, ZAGG keyboard and mophie power
station businesses, including reducing SKU counts and discontinuing
certain product lines.
As a result, Q1 2020 results include the following one-time
charges:
- Inventory write-downs totaling $44.8 million, a significant
portion of which includes non-discontinued products that we
determined would not be sold above the prior carrying value due to
the decline in demand linked to COVID-19,
- Goodwill impairment charge totaling $18.6 million,
- Equipment write-off of $2.5 million from product tooling linked
to discontinued brands and product lines,
- Intangible asset write-off of $1.1 million from discontinued
brands and product lines, and
- Severance charges totaling approximately $0.5 million.
The Strategic Review combined with ongoing enhancements to the
supply and demand forecasting processes are expected to improve
operating margins long-term as the Company is exiting less
profitable brands and product lines, simplifying product offerings
resulting in fewer SKUs and lower potential inventory obsolescence,
and decreasing the operating expense burden to support these brands
and product lines.
First Quarter 2020 Results (Comparisons versus First
Quarter 2019)(Amounts in millions, except per share
amounts)
|
For the Three Months Ended |
|
March 31, 2020 |
|
March 31, 2019 |
|
|
|
|
Net sales |
$ |
91.0 |
|
|
|
$ |
78.8 |
|
|
Gross (loss)
profit |
$ |
(18.9 |
) |
|
|
$ |
23.8 |
|
|
Gross (loss) profit
margin |
(21 |
) |
% |
|
30 |
|
% |
Gross profit
(excluding March 2020 inventory write-down) |
$ |
25.9 |
|
|
|
$ |
23.8 |
|
|
Gross profit margin
(excluding March 2020 inventory write-down) |
28 |
|
% |
|
30 |
|
% |
Net loss |
$ |
(75.6 |
) |
|
|
$ |
(14.4 |
) |
|
Diluted loss per
share |
$ |
(2.54 |
) |
|
|
$ |
(0.50 |
) |
|
Adjusted
EBITDA |
$ |
(7.5 |
) |
|
|
$ |
(9.0 |
) |
|
Net sales increased 16% to $91.0 million, compared to $78.8
million. The increase in net sales was primarily attributable to
(1) an increase in sales of screen protection products and (2) an
increase in sales of the HALO and mophie wireless power product
lines. This was partially offset by lost sales of approximately
$9.0 million due to the impact of COVID-19.
Gross loss was $(18.9) million compared to gross profit of $23.8
million. The decrease in gross profit/(loss) was primarily
attributable to (1) the March 2020 inventory write-downs of
$44.8 million primarily linked to the discontinuation of
certain brands and product lines resulting from the Strategic
Review combined with decreased demand due to the effects of
COVID-19, (2) an increase in duty rates as a result of higher
tariffs on products sourced from China, and (3) an increase of
expedited freight and higher overall freight rates due to Chinese
factories coming back online later than planned following the
Chinese New Year due to COVID-19. Excluding the impact from the
inventory write-downs, gross profit margin was 28% for the three
months ended March 31, 2020, compared to 30% for the three months
ended March 31, 2019.
Operating expenses were $63.2 million (70% of net sales)
compared to $40.9 million (52% of net sales). The increase in
operating expenses was primarily attributable to (1) an
$18.6 million impairment charge to goodwill resulting from the
carrying value of our net assets exceeding our market
capitalization, (2) a $2.5 million charge from the write-off of
product tooling linked to discontinued brands and product lines,
(3) a $1.1 million write-off recorded for the intangible
assets resulting from discontinued brands and product lines, (4)
$0.5 million incurred in connection with the lay-off of
certain employees in March 2020, and (5) $1.1 million related to
expenses for InvisbleShield On Demand expansion into the Latin
America region. These increases were partially offset by cost
reduction initiatives.
Balance Sheet Highlights (as of March 31, 2020,
December 31, 2019, and March 31, 2019)
|
March 31, 2020 |
|
December 31, 2019 |
|
March 31, 2019 |
|
|
|
|
|
|
Cash and cash equivalents |
$ |
14.2 |
|
|
$ |
17.8 |
|
|
$ |
14.8 |
|
Accounts receivable, net of
allowances |
$ |
83.7 |
|
|
$ |
142.8 |
|
|
$ |
93.6 |
|
Inventories |
$ |
93.6 |
|
|
$ |
144.9 |
|
|
$ |
100.2 |
|
Line of credit |
$ |
99.5 |
|
|
$ |
107.1 |
|
|
$ |
93.4 |
|
Net debt (Total debt less cash) |
$ |
85.4 |
|
|
$ |
89.3 |
|
|
$ |
78.6 |
|
QTD Days sales outstanding (DSOs) |
84 |
|
|
69 |
|
|
107 |
|
2020 Business Outlook
As a result of ongoing disruption and uncertainty related to the
global COVID-19 pandemic, ZAGG previously withdrew its first
quarter and full-year 2020 outlook. The Company is not providing an
update at this time.
Conference Call
A conference call will be held today, May 28, 2020, at 5:00
p.m. Eastern Standard Time to review these results. Interested
parties may access the call via the Internet on the Company's
website at investors.zagg.com (the URLs are included 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 gross profit
(and corresponding gross profit margin) excluding March 2020
inventory write-downs. Readers are cautioned that (1) Adjusted
EBITDA (earnings before stock-based compensation expense,
depreciation and amortization, other expense, net, transaction
costs, BRAVEN employee retention bonus, former CFO retention bonus,
inventory step-up amount in connection with the acquisition of
HALO, severance expense, March 2020 inventory write-down,
impairment of goodwill, loss (gain) on disposal of intangible
assets and equipment (loss of discontinued brands, product lines,
and related product tooling), and income tax benefit) and (2) gross
profit (and corresponding gross profit margin) excluding March 2020
inventory write-downs (gross profit [and corresponding profit
margin] excluding March 2020 inventory write-downs of $44.8
million) are not financial measures prepared in accordance with
accounting principles generally accepted in the United States of
America (“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 gross profit (and
corresponding gross profit margin) excluding March 2020 inventory
write-downs 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 gross profit (and
corresponding gross profit margin) excluding March 2020 inventory
write-downs 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:
- the impacts of certain environmental and health
risks, including the recent outbreak of the coronavirus (COVID-19)
and its potential effects on the Company's operations, sourcing
from China, and future demand for the Company's products for an
uncertain duration of time;
- the ability to design, produce, and distribute the creative
product solutions required to retain existing customers and to
attract new customers;
- building and maintaining marketing and distribution functions
sufficient to gain meaningful international market share for our
products;
- 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®;
- changes or delays in announced launch schedules for (or recalls
or withdrawals of) new mobile devices by major manufacturers like
Apple, Samsung, and Google;
- the ability to successfully integrate new operations or
acquisitions;
- the impacts of inconsistent quality or reliability of new
product offerings;
- the impacts of lower profit margins in certain new and existing
product categories, including certain mophie products;
- the impacts of changes in economic conditions, including on
customer demand;
- managing inventory in light of constantly shifting consumer
demand;
- 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;
- changes in U.S. and international trade policy and tariffs,
including the effect of increases in U.S.-China tariffs on selected
materials used in the manufacture of products sold by the Company
which are sourced from China;
- adoption of or changes in accounting policies, principles, or
estimates; and
- changes in the law, economic and financial conditions,
including the effect of enactment of U.S. 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®, 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
website at www.ZAGG.com and follow us on Facebook, Twitter, and
Instagram.
CONTACT:
Investor Relations:ICR Inc.Brendon
Frey203-682-8216brendon.frey@icrinc.com
Company:ZAGG IncJeff DuBois801-506-7336jeff.dubois@ZAGG.com
|
ZAGG INC AND SUBSIDIARIESCONDENSED
CONSOLIDATED BALANCE SHEETS(Amounts in thousands, except
par value amounts)(Unaudited) |
|
|
|
|
|
|
|
March 31, 2020 |
|
December 31, 2019 |
|
|
|
|
|
ASSETS |
|
|
|
Current
assets: |
|
|
|
|
Cash and cash equivalents |
$ |
14,150 |
|
|
$ |
17,801 |
|
|
Accounts receivable, net of
allowances of $1,655 and $1,143 |
83,746 |
|
|
142,804 |
|
|
Income tax receivable |
2,330 |
|
|
— |
|
|
Inventories |
93,556 |
|
|
144,944 |
|
|
Prepaid expenses and other
current assets |
4,719 |
|
|
6,124 |
|
Total
current assets |
198,501 |
|
|
311,673 |
|
|
|
|
|
|
Property and
equipment, net of accumulated depreciation of $12,717 and
$14,159 |
15,247 |
|
|
18,019 |
|
Intangible assets,
net of accumulated amortization of $99,176 and $95,632 |
58,418 |
|
|
63,110 |
|
Deferred income
tax assets, net |
23,148 |
|
|
22,657 |
|
Operating lease
right of use assets |
9,208 |
|
|
9,636 |
|
Goodwill |
24,920 |
|
|
43,569 |
|
Other assets |
200 |
|
|
567 |
|
Total
assets |
$ |
329,642 |
|
|
$ |
469,231 |
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
Current
liabilities: |
|
|
|
|
Accounts payable |
$ |
50,854 |
|
|
$ |
87,303 |
|
|
Income tax payable |
— |
|
|
5,266 |
|
|
Sales returns liability |
30,571 |
|
|
43,853 |
|
|
Accrued wages and wage related
expenses |
6,785 |
|
|
6,328 |
|
|
Accrued liabilities |
12,771 |
|
|
15,164 |
|
|
Current portion of operating
lease liabilities |
2,583 |
|
|
2,099 |
|
Total
current liabilities |
103,564 |
|
|
160,013 |
|
|
|
|
|
|
Line of
credit |
99,540 |
|
|
107,140 |
|
Operating lease
liabilities |
9,674 |
|
|
10,599 |
|
Total
liabilities |
212,778 |
|
|
277,752 |
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
Common stock, $0.001 par
value; 100,000 shares authorized; 36,884 and 36,610 shares
issued |
37 |
|
|
37 |
|
|
Treasury stock, 7,055 and
7,055 common shares at cost |
(50,455 |
) |
|
(50,455 |
) |
|
Additional paid-in
capital |
117,552 |
|
|
116,533 |
|
|
Accumulated other
comprehensive loss |
(1,351 |
) |
|
(1,631 |
) |
|
Retained earnings |
51,081 |
|
|
126,995 |
|
Total
stockholders’ equity |
116,864 |
|
|
191,479 |
|
Total
liabilities and stockholders’ equity |
$ |
329,642 |
|
|
$ |
469,231 |
|
|
|
|
|
|
|
|
|
|
ZAGG INC AND SUBSIDIARIESCONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS(Amounts in thousands,
except per share amounts)(Unaudited) |
|
|
|
|
|
For the Three Months Ended |
|
|
March 31, 2020 |
|
March 31, 2019 |
|
|
|
|
|
Net
sales |
$ |
90,981 |
|
|
$ |
78,750 |
|
Cost of
sales |
109,923 |
|
|
54,928 |
|
Gross
(loss) profit |
(18,942 |
) |
|
23,822 |
|
|
|
|
|
|
Operating
expenses: |
|
|
|
|
Advertising and marketing |
4,426 |
|
|
4,585 |
|
|
Selling, general and
administrative |
32,593 |
|
|
31,586 |
|
|
Transaction costs |
345 |
|
|
247 |
|
|
Impairment of goodwill |
18,649 |
|
|
— |
|
|
Loss (gain) on disposal of
intangible assets and equipment |
3,683 |
|
|
(2 |
) |
|
Amortization of intangible
assets |
3,544 |
|
|
4,466 |
|
Total
operating expenses |
63,240 |
|
|
40,882 |
|
|
|
|
|
|
Loss from
operations |
(82,182 |
) |
|
(17,060 |
) |
|
|
|
|
|
Other
income (expense): |
|
|
|
|
Interest expense |
(1,534 |
) |
|
(1,010 |
) |
|
Other income (expense) |
2 |
|
|
(516 |
) |
Total
other expense |
(1,532 |
) |
|
(1,526 |
) |
|
|
|
|
|
Loss
before provision for income taxes |
(83,714 |
) |
|
(18,586 |
) |
|
|
|
|
|
Income tax
benefit |
8,159 |
|
|
4,162 |
|
|
|
|
|
|
Net
loss |
$ |
(75,555 |
) |
|
$ |
(14,424 |
) |
|
|
|
|
|
Loss per
share attributable to stockholders: |
|
|
|
|
Basic loss per share |
$ |
(2.54 |
) |
|
$ |
(0.50 |
) |
|
Diluted loss per share |
$ |
(2.54 |
) |
|
$ |
(0.50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ZAGG INC AND SUBSIDIARIESRECONCILIATION OF
NON-U.S. GAAP FINANCIAL INFORMATION TO U.S. GAAP(Amounts
in thousands)(Unaudited) |
|
|
|
|
UNAUDITED
SUPPLEMENTAL DATA |
|
|
|
|
|
|
|
|
The following
Adjusted EBITDA, Adjusted gross profit and Adjusted gross profit
margin 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 they fail 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. |
|
|
|
|
|
|
Three Months Ended |
ADJUSTED EBITDA RECONCILIATION |
March 31, 2020 |
|
March 31, 2019 |
|
|
|
|
|
Net loss in accordance with U.S. GAAP |
$ |
(75,555 |
) |
|
$ |
(14,424 |
) |
|
|
|
|
|
Adjustments: |
|
|
|
a. |
Stock-based compensation
expense |
1,294 |
|
|
1,185 |
|
b. |
Depreciation and
amortization |
5,376 |
|
|
6,057 |
|
c. |
Other expense, net |
1,532 |
|
|
1,526 |
|
d. |
Transaction costs |
345 |
|
|
247 |
|
e. |
BRAVEN employee retention
bonus |
— |
|
|
47 |
|
f. |
Former CFO retention
bonus |
— |
|
|
110 |
|
g. |
Inventory step-up amount in
connection with acquisition of HALO |
— |
|
|
431 |
|
h. |
Severance expense |
528 |
|
|
— |
|
i. |
March 2020 inventory
write-down |
44,833 |
|
|
— |
|
j. |
Impairment of goodwill |
18,649 |
|
|
— |
|
k. |
Loss (gain) on disposal of
intangible assets and equipment |
3,683 |
|
|
— |
|
l. |
Income tax benefit |
(8,159 |
) |
|
(4,162 |
) |
Total
Adjustments |
68,081 |
|
|
5,441 |
|
|
|
|
|
|
Adjusted
EBITDA |
$ |
(7,474 |
) |
|
$ |
(8,983 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ZAGG INC AND SUBSIDIARIESRECONCILIATION OF
NON-U.S. GAAP FINANCIAL INFORMATION TO U.S. GAAP(Amounts
in thousands, except per share amounts)(Unaudited) |
|
|
GROSS PROFIT
RECONCILIATION |
Three Months Ended |
|
|
March 31, 2020 |
|
March 31, 2019 |
|
|
|
|
|
Gross (loss) profit in accordance with U.S.
GAAP |
$ |
(18,942 |
) |
|
|
$ |
23,822 |
|
|
|
|
|
|
|
Adjustment: |
|
|
|
|
March 2020 inventory
write-down |
44,833 |
|
|
|
— |
|
|
Adjusted
gross profit |
$ |
25,891 |
|
|
|
$ |
23,822 |
|
|
|
|
|
|
|
Adjusted
gross profit margin |
28 |
|
% |
|
30 |
|
% |
|
|
|
|
|
|
|
|
ZAGG (NASDAQ:ZAGG)
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