SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
(Mark One)
x | | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
þ Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year endedDecember 31, 2015¨ | | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For2018
, or ¨ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____ to ____.
001-34528
(Commission
file number: 001-34528File Number)
ZAGG INCInc
(Exact name of registrant as specified in its charter)
NEVADA | | 20-2559624 | | | | | | |
Delaware | | 20-2559624 |
(State or other jurisdiction of incorporation or organization) | | Identification No.) |
910 West Legacy Center Drive, Suite 500; Midvale, UT | | 84047 |
(Address of principal executive offices) | | (Zip Code) |
Issuer’s
910 West Legacy Center Way, Suite 500, Midvale, Utah, 84047
(Address of principal executive offices, including zip code)
(801) 263-0699
(Registrant's telephone
number: (801) 263-0699number, including area code)
Securities registered under 12(b) of the Exchange Act:
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| Common Stock, $.001 par value | | The NASDAQNasdaq Stock Market LLC |
(Title of Class)each class) | | (Name of exchange on which registered) |
Securities registered under 12 (g)12(g) of the Exchange Act:None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yeso¨ Noþ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yeso¨ NoþIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 2 months (or for such shorter period that the registrant was required to submit and post such files). Yesþ Noo
Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo¨ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
Indicate by check mark if disclosure of delinquent filings pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.þ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. ☐
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¨ Large Accelerated Filer | | ☒þ Accelerated Filer |
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☐¨ Non-accelerated Filer (do not check if a smaller reporting company) | | ☐¨ Smaller Reporting Company |
¨ Emerging Growth Company | |
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. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso¨ NoþThe aggregate market value
Based on the closing sales price of the voting and non-voting common equity held by non-affiliates as of June
30, 2015,29, 2018, the last business day of the Registrant's second fiscal quarter, the aggregate market value on the Nasdaq Stock Market of the voting and non-voting common equity held by non-affiliates was
$201,435,759.approximately $239,702,802. For purposes of the foregoing calculation only, directors and executive officers and holders of 10% or more of the issuer’s common capital stock have been deemed affiliates.
The number of shares of the Registrant’s common stock outstanding as of March
1, 2016,12, 2019, was
27,655,181.28,932,923.Documents incorporated by reference. Portions of the Registrant's Definitive Proxy Statement for the Registrant's 2019 Annual Meeting of Stockholders are incorporated by reference in Part III of this report. The Definitive Proxy Statement or an amendment to this Form 10-K will be filed with the Securities and Exchange Commission within 120 days after the Registrant's fiscal year end.
ZAGG INC
FISCAL YEAR ENDED DECEMBERInc
Fiscal year ended December 31,
2015FORM2018
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PART ISECTION | | CONTENTS | | PAGE |
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PART II | | |
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PART III | | |
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PART IV | | |
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Special Note Regarding Forward-Looking Statements
Information included or incorporated by reference in this
Annual Report on Form 10-Kreport, including Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations”, contains forward-looking
statements.statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. All forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of
ZAGG Inc and its subsidiaries (collectively “we”, “us”, “our”, “ZAGG”, or the
Company.“Company”), and such forward-looking statements are covered by the safe-harbor provisions contained in the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. Forward-looking statements may contain the words
“believes,” “project,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “strategy,” “plan,” “may,”“believes”, “project”, “expects”, “anticipates”, “estimates”, “forecasts”, “intends”, “strategy”, “plan”, “may”, “will”, “would”, “will
” “would,” be”, “will
be,” “will continue,”continue”, “will likely
result,”result”, and similar expressions, and are subject to numerous known and unknown risks and uncertainties. Additionally, statements relating to implementation of business strategy, future financial performance, acquisition strategies, capital raising transactions, performance of contractual obligations, and similar statements may contain forward-looking statements. In evaluating such statements, prospective investors and shareholders should carefully review various risks and uncertainties identified in this
Report,report, including the matters set forth under the captions “Risk Factors” and in
the Company’sour other
SECSecurities and Exchange Commission (“SEC”) filings. These risks and uncertainties could cause
the Company’sour actual results to differ materially from those indicated in the forward-looking statements.
The Company disclaimsWe disclaim any obligation to update or publicly announce revisions to any forward-looking statements to reflect future events or developments.
Although forward-looking statements in this
Annual Report on Form 10-Kreport reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the heading “Risk Factors” below, as well as those discussed elsewhere in this
Annual Report on Form 10-K.report. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this
Annual Report on Form 10-K. We file reports with the Securities and Exchange Commission (“SEC”). You can read and copy any materials we file with the SEC at the SEC’s Public Reference Room, 100 F. Street, NE, Washington, D.C. 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.report.
We disclaim any obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Annual Report on Form 10-K.report. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this Annual Report on Form 10-K, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
We file reports with the SEC. The SEC maintains an internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. The URL is included here as an inactive textual reference.
Our Business (amounts
We are global innovation leaders in
thousands)ZAGG Inc (“we,” “us,” “our,” “ZAGG,” or the “Company”) is headquarteredaccessories and technologies that empower mobile lifestyles, with a commitment to enhance every aspect of performance, productivity, and durability in Midvale, Utah, and has an international office located in Shannon, Ireland. The Company designs, produces, and distributes professional and premium product solutions for mobile devices includingwith our creative product solutions. Our business was initially created from the concept of using a clear film originally designed to protect the blades of military helicopters in harsh desert conditions to protect consumers’ mobile devices. Since then, we have endeavored to continuously innovate and improve our products to meet changing customer needs, and now offer a wide array of innovative products in several product categories to protect, enhance, and create a better mobile device experience. Mobile devices are essential to modern living and our mission is to enable the optimal mobile lifestyle through the use of our products.
In addition to our home-grown brands, we have created a platform to combine category-creating and innovative brands that we have acquired to our existing house of brands to address specific consumer needs and empower a mobile lifestyle. We have an award-winning product portfolio that includes screen protection, (glasspower cases, power management, wireless charging, audio, mobile keyboards, protective cases, and film), keyboards for tablet computers andother mobile devices, keyboard cases, earbuds, mobile power solutions, cables, and casesaccessories sold under the ZAGG®, InvisibleShield®, mophie®, IFROGZ®, BRAVEN®, Gear4®, and InvisibleShieldHALO® brands. In addition, the Company designs, produces, and distributes earbuds, headphones, mobile power solutions, Bluetooth speakers, cases, and cables for mobile devices under the iFrogz brand in the fashion and youth oriented lifestyle sector. We maintain our corporate headquarters at 910 West Legacy Center Drive,Way, Suite 500;500, Midvale, UT,Utah, 84047. TheOur telephone number of the Company is 801-263-0699. Our801-263-0699 and our website address is www.ZAGG.com.addresses are www.ZAGG.com, www.mophie.com, www.Gear4.com, and www.HALO.com. The URL isURLs are included here as an inactive textual reference.references. Information contained on, or accessible through, our websitewebsites is not a part of, and is not incorporated by reference into this report.On February 2, 2016, the Company and ZM Acquisition, Inc., a Delaware corporation and wholly-owned subsidiary of the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with mophie inc., a California corporation (“mophie”). mophie’s headquarters is located in Tustin, California. The acquisition was closed on March 3, 2016.
On the terms and subject to the conditions set forth in the Merger Agreement, the former mophie owners received aggregate closing merger consideration of $100,000 in cash.
The former mophie owners will participate in an earn-out period from April 1, 2016 to March 31, 2017 whereby the Company will pay-out additional consideration equal to five times mophie’s stand-alone EBITDA (as defined in the Merger Agreement) less the $100,000 upfront payment (subject to certain tax adjustments, escrow payments and bonus payments to mophie employees). The earn-out consideration, if any, shall be paid by issuance of up to $5,000 of shares of the Company’s common stock, and then in cash. Such shares of Company common stock will be valued as of February 1, 2016, the day prior to the announcement of the Merger Agreement.
On March 3, 2016, the Company and mophie closed on the transaction described above. Given that the transaction closed shortly before the filing of this Annual Report on Form 10-K, no financial information from mophie will be provided10-K.
We have established four corporate objectives and seven core values to act as parta foundation for and guide our Company daily:
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| Corporate Objectives | | Core Values |
| The Preferred Brand | | Integrity |
| Creative Product Solutions | | Ownership |
| Targeted Global Distribution | | Care for People |
| Operational Excellence | | Passion |
| | Continuous Improvement |
| | Performance |
| | Sense of Urgency |
The corporate objectives are intended to align our functional teams’ goals and execution. Every one of
this filing. Historical financial information will be filedour employees is trained to understand his or her role in
executing these objectives. Each core value acts as a
Form 8-K within 75 dayskey component in working toward our corporate objectives of
providing creative product solutions, executing targeted global distribution, achieving operational excellence, and being the
close of the merger.preferred brand for our customers.
Our innovative products are included in the following general categories:
•Protection (screen protection and protective cases)
•Power (power stations, wireless chargers, and power cases)
•Audio (earbuds, headphones, and speakers)
•Productivity and Other (keyboards and other mobile accessory products)
These products are broken down by brand as follows:
InvisibleShield
– The “Protection” BrandThe Products
InvisibleShield brand is focused onproducts, including InvisibleShield Film, InvisibleShield Glass, and the InvisibleShield On Demand® (“ISOD”) solution, are designed to provide premium, lifetime protection for mobile device protection. Fromscreens against shattering or scratching through military-grade solutions. Our products are designed to provide peace of mind by enabling consumers to enjoy their mobile devices without the inconvenience of a shattered, cracked, or scratched screen. Our protective filmInvisibleShield Film and glass to cases, InvisibleShield device protectionGlass products offer customersconsumers a wide array of protection types and features, all with a limited lifetime guarantee.Our films werewarranty.
InvisibleShield Film was originally developed originally to protect the leading edge of rotary blades on military helicopters. Through constant innovation, we continue to formulate new filmsfilm that areis designed to offer the highest standards in self-healing scratch protection, and impact protection. We also continue to innovatedrive innovation around simplifying the customer installation methodsapplication experience like we have done with our patented EasyEZ Apply Double Tabs.All of our films
® tabs, which are designed to help users align and apply InvisibleShield products. Additionally, we provide long lastingcustom-fit screen protection for the surface of any electronic device subject to normal wear and tear. We accommodate a custom fit for thousands of device types as well as offer anthrough our automated OnDemandISOD solution. With our ISOD solution, so retailers can supply customersconsumers with screen protection for both new and oldnearly any device modelsmodel, all without having to hold excess inventory.In addition to our traditional InvisibleShield film products, we launched
InvisibleShield Glass during the first quarter of 2014, which is designed to provide premium screen protection and clarity, along with a superior feel and compatible touch sensitivity.Along During 2018, we launched InvisibleShield Glass + VisionGuard™ for Apple
® iPhone® smartphones, Apple iPad® tablets and Google® Pixel® smartphones, which features protective EyeSafe® technology that filters out portions of the harmful high-energy visible blue light spectrum emanating from device screens, while maintaining the superior color performance of the device display. In addition, we introduced InvisibleShield Ultra Clear™ in 2019 for selected smartphone models that offers maximum clarity and shatter protection with our film and glass products,an advanced glass-like surface that feels as smooth as the InvisibleShield brand offers mobile device cases, likesmartphone's original screen. We have the
popular Orbit case, which complement our InvisibleShieldleading market share in screen protection
products.in the United States (“U.S.”), and have maintained that leading position by consistently delivering innovative InvisibleShield products to the market. We intend to continue to innovate and expand our screen protection products to meet the evolution of new technological products and consumer needs in the market.
Gear4 Products
In late November 2018, we acquired Gear4 HK Limited (“Gear4”), one of the top selling smartphone case brands in the United Kingdom (“U.K.”), to strengthen our protective case product line. Gear4 protective cases exclusively feature D3O® technology, which is designed to provide the thinnest and most advanced impact and shock absorption - the same material used in professional sports, industrial, and military equipment applications. D3O materials, in its raw state, can flow freely when moved slowly, but on shock, lock together to absorb and disperse energy before instantly returning to their flexible state. In early 2019, we released the Chelsea product line, which is a new-to-market concept that allows consumers to express their style by swapping the design of their case with ease. With this new Gear4 innovation, consumers can easily insert the design between a Gear4 clear case and the device for the perfect combination of style and impact protection.
With D3O technology and our expansive global distribution channels, we believe Gear4 cases will offer the best mobile device protection experience for our customers and provide us with meaningful growth opportunities in our protective case protection product line.
mophie Products
mophie is a leading battery case, mobile power, and wireless charging brand with award-winning products designed to liberate mobile users from the limitations of mobile devices by providing more time to rock, talk, watch, game, surf, save, and send. Notably, the original juice pack® was designed to provide device-specific protection as well as additional battery power to many of the most popular mobile phones. mophie products are recognized for style and engineered for performance, providing a seamless integration of hardware, software, and design. Currently, the mophie ecosystem of mobile accessories is designed to provide both power and protection for virtually any mobile device. With groundbreaking battery cases, wireless charging, universal batteries, cables, adapters, and docks, mophie products represent innovation at the forefront of design and development.
mophie's innovative universal wireless charging pads are designed to provide an optimized charging experience with the latest Qi wireless charging technology for universal compatibility. During 2018, new charge stream powerstation® products were launched to ensure customers have access to easy, fast and convenient wireless charging anywhere and anytime for Apple, Samsung®, and other Qi-enabled mobile devices. In early 2019, we launched the new juice pack access battery cases to provide advanced impact protection for the Apple's latest smartphones that features extra battery life, wireless charging and full access to the iPhone Lightning port.
We continue to innovate and expand our power case and power management product lines under the mophie brand to provide new product experiences that are pleasing to consumers.
HALO Products
In January 2019, we acquired Halo2Cloud, LLC (“HALO”), a leading direct-to-consumer accessories company with an extensive intellectual property (“IP”) portfolio. HALO designs, develops, and markets innovative technology products to make consumers' lives easier through empowering mobile lifestyles. The HALO brand is committed to offering products at the nexus of fashion and function to power consumers' lives. HALO has a rich history in innovation that includes wireless charging, car and wall chargers, portable power, and power wallets, with a long-standing reputation as one of the top selling electronics brands on QVC®, a global leader in televised home shopping and e-commerce. We believe that the acquisition of HALO will enable us to offer, at scale, the most innovative mobile lifestyle solutions available on the market today and be better positioned to address the evolving needs of consumers around the world.
IFROGZ Products
IFROGZ products are strategically designed and positioned to bring personal audio to the value space by providing a product assortment that represents outstanding performance, active lifestyles, and dual-purpose designs that are on trend with consumers’ needs. IFROGZ refines today’s newest audio technology to deliver the features consumers want, while eliminating those that needlessly increase costs, so that everyone can participate in our increasingly mobile world.
IFROGZ EarPollution®product line of InvisibleShieldearbuds and headphones specifically target a younger demographic while still appealing to a wide spectrum of consumers. During 2018, we introduced the Sound Hub™ wireless earbud family. With this new line of wireless audio, customers have more customized options for their wireless audio as its Bluetooth® receiver turns any device with a 3.5mm jack, such as headphones, earbuds, and speakers, into a wireless audio device.
We continue to innovate and expand our headphone and earbud product lines under the IFROGZ brand to include offerings for all ages under both the EarPollution and Sound Hub product lines.
BRAVEN Products
In July 2018, we acquired BRAVEN Audio (“BRAVEN”) to expand our audio product profile. As creators and innovators of the rugged Bluetooth audio category, BRAVEN combines unparalleled design with cutting-edge technology to produce premium Bluetooth audio solutions for the outdoor adventurer and modern audio enthusiast. BRAVEN's intelligently designed products include robust craftsmanship and world-class engineering to create a thrilling audio experience. In 2019, we introduced the BRV™-360 and the BRV-105 Bluetooth speakers. The BRV-360 speaker was designed to withstand rain, waterfalls, or dunks in future periodslakes, Combine BRV-360's waterproof IP67 rating with 12 hours of playtime, the ability to charge a smartphone 2X’s, and a form factor that fits easily in responsethat handy water bottle holder on your adventure pack, The BRV-105 speaker is our most versatile and affordable Bluetooth speaker in the BRAVEN line. BRV-105 is a palm-sized portable speaker that blasts with full body sound. This lightweight, durable and waterproof speaker has an 8 hour playtime and can be attached to market changes.
sport accessories, belt loops, handle bars and more using its versatile elastic strap. While on the go, the internal speakerphone enables hands-free phone calls with noise-canceling technology to eliminate any unwanted background sound.
We anticipate that the combination of high audio quality, ease of use, and superior features will enable us to develop the BRAVEN brand into one of the fastest growing wireless audio brands in the industry.
ZAGG
– The “Tech-cessory” BrandTheProducts
Products under the ZAGG brand
stands for innovativeare designed to empower people to live their lives unleashed. Mobility is changing how consumers do everything in their lives and
efficient, “tech-cessory” products. Ourwe seek to drive the mobile lifestyle forward with products that are designed to allow consumers to be productive and connected at work, at play, and at rest. ZAGG products, which include keyboards and cases, are designed to free consumers from the confines of the traditional workplace. We believe “getting away” shouldn’t mean being disconnected. As such, our ZAGG products are designed to
be professional, and feature
premiumcutting-edge design and
materialsinnovation to provide portability, style, and productivity that
appealcan keep up with even the most active mobile users. We support the communicators, commuters, creators, and closers who live a mobile lifestyle. With the right ZAGG mobile accessories, we believe no one ever needs to
customers looking for the best possible mobile accessory solutions.Keyboards
feel tethered or held back.
ZAGG keyboards are designed to offer our customersconsumers an enhanced and innovative productivity experience. Since entering this category, in 2010, ZAGG haswe have continually reinvented its productthe ZAGG line of keyboards while also providing timely, curated solutions for new devices released by Apple, Microsoft®, and Samsung, andas well as other leading mobile device manufacturers.providers. In addition to device specificdevice-specific keyboards and folio keyboard cases, the ZAGG has produced a universal line of full sizeuniversal full-size Bluetooth keyboards are designed to be compatible with virtually any device and mobile operating system. During 2018, we expanded our keyboard lineup with the Flex
® universal keyboard and stand, which features a slim and portable design. The Flex universal keyboard can work with any Bluetooth device and make data entry fast and easy by eliminating hunt-and-peck typing. In early 2019, we unveiled the Slim Book™ Go, Rugged Book™ Go, and Messenger Folio™ keyboards for iPad and iPad Pro models which feature a protective, yet lightweight design that boasts backlit, laptop-style keys for ultimate productivity in today’s on-the-go world. We
expect to continue to innovate and expand our
Bluetoothwireless keyboard product lines as end users’ requirements evolve in this rapidly changing
market segment.Power
ZAGG portable batteries are designed to charge any device that utilizes a USB, including smartphones, tablets, handheld gaming systems, and digital cameras.
Audio
ZAGG audio products are designed to be innovative and provide the user with superior value. We expect to continue to strategically release ZAGG audio products in future periods.
iFrogz – market.
Our Strategy
The
“Play” BrandThe iFrogz brand stands for fun, clever, and youthful mobile accessory products. The brand has had success in a varietyfocus of categories with large retailers in and outside of the United States.
Audio
In 2007, iFrogz released its first audio products under the EarPollution product line. The eclectic selection of earbuds and headphones specifically targeted a younger demographic, but still appealed to a wide spectrum of consumers. Since the initial launch of the EarPollution™ audio line, iFrogz has continued to innovate and expand its headphone and earbud products to include offerings for all ages under both the EarPollution and iFrogz brands.
Starting in 2013, the iFrogz Audio line began including portable Bluetooth speakers that combine clever functionality and a playful look with impressive audio quality.
Cases
iFrogz began manufacturing cases in 2006, initially for the Apple iPod. These unique cases were well received by the market due to their blend of fashion, quality, and design. Initially, all sales were online, but in early 2007 iFrogz began distributing its case products through large retailers and began more firmly establishing itself as a youthful and fashion-oriented brand. The iFrogz case offerings have expanded to include a wide array of sleek and stylish cases for new generations of Apple iPod, iPhone, iPad, and Samsung Galaxy smartphones and tablets.
Power
iFrogz power products cover a wide array of configurations. These colorful chargers, power banks, and cables offer tremendous value for a wide demographic of consumers.
Strategy
At ZAGG, our focusbusiness is to (1) design creative product solutions for users of mobile devices, (2) sell these products to consumers through targeted global distribution partners, retail partners, and online, (3) drive operational excellence across the organization, and (3)(4) become the preferred brand through emphasizing innovation and product-quality, providing excellent customer service, and focusing on the end-users’ experience with our products. We focus our corporate, team, and individual goals to accomplish thisthese overall corporate strategy.
objectives.
We plan to continue to expand our product offerings, including
enteringcompeting in new product categories and entering new domestic and global markets that we believe will be consistent with our overall corporate strategy.
We believe that by innovating with existing product categories, entering new geographic markets, and competing in new product categories, we can achieve our stated objectives and meet our strategic goals.
We design
ourInvisibleShield filmour InvisibleShield Film and Glass products for application on thousands of specific electronic devices. Our logistics partners acquire precision-cut raw materials from exclusive third-party suppliers. These precision-cut
InvisibleShieldsInvisibleShield Film and Glass products either use the
EasyEZ Apply
Double Tabstabs installation or are packaged with an installation kit consisting of a moisture adhesive-activating solution, a squeegee, and instructions for application on specific electronic devices. We have established relationships with package assembly, shipping, and logistics companies worldwide that we expect will allow us to expand
our InvisibleShield film production and shipping capacity
for InvisibleShield Film and Glass production as we continue to grow and enter new markets.
We also customize each InvisibleShield
filmFilm cut design for the specific electronic device and currently have thousands of unique designs. Each cut design is developed internally and is owned exclusively by us. We do not own the patent for the raw materials, which is held by our exclusive supplier. Our
filmInvisibleShield Film supplier has contractually agreed to not sell the
rawbase materials to any of our competitors. We believe that our relationship with the manufacturer of the raw material is on excellent terms and anticipate no interruption in our ability to acquire adequate supplies of raw materials and produce products.
We manufacture our other mobile device accessories
(InvsibleShield glass,(InvisibleShield Glass, keyboards, keyboard cases, audio products, cases,
power cases, mobile power
solutions, wireless charging solutions, and other accessories) using third party contract manufacturers located primarily in Asia. We have established relationships with third-party manufacturers, package assembly, warehousing, shipping, and logistics companies that allow us to expand our accessories production and shipping capacity as we continue to grow our current customer base and enter new markets.
For all
ZAGGour products, we design the exterior packaging to ensure it is consistent with the overall marketing strategy and is consistent with the desires of our major retailer partners. We have designed the hard plastic and cardboard box packaging to be informative and attractive for point-of-sale displays. We outsource the production of packaging to various independent third parties.
Portable electronic devices, notably handheld devices, continue to advance in performance and functionality. Furthermore, the market is expanding as evidenced by continued innovative new product releases, particularly in
tabletssmartphones and
smartphones.tablets. Correspondingly, the aesthetics of such devices are increasingly important as buyers typically consider the look and feel of such devices, as much as performance, in making their purchasing decisions.
As a result,
an industry anda significant market has emerged for
(1) protecting portable electronic devices, notably the “high end” tablet and smartphone devices, and
(2) enhancing the consumer experience
withby providing power, audio, and other accessories for mobile electronic devices.
We sell each of our product lines to consumers of electronic and hand-held devices directly viathrough our websitewebsites and other key online e-tailers,retailers, and through our distributorsglobal distribution and retail partners. We sell a significant amount of product for use on Apple’s iPad, iPhone and iPod devices; Samsung’siPad devices, and Samsung Galaxy® smartphones and tablets; and Microsoft Surface tablets, thoughalthough we have experienced continued diversification as other manufacturers’ presence in the market has increased.
In addition to Apple and Samsung devices noted above, the handheld electronics industry has continued to marketdevelop and developmarket devices with touch screen interfaces, and several major manufacturers, including Google, Microsoft, Amazon®, Motorola®, Dell®, Lenovo®, Blackberry®, Xiaomi®, Huawei®, and HTC®, continue to release innovative products each year. The InvisibleShield product line is the ideal device protection offering for all types of gadgets, in particular touch-screentouchscreen devices, as it does not interfere with the functionality of the device while offering complete scratchproofscratch-proof protection. Our ZAGG keyboard product line is ideal for tablet and smartphone users as the product line includes keyboards that are both device specificdevice-specific and device agnostic,device-agnostic, which are compatible with many tablet and smartphone devices. In addition, our iFrogz AudioIFROGZ audio product lines offerline offers excellent enhancement to any mobile device. Last, we view portabledevice and BRAVEN audio product line provides high-end audio quality for outdoor adventure. Our mophie power solutionscases and power management line and our newly acquired HALO power product line are viewed as a potential marketopportunity for significant future growth as mobile devices become more ingrained in our day-to-day lives. Lastly, with our recently-acquired Gear4 protective case line, we offer stylish smartphone cases made with the innovative D3O material that provides the best protection to phone devices. We intend to continue to focus our marketing and innovation efforts around these types of product solutions that protect and enhance mobile devices.
With thousands of InvisibleShield products/product configurations available, we have a protective covering
available for all major market segments of handheld electronic devices,
including:including smartphones, tablets,
MP3 players, notebook computers, laptops, gaming devices,
GPS devices, watch faces,smartwatches, and similar devices and surfaces. We intend to continue to configure the InvisibleShield product for use in newly developed consumer devices. The InvisibleShield can be quickly configured, packaged, and shipped to customers for new devices as they enter the consumer marketplace, making
theour InvisibleShield available for purchase at the time of or within days of the launch of new electronic devices.
In addition, InvisibleShield OnDemand, a patent pending systemEqually important, ISOD, our solution used to cut an InvisibleShield for virtually any mobile device in seconds, makes it possible for retailers to have an InvisibleShield available on the launch date for all device releases.
Globally,
One of the
penetration of smart phones and tablets continues to expand. Most often,strongest market segments currently is the smartphone
andsegment. Along with the tablet
market, buyers are drawn to these devices by their elegant design, as well as their easy-to-use functionality. However, everyday use often mars the finish of the devices’
screenscreens and other areas that receive wear and tear.
The InvisibleShield
protection products, as well as ZAGG, mophie, and
iFrogzGear4 branded cases, offer excellent device protection, while not impeding
the style and the form or functionality of the smartphones and tablets and do not inhibit the touch sensitivity for smartphones and tablets with touch screen technology.
Specifically, the recent addition of VisionGuard technology to our InvisibleShield products enables us to help device users protect their eyesight while using their mobile devices. Further, our
ZAGG keyboard line provides a professional and innovative solution
with stylish and lightweight design to interact with tablets and
smartphones.smartphones that boasts ultimate productivity for the users. Our IFROGZ audio line enables technology-rich audio experiences from well-designed and intuitive products. Lastly, the mophie ecosystem provides both power and protection accessories for virtually any mobile device.
With our acquisition of BRAVEN Audio, we are able to offer the toughest audio products with high-end sound quality to outdoor enthusiasts who now can enjoy an incredible audio experience virtually anywhere they go. Such high quality audio products, together with our existing global distribution channel, will enable us to increase our visibility in this particular market.
With the addition of Gear4 to our portfolio of brands, we are better enabled to provide top-of-the-line and modern case protection using D3O technology to protect and accessorize today's mobile devices used by consumers around the world.
HALO adds new distribution channels to our portfolio, including HALO's strong relationship with QVC, a global leader in televised home shopping and e-commerce. By adding HALO to its portfolio of brands, we will be unique at offering, at scale, HALO's innovative products and be better positioned to address the evolving needs of consumers around the world.
As sales of
consumer electronics continue to grow, we anticipate that sales of our complementary accessory products will
also continue to
grow, as well. Thegrow. One of our largest areas of
market opportunity relates to the sale of our
market opportunities relate to salesproducts in conjunction with the release of
new smartphones and tablets. Management believes that
ZAGG iswe are positioned to serve market needs within this industry with our multiple
productsproduct lines that include
devicescreen protection,
keyboards and keyboardpower cases,
power management, wireless charging, audio, mobile
power,keyboards, protective cases, and
protective cases.other mobile accessories.
Marketing and Distribution
Domestically, we sell our products on our
website,websites, to big box electronics retailers,
towireless retailers, other product distributors and
toretailers, and franchisees that
own and operate
cellphone repair locations, kiosks, and
ZAGG brandedZAGG-branded stores in shopping malls and retail centers. In addition, our products are available for sale worldwide
viathrough our
website andwebsites as well as through retailers and
distributersdistributors we have partnered with from our
subsidiarysubsidiaries in
Shannon, Ireland.Ireland, China and other international locations. Currently, we advertise our products primarily on the
Internet,internet, on television through QVC spotlights, through print advertisements in conjunction with our retail partners, and through point of sale displays at retail locations. We intend to continue to strategically expand our advertising activities in
2016,2019, particularly through point of sales displays within
retailers.retailers, social media campaigns on the internet, and on QVC. We are also seeking to create
and improve strategic partnerships with makers of smartphones and tablets, electronic accessories, and mobile content providers to enhance our product offerings.
Indirect Channels (amounts in thousands) We sell our products through indirect channels, including big box
retailers, wireless retailers, domestic and international distributors, independent Apple retailers, university bookstores, and small independently owned consumer electronics stores. For the year ended December 31,
2015,2018, we sold
approximately $238,666$473,923 of product, or approximately
89%88% of our overall net sales
for 2015 through this channel. We
requireenter into reseller agreements with many of our indirect channel
partners to enter into a reseller agreement with us.partners.
We continue to sell directly to retailers or through distributors to market and place our products for sale in the
United StatesU.S. and non-U.S. markets. We have entered into distribution agreements with partners throughout the world for the marketing, distribution and sale of our products.
Website Sales (amounts(amounts in thousands) We sell our products worldwide directly to consumers on our websitewebsites at www.ZAGG.com. www.ZAGG.com, www.mophie.com, www.Gear4.com, and www.HALO.com.
For the year ended December 31, 2015,2018, we sold approximately $14,787$42,685 of product, or approximately 5%8% of our overall net sales, for 2015, through our website. The URL is included here as an inactive textual references. Information contained on, or accessible through,websites.
Franchises (amounts in thousands)
In addition to operating a corporate ZAGG-branded store, we sell our
website is not part of, and is not incorporated by reference into, this Annual Report on Form 10-K.
Franchisees and ZAGG Owned Stores (amounts in thousands)
We sell ourproductsproducts to franchisees that operate cellphone repair locations, kiosks, and ZAGG brandedZAGG-branded stores in shopping malls and retail centers. We enter into agreements with third-party franchisees who then purchase our products and resell them to consumers. As part of the standard franchise agreement, franchisees are charged an up-front fee that is recognized into revenue over the life of the franchise term. In addition, ZAGG operatesterm on a number of kiosks and ZAGG branded stores. straight-line basis.
For the year ended December 31,
2015,2018, we sold
approximately $15,858$21,623 of product, or approximately
6%4% of our overall net sales,
for 2015, through franchisees and our corporate owned
stores.Company Organization
Our operations are divided into two operating groups: ZAGG Domestic, which serves customers in the United States and Canada, and ZAGG International, which serves customers throughout the reststore.
Warranties
All our products purchased by consumers through authorized retailers have varying levels of
the world. Both ZAGG Domestic and ZAGG International are organized with sales, marketing, eCommerce, operations, product development and management, and general and administration functional departments. Although ZAGG Domestic and ZAGG International operated in different locations, the product offerings are the same, as are the manufacturers, distribution channels, and type of customer.warranty coverage. For
these and other reasons,InvisibleShield branded products, we
consider ZAGG Domestic and ZAGG International a single reporting segment under US generally accepted accounting principles (“US GAAP”).Warranties
We offer a limited lifetime guaranty of the durability of ourInvisibleShield products.warranty. If the InvisibleShield product is ever scratched or damaged (inin the course of normal use),use, a customer simply needs tomay return the old product and we will replace it for free.at no cost to the customer other than a minimal handling fee. The productsdevices to which the InvisibleShield product is applied typically have relatively short lives, which helps to limit our exposure for warranty claims. ForShould products that contain electronic components, the Company offers a one-year manufacturer’s warranty should the product cease to function properly, duringwe also offer manufacturer's warranties for our products. For ZAGG, IFROGZ, and BRAVEN branded products, we offer a one-year manufacturer's warranty and for mophie branded products, we offer a two-year manufacturer's warranty. For Gear4 branded products, we offer a limited lifetime warranty. HALO does not offer an extended manufacturer's warranty.
Suppliers
We do not directly manufacture any of our products, rather we employ various third-party manufacturing partners in the
first year.U.S. and Asia to perform these services on our behalf. The services employed by these third parties include the selection of sub-suppliers that provide raw materials and other components used in the manufacturing process. We have endeavored to use common components and readily available raw materials in the design of our products that can be sourced from multiple sub-suppliers. However, raw film used in our InvisibleShield Film and ISOD products has been produced by a single supplier for the last 10 years. Our InvisibleShield Film supplier has contractually agreed to not sell the raw materials to any of our competitors.
Below is a high-level summary by product category of the manufacturing sources used by us:
•Screen Protection – Our screen protection product line is comprised of InvisibleShield Glass products (approximately 86% of 2018 screen protection sales or 49% of net sales), InvisibleShield Film products (approximately 9% of 2018 screen protection sales or 5% of net sales), and ISOD film blanks (approximately 5% of 2018 screen protection sales or 3% of net sales). Our InvisibleShield Glass products are sourced from factories in Asia with protective glass expertise, each of which uses a number of sub-suppliers for raw materials and other components. Our InvisibleShield Film and ISOD products are sourced through our third-party logistics partner, who purchases the raw film inventory from a single supplier (as discussed above). The VisionGuard raw materials are provided to the manufacturers through an exclusive licensing agreement with a third-party partner.
•Protective Cases – Our protective case product line consists of (1) ZAGG cases designed to protect device specific mobile devices, and (2) Gear4 cases featuring D3O technology designed to protect smartphones and tablets. Our protective cases are sourced from factories in Asia with expertise in case protection manufacturing, each of which uses a number of sub-suppliers for raw materials and other components. For Gear4, the D3O raw materials are provided to our manufacturers through an exclusive licensing agreement with a third-party partner who is the sole manufacturer of D3O materials.
•Power Management – Our power management product line consists of power products that are designed to provide on-the-go power for tablets, smartphones, smartwatches, cameras, and virtually all other electronic mobile devices. With the addition of HALO, our power management product line includes power stations, wireless charging, car and wall chargers, portable power, power wallets, and more. Our power products are sourced from factories in Asia with battery expertise, each of which uses a number of sub-suppliers for raw materials and other components.
•Audio – Our audio product line consists of earbuds, headphones, and speakers that are designed to be compatible with virtually all electronic mobile devices. Our audio products are sourced from factories in Asia with audio expertise, each of which uses a number of sub-suppliers for raw materials and other components.
•Keyboards – Our keyboard product line consists of (1) device-specific keyboards designed to fit individual tablets produced by original equipment manufacturers, and (2) keyboards that are designed to be device-agnostic and can be used on virtually any mobile device. Our keyboard products are sourced from factories in Asia with keyboard expertise, each of which uses a number of sub-suppliers for raw materials and other components.
Our product and operations teams work closely with suppliers from initial product development and throughout the manufacturing process to ensure that (1) the supplier understands and will build according to product specifications, (2) appropriate quality is maintained for the finished goods and for all sub-components, and (3) the supplier can meet our supply needs.
Intellectual Property Rights
We own utility and design patents in the U.S. and in various foreign countries which correspond to a number of our products, including patents with claims focused on certain features of
ZAGG’sour InvisibleShield
protective filmsscreen protection for electronic devices.
ZAGG continuesAlthough we develop a portion of our IP through internal innovation, IP is also obtained through strategic acquisitions. We continue to actively pursue
furtheradditional IP for our developing product portfolio, including patents and applications for our InvisibleShield screen protection
for its InvisibleShield protective films and associated methods in the
United StatesU.S. and in foreign countries, having filed patent applications for (i) both wet and dry application processes for securing protective
filmsInvisibleShield Film products to consumer electronic devices; (ii) dry-application protective
films;InvisibleShield Film products; and (iii) on-demand production of electronic device accessories, including
films.InvisibleShiled Film products. In addition,
ZAGG haswe have filed applications, and in some instances secured patents, for a variety of
itsour battery cases, mobile power, wireless charging, keyboard, audio and protective
cases and keyboardcase products.
ZAGG hasWe have additional patents pending in the U.S. and internationally for a variety of current and expected products.
ZAGG owns
We own thousands of InvisibleShield
protective filmFilm designs for protecting a variety of consumer electronic devices. New designs are routinely added to
ZAGG’sour portfolio to accommodate the newest electronic devices on the market.
Additionally, ZAGG iswe are the owner of numerous trademarks for use in connection with itsour goods and services. ZAGG hasWe have acquired many trademarks through our strategic acquisitions, have filed formal applications for a variety of trademarks, and hashave further secured trademark registrations for many of itsour trademarks in both the U.S. and in foreign countries.
ZAGG has
We have strategically developed relationships and,
in some cases, exclusive agreements with
a number of third partythird-party vendors and suppliers.
ZAGG’sOur long-standing
relationshiprelationships with
its raw material suppliers and
its manufacturers
expandsexpand the scope of potential
intellectual propertyIP protection available to
ZAGG,us, including development of innovative solutions for protective
films.films and glass. These relationships also provide
ZAGGus with a reasonable expectation that
itwe will be able to supply customers with products long into the future.
ZAGG regularly files patent
Our InvisibleShield Film, VisionGuard, and
trademark applicationsD3O suppliers retain the patents and IP rights for products developed on our behalf, though these suppliers have contractually agreed to
protect its inventions, designs and trademarks. While ZAGG believes thatnot sell the
ownershipraw materials to any of
intellectual propertyour competitors. IP protection held by us varies in effectiveness in preventing certain aspects of competition. Although we believe IP protection is
an important
to itsfactor in our business and that
itsour success
is baseddoes depend in part
uponon the ownership
of intellectual propertythereof, or exclusive rights
ZAGG’sthereto, we view the following as our keys to past and future success: (1) our distribution relationships with customers, (2) the speed with which we can bring a product to market, and (3) our ability to effectively launch a product into market to generate maximum sales. We also believe our success is
also based upon creative product solutions, establishing the preferred brand among both retailers and consumers,
and targeted global
distribution.Patentsdistribution and Trademarks
operational excellence.
The Company currently holds rightsaddition of our BRAVEN, Gear4, and HALO brands has added to patents relatingour expanding IP portfolio. We believe that this IP, which includes patent and trademark protections, will assist us in developing competitive advantages with our technology into the future.
Protection of IP is important to us and we protect IP when appropriate; however, we do not view IP in our industry as the key barrier to entry because of our rapidly changing industry. Often, by the time we receive patent or other IP protection on a product that would serve as a barrier to entry, the market has moved on to new technologies or products. Given this, we are selective in the IP we pursue, measuring the cost to protect certain aspects of its products. The Company has registered or has applied for trademarksIP against the potential benefit.
Due to our close partnership with suppliers in Asia, our third-party logistics partner, and the manufacturer of the raw film used in our InvisibleShield and ISOD products, our product development teams work directly with these partners in the U.S. and a numberdevelopment of foreign countries. Although the Company believes the ownership of suchproducts. Our key suppliers in Asia have contractually agreed that we will retain all patents and trademarks is an important factor in its businessIP rights to products that arise through our relationship, including design changes and that its success does depend in part oninnovations regardless of who instigates the ownership thereof, the Company relies primarily on the innovative skills, technical competence,product development change.
Employees
As of December 31, 2018, we had 618 full-time and
marketing abilities of its personnel.
The Company regularly files patent applications to protect innovations arising from its research, development and design, and is currently pursuing a number of patent applications. Over time, the Company has accumulated a portfolio of issued patents. No single patent or trademark is solely responsible for protecting the Company’s products. The Company believes the duration of its patents is adequate relative to the expected lives of its products.
Because of technological changes in the industries in which the Company competes, current extensive patent coverage and the rapid rate of issuance of new patents, it is possible that certain components of the Company’s products may unknowingly infringe existing patents or intellectual property rights of others. From time to time, the Company has been notified that it may be infringing certain patents or other intellectual property rights of third parties.
Employees
We have 166 full-time employees and 68 part-time employees, (total of 234), including our management team. 211491 of our employees are located in the United StatesU.S. and support our domestic operations, while 127 employees are located outside the operations of ZAGG Domestic, while there are 23 employees located in IrelandU.S. to support our ZAGG Internationalinternational operations. No employee is represented by a labor union, and we have never suffered an interruption of business caused by labor disputes. We believe our relationship with our employees is good.
good and have made efforts to ensure fair compensation, competitive benefits, and a positive working environment.
We are innovation leaders in mobile tech accessories for smartphones, tablets, smartwatches, and other mobile technology. For over 10 years, we have developed creative product solutions that enhance and protect mobile devices for consumers around the world. We have an award-winning product portfolio that includes screen protection, power cases, power management, wireless charging, audio, mobile keyboards, protective cases, and other mobile accessories sold under the ZAGG, InvisibleShield, mophie, IFROGZ, BRAVEN, Gear4, and HALO brands.
In June 2011, we acquired IFROGZ, an audio company, which expanded our product lines beyond screen protection and keyboards.
In March 2007, the Company changed its name from ShieldZone Corporation to ZAGG Incorporated to better position the Company for expansion2016, we acquired mophie, a leader in the mobile device accessories industry through organicpower management and power case categories. This acquisition further diversified our product lines into key growth product categories. The results of operations of mophie are included in our results of operations beginning on March 3, 2016.
In July 2018, we acquired BRAVEN, a rugged Bluetooth speakers and targeted acquisitions. The ShieldZone name was very specific to the screen protectionearbuds provider, which offers a high quality audio experience for outdoor adventurers. This new product line and although screen protection is a core product line,brand enables us to reach new markets and customer demographics. The results of operations of BRAVEN are included in our results of operations beginning on July 20, 2018.
In November 2018, we acquired Gear4, one of the
name change has provided the Company with the opportunity to add new product categories to its product portfolio. During 2011, the Company changed its name from ZAGG Incorporated to ZAGG Inc.In June 2011, ZAGG acquired iFrogz, which diversified the ZAGG product lines, particularly for audio and protectivetop selling smartphone case accessories.
In March 2016, ZAGG acquired mophie, which further diversified the existing ZAGG product lines, particularly for power management and battery case accessories.
The Company designs, produces, and distributes professional and premium product solutions for mobile devices including screen protection, keyboards for tablet computers and mobile devices, keyboard cases, earbuds, mobile power solutions, cables, and cases under the ZAGG and InvisibleShield brands. In addition, the Company designs, produces, and distributes earbuds, headphones, mobile power solutions, Bluetooth speakers, cases, and cables for mobile devices under the iFrogz brandbrands in the fashionU.K., for its stylish phone cases which are designed with D3O technology. D3O technology can provide incredible protection to smartphones and youth oriented lifestyle sector. Effectiveother electronic devices by using shock absorbing materials. We believe this acquisition will expand our product offering to better meet the needs of our smartphone consumers for innovative case protection. The results of operations of Gear4 are included in our results of operations beginning on December 1, 2018.
In January 2019, we acquired HALO, a leading direct-to-consumer accessories company with an extensive IP portfolio. HALO designs, develops and markets innovative technology products to make consumers' lives easier. This acquisition will enable us to enter new distribution channels, and to leverage new technology to enter into new consumer markets. The results of operations of HALO are not included in our results of operations as the
first quarter of 2016, the Company designs, produces, and distributes power management and battery case accessories under the mophie brand.ZAGG intends to continue to identify complimentary proven products and companies that fit the ZAGG growth strategy.
acquisition closed in January 2019.
Seasonal Business
The Company has historically experienced increased net sales in its fourth fiscal quarter compared to other quarters in its fiscal year due to increased holiday seasonal demand. This historical pattern should not be considered a reliable indicator of the Company’s future sales or financial performance.
In addition, the Company has
We have historically been positively impacted near the time of major device launches by Apple, Samsung, Google, and Samsung,other device manufacturers, particularly when there is a change in form factor. We expect major device launches to continue to positively impact our operations during 20162019 and beyond.
Because of the following factors, as well as other factors affecting the Company’s financial condition and operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.
Risks Related to our Financial Condition
(amounts in thousands)
If we are unable to maintain our line of credit facility or have a significant change in our
maximum borrowing
base,amount, we could face a deficiency in our
short termshort-term cash needs that would negatively impact our
business (amounts in thousands).In connection with the acquisition of mophie, the Companybusiness.
On April 12, 2018, we entered into
a Creditan amended and
Security Agreementrestated credit and security agreement with KeyBank National Association (“KeyBank”)
, as administrative agent,
Swing Line Lender and Issuing Lender, KeyBanc Capital Markets Inc.
, Zions Bank, as sole lead arranger and
JPMorgan Chase (“sole book runner, and other members of the lender group, which was subsequently amended by a first amendment agreement dated as of November 28, 2018 (as amended, the “2018 Credit and Security Agreement”).
The 2018 Credit and Security Agreement provides an $85,000$125,000 ( “Maximum Revolver Amount” ) revolving credit commitment (“(the “2018 Revolver”). which is not subject to borrowing base limitations. In addition, at our option, (i) up to $40,000 of the 2018 Revolver may be made available for the issuance of letters of credit, and (ii) we may obtain a term loan or increase the Maximum Revolver Amount of the 2018 Revolver by another $25,000 within a specified period defined in the 2018 Credit and Security Agreement. Borrowings and repayments under the 2018 Revolver may occur from time to time in the Company’sour ordinary course of business through the maturity date of March 2, 2021,April 11, 2023, at which time any amounts outstanding are to be paid in full (60-month term). All borrowings under the Revolver are subject to a borrowing base limit, which is calculated from outstanding accounts receivable and inventory on hand, and is reported to the administrative agent monthly. Interest on the 2018 Revolver will accrueaccrues either at the base rate plus a margin of 0.250% to 1.375% or Eurodollar rate plus a margin of 1.250% to 2.375%, in each case, based on the Leverage Ratio (as defined in the 2018 Credit and Security Agreement) plus 0.50% or LIBOR plus 1.50%. The Revolver is subject to an unused line fee calculated as 0.20% multiplied by the average unused amount of the Revolver.
The2018 Credit and Security Agreement also providesrequires us to pay a $25,000 term loanmonthly commitment (“Term Loan”).fee with a rate that can fluctuate between 0.175% and 0.275% based on the Leverage Ratio as defined in the 2018 Credit and Security Agreement. Payments on the Term Loanmonthly commitment fee are to be madepayable quarterly in consecutive monthly installmentsarrears, commencing on AprilJuly 1, 20162018, and continuing until the Term Loan is paid in full on March 2, 2020 (48-month term).Interest on the Term Loan will accrue at the base rate plus 1.0% or at a rate of LIBOR plus 2.0%.
each regularly scheduled payment date thereafter.
The
Credit and Security Agreement also provides for letters of credit with a fronting fee of 0.125% (paid per annum) for all issued and outstanding letters of credit.The2018 Credit and Security Agreement contains a number of financial and non-financial debt covenants, and the amount available under the Revolver is limited to the borrowing base calculated on a monthly basis.covenants. If we are not compliant with the covenants or have a reduction infail to fulfill our borrowing base,payment obligation, our ability to access the 2018 Revolver will be limited and the outstanding borrowings under the Term Loan may be declared immediately due and payable.limited. In such event, our short-term cash requirements may exceed available cash on hand resulting in material adverse consequences to our business. If we need to obtain additional funds as a result of the termination of the 2018 Credit and Security Agreement or the acceleration of amounts due thereunder, there can be no assurance that alternative financing can be obtained on substantially similar or acceptable terms, or at all. Our failure to promptly obtain alternate financing could limit our ability to implement our business plan and have an immediate, severe and adverse impact on our business, results of operations, financial condition and liquidity. In the event that no alternative financing is available, we would be forced to drastically curtail operations, or dispose of assets, or cease operations altogether.
The restrictive covenants contained in our
2018 Credit and Security Agreement may limit our activities.
Ourobligations under the
2018 Credit and Security Agreement are secured by
all or substantially all of
the Company’s assets and the majority of the equity in foreign subsidiaries.our assets. Under the 2018 Creditand Security
Agreement, we are subject to specified affirmative covenants customary for loans of this type. We are also subject to certainand negative covenants customary for loans of this type.Failure to comply with the restrictive covenants could accelerate the repayment of any debt outstanding under the
2018 Creditand Security
Agreement. Additionally, as a result of these restrictive covenants, we may be at a disadvantage compared to our competitors that have greater operating and financing flexibility than we do.Our level of indebtedness reduces our financial flexibility and could impede our ability to operate.
The
2018 Credit and Security Agreement requires us to pay a variable rate of interest, which will increase or decrease based on variations in
LIBOR.interest rates. Additionally, fluctuations in interest rates can significantly decrease our profits. We do not have any hedge or similar contracts that would protect us against changes in interest rates.
The amount of our indebtedness could have important consequences for us, including the following:
| · | requiring us to dedicate a substantial portion of our cash flow from operations to make payments on our debt, thereby reducing funds available for operations, future business opportunities and other purposes; |
| · | limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; |
| · | making it more difficult for us to satisfy our debt obligations, as any failure to comply with such obligations, including financial and other restrictive covenants, could result in an event of default under the Credit and Security Agreement, which could lead to, among other things, an acceleration of our indebtedness or foreclosure of the collateral, which could have a material adverse effect on our business or financial condition; |
| · | limiting our ability to borrow additional funds, or to sell assets to raise funds, if needed, for working capital, capital expenditures, acquisitions or other purposes; and |
| · | increasing our vulnerability to general adverse economic and industry conditions, including changes in interest rates. |
•requiring us to dedicate a substantial portion of our cash flow from operations to make payments on our debt, thereby reducing funds available for operations, future growth opportunities and other purposes;
•limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
•making it more difficult for us to satisfy our debt obligations, as any failure to comply with such obligations, including financial and other restrictive covenants, could result in an event of default under the Credit and Security Agreement, which could lead to, among other things, an acceleration of our indebtedness or foreclosure of the collateral, which could have a material adverse effect on our business or financial condition;
•limiting our ability to borrow additional funds, or to sell assets to raise funds, if needed, for working capital, capital expenditures, acquisitions or other purposes; and
•increasing our vulnerability to general adverse economic and industry conditions, including changes in interest rates.
We may not generate sufficient cash flows from operations to service and repay our debt and related obligations and have sufficient remaining funds to achieve or sustain profitability in our operations, meet our working capital and capital expenditure needs or compete successfully in our industry, which would have a material adverse effect on our operations.
Increases in interest rates may increase our interest expense and adversely affect our cash flow and our ability to service our indebtedness.
As of December 31, 2018, we had $58,363 of debt outstanding which was subject to variable interest rates. This variable rate debt had a total weighted average interest rate of approximately 4.03% per annum as of December 31, 2018. Increases in interest rates on this variable rate debt would increase our interest expense, which could harm our cash flows.
Risks Related to our Company and Business
Because sales of consumer electronic accessories are dependent on new products, product development and consumer acceptance, we could experience sharp decreases in our sales and profit margin if we are unable to continually introduce new products and achieve consumer acceptance.
The consumer and mobile electronics accessory industries are subject to constant and rapidly changing consumer preferences based on performance features and industry trends. We generate all of our sales from our consumer and mobile electronics accessories business. We cannot assure
youour stakeholders that we will be able to grow the revenues of our business or maintain profitability. Our consumer accessories business depends, to a large extent, on the introduction and availability of innovative products and technologies. We believe that our future success depends, in large part, upon our ability to enhance our existing products and to develop, introduce, and market new products and improvements to our existing products.
However, if we are not able to continually innovate and introduce new products that achieve consumer acceptance, our sales and profit margins may decline. Our revenues and profitability will depend on our ability to maintain existing and generate additional customers and develop new products. A reduction in demand for our existing products would have a material adverse effect on our business. The sustainability of current levels of our business and the future growth of such revenues, if any, depends on, among other factors:
| · | the overall performance of the economy and discretionary consumer spending, |
| · | competition within key markets, |
| · | continued customer acceptance of our products, |
| · | customer acceptance of newly developed products, and |
| · | the demand for other products and services. |
•the overall performance of the economy and discretionary consumer spending;
•competition within key markets;
•continued customer acceptance of our products;
•customer acceptance of newly developed products; and
•the demand for other products and services.
We cannot provide assurance that we will maintain or increase our current level of revenues or profits in future periods.
While we are pursuing and will continue to pursue product development opportunities, there can be no assurance that such products will come to fruition or become successful. Furthermore, while a number of those products are being tested, we cannot provide any definite date by which they will be commercially available or financially viable. We may experience operational problems with such products after commercial introduction that could delay or defeat the ability of such products to generate revenue or operating profits. Future operational problems could increase our costs, delay our plans, or adversely affect our reputation or our sales of other products which, in turn, could have a material adverse effect on our success and our ability to satisfy our obligations. We cannot predict which of the many possible future products will meet evolving industry standards and consumer demands. We cannot provide assurance that we will be able to adapt to such technological changes, offer such products on a timely basis or establish or maintain a competitive position.
Because we sell indirectly to customers through third-party retailers who operate traditional brick-and-mortar locations, the shift of sales demographics to more online retail business could harm our market share and our revenues.
Part of our current business model includes indirectly selling our products through third-party retailers. These third-party retailers operate physical brick-and-mortar locations to sell our products to our end customers. The current shift in purchasing demographics due to the changing preferences of customers who are moving from in-store purchases of goods to the convenience of online purchases creates additional risks of current revenue streams being impacted negatively and an overall decrease of market share.
Because we face intense competition, including competition from companies with significantly greater resources than ours,
if we
aremay be unable to compete effectively with these companies, our market share may decline, and our business could be harmed.
Our market is highly competitive with numerous competitors. Some of our competitors may have substantially greater financial, technical, marketing, and other resources than we possess, which may afford them competitive advantages over us. As a result, our competitors may introduce products that have advantages over our products in terms of features, functionality, ease of use, and revenue producing potential. They may also have more fully developed sales channels for consumer sales including large retail seller arrangements and international distribution capabilities. In addition, new companies may enter the markets in which we compete, further increasing competition in the consumer electronics accessories industry. Increased competition may result in price reductions, reduced profit margins, loss of market share, and an inability to generate cash flows that are sufficient to maintain or expand our development and marketing of new products, which would adversely impact our financial performance.
Because we are dependent on third party sources to acquire sufficient quantities of raw materials to produce our products, any interruption in those relationships could harm our results of operations and our revenues.
We do not manufacture any of our products; rather, we employ various third party manufacturing partners to perform these services on our behalf. The services employed by these third parties include the selection of sub-suppliers that provide raw materials and other components used in the manufacturing process. Our manufacturing partners acquire substantially all of the raw materials that we use in our products from a
limited numbervariety of suppliers.
Accordingly, weWe can give no assurance that:
| · | our supplier relationships will continue as presently in effect, |
| · | our suppliers will not become competitors, |
| · | our suppliers will be able to obtain the components necessary to produce high-quality, technologically-advanced products for us, |
| · | we will be able to obtain adequate alternatives to our supply sources should they be interrupted, |
| · | if obtained, alternatively sourced products of satisfactory quality would be delivered on a timely basis, competitively priced, comparably featured or acceptable to our customers, and |
| · | our suppliers will have sufficient financial resources to fulfill their obligations. |
•our supplier relationships will continue as presently in effect;
•our suppliers will not become competitors;
•our suppliers will be able to obtain the components necessary to produce high-quality, technologically-advanced products for us;
•we will be able to obtain adequate alternatives to our supply sources should they be interrupted;
•if obtained, alternatively sourced products of satisfactory quality would be delivered on a timely basis, competitively priced, comparably featured or acceptable to our customers; and
•our suppliers will have sufficient financial resources to fulfill their obligations.
Our inability to procure sufficient quality and quantities of products that are in demand could reduce our profitability and have a
material adversenegative effect on our relationships with our customers. If any of our supplier relationships are terminated or interrupted, we could experience an immediate or long-term supply shortage, which
couldwould have a
material adversenegative effect on our business.
Because we do not
internally developown all the technology
for a number ofincorporated in our
key products, including the InvisibleShield film products, the impact of technological advancements may cause profit margin erosion and adversely impact our profitability and inventory value.
Because
Although protection of IP is important to us and we protect IP when appropriate, we do not internally developview IP in our industry as an effective barrier to entry because of the technologyrapidly changing industry in which we operate. Very often, by the time we receive patent or other IP protection on a product that would serve as a barrier to entry, the market has moved on to new technologies or products. Given this, we are very selective in what we decide to protect, measuring the cost to protect certain aspects of IP against the potential benefit.
Due to our close partnership with suppliers in Asia, our third-party partners, and the manufacturer of the raw film used in our InvisibleShield Film and ISOD products, alongside our partnerships for
a numberD3O and VisionGuard raw materials, our product development teams work directly with these partners in the development of products. Our key suppliers in Asia have contractually agreed that we will retain all patents and IP rights to products that arise through our relationship, including design changes and innovations regardless of who instigates the product development change. These suppliers retain the patents and IP rights for products it develops on our behalf, though has contractually agreed to not sell the raw materials to any of our
key products,competitors. As we do not own the IP for raw materials, including the InvisibleShield
filmFilm, D3O, and VisionGuard products, we cannot provide assurance that we will be able to source technologically advanced products
in the future in order to remain competitive. Furthermore, the introduction or expected introduction of new products or technologies may depress sales of existing products and technologies. This may result in declining profit margins and inventory obsolescence. Because we maintain a substantial investment in product inventory, declining prices and inventory obsolescence could have a material adverse effect on our business and financial results.
Although we do not own the patent for the film, D3O, and VisionGuard raw materials, which is held by our exclusive suppliers, these suppliers have contractually agreed to not sell the raw materials to any of our competitors. We believe that our relationship with the manufacturer of the raw material is on excellent terms and anticipate no interruption in our ability to acquire adequate supplies of raw materials and produce products.
Our estimates of excess and obsolete inventory may prove to be inaccurate, in which case the net realizable value for excess and obsolete inventory may be understated or overstated. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in
demandtechnology or
technological developmentsdemand could have a significant impact on the value of our inventory and operating results.
There can be no guarantee that we will be able to expand into additional complementary product categories or to continue to configure our products to match new products or devices.
Although we anticipate expanding into additional complementary product categories to provide support to our strategy to provide creative product solutions to mobile device users, there can be no guarantee that we will be successful in innovating and expanding into additional product categories. Numerous factors, including market acceptance, finding and retaining contract partners that are acceptable to
ZAGG,us, and general market and economic conditions, could prevent us from participating in these complementary product categories, which could limit our ability to implement our business strategy.
Similarly, although we intend to continue to configure the screen protection, keyboards, audio,
battery cases, power management,
wireless charging, cases, and other product categories for new products and devices, there can be no guarantee that we will be able to either match the
current demand for our products as new devices and products are introduced, or that purchasers of such devices and products will want to purchase our products for use in connection with them. Any limitation in our ability to match demand or gain market acceptance of our products in connection with new devices and products could have a material adverse effect on our business.
Breaches of our information technology systems may materially damage business partner and customer relationships, curtail or otherwise adversely impact access to online stores, or subject
the Companyus to significant reputational, financial, legal, and operational consequences.
Our business requires that
the Companywe use and store customer, employee and business partner personally identifiable information (“PII”), which may include, among other information, names, addresses, phone numbers, email addresses, contact preferences, tax identification numbers, and payment account information.
The Company requiresWe require user names and passwords in order to access
itsour information technology systems.
The CompanyWe also
usesuse encryption and authentication technologies designed to secure the transmission and storage of data and prevent access to
Companyour data or accounts.
As with all companies, theseThese security measures are subject to
the risk of third-party security breaches, employee error, malfeasance, faulty password management, or other irregularities. For example, third parties may attempt to fraudulently induce employees or customers into disclosing user names, passwords or other sensitive information, which may in turn be used to access our information technology systems. To help protect
customerscustomer and
the Company, the Company monitorsvendor information and our own information, we monitor accounts and systems for unusual activity and may freeze accounts under suspicious circumstances, which may result in the delay or loss of customer orders.
In May 2018, the European Union (“EU”) adopted a regulation to protect personal data for all individuals within the EU and the European Economic Area (“GDPR”), which also covers personal data that is exported outside the EU and EEA areas. We conduct our business worldwide and therefore, we are subject to GDPR standards. In order to comply with GDPR, we may incur additional costs to amend certain of our business practices and systems. In addition, we may be susceptible to investigations, enforcement actions, regulatory penalties or significant legal liability if we violate any regulations related to data security incidents or privacy. In an event of such violation, we could be impacted adversely in our business, operating results and financial performance.
The Company devotes
We devote significant resources to network security, data encryption and other security measures to protect
itsour systems and data, but these security measures cannot provide absolute security. To the extent
the Company waswe were to experience a breach of
itsour systems and
waswere unable to protect sensitive data, such a breach could materially damage business partner and customer relationships, and curtail or otherwise adversely impact access to online stores and services. Moreover, if a computer security breach affects
the Company’sour systems or results in the unauthorized release of PII,
the Company’sour reputation and brand could be materially damaged, use of
the Company’sour products and services could decrease, and
the Companywe could be exposed to
a riskrisks of loss or litigation and possible liability. While
the Company maintainswe maintain insurance coverage that, subject to policy terms and conditions and subject to a significant self-insured retention, is designed to address certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses or all types of claims that may arise in the continually evolving area of cyber risk.
If we fail to maintain proper inventory levels, our business could be harmed.
We produce our key products prior to the time we receive customers’ purchase orders. We do this to minimize purchasing costs, the time necessary to fill customer orders, and the risk of non-delivery. However, we may be unable to sell the products we have produced in advance. Inventory levels in excess of customer demand may result in inventory write-downs, and the sale of excess inventory at discounted prices could significantly impair our brand image and have a material adverse effect on our operating results and financial condition. Conversely, if we underestimate demand for our products or if we fail to produce the quality products that we require at the time we need them, we may experience inventory shortages. Inventory shortages might delay shipments to customers, negatively impact distributor relationships, and diminish brand loyalty.
Mobile electronic devices typically have relatively short life cycles. We may be left with obsolete inventory if we do not accurately project the life cycle of different mobile electronic devices. The charges associated with reserving slow-moving or obsolete inventory as a result of not accurately estimating the useful life of mobile electronics could negatively impact the value of our inventory and operating results.
As we continue to grow our business into new markets, including internationally, it may put pressure on our gross profit margins.
The Company looks
We seek to continue
itsour expansion into new markets, including
internationally.additional international markets. As
the Company expandswe expand into new international markets through distributors, new indirect customers, and existing relationships with current indirect customers, it is possible that this expansion will adversely impact our consolidated gross profit margins. Accordingly, there is no assurance that we will continue to recognize similar gross profit margins in the future to those currently being realized.
As we continue to grow our business, entrance into new and complimentary product categories may put pressure on our gross profit margins.
We anticipate expanding into additional complementary product categories or in expanding our footprint in current product categories to support our strategies to provide creative product solutions to mobile device users and to diversify our product portfolio. However, there can be no guarantee that this expansion will occur at or above the gross profit margins we have historically realized. Accordingly, there is no assurance that we will continue to recognize similar gross profit margins in the future to those currently being realized.
The Company has contractual rights customary in the industry to use its Internet addresses, but if these rights were lost, the loss could have a material effect on the Company’s financial position and results from operations.
The Company has protected the right to use its Internet addresses to the extent possible, and the Company does not expect to lose its rights to use the Internet addresses. However, there can be no assurance in this regard, and such loss could have a material adverse effect on the Company’s financial position and results of operations.
Because we are dependent
for our success on key executive officers
for our success, our inability to retain these officers
wouldcould impede our business plan and growth strategies, which
wouldcould have a negative impact on our
business and the value of your investment.business.
Our success depends on the skills, experience and performance of key members of our management team including
Randy Hales,Chris Ahern, our
President and CEO;chief executive officer (“CEO”), Brian Stech, our president, Bradley J. Holiday, our
CFO; Steve Tarr,chief financial officer (“CFO”), and Jim Kearns, our
COO, and Brian Stech, our Executive VP of Sales and Marketing.chief operating officer. Although we have employment agreements with these individuals, were we to
unexpectedly lose one or more of these key executive officers, we
wouldcould be forced to expend significant time and money in the pursuit of a replacement, which
wouldcould result in both a delay in the implementation of our business plan and the diversion of working capital.
We can provide no assurance that we could find satisfactory replacementsThus, our board of directors has implemented succession plans for
each of these
key executive officers at all, or on terms that would not be unduly expensive or burdensome toroles, and systematically monitors the
Company. Although we routinely issue equity-based compensation to attractdevelopment and
retain employees,progression of each employee who has been identified as a possible future candidate for such
incentives may not be sufficient to attract and retain key personnel.roles.
A small number of our
retailerscustomers account for a significant amount of our net sales, and the loss of, or reduced purchases from, these or other
retailerscustomers could have
a materialan adverse effect on our operating results.
For the year ended December 31, 2018, Superior Communications, Inc. (“Superior”) and Best Buy Co., Inc. (“Best Buy”) were our largest customers and accounted for 10% or greater than 10% of net sales. For the year ended December 31, 2017, Superior was our largest customer. For the year ended December 31, 2016, Superior, Best Buy, and GENCO Distribution Systems, Inc. (“GENCO”) were our largest customers. The amount of net sales for each of these customers was as follows:
For
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | | | |
| 2018 | | 2017 | | 2016 |
| | | | | |
| Superior | 23% | | | 30% | | | 27% | |
| Best Buy | 10% | | | 9% | | | 11% | |
| GENCO | 4% | | | 8% | | | 11% | |
During the years ended December 31,
2015, 2014, or 2013, four2018, 2017, and 2016, no other customers accounted for
over 10%
of sales in a given year:| | | 2015 | | 2014 | | 2013 |
| Customer A | | | 20 | % | | | 30 | % | | | 26 | % |
| Customer B | | | 9 | % | | | 11 | % | | | 18 | % |
| Customer C | | | 11 | % | | | 11 | % | | | 6 | % |
| Customer D | | | 17 | % | | | 6 | % | | | 5 | % |
No other customer account balances were moreor greater than 10% of sales during 2015, 2014, or 2013.If the Company loses one or more of the Company’s significant customers, it would have a material adverse effect on the Company’s financial condition, results of operations, and cash flows.
net sales.
Although we have contracts in place governing our relationships with customers, the contracts are not long-term and all of our retailers generally purchase from us on a purchase order basis. As a result, these retailers generally may, with little or no notice or penalty, cease ordering and selling our products, or materially reduce their orders. If any of these retailers cease selling our products, slow their rate of purchase of our products, or decrease the number of products they purchase, our results of operations could be adversely affected.
If we lose one or more of our significant customers, it would have a material adverse effect on our financial condition, results of operations, and cash flows.
We may be adversely affected by the financial condition of our retailers and distributors.
Some of our retailers and distributors have experienced financial difficulties in the past. A retailer or distributor experiencing such difficulties will generally not purchase and sell as many of our products as it would under normal circumstances and may cancel orders. In addition, a retailer or distributor experiencing financial difficulties generally increases our exposure to uncollectible receivables. We extend credit to our retailers and distributors based on our assessment of their financial condition, without requiring collateral. While such credit losses have historically been within our estimated reserves for allowances for bad debts, we cannot assure that this will continue to be the case. Financial difficulties on the part of our retailers or distributors could have a material adverse effect on our results of operations and financial condition.
At
As of December 31,
20152018 and
2014,2017, the balance of accounts receivable from
threetwo separate customers
has exceeded 10%:
| | | 2015 | | 2014 |
| Customer A | | | 29 | % | | | 48 | % |
| Customer B | | | 5 | % | | | 14 | % |
| Customer C | | | 31 | % | | | 4 | % |
Superior and Best Buy. The amount of accounts receivable for each of these customers is was as follows:
| | | | | | | | | | | |
| December 31, | | |
| 2018 | | 2017 |
| | | |
| Superior | 50% | | | 31% | |
| Best Buy | 15% | | | 18% | |
No other customer account balances were more than 10% of accounts receivable
atas of December 31,
20152018 or
2014.2017. If one or more of our significant customers were to become insolvent or were otherwise unable to pay for the products provided, it would have a material adverse effect on our financial condition and results of operations.
If we fail to attract, train and retain sufficient numbers of our qualified personnel, our prospects, business, financial condition and results of operations
willmay be materially and adversely affected.
Our success depends to a significant degree upon our ability to attract, retain and motivate skilled and qualified personnel. Failure to attract and retain necessary technical personnel, sales and marketing personnel, and skilled management could adversely affect our business. If we fail to attract, train, and retain sufficient numbers of these highly qualified people, our prospects, business, financial condition, and results of operations
willmay be materially and adversely affected.
If our products contain defects, our reputation could be harmed and our results of operations adversely affected.
Some of our products may contain undetected defects due to imperfections in the underlying
rawbase materials used in production or manufacturing defects. The occurrence of defects or malfunctions could result in financial losses for our customers and in turn increase warranty claims from our customers and diversion of our resources. Any of these occurrences could also result in the loss of or delay in market acceptance of our products
due to damaged brand reputation and
may result in the loss of sales.
Because we experience seasonal and quarterly fluctuations in demand for our products, no one quarter is indicative of our results of operations for the entire fiscal year.
Our quarterly results may fluctuate quarter to quarter as a result of market acceptance of our products, the sales mix, changes in pricing, the timing of inventory write downs, changes in the cost of materials, the use of airfreight to transport products,
the incurrence ofand incurring other operating costs and factors beyond our control, such as general economic conditions and actions of competitors. We are also affected by seasonal buying cycles of consumers, such as the holiday season, and the introduction of popular consumer electronics, such as a new introduction of products from Apple, Samsung, Microsoft, HTC,
Blackberry,Google, and others. Accordingly, the results of operations in any quarter will not necessarily be indicative of the results that may be achieved for a full fiscal year or any future quarter.
Because we have limited protection on the intellectual propertyIP underlying our products, we may not be able to protect our products from the infringement of others or may be prevented from marketing our products.
We do not own proprietary rights with respect to the film we use in our InvisibleShield products. However, we have protected key proprietary design and utility elements of other products through patents. In addition, we own and keep confidential the design configurations of the film and the product cut designs which are our copyrights. We seek to protect our
intellectual propertyIP rights through confidentiality agreements with our employees, consultants and partners, and domestic and foreign patent prosecution and similar means. However, no assurance can be given that such measures will be sufficient to protect our
intellectual propertyIP rights or that the
intellectual propertyIP rights that we have are sufficient to protect other persons from creating and marketing substantially similar products. If we cannot protect our rights, we may lose our competitive advantage. Moreover, if it is determined that our products infringe on the
intellectual propertyIP rights of third parties, we may be prevented from marketing our products.
Claims relating to the infringement of third-party proprietary rights, even if not meritorious, could result in costly litigation, divert management’s attention and resources, or require us to either enter into royalty or license agreements which are not advantageous to us or pay material amounts of damages. In addition, parties making these claims may be able to obtain an injunction, which could prevent us from selling our products.
We face potential class action and derivative lawsuits and other potential liabilities that could materially adversely impact our business, financial condition and results of operations.
We have been, are currently, and may
Uncertainty in the
future be the subject of various lawsuits and proceedings. In September 2012, we and certain of our current and former officers and directors were named as defendants in two putative class action lawsuits.The plaintiffs in the putative class action lawsuits claimed that as a result of Robert G. Pedersen's alleged December 2011 margin account sales, the defendants initiated a succession plan to replace Mr. Pedersen as our CEO with Mr. Hales, but failed to disclose either the succession plan or Mr. Pedersen's margin account sales, in violation of Sections 10(b), 14(a), and 20(a), and SEC Rules 10b-5 and 14a-9, under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).On February 7, 2014, the Court entered an order granting the Company’s motion to dismiss the consolidated complaint.On February 25, 2014, plaintiffs filed a notice of appeal with the U.S. Court of Appeals, Tenth Circuit. The Tenth Circuit heard oral argument on the appeal on January 22, 2015, and issued a decision affirming the dismissal of all claims on August 18, 2015.On December 19 and 28, 2012, two shareholder derivative complaints were filed against several of the Company’s current and former officers and directors in the United States District Court for the District of Utah. These complaints make allegations similar to those presented in the consolidated class action lawsuit, and allege various state law causes of action, including claims for breach of fiduciary duty, waste of corporate assets, unjust enrichment, and insider trading. These complaints seek unspecified damages on behalf of the Company, which is named solely as a nominal defendant against whom no recovery is sought. On February 26, 2013, the District Court consolidated thePikkandRosenberg actions under the captionIn re ZAGG Inc. Shareholder Derivative Litigation, and on June 5, 2013, plaintiffs filed a consolidated complaint. On April 4, 2014, the defendants filed a motion to dismiss the consolidated complaint, which the court granted on October 9, 2014. On January 8, 2015, plaintiffs filed a notice of appeal with the U.S. Court of Appeals, Tenth Circuit. Briefing for the appeal was completed on October 1, 2015, and the Tenth Circuit heard oral argument on January 19, 2016. The Tenth Circuit has not yet issued a decision.
On December 14, 2012, a shareholder derivative complaint was filed against several of the Company’s current and former officers and directors in Utah state court. The complaint made allegations similar to those presented in the consolidated class action lawsuit and alleged claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment. The plaintiff in this action sought damages on behalf of the Company, which is named as a nominal defendant against whom no recovery is sought. TheMorgansternaction was dismissed pursuant to a stipulated motion to dismiss on January 22, 2016.
In the fourth quarter of 2012, the Company received requests to provide documentation and information to the staff of the SEC in connection with an investigation being conducted by the SEC’s Salt Lake City office. The Company believes the investigation includes a review of the facts and circumstances surrounding some of the same issues raised by the plaintiffs in the above lawsuits, including whether the Company failed to disclose Mr. Pedersen’s margin account sales. The Company responded to these requests and is cooperating with the staff although there has been no resolution to date.
See "Item 3-Legal Proceedings" for more information about these matters. In defending and ultimately resolving these matters, we may be required to pay amounts in excess of any insurance, divert management's attention from the operation of our business or change our business practices, any of which could materially adverselyeconomy can affect our business, financial condition, results of operations, liquidity and, consequently, the trading price of our common stock.
The current economy is affecting consumer spending patterns, which could adversely affect our business.
Consumer spending patterns, especially discretionary spending for products such as mobile, consumer, and accessory electronics, are affected by, among other things, prevailing economic conditions, energy costs, raw material costs, wage rates, inflation, interest rates, consumer debt, consumer confidence, and consumer perception of economic conditions. A general slowdown in the U.S. and certain international economies, or an uncertain economic outlook or market volatility could have a material adverse effect on our sales and operating results.
The disruptions in the national and international economies due to market volatility and uncertainty could depress consumer confidence and spending. If such conditions persist, consumer spending will likely decline further and this would have an adverse effect on our business and our results of operations.
If we are unable to effectively manage our growth, our operating results and financial condition will be adversely affected.
We intend to grow our business through strategic acquisitions and organically by expanding our sales and product development organizations. Any growth in or expansion of our business is likely to place a strain on our management and administrative resources, infrastructure, and information systems. As with other growing businesses, we expect that we will need to refine and expand our business development capabilities, our systems and processes, and our access to financing sources. We also will need to hire, train, supervise, and manage new employees. These processes are time consuming and expensive, will increase management responsibilities and will divert management attention. We provide no assurance that we will be able to:
•expand our systems effectively or efficiently or in a timely manner;
•allocate our human resources optimally;
•meet our capital needs;
•identify and hire qualified employees or retain valued employees; or
•incorporate effectively the components of any business or product line that we may acquire in our effort to achieve growth.
If our competitors misappropriate our proprietary know-how and trade secrets, it could have a material adverse effect on our business.
We depend heavily on the expertise of our product development team. If any of our competitors copy or otherwise gains access to similar products independently, we might not be able to compete as effectively. The measures we take to protect our designs may not be adequate to prevent their unauthorized use. Further, the laws of foreign countries may provide inadequate protection of such
intellectual propertyIP rights. We have brought and in the future may need to bring legal claims to enforce or protect such
intellectual propertyIP rights. Any litigation, whether successful or unsuccessful, could result in substantial costs and diversions of resources.
If any of our facilities were to experience catastrophic loss, our operations would be seriously harmed.
Our facilities could be subject to a catastrophic loss from fire, flood, earthquake, or terrorist activity. Our
corporate activities, including sales and marketing, customer service, finance, and other critical business operations are in
twoa limited number of primary locations. Our manufacturing and logistics activities are conducted at other facilities separate from our corporate headquarters. Any catastrophic loss at these facilities could disrupt our operations, delay production and revenue, and result in large expenses to repair or replace the
facility.facilities. While we
have obtainedmaintain insurance to cover most potential losses, we cannot provide assurance that our existing insurance coverage will be adequate against all other possible losses.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results, and current and potential stockholders may lose confidence in our financial reporting.
We are required to establish and maintain adequate internal control over financial reporting that provides reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with
US GAAP.U.S. generally accepted accounting principles (“U.S. GAAP”). We are likewise required, on an annual basis, to evaluate the effectiveness of our internal controls and to disclose on a quarterly basis any material changes in those internal controls.
Any failure to maintain and continue to improve our internal controls could adversely impact our ability to report our financial results on a timely and accurate basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations or may lose confidence in our reported financial information. Likewise, if our financial statements are not filed on a timely basis as required by the SEC and
Thethe Nasdaq Global Market, we could face severe consequences from those authorities. In either case, it could result in a material adverse effect on our business or have a negative effect on the trading price of our common stock.
Because we distribute products internationally, economic, political and other risks associated with our international sales and operations could adversely affect our operating results.
Because we sell our products worldwide, our business is subject to risks associated with doing business internationally. Our sales to customers outside the
United StatesU.S. accounted for approximately
9%16% of our net sales in fiscal
2015.2018. Accordingly, our future results could be harmed by a variety of factors, including:
| · | changes in foreign currency exchange rates; |
| · | changes in regulatory requirements; |
| · | changes in a specific country's or region's political or economic conditions; |
| · | tariffs, other trade protection measures and import or export licensing requirements; |
| · | potentially negative consequences from changes in tax laws or application of such tax laws; |
| · | difficulty in staffing and managing widespread operations; |
| · | changing labor regulations; |
| · | requirements relating to withholding taxes on remittances and other payments by subsidiaries; |
| · | different regimes controlling the protection of our intellectual property; |
| · | restrictions on our ability to own or operate subsidiaries, make investments or acquire new businesses in these jurisdictions; and |
| · | restrictions on our ability to repatriate dividends from our subsidiaries. |
•changes in foreign currency exchange rates;
•exchange controls;
•changes in regulatory requirements;
•changes in a specific country's or region's political or economic conditions;
•tariffs, other trade protection measures and import or export licensing requirements;
•potentially negative consequences from changes in tax laws or application of such tax laws;
•difficulty in staffing and managing widespread operations;
•changing labor regulations;
•requirements relating to withholding taxes on remittances and other payments by subsidiaries;
•different regimes controlling the protection of our IP;
•restrictions on our ability to own or operate subsidiaries, make investments or acquire new businesses in these jurisdictions; and
•restrictions on our ability to repatriate dividends from our subsidiaries.
Our international operations are affected by global economic and political conditions, only some of which are described above. Changes in economic or political conditions in any of the countries in which we operate could result in exchange rate movement, new currency or exchange controls or other restrictions being imposed on our operations. We cannot provide assurance that such changes will not have an adverse effect on our foreign operations and our financial results.
There can be no guarantee that additional amounts spent on marketing or advertising will result in
receipt of additional sales or
revenue to the Company.revenues.
In
2016,2019, management intends to
expandcontinue expanding our advertising with
moreadditional interactive displays within retailers,
and to continue ourfurther marketing efforts relating to existing products and potential new product
introductions.introductions, and increased social media marketing campaigns. However, there can be no guarantee that such increased advertising or marketing efforts and strategies will result in increased sales.
If
Changes in U.S. tax laws could cause uncertainty in our various tax conclusions.
On December 22, 2017, the Company does not effectively manage its global supply chain management functionsU.S. President signed into law a sweeping tax reform bill known as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The Tax Act changed the corporate tax rate, business-related deductions and taxation of foreign earnings, among other things, that were generally effective for taxable years beginning after December 31, 2017. The Tax Act, or any related, similar or amended legislation or other changes in U.S. federal income tax laws, could adversely affect the U.S. federal income taxation of our and our affiliates’ ongoing operations and may also adversely affect the integration efforts relating to, and potential synergies from, past strategic transactions. Any such changes and related consequences could have a material adverse impact on our financial results.
U.S. tariffs and international trade disputes could increase the cost of our products or make our products more expensive for customers.
On July 6, 2018, the U.S. Government imposed a 25% tariff on a variety of imports from China and on September 17, 2018, imposed a 10% tariff on additional products from China, which rate was schedule to be increased to 25% on March 1, 2019. The March 1, 2019 deadline was extended by the U.S. Government in late February 2019 with RR Donnelley,no new deadline announced. In response to the 2018 tarriffs, China imposed a 5% to 10% tariff on certain U.S. goods. A scheduled tariff increase on Chinese goods of 25% to occur on March 1, 2019 was suspended due to trade deal discussions still in progress. Our products have been impacted by the September 17, 2018 tariff, and would be further impacted by possible tariff rate increases that are possible under current trade negotiations. These international trade disputes could result in additional or RR Donnelley does not adequately performincreased tariffs and other protectionist measures that could adversely affect our business. Tariffs generally increase the supply chain management services it has been engagedcost of our products and the components and raw materials that go into making them. These increased costs could adversely impact the gross margin that we earn on sales of our products. Tariffs could also make our products more expensive for customers, which could make our products less competitive and reduce consumer demand. Countries may also adopt other protectionist measures that could limit our ability to provide, inventory receiptsoffer our products and services.
We are uncertain of the potential future magnitude that these and other potential trade disputes and policies may have on our financial statements. The tariffs described above may have a significant impact and may materially adversely affect our business, financial condition, and/or operating results.
The potential exit of the U.K. from the European Union (“E.U.”). may have uncertain effects and could adversely impact our business, results of operations and financial condition.
On June 23, 2016, the U.K. voted to exit from the E.U. and is due to leave the E.U. on March 29, 2019 (“Brexit”); however, on January 15, 2019, the U.K. parliament voted against Brexit. As a consequence, there may be delayed, order fulfillment coulda cease on Brexit, a delay to Brexit, or continuance of Brexit. With respect to such uncertainty, we cannot predict future implications; however, it is possible that the economic activities will be disrupted, supply chain expensesadversely impacted, and regulatory and legal complexities will be increased in this region. With our footprint in the Europe region, we may increase, and customer relationships may be harmed, resulting in aexperience negative impact or potential disruption to the Company’sour operations and decreased profitability.During 2014, the Company transitioned to RR Donnelley as the Company’sbusiness in terms of volatility in global supply chain provider. RR Donnelley has been engaged to perform warehousing, inventory receipt, order fulfillment,stock markets and shipping services for the Company. If the Company does not effectively manage its global supply chain management functions with RR Donnelley, or RR Donnelley does not adequately perform the services it has been engaged to provide, inventory receiptscurrency exchange rates. Such changes and volatility may be delayed, order fulfillment could be disrupted, supply chain expenses may increase,adversely impact our operating results and customer relationships may be harmed, resulting in a disruption to the Company’s operations and decreased profitability.
financial performance.
Risks Related to
the Company’sOur Securities
Because the price of our common stock has been, and may continue to be, volatile, our shareholders may not be able to sell shares of our common stock at or above the price paid for such shares.
The price for shares of our common stock has exhibited high levels of volatility with significant volume and price fluctuations, which may make our common stock unsuitable for some investors. For example, for the two years ended December 31,
2015,2018, the closing price of our common stock ranged from a high of
$12.22$23.70 to a low of
$3.94$5.90 per share. At times, the fluctuations in the price of our common stock may be unrelated to our operating performance. The price of our common stock may also be influenced by:
| · | •fluctuations in our results of operations or the operations of our competitors or customers; |
| · | the aggregate amount of our outstanding debt and perceptions about our ability to make debt service payments; |
| · | failure of our results of operations and sales revenues to meet the expectations of stock market analysts and investors; |
| · | perceived reductions in demand or expectations regarding future demand by our customers; |
| · | changes in stock market analyst recommendations regarding us, our competitors or our customers; |
| · | the timing and announcements of product innovations, new products or financial results by us or our competitors; |
| · | the acquisition of mophie |
| · | changes in ZAGG directors or executives; |
| · | increases in the number of shares of our common stock outstanding; and |
| · | changes in our industry. |
Further, although the Company believes operations of our competitors or customers;
•the acquisitionaggregate amount of our outstanding debt and perceptions about our ability to make debt service payments;
•failure of our results of operations and sales revenues to meet the expectations of stock market analysts and investors;
•perceived reductions in demand or expectations regarding future demand by our customers;
•changes in stock market analyst recommendations regarding us, our competitors or our customers;
•the timing and announcements of product innovations, new products or financial results by us or our competitors;
•the performance of mophie will be accretive to shareholder value,, BRAVEN, Gear4, and HALO post acquisitions;
•changes in our directors or executives;
•increases in the acquisition may adversely affect thenumber of shares of our common stock price of the Company.outstanding; and
•changes in our industry.
Based on the above, our stock price may continue to experience volatility. Therefore, we cannot guarantee that our investors will be able to resell our common stock at or above the price at which they purchased it.
Because we may, at some time in the future, issue additional securities, shareholders are subject to dilution of their ownership.
Although we have no immediate plans to raise additional capital, we may at some time in the future do so. Any such issuance would likely dilute shareholders’ ownership interest in our company and may have an adverse impact on the price of our common stock. In addition, from time to time we may issue shares of common stock in connection with equity financing activities or as incentives to our employees and business partners. We may expand the number of shares available under stock incentive and option plans, or create new plans. All issuances of common stock would be dilutive to an existing investor’s holdings in
the Company.us. If an investor’s holdings are diluted, the overall value of the shares may be diminished and the ability to influence shareholder voting will also be harmed.
Because we do not expect to pay dividends for the foreseeable future, investors seeking cash dividends will not purchase our common stock.
We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Our payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including but not limited to our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. In addition, our ability to pay dividends on our common stock may be limited by state law. Accordingly, investors must rely on sales of their common stock after price appreciation, which may not occur in the future, as the only way to realize their investment.
We may not be able to successfully integrate businesses we have acquired or which we may acquire in the future, and we may not be able to realize anticipated cost savings, revenue enhancements, or other synergies from such acquisitions.
Our ability to successfully implement our business plan and achieve targeted financial results and other benefits including, among other things, greater market presence and development, and enhancements to our product portfolio and customer base, is dependent on our ability to successfully integrate
mophie, which we acquired in the first quarter of 2016, and other businesses we may acquire in the future. We may not realize these benefits, as rapidly as, or to the extent, anticipated by our management. There can be no assurance that we will be able to successfully integrate
mophie or any
other acquired businesses, products or technologies without substantial expenses, delays or other operational or financial problems. Acquisitions involve a number of risks, some or all which could have a material adverse effect on
ourany acquired businesses, products or technologies. Furthermore, there can be no assurance that
mophie or any
other acquired business, product, or technology will be profitable or achieve anticipated revenues and income. Our failure to manage our acquisition strategy successfully could have a material adverse effect on our business, results of operations and financial condition. The process of integrating an acquired business involves risks, including but not limited to:
| · | demands on management related to the significant increase in the size of our business; |
| · | diversion of management's attention from the management of daily operations; |
| · | difficulties in the assimilation of different corporate cultures and business practices; |
| · | difficulties in conforming the acquired company's accounting policies to ours; |
| · | retaining the loyalty and business of the customers of acquired businesses; |
| · | retaining employees that may be vital to the integration of acquired businesses or to the future prospects of the combined businesses; |
| · | difficulties and unanticipated expenses related to the integration of departments, information technology systems, including accounting systems, technologies, books and records, and procedures, and maintaining uniform standards, such as internal accounting controls, procedures, and policies; |
| · | costs and expenses associated with any undisclosed or potential liabilities; |
| · | the use of more cash or other financial resources on integration and implementation activities than we expect; and |
| · | our ability to avoid labor disruptions in connection with any integration, particularly in connection with any headcount reduction. |
•demands on management related to the significant increase in the size of our business;
•diversion of management's attention from the management of daily operations;
•difficulties in the assimilation of different corporate cultures and business practices;
•difficulties in conforming the acquired company's accounting policies to ours;
•retaining the loyalty and business of the customers of acquired businesses;
•retaining employees that may be vital to the integration of acquired businesses or to the future prospects of the combined businesses;
•difficulties and unanticipated expenses related to the integration of departments, information technology systems, including accounting systems, technologies, books and records, and procedures, and maintaining uniform standards, such as internal accounting controls, procedures, and policies;
•costs and expenses associated with any undisclosed or potential liabilities;
•the use of more cash or other financial resources on integration and implementation activities than we expect; and
•our ability to avoid labor disruptions in connection with any integration, particularly in connection with any headcount reduction.
Failure to successfully integrate
mophie or otherany acquired businesses in the future may result in reduced levels of anticipated revenue, earnings, or operating efficiency than might have been achieved if we had not acquired such businesses.
In addition, any future acquisitions could result in
the incurrence ofincurring additional debt and related interest expense, contingent liabilities, and amortization expenses related to intangible assets, which could have a material adverse effect on our financial condition, operating results, and cash
flow.flows.
Techniques employed by short sellers may drive down the market price of
the Company’sour common stock.
Short selling is the practice of selling securities that the seller does not own, but rather has borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is in the short seller’s best interests for the price of the stock to decline, many short sellers publish, or arrange for the publication of, negative opinions regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a stock short. These short attacks have, in the past, led to selling of shares in the market.
In the past several years, our securities have been the subject of short selling. Reports and information have been published about
ZAGGus which
the Company believeswe believe are mischaracterized or incorrect, and which have occasionally been followed by a decline in our stock price.
It is not clear what additional effects the negative publicity will have on the Company,us, if any, other than potentially affecting the market price of our common stock. If the Company continueswe continue to be the subject of unfavorable allegations, the Companywe may have to expend a significant amount of resources to investigate such allegations and/or defend itself.our self. While the Companywe would strongly defend against any such short seller attacks, the Companywe may be constrained in the manner in which itwe can proceed against the relevant short seller by principles of freedom of speech, applicable state law, or issues of commercial confidentiality. Such a situation could be costly and time-consuming, and could distract the Company’sour management from growing the Company.our business. Additionally, such allegations against the Companyus could negatively impact itsour business operations and stockholdersstockholders' equity, and the value of any investment in the Company’sour stock could be reduced.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
Real Property (dollar (amounts in thousands)
Our principal executive offices and facilities are currently located at 910 West Legacy Center Way, Suite 500, Midvale, Utah, 84047. The lease agreement expires July 1, 2023.2023, with options to add subsequent extensions to the leasing period. Rent at this location is recorded on a straight linestraight-line lease rate of $81$80 per month. We alsoIn addition, we lease a storefront and kioskanother office space at mall locationsin Utah, office space in California, and Utah,office space in Florida, office space in Michigan, and office space in Shannon,England, Ireland and China for the office of our ZAGG Internationalinternational operations.
ITEM 3. LEGAL PROCEEDINGS
Certain of the legal proceedings in which we are involved are discussed in Note 12, "Commitments13, “Commitments and Contingencies,"Contingencies”, to our Consolidated Financial Statementsconsolidated financial statements in this Annual Report on Form 10-K,report, and are hereby incorporated by reference.
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5.5 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (dollar and share (amounts in thousands, excluding average price per share)During the first quarter of 2015, our board of directors approved a stock repurchase program, under which the Company is authorized to make repurchases of $15,000 in the aggregate of shares of the Company’s common stock. The repurchases were to be made through the use of a 10b5-1 Plan, which was put in place at the end of June 2015 and purchases of stock occurred during the second, third, and fourth quarters of 2015.
During the three months ended December 31, 2015, the Company purchased 144 shares of ZAGG Inc common stock for total consideration of $1,036, which included commissions and processing fees totaling $4.
| | Period | | | | (a) Total Number of Shares Purchased | | | | (b) Average Price Paid per Share | | | | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | | | (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | |
| | | | | | | | | | | | | | | | | | | |
| | October 1 – October 31, 2015 | | | | 144 | | | $ | 7.19 | | | | 144 | | | | – | |
| | November 1 – November 30, 2015 | | | | – | | | $ | – | | | | – | | | | – | |
| | December 1 – December 31, 2015 | | | | – | | | $ | – | | | | – | | | | – | |
| | Total | | | | 144 | | | $ | 7.19 | | | | 144 | | | | | |
Market Information
Our common stock is currently quoted on
The NASDAQthe Nasdaq Global Market of
The NASDAQthe Nasdaq Stock Market under the symbol ZAGG. The following table sets forth, for each full quarterly period within the two most recent fiscal years, the high and low sales prices (in dollars per share) of our common stock as reported or quoted on
The NASDAQthe Nasdaq Capital Market.
| 2015 Quarter Ended | | | High | | | Low | |
| | March 31, 2015 | | | $ | 9.87 | | | $ | 5.95 | |
| | June 30, 2015 | | | $ | 10.29 | | | $ | 7.60 | |
| | September 30, 2015 | | | $ | 8.60 | | | $ | 6.02 | |
| | December 31, 2015 | | | $ | 12.74 | | | $ | 6.58 | |
| 2014 Quarter Ended | | | High | | | Low | |
| | March 31, 2014 | | | $ | 4.78 | | | $ | 3.91 | |
| | June 30, 2014 | | | $ | 5.50 | | | $ | 4.18 | |
| | September 30, 2014 | | | $ | 6.19 | | | $ | 5.03 | |
| | December 31, 2014 | | | $ | 6.99 | | | $ | 4.81 | |
On March 12, 2019, the closing price of our common stock was $10.83.
| | | | | | | | | | | | | | |
| For the Year Ended December 31, 2018 | | High | | Low |
| | | | |
| First Quarter | | $20.81 | | $11.90 |
| Second Quarter | | $19.40 | | $10.90 |
| Third Quarter | | $17.80 | | $12.30 |
| Fourth Quarter | | $14.95 | | $7.96 |
| | | | | | | | | | | | | | |
| For the Year Ended December 31, 2017 | | High | | Low |
| | | | |
| First Quarter | | $7.55 | | $5.90 |
| Second Quarter | | $9.15 | | $6.55 |
| Third Quarter | | $16.15 | | $8.30 |
| Fourth Quarter | | $23.70 | | $14.10 |
Holders of Common stock
At February 7, 2016,
On March 12, 2019, there were approximately
2741 registered holders or persons otherwise entitled to hold our common shares pursuant to a shareholders’ list provided by our transfer agent, Empire Stock Transfer. The number of registered shareholders excludes any estimate by us of the number of beneficial owners of common shares held in street name.
Dividends
There are no restrictions in
Neither our
articlescertificate of incorporation
ornor our bylaws
that restrict us from declaring dividends. The
Nevada Revised Statutes,Delaware General Corporation Law and applicable case law, however,
dodoes prohibit us from declaring dividends where, after giving effect to the distribution of the dividend:
•we would not be able to pay our debts as they become due in the usual course of business;
•we would be engaged in a business for which our remaining assets would be unreasonably small in relation to the business; or •our totalnet assets would be less than the sum ofamount determined to be our total liabilities, plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution.capital.
We have not declared or paid cash dividends on our common stock since our inception, and our
Boardboard of
Directorsdirectors currently intends to
retain all earnings for use in the businessnot declare or issue cash dividends for the foreseeable future. Any future payment of dividends to holders of common stock will depend upon our results of operations, financial condition, cash requirements, and other factors deemed relevant by our
Boardboard of
Directors.directors.
Securities Authorized for Issuance Under Equity Compensation Plans
(share amounts in thousands) Plan Category | | Number of securities to be issued upon exercise of outstanding options and vesting of restricted stock | | | Weighted-average exercise price of outstanding options | | | Number of securities remaining available for future issuances under equity compensation plans (excluding securities reflected in first column) | |
| Equity compensation plans approved by security holders | | | 875 | | | $ | 8.14 | | | | 9,840 | |
| Equity compensation plans not approved by security holders | | | - | | | | - | | | | - | |
| Total | | | 875 | | | $ | 8.14 | | | | 9,840 | |
| | | | | | | | | | | | | | | | | | | | |
| Plan Category | | Number of securities to be issued upon exercise of outstanding options and vesting of restricted stock | | Weighted-average exercise price of outstanding options | | Number of securities remaining available for future issuances under equity compensation plans (excluding securities reflected in first column) |
| | | | | | |
| Equity compensation plans approved by security holders | | 821 | | $ | 10.49 | | 2,361 |
| Equity compensation plans not approved by security holders | | — | | — | | — |
| Total | | 821 | | $ | 10.49 | | 2,361 |
In
2007, the Company’sJanuary 2013, our board of directors adopted and in
2008 the Company’sJune 2013, our shareholders approved
the ZAGG Incorporated 2007 Stock Incentive Plan (the “2007 Plan”). The 2007 Plan was amended to increase the number of shares issuable under the 2007 Plan to 10,000. As of December 31, 2015, there were 6,239 shares available for grant under the 2007 Plan. However, uponadoption of the 2013 Plan in January 2013, the Company ceased to grant awards pursuant to the 2007 Plan. All subsequent awards were and all future awards will be granted under the 2013 Plan. All awards that are outstanding under the 2007 Plan will continue to vest, be exercisable, and expire according to their respective terms.In January 2013, the Company’s Board of Directors adopted and in June 2013, the Company���s shareholders approvedthe ZAGG Inc 2013 Equity Incentive Award Plan (the “2013 Plan”), a new equity incentive plan intended to replace. In April 2017, the 2007 Plan.compensation committee of our board of directors adopted, and in June 2017, our shareholders approved an amendment and restatement of the 2013 Plan (the “Amended Plan”). The 2013Amended Plan is an “omnibus plan” under which stock options, stock appreciation rights, performance share awards, restricted stock, and restricted stock units can be awarded. The 2013Amended Plan’s initial share reservation is 5,000 shares. The term of the plan is for 10 years from the date of its adoption.original adoption of the 2013 Plan. As of December 31, 2015,2018, there were approximately 3,6012,361 shares available for grant under the 2013 Plan.
Amended Plan.
Recent Sales of Unregistered Securities (amounts
Except as set forth on our Current Report on 8-K filed on December 4, 2018 there were no other unregistered sales of securities during the year ended December 31, 2018.
Stock Performance Graph
The graph below compares the cumulative 5-Year total return provided shareholders on our common stock relative to the cumulative total returns of the Russell 2000 index, Russell MicroCap and a customized peer group of eight companies, whose individual companies are listed in
thousands)footnote 1 below. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock, in each index and in each of the peer groups on December 31, 2013, and its relative performance is tracked through December 31, 2018.
The eight companies included in our customized peer group (the “Peer Group” in the chart below) are: Callaway Golf Co, Columbia Sportswear Co, Deckers Outdoor Corp, Fossil Group Inc., Garmin Ltd, Logitech International S.A., Plantronics Inc. and Vuzix Corp.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among ZAGG Inc, the Russell 2000 Index, the Russell MicroCap Index,
and Peer Group
*100 invested on December 31, 2013 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. Copyright© 2019 Russell Investment Group. All rights reserved.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 12/13 | | 12/14 | | 12/15 | | 12/16 | | 12/17 | | 12/18 |
| | | | | | | | | | | |
| ZAGG Inc | 100.00 | | 156.09 | | 251.49 | | 163.22 | | 424.14 | | 224.83 |
| Russell 2000 | 100.00 | | 104.89 | | 100.26 | | 121.63 | | 139.44 | | 124.09 |
| Russell MicroCap | 100.00 | | 103.65 | | 98.30 | | 118.32 | | 133.90 | | 116.39 |
| Peer Group | 100.00 | | 107.77 | | 79.03 | | 100.96 | | 123.48 | | 137.26 |
In 2016, we determined to change the comparison peer group from a self-selected group based on market capitalization to the Russell MicroCap index. We believe a change to the Russell MicroCap index will provide a better comparison to us because it is a broader base of companies with similar market cap rather than eight selected in the peer group. Furthermore, the companies we would consider peers within the industry are not public companies and would therefore not have information available to calculate a comparative five-year return. In 2018, Harmon International Industries Inc. and Sodastream International Ltd were removed from the peer group because they were acquired and no longer had discrete financial information that could be used for comparability purposes.
Repurchases
During the fourth quarter of 2015, our board of directors authorized the repurchase of up to $20,000 of our outstanding common stock with no expiration date. Our board of directors also authorized the use of a Rule 10b5-1 plan, which was put into place during the third quarter of 2018.
During the year ended December 31,
2015,2018, we
issued the following unregistered securities:We issued 45purchased 918 shares of ZAGG common stock uponfor total consideration of $12,096, which included commissions and processing fees totaling $34. As of December 31, 2018, a total of $5,462 remained authorized under the exercisestock repurchase program.
The following table summarized purchases of
warrants to purchase 307 shares. We received proceeds of $39 related to the exercise of the warrants as the exercise was executed through a net share settlement.We issued 21 unregistered shares ofour common stock as consideration for the purchase of a patent.
During the yearthree months ended December 31, 2014, we did not issue unregistered securities.
In2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | (a)
Total Number of Shares Purchased | | (b)
Average Price Paid per Share | | (c)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | (d)
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
| | | | | | | | |
| October 1 - October 31, 2018 | | 158 | | $ | 12.00 | | 158 | | 978 (1) |
| November 1 -November 30, 2018 | | 377 | | $ | 10.87 | | 377 | | 558 (1) |
| December 1 - December 31, 2018 | | — | | $ | — | | — | | 558 (1) |
| Total | | 535 | | $ | 11.20 | | 535 | | |
(1) As of December 31, 2018, the price of our stock was $9.78. The maximum number of shares that may yet be purchased under the 2015 plan was calculated for each month using the December 31, 2018 stock price and the total dollars that remained authorized under the 2015 plan.
On March 11, 2019, our board of directors authorized the cancellation of the
transactions listed above, the securities were issued pursuant to Section 4(2) of the Securities Act of 1933, as amended, (the “Securities Act”)2015 stock repurchase program, and
rules and regulations promulgated thereunder. None of the transactions involved a public offering.Stock Performance Graph
The following Performance Graph and related information shall not be deemed "soliciting material" or "filed" with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act or Exchange Act, each as amended, except to the extent we specifically incorporate it by reference into such filing.
The following graph compares the cumulative total shareholder return on our common stock over the five year period ended December 31, 2015, with the cumulative total return during such period of the NASDAQ Stock Market (U.S. Companies) and a peer group index composed of similarly sized public companies, the members of which are identified below for the same period. The following graph assumes an initial investment of $100.00 with dividends reinvested. The stock performance shown on the graph below represents historical stock performance and is not necessarily indicative of future stock price performance.
| | | | 12/31/10 | | | | 12/31/11 | | | | 12/31/12 | | | | 12/31/13 | | | | 12/31/14 | | | | 12/31/15 | |
| ZAGG Inc | | | 100.00 | | | | 92.78 | | | | 96.59 | | | | 57.09 | | | | 89.11 | | | | 143.57 | |
| NASDAQ Composite | | | 100.00 | | | | 100.53 | | | | 116.92 | | | | 166.19 | | | | 188.78 | | | | 199.95 | |
| Russell 3000 | | | 100.00 | | | | 101.03 | | | | 117.61 | | | | 157.07 | | | | 176.79 | | | | 177.64 | |
| Russell 2000 | | | 100.00 | | | | 95.82 | | | | 111.49 | | | | 154.78 | | | | 162.35 | | | | 155.18 | |
| Old Peer Group | | | 100.00 | | | | 123.28 | | | | 162.96 | | | | 176.93 | | | | 248.00 | | | | 240.71 | |
| New Peer Group | | | 100.00 | | | | 95.99 | | | | 94.66 | | | | 150.45 | | | | 184.47 | | | | 182.71 | |
In 2015, the Company determined it appropriate to change the comparison index from the Russell 3000 index to the Russell 2000 index and to addauthorized a new peer groupstock repurchase program that grants the repurchase of similarly sized public companies that have securities traded on the Nasdaq Stock Market. We believe the Russell 2000 index and the New Peer Group are more appropriate comparables than what has been traditionally used. The membersup to $20,000 of the New Peer Group are as follows: Basset Furniture Industries, Incorporated; CSS Industries, Inc.; Culp, Inc.; The Dixie Group, Inc.; Flexsteel Industries, Inc.; Hooker Furniture Corporation; iRobot Corporation; Lifetime Brands, Inc.; Nautilus, Inc.; Rocky Brands, Inc.; Skullcandy, Inc.; Superior Uniform Group, Inc.; and Universal Electronics Inc. Our Old Peer Group included the following members: Apple Inc., Comarco, Inc., iGo, Inc., Logitech International SA, Plantronics Inc, Skullcandy Inc, and Universal Electronics Inc. We will include the Russell 3000 return and the Old Peer Group in the schedule above this year for informational purposes.
our outstanding common stock.
ITEM 6. SELECTED FINANCIAL DATA (in(amounts in thousands, except per share amounts) The selected historical financial data presented below are derived from our consolidated financial statements. The selected financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,”Operations”, and our consolidated financial statements and the notes thereto included elsewhere in this report.
| | | Year ended December 31, | |
| | | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | |
| CONSOLIDATED STATEMENT OF OPERATIONS DATA: | | | | | | | | | | | | | | | |
| Net sales | | $ | 269,311 | | | $ | 261,585 | | | $ | 219,356 | | | $ | 264,425 | | | $ | 179,125 | |
| Income from operations | | | 25,864 | | | | 16,983 | | | | 10,946 | | | | 33,491 | | | | 28,137 | |
| Net income attributable to stockholders | | | 15,587 | | | | 10,461 | | | | 4,790 | | | | 14,505 | | | | 18,248 | |
| Earnings per share attributable to stockholders: | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.54 | | | $ | 0.35 | | | $ | 0.16 | | | $ | 0.48 | | | $ | 0.67 | |
| Diluted | | | 0.54 | | | | 0.34 | | | | 0.15 | | | | 0.46 | | | | 0.63 | |
| Weighted average shares: | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 28,773 | | | | 30,247 | | | | 30,900 | | | | 30,339 | | | | 27,133 | |
| Diluted | | | 29,089 | | | | 30,610 | | | | 31,459 | | | | 31,656 | | | | 29,082 | |
| | | | | | | | | | | | | | | | | | | | | |
| BALANCE SHEET DATA: | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 179,541 | | | $ | 201,279 | | | $ | 175,470 | | | $ | 206,085 | | | $ | 202,328 | |
| Current assets | | | 131,701 | | | | 147,023 | | | | 116,481 | | | | 131,185 | | | | 108,230 | |
| Current liabilities | | | 49,024 | | | | 74,206 | | | | 33,096 | | | | 41,816 | | | | 33,740 | |
| Total equity | | | 130,517 | | | | 127,073 | | | | 124,831 | | | | 124,096 | | | | 102,628 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | | | | | | | |
| 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | | | | | | | | |
| CONSOLIDATED STATEMENT OF OPERATIONS DATA: | | | | | | | | | |
| Net sales | $ | 538,231 | | $ | 519,495 | | $ | 401,857 | | $ | 269,311 | | $ | 261,585 |
| Income (loss) from operations | 51,696 | | 44,735 | | (21,360) | | 25,864 | | 16,983 |
| Net income (loss) | 39,189 | | 15,100 | | (15,587) | | 15,587 | | 10,461 |
| Earnings (loss) per share attributable to stockholders: | | | | | | | | | |
| Basic | $ | 1.40 | | $ | 0.54 | | $ | (0.56) | | $ | 0.54 | | $ | 0.35 |
| Diluted | $ | 1.38 | | $ | 0.53 | | $ | (0.56) | | $ | 0.54 | | $ | 0.34 |
| Weighted average shares: | | | | | | | | | |
| Basic | 28,064 | | 27,996 | | 28,006 | | 28,773 | | 30,247 |
| Diluted | 28,500 | | 28,407 | | 28,006 | | 29,089 | | 30,610 |
| | | | | | | | | |
| BALANCE SHEET DATA: | | | | | | | | | |
| Total assets | $ | 378,011 | | $ | 320,591 | | $ | 310,729 | | $ | 179,541 | | $ | 201,279 |
| Current assets | 261,227 | | 227,802 | | 174,436 | | 131,701 | | 147,023 |
| Current liabilities | 155,687 | | 184,592 | | 183,844 | | 49,024 | | 74,206 |
| Long-term liabilities | 63,833 | | — | | 9,623 | | — | | — |
| Total equity | 158,491 | | 135,999 | | 117,262 | | 130,517 | | 127,073 |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements, other than purely historical information, including estimates, projections, statements relating to
Overview
The focus of our business
plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Exchange Act. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.Overview
At ZAGG, our focus is to (1) designprovide creative product solutions, for users of mobile devices, (2) sell these products to end-users throughexecute targeted global distribution, partners(3) achieve operational excellence, and online, and (3) become(4) be the preferred brand through the innovation and quality offor our products, providing excellent customer service, and focusing on the end-users’ knowledge and experience with our products.customers. We focus our corporate, team, and individual goals to accomplish this overall corporate strategy.
We believe that
hand-heldmobile devices and gadgets can be best enjoyed with the right mix of
(1) protection from scratches and damage, and
(2) accessories that enhance the consumers’ electronic and mobile device
experience with their electronic device.experience. We believe that our full product
offering,portfolio, which includes screen protection,
our keyboard lines,power cases, power management, wireless charging, audio,
accessories, mobile
power solutions, andkeyboards, protective cases,
and other mobile accessories, provides consumers with unparalleled device protection and enhanced enjoyment of their mobile electronic device.
We plan to continue to expand our product offerings,portfolio, including entering into new product categories and entering new domestic and global markets that we believe will be consistent with our overall corporate strategy. Our products are available through our websitewebsites at www.ZAGG.com, www.mophie.com, www.Gear4.com, and www.HALO.com, and through our retail distribution channels, which include major retailers like Apple Inc., Amazon.com, Inc., Best Buy Walmart,Co Inc., Wal-Mart Stores Inc., AT&T Inc., Sprint Corp., Verizon Communications Inc., T-Mobile International AG, Target Corporation, Walgreens Boots Alliance, Inc., Ingram Micro, Inc., and Thethe Carphone Warehouse; QVC, independent electronics resellers; college bookstores; independent MacApple stores; mall kiosks; and other online retailers. Critical Accounting Policies
and Estimates
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related
disclosuredisclosures of
contingent assets and liabilities.these amounts in the notes to the financial statements. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Significant items subject to such estimates include inventory
reserves, sales returnsrealizability, variable consideration included as part of our revenue recognition accounting policy, and
warranty liability,the fair value of assets acquired and
income taxes.liabilities assumed in our business combinations.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably may have been used, or if changes in the estimate that are reasonably likely to occur may materially impact the financial statements. Management believes the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue recognition
The Company records revenue when persuasive evidence
Inventories
Inventories, consisting primarily of
an arrangement exists, product delivery has occurred,finished goods and raw materials, are valued at the
sales price to the customer is fixed or determinable, and collectability is reasonably assured. The Company’s revenue is derived from saleslower of
our products through our indirect channel, including retailers and distributors; through our direct channel, including www.ZAGG.com, and our corporate-owned and third-party-owned mall kiosks; and from the franchise fees derived from the onboarding of new franchisees. For product sales, our standard shipping terms are FOB shipping point, and we record revenue when the product is shipped, net of estimated returns and discounts. For some customers, the contractual shipping terms are FOB destination. For these shipments, we record revenue when the product is delivered, net of estimated returns and discounts. For franchise fees, we recognize revenuecost, determined on a
straight-linefirst in, first out basis,
overor net realizable value. Management performs periodic assessments to determine the
franchise term. The Companyexistence and estimated net realizable value of obsolete, slow moving, and unsaleable inventories, and records
revenue from royalty agreementsnecessary write-downs in
the period in which the royalty is earned.Promotional products given to customers or potential customers are recognized as a cost of sales. Cash incentives provided to our customers are recognized as a reduction of the related sale price, and, therefore, are a reduction in sales.
Reserve for sales returns and warranty liability
For product sales, the Company records revenue, net of estimated returns and discounts, when delivery has occurred, collection of the relevant receivable is reasonably assured, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Our return policy allows end users and certain retailers rights to return purchased products. In addition, the Company generally provides the ultimate consumer a warranty with each product. Due to the nature of the screen protection product line, end user returns for screen protection are generally not salvageable and are not included in inventory. We estimate a reserve for sales returns, warranty, and other credits, and record the estimated reserve amount as a reduction of sales, and as a sales return reserve liability. When product is returned and is expected to be resold, as is the case with returns of packaged screen protection, keyboards, audio products, cases, and power products, the reserve is recorded as a reduction of revenues and cost of sales and as a sales return reserve liability. The sales returns and warranty reserve requires management to make estimates regarding return rates for sales and warranty returns. Historical experience, actual claims, and customer return rights arereduce such inventories to estimated net realizable value. Once established, the key factors used in determiningoriginal cost of the estimated sales return and warranty reserve.
Inventories
inventory less the related inventory write down represents the new cost basis of such products.
In assessing the
realizationrealizability of inventories, we are required to make judgments as to future
sales prices, which are impacted by our estimates of demand requirements and
to compare these with current inventory levels.
When the market value of inventory is less than the carrying value, the inventory cost is written down to the estimated net realizable value thereby establishing a new cost basis. Our inventory requirements may change based on our projected customer demand, market conditions, technological and product life cycle changes, longer or shorter than expected usage periods, and other factors that could affect the valuation of our inventories.
Income taxes
Revenue Recognition Accounting Policy
We adopted Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” (“Topic 606”) in the first quarter of 2018. As a result of this adoption, we have made modifications to our accounting policy for revenue recognition.
Our revenue is derived from sales of our products through our indirect channel, including retailers, distributors, and franchisees; and sales of our products through our direct channel, including www.ZAGG.com, www.mophie.com, www.Gear4.com, and www.HALO.com, and our corporate-owned ZAGG-branded store. Our revenue is measured based on the amount of consideration we expect to receive, reduced by estimates for sales returns, discounts, and other credits. The Company recognizes deferred income tax assetsobservable standalone selling prices of products sold are based on the prices charged to customers and are mutually agreed upon by both parties before any orders are authorized. For substantially all of our sales, revenues are recognized at a point in time when control of the goods is transferred to customers, which generally occurs upon delivery to carriers or liabilities for expected future tax consequences of eventscustomers. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer, are excluded from revenue.
Topic 606 has required significant changes to how we recognize revenue. Updates to our accounting policies have been recognizedmade as part of adoption of this new standard. These changes to our accounting policies and procedures under the new standard have most significantly impacted the estimates previously used to determine our sales returns, discounts and other credits. The new variable consideration calculations for these estimates apply assumptions required by Topic 606, which require significant judgment. In applying these new assumptions, and in the financialapplication of Topic 606, we have determined that the updated accounting policies and estimates to ensure compliance under Topic 606 continue to be critical accounting policies and estimates.
Specifically, our sales returns and price concessions methodologies are significant estimates within the revenue recognition accounting policy. Our return policy allows end users and certain retailers rights to return purchased products. Due to the nature of the screen protection product line, end user returns for screen protection are generally not salvageable and are not included in inventory. We estimate a reserve for sales returns and record the estimated reserve amount as a reduction of sales in the consolidated statements or tax returns. Under this method, deferred income tax assets or liabilitiesof operations, and as a liability in the consolidated balance sheets. When products are determined based upon the difference between the financial statementreturned and income tax bases of assets and liabilities using enacted tax rates expected to apply when differences are expected to be settled or realized. Deferred income taxresold, as is the case with returns of packaged screen protection, keyboards, audio products, cases, and power products, the impact is recorded as a reduction of revenues and cost of sales in the consolidated statements of operations, and as a reduction in the sales return reserve liability with an increase in the right of return asset included in prepaid expenses and other current assets in the consolidated balance sheets. The sales returns estimate requires management to make judgments regarding return rates for sales whereby historical experience and actual claims are key factors used in determining such estimated sales return reserve.
Our price concession policy estimates price concessions to be granted on goods which are sold to distributors and retailers. We estimate a reserve using historical price concession data, and record the estimated reserve amount as a reduction of revenue in the consolidated statements of operations, and as a liability in the consolidated balance sheets. When we issue credits to customers on actual price concessions granted, the impact is recorded as a reduction of revenues and cost of sales in the consolidated statements of operations, and as a reduction in the liability in the consolidated balance sheets. The price concession estimate requires management to make judgments regarding price concessions for sales whereby historical experience and actual claims are key factors used in determining such estimated price concession reserve.
Business Combinations
We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over these fair values is recorded as goodwill. We engaged an independent third-party valuation firm to assist us in determining the fair values of certain assets acquired and liabilities assumed. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. The significant purchased classes of intangible assets recorded by us include trade names, patents and technology, customer relationships, non-compete agreements, and backlog. The fair values assigned to the identified intangible assets are revieweddiscussed in Note 6 to the consolidated financial statements.
Significant estimates in valuing certain intangible assets include but are not limited to: future expected cash flows related to each individual asset, market position of the trade names and assumptions about cash flow savings from the trade names, determination of useful lives, and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and thus, actual results may differ from estimates.
Environmental, Social and Governance Initiatives
Overview
Corporate social responsibility has long been an integral part of our business and corporate culture. Environmental, social and governance initiatives (“ESG”) issues have been woven into our culture since our inception. As sustainability “best practices” evolve over time, so will our ESG initiatives and respective disclosures.
In 2018, we created a “Sustainability Working Group” consisting of dedicated internal resources and external advisors to address ESG factors related to us. The goal of the Sustainability Working Group is to improve our long-term performance utilizing ESG factors material to our business. Our framework for recoverabilityESG factor evaluation and valuation allowancesdisclosure is informed by potential opportunities and risks for our business, views of our shareholders, leading ESG ratings agencies, and leading ESG reporting frameworks. Among the ESG reporting frameworks, we primarily utilized the Sustainability Accounting Standard Board's (“SASB”) Sustainability Accounting Standards relevant for our industry (SASB industry classification: Apparel, Accessories and Footwear and the Multiline and Specialty Retailers and Distributors). We determined that many of the topics in those standards represent trends and uncertainties that may materially impact our operational performance or financial condition.
In addition to considering the ESG impacts on our business, the views of our shareholders, the leading ESG frameworks, and ESG ratings agencies, we considered the ESG perspectives of other stakeholders, including but not limited to our employees, customers, and the communities in which we operate.
Our sustainability disclosures will evolve over time as our business continues to grow. At this time, our board of directors, management, and Sustainability Working Group identified the following topics for disclosure: Supply Chain, Packaging, Cybersecurity, Employee Diversity and Inclusion, Political/Lobbying Contributions, and Employee Transportation Incentives.
Supply Chain
Manufacturers’ Accountability – We comply with the California Transparency and Supply Chain Act, we have a zero-tolerance policy for slavery and human trafficking, and we hold our manufacturers to the highest standards. We require each of our manufacturers to agree to and execute our Manufacturer’s Code of Conduct, which requires our manufacturers to comply with all applicable laws and regulations, to treat each employee with dignity and respect, to not discriminate, and to provide all employees with a safe and healthy workplace. Furthermore, each manufacturer agrees that its factory may be inspected at any time and that any noncompliance will represent a breach of the applicable supply agreement.
We annually engage in internal verification activities to identify, assess and manage the risks of human trafficking in our product supply chain. We require each manufacturer to sign an agreement stating that it will only use subcontractors or independent contractors who are provided whencompliant with and agree to our Manufacturer’s Code of Conduct.
Internal Accountability – We have internal procedures for determining whether employees or contractors are complying with company standards regarding slavery and human trafficking. Our legal department conducts an annual training in which employees are trained on human trafficking and slavery awareness within our manufacturers. Our operations and product teams are required to attend such trainings as those departments are primarily responsible for monitoring compliance. Furthermore, we require each employee to be familiar with our Manufacturer’s Code of Conduct.
Foreign Corrupt Practice Act Policy – We comply with the Foreign Corrupt Practices Act of 1977, as amended (“FCPA”). The FCPA makes it is more likelyillegal for U.S. persons, including U.S. companies and their subsidiaries, officers, directors, employees and agents, and any stockbrokers acting on their behalf, to bribe foreign officials. The FCPA also requires U.S. companies and their subsidiaries to keep accurate and complete books and records and to maintain proper internal accounting controls. All of our employees are required to sign our FCPA policy and complete FCPA education.
Packaging
We regularly review our product packaging for environmental impact and cost. In 2018, we changed the packaging for our BRAVEN product line from acrylic to paper packaging. In addition, we opted to use white rather than not that a deferred tax asset will not be realizableblack dry molded pulp trays to avoid the use of harmful oils/chemicals required in their development. We plan to continue to consider packaging enhancements for other product offerings and their respective environmental impacts for our products moving forward.
In addition to the BRAVEN packaging improvements, we invested in the future.packaging of our warranty mailer program. We offer a limited lifetime replacement program for our glass products. If the glass scratches or breaks, even through normal daily use, we will replace it for a $5.99 shipping and handling cost. The effect on deferred tax assetsprevious warranty process included a complete retail packaged glass replacement, packing slip, and liabilitiesreturn envelope, packed in a heavy card stock outbound shipping envelope. The new warranty mailer process eliminates the need for a packing slip and uses a different envelope that is 37% less paper, reducing costs as well as the environmental impact.
The implementation of a changestreamlined, environmentally-friendly warranty replacement system not only led to a significant reduction in tax rates is recognized in incomematerial used, but also reduced Carbon Dioxide (“CO2”) emissions. In 2018 alone, this new system reduced material usage by approximately 180,394 pounds, a 43.1% weight reduction. CO2 emissions from pre-consumer freight were reduced by over 447 tons. In addition, 89.6% of the materials used in the periodnew system are recyclable, as opposed to only 64.1% of the materials used previously.
Cybersecurity
We continually monitor and address cybersecurity risk. We have taken action to ensure data privacy and security for our customers on our e-commerce platform as well as require regular cybersecurity training for our employees.
We continually train our employees on cybersecurity. A company-wide training program that
includesstarted in the
enactment date.first quarter of 2018 received a 100% completion rate as of the end of the fourth quarter of 2018. The Company recognizestopics included the effectGDPR, email security, strong password creation and usage and phishing. The phishing training provided tangible results. The initial click rate was baselined at 18%. Following the training programs, the ZAGG click rate decreased to 8.4%.
In 2018, we invested in cybersecurity technologies and services that continue to bolster our defense in depth techniques, including: email security advancements such as safe attachment and uniform resource locator detonation capabilities; two-form authentication technologies providing secure access to key systems and services; automation of income tax positions only if those positionssoftware patch management; and additional tools to test weak passwords across the organization.
In addition to significant cybersecurity investment, we made several information technology business process improvements that will result in a more secure environment for our customers and employees. Technology platforms that support key business processes are under review to align with business process improvements and lower our exposure to malicious attacks. In addition, our 2018 acquisition activity created many disparate e-commerce shopping experiences. A single consolidated e-commerce platform supporting cross brand shopping will be introduced in 2019. A single platform will bolster our cybersecurity defenses.
Diversity
We have a responsibility to create a workplace where our employees can thrive. We foster an inclusive culture where our employees can fully contribute their skills and talents. We want our employees to be valued and supported both at work and in their communities. We strive to maintain an environment of mutual respect, free of discrimination or harassment. At ZAGG, we seek to enable and support our employees by fostering transparency, collaboration and community.
The tables below provide information about our gender and ethnic employee diversity. Since 2016, we have increased in gender and ethnic diversity.
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | | | |
| 2018 | | 2017 | | 2016 |
| | | | | |
| Female | 39.1 | % | | 39.6 | % | | $ | 35.0 | % |
| Male | 60.9 | % | | 60.4 | % | | $ | 65.0 | % |
| Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | | | |
| 2018 | | 2017 | | 2016 |
| | | | | |
| Asian | 9.0 | % | | 7.0 | % | | $ | 5.4 | % |
| Black or African American | 2.7 | % | | 1.6 | % | | $ | 1.0 | % |
| Hispanic or Latino | 6.5 | % | | 6.2 | % | | $ | 12.8 | % |
| Native Hawaiian or Other Pacific Islander | 0.4 | % | | 0.3 | % | | $ | 0.0 | % |
| Not Specified | 7.5 | % | | 10.8 | % | | $ | 0.5 | % |
| Two or more races | 3.7 | % | | 1.1 | % | | $ | 0.0 | % |
| White | 70.2 | % | | 73.0 | % | | $ | 80.3 | % |
| Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
Political/Lobbying Contributions (amounts in thousands)
We have made no material political or lobbying contributions.
Employee Transportation Incentives
Corporate sustainability is an integral part of our culture. We encourage our employees to limit their carbon footprint by providing transportation incentives.
Public Transit Incentive – We provide up to a $50 credit each month to each employee who uses public transit. The incentive is pro-rated for monthly employee usage. The table below presents the number of employees who qualified for the public transit incentive by participating office since 2016.
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | | | |
| 2018 | | 2017 | | 2016 |
| | | | | |
| Irvine | 2 | | 0 | | 0 |
| Kalamazoo | 3 | | 1 | | 0 |
| Salt Lake City | 8 | | 1 | | 0 |
| Total | 13 | | 2 | | 0 |
Carpool Incentive – Our employees who carpool 3 or more likely than not of being sustained. Recognized income tax positionsdays per week, each week during a month, are measuredeligible to receive a $50 gas card at the largest amount that is greater than 50% likelyend of being realized. Changesthe month. Our employees who carpool 1-2 days per week, each week during a month, are eligible to receive a $25 gas card at the end of the month. The table below presents the number of employees who qualified for the carpool incentive by participating office since 2016.
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | | | |
| 2018 | | 2017 | | 2016 |
| | | | | |
| Irvine | 2 | | 2 | | 0 |
| Kalamazoo | 37 | | 17 | | 0 |
| Salt Lake City | 8 | | 6 | | 0 |
| Total | 47 | | 25 | | 0 |
Zero or Low-Emissions Vehicle Incentive – We are committed to taking steps to improve the environment in recognitionour local community. To this end, we provide a one-time incentive to employees who purchase a zero or measurement are reflected inlow emissions vehicle. Employees who purchase a new electric or hybrid vehicle may be eligible for a $5,000 incentive. Employees who purchase a used electric or hybrid vehicle may be eligible for a $1,000 incentive. The table below presents the period in whichnumber of employees who qualified for the change in judgment occurs. The Company records estimated interest and penalties related to unrecognized tax benefits, if any, as a component of income tax provision.The Company has foreign subsidiaries that conductzero or support its business outside the United States. The Company does not provide for U.S. income taxes on undistributed earnings for its foreign subsidiaries as the foreign earnings will be permanently reinvested in such foreign jurisdictions.
low-emissions vehicle incentive by participating office since 2016. | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | | | |
| 2018 | | 2017 | | 2016 |
| | | | | |
| Irvine | 7 | | 5 | | 0 |
| Kalamazoo | 2 | | 0 | | 0 |
| Salt Lake City | 5 | | 2 | | 0 |
| Total | 14 | | 7 | | 0 |
Results of Operations (in(amounts in thousands) The following table sets forth our results of operations expressed as a percentage of net sales for the periods
indicated (amounts in thousands):| | | Year Ended December 31, | |
| | | 2015 | | | 2014 | | | 2013 | |
| Net sales | | $ | 269,311 | | | | 100.0 | % | | $ | 261,585 | | | | 100.0 | % | | $ | 219,356 | | | | 100.0 | % |
| Cost of sales | | | 167,627 | | | | 62.2 | | | | 178,241 | | | | 68.1 | | | | 132,236 | | | | 60.3 | |
| Gross profit | | | 101,684 | | | | 37.8 | | | | 83,344 | | | | 31.9 | | | | 87,120 | | | | 39.7 | |
| Advertising and marketing | | | 10,436 | | | | 3.9 | | | | 7,542 | | | | 2.9 | | | | 8,952 | | | | 4.1 | |
| Selling, general and administrative | | | 56,931 | | | | 21.1 | | | | 49,110 | | | | 18.8 | | | | 46,356 | | | | 21.1 | |
| Impairment of goodwill and intangibles | | | - | | | | 0.0 | | | | - | | | | 0.0 | | | | 11,246 | | | | 5.1 | |
| Amortization of definite-lived intangibles | | | 8,453 | | | | 3.1 | | | | 9,709 | | | | 3.7 | | | | 9,620 | | | | 4.4 | |
| Income from operations | | | 25,864 | | | | 9.6 | | | | 16,983 | | | | 6.5 | | | | 10,946 | | | | 5.0 | |
| Interest expense | | | (97 | ) | | | (0.0 | ) | | | (170 | ) | | | (0.1 | ) | | | (575 | ) | | | (0.3 | ) |
| Loss from equity method investment in HzO | | | - | | | | 0.0 | | | | - | | | | 0.0 | | | | (2,013 | ) | | | (0.9 | ) |
| Other income and (expense) | | | (69 | ) | | | (0.0 | ) | | | 121 | | | | 0.0 | | | | 127 | | | | 0.1 | |
| Income before provision for income taxes | | | 25,698 | | | | 9.5 | | | | 16,934 | | | | 6.5 | | | | 8,485 | | | | 3.9 | |
| Income tax provision | | | (10,111 | ) | | | (3.8 | ) | | | (6,473 | ) | | | (2.5 | ) | | | (3,695 | ) | | | (1.7 | ) |
| Net income | | | 15,587 | | | | 5.8 | | | | 10,461 | | | | 4.0 | | | | 4,790 | | | | 2.2 | |
indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | | | | | | | | | |
| 2018 | | | | 2017 | | | | 2016 | | |
| | | | | | | | | | | |
| Net sales | $ | 538,231 | | 100.0 | % | | $ | 519,495 | | 100.0 | % | | $ | 401,857 | | 100.0 | % |
| Cost of sales | 352,358 | | 65.5 | | | 350,497 | | 67.5 | | | 274,255 | | 68.2 | |
| Gross profit | 185,873 | | 34.5 | | | 168,998 | | 32.5 | | | 127,602 | | 31.8 | |
| Advertising and marketing | 11,994 | | 2.2 | | | 11,101 | | 2.1 | | | 12,440 | | 3.1 | |
| Selling, general and administrative | 108,623 | | 20.2 | | | 105,398 | | 20.3 | | | 96,229 | | 23.9 | |
| (Gain) loss on disputed mophie purchase price | — | | — | | | (6,967) | | (1.3) | | | 24,317 | | 6.1 | |
| Transaction costs | 1,678 | | 0.3 | | | 725 | | 0.1 | | | 2,591 | | 0.6 | |
| Impairment of intangible asset | — | | — | | | 1,959 | | 0.4 | | | — | | — |
| Amortization of long-lived intangibles | 11,882 | | 2.2 | | | 12,047 | | 2.3 | | | 13,385 | | 3.3 | |
| Total operating expenses | 134,177 | | 24.9 | | | 124,263 | | 23.9 | | | 148,962 | | 37.1 | |
| Income (loss) from operations | 51,696 | | 9.6 | | | 44,735 | | 8.6 | | | (21,360) | | (5.3) | |
| Interest expense | (1,684) | | (0.3) | | | (2,081) | | (0.4) | | | (1,851) | | (0.5) | |
| Other (expense) income | (483) | | (0.1) | | | 698 | | 0.1 | | | (348) | | (0.1) | |
| Total other expense | (2,167) | | (0.4) | | | (1,383) | | (0.3) | | | (2,199) | | (0.5) | |
| Income (loss) before provision for income taxes | 49,529 | | 9.2 | | | 43,352 | | 8.3 | | | (23,559) | | (5.9) | |
| Income tax (provision) benefit | (10,340) | | (1.9) | | | (28,252) | | (5.4) | | | 7,972 | | 2.0 | |
| Net income (loss) | $ | 39,189 | | 7.3 | % | | $ | 15,100 | | 2.9 | % | | $ | (15,587) | | (3.9) | % |
YEAR ENDED DECEMBER 31, 2015,2018, AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2014 (in2017 (amounts in thousands, except per share data)
Net sales for the year ended December 31,
2015, were $269,3112018, was $538,231 compared to net sales of
$261,585$519,495 for the year ended December 31,
2014,2017, an increase of
$7,726$18,736 or
3%4%. The
year-over-year change is due primarily to (1) the increase in
revenue from 2014 to 2015screen protection which was
accomplished despite the fact thatdriven by the new
Apple iPhone
releases did not result in a change inlaunch as well as the
form factor, which typically results in increased sales due to high customer load-ins. Theintroduction of the Glass + VisionGuard screen protection products, and (2) the increase in sales
primarilyof our power management products, particularly those accessories related to
the following factors: (1) expanded product penetrationwireless charging. These increases were partially offset by a decrease in
existing customers, (2) expanded distribution to new customers, (3) continued success within the screen protection product category, particularly with InvisibleShield Glass, and (4) increased sales
in Western Europe. We continue to sell into our indirect channel retailers including Best Buy, Walmart, Target, Walgreens, and the Carphone Warehouse; wireless carriers including AT&T, Sprint, Verizon, and T-Mobile; and both domestic and foreign electronics accessory distributors. We are still focused on distribution through our franchise program and through our website, www.ZAGG.com.of power cases.
The percentage of
net sales related to our key product categories for the years ended December 31,
20152018 and
2014,2017, was approximately:
| | | 2015 | | 2014 |
| Screen Protection | | | 67 | % | | | 46 | % |
| Keyboards | | | 19 | % | | | 31 | % |
| Audio | | | 9 | % | | | 12 | % |
| Power Management | | | 3 | % | | | 6 | % |
| Other | | | 2 | % | | | 5 | % |
| | | | | | | | | | | |
| For the Years Ended December 31, | | |
| 2018 | | 2017 |
| | | |
| Screen protection | 57% | | | 48% | |
| Power management | 26% | | | 26% | |
| Power cases | 6% | | | 15% | |
| Audio | 5% | | | 5% | |
| Keyboards | 5% | | | 5% | |
| Other | 1% | | | 1% | |
The percentage of
net sales related to our key distribution channels for
the years ended December 31,
20152018 and
2014,2017, was approximately:
| | | 2015 | | 2014 |
| Indirect channel | | | 89 | % | | | 90 | % |
| Website | | | 5 | % | | | 5 | % |
| Mall cart and kiosk program | | | 6 | % | | | 5 | % |
| | | | | | | | | | | |
| For the Years Ended December 31, | | |
| 2018 | | 2017 |
| | | |
| Indirect | 88% | | | 89% | |
| Website | 8% | | | 8% | |
| Franchise | 4% | | | 3% | |
The percentage of
net sales by geographic region for the years ended December 31,
20152018 and
2014,2017, was approximately:
| | | 2015 | | 2014 |
| United States | | | 91 | % | | | 90 | % |
| Europe | | | 8 | % | | | 7 | % |
| Other | | | 1 | % | | | 3 | % |
| | | | | | | | | | | |
| For the Years Ended December 31, | | |
| 2018 | | 2017 |
| | | |
| United States | 84% | | | 84% | |
| Europe | 9% | | | 9% | |
| Other | 7% | | | 7% | |
Gross profit for the year ended December 31,
2015,2018, was
$101,684$185,873 or approximately
38%35% of net sales, compared to
$83,344$168,998 or approximately
32%33% of net sales for the year ended December 31,
2014.2017. The increase in
gross profit margin was primarily
linkedattributable to
(1) a significant inventory write-down recorded during 2014 for product expected to be sold below the
carrying value that did not recur in 2015 and (2) a favorable sales mix
as a larger percentage of
our 2015 sales came from screen protection
sales,products, our highest margin product
category.category, which increased during the year ended December 31, 2018, to approximately 57% of net sales compared to approximately 48% of net sales during the year ended December 31, 2017.
Total operating expenses for
the year ended December 31,
2015, were $75,820, an increase of $9,459 from total2018, was $134,177, compared to operating expenses
forof $124,263 the year ended December 31,
2014,2017, an increase of
$66,361.$9,914 or 8%. The increase in operating expenses was primarily attributable to
(1) the
following factors; (1) increased 2015 marketing$6,967 gain related to the settlement of litigation related to the disputed mophie purchase price in 2017 that did not recur in 2018, (2) increases in headcount to support the additional growth of the Company, (3) additional selling, general and
advertising expenses, (2) increased customer service charges from higher customer call volume linked primarily to InvisibleShield warranty replacements,administrative expense associated with the newly acquired BRAVEN and
(3) increased stock-based compensation expense due to increased executive award grants.Gear4 businesses, and (4) transaction costs incurred in connection with the acquisition of BRAVEN and Gear4. These increases were partially offset by
(1) a
reductiondecrease in
amortization expense.depreciation expense resulting from lower carrying amounts of property and equipment during the year ended December 31, 2018, (2) a $1,959 charge in 2017 related to the impairment of a patent that did not recur in 2018, and (3) operating expense synergies realized related to the mophie integration.
We reported income from operations of
$25,864$51,696 for the year ended December 31,
2015,2018, compared to
income from operations of $16,983$44,735 for the year ended December 31,
2014,2017, an increase of
$8,881.$6,961. The
changeincrease in income from operations was
dueprimarily attributable to
the items identified above underincreases in net sales
and gross profit,
andpartially offset by an increase in operating expenses.
Other
income (expense)expense, net
For the year ended December 31,
2015,2018, total other expense,
net was
$166$2,167 compared to total other expense,
net of
$49$1,383 for the year ended December 31,
2014.
2017, an increase of $784.
We recognized an income tax provision of
$10,111$10,340 for the year ended December 31,
2015,2018, compared to
income tax expense of $6,473$28,252 for the year ended December 31,
2014.2017. From
20142017 to
2015,2018, our effective tax rate
increaseddecreased from
38.2%65.2% to
39.3%20.9%. During the fourth quarter of 2017, the U.S. Government passed the Tax Act, which enacted significant changes to the U.S. federal tax code, including a reduction in the federal income tax rate for corporations from 35% to 21%. The
increaselower rate was effective for the 2018 tax year. Moreover, because of the Tax Act, we recorded a one-time charge in
rate is attributable2017 of $12,353, substantially all of which was non-cash, to income tax expense primarily to
statereflect (1) the re-measurement of deferred tax assets utilizing the lower federal income tax rate
changes and
a decrease(2) the tax on mandatory deemed repatriation of foreign earnings. The reduction in the
domestic manufacturing deduction.tax rate from 2017 to 2018 is significantly attributable to the factors noted above.
As a result of these factors, we reported net income of
$15,587$39,189 or
$0.54$1.38 per
share on a fully diluted
sharebasis for the year ended December 31,
2015,2018, compared to
net income of $10,461$15,100 or
$0.34$0.53 per
share on a fully diluted
sharebasis for the year ended December 31,
2014.2017.
YEAR ENDED DECEMBER 31, 2014,2017, AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2013 (in2016 (amounts in thousands, except per share data)
Net sales for the year ended December 31,
2014, were $261,5852017 was $519,495 compared to net sales of
$219,356$401,857 for the year ended December 31,
2013,2016, an increase of
$42,229$117,638 or
19%29%. The
year-over-year change is due primarily to (1) the increase in
revenue from 2013 to 2014 was primarily related to the following factors: (1) strong sales of our
accessorypower management products,
designed forparticularly accessories supporting the
iPhone 6 and iPhone 6 Plus,wireless charging ecosystem, (2)
increased success within the screen protection product category, particularly with the launch of InvisibleShield Glass, (3) increased placement and improved point of sale marketing for the keyboard product category at key retailers, (4) increased sales of
mobile power solutions,screen protection products in key wireless and
(5) increasedretail accounts, particularly in international
sales.markets, and (3) the inclusion of 12 months of mophie sales during 2017 versus only 10 months in 2016. These increases were partially offset by a decrease in sales of keyboards.
The percentage of
net sales related to our key product categories for the years ended December 31,
20142017 and
2013,2016, was approximately:
| | | 2014 | | 2013 |
| Screen Protection | | | 46 | % | | | 42 | % |
| Keyboards | | | 31 | % | | | 29 | % |
| Audio | | | 12 | % | | | 16 | % |
| Power Management | | | 6 | % | | | 2 | % |
| Other | | | 5 | % | | | 11 | % |
| | | | | | | | | | | |
| For the Years Ended December 31, | | |
| 2017 | | 2016 |
| | | |
| Screen protection | 48% | | | 54% | |
| Power management | 26% | | | 15% | |
| Power cases | 15% | | | 15% | |
| Audio | 5% | | | 6% | |
| Keyboards | 5% | | | 9% | |
| Other | 1% | | | 1% | |
The percentage of
net sales related to our key distribution channels for years ended December 31,
20142017 and
2013,2016, was approximately:
| | | 2014 | | 2013 |
| Indirect channel | | | 90 | % | | | 85 | % |
| Website | | | 5 | % | | | 9 | % |
| Mall cart and kiosk program | | | 5 | % | | | 6 | % |
| | | | | | | | | | | |
| For the Years Ended December 31, | | |
| 2017 | | 2016 |
| | | |
| Indirect | 89% | | | 87% | |
| Website | 8% | | | 9% | |
| Franchise | 3% | | | 4% | |
The percentage of
net sales by geographic region for the years ended December 31,
20142017 and
2013,2016, was approximately:
| | | 2014 | | 2013 |
| United States | | | 90 | % | | | 90 | % |
| Europe | | | 7 | % | | | 5 | % |
| Other | | | 3 | % | | | 5 | % |
| | | | | | | | | | | |
| For the Years Ended December 31, | | |
| 2017 | | 2016 |
| | | |
| United States | 84% | | | 88% | |
| Europe | 9% | | | 7% | |
| Other | 7% | | | 5% | |
Gross profit for the year ended December 31,
2014,2017 was
$83,344$168,998 or approximately
32%33% of net sales,
as compared to
$87,120$127,602 or approximately
40%32% of net sales for the year ended December 31,
2013. This decline2016. The increase in
gross profit margin was primarily
linkeddue to
improvements in margins of mophie-branded product and a $2,586 charge incurred during 2016 related to the impact of the fair value write-up of mophie inventory
write-downs recorded during 2014 for product expected to be sold below the carrying value.that did not recur in 2017. This
negative impact on gross profit marginincrease was partially offset by an increase in
freight costs and a shift in the
sale ofproduct mix whereby 2017 screen protection
which is our most profitable product category.sales were a smaller percentage of overall sales compared to the prior year (although overall screen protection sales increased by $33,628 or 16%).
Total operating expenses for
the year ended December 31,
2014, were $66,361, a decrease of $9,813 from total2017, was $124,263, compared to operating expenses
forof $148,962 the year ended December 31,
2013,2016, a decrease of
$76,174.$24,699 or 17%. The
$9,813 decrease in operating expenses was primarily attributable to
(1) the
following factors; (1) 2013 non-cash impairment charges of $11,246 and $591 related to the impairment of goodwill and intangibles and an investment$24,317 loss on disputed mophie purchase price in
a private company, respectively, which charges2016 that did not recur in
2014,2017, (2) a
decline is share-based compensation expense due$6,967 gain recorded during the fourth quarter related to
fewer grants being madethe settlement of litigation related to
employees than in prior years, andthe disputed mophie purchase price, (3)
an overall decreasesynergies from cost reduction initiatives, (4) lower transaction-related costs, (5) a reduction in advertising and marketing
expenses due to aspend, and (6) an overall reduction in
less effective online advertising.amortization expense. These
reductions in operating expensesdecreases were partially offset by
(1)the following increases in
salariesoperating expense: (1) the inclusion of 12 months of mophie-related expenses for 2017 compared with 10 months in 2016, (2) the $1,959 impairment of an intangible asset in 2017, and
benefits expense as employees earned their 2014 annual bonus (no annual bonus was earned in 2013) and (2) increases in commission due to(3) an
overall increase in
sales.operating expense related to the launch of certain wireless charging accessories.
Income
(Loss) from operations
We reported income from operations of
$16,983$44,735 for the year ended December 31,
2014,2017 compared to
incomea loss from operations of
$10,946$21,360 for the year ended December 31,
2013,2016, an increase of
$6,037.$66,095. The
changeincrease in income from operations was
dueprimarily attributable to
the items identified above underincreases in net sales
and gross profit, and
a decrease in operating
expenses.
expenses primarily due to a $24,317 loss on disputed mophie purchase price in 2016 and the $6,967 gain recorded in 2017 related to the settlement of litigation related to the disputed mophie purchase price.
Other
income (expense)expense, net
For the year ended December 31,
2014,2017, total other expense,
net was
$49$1,383 compared to total other expense,
net of
$2,461$2,199 for the year ended December 31,
2013.2016, a decrease of $816 or 37%. The decrease
is primarily attributable to a decline in
the loss from our equity method investment in HzO as the balance was
reduced to $0 during 2013 and a reduction in interest expense tiedprimarily due to an
overall reductionincrease in
debt from $17,543 at December 31, 2013 to $0 at December 31, 2014.
other income in 2017.
Income
tax provisiontaxes
We recognized an income tax
provisionexpense of
$6,473$28,252 for the year ended December 31,
2014,2017, compared to income tax
expensebenefit of
$3,695$7,972 for the year ended December 31,
2013.2016. From
20132016 to
2014,2017, our effective tax rate
decreasedincreased from
43.5%33.8% to
38.2%65.2%.
The decrease in rate is attributableDuring the fourth quarter of 2017, the U.S. Government passed the Tax Act, which enacted significant changes to
an increasethe U.S. federal tax code, including a reduction in the
domestic manufacturing deduction as well as a change in the statefederal income tax rate
used for
valuationcorporations from 35% to 21%. As a result of the Tax Act, we recorded a one-time charge of $12,353, substantially all of which was non-cash, to income tax expense primarily to reflect (1) the remeasurement of deferred
tax assets utilizing the lower federal income
taxes. These decreases were partially offset by an increase intax rate and (2) the
state rate used for current income taxes.tax on mandatory deemed repatriation of foreign earnings.
Net income
(loss)
As a result of these factors, we reported net income of
$10,461$15,100 or
$0.34$0.53 per
share on a fully diluted
sharebasis for the year ended December 31,
2014,2017 compared to net
incomeloss of
$4,790$15,587 or
$0.15$0.56 per
share on a fully diluted
sharebasis for the year ended December 31,
2013.2016.
Liquidity and Capital Resources (in(amounts in thousands)
Comparison of the Year Ended December 31,
20152018 to
2014At2017
As of December 31, 2015,2018, our principal sources of liquidity were cash generated by operations, cash on-hand, and availabilitynet borrowings from revolving credit facilities. Our principal uses of cash have been for business acquisitions, purchase of property and equipment, purchase of treasury shares, and payments for the net share settlement of restricted stock.
Cash and cash equivalents on-hand decreased to $15,793 on December 31, 2018, from $24,989 on December 31, 2017, a decrease of $9,196. The decrease in cash is largely the result of (1) $28,351 net payment in connection with the Gear4 acquisition, (2) $12,096 paid for the purchase of treasury shares, (3) $7,243 in purchases of property and equipment, (4) $4,451 payment in connection with the BRAVEN acquisition, and (5) $2,722 payments for the net share settlement of restricted stock. These expenditures are partially offset by $25,858 generated from operating activities and $20,825 net proceeds received from the term and revolving credit facilities. Of the $15,793 cash balance on December 31, 2018, cash from foreign entities totaled $14,271, which constitutes 90% of the total cash and cash equivalents balance.
Accounts receivable, net of allowances, increased to $156,667 on December 31, 2018, from $123,220 on December 31, 2017, an increase of $33,447. The increase in accounts receivable is largely due to higher sales from the month ended December 31, 2018 compared to the month ended December 31, 2017.
Inventories increased to $82,919 on December 31, 2018, from $75,046 on December 31, 2017, an increase of $7,873. The increase was primarily due to an increase in inventory from the acquisitions of BRAVEN and Gear4.
Accounts payable decreased to $80,908 on December 31, 2018, from $96,472 on December 31, 2017, a decrease of $15,564. The decrease is largely due to the launch of wireless charging products in the third quarter of 2017 which resulted in additional payables as of December 31, 2017.
As of December 31, 2018, working capital was $105,540 compared to $43,210 as of December 31, 2017, an increase of $62,330. The improvement in the working capital position was primarily attributable to reductions in accounts payable and the shift of the line of credit from current liabilities to non-current liabilities.
During the third quarter of 2015, our credit facility.board of directors approved a stock repurchase program with no expiration date. As of December 31, 2018, we have $5,462 remaining under this program. On March 11, 2019, our board of directors authorized the cancellation of the 2015 stock repurchase program, and authorized a new stock repurchase program that grants the repurchase of up to $20,000 of our outstanding common stock.
Comparison of the Year Ended December 31, 2017 to 2016
At December 31, 2017, our principal sources of liquidity were cash generated by operations and cash on-hand. Our principal uses of cash have been to fund working capital requirements, make payments on outstanding debt, and
repurchase shares of ZAGG Inc common stock.purchase tooling for new products.
Cash and cash equivalents on-hand increased to
$13,002$24,989 on December 31,
2015,2017, from
$9,461$11,604 on December 31,
2014,2016, an increase of
$3,541.$13,385. The increase in cash is largely the
net result of
positive$34,074 in cash
from operations during 2015,provided by operating activities, which was offset by
$14,930$14,083 used in
cash used topayment of outstanding debt, $5,766 in purchases of property and equipment, and $1,492 paid for the purchase
of treasury
stock and $4,910 in capital expenditures. Earnings from foreign operations are considered permanently re-invested and ofstock. Of the
$13,002$24,989 cash balance on December 31,
2015,2017, cash from foreign entities totaled
$4,873,$14,844, which constitutes
37%59% of the total cash and cash equivalents balance.
Accounts receivable, net of allowances, decreased to $57,647 on December 31, 2015, from $75,729 on December 31, 2014, a decrease of $18,082. The decrease is largely due to net sales decreasing to $78,632 in the fourth quarter of 2015 compared to $102,415 in the fourth quarter of 2014. The decline in fourth quarter sales is directly attributable to the Apple iPhone 6 and 6 Plus launches in 2014, which were form factor changes – when Apple changes the iPhone form factor, we see an increase in sales due to significant customer load-ins to support the launch. In the fourth quarter of 2015, the iPhone 6s and 6s Plus launches did positively impact sales, but as it did not involve a form factor change, no customer load-ins were necessary to support the launch at retail.
Accounts payable decreased to $33,846 on December 31, 2015, from $49,379 on December 31, 2014, a decrease of $15,533. The decrease is largely the result of lower overall sales and thus lower inventory purchases, and the timing of payments to our third-party logistics partners.
At December 31, 2015, working capital was $82,677 compared to $72,817 as of December 31, 2014.
During the third quarter of 2015, the Company’s board of directors approved a $20,000 stock repurchase program with no expiration date. As of December 31, 2015, the Company had not purchased any shares under this stock repurchase program.
Comparison of the Year Ended December 31, 2014 to 2013
Cash and cash equivalents on-hand decreased to $9,461 on December 31, 2014, from $15,031 on December 31, 2013, a decrease of $5,570. The decrease in cash is largely the result of positive cash from operations during 2014, offset by $17,543 in payments on debt during 2014, $9,579 in cash used to purchase treasury stock, and $4,430 in capital expenditures. Earnings from foreign operations are considered permanently re-invested and of the $9,461 cash balance on December 31, 2014, cash from foreign entities totaled $5,036, which constitutes 53% of the total cash and cash equivalents balance.
Accounts receivable, net of allowances, increased to
$75,729$123,220 on December 31,
2014,2017, from
$46,591$83,835 on December 31,
2013,2016, an increase of
$29,138.$39,385. The increase
in accounts receivable is largely due to
netthe year-over-year increase in fourth quarter sales
increasing to $102,415from $114,929 in the fourth quarter of
2014 compared2016 to
$66,818$176,924 in the fourth quarter of
2013.2017, an increase of $61,995 or 54%.
Inventories increased to $75,046 on December 31, 2017, from $72,769 on December 31, 2016, an increase of $2,277. The increase was primarily due to the launch of wireless charging accessories during the fourth quarter of 2017. This increase was partially offset by improvements in planning, forecasting, and purchasing processes.
Accounts payable increased to
$49,379$96,472 on December 31,
2014,2017, from
$15,207$85,022 on December 31,
2013,2016, an increase of
$34,172.$11,450. The increase is largely
driven by the
result of increased inventory purchases in December 2014, payments due to our third-party logistics partners, and an overall increase in
operating activities when comparing the fourth quarter of 2014sales and business operations compared to the
fourth quarter of 2013.prior year.
At December 31,
2014,2017, working capital was
$72,817$43,210 compared to
$83,385$(9,408) as of December 31,
2013.2016. The improvement in working capital is largely due to increased sales and profitability at the Company. Further, it should be noted that the 2016 Revolver is classified as a current liability due to the existence of a lockbox agreement as required by current U.S. GAAP, although the outstanding balance is not due to be repaid until 2021. If the 2016 Revolver were excluded from current liabilities, the working capital would be $66,685 on December 31, 2017, versus $21,899 on December 31, 2016.
Debt and
Letters of Credit
Facilities
On
December 23, 2014, the Company and Wells Fargo,April 12, 2018, we entered into
the Third Amendment, which modified the original Credit Agreement entered into between the Companyan amended and
Wells Fargo on December 7, 2012restated credit and
all subsequent amendments to the Credit Agreement (First Amendment to the Credit Agreement entered into on December 20, 2013 and Second Amendment to the Credit Agreement entered into on November 4, 2014). TheLine of Credit includes a letter of credit sub-feature that allows the Company to issue standby commercial letters of credit against the Line of Credit, not to exceed at any time an aggregate of $5,000. During 2015 and 2014, ZAGG did not issue any standby commercial letters of credit.On August 24, 2015, the Company and Wells Fargo, entered into the Fourth Amendment to Credit Agreement (“Fourth Amendment”), which modified the original Credit Agreement entered into between the Company and Wells Fargo on December 7, 2012 and all subsequent amendments to the Credit Agreement. The Fourth Amendment modified a debt covenant to allow the Company to purchase up to $15,000 of ZAGG Inc common stock during each calendar year, including the 2015 calendar year, rather than during consecutive twelve month periods, as was documented in the Credit Agreement prior to the Fourth Amendment.
As of December 31, 2015 and 2014, the total balance outstanding on the line of credit was zero.Borrowings and repayments under the Line of Credit may occur from time to time in the Company’s ordinary course of business through December 1, 2016. Any outstanding borrowings under the Line of Credit mature and are due on December 1, 2016.
Any outstanding principal balance under the line of credit bears interest at a fluctuating rate per annum determined to be the sum of the (1) LIBOR margin established under the Credit Agreement (with the initial LIBOR margin being set at 1.25%) and (2) Daily Three Month LIBOR (as defined in the Credit Agreement) in effect from time to time. Each change in the rate of interest will become effective on each business day on which a change in daily three month LIBOR is announced by Wells Fargo.
The Credit Agreement contained a number of financial and non-financial debt covenants. At December 31, 2015, the Company was in compliance with all covenants associated with the Credit Agreement.
On March 3, 2016, concurrent with the close of the merger with mophie, the Company entered into a Credit and Security Agreement (“security agreement (the “2018 Credit and Security Agreement”) with KeyBank, as the administrative agent, Swing Line Lender and Issuing Lender, KeyBanc Capital Markets Inc., as sole lead arranger and Zions Bank. sole book runner, and other members of the lender group, which was subsequently amended by a first amendment agreement dated as of November 28, 2018 (as amended, the “2018 Credit and Security Agreement”).
The
2018 Credit and Security Agreement
replacesconsists of an $125,000 secured revolving credit facility (the “2018 Revolver”), which is not subject to borrowing base limitations. In addition, at our option, (i) up to $40,000 of the
Credit Agreement with Wells Fargo described above, which was terminated upon signing2018 Revolver may be made available for the
issuance of letters of credit, and (ii) we may obtain a term loan or increase the Maximum Revolver Amount of the 2018 Revolver by another $25,000 within a specified period defined in the 2018 Credit and Security Agreement.
The Proceeds from the 2018 Revolver were used to fully retire the 2016 term loan under the 2016 Credit and Security Agreement provides an $85,000 revolvingand thus, the 2018 Revolver is the only credit commitment (“Revolver”).Borrowingsinstrument effective April 12, 2018. As of December 31, 2018, no letters of credit were issued and repayments under the Revolver may occur from time to time in the Company’s ordinary course of business through the maturity date of March 2, 2021, at which time any amounts outstanding are$40,000 was available to be paid in full (60-month term). All borrowings under theissued for letters of credit.
The 2018 Revolver are subject to a borrowing base limit, which is calculated from outstanding accounts receivable and inventory, and reported to the administrative agent monthly. Interest on the Revolver will accrueinitially bears interest at an annual rate, at our option, of (i) the base rate (as defined in the 2018 Credit and Security Agreement) plus 0.50%a margin of 0.250% to 1.375% based on the prior quarter-end Leverage Ratio or LIBOR(ii) the Eurodollar Rate (as defined in the 2018 Credit and Security Agreement) plus 1.50%a margin of 1.250% to 2.375% based on the prior quarter-end Leverage Ratio. The 2018 Revolver matures April 11, 2023, subject to early termination in the event of default.
In addition, we are required to pay a monthly Applicable Commitment Fee Rate (as defined in the 2018 Credit and Security Agreement) that can fluctuate between 0.175% and 0.275% based on the Leverage Ratio (as defined in the 2018 Credit and Security Agreement). The
Revolvercommitment fee is
subject to an unused line fee calculated
monthly using the Maximum Revolving Amount (as defined in the 2018 Credit and Security Agreement) at the end of each calendar month, minus the Revolving Credit Exposure (exclusive of the Swing Line Exposure) (each as
0.20%defined in the 2018 Credit and Security Agreement) at the end of such day, multiplied by the
average unused amount of the Revolver.Applicable Commitment Fee Rate in effect on such day divided by three hundred sixty (360). The monthly commitment fee is payable quarterly in arrears, commencing on July 1, 2018, and continuing on each regularly scheduled payment date thereafter.
The 2018 Credit and Security Agreement contains customary representations and warranties and restrictive covenants. The 2018 Credit and Security Agreement also
provides a $25,000 term loan commitment (“Term Loan”). Payments oncontains affirmative and negative covenants requiring, among other things, us to meet certain financial ratio tests and to provide certain information to the
Term Loan are to be made in consecutive monthly installments commencing on April 1, 2016 and continuing until the Term Loan is paid in full on March 2, 2020 (48-month term).Interest on the Term Loan will accrue at the base rate plus 1.0% or at a rate of LIBOR plus 2.0%.lenders. The 2018 Credit and Security Agreement also provides for letters of creditincludes financial maintenance covenants that require compliance with a fronting feeLeverage Ratio and a Fixed Charge Coverage Ratio (both defined in the 2018 Credit and Security Agreement), tested at the end of 0.125% (paid per annum) for all issued and outstanding letters of credit
each fiscal quarter commencing with the three months ended June 30, 2018.
The 2018 Credit and Security Agreement provides for a lockbox and cash collateral account and that allalso contains customary events of default. If an event of default occurs, the Company’s deposit accounts will be maintained withlenders under the administrative agent. The2018 Credit and Security Agreement is collateralizedwould be entitled to take various actions, including the acceleration of amounts due thereunder and all other actions permitted to be taken by substantially alla secured creditor.
As part of the
assets of the Company and its subsidiaries. The2018 Credit and Security Agreement,
establishes two debt covenants that are measured on a quarterly basis: | · | Maximum Leverage Ratio: Defined as the ratio of total funded indebtedness to Consolidated EBITDA (as defined in the Credit and Security Agreement), which cannot be more than 3.50 on a trailing four quarter basis. |
| · | Minimum Fixed Charge Coverage Ratio: Defined as the ratio of Consolidated EBITDA (as defined in the Credit and Security Agreement) minus taxes, capital distributions and unfunded capital expenditures divided by the sum of interest payments, principal payments, and capital lease payments; the minimum allowed under the Credit and Security Agreement is 1.10 on a trailing four quarter basis. |
the lockbox arrangement requirement in the 2016 Credit and Security Agreement was terminated and thus, we now have full control of cash upon receipt from customers.
Based on our current operations,
and those of mophie, we believe that cash generated from operations, cash on hand, and available borrowings under the
2018 Credit and Security Agreement will be adequate to meet our expected capital expenditures and working capital needs for the next 12 months and beyond. However, we operate in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. Accordingly,
there can be no assurance that we may
not be requiredneed to raise additional funds through the sale of equity or debt securities or from debt facilities. Additional capital, if needed, may not be available on satisfactory terms, if at all.
Contractual Obligations and Commitments (in(amounts in thousands) The following table provides information on our contractual obligations as of December 31,
2015:| | | Payments due by period |
| Contractual Obligations | | | Total | | | | Less Than 1 Year | | | | 1 - 3 years | | | | 3 - 5 years | | | | More than 5 years | |
| Operating Lease Obligations | | $ | 10,413 | | | $ | 1,235 | | | $ | 2,819 | | | $ | 2,763 | | | $ | 3,596 | |
| Total | | $ | 10,413 | | | $ | 1,235 | | | $ | 2,819 | | | $ | 2,763 | | | $ | 3,596 | |
| (1) | Unrecognized uncertain tax benefits of $1,265 are not included in the table above as we are not sure when the amount will be paid. |
2018: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments Due by Period (1) | | | | | | | | |
| Total | | Less Than 1 Year | | 1 - 3 years | | 3 - 5 years | | More than 5 years |
| | | | | | | | | |
| 2018 Credit and Security Agreement | $ | 58,363 | | $ | — | | $ | — | | $ | 58,363 | | $ | — |
| Operating leases | 15,088 | | 3,198 | | 5,299 | | 4,493 | | 2,098 |
| Total | $ | 73,451 | | $ | 3,198 | | $ | 5,299 | | $ | 62,856 | | $ | 2,098 |
(1) Unrecognized uncertain tax benefits of $1,398 are not included in the table above as we are not sure when the amount will be paid.
Off Balance Sheet Arrangements
As of December 31, 2015,2018, there were no off balance sheet arrangements.arrangements, except our operating lease commitments.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks in the ordinary course of our business. These risks result primarily from changes in foreign currency exchange rates and interest rates. In addition, our international operations are subject to risks related to differing economic conditions, changes in political climate, differing tax structures, and other regulations and restrictions.
To date we have not utilized derivative financial instruments or derivative commodity instruments. We
do not expect to employ these or other strategies to hedge market risk in the foreseeable future. We invest
a portion of our cash in money market funds, which are subject to minimal credit and market risk. We believe that the market risks associated with these financial instruments are immaterial, although there can be no guarantee that these market risks will be immaterial to us.
See “Liquidity and Capital Resources” in this Annual Report on Form 10-K for further discussion of our financing facilities and capital structure. Market risk, calculated as the potential change in fair value of our cash equivalents and line of credit resulting from a hypothetical 1.0% (100 basis point) change in interest rates, was not material atas of December 31, 2015.2018.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and footnotesnotes thereto are set forth beginning on page F-1 of this Report.Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
| 1. | Disclosure Controls and Procedures |
1Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial
and accounting officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act, as of December 31,
2015.2018. Based on this evaluation, our principal executive officer and principal financial and accounting officer concluded that as of the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures are effective and were designed to provide reasonable assurance that information required to be included in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported as specified in the SEC’s rules and forms. | 2. | Management’s Report on Internal Control Over Financial Reporting |
2Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:
| · | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; |
| · | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles; |
•pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
| · | provide reasonable assurance that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and |
| · | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our consolidated financial statements. |
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and our receipts and expenditures are being made only in accordance with authorization of our management and directors; and
•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our consolidated financial statements.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial
and accounting officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting
as of December 31, 2018, based on the framework in
"Internal Control—Integrated Framework"“Internal Control-Integrated Framework” (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this evaluation, our management determined
that ourinternal control over financial reporting
was effective based on these criteria as of December 31, 2015.2018.
On November 30, 2018, we acquired Gear4. As permitted by SEC guidance for newly acquired businesses, we excluded Gear4 from our assessment of internal control over financial reporting, which represented total assets of $47,575 and total revenues of $2,955, as of and for the period from the closing of the acquisitions to December 31, 2018.
Our independent registered public accounting firm, KPMG LLP, has issued an attestation report on our internal control over financial reporting, which is included at 9A.5
below | 3. | Changes in Internal Control Over Financial Reporting |
below.
3. Changes in Internal Control Over Financial Reporting
As a result of the material weakness which existed as of December 31,
20142017 related to the ineffective
operation ofcontrol environment, risk assessment, and control activities regarding (1) the
reconciliation of in-transit inventorytracking and
the review thereof,accounting for customer product returns; and (2) accounting for accounts receivable related to sales returns with a significant customer, as discussed in our Annual Report on Form 10-K for the year ended December 31,
2014,2017, management has completed the following changes to the Company’s internal controls that have materially affected our internal control over financial reporting during the year ended December 31,
2015: | · | We have conducted inventory reconciliation training with those responsible for performing and reviewing inventory reconciliations. Process improvements developed as part of these trainings were used in the reconciliations performed for the year ended December 31, 2015. |
| · | We have renegotiated contract terms with the Company’s key inventory suppliers to change the inventory delivery terms from free on board (“FOB”) shipping point to FOB destination, thereby significantly reducing in-transit inventory. The amendments to the supplier contracts were completed during the second quarter of 2015, and the first purchase orders under these terms commenced during the second quarter of 2015. |
2018:
•Enhanced our control environment by establishing appropriate authorities and responsibilities in alignment with the objectives of internal control over financial reporting;
•Implemented a cross functional risk assessment process to identify and assess changes in the business that could significantly impact internal control over financial reporting;
•Designed and implemented control activities over the customer returns process;
•Designed and implemented control activities over the management of accounts receivable transactions due to the growth of the Company; and
•Designed and implemented certain automated control processes to replace manual processes.
Management has assessed the above identified changes to its internal control over financial reporting to ensure that the changes have been properly designed and implemented and are operating effectively. The assessment performed has allowed management to conclude that the material weakness at December 31,
20142017 has been remediated and that internal
controlscontrol over financial reporting
werewas effective
atas of December 31,
2015. | 4. | Inherent Limitations on Effectiveness of Controls |
Our disclosure controls2018.
4. Inherent Limitations on Effectiveness of Controls
Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and procedures are designedcompliance and is subject to provide reasonable assurance of achieving their objectives. Nevertheless, an internallapses in judgment and breakdowns resulting from human failures. Internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system reflects the fact that there are resource constraints, and the benefits of controls are considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controlsover financial reporting also can be circumvented by the individual actscollusion or improper management override. Because of some persons,such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by collusion of two or more people, or by management overrideinternal control over financial reporting. However, these inherent limitations are known features of the internal control. Thefinancial reporting process. Therefore, it is possible to design of any system of controls also is based in part upon certain assumptions aboutinto the likelihood of future events,process safeguards to reduce, though not eliminate, this risk.
5. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and
there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. | 5. | REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
The Board of Directors and Stockholders
Opinion on Internal Control Over Financial Reporting
We have audited ZAGG Inc’s and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2015,2018, based on criteria established inInternal Control—Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). ZAGG Inc’s In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and related notes (collectively, the “consolidated financial statements”), and our report dated March 14, 2019 expressed an unqualified opinion on those consolidated financial statements.
The Company acquired Gear4 HK Limited (“Gear4”) during 2018, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018, Gear4’s internal control over financial reporting associated with total assets of $47,575,000 and total revenues of $2,955,000 included in the consolidated financial statements of the Company as of and for the year ended December 31, 2018. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Gear4.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial
Reporting (Item 9A.2).Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, ZAGG Inc maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of ZAGG Inc and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2015, and our report dated March 8, 2016 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
| | |
| /s/ KPMG LLP |
| Salt Lake City, Utah |
| March 14, 2019 |
Salt Lake City, Utah
March 8, 2016
ITEM 9B. OTHER INFORMATION
Not applicable.
None.
Items 10, 11, 12, 13 and 14 in Part III of this Annual Report on Form 10-K are incorporated herein by reference to our definitive proxy statement for our 20162019 Annual Meeting of Shareholders.Stockholders. We intend to file our definitive proxy statement with the SEC not later than 120 days after December 31, 2015,2018, pursuant to Regulation 14A of the Exchange Act.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS,
AND FINANCIAL STATEMENT SCHEDULES
15(a)(1). Financial Statements.
The following
consolidated financial statements, and related notesConsolidated Financial Statements, Notes to Consolidated Financial Statements, and Report of Independent Registered Public Accounting Firm are filed as part of this Annual
Report:Report on Form 10-K: | Page | | | | | | | |
| CONTENTS | | PAGE |
| | |
| F-2 | |
| | |
| Consolidated Financial Statements: | | |
| | |
| F-3 | |
| | |
| F-4 | |
| | |
| F-5 | |
| | |
| F-6 | |
| | |
| F-7 | |
| | |
| F-9 |
| |
15(a)(2). Financial Statement Schedules.
None.
All schedules have been omitted because they are not required, not applicable, not present in amounts sufficient to require submission of the schedule, or the required information is otherwise included.
ExhibitNumber | | Description
| | | | | | |
2.1Exhibit Number | | Description |
| | |
| | Share Purchase Agreement, and Plandated as of MergerNovember 30, 2018 by and among ZAGG Inc, ZM Acquisition, Inc., mophie inc.Patriot Corporation Unlimited Company, STRAX Holding GmbH, and Gear4 HK Limited (previously filed as an exhibit to a Current Report on Form 8-K filed with the Commission on February 2, 2016December 4, 2018, and incorporated herein by this reference). |
2.2
| | First Amendment to |
| | Membership Interest Purchase Agreement, and Plan of Merger, dated as of MarchJanuary 3, 2016,2019, by and among ZAGG Inc, ZM Acquisition, Inc., mophie inc.ZAGG Hampton LLC, Halo2Cloud, LLC, the members of Halo2Cloud, LLC, and Daniel HuangPatrick Keenan, as Sellers' representative (previously filed as an exhibit to a Current Report on Form 8-K filed with the Commission on MarchJanuary 8, 20162019, and incorporated herein by this reference). |
3.1 | | Articles |
| | |
3.1.1 | | Certificate of Correction as filed with the State of Nevada (previously filed as an exhibit to Form 10-K filed with the Commission on March 15, 2012 and incorporated herein by this reference). |
3.2 | | Amended and Restated Bylaws of ZAGG IncorporatedInc (previously filed as an exhibit to a Current Report on Form 8-K filed with the Commission on November 19, 2014June 14, 2016, and incorporated herein by this reference). |
3.2.1 | | Amendment to Second Amended and Restated |
| | |
10.1 | | Credit Agreement between |
| | |
10.2 | | Revolving Line of Credit Note & Addendum to Revolving Line of Credit Note between |
| | |
10.3 | | Term Note & Addendum to Term Note between ZAGG Inc and Wells Fargo Bank, National Association (previously filed as an exhibit to a Current Report on Form 8-K filed with the Commission on December 13, 2012 and incorporated herein by this reference). |
10.4 | | Security Agreement between ZAGG Inc and Wells Fargo Bank, National Association (previously filed as an exhibit to a Current Report on Form 8-K filed with the Commission on December 13, 2012 and incorporated herein by this reference). |
10.5 | | General Pledge Agreement between ZAGG Inc and Wells Fargo Bank, National Association (previously filed as an exhibit to a Current Report on Form 8-K filed with the Commission on December 13, 2012 and incorporated herein by this reference). |
10.6* | | Employment Agreement between ZAGG Inc and Randy Hales (previously filed as an exhibit to a Current Report on Form 8-K filed with the Commission on December 13, 2012 and incorporated herein by this reference). |
10.7* | | ZAGG IncRestated 2013 Equity Incentive Award Plan (previously filed as an exhibit to a Current Report on Form 8-K filed with the Commission on January 17, 2013June 23, 2017, and incorporated herein by this reference). |
10.8* | | |
| 10.2* | | |
10.9 | | First Amendment to Credit Agreement between |
| 10.3* | | |
10.10 | | First Modification to Promissory Note and to Addendum between ZAGG Inc and Wells Fargo Bank, National Association (previously filed as an exhibit to a Current Report on Form 8-K filed with the Commission on December 23, 2013 and incorporated herein by this reference). |
10.11 | | Second Amendment to Credit Agreement and Waiver of Default between ZAGG Inc and Wells Fargo Bank, National Association (previously filed as an exhibit to a Quarterly Report on Form 10-Q filed with the Commission on November 5, 2014 and incorporated herein by this reference). |
10.12 | | Second Modification of Promissory Note between ZAGG Inc and Wells Fargo Bank, National Association (previously filed as an exhibit to a Quarterly Report on Form 10-Q filed with the Commission on November 5, 2014 and incorporated herein by this reference). |
10.13 | | Third Amendment to Credit Agreement and Waiver of Default between ZAGG Inc and Wells Fargo Bank, National Association (previously filed as an exhibit to a Current Report on Form 8-K filed with the Commission on December 23, 2014 and incorporated herein by this reference). |
10.14 | | Third Modification of Promissory Note between ZAGG Inc and Wells Fargo Bank, National Association (previously filed as an exhibit to a Current Report on Form 8-K filed with the Commission on December 23, 2014 and incorporated herein by this reference). |
10.15 | | Fourth Modification of Promissory Note between ZAGG Inc and Wells Fargo Bank, National Association (previously filed as an exhibit to a Current Report on Form 8-K filed with the Commission on August 25, 2015 and incorporated herein by this reference). |
10.16 | | |
10.17* | | |
| | |
10.18* | | Employment Agreementdated June 11, 2015, between ZAGG Inc and Brad Holiday (previously filed as an exhibit to a Current Report on Form 8-K filed with the Commission on June 11, 20152015, and incorporated herein by this reference). |
10.19* | | |
| | |
10.20* | | Change of Control Addendum |
| | |
10.21 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | Amended and Restated Credit Agreement and Security Agreement, dated as of March 3, 2016,April 12, 2018, by and among ZAGG Inc, KeyBank National Association, KeyBancKeyBank Capital Markets Inc., ZB, N.A. D/B/A Zions First National Bank, and the other lenders party thereto (previously filed as an exhibit to a Current Report on Form 8-K filed with the Commission on March 8, 2016April 12, 2018, and incorporated herein by this reference). |
10.22 | | |
| | | | | | | | |
| | $30,909,090.9040,000,000 Revolving Credit Note, dated March 3, 2016,April 12, 2018, by ZAGG Inc to ZB, N.A. d/b/a Zions First National Bank (previously filed as an exhibit to a Current Report on Form 8-K filed with the Commission on April 12, 2018, and incorporated herein by this reference). |
| | |
| | |
| | |
| | |
| | |
| | |
10.23 | | $27,045,454.55 Revolving Credit Note, |
| | First Amendment Agreement, dated March 3, 2016,as of November 28, 2018, by and among ZAGG Inc, toKeyBank National Association, ZB, N.A. dba Zions First National, MUFG Union Bank, (previously filed as an exhibit to a Current Report on Form 8-K filed with the Commission on March 8, 2016N.A., and incorporated herein by this reference). |
10.24 | | $27,045,454.55 Revolving Credit Note, dated March 3, 2016, by ZAGG Inc to JPMorgan Chase Bank, N.A. (previously filed as an exhibit to a Current Report on Form 8-K filed with the Commission on March 8, 2016 and incorporated herein by this reference). |
10.25 | | $9,090,909.10 Term Note, dated March 3, 2016, by ZAGG Inc to KeyBank National Association (previously filed as an exhibit to a Current Report on Form 8-K filed with the Commission on March 8, 2016December 4, 2018, and incorporated herein by this reference). |
10.26 | | $7,954,545.45 Term Note, |
| | |
10.27 | | $7,954,545.45 Term Note, |
| | |
10.28 | | $8,500,000.00 Swing Line Note, |
| | |
| | |
| | |
10.29 | | Guaranty of Payment, dated as of March 3, 2016, by iFrogz Inc., ZAGG LLC, ZAGG Intellectual Property Holding Co., Inc., ZAGG Retail, Inc., mophie inc., and mophie LLC in favor of KeyBank National Association, as administrative agent, for the benefit of the administrative agent and the lenders identified therein (previously filed as an exhibit to a Current Report on Form 8-K filed with the Commission on March 8, 2016 and incorporated herein by this reference). |
10.30 | | Security Agreement, dated asList of March 3, 2016, by iFrogz Inc., ZAGG LLC, ZAGG Intellectual Property Holding Co., Inc., ZAGG Retail, Inc., mophie inc., and mophie LLC in favor of KeyBank National Association, as administrative agent, for the benefit of the administrative agent and the lenders identified therein (previously filed as an exhibit to a Current Report on Form 8-K filed with the Commission on March 8, 2016 and incorporated herein by this reference).subsidiaries |
10.31 | | Pledge Agreement, dated as of March 3, 2016, by ZAGG Inc in favor of KeyBank National Association, as administrative agent, for the benefit of the administrative agent and the lenders identified therein (previously filed as an exhibit to a Current Report on Form 8-K filed with the Commission on March 8, 2016 and incorporated herein by this reference). |
10.32 | | Pledge Agreement, dated as of March 3, 2016, by iFrogz Inc. in favor of KeyBank National Association, as administrative agent, for the benefit of the administrative agent and the lenders identified therein (previously filed as an exhibit to a Current Report on Form 8-K filed with the Commission on March 8, 2016 and incorporated herein by this reference). |
10.33 | | Pledge Agreement, dated as of March 3, 2016, by ZAGG LLC in favor of KeyBank National Association, as administrative agent, for the benefit of the administrative agent and the lenders identified therein (previously filed as an exhibit to a Current Report on Form 8-K filed with the Commission on March 8, 2016 and incorporated herein by this reference). |
10.34 | | Pledge Agreement, dated as of March 3, 2016, by mophie inc. in favor of KeyBank National Association, as administrative agent, for the benefit of the administrative agent and the lenders identified therein (previously filed as an exhibit to a Current Report on Form 8-K filed with the Commission on March 8, 2016 and incorporated herein by this reference). |
10.35 | | Pledge Agreement, dated as of March 3, 2016, by mophie LLC in favor of KeyBank National Association, as administrative agent, for the benefit of the administrative agent and the lenders identified therein (previously filed as an exhibit to a Current Report on Form 8-K filed with the Commission on March 8, 2016 and incorporated herein by this reference). |
10.36 | | Intellectual Property Security Agreement, dated as of March 3, 2016, by ZAGG Intellectual Property Holding Co., Inc. in favor of KeyBank National Association, as administrative agent, for the benefit of the administrative agent and the lenders identified therein (previously filed as an exhibit to a Current Report on Form 8-K filed with the Commission on March 8, 2016 and incorporated herein by this reference). |
10.37 | | Intellectual Property Security Agreement, dated as of March 3, 2016, by mophie inc. in favor of KeyBank National Association, as administrative agent, for the benefit of the administrative agent and the lenders identified therein (previously filed as an exhibit to a Current Report on Form 8-K filed with the Commission on March 8, 2016 and incorporated herein by this reference). |
21.1 | | List of subsidiaries. |
23.1 | | |
31.1 | | |
| | |
31.2 | | |
| | |
32.1 | | |
| | |
32.2 | | Certification of Chief Financial Officer pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| EX-101.INS | | XBRL Instance Document |
EX-101.SCH | | |
| EX-101.SCH | | XBRL Taxonomy Extension Schema Document |
EX-101.CAL | | |
| EX-101.CAL | | XBRL Taxonomy Extension Calculation Linkbase |
EX-101.DEF | | |
| EX-101.DEF | | XBRL Taxonomy Extension Definition Linkbase |
EX-101.LAB | | |
| EX-101.LAB | | XBRL Taxonomy Extension Labels Linkbase |
EX-101.PRE | | |
| | | | | | | | |
| EX-101.PRE | | XBRL Taxonomy Extension Presentation Linkbase |
* Management compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(b) of this report. |
∗Management compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(b) of this report.
ITEM 16. FORM 10-K SUMMARY
None.
Pursuant to the requirements of section 13 or 15 (d) of the Securities Exchange Act of 1934, the
Registrantregistrant has duly caused this
Reportreport to be signed on its behalf by the undersigned, thereunto duly authorized.
| ZAGG INC | | | | | | | |
| ZAGG INC | |
| | |
Dated: March 8, 201614, 2019 | By: | /s/ RANDALL L. HALES CHRIS M. AHERN |
| Randall L. Hales
President, CEO,
| Chris M. Ahern Chief Executive Officer & Director (Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| | | | | | | | |
Dated: March 8, 201614, 2019 | By: | /s/ RANDALL L. HALES CHRIS M. AHERN |
| Randall L. Hales
President, CEO,
| Chris M. Ahern Chief Executive Officer & Director (Principal Executive Officer) |
| | |
Dated: March 8, 201614, 2019 | By: | /s/ BRADLEY J. HOLIDAY |
| | (Principal Accounting and Financial Officer) |
| |
Dated: March 8, 2016 | By:/s/ CHERYL LARABEE |
| Cheryl Larabee
Chairperson
|
| |
Dated: March 8, 2016 | By:/s/ DAN MAURER |
| Dan Maurer
Director
|
| |
Dated: March 8, 2016 | By:/s/ TODD HEINER |
| Todd Heiner
Director
|
| |
| | |
Dated: March 8, 201614, 2019 | By: /s/By: | /s/ CHERYL A. LARABEE |
| | Cheryl A. Larabee Chairperson |
| | |
| Dated: March 14, 2019 | By: | /s/ DANIEL R. MAURER |
| | Daniel R. Maurer Director |
| | |
| Dated: March 14, 2019 | By: | /s/ MICHAEL T. BIRCH |
| | Michael T. Birch Director |
| | |
| Dated: March 14, 2019 | By: | /s/ P. SCOTT STUBBS |
| | Director |
ZAGG INC AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
CONTENTS | Page | | | | | | | |
| CONTENTS | | PAGE |
| | |
| F-2 | |
| | |
| Consolidated Financial Statements: | | |
| | |
| F-3 | |
| | |
| F-4 | |
| | |
| F-5 | |
| | |
| F-6 | |
| | |
| F-7
| |
| | |
| F-9 | |
Report of Independent Registered Public Accounting Firm
The
To the Stockholders and Board of Directors
and Stockholders Opinion on the ConsolidatedFinancial Statements
We have audited the accompanying consolidated balance sheets of ZAGG, Inc and subsidiaries (the “Company”) as of December 31, 20152018 and 2014, and2017, the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the years in the three-year period ended December 31, 2015. 2018, and the related notes (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 14, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for revenue from contracts with customers in 2018 due to the adoption of Accounting Standards Codification Topic 606 – Revenue from Contracts with Customers.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material
misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
supportingregarding the amounts and disclosures in the
consolidated financial statements.
An auditOur audits also
includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial
statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ZAGG Inc and subsidiaries
We have served as
of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), ZAGG Inc’s internal control over financial reporting as of December 31, 2015, based on criteria established inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 8, 2016, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Salt Lake City, Utah
March 8, 2016
auditor since 2010. | | |
|
| Salt Lake City, Utah |
| March 14, 2019 |
ZAGG INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(
amounts in thousands, except par value)
| | | | | | | |
| | | 2015 | | | 2014 | |
| ASSETS | | | | | | | | |
| | | | | | | | | |
| Current assets | | | | | | | | |
| Cash and cash equivalents | | $ | 13,002 | | | $ | 9,461 | |
| Accounts receivable, net of allowances of $568 in 2015 and $1,910 in 2014 | | | 57,647 | | | | 75,729 | |
| Inventories | | | 45,912 | | | | 48,378 | |
| Prepaid expenses and other current assets | | | 3,142 | | | | 2,681 | |
| Income tax receivable | | | 1,158 | | | | - | |
| Deferred income tax assets | | | 10,840 | | | | 10,774 | |
| | | | | | | | | |
| Total current assets | | | 131,701 | | | | 147,023 | |
| | | | | | | | | |
| Property and equipment, net of accumulated depreciation at $10,539 in 2015 and $7,659 in 2014 | | | 8,309 | | | | 7,300 | |
| | | | | | | | | |
| Intangible assets, net of accumulated amortization at $41,803 in 2015 and $33,242 in 2014 | | | 23,045 | | | | 31,408 | |
| | | | | | | | | |
| Deferred income tax assets | | | 15,386 | | | | 14,290 | |
| | | | | | | | | |
| Note receivable, net | | | - | | | | 801 | |
| | | | | | | | | |
| Other assets | | | 1,100 | | | | 457 | |
| | | | | | | | | |
| Total assets | | $ | 179,541 | | | $ | 201,279 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
| | | | | | | | | |
| Current liabilities | | | | | | | | |
| Accounts payable | | $ | 33,846 | | | $ | 49,379 | |
| Income taxes payable | | | - | | | | 6,464 | |
| Accrued liabilities | | | 5,068 | | | | 6,910 | |
| Accrued wages and wage related expenses | | | 2,244 | | | | 2,600 | |
| Deferred revenue | | | 17 | | | | 179 | |
| Sales returns liability | | | 7,849 | | | | 8,674 | |
| | | | | | | | | |
| Total current liabilities | | | 49,024 | | | | 74,206 | |
| | | | | | | | | |
| Stockholders' equity | | | | | | | | |
| Common stock, $0.001 par value; 100,000 shares authorized; | | | | | | | | |
| 33,219 and 32,686 shares issued in 2015 and 2014, respectively | | | 33 | | | | 33 | |
| Additional paid-in capital | | | 88,983 | | | | 85,154 | |
| Accumulated other comprehensive income (loss) | | | (1,597 | ) | | | (895 | ) |
| Note receivable collateralized by stock, net | | | - | | | | (348 | ) |
| Treasury stock, 5,679 and 3,569 common shares in 2015 and 2014 respectively, at cost | | | (35,194 | ) | | | (19,576 | ) |
| Retained earnings | | | 78,292 | | | | 62,705 | |
| | | | | | | | | |
| Total stockholders' equity | | | 130,517 | | | | 127,073 | |
| | | | | | | | | |
| Total liabilities and stockholders' equity | | $ | 179,541 | | | $ | 201,279 | |
| | | | | | | | | | | | | | |
| | As of December 31, | | |
| | 2018 | | 2017 |
| ASSETS | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | $ | 15,793 | | $ | 24,989 |
| Accounts receivable, net of allowances of $885 and $734 | 156,667 | | 123,220 |
| Income tax receivable | 375 | | — |
| Inventories | 82,919 | | 75,046 |
| Prepaid expenses and other current assets | 5,473 | | 4,547 |
| Total current assets | | 261,227 | | 227,802 |
| | | | |
| Property and equipment, net of accumulated depreciation of $11,844 and $12,540 | | 16,118 | | 13,444 |
| Intangible assets, net of accumulated amortization of $78,627 and $66,639 | | 52,054 | | 39,244 |
| Deferred income tax assets | | 19,403 | | 24,403 |
| Goodwill | | 27,638 | | 12,272 |
| Other assets | | 1,571 | | 3,426 |
| Total assets | | $ | 378,011 | | $ | 320,591 |
| | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | |
| Current liabilities: | | | | |
| Accounts payable | $ | 80,908 | | $ | 96,472 |
| Income tax payable | — | | 2,052 |
| Sales returns liability | 54,432 | | 34,536 |
| Accrued wages and wage related expenses | 6,624 | | 5,652 |
| Accrued liabilities | 13,723 | | 8,168 |
| Deferred revenue | — | | 315 |
| Line of credit | — | | 23,475 |
| Current portion of long-term debt, net of deferred loan costs of $0 and $141 | — | | 13,922 |
| Total current liabilities | | 155,687 | | 184,592 |
| | | | |
| Line of credit | | 58,363 | | — |
| Other long-term liabilities | | 5,470 | | — |
| Total liabilities | | 219,520 | | 184,592 |
| Commitments and contingencies (Note 13) | | | | |
| | | | |
| Stockholders' equity: | | | | |
| Common stock, $0.001 par value; 100,000 shares authorized; 34,457 and 34,104 shares issued | 34 | | 34 |
| Treasury stock, 6,983 and 6,065 common shares, at cost | (49,733) | | (37,637) |
| Additional paid-in capital | 96,486 | | 96,145 |
| Accumulated other comprehensive loss | (1,410) | | (348) |
| Retained earnings | 113,114 | | 77,805 |
| | 158,491 | | 135,999 |
| Total stockholders' equity | | | | |
| Total liabilities and stockholders' equity | | $ | 378,011 | | $ | 320,591 |
See accompanying notes to consolidated financial statements.
ZAGG INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(
amounts in thousands, except per share amounts)
| | | For the Years Ended December 31, | |
| | | 2015 | | | 2014 | | | 2013 | |
| Net sales | | $ | 269,311 | | | $ | 261,585 | | | $ | 219,356 | |
| Cost of sales | | | 167,627 | | | | 178,241 | | | | 132,236 | |
| Gross profit | | | 101,684 | | | | 83,344 | | | | 87,120 | |
| | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | |
| Advertising and marketing | | | 10,436 | | | | 7,542 | | | | 8,952 | |
| Selling, general and administrative | | | 56,931 | | | | 49,110 | | | | 46,356 | |
| Impairment of goodwill and intangibles | | | - | | | | - | | | | 11,246 | |
| Amortization of definite-lived intangibles | | | 8,453 | | | | 9,709 | | | | 9,620 | |
| | | | | | | | | | | | | |
| Total operating expenses | | | 75,820 | | | | 66,361 | | | | 76,174 | |
| | | | | | | | | | | | | |
| Income from operations | | | 25,864 | | | | 16,983 | | | | 10,946 | |
| | | | | | | | | | | | | |
| Other income (expense): | | | | | | | | | | | | |
| Interest expense | | | (97 | ) | | | (170 | ) | | | (575 | ) |
| Loss from equity method investment in HzO | | | - | | | | - | | | | (2,013 | ) |
| Other expense | | | (69 | ) | | | 121 | | | | 127 | |
| | | | | | | | | | | | | |
| Total other income (expense) | | | (166 | ) | | | (49 | ) | | | (2,461 | ) |
| | | | | | | | | | | | | |
| Income before provision for income taxes | | | 25,698 | | | | 16,934 | | | | 8,485 | |
| | | | | | | | | | | | | |
| Income tax provision | | | (10,111 | ) | | | (6,473 | ) | | | (3,695 | ) |
| | | | | | | | | | | | | |
| Net income | | | 15,587 | | | | 10,461 | | | | 4,790 | |
| | | | | | | | | | | | | |
| Earnings per share attributable to stockholders: | | | | | | | | | | | | |
| Basic earnings per share | | $ | 0.54 | | | $ | 0.35 | | | $ | 0.16 | |
| Diluted earnings per share | | $ | 0.54 | | | $ | 0.34 | | | $ | 0.15 | |
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, | | | | |
| | 2018 | | 2017 | | 2016 |
| | | | | | |
| Net sales | | $ | 538,231 | | $ | 519,495 | | $ | 401,857 |
| Cost of sales | | 352,358 | | 350,497 | | 274,255 |
| Gross profit | | 185,873 | | 168,998 | | 127,602 |
| | | | | | |
| Operating expenses: | | | | | | |
| Advertising and marketing | 11,994 | | 11,101 | | 12,440 |
| Selling, general and administrative | 108,623 | | 105,398 | | 96,229 |
| (Gain) loss on disputed mophie purchase price | — | | (6,967) | | 24,317 |
| Transaction costs | 1,678 | | 725 | | 2,591 |
| Impairment of intangible asset | — | | 1,959 | | — |
| Amortization of long-lived intangibles | 11,882 | | 12,047 | | 13,385 |
| Total operating expenses | | 134,177 | | 124,263 | | 148,962 |
| | | | | | |
| Income (loss) from operations | | 51,696 | | 44,735 | | (21,360) |
| | | | | | |
| Other income (expense): | | | | | | |
| Interest expense | (1,684) | | (2,081) | | (1,851) |
| Other (expense) income | (483) | | 698 | | (348) |
| Total other expense | | (2,167) | | (1,383) | | (2,199) |
| | | | | | |
| Income (loss) before provision for income taxes | | 49,529 | | 43,352 | | (23,559) |
| | | | | | |
| Income tax (provision) benefit | | (10,340) | | (28,252) | | 7,972 |
| | | | | | |
| Net income (loss) | | $ | 39,189 | | $ | 15,100 | | $ | (15,587) |
| | | | | | |
| Earnings (loss) per share attributable to stockholders: | | | | | | |
| Basic earnings (loss) per share | $ | 1.40 | | $ | 0.54 | | $ | (0.56) |
| Diluted earnings (loss) per share | $ | 1.38 | | $ | 0.53 | | $ | (0.56) |
See accompanying notes to consolidated financial statements.
ZAGG INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)
(
amounts in thousands)
| | | For the Years Ended December 31, | |
| | | 2015 | | | 2014 | | | 2013 | |
| Net income | | $ | 15,587 | | | $ | 10,461 | | | $ | 4,790 | |
| | | | | | | | | | | | | |
| Other comprehenseive income (loss), net of loss: | | | | | | | | | | | | |
| Foreign currency translation gain (loss) | | | (702 | ) | | | (988 | ) | | | 150 | |
| | | | | | | | | | | | | |
| Total other comprehensive income (loss) | | | (702 | ) | | | (988 | ) | | | 150 | |
| | | | | | | | | | | | | |
| Comprehensive income | | $ | 14,885 | | | $ | 9,473 | | | $ | 4,940 | |
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, | | | | |
| | 2018 | | 2017 | | 2016 |
| | | | | | |
| Net income (loss) | | $ | 39,189 | | $ | 15,100 | | $ | (15,587) |
| | | | | | |
| Other comprehensive (loss) gain, net of tax: | | | | | | |
| Foreign currency translation (loss) gain | (1,062) | | 1,766 | | (517) |
| Total other comprehensive (loss) income | | (1,062) | | 1,766 | | (517) |
| | | | | | |
| Comprehensive income (loss) | | $ | 38,127 | | $ | 16,866 | | $ | (16,104) |
See accompanying notes to consolidated financial statements.
ZAGG INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(
amounts in thousands)
| | | | | | | | | | | | | | | | | |
| | | | | | | | | Accumulated | | | | | | | | |
| | | | | | | Additional | | Other | | Note Receivable | | | | | | Total |
| | | | Common Stock | | | | Paid-in | | | | Comprehensive | | | | Collateralized | | | | Treasury | | | | Retained | | | | Stockholders' | |
| | | | Shares | | | | Amount | | | | Capital | | | | Income (Loss) | | | | By Stock | | | | Stock | | | | Earnings | | | | Equity | |
| Balances, December 31, 2012 | | | 31,215 | | | $ | 31 | | | $ | 77,234 | | | $ | (57 | ) | | $ | (566 | ) | | $ | – | | | $ | 47,454 | | | $ | 124,096 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 4,790 | | | | 4,790 | |
| Other comprehensive loss | | | – | | | | – | | | | – | | | | 150 | | | | – | | | | – | | | | – | | | | 150 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Purchase of 1,756 shares of treasury stock | | | – | | | | – | | | | – | | | | – | | | | – | | | | (9,997 | ) | | | – | | | | (9,997 | ) |
| Consideration for acquisition of patent | | | 500 | | | | 1 | | | | 1,945 | | | | – | | | | – | | | | – | | | | – | | | | 1,946 | |
| Option exercises | | | 135 | | | | – | | | | 270 | | | | – | | | | – | | | | – | | | | – | | | | 270 | |
| Restricted stock release | | | 481 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | |
| Option expense | | | – | | | | – | | | | 280 | | | | – | | | | – | | | | – | | | | – | | | | 280 | |
| Restricted stock expense | | | – | | | | – | | | | 3,846 | | | | – | | | | – | | | | – | | | | – | | | | 3,846 | |
| Payment of withholding of restricted stock units | | | – | | | | – | | | | (257 | ) | | | – | | | | – | | | | – | | | | – | | | | (257 | ) |
| Tax shortfall related to share-based payments | | | – | | | | – | | | | (511 | ) | | | – | | | | – | | | | – | | | | – | | | | (511 | ) |
| Reclassification of note receivable collateralized by stock | | | – | | | | – | | | | – | | | | – | | | | 218 | | | | – | | | | – | | | | 218 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balances, December 31, 2013 | | | 32,331 | | | $ | 32 | | | $ | 82,807 | | | $ | 93 | | | $ | (348 | ) | | $ | (9,997 | ) | | $ | 52,244 | | | $ | 124,831 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 10,461 | | | | 10,461 | |
| Other comprehensive loss | | | – | | | | – | | | | – | | | | (988 | ) | | | – | | | | – | | | | – | | | | (988 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Purchase of 1,813 shares of treasury stock | | | – | | | | – | | | | – | | | | – | | | | – | | | | (9,579 | ) | | | – | | | | (9,579 | ) |
| Warrant exercises | | | 3 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | |
| Option exercises | | | 148 | | | | – | | | | 265 | | | | – | | | | – | | | | – | | | | – | | | | 265 | |
| Restricted stock release | | | 204 | | | | 1 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 1 | |
| Stock-based compensation expense | | | – | | | | – | | | | 2,248 | | | | – | | | | – | | | | – | | | | – | | | | 2,248 | |
| Payment of withholding of restricted stock units | | | – | | | | – | | | | (75 | ) | | | – | | | | – | | | | – | | | | – | | | | (75 | ) |
| Tax shortfall related to share-based payments | | | – | | | | – | | | | (91 | ) | | | – | | | | – | | | | – | | | | – | | | | (91 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balances, December 31, 2014 | | | 32,686 | | | $ | 33 | | | $ | 85,154 | | | $ | (895 | ) | | $ | (348 | ) | | $ | (19,576 | ) | | $ | 62,705 | | | $ | 127,073 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 15,587 | | | | 15,587 | |
| Other comprehensive loss | | | – | | | | – | | | | – | | | | (702 | ) | | | – | | | | – | | | | – | | | | (702 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Purchase of 2,030 shares of treasury stock | | | – | | | | – | | | | – | | | | – | | | | – | | | | (14,930 | ) | | | – | | | | (14,930 | ) |
| Foreclosure of 80 shares of stock collateralizing note receivable | | | – | | | | – | | | | – | | | | – | | | | 348 | | | | (688 | ) | | | – | | | | (340 | ) |
| Option exercises | | | 118 | | | | – | | | | 168 | | | | – | | | | – | | | | – | | | | – | | | | 168 | |
| Warrant exercises | | | 45 | | | | – | | | | 38 | | | | – | | | | – | | | | – | | | | – | | | | 38 | |
| Restricted stock release | | | 349 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | |
| Consideration for acquisition of patent | | | 21 | | | | – | | | | 198 | | | | – | | | | – | | | | – | | | | – | | | | 198 | |
| Stock-based compensation expense | | | – | | | | – | | | | 3,893 | | | | – | | | | – | | | | – | | | | – | | | | 3,893 | |
| Payment of withholding of restricted stock units | | | – | | | | – | | | | (724 | ) | | | – | | | | – | | | | – | | | | – | | | | (724 | ) |
| Tax windfall related to share-based payments | | | – | | | | – | | | | 256 | | | | – | | | | – | | | | – | | | | – | | | | 256 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balances, December 31, 2015 | | | 33,219 | | | $ | 33 | | | $ | 88,983 | | | $ | (1,597 | ) | | $ | – | | | $ | (35,194 | ) | | $ | 78,292 | | | $ | 130,517 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | | | | | | | | | |
| Shares | | Amount | | Additional
Paid-in
Capital | | Accumulated
Other Comprehensive
Loss | | Treasury
Stock | | Retained
Earnings | | Total
Stockholders'
Equity |
| | | | | | | | | | | | | |
| Balances, December 31, 2015 | 33,219 | | $ | 33 | | $ | 88,983 | | $ | (1,597) | | $ | (35,194) | | $ | 78,292 | | $ | 130,517 |
| | | | | | | | | | | | | |
| Net loss | — | | — | | — | | — | | — | | (15,587) | | (15,587) |
| Other comprehensive loss | — | | — | | — | | (517) | | — | | — | | (517) |
| | | | | | | | | | | | | |
| Purchase of 152 shares of treasury stock | — | | — | | — | | — | | (951) | | — | | (951) |
| Option exercises | 21 | | — | | — | | — | | — | | — | | — |
| Warrant exercises | 7 | | — | | 54 | | — | | — | | — | | 54 |
| Restricted stock release | 589 | | 1 | | — | | — | | — | | — | | 1 |
| Employee stock purchase plan release | 4 | | — | | — | | — | | — | | — | | — |
| Stock-based compensation expense | — | | — | | 3,830 | | — | | — | | — | | 3,830 |
| Payment of withholding taxes on restricted stock units | — | | — | | (630) | | — | | — | | — | | (630) |
| Excess tax benefit related to share-based payments | — | | — | | 545 | | — | | — | | — | | 545 |
| Balances, December 31, 2016 | 33,840 | | $ | 34 | | $ | 92,782 | | $ | (2,114) | | $ | (36,145) | | $ | 62,705 | | $ | 117,262 |
| | | | | | | | | | | | | |
| Net income | — | | — | | — | | — | | — | | 15,100 | | 15,100 |
| Other comprehensive income | — | | — | | — | | 1,766 | | — | | — | | 1,766 |
| | | | | | | | | | | | | |
| Purchase of 234 shares of treasury stock | — | | — | | — | | — | | (1,492) | | — | | (1,492) |
| Restricted stock release | 262 | | — | | — | | — | | — | | — | | — |
| Employee stock purchase plan release | 2 | | — | | 29 | | — | | — | | — | | 29 |
| Stock-based compensation expense | — | | — | | 3,602 | | — | | — | | — | | 3,602 |
| Payment of withholding taxes on restricted stock units | — | | — | | (268) | | — | | — | | — | | (268) |
| Balances, December 31, 2017 | 34,104 | | $ | 34 | | $ | 96,145 | | $ | (348) | | $ | (37,637) | | $ | 77,805 | | $ | 135,999 |
| Cumulative effect of accounting change | — | | — | | — | | — | | — | | (3,880) | | (3,880) |
| Balances after cumulative effect of accounting change | 34,104 | | $ | 34 | | $ | 96,145 | | $ | (348) | | $ | (37,637) | | $ | 73,925 | | $ | 132,119 |
| | | | | | | | | | | | | |
| Net income | — | | — | | — | | — | | — | | 39,189 | | 39,189 |
| Other comprehensive loss | — | | — | | — | | (1,062) | | — | | — | | (1,062) |
| Purchase of 918 shares of treasury stock | — | | — | | — | | — | | (12,096) | | — | | (12,096) |
| Restricted stock release | 351 | | — | | — | | — | | — | | — | | — |
| Employee stock purchase plan release | 2 | | — | | 54 | | — | | — | | — | | 54 |
| Stock-based compensation expense | — | | — | | 3,009 | | — | | — | | — | | 3,009 |
| Payment of withholding taxes on restricted stock units | — | | — | | (2,722) | | — | | — | | — | | (2,722) |
| Balances, December 31, 2018 | 34,457 | | $ | 34 | | $ | 96,486 | | $ | (1,410) | | $ | (49,733) | | $ | 113,114 | | $ | 158,491 |
See accompanying notes to consolidated financial statements.
ZAGG INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
OF CASH FLOWS (
amounts in
thousands)| | | For the Years Ended December 31, | |
| | | 2015 | | | 2014 | | | 2013 | |
| Cash flows from operating activities | | | | | | | | | | | | |
| Net income | | $ | 15,587 | | | $ | 10,461 | | | $ | 4,790 | |
| Adjustments to reconcile net income to net cash | | | | | | | | | | | | |
| provided by operating activities: | | | | | | | | | | | | |
| Stock-based compensation | | | 3,893 | | | | 2,173 | | | | 4,126 | |
| Impairment of goodwill and intangibles | | | - | | | | - | | | | 11,246 | |
| Impairment of investment | | | - | | | | - | | | | 591 | |
| Excess tax benefit (shortfall) related to share-based payments | | | 256 | | | | (22 | ) | | | (52 | ) |
| Depreciation and amortization | | | 12,933 | | | | 12,899 | | | | 12,157 | |
| Reduction in reserve on note receivable upon foreclosure recovery | | | (639 | ) | | | - | | | | - | |
| Deferred income taxes | | | (1,162 | ) | | | (5,770 | ) | | | (5,787 | ) |
| Amortization of deferred loan costs | | | 60 | | | | 66 | | | | 120 | |
| Write-off of deferred loan costs | | | - | | | | - | | | | 27 | |
| Loss on investment in equity method investment | | | - | | | | - | | | | 2,013 | |
| Changes in operating assets and liabilities | | | | | | | | | | | | |
| Accounts receivable, net | | | 18,383 | | | | (29,490 | ) | | | 8,079 | |
| Inventories | | | 2,064 | | | | (4,350 | ) | | | (4,404 | ) |
| Prepaid expenses and other current assets | | | (651 | ) | | | (421 | ) | | | 7,335 | |
| Other assets | | | 551 | | | | 160 | | | | - | |
| Accounts payable | | | (14,635 | ) | | | 33,373 | | | | (3,838 | ) |
| Income taxes payable | | | (7,366 | ) | | | 13 | | | | 2,787 | |
| Accrued liabilities | | | (3,410 | ) | | | 4,616 | | | | (1,557 | ) |
| Accrued wages and wage related expenses | | | (356 | ) | | | 1,709 | | | | (1,872 | ) |
| Deferred revenue | | | (162 | ) | | | 21 | | | | (564 | ) |
| Sales returns liability | | | (814 | ) | | | 813 | | | | 1,167 | |
| | | | | | | | | | | | | |
| Net cash provided by operating activities | | | 24,532 | | | | 26,251 | | | | 36,364 | |
| | | | | | | | | | | | | |
| Cash flows from investing activities | | | | | | | | | | | | |
| Deposits on and purchase of intangible assets | | | - | | | | - | | | | (500 | ) |
| Purchase of property and equipment | | | (4,910 | ) | | | (4,430 | ) | | | (2,588 | ) |
| | | | | | | | | | | | | |
| Net cash used in investing activities | | | (4,910 | ) | | | (4,430 | ) | | | (3,088 | ) |
| | | | | | | | | | | | | |
| Cash flows from financing activities | | | | | | | | | | | | |
| Payment of debt issuance costs | | | - | | | | - | | | | (43 | ) |
| Purchase of treasury stock | | | (14,930 | ) | | | (9,579 | ) | | | (9,997 | ) |
| Proceeds from revolving credit facilities | | | 9,871 | | | | 56,075 | | | | 69,291 | |
| Payments on revolving credit facilities | | | (9,871 | ) | | | (73,618 | ) | | | (73,921 | ) |
| Payments on term note | | | - | | | | - | | | | (24,000 | ) |
| Proceeds from exercise of warrants and options | | | 207 | | | | 265 | | | | 270 | |
| Payment of withholding of restricted stock units | | | (724 | ) | | | - | | | | - | |
| Excess tax benefits related to share-based payments | | | (256 | ) | | | 22 | | | | 52 | |
| | | | | | | | | | | | | |
| Net cash used in financing activities | | | (15,703 | ) | | | (26,835 | ) | | | (38,348 | ) |
| | | | | | | | | | | | | |
| Effect of foreign currency exchange rates on cash and cash equivalents | | | (378 | ) | | | (556 | ) | | | (74 | ) |
| | | | | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | 3,541 | | | | (5,570 | ) | | | (5,146 | ) |
| | | | | | | | | | | | | |
| Cash and cash equivalents at beginning of the period | | | 9,461 | | | | 15,031 | | | | 20,177 | |
| | | | | | | | | | | | | |
| Cash and cash equivalents at end of the period | | $ | 13,002 | | | $ | 9,461 | | | $ | 15,031 | |
| | | | | | | | | | | | | |
| Supplemental disclosure of cash flow information | | | | | | | | | | | | |
| Cash paid during the period for interest | | $ | 46 | | | $ | 97 | | | $ | 461 | |
| Cash paid during the period for taxes | | $ | 18,710 | | | $ | 12,370 | | | $ | 6,515 | |
thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Years Ended December 31, | | | | |
| | | 2018 | | 2017 | | 2016 |
| | | | | | | |
| Cash flows from operating activities: | | | | | | | |
| Net income (loss) | | $ | 39,189 | | $ | 15,100 | | $ | (15,587) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | |
| | Stock-based compensation | 3,009 | | 3,602 | | 3,830 |
| | Excess tax benefits related to share-based payments | — | | — | | (641) |
| | Depreciation and amortization | 18,288 | | 21,889 | | 22,271 |
| | Loss on disposal of property and equipment | 38 | | 34 | | — |
| | Deferred income taxes (benefits) | 4,992 | | 14,168 | | (7,972) |
| | Revaluation of deferred income taxes from U.S. tax reform | — | | 11,806 | | — |
| | Amortization of deferred loan costs | 191 | | 263 | | 202 |
| | Loss on modification of debt | 243 | | — | | — |
| | Impairment of intangible asset | — | | 1,959 | | — |
| | (Gain) loss on disputed mophie purchase price | — | | (6,967) | | 24,317 |
| Changes in operating assets and liabilities (net of amounts acquired): | | | | | | |
| | Accounts receivable, net | (33,119) | | (38,093) | | (11,587) |
| | Inventories | (3,405) | | (906) | | (2,198) |
| | Prepaid expenses and other current assets | 1,192 | | (1,113) | | 422 |
| | Other assets | 1,805 | | (928) | | (330) |
| | Accounts payable | (18,714) | | 10,677 | | 14,094 |
| | Income taxes (payable) receivable | (3,827) | | 4,866 | | 9,994 |
| | Accrued liabilities | 747 | | (4,505) | | 2,836 |
| | Accrued wages and wage related expenses | 990 | | (517) | | 1,819 |
| | Deferred revenue | — | | 42 | | 246 |
| | Sales returns liability | 13,889 | | 3,719 | | (9,037) |
| | Other | 350 | | (1,022) | | — |
| Net cash provided by operating activities | | | 25,858 | | 34,074 | | 32,679 |
| | | | | | | |
| Cash flows from investing activities: | | | | | | | |
| Purchase of property and equipment (net of business acquired) | | (7,243) | | (5,766) | | (8,633) |
| Proceeds from disposal of equipment | | 25 | | 29 | | — |
| Purchase of mophie, net of cash acquired | | — | | — | | (74,743) |
| Purchase of BRAVEN | | (4,451) | | — | | — |
| Purchase of Gear4, net of cash acquired | | (28,351) | | — | | — |
| Net cash used in investing activities | | | (40,020) | | (5,737) | | (83,376) |
See accompanying notes to consolidated financial statements.
ZAGG INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars and shares in thousands)
Supplemental schedule of noncash investing and financing activities
For the Year Ended December 31, 2015:
Purchase of $269 in fixed assets financed through accounts payable.
Purchase of $1,218 in fixed assets financed through tenant improvement allowance.
Foreclosure on real property valued at $1,099 that served as collateral to the note receivable (recorded as a component of other assets in the consolidated balance sheet).
Foreclosure on the Company’s common stock valued at $688 that served as collateral to the note receivable (recorded as treasury stock in the consolidated balance sheet).
Issued 21 shares of common stock with a fair value of $198 in connection with the purchase of a patent.
For the Year Ended December 31, 2014:
Purchase of $975 in fixed assets financed through accounts payable.
For the Year Ended December 31, 2013:
Reclassification of $218 from note receivable collateralized by stock to note receivable.
Issued 500 shares of common stock with a fair value of $2,275 in connection with the purchase of patent (patent is recorded as a component of intangible assets in the consolidated balance sheet). $1,945 was recorded to additional paid in capital, $1 was recorded to common stock, while the remaining $329 was recorded as a liability within accrued liabilities on the consolidated balance sheet.
ZAGG INC AND SUBISDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(
Dollars, units, & sharesamounts in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Years Ended December 31, | | | | |
| | | 2018 | | 2017 | | 2016 |
| | | | | | | |
| Cash flows from financing activities: | | | | | | | |
| Payment of debt issuance costs | | (463) | | (157) | | (1,144) |
| Proceeds from revolving credit facility | | 358,980 | | 434,826 | | 336,391 |
| Payments on revolving credit facility | | (336,071) | | (442,659) | | (305,084) |
| Proceeds from term loan facility | | — | | — | | 25,000 |
| Payments on term loan facility | | (2,084) | | (6,250) | | (4,688) |
| Purchase of treasury stock | | (12,096) | | (1,492) | | (951) |
| Payment of withholdings tax on restricted stock units | | (2,722) | | (268) | | (630) |
| Proceeds from issuance of stock under employee stock purchase plan and exercise of warrants | | 54 | | 29 | | 54 |
| Excess tax costs related to share-based payments | | — | | — | | 641 |
| Net cash provided by (used in) financing activities | | | 5,598 | | (15,971) | | 49,589 |
| | | | | | | |
| Effect of foreign currency exchange rates on cash and cash equivalents | | | (632) | | 1,019 | | (290) |
| | | | | | | |
| Net (decrease) increase in cash and cash equivalents | | | (9,196) | | 13,385 | | (1,398) |
| | | | | | | |
| Cash and cash equivalents at beginning of the period | | | 24,989 | | 11,604 | | 13,002 |
| Cash and cash equivalents at end of the period | | | $ | 15,793 | | $ | 24,989 | | $ | 11,604 |
| | | | | | | |
| Supplemental disclosure of cash flow information: | | | | | | | |
| | Cash paid during the period for interest | $ | 1,674 | | $ | 1,776 | | $ | 1,497 |
| | Cash paid (refunded) during the period for taxes, net | 9,123 | | (2,174) | | (9,521) |
| | | | | | | |
| Supplemental schedule of noncash investing and financing activities: | | | | | | | |
| | Purchase of property and equipment financed through accounts payable | $ | 517 | | $ | 492 | | $ | 758 |
| | Purchase of mophie financed through contingent payments | — | | — | | 12,139 |
| | Modification of debt that resulted in payment of existing term loan balance | 11,991 | | — | | — |
| | Purchase of Gear4 through contingent payments and common stock | 9,355 | | — | | — |
See accompanying notes to consolidated financial statements.
ZAGG INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(1)ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ZAGG Inc and its subsidiaries (the “Company”) are innovation leaders in mobile tech accessories for smartphones and tablets. For over 10 years, the Company has developed creative product solutions that enhance and protect mobile devices for consumers around the world. The Company has an award-winning product portfolio that includes screen protection, power cases, power management, wireless charging, audio, mobile keyboards, protective cases, and other mobile accessories sold under the ZAGG, InvisibleShield, mophie, IFROGZ, BRAVEN, Gear4, and HALO brands.
In June 2011, the Company acquired IFROGZ, an audio company, which expanded its product lines beyond screen protection and keyboards.
In March 2007,2016, the Company changed its name from ShieldZone Corporation to ZAGG Incorporated to better positionacquired mophie inc. (“mophie”), a leader in the power management and power case categories. This acquisition further diversified the Company's product lines into key growth product categories. The results of operations of mophie are included in the Company's results of operations beginning on March 3, 2016.
In July 2018, the Company acquired BRAVEN Audio (“BRAVEN”), a rugged Bluetooth speakers and earbuds provider, which offers a high quality audio experience for expansion in the mobile device accessories industry through organic growth and targeted acquisitions. The ShieldZone name was very specific to the screen protectionoutdoor adventurers. This new product line and although screenbrand enables the Company to reach new markets and customer demographics. The results of operations of BRAVEN are included in the Company's results of operations beginning on July 20, 2018.
On November 30, 2018, the Company acquired Gear4 HK Limited (“Gear4”), one of the top selling smartphone case brands in the United Kingdom, for its stylish phone cases which are designed with D3O technology. D3O technology can provide incredible protection to smartphones and other electronic devices by using shock absorbing materials. The Company believe this acquisition will expand its product offering to better meet the needs of its smartphone consumers for innovative case protection. The results of operations of Gear4 are included in the Company's results of operations beginning on December 1, 2018.
In January 2019, the Company acquired Halo2Cloud, LLC (“HALO”), a leading direct-to-consumer accessories company with an extensive IP portfolio. HALO designs, develops and markets innovative technology products to make consumers' lives easier. This acquisition will enable the Company to enter new distribution channels, and to leverage new technology to enter into new consumer markets. The results of operations of HALO are not included in the Company's results of operations as the acquisition is a
core product line,subsequent event to the
name change has provided the Company with the opportunity to add new product categories to its product portfolio. During 2011, the Company changed its name from ZAGG Incorporated to ZAGG Inc.In June 2011, ZAGG acquired 100% of the outstanding shares of iFrogz, which further diversified the existing ZAGG product lines, particularly for audio and protective case accessories.
The Company designs, produces, and distributes professional and premium creative product solutions including screen protection, keyboards for tablet computers and mobile devices, keyboard cases, earbuds, mobile power solutions, cables, and cases under the ZAGG and InvisibleShield brands. In addition, the Company designs, produces, and distributes earbuds, headphones, mobile power solutions, Bluetooth speakers, cases, and cables for mobile devices under the iFrogz brand in the fashion and youth oriented lifestyle sector.
consolidated financial statements.
The preparation of consolidated financial statements in conformity with
United States (“U.S.
”) generally accepted accounting principles (“
USU.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting
period.periods, with related disclosures of these amounts in the notes to the financial statements. Actual results could differ from those estimates. Significant items subject to such estimates include the
valuation of inventory
write-downs, sales returnsobsolescence, variable consideration related to revenue recognition, and
warranty liability,the fair value estimates of assets acquired and
income taxes.liabilities assumed in business combinations. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the economic environment, which management believes to be reasonable under the circumstances. Management adjusts such estimates and assumptions when facts and circumstances dictate an adjustment is necessary.
Principles of consolidation
The consolidated financial statements include the accounts of
ZAGG Incthe Company and its wholly owned
subsidiaries ZAGG International Distribution Limited (“ZAGG International”), Patriot Corporation, ZAGG Intellectual Property Holding Co, Inc., and ZAGG Retail, Inc.subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
The Company holds an investment in HzO, Inc. (“HzO”), a private companyengaged in the development of water-blocking technologies for consumer and industrial applications. The investment is less than 20% and thus is accounted for under the cost method. Due to accumulated losses, the carrying amount of the investment in HzO was $0 at December 31, 2015 and 2014.
The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. Amounts receivable from credit card processors are also considered cash equivalents because they are both short-term and highly liquid in nature and are typically converted to cash within three days of the sales transaction. Amounts receivable from credit card processors
atas of December 31,
20152018 and
20142017 totaled
$61$83 and
$120,$116, respectively. Cash equivalents as of December 31,
20152018 and
2014,2017 consisted primarily of money market fund investments and amounts receivable from credit card processors.
ZAGG INC AND SUBISDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, units, & shares in thousands, except per share data)
The Company measures at fair value certain financial and non-financial assets by using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are:
Level 1 — Quoted market prices in active markets for identical assets or liabilities;
Level 2 — Significant other observable inputs (e.g., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable such as interest rate and yield curves, and market-corroborated inputs); and
Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting unit to develop its own assumptions.
The Company sells its products to end users through indirect distribution channels and other resellers who are extended credit terms after an analysis of their financial condition and credit worthiness. Credit terms to distributors and resellers, when extended, are based on evaluation of the customers’ financial condition. Accounts receivable are recorded at invoiced amounts and do not bear interest.
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. Management regularly evaluates the allowance for doubtful accounts considering historical losses adjusted to take into account current market conditions, customers’ financial condition, receivables in dispute, receivables aging, and current payment patterns. Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Payments subsequently received on
written offwritten-off receivables are credited to bad debt expense in the period of recovery.
The following summarizes the activity in the Company’s allowance for doubtful accounts for the years ended December 31,
2015, 20142018, 2017, and
2013:| | | For the Years Ended December 31, | |
| | | 2015 | | | 2014 | | | 2013 | |
| Balance at beginning of year | | $ | 1,910 | | | $ | 2,540 | | | $ | 2,974 | |
| Additions charged to expense | | | 243 | | | | 389 | | | | 1,142 | |
| Write-offs charged against the allowance | | | (1,585 | ) | | | (1,019 | ) | | | (1,576 | ) |
| Balance at end of year | | $ | 568 | | | $ | 1,910 | | | $ | 2,540 | |
2016:
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | | | |
| 2018 | | 2017 | | 2016 |
| | | | | |
| Balance at beginning of year | $ | 734 | | $ | 824 | | $ | 568 |
| Additions charged to expense | 312 | | 339 | | 599 |
| Assumed in acquisition of mophie | — | | — | | 91 |
| Write-offs charged against the allowance | (151) | | (444) | | (430) |
| Foreign currency translation (loss) gain | (10) | | 15 | | (4) |
| Balance at end of year | $ | 885 | | $ | 734 | | $ | 824 |
Inventories, consisting primarily of finished goods and raw materials, are valued at the lower of cost, determined on a first in, first out basis, or
market.net realizable value. Management performs periodic assessments to
estimate realizable values and to determine
the existence of obsolete, slow moving, and non-saleable inventories, and records necessary
write downswrite-downs in cost of sales to reduce such inventories to
estimated net realizable value. Once established, the original cost of the inventory less the related inventory write down represents the new cost basis of such products.
ZAGG INC AND SUBISDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, units, & shares in thousands, except per share data)
Property and equipment
Property and equipment are recorded at cost. Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the useful life of the asset or the term of the lease.
Major additions and improvements are capitalized, while costs for minor replacements, maintenance and repairs that do not increase the useful life of an asset are expensed as incurred. Upon retirement or other disposition of property and equipment, the cost and related accumulated depreciation or amortization are removed from the accounts. The resulting gain or loss is reflected in selling, general and administrative
expense.Duringexpense in the second quarterconsolidated statements of 2014,operations.
Goodwill
At least annually or when events and circumstances warrant an evaluation, the Company commencedperforms its impairment assessment of goodwill. This assessment permits an entity to initially perform a development project utilizing both internalqualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the quantitative goodwill impairment test. If an entity concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not need to perform the impairment test for the reporting unit.
If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the impairment analysis is performed, which incorporates a fair-value based approach. The Company determines the fair value of its reporting units based on discounted cash flows and
external developers to improvemarket approach analyses as considered necessary. The Company considers factors such as the
company’s website.economy, reduced expectations for future cash flows coupled with a decline in the market price of its stock and market capitalization for a sustained period as indicators for potential goodwill impairment. If the reporting unit’s carrying amount exceeds its fair value, the Company will record an impairment charge based on that difference. The
development project was intended to provide additional functionalityimpairment charge will be limited to the
website and transition the websiteamount of goodwill allocated to
an improved software platform. The Company capitalized website development costs for internal and external developers and commenced depreciation of the capitalized costs during 2015 when the resulting website functionality was ready for its intended use and placed in service.Intangiblesthat reporting unit.
Intangible assets include internet addresses,
patents, intellectual property, and acquired intangibles in connection with the
acquisitionacquisitions of
iFrogz,IFROGZ, mophie, BRAVEN and Gear4, which include customer relationships,
trademarks,trade names, patents and technology, non-compete agreements, and other miscellaneous intangible assets.
Definite-lived
Long-lived intangible assets are amortized over their estimated economic lives, using a straight-line or accelerated method consistent with the underlying expected future cash flows related to the specific intangible asset.
Amortization expense is recorded within cost of sales or operating expense depending on the underlying intangible assets.
Impairment of long-lived assets
Long-lived assets, such as property and equipment and
definite-livedamortizing intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, recoverability of long-lived assets is measured by comparison of its carrying amount to the undiscounted cash flows that the asset or asset group is expected to generate
over the remaining life in measuring whether the assets are recoverable. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary.
For the years ended December 31, 2018 and 2016, no impairment of long-lived assets were indicated and thus, no impairment charge was recorded. For the year ended December 31, 2017, the Company recognized an impairment charge of $1,959.
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
The Company recordsadopted Accounting Standards Code Topic 606, “Revenue from Contracts with Customers” (“Topic 606”) with a date of initial application of January 1, 2018. As a result of this adoption, the Company has changed its accounting policy for revenue recognition. Revenue is measured based on the amount of consideration that is expected to be received by the Company for providing goods or services under a contract with a customer, which is initially estimated with pricing specified in the contract and adjusted primarily for sales returns, discounts and other credits at contract inception then updated each reporting period. The Company recognizes revenue when persuasive evidence of an arrangementa contract with a customer exists product delivery has occurred, the sales price toand a performance obligation is identified and satisfied as the customer obtains control of the goods or services.
Revenue is fixed or determinable, and collectability is reasonably assured. The Company’s revenue is derived from sales of our products through our indirect channel, including retailers and distributors; through our direct channel, including www.ZAGG.com, and our corporate-owned and third-party-owned mall kiosks; and from the franchise fees derived from the onboarding of new franchisees. For product sales, our standard shipping terms are FOB shipping point, and we record revenue when the product is shipped,recognized net of estimated returnsany taxes collected from customers and discounts. For some customers, the contractual shipping terms are FOB destination. For these shipments, we record revenue when the product is delivered, net of estimated returns and discounts. For franchise fees, we recognize revenue on a straight-line basis over the franchise term.subsequently remitted to governmental authorities. The Company records revenue from royalty agreementstypically only charges sales taxes in transactions with customers on the period in whichCompany's web sites.
When the
royalty is earned.Promotional products given to customers or potential customers are recognized as a cost of sales. Cash incentives provided to our customers are recognized as a reductionCompany performs shipping and handling activities after the customer obtains control of the related sale price, and, therefore,goods, the Company accounts for the costs as fulfillment costs, as allowed as an accounting policy election under Topic 606. For those instances where shipping occurs before the customer obtains control of the goods, the shipping costs are a reduction in sales.
accounted for as fulfillment activities, as required by Topic 606.
Allowance for sales returns, warranty,warranties, and other credits
For product sales, the Company records revenue, net of estimated returns and discounts, when delivery has occurred, collection of the relevant receivable is reasonably assured, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Our
The Company's return policy allows end users and certain retailers rights to return purchased products. In addition, the Company generally provides the ultimate consumer a warranty withfor each product. Due to such policies, the natureCompany’s contracts give rise to several types of variable consideration under Topic 606, including sales returns, warranty, and other credits. Certain customers receive credit-based incentives or credits, which are accounted for as variable consideration in the screen protection product line, end user returnsform of credit memos off future purchases from the Company. The Company estimates these amounts based on the expected amount to be provided to customers and reduces revenue accordingly for screen protection are generally not salvageable and are not included in inventory. We estimateeach transaction.
The Company estimates a reserve for sales returns,
warranty,warranties, and other credits, and
recordrecords the
respective estimated reserve
amount as a reduction of sales, andamounts as a sales return
reserve liability. Whenliability in the consolidated balance sheets, including a right to return asset included in prepaid expenses and other current assets in the consolidated balance sheets when a product
is returned and is expected to be
resold, as is the case with returns of packaged screen protection, keyboards, audio products, cases,returned and
power products, the impact is recorded as a reduction of revenues and cost of sales, and as a reduction in the sales return reserve liability. The sales returns and warranty reserve requires management to make estimates regarding return rates for sales and warranty returns.resold. Historical experience, actual claims, and customer return rights are the key factors used in determining the estimated sales
returnreturns, warranty claims, and
warranty reserve.other credits.
The following summarizes the activity in the Company’s sales return,
warranty, and
warrantyother credits liability for the years ended December 31,
2015, 20142018, 2017, and
2013:| | | For the Year Ended December 31, | |
| | | 2015 | | | 2014 | | | 2013 | |
| Balance at beginning of year | | $ | 8,674 | | | $ | 7,872 | | | $ | 6,697 | |
| Additions charged to sales | | | 43,320 | | | | 35,923 | | | | 30,450 | |
| Sales returns & warranty claims charged against reserve | | | (44,145 | ) | | | (35,121 | ) | | | (29,275 | ) |
| Balance at end of year | | $ | 7,849 | | | $ | 8,674 | | | $ | 7,872 | |
2016:
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | | | |
| 2018 | | 2017 | | 2016 |
| | | | | |
| Balance at beginning of year | $ | 34,536 | | $ | 30,720 | | $ | 10,196 |
| Cumulative effect of adoption of Topic 606 | 5,250 | | — | | — |
| Additions charged to sales | 149,930 | | 90,018 | | 92,868 |
| Assumed in acquisition of mophie | — | | — | | 29,584 |
| Sales returns and warranty claims charged against reserve | (135,963) | | (86,299) | | (101,928) |
| Assumed in acquisition of Gear4 | 846 | | — | | — |
| Foreign currency translation loss | (167) | | 97 | | — |
| Balance at end of year | $ | 54,432 | | $ | 34,536 | | $ | 30,720 |
The Company recognizes deferred income tax assets or liabilities for expected future tax consequences of events that have been recognized in the financial statements or tax returns. Under this method, deferred income tax assets or liabilities are determined based upon the difference between the financial statement and income tax bases of assets and liabilities using enacted tax rates expected to apply when differences are expected to be settled or realized. Deferred income tax assets are reviewed for recoverability and valuation allowances are provided when it is more likely than not that a deferred tax asset will not be realizable in the future. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records estimated interest and penalties related to unrecognized tax benefits, if any, as a component of income tax provision.
The Company has foreign subsidiaries that conduct or support its business outside the
United States.U.S. The
Company does not provide forCompany’s intention before enactment of the Tax Cut and Jobs Act of 2017 (the “Tax Act”) was to permanently reinvest these earnings, thereby indefinitely postponing their remittance to the U.S.
income taxes on undistributed earnings for its foreign subsidiaries asInternal Revenue Service. This will continue to be the
foreignCompany’s intention. Foreign earnings will be
permanently reinvestedtaxed according to regulatory calculations in
suchthe period earned or eligible for a 100% dividends received deduction. One of the measures in the Tax Act was a mandatory deemed repatriation tax on the historical earnings and profits of certain U.S.-owned foreign
jurisdictions.
ZAGG INC AND SUBISDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, units, & sharescorporations. The Company recognized and remitted the tax associated with the undistributed earnings and profits in thousands, except per share data)
the 2017 tax year of $368 (net of $221 of foreign tax credit).
The Company recognizes stock-based compensation expense in its consolidated financial statements for
awardsrestricted stock units granted to employees and
non-employees, which include restricted stock, stock options, and warrants.directors. Equity-classified awards are measured at the grant date fair value of the award. The fair value of restricted stock
units is measured on the grant date based on the quoted closing market price of the Company’s common stock. The
fair value of the stock options is measured on the grant date using the Black-Scholes option pricing modelbased on the underlying common stock closing price as of the date of grant, the expected term, stock price volatility, and risk-free interest rates. The Company recognizes compensation expense
net of estimated forfeitures on a straight-line basis over the requisite service period of the award, which is generally the vesting term of the award.
TheFor those performance-based awards, the Company recognizes compensation expense on a straight-line basis
for those performance-based awards thatbased on management estimates of the extent to which the performance criteria are probable to be achieved. No compensation expense is ultimately recognized for awards for which employees do not render the requisite service and are forfeited.
Excess tax benefits of awards that are recognized in equity related to stock option exercises are reflected as financing cash inflows.
Advertising and marketing
General advertising is expensed as incurred. Advertising allowances provided to retailers are recorded as an expense at the time of the related sale if the Company receives an identifiable benefit in exchange for the consideration and has evidence of fair value for the advertising; otherwise, the allowance is recorded as a reduction of revenue. Advertising expenses for the years ended December 31,
2015, 20142018, 2017, and
20132016 were
$10,436, $7,542$11,994, $11,101, and
$8,952,$12,440, respectively.
Foreign currency translation and transactions
The Company’s primary operations are at the parent level which uses
the U.S.
dollar (USD)dollars (“USD”) as its functional currency. The Euro is the functional currency of the Company’s
foreign subsidiaries.subsidiary in Ireland, while the Renminbi is the functional currency of the Company’s subsidiary in China. Accordingly, assets and liabilities for these subsidiaries are translated into USD using exchange rates in effect at the end of each period. Revenue and expenses for these subsidiaries are translated using rates that approximate those in effect during the
period.periods. Gains and losses from these translations are recorded as a component of stockholders’ equity. Gains and losses resulting from foreign currency transactions are included
in income as a component of other
(expense) income
and (expense) in the consolidated statements of operations and totaled
$52, $149$(360), $590, and
($7)$(144) for the years ended December 31,
2015, 20142018, 2017, and
2013,2016, respectively.
Earnings
(loss) per share
Basic earnings
(loss) per common share excludes dilution and is computed by dividing net income
(loss) attributable to stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings
(loss) per common share reflects the potential dilution that could occur if
restricted stock
optionsunits or other common stock equivalents were
released, exercised or
otherwise converted into common stock. The dilutive effect of
stock options or other common stock equivalents is calculated using the treasury stock method.
The following is a reconciliation of the numerator and denominator used to calculate basic earnings
(loss) per share and diluted earnings
(loss) per share for the years ended December 31,
2015, 20142018, 2017, and
2013:| | | 2015 | | | 2014 | | | 2013 | |
| Net income attributable to stockholders | | $ | 15,587 | | | $ | 10,461 | | | $ | 4,790 | |
| | | | | | | | | | | | | |
| Weighted average shares outstanding | | | 28,773 | | | | 30,247 | | | | 30,900 | |
| Dilutive effect of stock options, restricted stock, and warrants | | | 316 | | | | 363 | | | | 559 | |
| Weighted average diluted potential shares | | | 29,089 | | | | 30,610 | | | | 31,459 | |
| Earnings per share attributable to stockholders: | | | | | | | | | | | | |
| Basic | | $ | 0.54 | | | $ | 0.35 | | | $ | 0.16 | |
| Dilutive | | $ | 0.54 | | | $ | 0.34 | | | $ | 0.15 | |
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, | | | | |
| | 2018 | | 2017 | | 2016 |
| | | | | | |
| Net (loss) income | | $ | 39,189 | | $ | 15,100 | | $ | (15,587) |
| Weighted average shares outstanding: | | | | | | |
| Basic | 28,064 | | 27,996 | | 28,006 |
| Dilutive effect of restricted stock units | 436 | | 411 | | — |
| Diluted weighted average shares outstanding | | 28,500 | | 28,407 | | 28,006 |
| Earnings (loss) per share: | | | | | | |
| Basic | $ | 1.40 | | $ | 0.54 | | $ | (0.56) |
| Dilutive | $ | 1.38 | | $ | 0.53 | | $ | (0.56) |
ZAGG INC AND SUBISDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, units, & shares in thousands, except per share data)
For the years ended December 31,
2015, 2014,2018, 2017, and
2013,2016, restricted stock
warrants and stock optionsunits to purchase
250, 485,144, 19, and
620815 shares of common stock, respectively,were not considered in calculating diluted earnings
(loss) per share because
the warrant or stock option exercise prices or the total expected proceeds under the treasury stock method for the warrants, restricted stock, or stock options was greater than the average market price of common shares during the period and, therefore, the effect would be anti-dilutive.
Business combinations
The Company allocates the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over these fair values is recorded as goodwill. The Company has engaged an independent third-party valuation firm to assist in determining the fair values of certain assets acquired and liabilities assumed. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. The significant purchased classes of intangible assets recorded by the Company include customer relationships, trade names, patents and technology, non-compete agreements, and other miscellaneous intangible assets. The fair values assigned to the identified intangible assets are discussed in Note 6 to the consolidated financial statements.
Significant estimates in valuing certain intangible assets include but are not limited to: future expected cash flows related to each individual asset, market position of the trade names and assumptions about cash flow savings from the trade names, determination of useful lives, and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and thus, actual results may differ from estimates.
Segment reporting
The Company is in the process of consolidating a number of processes and functions from the acquired businesses, including the merging of several of the recently acquired entities' enterprise resource planning (“ERP”) systems into the Company’s ERP system. In addition, global functional teams are directly managed by an executive from the corporate headquarters. These merged functional areas include the following: sales, marketing, product management, product development, operations, customer service, accounting, finance, legal, human resources, and IT. As the Company has continued to evolve as a mobile lifestyle company, the information regularly reviewed by the chief operating decision maker is at the consolidated level for all types of products and services generated by the Company, including relevant sales and budget reviews. Management has evaluated its reportable segments and concluded that the Company is a single reportable segment.
Reclassification of prior year presentation
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on reported results of operations. A reclassification has been made with a $2,347 reduction to accrued liabilities and a $2,347 increase to sales returns liabilities, both reported as current liabilities.
Recent accounting pronouncements
Adopted accounting pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standard Update (“ASU”) No. 2014-09, “Revenue“Revenue from Contracts with Customers (Topic 606)Customers” (“Topic 606”).” This ASU Topic 606 includes a five-step process by which entities will recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which an entity expects to be entitled to in exchange for those goods or services. The ASUTopic 606 also will requirerequires enhanced disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. On July 9, 2015,The Company adopted Topic 606 on January 1, 2018, using the FASB voted to approve a one year deferralmodified retrospective approach, with the cumulative effect of initially adopting the effectivenew standard recognized in retained earnings at the date of this ASU. This deferraladoption. Therefore, the prior period comparative information was issued by the FASB in ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date”not adjusted and continues to be reported under ASC Topic 605, “Revenue Recognition” (“Topic 605”). As a result of ASU No. 2015-14 the Company expects that it will apply the new revenue standard to annual and interim reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.See Note 2 for further details.
Issued accounting pronouncements not yet adopted
In July 2015,February 2016, the FASB issued ASU No. 2015-11, “Simplifying2016-02, “Leases” (“Topic 842”), which modifies the Measurementaccounting for leases, intending to increase transparency and comparability of Inventory.” This ASU provides guidanceorganizations by requiring balance sheet presentation of leased assets and increased financial statement disclosure of leasing arrangements. Topic 842 will require entities to entities that measure inventory usingrecognize a method other than last-in, first-out (LIFO) or the retail inventory method. For entities using first-in, first-out (FIFO) or average cost, the measurement principleliability for their inventory changeslease obligations and a corresponding recognition of right-of-use (“ROU”) assets over the lease term. Lease obligations are to be measured at their present value and accounted for using the effective interest method. The accounting for the leased asset will differ slightly depending on whether the agreement is deemed to be a financing or operating lease. For financing leases, the leased asset is depreciated on a straight-line basis and depreciation expense is recorded separately from the lowerinterest expense in the statements of costoperations, resulting in higher expense in the earlier part of the lease term. For operating leases, the depreciation and interest expense components are combined, recognized evenly over the term of the lease, and presented as a reduction to operating income. Topic 842 requires that assets and liabilities be presented or marketdisclosed separately, and requires additional disclosure of certain qualitative and quantitative information related to lower of cost and net realizable value. Current U.S. GAAP requires, at each financial statement date, that entities measure inventory at the lower of cost or market. The measurement of marketthese lease agreements. Topic 842 is commonly the current replacement cost. However, entities also need to consider net realizable value and net realizable value less an approximately normal profit margin in their measurement. For entities using a method other than LIFO or the retail inventory method, the ASU replaces market with net realizable value. This ASU requires prospective adoption for inventory measurementeffective for annual and interim periods beginning after December 15, 2016 for public business entities. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.2018. In September 2015,addition, in July 2018, the FASB issued ASU No. 2015-16, “Simplifying2018-11
“Targeted Improvements” to provide an additional transition method whereby entities are allowed to initially apply Topic 842 by adjusting equity at the Accounting for Measurement-Period Adjustments,” which eliminatesadoption date as compared to the requirement for an acquirerbeginning of the earliest period presented, and recognize a cumulative-effect adjustment to retrospectively adjust the financial statements for measurement-period adjustments that occurbeginning balance of retained earnings in periods after a business combination is consummated. The ASU is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2015.the period of adoption. The Company is currently evaluatingplans to adopt the impact this ASUstandard using the modified retrospective approach beginning January 1, 2019. The Company expects to elect the package of practical expedients upon adoption, which allows for the application of the standard solely to the transition period in 2019 but does not require application to prior fiscal comparative periods presented. In preparation for adoption of Topic 842, the Company has been updating the accounting policy, and implementing internal controls and key functionality to enable the preparation of financial information. The Company expects that Topic 842 will have
a material impact on its consolidated
balance sheets due to recognition of additional lease liabilities based on the present value of the remaining minimum rental payments for lease components, with corresponding ROU assets, for its operating leases. The financial
statements.impact has an estimated range of approximately $10,000 to $15,000 upon the adoption of Topic 842. The Company does not expect the adoption to have a material impact on the consolidated statement of operations or the beginning balance of retained earnings. In November 2015,addition, the FASB issued ASU No. 2015-17, “Balance Sheet ClassificationCompany currently expects to elect, as an accounting policy, not to recognize lease liabilities and ROU assets for short-term leases that have a lease term of Deferred Taxes,” which requires entities with12 months or less. Adoption of Topic 842 will also expand the Company's disclosure related to its leasing activities.
(2) REVENUE
Adoption of Topic 606
The adoption of Topic 606 resulted in an increase in accounts receivable of $115; an increase in prepaid expenses and other current assets of $1,255 for the recognition of the right of return assets; an increase in sales return liability of $5,250 for the recognition of the sales returns liability on a classifiedgross basis and for the change in estimating refund liabilities under Topic 606; an increase in accrued liabilities of $314; a decrease in deferred revenue of $314; and a decrease of $3,880 in retained earnings as a cumulative effect of adoption. The largest driver of changes for the adoption of Topic 606 was the change in estimate for price concessions offered to end customers. Under Topic 605, price concessions to end customers were recognized when such incentives were explicitly offered to the end customer, whereas under Topic 606 such incentives are estimated and recorded at the time of the sale of products to the Company’s customers.
The accounts that changed under Topic 606 for the consolidated balance sheet as of December 31, 2018 are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Reported as of December 31, 2018 | | Adjustments as of December 31, 2018 | | Balances Without Adoption of Topic 606 as of December 31, 2018 |
| | | | | | |
| Consolidated balance sheet changes: | | | | | | |
| Accounts receivable, net of allowances | $ | 156,667 | | $ | (49) | | $ | 156,618 |
| Prepaid expenses and other current assets | 5,473 | | (999) | | 4,474 |
| Sales returns liability | 54,432 | | (9,159) | | 45,273 |
| Accrued liabilities | 13,723 | | (96) | | 13,627 |
| Deferred revenue | — | | 96 | | 96 |
| Retained earnings | 113,114 | | 8,111 | | 121,225 |
The accounts that changed under Topic 606 for the consolidated statement of operations for the year ended December 31, 2018 are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Reported for the Year Ended December 31, 2018 | | Adjustments for the Year Ended December 31, 2018 | | Amounts Without Adoption of Topic 606 for the Year Ended December 31, 2018 |
| | | | | | |
| Consolidated statement of operations changes: | | | | | | |
| Net sales | $ | 538,231 | | $ | 8,127 | | $ | 546,358 |
| Cost of sales | 352,358 | | 16 | | 352,374 |
Performance Obligations
The Company’s revenue is derived from sales of device accessories, including screen protection, power cases, power management, wireless charging, personal audio, mobile keyboards and protective cases; through its indirect channel, including retailers, distributors, and franchisees; and through its direct channel, including websites, www.ZAGG.com, www.mophie.com, and www.Gear4.com, corporate-owned and franchise-owned mall kiosks, cellphone repair stores, and Company-branded stores. Such sales mostly contain promises to presenttransfer manufactured products to customers, and in limited arrangement to provide services to customers, in which judgment is required to determine whether such promises are considered distinct performance obligations and should be accounted separately or combined into a single performance obligation. The majority of the products sold by the Company are considered distinct on their own and accounted for separately. Warranties provided to customers are considered as assurance-type warranties under Topic 606 due to the fact that such warranties primarily provide exchange of products for repair and do not offer additional services to the customers and consequently, they are not accounted in separate performance obligations but combined with the promised products sold into a single performance obligation.
Revenue Recognition
When determining the transaction price, or in other words, the amount of revenue to be recognized, transaction price is based on the observable standalone selling prices charged to customers that are mutually agreed upon by both parties before any orders are authorized, reduced by estimated sales returns and discounts, which are considered as variable consideration under Topic 606. To estimate the amount of variable consideration for revenue adjustment, the Company uses the expected value method with inputs from a portfolio of data where significant judgment is applied. As concluded above, majority of products sold or services provided is either determined as a separate performance obligation or to be combined into a single performance obligation and therefore, no allocation of revenue across several performance obligations is required.
For substantially all of the Company's sales, the performance obligations are satisfied and revenues are recognized at a point in time when control of the products is transferred to customers, which generally occurs upon delivery to customers or to shipping carriers. Specifically, the Company's standard shipping terms for product sales are free on board (“FOB”) shipping point at which the Company recognizes revenues when the products are shipped. However, for certain customers, the contractual shipping terms are FOB destination in which revenues are recognized when the products are delivered as control is transferred to customers at such point.
The payment terms for the Company's customers vary by sales channels in which the products are sold. For products sold through the Company's direct channel, customers typically pay in full at a point of sale. For products sold through indirect channel and franchisees, customers are extended credit that have terms which are less than six months.
Promotional products given to customers or potential customers are recognized as a cost of sales. Cash incentives provided to the Company's customers are recognized as a reduction of the related sale price and, therefore are a reduction in revenues.
Disaggregation of Revenue from Contracts with Customers
In the following tables, revenue from contracts with customers are disaggregated by key product lines, key distribution channels, and key geographic regions.
The percentage of net sales related to the Company’s key product lines for the years ended December 31, 2018, 2017, and 2016, was approximately as follows:
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | | | |
| 2018 | | 2017 | | 2016 |
| | | | | |
| Screen protection | 57% | | | 48% | | | | 54% | |
| Power management | 26% | | | 26% | | | | 15% | |
| Power cases | 6% | | | 15% | | | | 15% | |
| Audio | 5% | | | 5% | | | | 6% | |
| Keyboards | 5% | | | 5% | | | | 9% | |
| Other | 1% | | | 1% | | | | 1% | |
The percentage of net sales related to the Company’s key distribution channels for the years ended December 31, 2018, 2017, and 2016, was approximately as follows:
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | | | |
| 2018 | | 2017 | | 2016 |
| | | | | |
| Indirect channel | 88% | | | 89% | | | 87% | |
| Website | 8% | | | 8% | | | 9% | |
| Franchisees | 4% | | | 3% | | | 4% | |
The percentage of net sales related to the Company’s key geographic regions for the years ended December 31, 2018, 2017, and 2016, was approximately as follows:
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | | | |
| 2018 | | 2017 | | 2016 |
| | | | | |
| United States | 84% | | | 84% | | | 88% | |
| Europe | 9% | | | 9% | | | 7% | |
| Other | 7% | | | 7% | | | 5% | |
Contract Balances
Timing of revenue recognition may differ from timing of invoicing to customers or timing of consideration received. The following table provides information about receivables, right of return assets, contract liabilities, refund liabilities, and warranty liabilities from the Company's contracts with customers as of December 31, 2018:
| | | | | |
| December 31, 2018 |
| |
| Receivables, which comprises the balance in accounts receivable, net of allowances | $ | 156,667 |
| Right of return assets, which are included in prepaid expenses and other current assets | 999 |
| Refund liabilities, which are included in sales return liability | 49,786 |
| Warranty liabilities, which are included in sales return liability | 4,646 |
| Contract liabilities, which are included in accrued liabilities | 96 |
The current balance of the right of return assets is the estimated amount of inventory to be returned that is expected to be resold. The current balance of refund liabilities is the expected amount of estimated sales returns, discounts and other credits from sales that have occurred. The current balance of warranty liabilities is the expected amount of warranty claim returns from sales that have occurred. The current balance of contract liabilities primarily relates to the advance consideration received from customers for products for which transfer of control has not yet occurred and therefore, revenue is deferred tax assets and will be recognized when the transfer of control has been completed.
The following summarizes the activities in the Company’s warranty liabilities as noncurrent. The ASU is effective for public business entities for interimthe year ended December 31, 2018:
| | | | | |
| Balance at beginning of year | $ | 4,189 |
| Additions | 14,292 |
| Warranty claims charged | (13,836) |
| Foreign currency translation gain | 1 |
| Balance at end of year | $ | 4,646 |
Practical Expedients and annual periods in fiscal years beginning after December 15, 2016. Policy Elections
The Company applies the following practical expedients in its application of Topic 606:
•The Company does not adjust the transaction price for significant financing components for periods less than one year;
•The Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is currently evaluatingone year or less. These costs are included in selling, general, and administrative expenses;
•The Company recognizes the impact this ASU willcost for shipping and handling as a fulfillment activity after control over products have on its consolidated financial statements.(2)transferred to the
customer. For product sales, the standard shipping terms are FOB shipping point under which revenue is recorded when the product is shipped, net of estimated returns and discounts. Shipping and handling costs are included in cost of sales; and •The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed.
Inventory consisted of the following
components:| | | December 31, | |
| | | 2015 | | | 2014 | |
| | | | | | | |
| Finished goods | | $ | 44,764 | | | $ | 48,145 | |
| Raw materials | | | 1,148 | | | | 233 | |
| Total inventories | | $ | 45,912 | | | $ | 48,378 | |
components as of December 31, 2018 and 2017:
| | | | | | | | | | | |
| December 31, | | |
| 2018 | | 2017 |
| | | |
| Finished goods | $ | 81,397 | | $ | 74,734 |
| Raw materials | 1,522 | | 312 |
| Total inventories | $ | 82,919 | | $ | 75,046 |
Included in prepaid expenses and other current assets were inventory deposits with third-party manufacturers atas of December 31, 20152018 and 20142017 of $813$382 and $1,425,$1,906, respectively.
ZAGG INC AND SUBISDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, units, & shares in thousands, except per share data)
(3) INVESTMENT IN HzO
HzO is a private companyengaged in the development of water-blocking technologies for consumer and industrial electronics applications.Prior to the fourth quarter of 2013, the Company accounted for its investment in HzO under the equity method of accounting. However, due to an equity raise by HzO during the fourth quarter of 2013 that reduced ZAGG’s ownership percentage below 20%, the Company began accounting for the investment as a cost method investment. Subsequent to 2013 year-end, HzO raised additional equity capital, which has reduced ZAGG’s ownership interest below 10% at December 31, 2015.
For the year ended December 31, 2013, the Company recorded a loss from investment in HzO of $2,013. The loss from investment in HzO was recorded as a component of other income (expense) in the consolidated statement of operations. The carrying value of the investment at December 31, 2015 and 2014 was $0 due to the accumulated losses.
(4) PROPERTY AND EQUIPMENT
Property and equipment, net consisted of the
following:| | | | | December 31, | |
| | | | | 2015 | | | 2014 | |
| | | Useful Lives | | | | | | | | |
| Computer equipment and software | | 3 to 5 years | | $ | 2,912 | | | $ | 2,627 | |
| Equipment and molds | | 3 to 7 years | | | 9,536 | | | | 8,238 | |
| Furniture and fixtures | | 7 years | | | 745 | | | | 770 | |
| Automobiles | | 5 years | | | 199 | | | | 234 | |
| Leasehold improvements | | 1 to 8 years | | | 5,456 | | | | 3,090 | |
| | | | | | 18,848 | | | | 14,959 | |
| Less accumulated depreciation and amortization | | | | | (10,539 | ) | | | (7,659 | ) |
| | | | | | | | | | | |
| Net property and equipment | | | | $ | 8,309 | | | $ | 7,300 | |
following as of December 31, 2018 and 2017:
| | | | | | | | | | | | | | | | | |
| | | December 31, | | |
| Useful Lives | | 2018 | | 2017 |
| | | | | |
| Computer equipment and software | 3 to 5 years | | $ | 2,180 | | $ | 2,163 |
| Equipment and molds | 3 to 10 years | | 13,662 | | 12,395 |
| Furniture and fixtures | 7 years | | 1,904 | | 1,824 |
| Automobiles | 5 years | | 85 | | 126 |
| Building and improvements | 40 years | | 2,486 | | 3,332 |
| Leasehold improvements | 1 to 5 years | | 7,320 | | 5,819 |
| Land | | | 325 | | 325 |
| Property and equipment, gross | | | 27,962 | | 25,984 |
| | | | | |
| Less accumulated depreciation and amortization | | | (11,844) | | (12,540) |
| Property and equipment, net | | | $ | 16,118 | | $ | 13,444 |
For the years ended December 31, 2018, 2017, and 2016, depreciation expenses were $6,293, $9,727, and $8,776, respectively, which were included as a component of selling, general and administrative expense in the consolidated statements of operations.
(5) GOODWILL AND INTANGIBLE ASSETS
Impairment of
During the year ended December 31, 2013,2018, goodwill increased in connection with the BRAVEN and Gear4 acquisitions. The following table summarizes the changes in goodwill during 2018:
| | | | | |
| Balance as of December 31, 2017 | $ | 12,272 |
| Increase in connection with BRAVEN acquisition | 298 |
| Increase in connection with Gear4 acquisition | 15,068 |
| Balance as of December 31, 2018 | $ | 27,638 |
There was no change in goodwill during the year ended December 31, 2017. The Company noted no impairment of goodwill for the years ended December 31, 2018 and 2017.
Long-lived Intangibles
The following tables reflect the gross carrying amount and accumulated amortization of the Company's long-lived intangible assets, net for the years ended December 31, 2018 and 2017:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, 2018 | | | | | | | | |
| Gross Carrying Amount | | Acquisitions | | Accumulated Amortization | | Net Carrying Amount | | Weighted Average Amortization Period |
| | | | | | | | | |
| Customer relationships | $ | 49,700 | | $ | 11,186 | | $ | (45,326) | | $ | 15,560 | | 7.6 years |
| Trade names | 31,269 | | 12,518 | | (16,799) | | 26,988 | | 9.9 years |
| Patents and technology | 18,451 | | 872 | | (10,600) | | 8,723 | | 8.0 years |
| Non-compete agreements | 5,896 | | — | | (5,118) | | 778 | | 4.9 years |
| Other | 567 | | 222 | | (784) | | 5 | | 1.8 years |
| Total amortizable assets | $ | 105,883 | | $ | 24,798 | | $ | (78,627) | | $ | 52,054 | | 8.3 years |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, 2017 | | | | | | | | |
| Gross Carrying Amount | | Impairments | | Accumulated Amortization | | Net Carrying Amount | | Weighted Average Amortization Period |
| | | | | | | | | |
| Customer relationships | $ | 49,700 | | $ | — | | $ | (40,441) | | $ | 9,259 | | 7.5 years |
| Trade names | 31,269 | | — | | (13,415) | | 17,854 | | 9.8 years |
| Patents and technology | 21,228 | | (2,777) | | (7,470) | | 10,981 | | 8.8 years |
| Non-compete agreements | 5,896 | | — | | (4,759) | | 1,137 | | 4.9 years |
| Other | 567 | | — | | (554) | | 13 | | 2.4 years |
| Total amortizable assets | $ | 108,660 | | $ | (2,777) | | $ | (66,639) | | $ | 39,244 | | 8.2 years |
On April 11, 2017, the Company received a final court order stating that the claims of one of its patents were either unpatentable or cancelled. Accordingly, management determined that the patent’s carrying value was not recoverable through future cash flows and was impaired as of March 31, 2017. Consequently, the Company recorded an impairment
loss consisting of
goodwilla reduction of
$1,484 when it was determined that thegross carrying amount of $2,777, accumulated amortization of $818, and net carrying value of
goodwill exceeded its fair value. The determination was made during$1,959 to reduce the
impairment analyses performed during the fourth quarter of 2013. In conjunction with the impairment test, the Company considered factors such as the overall decline in the market pricenet carrying value of the
Company’s stock, a decline in market capitalization for a sustained period, and a decline in forecasted operations as indicators for potential goodwill impairment. In determining the amount of impairment, the Company considered both the income approach, utilizing a discounted cash flow analysis, and market approach, which considers what other purchasers and sellers in the market have paid for companies reasonably similarcancelled patent to
the reporting unit.The goodwill impairment is included as a component of impairment of goodwill and intangibles in the consolidated statement of operations. No goodwill was acquired during the years ended December 31, 2015 and 2014.
$0.
ZAGG INC AND SUBISDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, units, & shares in thousands, except per share data)
The changes in the carrying amount of goodwill for the year ended December 31, 2013, are as follows:
| | | 2013 | |
| Balance as of January 1 | | | | |
| Gross goodwill | | $ | 6,925 | |
| Accumulated impairment losses | | | (5,441 | ) |
| Net goodwill as of January 1 | | | 1,484 | |
| Goodwill acquired during the year | | | - | |
| Impairment loss | | | (1,484 | ) |
| Balance as of December 31 | | | | |
| Gross goodwill | | | 6,925 | |
| Accumulated impairment losses | | | (6,925 | ) |
| Net goodwill as of December 31 | | $ | - | |
Impairment of Indefinite-lived Intangible Assets
During the fourth quarter of 2013, the Company made a brand strategy change to place greater emphasis on the promotion of the ZAGG and InvisibleShield brands. As a result of this decision, we determined that future cash flows under the iFrogz trademark likely will be less than previously estimated and that the trademark should be considered a definite-lived intangible asset. Management incorporated this information into an impairment analysis performed during the fourth quarter of 2013, relying on a discounted cash flow analysis and market approach. Management determined the carrying amount of the trademark exceeded the fair value and an impairment charge of $9,762 was recorded at December 31, 2013as a component of the impairment of goodwill and intangibles line in the consolidated statement of operations. As the trademark was then considered a definite-lived intangible, the Company commenced amortizing the trademark over a ten-year useful life on an accelerated basis consistent with the projected future cash flows from the trademark. Amortization of this intangible commenced in the first quarter of 2014. Future amortization of this trademark is included in the estimated future amortization expense table below in this Note.
| | | | |
| | | December 31, 2013 | |
| | | | | |
| iFrogz trademark prior to impairment | | $ | 16,800 | |
| iFrogz trademark impairment | | | (9,762 | ) |
| iFrogz trademark – definite-lived | | $ | 7,038 | |
Definite-lived Intangibles
Definite-lived intangibles as of December 31, 2015 and 2014, were as follows:
| | | As of December 31, 2015 | |
| | | Gross Carrying Amount | | | Accumulated Amortization | | | Acquisitions | | | Net Carrying Amount | | | Weighted Average Amortization Period | |
| | | | | | | | | | | | | | | | |
| Customer relationships | | $ | 41,500 | | | $ | (29,150 | ) | | $ | - | | | $ | 12,350 | | | | 8.0 years | |
| Non-compete agreements | | | 4,100 | | | | (3,729 | ) | | | - | | | | 371 | | | | 4.8 years | |
| Other Trademarks | | | 3,500 | | | | (2,604 | ) | | | - | | | | 896 | | | | 9.7 years | |
| iFrogz Trademark | | | 7,038 | | | | (2,219 | ) | | | - | | | | 4,819 | | | | 10.0 years | |
| EarPollution Trademark | | | 2,383 | | | | (1,430 | ) | | | - | | | | 953 | | | | 8.0 years | |
| Other | | | 600 | | | | (592 | ) | | | - | | | | 8 | | | | 5.0 years | |
| Acquired technology | | | 709 | | | | (375 | ) | | | - | | | | 334 | | | | 7.0 years | |
| Internet address | | | 124 | | | | (90 | ) | | | - | | | | 34 | | | | 10.0 years | |
| Patents | | | 4,696 | | | | (1,614 | ) | | | 198 | | | | 3,280 | | | | 12.5-14.0 years | |
| Total amortizable assets | | $ | 64,650 | | | $ | (41,803 | ) | | $ | 198 | | | $ | 23,045 | | | | 8.4 years | |
| | | | | | | | | | | | | | | | | | | | | |
ZAGG INC AND SUBISDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, units, & shares in thousands, except per share data)
| | | | |
| | | As of December 31, 2014 | |
| | | Gross Carrying Amount | | | Accumulated Amortization | | | Acquisitions | | | Net Carrying Amount | | | Weighted Average Amortization Period | |
| | | | | | | | | | | | | | | | |
| Customer relationships | | $ | 41,500 | | | $ | (23,839 | ) | | $ | - | | | $ | 17,661 | | | | 8.0 years | |
| Non-compete agreements | | | 4,100 | | | | (2,949 | ) | | | - | | | | 1,151 | | | | 4.8 years | |
| Other Trademarks | | | 3,500 | | | | (2,216 | ) | | | - | | | | 1,284 | | | | 9.7 years | |
| iFrogz Trademark | | | 7,038 | | | | (1,152 | ) | | | - | | | | 5,886 | | | | 10.0 years | |
| EarPollution Trademark | | | 2,383 | | | | (1,026 | ) | | | - | | | | 1,357 | | | | 8.0 years | |
| Other | | | 600 | | | | (554 | ) | | | - | | | | 46 | | | | 5.0 years | |
| Acquired technology | | | 709 | | | | (267 | ) | | | - | | | | 442 | | | | 7.0 years | |
| Internet address | | | 124 | | | | (78 | ) | | | - | | | | 46 | | | | 10.0 years | |
| Patents | | | 4,696 | | | | (1,161 | ) | | | - | | | | 3,535 | | | | 12.5-14.0 years | |
| Total amortizable assets | | $ | 64,650 | | | $ | (33,242 | ) | | $ | - | | | $ | 31,408 | | | | 8.4 years | |
Customer relationships, trademarks,trade names, and other intangibles are amortized on an accelerated basis consistent with their expected future cash flows over their estimated useful life,lives, which results in accelerated amortization. The remaining definite-livedlong-lived intangible assets are amortized using the straight linestraight-line method over their estimated useful life. For the years ended December 31, 2015, 2014,2018, 2017, and 20132016, amortization expense was $8,562, $9,811,expenses were $11,988, $12,159, and $9,702, respectively. Amortization expense was$13,495, respectively, which were primarily recorded as a component of operating expense,expenses; however, amortization expenseexpenses related to acquired technology in 2015, 2014,for the years ended December 31, 2018, 2017, and 20132016 of $109, $102,$106, $112, and $82,$110, respectively, waswere recorded as a component of cost of sales.
Duringsales in the fourth quarterconsolidated statements of 2015, the Company acquired certain patents and patent applications from a third party. The patents and patent applications relate to the screen protection product line and were acquired for consideration of 21 shares of ZAGG Inc common stock, which had a value of $198 on the date of acquisition. The $198 in patent acquisition costs is being amortized over the 14-year remaining weighted average life of the patents.
operations.
Estimated future amortization expense
for long-lived intangibles is as follows:
| | 2016 | | | $ | 7,140 | |
| | 2017 | | | | 5,663 | |
| | 2018 | | | | 4,640 | |
| | 2019 | | | | 2,304 | |
| | 2020 | | | | 953 | |
| | Thereafter | | | | 2,345 | |
| | Total | | | $ | 23,045 | |
| | | | | |
| 2019 | $ | 13,395 |
| 2020 | 10,447 |
| 2021 | 7,534 |
| 2022 | 5,748 |
| 2023 | 4,773 |
| Thereafter | 10,157 |
| Total | $ | 52,054 |
(6) INCOME TAXES
ACQUISITIONS
Acquisition of Gear4
On November 30, 2018 (the “Gear4 Acquisition Date”), Patriot Corporation Unlimited Company, an entity registered and incorporated in Ireland and a wholly-owned subsidiary of the Company, entered into a share purchase agreement (the “Purchase Agreement”) with STRAX Holding GmbH, an entity registered and incorporated in Germany (“STRAX”), and Gear4 HK Limited, an entity registered and incorporated in Hong Kong and a wholly-owned subsidiary of STRAX (“Gear4”), to acquire from STRAX all of the issued and outstanding equity securities of Gear4 (the “Gear4 Acquisition”). With its expansive global distribution channels, the Company believes that the Gear4 Acquisition will strengthen its case product profile to drive increased sales and profitability.
The purchase consideration for the Gear4 Acquisition was $32,200 in cash, 638 shares of the Company's common stock valued at $6,001, and contingent consideration estimated at $1,629 (the “Gear4 Earnout Consideration”). The initial purchase price was subject to adjustment based on the results of Gear4's net sales as defined in the Purchase Agreement for the year ended December 31, 2018. The Gear4 Earnout Consideration is recorded in other long-term liabilities in the consolidated balance sheets.
As agreed in the Purchase Agreement, cash consideration of $1,725 and 225 shares of the Company's common stock valued at $2,116 was retained by the Company and will be held by the Company for 18 months following the Gear4 Acquisition Date as security for STRAX's indemnification obligations. The $3,841 retained by the Company that is due to STRAX is recorded in other long-term liabilities in the consolidated balance sheets.
The following summarizes the components of the purchase consideration for Gear4:
| | | | | |
| Cash consideration | $ | 32,200 |
| Company common stock | 6,001 |
| Contingent consideration | 1,629 |
| Total purchase price | $ | 39,830 |
STRAX is also entitled to the Gear4 Earnout Consideration from the Company if the Gear4 net sales as reported in audited financial statements for the year ended December 31, 2019, reported under U.S. GAAP, exceeds certain targets. Specifically, if the Gear4's net sales as reported under U.S. GAAP for the year ended December 31, 2019 are equal to or exceed $60,000 but less than $90,000, STRAX is entitled to $5,000. If the Gear4's net sales for the year ended December 31, 2019 are equal to or exceed $90,000, STRAX is entitled to $10,000. The maximum amount to be paid out under the Gear4 Earnout Consideration would be $10,000.
The total purchase price of $39,830 was allocated to identifiable assets acquired and liabilities assumed based on their respective fair values. The excess of the purchase price over the fair value of the tangible and intangible assets acquired and liabilities assumed is recorded as goodwill.
The following table summarizes the fair values of the identifiable assets acquired and liabilities assumed as of the Gear4 Acquisition Date:
| | | | | |
| Cash | $ | 2,124 |
| Accounts receivable (gross contractual receivables of $203) | 104 |
| Prepaids and other current assets | 671 |
| Inventory | 2,831 |
| Inventory step-up | 96 |
| Property and equipment | 1,427 |
| Amortizable identifiable intangible assets | 23,024 |
| Goodwill | 15,068 |
| Accounts payable | (2,584) |
| Accrued liabilities | (773) |
| Sales return liability | (932) |
| Taxes payable | (1,226) |
| Total | $ | 39,830 |
Identifiable Intangible Assets
Classes of acquired intangible assets include trade names, customer relationships, and backlog. The fair value of the identifiable intangible assets was determined using the income valuation method. For assets valued under the income approach, the estimate of the present value of expected future cash flows for each identifiable asset was based on discount rates which incorporate a risk premium to take into account the risks inherent in those expected cash flows. The expected cash flows were estimated using available historical data adjusted based on the Company’s historical experience and the expectations of market participants. The amounts assigned to each class of intangible asset and the related weighted average amortization periods are as follows:
| | | | | | | | | | | |
| Intangible Asset Class | | Weighted Average Amortization Period |
| | | |
| Trade names | $ | 11,617 | | 10 years |
| Customer relationships | 11,186 | | 8 years |
| Backlog | 221 | | 1 month |
| Total | $ | 23,024 | | |
Goodwill
Goodwill represents the excess of the Gear4 purchase price over the fair value of the assets acquired and liabilities assumed. The Company believes that the primary factors supporting the amount of the goodwill recognized are the significant growth opportunities and expected synergies of the combined entity.
Results of Operations
The results of operations of Gear4 were included in the Company's results of operations beginning on December 1, 2018. For Gear4's results of operations from December 1, 2018 through December 31, 2018, Gear4 generated net sales of $2,955 and had a net income before tax provisionof $1,814.
Pro Forma Results of Operations (unaudited)
The following unaudited pro-forma results of operations for the years ended December 31,
2015, 20142018, and
2013, are:| | | 2015 | | | 2014 | | | 2013 | |
| Current provision: | | | | | | | | | | | | |
| Federal | | $ | (9,429 | ) | | $ | (9,705 | ) | | $ | (8,720 | ) |
| State | | | (1,783 | ) | | | (2,502 | ) | | | (762 | ) |
| Foreign | | | (61 | ) | | | (36 | ) | | | - | |
| Total current | | | (11,273 | ) | | | (12,243 | ) | | | (9,482 | ) |
| Deferred provision: | | | | | | | | | | | | |
| Federal | | | 973 | | | | 4,144 | | | | 5,036 | |
| State | | | 189 | | | | 1,626 | | | | 751 | |
| Foreign | | | - | | | | - | | | | - | |
| Total deferred | | | 1,162 | | | | 5,770 | | | | 5,787 | |
| Total provision | | $ | (10,111 | ) | | $ | (6,473 | ) | | $ | (3,695 | ) |
| | | | | | | | | | | |
| For the Years Ended December 31, | | |
| 2018 | | 2017 |
| | | |
| Net sales | $ | 568,802 | | $ | 544,097 |
| Net income | $ | 35,218 | | $ | 24,745 |
| Basic earnings per share | $ | 1.25 | | $ | 0.88 |
| Diluted earnings per share | $ | 1.24 | | $ | 0.87 |
The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred had the transaction been consummated as of January 1, 2017. Furthermore, such unaudited pro forma information is not necessarily indicative of future operating results of the combined companies, due to changes in operating activities following the purchase, and should not be construed as representative of the operating results of the combined companies for any future dates or periods.
For the years ended December 31, 2018 and 2017, pro forma net income includes pro forma amortization expense of $2,956 and $4,217, respectively. In addition, the Company included interest from the amended credit facility and amortization of debt issuance costs for the years ended December 31, 2018 and 2017 of $1,588 and $1,732, respectively. Pro forma net income for the year ended December 31, 2018 was adjusted to exclude non-recurring items including acquisition-related costs of $595 and the expensing of the fair value adjustment to inventory of $16. Pro forma net income for the year ended December 31, 2017 was adjusted to include acquisition-related costs of $595 and amortization related to the fair value adjustment to inventory of $96.
The unaudited pro forma results do not reflect events that either have occurred or may occur after the Gear4 Acquisition, including, but not limited to, the anticipated realization of ongoing savings from operating synergies in subsequent periods.
As part of the Gear4 Acquisition, the Company incurred legal, accounting, investment banking and other due diligence fees that were expensed when incurred. Total fees incurred related to the Gear4 Acquisition for the year ended December 31, 2018 was $595 which was included as a component of operating expenses on the consolidated statements of operations.
In connection with the Gear4 Acquisition, the Company amended its existing credit facility to fund the transaction. See Note 9 for detail of the amendment.
Acquisition of BRAVEN
On July 20, 2018 (the “BRAVEN Acquisition Date”), ZAGG
INC AND SUBISDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, units, & sharesAmplified, Inc., a Delaware corporation and wholly-owned subsidiary of the Company, completed its acquisition (the “BRAVEN Acquisition”) of BRAVEN Audio (“BRAVEN”) pursuant to the terms of an asset purchase agreement with Incipio LLC. In connection with the BRAVEN Acquisition, the Company acquired accounts receivable, inventory, property and equipment, intellectual property, a product and engineering team, and certain other assets as well as assumed certain liabilities for cash consideration of $4,451.
BRAVEN products include rugged Bluetooth speakers and earbuds, which are expected to expand the Company's product profile and markets.
The purchase price of $4,451 was allocated to identifiable assets acquired and liabilities assumed based on their respective fair values. The excess of the purchase price over the fair value of the tangible and intangible assets acquired and liabilities assumed is recorded as goodwill.
The following table summarizes the fair values of the identifiable assets acquired and liabilities assumed as of BRAVEN Acquisition Date:
| | | | | |
| Accounts receivable (gross contractual receivables of $650) | $ | 650 |
| Inventory | 2,141 |
| Inventory step-up | 179 |
| Property and equipment | 368 |
| Amortizable identifiable intangible assets | 1,774 |
| Goodwill | 298 |
| Accounts payable | (959) |
| Total | $ | 4,451 |
Identifiable Intangible Assets
Classes of acquired intangible assets include patents and technology, trade names, and backlog. The fair value of the identifiable intangible assets was determined using various valuation methods, including the income approach. For assets valued under the income approach, the estimate of the present value of expected future cash flows for each identifiable asset was based on discount rates which incorporate a risk premium to take into account the risks inherent in
thousands, except per share data)
those expected cash flows. The expected cash flows were estimated using available historical data adjusted based on the Company’s historical experience and the expectations of market participants. The amounts assigned to each class of intangible asset and the related weighted average amortization periods are as follows:
| | | | | | | | | | | |
| Intangible Asset Class | | Weighted Average Amortization Period |
| | | |
| Patents and technology | $ | 872 | | 3.1 years |
| Trade names | 901 | | 10 years |
| Backlog | 1 | | 6 months |
| Total | $ | 1,774 | | |
Goodwill
Goodwill represents the excess of the BRAVEN purchase price over the fair value of the assets acquired and liabilities assumed. The Company believes that the primary factors supporting the amount of the goodwill recognized are the engineering team, significant growth opportunities, and expected synergies of the combined entity.
Results of Operations
The results of operations of BRAVEN were included in the Company's results of operations beginning on July 20, 2018. For BRAVEN's results of operations from July 20, 2018 through December 31, 2018, BRAVEN generated net sales of $2,421 and had a net loss before tax of $2,788.
As part of the BRAVEN Acquisition, the Company incurred legal, accounting, and other due diligence fees that were expensed when incurred. Total fees related to the BRAVEN acquisition for the year ended December 31, 2018 was $60, which was included as a component of operating expenses on the consolidated statements of operations.
(7) INCOME TAXES
Income (loss) from operations before taxes for the years ended December 31, 2018, 2017, and 2016, consisted of the following:
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | | | |
| 2018 | | 2017 | | 2016 |
| | | | | |
| U.S. operations | $ | 44,236 | | $ | 37,850 | | $ | (22,220) |
| Foreign operations | 5,293 | | 5,502 | | (1,339) |
| Total | $ | 49,529 | | $ | 43,352 | | $ | (23,559) |
Income tax (provision) benefit components for the years ended December 31, 2018, 2017, and 2016, consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, | | | | |
| | 2018 | | 2017 | | 2016 |
| | | | | | |
| Current (provision) benefit: | | | | | | |
| Federal | $ | (1,922) | | $ | (779) | | $ | (89) |
| State | (2,810) | | (532) | | 138 |
| Foreign | (617) | | (786) | | (31) |
| Total current (provision) benefit | | (5,349) | | (2,097) | | 18 |
| Deferred (provision) benefit: | | | | | | |
| Federal | (5,296) | | (25,919) | | 7,612 |
| State | 184 | | (345) | | 342 |
| Foreign | 121 | | 109 | | — |
| Total deferred (provision) benefit | | (4,991) | | (26,155) | | 7,954 |
| Total (provision) benefit | | $ | (10,340) | | $ | (28,252) | | $ | 7,972 |
The following is a reconciliation of the income taxes computed using the federal statutory rate to the provision for income taxes for the years ended December 31,
2015, 20142018, 2017, and
2013:| | | 2015 | | | 2014 | | | 2013 | |
| Tax at statutory rate (35%) | | $ | (8,994 | ) | | $ | (5,927 | ) | | $ | (2,970 | ) |
| State tax, net of federal tax benefit | | | (1,089 | ) | | | (955 | ) | | | 25 | |
| Non-deductible expense and other | | | 116 | | | | 220 | | | | 564 | |
| Affiliate tax rate differential | | | (464 | ) | | | (900 | ) | | | (136 | ) |
| Domestic production activities deduction | | | 459 | | | | 688 | | | | 331 | |
| Return to provision adjustment | | | 126 | | | | 453 | | | | (148 | ) |
| Liquidation of iFrogz EU | | | - | | | | - | | | | 5 | |
| Reserve related to unrecognized tax benefits | | | (264 | ) | | | (541 | ) | | | (382 | ) |
| Interest and penalties | | | (1 | ) | | | (37 | ) | | | (32 | ) |
| Effect of state rate changes, net of federal tax benefit | | | - | | | | 526 | | | | - | |
| Increase in valuation allowance | | | - | | | | - | | | | (952 | ) |
| | | $ | (10,111 | ) | | $ | (6,473 | ) | | $ | (3,695 | ) |
2016:
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | | | |
| 2018 | | 2017 | | 2016 |
| | | | | |
| Tax at statutory rate (21% for 2018, 35% for 2017 and 2016) | $ | (10,401) | | $ | (15,173) | | $ | 8,246 |
| State tax, net of federal tax benefit | (2,830) | | (1,217) | | 1,041 |
| Non-deductible expense and other | (300) | | (830) | | 333 |
| Restricted stock awards | 833 | | (831) | | — |
| Foreign tax rate differential | 615 | | 1,248 | | (491) |
| GILTI | (299) | | — | | — |
| Mandatory repatriation of foreign earnings | — | | (547) | | — |
| Return to provision adjustment | 778 | | (212) | | (36) |
| Reserve related to unrecognized tax benefits | 598 | | 107 | | (452) |
| Interest and penalties | (6) | | (1) | | (14) |
| Effect of federal rate change | — | | (11,806) | | — |
| Effect of state rate changes, net of federal tax benefit | 732 | | 1,010 | | (655) |
| Change in valuation allowance | (60) | | — | | — |
| Total reconciliation amount | $ | (10,340) | | $ | (28,252) | | $ | 7,972 |
The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities
atas of December 31,
20152018 and
2014,2017, are as follows:
| | | 2015 | | | 2014 | |
| Deferred tax assets: | | | | | | | | |
| Allowance for doubtful accounts | | $ | 196 | | | $ | 729 | |
| Deferred revenue | | | 7 | | | | 12 | |
| Inventories | | | 5,581 | | | | 5,584 | |
| Stock-based compensation | | | 2,406 | | | | 1,825 | |
| Sales returns accrual | | | 2,974 | | | | 3,374 | |
| Acquisition costs, net of amortization | | | 217 | | | | 238 | |
| Intangible assets | | | 12,924 | | | | 11,708 | |
| Goodwill | | | 1,886 | | | | 2,067 | |
| HzO investment | | | 1,520 | | | | 1,520 | |
| Capital loss carry-over | | | 278 | | | | 278 | |
| Reserve on note receivable | | | 336 | | | | 583 | |
| Other liabilities | | | 499 | | | | 66 | |
| Deferred tax assets | | | 28,824 | | | | 27,984 | |
| Valuation allowance | | | (1,798 | ) | | | (1,798 | ) |
| Total deferred tax assets | | $ | 27,026 | | | $ | 26,186 | |
| Deferred tax liabilities: | | | | |
| Property and equipment | | | 800 | | | | 1,122 | |
| Total gross deferred tax liabilities | | | 800 | | | | 1,122 | |
| Net deferred tax assets | | $ | 26,226 | | | $ | 25,064 | |
| Deferred tax assets, net – current | | $ | 10,840 | | | $ | 10,774 | |
| Deferred tax assets, net – noncurrent | | | 15,386 | | | | 14,290 | |
| Net deferred tax assets | | $ | 26,226 | | | $ | 25,064 | |
| | | | | | | | | | | | | | |
| | December 31, | | |
| | 2018 | | 2017 |
| | | | |
| Deferred tax assets: | | | | |
| Allowance for doubtful accounts | $ | 141 | | $ | 146 |
| Property and equipment | 145 | | 396 |
| Deferred revenue | — | | 11 |
| Inventories | 4,672 | | 7,265 |
| Stock-based compensation | 562 | | 790 |
| Sales returns accrual | 5,058 | | 4,343 |
| Acquisition costs, net of amortization | 107 | | 116 |
| Intangible assets | 4,087 | | 2,230 |
| Goodwill | 926 | | 1,009 |
| HzO investment | 1,048 | | 1,007 |
| Capital loss carry-over | 191 | | 184 |
| Net operating loss carryforward | 19 | | 3,338 |
| Federal and state credit carryforwards | 2,070 | | 3,440 |
| Other liabilities | 1,894 | | 1,586 |
| Total gross deferred tax assets | 20,920 | | 25,861 |
| Valuation allowance | (1,517) | | (1,458) |
| Total deferred tax assets | | $ | 19,403 | | $ | 24,403 |
ZAGG INC AND SUBISDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, units, & shares in thousands, except per share data)
The Company recorded a full valuation allowance against a deferred tax asset generated by capital losses on its investment in HzO. HzO is a development stage enterprise and given current operations and uncertainty of future profitability, management has determined that it is more likely than not that the deferred tax asset will not be realizable. Given this, a full valuation allowance at December 31,
20152018 and
20142017 of
$1,520,$1,048 and $1,007, respectively, has been recorded against
thethis deferred tax asset. In addition, at December 31,
20152018 and
2014,2017, the Company recorded a full valuation allowance against deferred tax assets resulting from capital loss carry-overs of
$278$191 and $184, respectively, as the Company determined that it was unlikely the capital loss carry-overs would be utilized.
For all other Additionally, a valuation allowance of $278 and $267 as of December 31, 2018 and 2017, respectively, were recorded on California research and development credit carryforwards that were added upon the acquisition of mophie for the year ended December 31, 2017.
As of December 31, 2018, the Company had federal net operating loss carryforward of approximately $90, which may be used to offset future taxable income.
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets,
the Company considers all available positive and negative evidence, including but not limited to scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. Additionally, we consider historical performance in our evaluation of the realizability of deferred tax assets, specifically, three years of cumulative operating income. Weighing both the positive and negative evidence, management concludes no
additional valuation allowance
has beenneeds to be recorded at December 31,
2015 and 2014, as management2018. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize its deferred tax assets.
Moreover, historical data provides evidence of sustained profitability.
The Company has not recognized a deferred tax liability for the undistributed earnings of its foreign operations that arose in
20152018 and prior years as the Company considers these earnings to be permanently reinvested. Cash held by foreign entities that is considered permanently re-invested totaled
$4,873$14,271 as of December 31,
2015. Currently, there are no2018. There were earnings and profits that
resideresided in the Company’s foreign
operations. Aoperations that were repatriated under recent U.S. tax reform; the impact of this repatriation
of cash would likely result in a return of basis. Upon the generation of future cumulative taxable income by the foreign operations and subsequent repatriation, the Company would need to accrue and pay the related tax. However, no tax would accruewas included in the
case ofprovision and U.S. tax return for the
settlement of intercompany payables or payment of intercompany royalties.year ended December 31, 2017. The Company considers these funds permanently
re-invested and has no plans to repatriate them.re-invested.
The Company recognizes the impact of a tax position in the financial statements if that position is more likely than not of being sustained
onupon audit, based on the technical merits of the position. As of December 31,
20152018 and
2014,2017, the Company recorded a tax contingency of
$1,265$1,398 and
$1,001,$2,278, respectively. The tax contingencies are primarily related to the
Company’sCompany's global tax strategy,
and certain transactions in foreign jurisdictions in prior
periods. Theseperiods, and research and development credits taken for federal and state purposes. Another component of the tax contingency relates to the mophie acquisition which relate to research and development credits taken for federal and state purposes. The tax contingencies, on a gross basis, are reconciled in the table below:
| | | 2015 | | | 2014 | |
| | | | | | | | | |
| Unrecognized tax benefits, as of January 1 | | $ | 1,001 | | | $ | 460 | |
| Gross increases – tax positions in current period | | | 264 | | | | 541 | |
| Total benefit | | $ | 1,265 | | | $ | 1,001 | |
| | | | | | | | | | | |
| December 31, | | |
| 2018 | | 2017 |
| | | |
| Unrecognized tax benefits, as of January 1 | $ | 2,278 | | $ | 2,230 |
| Gross increases (decreases) – tax positions in current period | 27 | | 444 |
| Gross increases (decreases) – prior year tax positions | — | | 58 |
| Gross increases (decreases) – lapse of statute | (907) | | (454) |
| Total benefit | $ | 1,398 | | $ | 2,278 |
As of December 31,
2015,2018, the Company's liability related to unrecognized tax benefits was
$1,265$1,398 of which
$1,223$1,398 would impact the
Company'sCompany’s effective tax rate if recognized.
(8) FAIR VALUE MEASUREMENTS
At December 31, 2018 and 2017, the Company’s financial instruments included cash and cash equivalents, accounts receivable, accounts payable, and a line of credit. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximates fair value due to the short-term maturities of these financial instruments. The carrying value of the debt balances approximate fair value because the variable interest rates reflect current market rates.
(9) DEBT AND LINE OF CREDIT
Long-term debt, net as of December 31, 2018 and 2017, was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, | | | | | | |
| 2018 | | | | 2017 | | |
| Amount | | Weighted-Average Interest Rate | | Amount | | Weighted-Average Interest Rate |
| | | | | | | |
| 2016 Credit and Security Agreement | | | | | | | |
| 2016 Revolver | $ | — | | | | $ | 23,475 | | 3.30 | % |
| 2016 Term Loan, net of deferred loan costs of $0 and $141 | — | | | | 13,922 | | 3.38 | % |
| | | | | | | |
| 2018 Credit and Security Agreement | | | | | | | |
| 2018 Revolver | 58,363 | | 4.03 | % | | — | | |
| Total debt outstanding | 58,363 | | | | 37,397 | | |
| Current portion of total debt outstanding, net of deferred loan costs of $0 and $141 | — | | | | 37,397 | | |
| Total long-term debt outstanding | $ | 58,363 | | | | | $ | — | | |
2018 Credit and Security Agreement
On April 12, 2018, the Company entered into an amended and restated credit and security agreement (the “2018 Credit and Security Agreement”) with KeyBank National Association (“KeyBank”), as administrative agent, Swing Line Lender and Issuing Lender, KeyBanc Capital Markets Inc., as sole lead arranger and sole book runner, and other members of the lender group, which was subsequently amended by a first amendment agreement dated as of November 28, 2018 (as amended, the “2018 Credit and Security Agreement”).
The 2018 Credit and Security Agreement consists of an $125,000 (“Maximum Revolver Amount”) secured revolving credit facility (the “2018 Revolver”), which is not subject to borrowing base limitations. In addition, at the Company’s option, up to $40,000 of the 2018 Revolver may be made available for the issuance of letters of credit. Proceeds from the 2018 Revolver were used to fully retire the 2016 Term Loan and thus, the 2018 Revolver is the only credit instrument effective April 12, 2018. As of December 31, 2018, no letters of credit were issued and $40,000 was available to be issued for letters of credit.
The 2018 Revolver initially bears interest at an annual rate, at the Company’s option, of (i) the base rate (as defined in the 2018 Credit and Security Agreement) plus a margin of 0.250% to 1.375% based on the prior quarter-end Leverage Ratio or (ii) the Eurodollar Rate (as defined in the 2018 Credit and Security Agreement) plus a margin of 1.250% to 2.375% based on the prior quarter-end Leverage Ratio. The 2018 Revolver matures April 11, 2023, subject to early termination in the event of default.
In addition, the Company is required to pay a monthly Applicable Commitment Fee Rate (as defined in the 2018 Credit and Security Agreement) that can fluctuate between 0.175% and 0.275% based on the Leverage Ratio (as defined in the 2018 Credit and Security Agreement). The commitment fee is calculated monthly using the Maximum Revolving Amount (as defined in the 2018 Credit and Security Agreement) at the end of each calendar month, minus the Revolving Credit Exposure (exclusive of the Swing Line Exposure) (each as defined in the 2018 Credit and Security Agreement) at the end of such day, multiplied by the Applicable Commitment Fee Rate in effect on such day divided by three hundred sixty (360). The monthly commitment fee is payable quarterly in arrears, commencing on July 1, 2018 and continuing on each regularly scheduled payment date thereafter.
The 2018 Credit and Security Agreement contains customary representations and warranties and restrictive covenants. The 2018 Credit and Security Agreement also contains affirmative and negative covenants requiring, among other things, the Company to meet certain financial ratio tests and to provide certain information to the lenders. The 2018 Credit and Security Agreement also includes financial maintenance covenants that require compliance with a Leverage Ratio and a Fixed Charge Coverage Ratio (both defined in the 2018 Credit and Security Agreement), tested at the end of each fiscal quarter commencing with the three months ended June 30, 2018.
The 2018 Credit and Security Agreement also contains customary events of default. If an event of default occurs, the lenders under the 2018 Credit and Security Agreement would be entitled to take various actions, including the acceleration of amounts due thereunder and all other actions permitted to be taken by a secured creditor.
As part of the 2018 Credit and Security Agreement, the lockbox arrangement requirement in the 2016 Credit and Security Agreement was terminated and thus, the Company now has full control of cash upon receipt from customers. With the lockbox arrangement in the 2016 Credit and Security Agreement, amounts outstanding under the 2016 Revolver were classified as a current liability because cash receipts were required to be automatically swept against the 2016 Revolver. As the 2018 Credit and Security Agreement does not have a lockbox arrangement and the 2018 Revolver does not mature until 2023, the 2018 Revolver is classified as a noncurrent liability.
The Company incurred a loss of $243 of deferred loan costs written off for the retirement of the 2016 Credit and Security Agreement as of the 2018 Credit and Security Agreement effective date. In conjunction with the $521 previously capitalized deferred loan cost carried over from the 2016 Credit and Security Agreement, the Company capitalized $294 debt issuance costs for the 2018 Credit and Security Agreement and $170 debt issuance costs for the First Amendment, totaling a new beginning balance of $985 for deferred loan costs, with $865 remaining as of December 31, 2018 to be amortized which is included in other assets in the condensed consolidated balance sheets.
The weighted average interest rate of the secured revolving credit facilities were approximately 4.03% and 3.30% per annum as of December 31, 2018 and December 31, 2017, respectively. The weighted average interest rate of the 2016 Term Loan was 3.38% and the effective rate was 3.01% as of December 31, 2017. Contractual future payments under the 2018 Credit and Security Agreement are $58,363 from the 2018 Revolver, which will be due in 2023.
2016 Credit and Security Agreement
On March 3, 2016, the Company entered into a credit and security agreement (the “2016 Credit and Security Agreement”) with KeyBank as the administrative agent, with KeyBanc Capital Markets Inc., JP Morgan Chase Bank, N.A. (“JP Morgan”) and ZB, N.A., dba Zions First National Bank (“Zions”) as lenders. The 2016 Credit and Security Agreement provided an $85,000 revolving credit commitment (“2016 Revolver”). All borrowings under the 2016 Revolver were subject to a borrowing base limit, which was calculated from outstanding accounts receivable and inventory, and reported to the administrative agent at least monthly. Interest on the 2016 Revolver accrued at the base rate plus 0.5% or the London Interbank Offered Rate (“LIBOR”) plus 1.5%. The 2016 Revolver was subject to an unused line fee calculated as 0.2% multiplied by the average unused amount of the 2016 Revolver.
The 2016 Credit and Security Agreement also provided (1) a $25,000 term loan commitment (“2016 Term Loan”), with interest accrued at the base rate plus 1.00% or at a rate of LIBOR plus 2.00%; (2) letters of credit with a fronting fee of 0.125% (paid per annum) for all issued and outstanding letters of credit; and (3) a lockbox and cash collateral account that was maintained with KeyBank. As of December 31, 2017, the effective rate on the 2016 Term Loan was 3.01%.
In connection with the establishment of the 2016 Credit and Security Agreement, the Company incurred and capitalized $1,144 of direct costs; $884 of the costs were related to the 2016 Revolver and as such were reflected as a component of other assets, and $260 was reflected as an offset to long-term debt in the consolidated balance sheet. For the year ended December 31, 2017, the Company amortized $263 of these loan costs, which were included as a component of interest expense in the consolidated statements of operations.
On July 17, 2017, the Company, KeyBank, JP Morgan, and Zions (collectively, the “Lenders”), and KeyBank, as the administrative agent for the Lenders, entered into a third amendment agreement (the “Amendment”), which amended the 2016 Credit and Security Agreement to increase the revolving amount, expand Permitted Foreign Subsidiary Loans, Guaranties and Investments, increase the letter of credit commitment and the borrowing base, as defined in the Amendment.
In connection with the Amendment, the Company also entered into replacement revolving credit notes with each of the Lenders. As consideration for entering into the Amendment, the Company agreed to pay the administrative agent and the Lenders total amendment and arrangement fees of $145, pursuant to the terms of an administrative agent fee letter and a closing fee letter entered into with KeyBank. The changes to the 2016 Credit and Security Agreement described above were made to support core-business opportunities.
Effective September 4, 2017, the Company directed KeyBank to establish an irrevocable standby letter of credit (“Letter of Credit”) to support purchases of inventory from a key supplier. The 2016 Credit and Security Agreement required that the face value of the Letter of Credit reduced the borrowing base under the 2016 Revolver. From September 4, 2017, through September 17, 2017, the face value amount of the Letter of Credit was $10,000. From September 18, 2017, through February 28, 2018 (the end of the contractual period), the face value was increased to $25,000. The Company agreed to pay interest at an annual rate of 1.625% calculated on the face value amount and paid quarterly, which interest was classified in interest expense on the consolidated statement of operations. Fees incurred associated with setting up the Letter of Credit for the year ended December 31, 2017 was $157 and interest incurred for the available balance on the Letter of Credit for the year ended December 31, 2017 was $147. No draws on the Letter of Credit occurred as of December 31, 2017. For the years ended December 31, 2015, 2014,2017 and 2013, the Company recorded $2, $37,2016, $129 and $32,$65, respectively, in each yearunused line fees had been incurred and were included as a component of interest expense in interestthe consolidated statements of operations.
The 2016 Credit and
penalties.The Company is currently not under examination by any state or federal tax authority, but remains subject to income tax examinations for each of its open tax years, which extend back to 2012 for federal income tax purposesSecurity Agreement was extinguished in connection with the 2018 Credit and 2011 for state income tax purposes.
(7) STOCK OPTIONS, WARRANTS, ANDSecurity Agreement (as described above).
Equity Incentive Award Plans
In
2007, the Company’s board of directors adopted and in 2008 the Company’s shareholders approved the ZAGG Incorporated 2007 Stock Incentive Plan (the “2007 Plan”). The 2007 Plan was amended to increase the number of shares issuable under the 2007 Plan to 10,000. Uponadoption of the 2013 Plan in January 2013, the Company ceased to grant awards pursuant to the 2007 Plan, though 6,239 shares remained available to grant under the 2007 Plan. All subsequent awards were and all future awards will be granted under the 2013 Plan. All awards that are outstanding under the 2007 Plan will continue to vest, be exercisable, and expire according to their respective terms.
ZAGG INC AND SUBISDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, units, & shares in thousands, except per share data)
On January 15, 2013, the Company’sour board of directors adopted and in June 2013, the Company’sour shareholders approvedthe ZAGG Inc 2013 Equity Incentive Award Plan (the “2013 Plan”), a new equity incentive plan intended to replace. In April 2017, the 2007 Plan.compensation committee of our board of directors adopted, and in June 2017, our shareholders approved an amendment and restatement of the 2013 Plan (the “Amended Plan”). The 2013Amended Plan is an “omnibus plan” under which stock options, stock appreciation rights, performance share awards, restricted stock, and restricted stock units can be awarded. The 2013Amended Plan’s initial share reservation is 5,000 shares. The term of the plan is for 10 years from the date of its adoption.original adoption of the 2013 Plan. As of December 31, 2015,2018, there were approximately 3,6012,361 shares available for grant under the 2013Amended Plan.
Common
Restricted Stock
OptionsOption
The fair value of the restricted stock awards
are granted
with an exercise price equal tois based on the
marketclosing share price of the Company’s
common stock
aton the date of
grant; those optiongrant. The restricted stock awards
generally vest
based on three years of continuous service and have five-year contractual terms.The fair value of stock options has historically been estimated as of the grant date using the Black-Scholes option pricing model, though no stock options were granted during 2015, 2014, or 2013.
The following table summarizes the stock option activity for the Company’s stock incentive plans for the year ended December 31, 2015:
| | | | | | �� Options
(In thousands) | | | | Weighted- Average Exercise Price
(Per share) | | | | Weighted- Average Remaining Contractual Term
(In years) | | | | Net Aggregate Intrinsic Value
(In thousands) | |
| | Outstanding at December 31, 2014 | | | | 285 | | | $ | 5.02 | | | | 0.6 | | | $ | 504 | |
| | Exercised | | | | (192 | ) | | | 3.52 | | | | | | | | | |
| | Outstanding at December 31, 2015 | | | | 93 | | | $ | 8.14 | | | | 0.2 | | | $ | 259 | |
| | Exercisable at December 31, 2015 | | | | 93 | | | $ | 8.14 | | | | 0.2 | | | $ | 259 | |
The total intrinsic value of options exercised during the years ended December 31, 2015, 2014, and 2013, was $416, $417, and $540, respectively.
As of December 31, 2015, there was $0 of total unrecognized compensation cost related to nonvested stock options granted under the stock incentive plans. The total grant date fair value of options vested during the years ended December 31, 2015, 2014 and 2013, was $0 (no options vested in 2015), $154, and $593, respectively.
The Company recorded share-based compensation expense only for those options that are expected to vest. The estimated fair value of the stock options is recognized on a straight-line basis over a three-year vesting term for employees and a nine-month vesting term for annual director grants, depending on the requisite service periodterms of the award, which is generally the vesting term of the award. During the years ended December 31, 2015, 2014 and 2013, the Company recorded equity-based compensation expense of $0 (no options vested in 2015), $28 and $280, respectively, which is included as a component of selling, general and administrative expense. The net tax benefit recognized on equity-based compensation expense for the year ended December 31, 2015, 2014 and 2013 was $0, $73, and $88, respectively. The tax benefit realized from stock options exercised for the year ended December 31, 2015, 2014, and 2013 was $151, $73, and $88, respectively.
Warrants
During the years ended December 31, 2015, 2014, and 2013, the Company did not grant warrants to purchase common stock. Warrants outstanding at December 31, 2015 were granted prior to 2013. For the year ended December 31, 2015, 2014, and 2013, the Company recorded expense of zero in each respective year related to warrant grants.
ZAGG INC AND SUBISDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, units, & shares in thousands, except per share data)
The following table summarizes the warrant activity for the year ended December 31, 2015:
| | | | | | Warrants
(In thousands) | | | | Weighted- Average Exercise Price
(Per share) | | | | Weighted- Average Remaining Contractual Term
(In years) | | | | Net Aggregate Intrinsic Value
(In thousands) | |
| | Outstanding at December 31, 2014 | | | | 385 | | | $ | 8.12 | | | | 1.0 | | | $ | (512 | ) |
| | Exercised | | | | (307 | ) | | | 7.89 | | | | | | | | | |
| | Outstanding at December 31, 2015 | | | | 78 | | | $ | 9.03 | | | | 0.7 | | | $ | 148 | |
| | Exercisable at December 31, 2015 | | | | 78 | | | $ | 9.03 | | | | 0.7 | | | $ | 148 | |
The weighted-average and grant-date or vest-date fair value of warrants granted during the years ended December 31, 2015, 2014, and 2013, was zero as no grants occurred from 2013 to 2015. The total intrinsic value of warrants exercised during the years ended December 31, 2015, 2014 and 2013, was $277, $18, and $0, respectively.
As of December 31, 2015, there was $0 of total unrecognized estimated compensation cost related to nonvested warrants granted. The total fair value of warrants vested during the years ended December 31, 2015, 2014, and 2013 was $0, $33, and $0, respectively.
For warrants that are compensatory, the Company records share-based compensation expense related to warrants only for warrants that have vested. The amount of the expense recognized is based on the estimated fair value of the warrants on the vesting date. During the years ended December 31, 2015, 2014 and 2013, the Company recorded equity-based compensation expense related to warrants of zero in each respective year. The net tax benefit recognized on equity-based compensation expense related to warrants for the year ended December 31, 2015, 2014 and 2013 was zero in each respective year. The tax benefit realized from compensatory warrants exercised for the years ended December 31, 2015, 2014, and 2013 was $69, $9, and $0, respectively.
Restricted Stock
Restricted stock awards are granted with a fair value equal to the ending stock price on the date ofindividual grant. A summary of the status of the Company’s restricted stock awards as of December 31, 2015,2018, and changes during the year ended December 31, 2015,2018, is presented below:
| | | Restricted Stock (In thousands) | | | Weighted- Average Grant Date Fair Value
(Per share) | |
| Outstanding at December 31, 2014 | | | 627 | | | $ | 4.83 | |
| Granted | | | 673 | | | | 7.03 | |
| Vested | | | (445 | ) | | | 5.25 | |
| Forfeited | | | (73 | ) | | | 6.02 | |
| Outstanding at December 31, 2015 | | | 782 | | | $ | 6.47 | |
As
| | | | | | | | | | | |
| Restricted Stock (in thousands) | | Weighted-Average Grant Date Fair Value (per share) |
| | | |
| Outstanding as of December 31, 2017 | 1,034 | | $ | 8.29 |
| Granted | 454 | | 11.96 |
| Vested | (509) | | 8.28 |
| Forfeited | (158) | | 7.45 |
| Outstanding as of December 31, 2018 | 821 | | $ | 10.49 |
The grant of restricted stock awards with respective weighted-average fair value per share for the years ended December 31, 2015, there was $1,7752018, 2017, and 2016, is summarized as follows:
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | | | |
| 2018 | | 2017 | | 2016 |
| | | | | |
| Granted | 454 | | 604 | | 1,071 |
| Weighted average fair value per share | $ | 11.96 | | $ | 8.26 | | $ | 7.85 |
As part of
total unrecognized compensation cost related to nonvestedthe 454, 604, and 1,071 restricted stock awards granted
underduring the
stock incentive plans. That cost is expected to be recognized over a weighted-average period of approximately 1.1 years.Theyears ended December 31, 2018, 2017, and 2016, the Company recorded share-based compensation expense only forgranted 182, 409, and 531 restricted stock thatawards, respectively, to certain executives and employees of the Company where vesting is expectedlinked to vest. specific performance criterion. These performance-based restricted stock awards only vest upon the (1) Company’s achievement of specified thresholds of net sales, Adjusted EBITDA, or specific goals for the individual executive, and (2) continued employment through the applicable vesting date.
The estimated fair value of the restricted stock awards is recognized on a straight-line basis over the requisite service period of the award, which is generally the vesting term of the award. TheFor the performance-based awards, the Company recognizes compensation expense on a straight-line basis for those performance-based awards thatwhen management estimates the performance criteria are probable to be achieved. DuringThe following is stock-based compensation expenses related to restricted stock awards and tax benefits recorded for the years ended December 31, 2015, 2014,2018, 2017, and 2013, the Company recorded equity-based2016:
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | | | |
| 2018 | | 2017 | | 2016 |
| | | | | |
| Stock-based compensation expense related to restricted stock awards (1) | $ | 3,009 | | $ | 3,602 | | $ | 3,830 |
| Tax benefit recognized on stock-based compensation expense | $ | 813 | | $ | 1,378 | | $ | 1,465 |
| Tax benefit realized from vested restricted stock units | $ | 2,212 | | $ | 962 | | $ | 2,119 |
(1) Stock-based compensation expense of $3,893, $2,053, and $3,846, respectively, which isexpenses are included as a component of selling, general, and administrative expense. The net tax benefit recognizedexpense on equity-based compensation expense for the years ended December 31, 2015, 2014, and 2013, was $1,489, $785, and $1,458, respectively. The tax benefit realized from vested restricted stock forconsolidated statements of operations.
Certain employees of the
years ended December 31, 2015, 2014, and 2013, was $1,014, $378, and $1,042, respectively.
ZAGG INC AND SUBISDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, units, & shares in thousands, except per share data)
During the years ended December 31, 2015, 2014, and 2013, certain ZAGG employeesCompany elected to receive a net amount of shares upon the vesting of a restricted stock grantaward grants in exchange for the Company incurringpaying up to the maximum statutory withholding amount of the employees’ tax liabilityliabilities for the fair value of the award on the vestvesting date. This resulted in the Company recording $724, $75,$2,722, $268, and $257, respectively, in compensation expense, with the offset being originally recorded to accrued wages and wage related expenses rather than to additional paid-in capital.
(8) FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
At December 31, 2015 and 2014, the Company’s financial instruments included cash and cash equivalents, accounts receivable, and accounts payable. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximates fair value due to the short-term maturities of these financial instruments.
Fair Value Measurements
At December 31, 2015 and 2014, the following assets and liabilities were measured at fair value on a recurring basis using the level of inputs shown (in thousands):
| | | | | | Fair Value Measurements Using: |
| | | December 31, 2015 | | | Level 1 Inputs | | Level 2 Inputs | | | Level 3 Inputs | |
| Money market funds included in cash equivalents | | $ | 375 | | | $375 | | | - | | | | - | |
| | | | | | Fair Value Measurements Using: |
| | | December 31, 2014 | | | Level 1 Inputs | | Level 2 Inputs | | | Level 3 Inputs | |
| Money market funds included in cash equivalents | | $ | 374 | | | $374 | | | - | | | | - | |
Non-Recurring Fair Value Measurements
The Company also measures the fair value of certain assets on a non-recurring basis, generally quarterly, annually or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. These assets include intangible assets, property and equipment, and collateral securing the note receivable.
(9) NOTE RECEIVABLE
In June 2008, Lorence Harmer became a member of the Company’s board of directors and in December 2009, was appointed as the chairman of the audit committee. Mr. Harmer introduced the Company to a consumer electronics product, which became known as the ZAGGbox. The Company subsequently entered into negotiations with Teleportall, LLC (“Teleportall”), the owner of the technology used in the ZAGGbox, regarding production and distribution of the ZAGGbox. In 2009 and 2010 the Company entered into various agreements with Teleportal, including agreements appointing the Company as the exclusive distributor for the ZAGGbox in North America, issued purchase orders for ZAGGbox units in the aggregate amount of $3,500 and advanced to Teleportall a total of $3,900 against the total purchase price for the units ordered by the Company. Additionally, in May 2010, the Company entered into an agreement with Harmer Holdings, LLC (“Holdings”), an affiliate of Mr. Harmer, under which Holdings agreed to repurchase unsold ZAGGboxes under certain circumstances.
ZAGG INC AND SUBISDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, units, & shares in thousands, except per share data)
In late 2010 the Company determined that the ZAGGbox product would not be ready to market and sell$630, during the 2010 Christmas season and the Company commenced discussions to restructure its agreements with Teleportall. As a result of the foregoing, the Company entered into an agreement with Teleportall, Mr. Harmer and several entities owned or controlled by Mr. Harmer (the “Harmer Agreement”), dated March 23, 2011, but subject to further negotiations and ratification through April 5, 2011. Pursuant to the Harmer Agreement, the parties agreed to terminate the prior agreements and convey all ZAGG rights in the ZAGGbox to Teleportall on the following terms:
Mr. Harmer, Teleportall, and certain of their affiliates delivered a promissory note (the “Note”) dated March 23, 2011, to the Company in the original principal amount of $4,126 which accrued interest at the rate of LIBOR plus 4% per annum (adjusted quarterly) payable as follows: (i) interest only payments (a) on September 23, 2011, and (b) thereafter on or before the last day of each calendar quarter, (ii) 50% of the net profits of each ZAGGbox sale by Teleportall and its affiliates, and (iii) the unpaid balance of principal and interest due in full on March 23, 2013. The Note was secured by certain real property, interests in entities that own real property and restricted and free-trading securities.
In exchange for a license fee to the Company, Teleportall and the Company entered into a License Agreement under which the Company licensed to Teleportall the use of certain ZAGG names and trademarks to sell and distribute the ZAGGbox product.
In exchange for commissions to be paid by the Company, Teleportall and ZAGG entered into a non-exclusive, two year Commission Agreement on March 23, 2011, under which Teleportall could make introductions of many ZAGG products in all countries where ZAGG did not then have exclusive dealing agreements in respect of the marketing, distribution or sale of its products.
No revenue has been recognized from Teleportall.
The Note was originally accounted for under the cost recovery method and was originally included in the consolidated balance sheet at $3,900 which was the value of the ZAGGbox inventory advances. The original face value of the Note of $4,126 was for reimbursement of the inventory advances and other costs associated with the ZAGGbox and approximated fair value at March 23, 2011, as the variable interest rate on the Note approximated market rates.
On September 20, 2011, and prior to the due date of the first interest-only payment due on the Note, Mr. Harmer and two of his affiliates, Holdings and Teleportall, filed a lawsuit in Utah state court (the “Court”) against the Company, Robert G. Pedersen, II (ZAGG’s former CEO), Brandon T. O’Brien (ZAGG’s former CFO) and KPMG LLP (ZAGG’s independent registered public accounting firm). KPMG LLP and Messrs. Pedersen and O’Brien were subsequently dismissed from the lawsuit. In their lawsuit, the plaintiffs allege that the defendants defamed Mr. Harmer, breached the Harmer Agreement and interfered with other rights of the plaintiffs.
Mr. Harmer failed to make the required interest-only payment to the Company due on September 23, 2011. Thereafter, the Company filed counterclaims against Mr. Harmer, Holdings and Teleportall to collect the balance due under the Note. Also, ZAGG commenced foreclosure on the collateral securing the Note, which consisted of real property, interests in entities that own real property, and restricted and free-trading securities, which included shares of ZAGG Inc common stock.
On May 21, 2015, the Court issued a final judgment whereby all claims brought by Harmer were disposed of in favor of ZAGG and dismissed with prejudice. In addition, the Court granted summary judgment in favor of ZAGG on all counterclaims against Harmer, Holdings and Teleportall and ZAGG was awarded judgment in the amount of $4,735 with interest at 12% per annum until paid in full and reasonable attorney fees. Following the final judgment the Company began the foreclosure process on all remaining collateral securing the Note.
On June 29, 2015, the Company foreclosed on certain real property securing the Note, which was valued by an independent appraiser and determined to have a current fair value of $1,099. In conjunction with the foreclosure, the Company reclassified $801 of the Note previously collateralized by the foreclosed real property and included in other assets, and $298 of the Note collateralized by ZAGG Inc stock, as a $1,099 asset held for sale and presented it as a component of other assets in the condensed consolidated balance sheets. After this reclassification, the remaining balance of the Note was $50.
ZAGG INC AND SUBISDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, units, & shares in thousands, except per share data)
On July 13, 2015, the Company foreclosed on 80 shares of ZAGG Inc common stock that were determined by the Company to have a fair value of $688 on the date of foreclosure. At the time of the foreclosure, the Note receivable balance totaled $50 and was reduced to $0. The $639 excess in value of the common stock over the book value of the Note was recorded by the Company as a recovery of a previously established reserve in selling, general and administrative expense in the consolidated statement of operations, which is the same financial statement line item in which the Company previously recorded write-downs of the Note.
As of December 31, 2015, management determined that the estimated fair value of the remaining underlying collateral was between $135 and $270, consisting of real property investments.
Since the Note became collateral dependent in October 2011, management has (1) foreclosed on and sold 45 shares of ZAGG Inc common stock for $496 (December 2011); (2) foreclosed on real property valued at $250 (January 2012); (3) foreclosed on stock and warrants in a private company of $516 (May 2012); (4) foreclosed on real property valued at $1,099 as discussed above; and (5) foreclosed on 80 shares of ZAGG Inc common stock for $688. These foreclosures were recorded as a reduction to the Note in the period in which the foreclosure occurred. Management continues to actively pursue the foreclosure of all remaining collateral and execution on other assets of Harmer, Holdings, and Teleportall.
At December 31, 2015, the total unpaid principal balance, including accrued interest, late fees, attorney fees, and costs incurred in collection, totaled $4,836.
At December 31, 2015, the entire unpaid balance on the note receivable was fully reserved. The balance of the reserve on the note receivable at December 31, 2014 was $3,585. Increases to the reserve during 2015 consisted of legal fees of $1,397 and accrued interest of $493. These additions were offset by recoveries of collateral, which reduced the reserve by $639, resulting in an ending balance of $4,836.
(10) DEBT AND LETTERS OF CREDIT
On December 23, 2014, the Company and Wells Fargo, entered into the Third Amendment, which modified the original Credit Agreement entered into between the Company and Wells Fargo on December 7, 2012 and all subsequent amendments to the Credit Agreement (First Amendment to the Credit Agreement entered into on December 20, 2013 and Second Amendment to the Credit Agreement entered into on November 4, 2014). TheLine of Credit includes a letter of credit sub-feature that allows the Company to issue standby commercial letters of credit against the Line of Credit, not to exceed at any time an aggregate of $5,000. During 2015 and 2014, ZAGG did not issue any standby commercial letters of credit.
On August 24, 2015, the Company and Wells Fargo, entered into the Fourth Amendment to Credit Agreement (“Fourth Amendment”), which modified the original Credit Agreement entered into between the Company and Wells Fargo on December 7, 2012 and all subsequent amendments to the Credit Agreement. The Fourth Amendment modified a debt covenant to allow the Company to purchase up to $15,000 of ZAGG Inc common stock during each calendar year, including the 2015 calendar year, rather than during consecutive twelve month periods, as was documented in the Credit Agreement prior to the Fourth Amendment.
As of December 31, 2015 and 2014, the total balance outstanding on the Line of Credit was zero. As of December 31, 2015 and 2014, the total amount available to borrow under the Line of Credit was $25,000.Borrowings and repayments under the Line of Credit may occur from time to time in the Company’s ordinary course of business through December 1, 2016. Any outstanding borrowings under the Line of Credit mature and are due on December 1, 2016.
Any outstanding principal balance under the Line of Credit bears interest at a fluctuating rate per annum determined to be the sum of the (1) LIBOR margin established under the Credit Agreement (with the initial LIBOR margin being set at 1.25%) and (2) Daily Three Month LIBOR (as defined in the Credit Agreement) in effect from time to time. Each change in the rate of interest will become effective on each business day on which a change in daily three month LIBOR is announced by Wells Fargo.
In addition, the Company pays Wells Fargo a quarterly fee based on the average unused amount of the Line of Credit depending on the Company’s leverage ratio (as this term is defined in the Credit Agreement).
For the years ended December 31, 20152018, 2017, and 2014, $38 and $75,2016, respectively, in unused line fees had been incurred and was included as a componentreduction to additional paid-in capital.
As of
interest expense in the consolidated statement of operations.At December 31, 2015, the interest rate on the Line2018, there was $6,090 of Credit was 1.25%, though as noted above, the outstanding balance was $0. At December 31, 2014, the weighted average interest rate on all outstanding borrowingstotal unrecognized compensation cost related to nonvested restricted stock awards granted under the Line of Credit was 1.13%. At December 31, 2015 and 2014, the effective interest rate was 0% as there were no amounts outstanding.
The Company originally incurred and capitalized $238 of direct costs related to the establishment of the Credit Agreement with Wells Fargo. For the years ended December 31, 2015 and 2014, the Company amortized $60 and $66, respectively of these loan costs,Amended Plan, which is included asexpected to be recognized over a componentweighted-average period of interest expense inapproximately 1.3 years.
(11) TREASURY STOCK
During the
consolidated statementfourth quarter of
operations.The Company amortizes these deferred loan costs under the effective interest rate method. The carrying value of deferred loan costs at December 31, 2015, and 2014, was $0 and $60, respectively, and is included as a component of noncurrent other assets in the consolidated balance sheet.
The Credit Agreement includes a number of financial and non-financial debt covenants.
In fiscal year 2015 and 2014, the Company’s board of directors authorized the repurchase of up to $15,000 and $10,000, respectively,$20,000 of the Company’s outstanding common stock.stock with no expiration date. The Company’s board of directors also authorized the Company to enter into ause of Rule 10b5-1 plan when appropriate.
Forplans during the years endedDecember 31,, 2018 and 2017. As of December 31, 2018 and 2017, a total of $5,462 and $17,558 remained authorized under the stock repurchase program, respectively.
On March 11, 2019, the Company's board of directors authorized the cancellation of the 2015 stock repurchase program, and 2014,authorized a new stock repurchase program that grants the Company purchased 2,110 and 1,813 shares, respectively,repurchase of ZAGG Incup to $20,000 of the Company's outstanding common stock. Cash consideration paid for the purchase of ZAGG Inc common stock
The Company repurchased shares for the years ended December 31, 20152018 and 2014 was $14,930 and $9,579, respectively, which included commissions paid to brokers of $61 and $54, respectively. For the years ended December 31, 2015 and 2014, the weighted average price per share was $7.32 and $5.25, respectively. 2017, presented as follows:
| | | | | | | | | | | |
| For the Years Ended December 31, | | |
| 2018 | | 2017 |
| | | |
| Shares repurchased | 918 | | 234 |
| Cash consideration paid | $ | 12,096 | | $ | 1,492 |
| Commissions to brokers included in cash consideration paid | $ | 34 | | $ | 9 |
| Weighted average price per share repurchased | $ | 13.18 | | $ | 6.35 |
The consideration paid has been recorded within stockholders’ equity in the consolidated balance
sheet.In addition, duringsheets.
(12) DEFINED CONTRIBUTION PLAN
The Company offers a 401(k) plan for full-time employees that is effective on the
third quarterfirst day of
2015,employment. The Company matches participant contributions of 100% up to 5% of an employees’ salary that is immediately vested. Costs recognized for the
Company foreclosed on 80 shares of ZAGG Inc common stock linkedyears ended December 31, 2018, 2017, and 2016, related to the
full recourse note receivable described in Note 9. The Company foreclosed on these shares at a price per share of $8.59employer 401(k) match, totaled $1,556, $1,298, and
a total value of $688. These shares are currently being held by the Company as treasury stock.During the third quarter of 2015, the Company’s board of directors approved an additional $20,000 stock repurchase program with no expiration date. As of December 31, 2015, the Company had not purchased any shares under this stock repurchase program.
$941, respectively.
ZAGG INC AND SUBISDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, units, & shares in thousands, except per share data)
(12)
(13) COMMITMENTS AND CONTINGENCIES
The Company leases office and warehouse space,
officea retail store, and other miscellaneous equipment and
mall cart locationsservice items under operating leases that expire through
2023.2026. Future minimum rental payments required under the operating leases at December 31,
20152018 are as follows:
| | 2016 | | | $ | 1,235 | |
| | 2017 | | | | 1,476 | |
| | 2018 | | | | 1,343 | |
| | 2019 | | | | 1,366 | |
| | 2020 | | | | 1,397 | |
| | Thereafter | | | | 3,596 | |
| | Total | | | $ | 10,413 | |
For
| | | | | |
| 2019 | $ | 3,198 |
| 2020 | 2,842 |
| 2021 | 2,457 |
| 2022 | 2,517 |
| 2023 | 1,976 |
| Thereafter | 2,098 |
| Total | $ | 15,088 |
Certain of the
years ended December 31, 2015, 2014Company's leases contain free rent provisions, leasehold improvement incentives and
2013,options for renewal. Rent expenses, including the free rent
expense was $1,642, $1,640,provisions and
$1,564, respectively. Rent expense isleasehold improvement incentives, are recognized on a basis which approximates straight line over the lease term.
Rent expense forFor the years ended December 31,
2015, 2014,2018, 2017, and
2013 was net of sublease income of $0, $910,2016, rent expenses were $3,217, $2,847, and
$996 respectively. Rent expense, net of sublease income, is$3,190, respectively, which were recorded as a component of selling, general and administrative expense on the consolidated
statementstatements of operations.
Commercial Litigation
Lorence A. Harmer, et al v
ZAGG Inc et al., Third Judicialand mophie, Inc. v. Anker Technology Co. Ltd. and Fantasia Trading LLC, United States District Court Salt Lake County, Statefor the Central District of Utah, CivilCalifornia, Case No. 1109176878:17-CV-2193-DOC-DFM (the “Anker Lawsuit”). On September 20, 2011, Lorence A. Harmer, a former director of ZAGG and two of his affiliates, Harmer Holdings, LLC, and Teleportall, LLC (the “Harmer Parties”), filed a lawsuit against the Company, Robert G. Pedersen II, Brandon T. O’Brien, and KPMG LLP. The plaintiffs alleged that the defendants defamed Mr. Harmer, breached the Settlement Agreement and other agreements between the plaintiffs and the Company (alleging claims for breach of contract, breach of the covenant of good faith, and fair dealing), and interfered with other rights of the plaintiffs. The defendants denied all of the material allegations made by the plaintiffs. KPMG LLP was dismissed from the lawsuit in January 2012. In October 2012, the Company filed a counterclaim and third-party complaint against Harmer, Holdings, Teleportall and third-party Global Industrial Services Limited asserting claims for breach of contract, deficiency, indemnity and attorneys’ fees, breach of the implied covenant of good faith and fair dealing, quasi contract, unjust enrichment, quantum meruit and declaratory judgment. In June 2013, the court dismissed the plaintiffs’ claims for defamation, negligence, tortious interference, and interference with prospective economic relations againstDecember 15, 2017, the Company and all claims against Messrs. Pedersenmophie filed the Anker Lawsuit alleging that Anker Technology Co. Ltd. (“Anker”) and O’Brien. In November 2013, the court entered default judgment on the Company’s third-partyFantasia Trading LLC (“Fantasia”) infringe U.S. Patent Nos. 8,971,039, 9,077,013, 9,088,028, 9,088,029, 9,172,070, and 9,406,913 in connection with protective battery cases for smartphones. The Anker products accused of infringement include Anker’s Ultra Slim Extended Battery Case for iPhone 6 / 6s (4.7 inch) with 2850mAh capacity; Premium Extended Battery Case for iPhone 6 / 6s (4.7 inch) with 3100mAh Capacity; PowerCore Case for iPhone 7 (4.7 inch), 80% Extra Battery; PowerCore Case for iPhone 7 (4.7 inch), 95% Extra Battery; and 2400mAh MFI Certified Rubber-Feel Premium Rechargeable Extended Battery Case for iPhone 5s, 5. The complaint against Global Industrial Services Limited. On May 21, 2015, the court granted summary judgment in the Company’s favor against the Harmer Parties, and thereafter entered a final judgment against the Harmer Parties in the amount of $4,735 with interest at 12% per annum until paid in full, and dismissed all of the Harmer Parties’ remaining claims against the Company with prejudice. On October 2, 2015, the court entered an order adding the amount of $1,396 to the judgment for the attorney fees and costs incurredfiled by the Company and mophie seeks monetary damages and an injunction against Anker. On March 12, 2018, Anker and Fantasia filed answers and counterclaims in the litigation. The Harmer Parties filed a noticelawsuit. In their answers, Anker and Fantasia denied infringement of appeal declaring their intention to seek reviewany valid claim and asserted counterclaims for non-infringement and invalidity of the final judgment in the Utah appellate courts.patents at issue. The Company is moving forward with collection efforts pursuantdisputes Anker’s contentions and will defend the claims and otherwise respond to the final judgment.allegations. The matter is scheduled for trial in November 2019. This matter is not expected to have a material adverse effect on the Company’s financial position, results of operations, or liquidity.Peter Kravitz
Best Case and Accessories, Inc. v. ZAGGZagg, Inc., U.S. Bankruptcy United States District Court for the Eastern District of Delaware, Adv. Pro.New York, Case No. 15-51558(BLS)1:18-CV-04048-LDH-RML (the “BCA Lawsuit”).On October 29, 2015, Kravitz, as Liquidating Trustee (the “Trustee”July 13, 2018, Best Case and Accessories, Inc. (“Best Case”) of the RSH Liquidating Trust (formally known as RadioShack) filed a complaint against the Company. The Company had previously sent a letter to Best Case alleging among other things,that it was using product packaging and display trade dress that is confusingly similar to the Company’s trade dress. In the complaint, Best Case alleges that it does not infringe the Company’s trade dress and that the Company received preference payments for producttortuously interfered with Best Case's business relationships, which the Company sold and delivered to RadioShack in the amount of $1,834 pursuant to Section 547 of the Bankruptcy Code and in the alternative pursuant to Section 548 of the Bankruptcy Code. The Company believes that the Trustee’s claims are without merit and is vigorously defending against them.disputes. On February 2, 2016,8, 2019, the Company filed its answera Complaint for trade dress infringement against Best Case in the United States District Court for the District of Utah, Case No. 2:19-CV-00090-PMW, in order to respond to the complaint stating, among other things, thatallegations and defend against the Company has a full and complete defense to the Trustee’s allegations in that all payments were received by the Company in the ordinary course of business and all payments received by the Company were paid pursuant to ordinary business terms. The Company also asserted the defense that the Company provided subsequent new value to RadioShack and that the payments are otherwise not recoverable by the Trustee. The case is currently in the discovery phase with trial to be held in 2017.claims. This matter is not expected to have a material adverse effect on the Company’s financial position, results of operations, or liquidity.
SEC Investigation
ZAGG INC AND SUBISDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, units, & shares in thousands, except per share data)
Patent/Trademark Litigation
ZAGG v. TrekStor, Regional Court, Dusseldorf, Germany. In September 2011, the
The Company
brought suit in Dusseldorf, Germany against TrekStor for infringement of ZAGG design registrations for the ZAGGmate keyboard case and for unfair competition. After the Company completed briefing of its claims against TrekStor and presented its case at oral argument, TrekStor filed a separate proceeding alleging that it is the owner of the ZAGGmate keyboard case design. The Company’s action against TrekStor was then stayed pending the resolution of TrekStor’s case against the Company. On July 23, 2013, TrekStor’s claims were dismissed and the Company was awarded its costs in that action. This dismissal was appealed and again decided in the Company’s favor in a final decisionpreviously disclosed an investigation by the
appeals court. The oral hearing in the infringement matter was heard on July 1, 2014 during which the court found in the Company’s favor and granted injunctive relief as well as damages and costs in an amount to be determined. The Company is presently seeking entry of a judgment against Trekstor for its damages and costs. In the opinion of management, the ultimate disposition of TrekStor’s appeal will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.
ZAGG Intellectual Property Holding Co v. Tech21 et al., U.S. District Court, District of Utah, 2:14-cv-00113-BCW.On February 18, 2014, ZAGG IP filed a complaint against Tech21, Ltd. alleging, among other things, that the defendant makes, uses, sells, offers for sale, and/or imports into the United States a kit for protecting a surface of an electronic device that infringes at least one claim of ZAGG IP’s U.S. patent No. 8,567,596 entitled Electronic Device Protective Film Application Kit and Method (the “‘596 Patent”). The defendant has not filed any counterclaims and no material determinations have been made by the court in this matter. This litigation is stayed pending resolution of Inter Partes Patent Review of the ‘596 Patent, in the USPTO.
ZAGG Intellectual Property Holding Co v. Superior Communications, Inc., U.S. District Court, District of Utah 2:14-cv-00121-TS.On February 19, 2014, ZAGG IP filed a complaint against Superior Communications, Inc. alleging, among other things, that the defendant makes, uses, sells, offers for sale, and/or imports into the United States kits for protecting a surface of an electronic device that infringe at least one claim of the ‘596 Patent. The defendant has not filed any counterclaims and no material determinations have been made by the court in this matter. This litigation is stayed pending resolution of Inter Partes Patent Review of the ‘596 Patent, in the USPTO.
Inter Partes Review of Patent No. 8,567,596 B1 in the United States Patent and Trademark Office, Patent Trial and Appeal Board (“PTAB”), Case IPR2014-01262. On August 8, 2014, Tech 21 UK LTD. filed a Corrected Petition requesting inter partes review of claims 1-18 of U.S. Patent No. 8,567,596. Inter partes review was instituted on February 19, 2015. On January 27, 2016, the PTAB ordered that certain claims in the patent were unpatentable and other claims were canceled. The Company intends to appeal the PTAB’s decision in the Federal Circuit Court of Appeals. While under appeal, the patent remains in force. At December 31, 2015, unamortized book value of $2,235 remained on the Company’s books for acquisition costsSEC related to this patent, which is included in the balance of intangible assets on the consolidated balance sheet. The Company will assess the impact to the book value of the patent acquisition costs upon resolution of the Company’s appeal to the Federal Circuit Court of Appeals.
Class Action Lawsuits
James H. Apple, et al. v. ZAGG Inc, et al., U.S. District Court, District of Utah, 2:12-cv-00852; Ryan Draayer, et al. v. Zagg Inc, et al., U.S. District Court, District of Utah, 2:12-cv-00859. On September 6 and 10, 2012, two putative class action lawsuits were filed by purported Company shareholders against the Company, Randall Hales, Brandon O’Brien, and Cheryl Larabee, as well as Robert G. Pedersen II, the Company’s former Chairman and CEO, and Edward Ekstrom and Shuichiro Ueyama, former members of the Company’s Board of Directors. These lawsuits were amended by a complaint filed on May 6, 2013. The plaintiffs sought certification of a class of purchasers of the Company’s stock between October 15, 2010 and August 17, 2012. The plaintiffs claimed that as a result of Mr. Pedersen’s alleged December 2011 margin account sales, the defendants initiated a succession plan to replace Mr. Pedersen as the Company’s CEO with Mr. Hales, but failed to disclose either the succession plan or Mr. Pedersen’s margin account sales, in violation of Sections 10(b), 14(a), and 20(a), and SEC Rules 10b-5 and 14a-9, under the Securities Exchange Act of 1934 (the “Exchange Act”). On March 7, 2013, the U.S. District Court for the District of Utah (the “Court”) consolidated theApple andDraayer actions under the captionIn re: Zagg, Inc. Securities Litigation, and on May 6, 2013, plaintiffs filed a consolidated complaint. On July 5, 2013, the defendants filed a motion to dismiss the consolidated complaint, which the Court granted on February 7, 2014. On February 25, 2014, plaintiffs filed a notice of appeal with the U.S. Court of Appeals, Tenth Circuit. The Tenth Circuit heard oral argument on the appeal on January 22, 2015, and issued a decision affirming the dismissal of all claims on August 18, 2015.
ZAGG INC AND SUBISDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, units, & shares in thousands, except per share data)
Albert Pikk v. Robert G. Pedersen II, et al., U.S. District Court, District of Utah, Case No. 2:12-cv-01188;Rosenberg v. Robert G. Pedersen II, et al., U.S. District Court, District of Utah, Case No. 2:12-cv-01216. On December 19 and 28, 2012, two shareholder derivative complaints were filed against several of the Company’s current and former officers and directors in the United States District Court for the District of Utah. These complaints make allegations similar to those presented in the consolidated class action lawsuit, and allege various state law causes of action, including claims for breach of fiduciary duty, waste of corporate assets, unjust enrichment, and insider trading. These complaints seek unspecified damages on behalf of the Company, which is named solely as a nominal defendant against whom no recovery is sought. On February 26, 2013, the District Court consolidated thePikkandRosenberg actions under the captionIn re ZAGG Inc. Shareholder Derivative Litigation, and on June 5, 2013, plaintiffs filed a consolidated complaint. On April 4, 2014, the defendants filed a motion to dismiss the consolidated complaint, which the court granted on October 9, 2014. On January 8, 2015, plaintiffs filed a notice of appeal with the U.S. Court of Appeals, Tenth Circuit. Briefing for the appeal was completed on October 1, 2015, and the Tenth Circuit heard oral argument on January 19, 2016. The Tenth Circuit has not yet issued a decision.
Arthur Morganstern, et al. v. Robert G. Pedersen II, et al., Third Judicial District Court, Salt Lake County, State of Utah, Civil No. 120908452. On December 14, 2012, a shareholder derivative complaint was filed against several of the Company’s current and former officers and directors in Utah state court. The complaint made allegations similar to those presented in the consolidated class action lawsuit and alleged claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment. The plaintiff in this action sought damages on behalf of the Company, which is named as a nominal defendant against whom no recovery is sought. TheMorgansternaction was dismissed pursuant to a stipulated motion to dismiss on January 22, 2016.
SEC Investigation
In the fourth quarter of 2012, the Company received requests to provide documentation and information to the staff of the SEC in connection with an investigation being conducted by the SEC’s Salt Lake City office. The Company believes the investigation includes a review of the facts and circumstances surrounding someformer Chief Executive Officer Robert Pedersen's pledge and subsequent sale of Company shares and the fact that such pledges and sales were not disclosed in the Company's 2011 10-K filed on March 15, 2012, or 2012 Proxy filed on April 27, 2012. On March 7, 2019, the Staff of the same issues raised by the plaintiffs in the above lawsuits, including whetherSEC informed the Company failedthat, after additional consideration and analysis, it has decided to disclose Mr. Pedersen’s margin account sales. The Company responded to these requeststerminate the investigation and is cooperating withdismiss the staff although there has been no resolution to date.
matter.
The Company is not a party to any other material litigation or claims at this time. While the Company currently believes that the amount of any ultimate
potentialprobable loss for known matters would not be material to the Company’s financial condition, the outcome of these actions is inherently difficult to predict. In the event of an adverse outcome, the ultimate potential loss could have a material adverse effect on the Company’s financial condition or results of operations in a particular period.
The Company establishes reserves when a particular contingency is probable and estimable.
Other than those discussed above, theThe Company has not accrued for any loss
atas of December 31,
20152018, in the
condensed consolidated financial statements as the Company does not consider a loss to be probable or estimable. The Company faces contingencies that are reasonably possible to occur; however, the reasonably possible exposure to losses cannot currently be estimated.
ZAGG INC AND SUBISDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, units, & shares in thousands, except per share data)
(13)
Concentration of
credit riskCredit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company places its cash with high credit quality financial institutions. The Company maintains its cash in bank deposit accounts, which, at times, exceed federally insured limits. The Company has not experienced any losses in
suchcash accounts
throughfor the years ended December 31,
2015.At2018, 2017, and 2016.
As of December 31,
20152018 and
2014,2017, two separate customers exceeded 10% of the balance of accounts receivable,
from three separate customers has exceeded 10%:| | | 2015 | | 2014 |
| Customer A | | | 29% | | | | 48% |
| Customer B | | | 5% | | | | 14% | |
| Customer C | | | 31% | | | | 4% | |
as follows:
| | | | | | | | | | | |
| December 31, | | |
| 2018 | | 2017 |
| | | |
| Superior | 50% | | | 31% | |
| Best Buy | 15% | | | 18% | |
No other customer account balances were more than 10% of accounts receivable
atas of December 31,
20152018 or
2014.2017. If one or more of the Company’s significant customers were to become insolvent or were otherwise unable to pay for the products provided, it would have a material adverse effect on the Company’s financial condition and results of operations.
Concentration of Supplier
The Company does not directly manufacture any of its products, rather the Company employs various third-party manufacturing partners in the U.S. and Asia to perform these services on its behalf. The services employed by these third parties include the selection of sub-suppliers that provide raw materials and other components used in the manufacturing process. The Company has endeavored to use common components and readily available raw materials in the design of its products that can be sourced from multiple sub-suppliers. However, raw film used in its InvisibleShield Film and ISOD products has been produced by a single supplier
for the last 10 years. The Company's film supplier has contractually agreed to not sell the raw materials to any of its competitors.
Below is a high-level summary by product category of the manufacturing sources used by the Company:
•Screen Protection – The screen protection product line is comprised of InvisibleShield Glass products (approximately 86% of 2018 screen protection sales or 49% of net sales), InvisibleShield Film products (approximately 9% of 2018 screen protection sales or 5% of net sales), and ISOD film blanks (approximately 5% of 2018 screen protection sales or 3% of net sales). The InvisibleShield Glass products are sourced from factories in Asia with protective glass expertise, each of which uses a number of sub-suppliers for raw materials and other components. The InvisibleShield Film and ISOD products are sourced through the Company's third-party logistics partner, who purchases the raw film inventory from a single supplier (as discussed above). The VisionGuard raw materials are provided to the Company's manufacturers through an exclusive licensing agreement with a third-party partner.
•Protective Cases – The protective case product line consists of (1) ZAGG cases designed to protect device-specific mobile devices, and (2) Gear4 cases featuring D3O technology designed to protect smartphones and tablets. The Company’s logistics partners arrangeprotective cases are sourced from factories in Asia with expertise in case protection manufacturing, each of which uses a number of sub-suppliers for production of its raw materials relatedand other components. For Gear4, the D3O raw materials are provided to the InvisibleShield filmmanufacturers through an exclusive licensing agreement with a third-party partner who is the sole manufacturer of D3O materials.
•Power Management – The power management product line consists of power products primarilythat are designed to provide on-the-go power for tablets, smartphones, smartwatches, cameras, and virtually all other electronic mobile devices. With the addition of HALO, the Company's power management product line includes power stations, wireless charging, car and wall chargers, portable power, power wallets, and more. The power products are sourced from one source. Management is awarefactories in Asia with battery expertise, each of similarwhich uses a number of sub-suppliers for raw materials and other components.
•Audio – The audio product line consists of earbuds, headphones, and speakers that wouldare designed to be availablecompatible with virtually all electronic mobile devices. The audio products are sourced from factories in Asia with audio expertise, each of which uses a number of sub-suppliers for raw materials and other sources if requiredcomponents.
•Keyboards – The keyboard product line consists of (1) device-specific keyboards designed to fit individual tablets produced by original equipment manufacturers, and has current plans(2) keyboards that are designed to immediately engage such resources if necessary. A changebe device-agnostic and can be used on virtually any mobile device. The keyboard products are sourced from factories in Asia with keyboard expertise, each of which uses a number of sub-suppliers for raw materials and other components.
The Company's product and operations teams work closely with suppliers from initial product development and throughout the manufacturing process to ensure that (1) the supplier
however, could cause a delay in manufacturingunderstands and
a possible loss of sales, which could adversely affect operating results.will build according to product specifications, (2) appropriate quality is maintained for the finished goods and for all sub-components, and (3) the supplier can meet the Company's supply needs.
Concentration of Sales
For the year ended December 31, 2018, Superior and Best Buy accounted for 10% or greater than 10% of net sales. For the year ended December 31, 2017, Superior accounted for over 10% of net sales. For the year ended December 31, 2016, Superior, Best Buy, and GENCO accounted for over 10% of net sales. The amount of net sales
for each of these customers are outlined as follows:
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | | | |
| 2018 | | 2017 | | 2016 |
| | | | | |
| Superior | 23% | | | 30% | | | 27% | |
| Best Buy | 10% | | | 9% | | | 11% | |
| GENCO | 4% | | | 8% | | | 11% | |
For the years ended December 31,
2015, 2014, or 2013, four2018, 2017, and 2016, no other customers accounted for
over10% or greater than 10% of
sales in a given year:| | | 2015 | | 2014 | | 2013 |
| Customer A | | | 20% | | | | 30% | | | | 26% | |
| Customer B | | | 9% | | | | 11% | | | | 18% | |
| Customer C | | | 11% | | | | 11% | | | | 6% | |
| Customer D | | | 17% | | | | 6% | | | | 5% | |
No other customer account balances were more that 10% of sales during 2015, 2014, or 2013.Ifnet sales.
Although the Company
loses onehas contracts in place governing the relationships with its retail distribution customers (“retailers”), the contracts are not long-term and all the retailers generally purchase from the Company on a purchase order basis. As a result, these retailers generally may, with little or
more ofno notice or penalty, cease ordering and selling the Company’s
significant customers, it would have a material adverse effect onproducts, or materially reduce their orders. If any of these retailers cease selling the Company’s
financial condition andproducts, slow their rate of purchase of its products, or decrease the number of products they purchase, the Company’s results of
operations.The percentageoperations could be adversely affected.
As of
sales by geographic region for the years ended December 31,
2015, 2014,2018 and
2013 was approximately:| | | 2015 | | 2014 | | 2013 |
| United States | | | 91% | | | | 90% | | | | 90% | |
| Europe | | | 8% | | | | 7% | | | | 5% | |
| Other | | | 1% | | | | 3% | | | | 5% | |
At December 31, 2015 and 2014,2017, net assets located overseas in Shannon, Irelandinternational locations totaled $8,387$45,387 and $8,050,$16,249, respectively.
ZAGG INC AND SUBISDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, units, & shares in thousands, except per share data)
(14) SEGMENT REPORTING
The Company services North American customers out of its corporate headquarters located in Midvale, Utah (“ZAGG Domestic”). For rest of world customers, the Company operates out of its wholly-owned subsidiary located in Shannon, Ireland (“ZAGG International”). Both corporate locations have consistent business processes, sell the same basic products, and sell to the same type of customers at similar margins. Although discrete financial information for ZAGG Domestic and ZAGG International is regularly reviewed by the Company’s chief operating decision maker, the operations at both locations are consistent and ZAGG International’s operations do not rise to the level of significance to require separate segment reporting under US GAAP. Given this, management concluded that the Company should be considered a single reportable segment for disclosure purposes.
(15)
– QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial information is presented in the following
summary:| | | Year ended December 31, 2015 |
| | | | First Quarter | | | | Second Quarter | | | | Third Quarter | | | | Fourth Quarter | | | | Year | |
| Net sales | | $ | 57,216 | | | $ | 66,689 | | | $ | 66,774 | | | $ | 78,632 | | | $ | 269,311 | |
| Income from operations | | | 5,439 | | | | 6,253 | | | | 6,228 | | | | 7,944 | | | | 25,864 | |
| Net income | | | 3,200 | | | | 3,691 | | | | 3,739 | | | | 4,957 | | | | 15,587 | |
| Earnings per share attributable to stockholders: (1) | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.11 | | | $ | 0.13 | | | $ | 0.13 | | | $ | 0.18 | | | $ | 0.54 | |
| Diluted | | | 0.11 | | | | 0.12 | | | | 0.13 | | | | 0.18 | | | | 0.54 | |
| Weighted average common shares: | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 29,380 | | | | 29,521 | | | | 28,734 | | | | 27,483 | | | | 28,773 | |
| Diluted | | | 29,678 | | | | 29,754 | | | | 28,930 | | | | 28,022 | | | | 29,089 | |
| | | Year ended December 31, 2014 |
| | | | First Quarter | | | | Second Quarter | | | | Third Quarter | | | | Fourth Quarter | | | | Year | |
| Net sales | | $ | 49,003 | | | $ | 50,154 | | | $ | 60,013 | | | $ | 102,415 | | | $ | 261,585 | |
| Income (loss) from operations | | | 1,940 | | | | 1,580 | | | | (6,611 | ) | | | 20,074 | | | | 16,983 | |
| Net income (loss) | | | 988 | | | | 793 | | | | (4,319 | ) | | | 12,999 | | | | 10,461 | |
| Earnings (loss) per share attributable to stockholders: (1) | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.03 | | | $ | 0.03 | | | $ | (0.14 | ) | | $ | 0.44 | | | $ | 0.35 | |
| Diluted | | | 0.03 | | | | 0.03 | | | | (0.14 | ) | | | 0.43 | | | | 0.34 | |
| Weighted average common shares: | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 30,549 | | | | 30,281 | | | | 30,312 | | | | 29,854 | | | | 30,247 | |
| Diluted | | | 30,864 | | | | 30,575 | | | | 30,312 | | | | 30,288 | | | | 30,610 | |
| | |
(1) | | The earnings per share calculations for each of the quarters were based upon the weighted average number of shares outstanding during each period, and the sum of the quarters may not be equal to the full year earnings per common share amounts. |
The decline in income during the third quarter of 2014 was primarily linked to inventory write-downs recorded for product expected to be sold below the carrying value.
(16) DEFINED CONTRIBUTION PLAN
The Company offers a 401(k) plan for full-time employees that have been with the Company for over 90 days. The Company matches participant contributions of 100% up to 3% of an employees’ salary and 50% of contributions from 4-5% of an employees’ salary. Costs recognizedsummary for the yearyears ended December 31, 2015, 2014,2018 and 2013 related2017:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2018 | | | | | | | | |
| | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | | Year |
| | | | | | | | | | |
| Net sales | | $ | 112,066 | | $ | 118,565 | | $ | 141,087 | | $ | 166,513 | | $ | 538,231 |
| Income from operations | | 7,919 | | 5,193 | | 18,256 | | 20,328 | | 51,696 |
| Net income | | 7,029 | | 3,215 | | 14,626 | | 14,319 | | 39,189 |
| Earnings per share: (1) | | | | | | | | | | |
| Basic | $ | 0.25 | | $ | 0.11 | | $ | 0.52 | | $ | 0.52 | | $ | 1.40 |
| Diluted | $ | 0.24 | | $ | 0.11 | | $ | 0.51 | | $ | 0.52 | | $ | 1.38 |
| Weighted average common shares: | | | | | | | | | | |
| Basic | 28,209 | | 28,299 | | 28,241 | | 27,687 | | 28,064 |
| Diluted | 28,693 | | 28,666 | | 28,563 | | 28,258 | | 28,500 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2017 | | | | | | | | |
| | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | | Year |
| | | | | | | | | | |
| Net sales | | $ | 92,946 | | $ | 115,227 | | $ | 134,398 | | $ | 176,924 | | $ | 519,495 |
| (Loss) income from operations | | (6,649) | | 5,497 | | 15,935 | | 29,952 | | 44,735 |
| Net (loss) income | | (6,138) | | 3,403 | | 9,776 | | 8,059 | | 15,100 |
| (Loss) earnings per share: (1) | | | | | | | | | | |
| Basic | $ | (0.22) | | $ | 0.12 | | $ | 0.35 | | $ | 0.29 | | $ | 0.54 |
| Diluted | $ | (0.22) | | $ | 0.12 | | $ | 0.34 | | $ | 0.28 | | $ | 0.53 |
| Weighted average common shares: | | | | | | | | | | |
| Basic | 28,059 | | 27,963 | | 27,969 | | 27,969 | | 27,996 |
| Diluted | 28,059 | | 28,213 | | 28,381 | | 28,781 | | 28,407 |
(1) The earnings per share calculations for each of the quarters were based upon the weighted average number of shares outstanding during each period, and the sum of the quarters may not be equal to the
employer 401(k) match totaled $335, $414, and $263, respectively.(17)full year earnings per common share amounts.
(16) SUBSEQUENT
EVENTSAcquisition of mophie
EVENT
On February 2, 2016, the Company and ZM Acquisition, Inc., a Delaware corporation and wholly-owned subsidiary of the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with mophie inc., a California corporation (“mophie”).
ZAGG INC AND SUBISDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, units, & shares in thousands, except per share data)
On the terms and subject to the conditions set forth in the Merger Agreement, the former mophie owners are entitled to receive aggregate closing merger consideration of $100,000 in cash.
The former mophie owners will participate in an earn-out period from April 1, 2016 to March 31, 2017 whereby the Company will pay-out additional consideration equal to five times mophie’s stand-alone EBITDA (as defined in the Merger Agreement) less the $100,000 upfront payment (subject to certain tax adjustments, escrow payments and bonus payments to mophie employees). The earn-out consideration, if any, shall be paid by issuance of up to $5,000 of shares of the Company’s common stock, and then in cash. Such shares of the Company’s common stock was valued as of February 1, 2016, the day prior to the announcement of the Merger Agreement.
In addition to the consideration described above, the former mophie owners will be entitled to receive certain contingent payments that include (i) mophie tax refunds for certain California hiring credits for the 2012 and 2013 tax years, net operating losses carried back to 2012 for California income taxes and 2013 for federal income taxes, and write-downs and losses resulting from the dissolution of a Dutch limited partnership, (ii) any refund or credit for pre-closing overpayments of customs and duties by mophie when and as determined to be payable by applicable government entities, (iii) the total proceeds from the sale of certain mophie excess real property located in Kalamazoo, Michigan, and (iv) the settlement proceeds or collection receipts from a lawsuit currently on appeal. The payment of amounts due under (i) – (iv) above will be net of the Company’s expenses incurred/paid in connection with actions taken with respect to these matters.
The Merger Agreement requires that cash in an amount equal to $5,000, plus 10% of earn-out consideration, if any, be placed in a third party escrow fund for eighteen months as partial security for the indemnification obligations under the Merger Agreement. The Company has agreed to use commercially reasonable efforts to obtain representation and warranty insurance which, if obtained, will reduce the escrow fund in an amount to be determined, but no less than $2,000.
On MarchJanuary 3, 2016, the Company and mophie closed on the transaction described above.
Credit Agreement
Concurrent with the close of the merger with mophie,2019, the Company entered into a Creditmembership interest purchase agreement to acquire HALO for a total purchase consideration of approximately $43,000. The total purchase consideration included a combination of cash and Security Agreementshares of Company common stock. HALO is a leading direct-to-consumer mobile accessories company with KeyBank National Association (“KeyBank”), acting as administrative agentan extensive intellectual property portfolio that specializes in wireless charging, car and swing line lender; KeyBanc Capital Markets Inc., acting as joint lead arrangerwall chargers, portable power, power wallets, and sole book runner; Zions Bank (“Zions”), as joint lead arranger;other accessories. The Company acquired HALO to expand its product portfolio and JP Morgan Chase, as a member of the bank syndicate (“Credit and Security Agreement”). The Credit and Security Agreement replaces the Credit Agreement with Wells Fargo described in Note 10, which was terminated upon signing the Credit and Security Agreement.
The Credit and Security Agreement provides an $85,000 revolving credit commitment (“Revolver”).Borrowings and repayments under the Revolver may occur from time to time in the Company’s ordinary course of business through the maturity date of March 2, 2021, at which time any amounts outstanding are to be paid in full (60-month term). All borrowings under the Revolver are subject to a borrowing base limit, which is calculated from outstanding accounts receivable and inventory, and reportedenter into new distribution channels.
Due to the administrative agent monthly. Interest onfact that the Revolver will accrue atCompany has not completed the base rate plus 0.50% or LIBOR plus 1.50%. The Revolver is subject to an unused line fee calculated as 0.20% multiplied byaudit of HALO's 2018 financial statements, nor has the average unused amount of the Revolver.The Credit and Security Agreement also provides a $25,000 term loan commitment (“Term Loan”). Payments on the Term Loan are to be made in consecutive monthly installments commencing on April 1, 2016 and continuing until the Term Loan is paid in full on March 2, 2020 (48-month term).Interest on the Term Loan will accrue at the base rate plus 1.0% or at a rate of LIBOR plus 2.0%.
The Credit and Security Agreement also provides for letters of credit with a fronting fee of 0.125% (paid per annum) for all issued and outstanding letters of credit
The Credit and Security Agreement provides for a lockbox and cash collateral account that will be maintained with the administrative agent. The Credit and Security Agreement is collateralized by substantiallyCompany obtained all of the assetsinformation necessary to conclude on the fair values of the Company.identifiable assets acquired and liabilities assumed as part of the HALO acquisition, the Company has not disclosed pro forma information and/or nonrecurring adjustments under ASC 805,
Business Combinations. The Credit and Security Agreement establishes two debt covenants that are measured on a quarterly basis: | · | Maximum Leverage Ratio: Defined as the ratio of total funded indebtedness to Consolidated EBITDA (as defined in the Credit and Security Agreement), which cannot be more than 3.50 on a trailing four quarter basis. |
| · | Minimum Fixed Charge Coverage Ratio: Defined as the ratio of Consolidated EBITDA (as defined in the Credit and Security Agreement) minus taxes, capital distributions and unfunded capital expenditures divided by the sum of interest payments, principal payments, and capital lease payments; the minimum allowed under the Credit and Security Agreement is 1.10 on a trailing four quarter basis. |
F-31
Company expects to furnish preliminary information in the financial statements for the quarter ended March 31, 2019.
