Washington,
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Commission File No. 000-52211
| 001-34528 | ||
(Commission File Number) | ||
| Delaware | 20-2559624 | |||||
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) | |||||
910 West Legacy Center Drive, Suite 500
Midvale, Utah 84047
| 910 West Legacy Center Way, Suite 500 Midvale, Utah 84047 | ||
(801) 263-0699
| (801) 263-0699 | ||
| N/A | ||
¨ Large Accelerated Filer | þ Accelerated Filer | ||||
¨ Non-accelerated Filer | ¨ Smaller Reporting Company | ||||
¨ Emerging Growth Company | |||||
Yes ☐
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common Stock, $.001 par value | ZAGG | The Nasdaq Stock Market, LLC | ||||||
ZAGG INC AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
| CONTENTS | PAGE | |||||||||||||
EQUITY In December 31, 2016 HALO HALO Acquisition Date necessary to determine the fair values of the assets acquired and liabilities assumed, but in no case is to exceed more than one year from the HALO Acquisition Date. The Company is analyzing information to verify assets acquired and liabilities assumed. $1,646. Nine months ended September 30, 2016 For the $433. increased in connection with the HALO Acquisition. The following table summarizes the changes in December 31, 2016 September 30, 2017 Level 1 Inputs Level 2 Inputs Level 3 Inputs December 31, 2016 Level 1 Inputs Level 2 Inputs Level 3 Inputs As part of the linked to any performance criterion. 2018, respectively. The Company matter. follows: Concentration of net sales Three months ended September 30, 2017 Nine months ended September 30, 2017 Three months ended September 30, 2017 Nine months ended September 30, 2017 Certain statements, other than purely historical information, including estimates, projections, statements relating to 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 of 1933 and Section 21E of the Securities Exchange Act of 1934. 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 optimal mobile lifestyle through the use of our products. We continue to innovate and expand our screen protection products to meet the evolution of new technology and consumer needs in the market. During 2018, new charge stream powerstation brands in the industry. Critical Accounting Policies and Estimates 2017 2016 Gross profit same period last year. credit. Liquidity and Capital Resources purchase of treasury shares. income tax receivable due to the loss recorded for the three months ended March 31, 2019. that information required to be included in the reports filed or submitted under the Exchange Act of 1934 is recorded, processed, summarized, and reported as specified in the SEC’s rules and forms. September 30, December 31, 2017 2016 ASSETS Current assets: Cash and cash equivalents $ 11,394 $ 11,604 Accounts receivable, net of allowances of $1,221 in 2017 and $824 in 2016 96,830 83,835 Inventories 72,005 72,769 Prepaid expenses and other current assets 3,531 3,414 Income tax receivable 138 2,814 Total current assets 183,898 174,436 Property and equipment, net of accumulated depreciation of $20,950 in 2017 and $18,371 in 2016 15,066 17,755 Goodwill 12,272 12,272 Intangible assets, net of accumulated amortization of $63,596 in 2017 and $55,298 in 2016 42,286 53,362 Deferred income tax assets 44,652 50,363 Other assets 1,635 2,541 Total assets $ 299,809 $ 310,729 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 82,742 $ 85,022 Accrued liabilities 23,825 22,216 Sales returns liability 29,342 28,373 Accrued wages and wage related expenses 5,649 6,169 Deferred revenue 214 273 Line of credit 16,264 31,307 Current portion of long-term debt, net of deferred loan costs of $65 in 2017 and 2016 6,185 10,484 Total current liabilities 164,221 183,844 Noncurrent portion of long-term debt, net of deferred loan costs of $92 in 2017 and $141 in 2016 9,283 9,623 Total liabilities 173,504 193,467 Stockholders’ equity: Common stock, $0.001 par value; 100,000 shares authorized; 34,057 and 33,840 shares issued in 2017 and 2016, respectively $ 34 $ 34 Additional paid-in capital 95,106 92,782 Accumulated other comprehensive loss (944 ) (2,114 ) Treasury stock, 6,065 and 5,831 common shares in 2017 and 2016 respectively, at cost (37,636 ) (36,145 ) Retained earnings 69,745 62,705 Total stockholders’ equity 126,305 117,262 Total liabilities and stockholders’ equity $ 299,809 $ 310,729 March 31, 2019 December 31, 2018 ASSETS Current assets: Cash and cash equivalents $ 14,789 $ 15,793 Accounts receivable, net of allowances of $700 and $885 93,617 156,667 Income tax receivable 2,149 375 Inventories 100,226 82,919 Prepaid expenses and other current assets 4,371 5,473 Total current assets 215,152 261,227 Property and equipment, net of accumulated depreciation of $12,326 and $11,844 18,016 16,118 Intangible assets, net of accumulated amortization of $83,046 and $78,627 75,189 52,054 Deferred income tax assets 14,302 19,403 Goodwill 43,560 27,638 Other assets 10,574 1,571 Total assets $ 376,793 $ 378,011 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 55,045 $ 80,908 Sales returns liability 33,824 54,432 Accrued wages and wage related expenses 6,183 6,624 Accrued liabilities 11,791 13,723 Total current liabilities 106,843 155,687 Line of credit 93,363 58,363 Other long-term liabilities 20,052 5,470 Total liabilities 220,258 219,520 Commitments and contingencies (Note 10) Stockholders’ equity: Common stock, $0.001 par value; 100,000 shares authorized; 36,117 and 34,457 shares issued 36 34 Treasury stock, 7,055 and 6,983 common shares at cost (50,455) (49,733) Additional paid-in capital 109,869 96,486 Accumulated other comprehensive loss (1,566) (1,410) Retained earnings 98,651 113,114 Total stockholders’ equity 156,535 158,491 Total liabilities and stockholders’ equity $ 376,793 $ 378,011 1 Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2017 2016 2017 2016 Net sales $ 134,398 $ 124,662 $ 342,571 $ 286,928 Cost of sales 86,006 81,516 229,749 189,180 Gross profit 48,392 43,146 112,822 97,748 Operating expenses: Advertising and marketing 2,627 3,389 7,703 8,578 Selling, general and administrative 26,720 25,607 78,727 70,243 Loss on disputed mophie purchase price - 24,317 - 24,317 Transaction costs 96 145 611 2,467 Impairment of intangible asset - - 1,959 - Amortization of long-lived intangibles 3,014 2,398 9,040 9,909 Total operating expenses 32,457 55,856 98,040 115,514 Income (loss) from operations 15,935 (12,710 ) 14,782 (17,766 ) Other income (expense): Interest expense (417 ) (575 ) (1,527 ) (1,367 ) Other income (expense) 18 (81 ) 67 (272 ) Total other expense (399 ) (656 ) (1,460 ) (1,639 ) Income (loss) before provision for income taxes 15,536 (13,366 ) 13,322 (19,405 ) Income tax (provision) benefit (5,760 ) 6,261 (6,281 ) 7,963 Net income (loss) $ 9,776 $ (7,105 ) $ 7,041 $ (11,442 ) Earnings (Loss) per share: Basic earnings (loss) per share $ 0.35 $ (0.25 ) $ 0.25 $ (0.41 ) Diluted earnings (loss) per share $ 0.34 $ (0.25 ) $ 0.25 $ (0.41 ) For the Three Months Ended March 31, 2019 March 31, 2018 Net sales $ 78,750 $ 112,066 Cost of sales 54,928 74,474 Gross profit 23,822 37,592 Operating expenses: Advertising and marketing 4,585 2,594 Selling, general and administrative 31,584 24,307 Transaction costs 247 — Amortization of intangible assets 4,466 2,772 Total operating expenses 40,882 29,673 (Loss) income from operations (17,060) 7,919 Other income (expense): Interest expense (1,010) (500) Other (expense) income (516) 495 Total other expense (1,526) (5) (Loss) income before provision for income taxes (18,586) 7,914 Income tax benefit (provision) 4,162 (885) Net (loss) income $ (14,424) $ 7,029 (Loss) earnings per share attributable to stockholders: Basic (loss) earnings per share $ (0.50) $ 0.25 Diluted (loss) earnings per share $ (0.50) $ 0.24 2 Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2017 2016 2017 2016 Net income (loss) $ 9,776 $ (7,105 ) $ 7,041 $ (11,442 ) Other comprehenseive income, net of tax: Foreign currency translation gain 326 57 1,171 92 Total other comprehensive income 326 57 1,171 92 Comprehensive income (loss) $ 10,102 $ (7,048 ) $ 8,212 $ (11,350 ) For the Three Months Ended March 31, 2019 March 31, 2018 Net (loss) income $ (14,424) $ 7,029 Other comprehensive (loss) gain, net of tax: Foreign currency translation (loss) gain (156) 289 Total other comprehensive (loss) income (156) 289 Total comprehensive (loss) income $ (14,580) $ 7,318 3CASH FLOWS Nine Months Ended September 30, September 30, 2017 2016 Cash flows from operating activities Net income (loss) $ 7,041 $ (11,442 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation 2,536 3,675 Excess tax benefits related to share-based payments - (569 ) Depreciation and amortization 16,508 19,108 Loss on disposal of property and equipment 13 - Deferred income taxes 5,203 (9,512 ) Amortization of deferred loan costs 192 141 Impairment of intangible asset 1,959 - Loss on disputed mophie purchase price - 24,317 Changes in operating assets and liabilities, net of acquisition: Accounts receivable, net (12,054 ) (10,496 ) Inventories 1,636 2,132 Prepaid expenses and other current assets (104 ) 500 Income taxes receivable 3,195 12,899 Other assets 918 (227 ) Accounts payable (3,526 ) 1,981 Accrued liabilities 1,143 1,759 Accrued wages and wage related expenses (520 ) 802 Deferred revenue (59 ) - Sales returns liability 907 (9,152 ) Other (416 ) - Net cash provided by operating activities 24,572 25,916 Cash flows from investing activities Purchase of property and equipment (3,792 ) (6,135 ) Proceeds from disposal of equipment 28 - Purchase of mophie, net of cash acquired - (74,743 ) Net cash used in investing activities (3,764 ) (80,878 ) Cash flows from financing activities Payment of debt issuance costs (157 ) (1,144 ) Proceeds from revolving credit facility 296,485 230,117 Payments on revolving credit facility (311,528 ) (199,922 ) Proceeds from term loan facility - 25,000 Payments on term loan facility (4,687 ) (3,125 ) Purchase of treasury stock (1,492 ) - Payment of withholdings on restricted stock units (240 ) (621 ) Proceeds from exercise of warrants and options 29 54 Excess tax benefits related to share-based payments - 569 Net cash (used in) provided by financing activities (21,590 ) 50,928 Effect of foreign currency exchange rates on cash equivalents 572 (13 ) Net decrease in cash and cash equivalents (210 ) (4,047 ) Cash and cash equivalents at beginning of the period 11,604 13,002 Cash and cash equivalents at end of the period $ 11,394 $ 8,955 Supplemental disclosure of cash flow information Cash paid during the period for interest $ 1,361 $ 1,106 Cash (refunded) during the period for taxes, net (2,317 ) (597 ) Cash refunded during the period for mophie taxes, net - (11,021 ) For the Three Months Ended March 31, 2019 Common Stock Shares Amount Additional Paid-in Capital Accumulated Other Comprehensive Loss Treasury Stock Retained Earnings Total Stockholders’
EquityBalances, December 31, 2018 34,457 $ 34 $ 96,486 $ (1,410) $ (49,733) $ 113,114 $ 158,491 Cumulative effect of accounting change — — — — — (39) (39) Balance after cumulative effect of accounting change 34,457 34 96,486 (1,410) (49,733) 113,075 158,452 Net loss — — — — — (14,424) (14,424) Other comprehensive loss — — — (156) — — (156) Treasury stock purchase — — — — (722) — (722) Restricted stock release 200 — — — — — — Employee stock purchase plan release 2 — 13 — — — 13 Stock-based compensation expense — — 1,185 — — — 1,185 Payment of withholding taxes on restricted stock units — — (782) — — — (782) Shares issued as consideration for acquisition 1,458 2 12,967 — — — 12,969 Balances, March 31, 2019 36,117 $ 36 $ 109,869 $ (1,566) $ (50,455) $ 98,651 $ 156,535 For the Three Months Ended March 31, 2018 Common Stock Shares Amount Additional Paid-in Capital Accumulated Other Comprehensive Loss Treasury Stock Retained Earnings Total Stockholders’
EquityBalances, December 31, 2017 34,104 $ 34 $ 96,145 $ (348) $ (37,637) $ 77,805 $ 135,999 Cumulative effect of accounting change — — — — — (3,880) (3,880) Balance after cumulative effect of accounting change 34,104 34 96,145 (348) (37,637) 73,925 132,119 Net income — — — — — 7,029 7,029 Other comprehensive loss — — — 289 — — 289 Restricted stock release 312 — — — — — — Employee stock purchase plan release 1 — — — — — — Stock-based compensation expense — — 601 — — — 601 Payment of withholding taxes on restricted stock units — — (2,612) — — — (2,612) Balances, March 31, 2018 34,417 $ 34 $ 94,134 $ (59) $ (37,637) $ 80,954 $ 137,426 4For the Three Months Ended March 31, 2019 March 31, 2018 Cash flows from operating activities: Net (loss) income $ (14,424) $ 7,029 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Stock-based compensation expense 1,185 601 Depreciation and amortization 5,989 5,030 Deferred income tax (benefit) expense (1,076) 322 Gain (loss) on disposal of property and equipment (2) 10 Amortization of deferred loan costs 50 71 Amortization of right of use assets, net of acquisitions 499 — Changes in operating assets and liabilities: Accounts receivable, net 65,302 50,036 Inventories (14,229) (3,367) Prepaid expenses and other current assets 2,327 1,279 Other assets (138) (385) Accounts payable (28,717) (41,394) Income tax (payable) receivable (2,192) 200 Sales returns liability (23,287) (6,555) Accrued wages and wage related expenses (1,563) (497) Accrued liabilities (1,941) (1,805) Other long-term liabilities (132) — Other 212 (847) Net cash (used in) provided by operating activities (12,137) 9,728 Cash flows from investing activities: Purchase of property and equipment (2,628) (1,933) Proceeds from disposal of equipment 2 26 Purchase of HALO, net of cash acquired (20,368) — Net cash used in investing activities (22,994) (1,907) Cash flows from financing activities: Proceeds from revolving credit facility 125,932 138,899 Payments on revolving credit facility (90,932) (152,711) Payments on term loan facility — (1,563) Purchase of treasury stock (722) — Proceeds from issuance of stock under employee stock purchase plan 13 — Net cash provided by (used in) financing activities 34,291 (15,375) Effect of foreign currency exchange rates on cash equivalents (164) 310 Net decrease in cash and cash equivalents (1,004) (7,244) Cash and cash equivalents at beginning of the period 15,793 24,989 Cash and cash equivalents at end of the period $ 14,789 $ 17,745 (Unaudited)Supplemental schedule of noncash investing and financing activitiesFor the Nine Months Ended September 30, 2017:Purchase of $1,719 in fixed assets financed through accounts payable.For the Nine Months Ended September 30, 2016:Purchase of mophie financed through contingent payments of $12,139.Purchase of $1,342 in fixed assets financed through accounts payable and accrued liabilities.5For the Three Months Ended March 31, 2019 March 31, 2018 Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 923 $ 478 Cash (refunded) paid during the period for income taxes, net (811) 324 Supplemental disclosure of non-cash investing and financing activities: Purchase of property and equipment financed through accounts payable $ 696 $ 178 Withholding tax on restricted stock units recorded in accrued wages and wage related expenses 782 2,610 Purchase of HALO through amounts due to seller, contingent payments and common stock 16,985 — (1)NATURE OF OPERATIONS AND BASIS OF PRESENTATIONZAGG®(“we,” “us,” “our,” “ZAGG,” or the(the “Company”) are innovation leaders in mobile tech accessories for smartphones and tablets. For over 10 years, ZAGGthe 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, personal audio, mobile keyboards, protective cases, and casesother mobile accessories sold under the ZAGG®ZAGG®, InvisibleShield®InvisibleShield®, mophie®mophie®, IFROGZ®, BRAVEN®, Gear4®, and IFROGZ®HALO® brands.2016 Annual Report on Form 10-K.10-K for the year ended December 31, 2018 (the “2018 Form 10-K”). Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year.and disclosure of contingent assets and liabilities at the date of the condensed 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.On March 3, 2016, the Company acquired mophie inc. ("mophie"). The results of operations of mophie are included in the Company's results of operations beginning on March 3, 2016. See Note 3 for additional details on the acquisition.The condensed consolidated financial statements include the accounts of ZAGG Inc and its wholly owned subsidiaries ZAGG International Distribution Limited (“ZAGG International”); Patriot Corporation; ZAGG Intellectual Property Holding Co, Inc. (“ZAGG IP”); ZAGG Retail, Inc; ZAGG Netherlands B.V.; ZAGG Mobile Accessories Australia Pty Ltd; ZAGG Hong Kong Ltd; ZAGG Japan G.K.; ZAGG Singapore Pte. Ltd.; mophie inc.; mophie LLC; mophie Technology Development Co., Ltd; mophie Netherlands Coöperatie U.A.; and mophie Limited. All intercompany transactions and balances have been eliminated in consolidation.Annual Report onconsolidated financial statements included in Form 10-K for the year ended December 31, 2016.
2018. Except for the changes below, the Company has consistently applied the accounting policies to all periods presented in these condensed consolidated financial statements.6Recent Accounting Pronouncements (amounts in thousands)In May 2014, the FinancialAdoption of Accounting Standards BoardCodification (“FASB”ASC”) issued an Accounting Standard Update (“ASU”Topic 842, “Leases” (In thousands, except lease terms and discount rates)No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” This ASUa date of initial application of January 1, 2019. As a result of this adoption, the Company has changed its accounting policy for leases as detailed below. 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 in exchange for those goods or services. The ASU also will require 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. The ASU may be adopted utilizing one of two methods. The first method is to adopt the ASU by recording the effect of the guidance in the ASU retrospectively to each prior period presented in the period of adoption. The second method is to adopt the ASU by recording the effect of the guidance in the ASU retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. On July 9, 2015, the FASB voted to approve a one-year deferral of the effective date of this ASU. This deferral was issued by the FASB in ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date”. 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. In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients”. The amendments and practical expedients presented in the ASU aim to simplify the transition toadopting the new standard to provide practical expedientsbeing recognized in retained earnings at January 1, 2019, which allows for transition and sales taxes, and to clarify certain aspectsthe application of the standard solely to the transition period in 2019 but does not require application to prior fiscal comparative periods presented. Therefore, the prior period comparative information has not been adjusted and continues to be reported under the previous ASC Topic 840, “Leases” (“Topic 840”) standard. The Company currently anticipates adoptingelected the standard using the modified retrospective approach with thepackage of available practical expedients allowable under Topic 842 guidelines in its adoption approach.aton the date of initial application.lease commencement date. The Company is currently evaluatingstandard had a material impact in the impact the ASU will have on itsCompany’s consolidated financial statements.In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory.” This ASU provides guidance to entities that measure inventory using 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 principle for their inventory changes from the lower of cost or market 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 market 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 measurement for annual and interim periods beginning after December 15, 2016, for public business entities. The Company has concluded that this ASUbalance sheets, but did not have a materialsignificant impact on our financial position or resultsin its condensed consolidated statements of operations.November 2015,addition, the FASB issued ASU No. 2015-17, “Balance Sheet Classificationadoption of Deferred Taxes,” which requires entities withTopic 842 had no impact to cash provided by or used in operating, financing, or investing on the condensed consolidated statements of cash flows.balance sheet to present all deferred tax assets and liabilities as noncurrent. The amendments in the ASU may be applied either prospectively to all deferred tax liabilities and assetsan operating lease or retrospectively to all periods presented. The ASU is effective for public business entities for interim and annual periods in fiscal years beginning after December 15, 2016. During the year ended Decembera finance lease. As of March 31, 2017,2019, the Company adopted the ASU using the retrospective approach resulting in recording deferred tax assets as non-current for current and prior periods presented. This adoption does not impact our results of operations.In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”, which requires lessees to recognize most leases, includingonly has operating leases. For operating leases, on-balance sheet via a right of use asset andthe Company measures lease liability. Lessees are allowed to account for short-term leases (i.e., leases with a term of 12 months or less) off-balance sheet, consistent with current operating lease accounting. A number of other significant changes to lease accounting have been effected throughliabilities based on the issuance of this standard. The requirementspresent value of the new standard forfuture minimum lease payments over the lease term at commencement date. As most of its leases shall be recognized anddo not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. ROU assets are measured atas the beginningsum of the earliest comparative period presented. When adopted,amount of the initial measurement of the lease liability, plus any prepaid lease payments made minus any lease incentives received, and any initial direct costs incurred. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will be requiredexercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term.adjust equity atseparate the beginninglease and non-lease components for its leases for physical space and equipment and accounts for them as a single lease component.earliest comparative period presented,leases up to 10 years. The following table provides information about operating lease ROU assets, current lease liabilities, and non-current lease liabilities as of March 31, 2019:March 31, 2019 Right of use assets, included in other assets $ 9,091 Operating lease liabilities, included in accrued liabilities 2,193 Operating lease liabilities, included in other long-term liabilities 12,163 other comparative amounts disclosed for each prior period presentedactivities in the financial statements,Company’s ROU assets and lease liabilities for the three months ended March 31, 2019:Beginning Balance as of January 1, 2019 Adoption of Topic 842 Additions Amortization Ending Balance as of March 31, 2019 ROU assets $ — $ 8,842 $ 748 $ (499) $ 9,091 Lease liabilities — 13,046 1,775 (465) 14,356 ifa component of selling, general and administrative expense on the requirementscondensed consolidated statement of operations. As of March 31, 2019, the new standardCompany had alwaysa weighted-average remaining lease term of 5.6 years and a weighted-average discount rate used to calculate the lease liability of 4.43%.Remaining 2019 $ 2,509 2020 3,044 2021 2,677 2022 2,737 2023 2,202 Thereafter 3,141 Total lease payments $ 16,310 Less: imputed interest (1,954) Lease liabilities $ 14,356 applied. The new standard also contains practical expedientsentered into under which the Company may electhas significant rights and obligations as the lessee except those noted above.follow. The new standard is effectivethe Company’s key product lines for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements, including whether to elect the practical expedients outlined in the new standard.7In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which simplified accounting for share-based payments. The ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those years for public business entities. Early adoption is permitted in any interim or annual period provided that the entire ASU is adopted. The new standard contains several amendments that simplify the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The changes in the new standard eliminate the accounting for excess tax benefits to be recognized in additional paid-in capital and tax deficiencies recognized either in the income tax provision or in additional paid-in capital. The Company has adopted ASU 2016-09 as of the beginning of the quarterthree months ended March 31, 2017. During2019, andFor the Three Months Ended March 31, 2019 March 31, 2018 Protection (screen protection and cases) 59% 50% Power (power management and power cases) 29% 39% Audio 5% 5% Productivity (keyboards and other) 7% 6% quarterCompany’s key distribution channels for the three months ended March 31, 2017, the Company applied the amendment relating2019, and 2018, was approximately as follows:For the Three Months Ended March 31, 2019 March 31, 2018 Indirect channel 79% 88% Website 14% 8% Franchisees 7% 4% recognition of excess tax benefits and deficiencies on a prospective basis and, accordingly, has recognized all excess tax benefits and tax deficiencies as income tax expense or benefit as discrete items resulting in the recognition of income tax expense of $171Company’s key geographic regions for the ninethree months ended September 30, 2017.March 31, 2019, and 2018, was approximately as follows:For the Three Months Ended March 31, 2019 March 31, 2018 United States 71% 82% Europe 12% 9% Other 17% 9% Companyfollowing 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 March 31, 2019, and December 31, 2018:March 31, 2019 December 31, 2018 Receivables, which comprises the balance in accounts receivable, net of allowances $ 93,617 $ 156,667 Right of return assets, which are included in prepaid expenses and other current assets 785 999 Refund liabilities, which are included in sales return liability 29,966 49,786 Warranty liabilities, which are included in sales return liability 3,858 4,646 Contract liabilities, which are included in accrued liabilities 85 96 recorded a cumulative-effect adjustment to retained earnings as of the beginning of the year because all tax benefits had previously beenyet occurred and therefore, revenue is deferred and will be recognized when the tax deductions related to stock compensation were utilized to reduce taxes payable. The Company has elected to apply the amendment related to the presentationtransfer of cash flows for excess tax benefits on a prospective basis and no prior periods have been adjusted. The Company’s financial position or results of operations were not impacted by amendments related to the statutory tax withholding requirement and, accordingly, no adjustmentcontrol has been recorded. The Company will continue to classify cash remitted tocompleted.tax authorities as a financing activity as now required by the amendmentsthree months ended March 31, 2019, revenue recognized that was included in the ASU. contract liability balance as of December 31, 2018, was $11.ASU permits a policy election to either record forfeitures as they occur or estimate forfeitures consistent with historical U.S. GAAP. The Company has elected to record forfeitures as they occur, which did not have a material impact on our financial position or results of operations.In August 2016,following summarizes the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which addresses eight classification issues related to the statement of cash flows: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon bonds; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. The ASU is effective for public business entities for fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The amendmentsactivities in the ASU should be applied using a retrospective transition method to each period presented. If it is impracticableCompany’s warranty liabilities for the amendments to be applied retrospectively for some of the issues, the amendments for those issues may be applied prospectively as of the earliest date practicable. The Company has elected to early adopt this standard in the current quarterthree months ended September 30, 2017, and will apply this standard to any classification issues that occur in future periods as none exist in the current reportable period.In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,” which requires entities to recognize at the transaction date the income tax consequences of intercompany asset transfers other than inventory. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. The Company will adopt this standard in the first quarter of 2018. The adoption of this standard is not expected to have a material impact on our financial position or results of operations.In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which requires companies to include cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the statement of cash flows. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. The Company has elected to early adopt this standard in the current quarter ended September 30, 2017, and if in future periods restricted cash exists at the Company, this standard will be applied as none exist in the current reportable period.In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which requires an entity to no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2019. All entities may early adopt the standard for goodwill impairment tests with measurement dates after January 1, 2017. The Company has elected to early adopt this standard and will perform its annual goodwill impairment assessment in the fourth quarter of 2017. The adoption of this standard is not expected to have a material impact to our financial position or results of operations.8Balance as of December 31, 2018 $ 4,646 Additions 2,253 Warranty claims charged (3,041) Balance as of March 31, 2019 $ 3,858 In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718),” which clarifies what constitutes a modificationa share-based payment award. This ASU is effective for all entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The Company has elected to early adopt this ASU in the current quarter ended September 30, 2017, and will apply any stock compensation modifications that occur in future periods as none exist in the current reportable period.(2)INVENTORIESAt September 30, 2017, and December 31, 2016, inventories consisted of the following: September 30, 2017 Finished goods $ 71,557 $ 72,490 Raw materials 448 279 Total inventories $ 72,005 $ 72,769 Included in prepaid expenses and other current assets were inventory deposits with third-party manufacturers at September 30, 2017, and December 31, 2016, of $1,333 and $437, respectively.(3)ACQUISITION OF MOPHIEFebruary 2, 2016,January 3, 2019, (the “HALO Acquisition Date”), ZAGG and ZM Acquisition, Inc.,Hampton LLC, a Delaware corporationlimited liability company and wholly-ownedwholly owned subsidiary of the Company, entered into an Agreement and Plan of Mergera membership interest purchase agreement (the “Merger“Purchase Agreement”) with mophie, a California corporation, the principal shareholders of mophie named therein (the “Principal Shareholders”Halo2Cloud, LLC (“HALO”), and Daniel Huang as representativeits equity owners to acquire all of the mophie shareholders, warrant holders,outstanding equity interests of HALO (the “HALO Acquisition”). HALO is a leading direct-to-consumer mobile accessories company with an extensive intellectual property portfolio that specializes in wireless charging, car and option holders, pursuantwall chargers, portable power, and other accessories. The Company acquired HALO to expand its product portfolio and to enter into new distribution channels.Cash consideration $ 23,943 Company common stock 12,968 Contingent consideration 1,593 Total purchase price $ 38,504 ZMmay result in adjustments to the preliminary values presented below, when management’s estimates are finalized:Cash $ 1,151 Accounts receivable 2,436 Inventory 2,889 Inventory step up 494 Prepaid expenses and other assets 1,310 Property and equipment 627 Amortizable identifiable intangible assets 27,554 Goodwill 15,922 Other assets 546 Accounts payable (2,867) Income tax payable (501) Accrued expenses (217) Accrued wages and wage related expenses (324) Sales return liability (2,728) Deferred tax liability (6,177) Other long-term liabilities (1,611) Total $ 38,504 Inc. agreedoccurred in the current interim period and in light of the magnitude of the transaction, the Company is still waiting to merge with and into mophie, with mophie continuingreceive the 2018 audited financial statements for HALO as well as the surviving corporation (the “Merger”). On March 3, 2016,finalization of the fair value measurements of the assets acquired and liabilities assumed. As a result, the Company’s fair value estimates for the purchase price, assets acquired, and liabilities assumed are preliminary and may change during the allowable measurement period. The allowable measurement period continues to the date the Company completedobtains and analyzes all relevant information that existed as of the Merger.Intangible Asset Class Weighted Average Amortization Period Technologies $ 14,187 8.9 years Trade names 4,409 10.0 years Customer relationships 8,958 8.0 years Total 27,554 mophie areHALO were included in the Company’s results of operations beginning on January 4, 2019. For HALO’s results of operations from January 4, 2019, through March 3, 2016. For the period of March 3, 2016, through September 30, 2016, mophie31, 2019, HALO generated net sales of $79,390$1,273 and had a net loss before tax of $17,030.formaForma Results fromof Operations unaudited pro-forma results of operations for the ninethree months ended September 30, 2016,March 31, 2019, and 2018, give pro forma effect as if the acquisition of HALO had occurred on January 1, 2018, after giving effect to certain adjustments including the amortization of intangible assets, tax adjustments, specific transaction related expenses incurred prior to the execution date, and assumes the purchase price was allocated to the assets purchased and liabilities assumed based on their fair market values at the date of purchase.For the Three Months Ended March, 31 2019 2018 Net sales $ 78,750 $ 110,922 Net (loss) income $ (13,946) $ 2,314 Basic (loss) earnings per share $ (0.48) $ 0.08 Diluted (loss) earnings per share $ (0.48) $ 0.08 periodperiods presented, after giving effect to certain adjustments including the amortization of intangible assets, interest expense, tax adjustments, specific transaction related expenses incurred prior to the execution date, and assumes the purchase price was allocated to the assets purchased and liabilities assumed based on their fair market values at the date of purchase. Net sales $ 304,254 Net loss $ (15,432 ) Basic loss per share $ (0.55 ) Diluted loss per share $ (0.55 ) For the Three Months Ended
March 31, 2018Net sales $ 117,272 Net income $ 5,360 Basic earnings per share $ 0.19 Diluted earnings per share $ 0.19 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 for the dates indicated.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.9ninethree months ended September 30, 2016,March 31, 2018, pro forma net lossincome includes projectedpro forma amortization expense of $5,076. In addition, the Company included$883 and interest from the newamended credit facility and amortization of debt issuance costs for the nine months ended September 30, 2016, of $1,508. Material non-recurring adjustments excluded from the pro forma financial information above consists of the $2,586 step up of mophie inventory to its fair value, which was recorded as an unfavorable adjustment to cost of goods sold during the nine months following the acquisition date. unaudited pro forma results do not reflect events that either have occurred or may occur after the Merger,Gear4 Acquisition, including, but not limited to, the anticipated realization of ongoing savings from operating synergies in subsequent periods.(4)GOODWILL AND INTANGIBLE ASSETSGoodwillThereMarch 31, 2019 December 31, 2018 Finished goods $ 99,237 $ 81,397 Raw materials 989 1,522 Total inventories $ 100,226 $ 82,919 no additions to nor impairmentinventory deposits with third-party manufacturers of goodwill for$453 and $382 as of March 31, 2019, and December 31, 2018, respectively.or nine months ended September 30, 2017. The balance ofMarch 31, 2019, goodwill as of September 30, 2017, was $12,272.Long-lived Intangible Assetsgross long-livedgoodwill during the three months ended March 31, 2019:Balance as of December 31, 2018 $ 27,638 Increase in connection with HALO Acquisition 15,922 Balance as of March 31, 2019 $ 43,560 assets:Gross balance at December 31, 2016 $ 108,659 Impairment loss on patent (2,777 ) Gross balance at September 30, 2017 $ 105,882 On April 11, 2017,assets increased $27,554 for patents and technology, trade names, customer relationships and unfavorable lease for the Company received a final court order stating thatthree months ended March 31, 2019. There were no additions to intangible assets for the claimsthree months ended March 31, 2018. Additionally, there were no impairments of oneintangible assets for the three months ended March 31, 2019, and 2018.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 impairedaccumulated amortization as of March 31, 2017. Consequently, for the nine months period ended September 30, 2017, the Company recorded an impairment loss consisting of a reduction of gross carrying amount of $2,777, accumulated amortization of $818, and net carrying value of $1,959 to reduce the net carrying value of the cancelled patent to $0.Long-lived intangible assets, net of amortization as of September 30, 2017,2019, and December 31, 2016,2018, were as follows: September 30,
2017 Customer relationships $ 10,597 $ 14,612 Tradenames 18,767 21,506 Patents and technology 11,680 15,727 Non-compete agreements 1,227 1,497 Other 15 20 Total amortizable intangible assets $ 42,286 $ 53,362 March 31, 2019 December 31, 2018 Trade names $ 29,946 $ 26,988 Patents and technology 21,652 8,723 Customer relationships 22,894 15,560 Non-compete agreements 692 778 Other 5 5 Total intangible assets, net of accumulated amortization $ 75,189 $ 52,054 amortizable intangible assets as of September 30, 2017,March 31, 2019, and December 31, 2016, is 8.2 years.
2018, was 8.3 years and 8.3 years, respectively.10(5)INCOME TAXESSeptember 30, 2017,March 31, 2019, and 2016, was 37% and 47%,2018, respectively. The Company’s effective tax for the nine months ended September 30, 2017, and 2016, was 47% and 41%, respectively. The changeincrease in the effective tax rate forwas due to several factors including but not limited to a difference in the three months ended September 30, 2017, comparedamount of the discrete item with respect to the three months ended September 30, 2016, was primarily due to losses from foreign jurisdictions for which income tax benefits were not recognized as wellrestricted stock unit awards. The majority of the ratio of credits and other permanent differences to pre-tax book income and loss for respective periods. The changeCompany’s restricted stock unit awards vest in the effective tax rate for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, was primarily due to various discrete expenses recognized during the period related to the true up of a deferred amount for stock compensation and other discrete items related to the return to provision calculation.first quarter. The Company’s effective tax rate will generally differ from the U.S. Federal statutory rate of 35%21%, due to state taxes, permanent items andincluding amounts disallowed under §162(m) of the Internal Revenue Code, the Company’s global tax strategy.(6)FAIR VALUE MEASURESFair Value of Financial InstrumentsAt September 30, 2017, the Company’s financial instruments included cash and cash equivalents, accounts receivable, accounts payable, a line of credit, and a term loan. 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.Fair Value MeasurementsThe 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); andLevel 3 — Unobservable inputs in which there is little or no market data, which require the Company to develop its own assumptions.At September 30, 2017, and December 31, 2016, the following assets were measured at fair value on a recurring basis using the level of inputs shown: Fair Value Measurements Using: Money market funds included in cash equivalents $ 5 $ 5 — — Fair Value Measurements Using: Money market funds included in cash equivalents $ 5 $ 5 — — 11(7)DEBT AND LINE OF CREDITLong-term debt, net as of September 30, 2017, and December 31, 2016, was as follows: September 30,
2017 December 31,
2016 Line of credit $ 16,264 $ 31,307 Term loan 15,468 20,107 Total debt outstanding 31,732 51,414 Less current portion 22,449 41,791 Total long-term debt outstanding $ 9,283 $ 9,623 On July 17, 2017, ZAGG Inc, KeyBank National Association (“KeyBank”), Zions First National Bank (“Zions Bank”), and JPMorgan Chase Bank, N.A. (collectively, the “Lenders”), and KeyBank, as the administrative agent for the Lenders, entered into a Third Amendment Agreement (“Amendment”), which amends the original Credit and Security Agreement dated as of March 3, 2016, by and among the Companystrategy, and the Lenders. inclusion of global intangible low taxed income and the corresponding foreign tax credit.Amendment includes the following revisions to the original Credit Agreement:●Increased the Maximum Revolving Amount, as defined in the Credit Agreement, from $85,000 to:○$135,000 from July 17, 2017, to December 31, 2017;○$110,000 from January 1, 2018, to May 31, 2018; and○$100,000 from June 1, 2018, forward.●Expanded Permitted Foreign Subsidiary Loans, Guaranties and Investments, as defined in the Credit Agreement, to include:○A $2,000 loan dated April 5, 2017, from the Company to ZAGG International Distribution Limited; and○Any other loan or investment by the Company or any domestic subsidiarygrant of the Company in or to, or guaranty of indebtedness of, any foreign subsidiary of the Company for the period July 17, 2017, to March 31, 2018, in an aggregate amount not to exceed $8,000.●Increased the Letter of Credit Commitment, as defined in the Credit Agreement, from $7,500 to an aggregate amount of $40,000.●Increased the Borrowing Base, as defined in the Credit Agreement, on a seasonal basis between August 1, 2017, and September 30, 2017, by $15,000, which seasonal increase to the Borrowing Base was subsequently extended by the Lenders to October 31, 2017.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 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 Credit 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 Credit Agreement requires that the face value of the Letter of Credit reduce the Borrowing Base under the existing Line of Credit.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 is classified in interest expense on the condensed consolidated statement of operations. Fees incurred associated with the Letter of Credit as of September 30, 2017, are $157. No draws on the Letter of Credit occurred as of September 30, 2017.(8)STOCK-BASED COMPENSATIONDuring the three and nine months ended September 30, 2017, the Company granted 45 and 479 restricted stock units respectively. During the three and nine months ended September 30, 2016, the Company granted 163 and 876 restricted stock units, respectively. The restricted stock units granted during the three and nine months ended September 30, 2017, were estimated to have awith respective weighted-average fair value per share of $8.65 and $6.77, respectively. The restricted stock units granted duringfor the three and nine months ended September 30, 2016, were estimated to have a weighted-average fair value per share of $6.41March 31, 2019$8.17, respectively. 2018, is summarized as follows:For the Three Months Ended March 31, 2019 March 31, 2018 Granted 643 81 Weighted average fair value per share $ 9.82 $ 14.50 12479 and 876 grants discussed above,643 restricted stock units granted during the ninethree months ended September 30, 2017, and 2016,March 31, 2019, the Company granted 372 and 575287 restricted stock units respectively, to certain executives and employees of the Company where vesting is linked to specific performance criterion. TheThese performance-based restricted stock units granted in 2017 and 2016 only vest upon the (1) Company’s achievement of specified thresholds of net sales, Adjusted EBITDA, or specific goals for the individual executive. As of September 30, 2017,executive, and (2) continued employment through the Company believes it is probable that it will achieve the targets for allapplicable vesting date. No restricted stock units granted induring the ninethree months ended September 30, 2017. Of the 575 restricted stock units granted in the nine months ending September 30, 2016, 42 shares vested and 307 sharesMarch 31, 2018 were forfeited, and 226 have not yet vested or been forfeited.During the three and nine months ended September 30, 2017, the Company recordedThe following are stock-based compensation expenseexpenses related to restricted stock units of $899recorded for the three months ended March 31, 2019, and $2,536, respectively,2018, which isare included as a component of selling, general, and administrative expense. expense on the condensed consolidated statement of operations:For the Three Months Ended March 31, 2019 March 31, 2018 Stock-based compensation expense related to restricted stock units $ 1,185 $ 601 and nine months ended September 30, 2016, theMarch 31, 2019, and 2018, certain Company recorded stock-based compensation expense related to restricted stock units of $1,384 and $3,675, respectively, which is included as a component of selling, general, and administrative expense.During the nine months ended September 30, 2017, and 2016, certain ZAGG employees elected to receive a net amount of shares upon the vesting of restricted stock unit grants in exchange for the Company paying up to the maximum statutory withholding amount of the employees’ tax liabilities for the fair value of the award on the vesting date. This resulted in the Company paying $240recording $782 and $621, respectively, which is$2,612 reflected as a reduction of additional paid-in capital. We also recognized an increasecapital, respectively. Of the $782 and $2,612 recorded as a reduction of additional paid-in capital, $782 and $2,610 was included in accrued wages and wage related to the employee stock purchase planexpenses as of $29March 31, 2019, and $54, respectively, for the nine months ended September 30, 2017, and 2016.(9)EARNINGS (LOSS) PER SHAREand nine months ended September 30, 2017,March 31, 2019, and 2016: Three months ended September 30, 2017 September 30, 2016 Net income (loss) $ 9,776 $ (7,105 ) Weighted average shares outstanding: Basic 27,969 28,125 Dilutive effect of restricted stock units and warrants 412 — Diluted 28,381 28,125 Earnings (loss) per share: Basic $ 0.35 $ (0.25 ) Diluted $ 0.34 $ (0.25 ) Nine months ended September 30, 2017 September 30, 2016 Net income (loss) $ 7,041 $ (11,442 ) Weighted average shares outstanding: Basic 27,996 27,987 Dilutive effect of restricted stock units and warrants 233 — Diluted 28,229 27,987 Earnings (loss) per share: Basic $ 0.25 $ (0.41 ) Diluted $ 0.25 $ (0.41 )
2018:13For the Three Months Ended March 31, 2019 March 31, 2018 Net (loss) income $ (14,424) $ 7,029 Weighted average shares outstanding: Basic 28,883 28,209 Dilutive effect of restricted stock units — 484 Diluted 28,883 28,693 (Loss) earnings per share: Basic $ (0.50) $ 0.25 Diluted $ (0.50) $ 0.24 and nine months ended September 30, 2017, there were noMarch 31, 2019, 1,187 restricted stock units excluded fromwere not considered in calculating diluted loss per share because the calculation of diluted earnings per share. Company was in a loss position, and therefore, the effect would have been anti-dilutive.and nine months ended September 30, 2016, 1,001March 31, 2018, 114 restricted stock units and 50 warrantsused to purchase shares of common stock were not considered in calculating diluted earnings per share as their effect would have been anti-dilutive.(10)TREASURY STOCKForand nine months ended September 30, 2017, the Company purchased 0March 31, 2019, and 234 shares of ZAGG Inc common stock, respectively. Cash consideration paid for the purchase of ZAGG Inc common stock for the nine months ended September 30, 2017, was $1,492, which included commissions paid to brokers of $9. For the nine months ended September 30, 2017, the weighted average price per share was $6.32. 2018, as follows:For the Three Months Ended March 31, 2019 March 31, 2018 Shares repurchased 72 — Cash consideration paid $ 722 $ — Commissions to brokers included in cash consideration paid $ 2 $ — Weighted average price per share repurchased $ 10.00 $ — ForthreeCentral District of California, Case No. 8:17-CV-2193-DOC-DFM (the “Anker Lawsuit”). On December 15, 2017, the Company and nine months ended September 30, 2016, no purchases of treasury stock occurred.(11)COMMITMENTS AND CONTINGENCIESOperating leasesThe Company leases office and warehouse space, office equipment, and mall cart locations under operating leases that expire through 2023. Future minimum rental payments required under the operating leases at September 30, 2017, were as follows:Remaining 2017 $ 722 2018 2,058 2019 1,588 2020 1,532 2021 1,458 Thereafter 2,596 Total $ 9,954 For the three months ended September 30, 2017, and 2016, rent expense was $736 and $793, respectively. For the nine months ended September 30, 2017, and 2016, rent expense was $2,179 and $2,450, respectively. Rent expense was recognized on a basis which approximates straight-line over the lease term and was recorded as a component of selling, general and administrative expense on the condensed consolidated statement of operations.Commercial LitigationDaniel Huang, individually and as shareholder representative v. ZAGG Inc, Court of Chancery of the State of Delaware, C.A. No. 12842 (the “Huang Delaware Lawsuit”). On October 21, 2016, Daniel Huang, as the representative of the former mophie inc. shareholders, under the Merger Agreement as disclosed in Note 3, filed the Huang DelawareAnker Lawsuit alleging that Anker Technology Co. Ltd. (“Anker”) and Fantasia 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 filed by the Company breached the Merger Agreement by failing to pay certain contingent payments (the “Contingent Payments”) related to tax refunds and customs duty recoveriesmophie seeks monetary damages and seeking damages in an amount no less than $11,420.injunction against Anker. On December 16, 2016, the CompanyMarch 12, 2018, Anker and Fantasia filed an Answeranswers and Counterclaimscounterclaims in the lawsuit. In its Answer, the Company acknowledged its obligation under the Merger Agreement to make the Contingent Payments under certain circumstances, but averred that this obligation was subject to a right to withhold the tax refundstheir answers, Anker and customs duty recoveries received to date and, subject to the Court’s ruling on the Company’s Counterclaims, subsequently set-off its damages against the Contingent Payments. In its Answer, the CompanyFantasia denied that any payments were due at that time or that it was in breachinfringement of any provisionvalid claim and asserted counterclaims for non-infringement and invalidity of the Merger Agreement. Regarding the Counterclaims, after the closing of the merger, ZAGG discovered breaches of certain representations, warranties and covenants made by Huang and mophie that have resulted in damages exceeding $22,000.On October 31, 2017, the Company and Daniel Huang as the representative of the former mophie inc. shareholders, entered into a settlement agreement (“Delaware Settlement Agreement”). The Delaware Settlement Agreement provides for a mutual general release of all claims asserted in Huang Delaware Lawsuit and that (1) the Company will receive the $2,000 in cash held in escrow in connection with the Merger Agreement, (2) the former mophie shareholders will receive $8,000 of the Contingent Payments in full settlement (“Settlement Amount”) of all claims asserted against the Company in the Huang Delaware Lawsuit, and (3) the Company will retain the remaining Contingent Payments. The difference between the Contingent Payments recorded in purchase accounting and Settlement Amount will be recorded as a gain on disputed mophie purchase price during the fourth quarter of 2017:Contingent payments recorded in purchase accounting $ 12,139 Cash collected from duty recoveries $ 2,828 Total contingent payments in accrued liabilities $ 14,967 Settlement amount $ 8,000 Gain on disputed mophie purchase price $ 6,967
patents at issue.14ZAGG Inc et al. v. Daniel Huang et al., Orange County Superior Court, State of California, Civil No. 30-2016-00892767-CU-BC-CJC (the “Huang California Lawsuit”). On December 15, 2016, ZAGG and mophie filed a complaint against Daniel Huang and Immotor, LLC (“Immotor”). The complaint alleged that Huang and the company he founded, Immotor, misappropriated confidential information belonging to mophie while Huang was serving as an officer and director of mophie.On October 31, 2017, the Company, mophie, Immotor and Daniel Huang entered into a settlement agreement (“California Settlement Agreement”). The California Settlement Agreement provides for a mutual general release of all claims asserted in the Huang California Lawsuit and of other claims asserted by Huang against the Company and mophie and that Huang would receive a non-exclusive license for certain power management technology for use solely in connection with two-wheeled vehicles.continues to retain rights under a representations and warranties insurance policy obtained at the time of the acquisition of mophie to seek reimbursement for payments of third party claims or to recover losses relating to breaches of mophie’s representations and warranties, except in respect of the claims released in connection the dismissal of the Huang Delaware Lawsuit and the Huang California Lawsuit.Eric Stotz and Alan Charles v. mophie inc., U.S. District Court, Central District of California, Civil Action No. 2:16-cv-08898-GW-FFM. On January 13, 2017, Eric Stotz and Alan Charles, individually and on behalf of a purported class, filed a first amended class action complaint alleging that they purchased certain mophie external battery packs and that the battery packs did not extend the life of the phones’ internal batteries as advertised and adversely affected the phones’ internal battery life. Plaintiffs allege violations of California’s unfair competition law, California’s Consumer Legal Remedies Act, New York’s unlawful deceptive acts and practices statute, and New York’s false advertising law. The Company has denied all liabilitydisputes Anker’s contentions and will defend the claims and otherwise respond to the 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.SEC Investigationfourth quarter of 2012,complaint, Best Case alleges that it does not infringe the Company’s trade dress and that the Company received requeststortiously interfered with Best Case’s business relationships, which the Company disputes. On February 8, 2019, the Company filed a 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 provide documentation and informationrespond to the staffallegations and defend against the claims. This matter is not expected to have a material adverse effect on the Company’s financial position, results of operations, or liquidity.in connection withInvestigationbeing conducted by the SEC’s Salt Lake City office. The Company believes the investigation includes a review of theSEC related to facts and circumstances surrounding former 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. TheOn March 7, 2019, the Staff of the SEC informed the Company respondedthat, after additional consideration and analysis, it has decided to these requeststerminate the investigation and is cooperating withdismiss the staff although there has been no resolution to date.for any of the litigation or claims noted above, the ultimate potential loss could have a material adverse effect on the Company’s financial condition or results of operations in a particular period.establishes reservesrecords a liability when a particular contingency is probable and estimable. The Company has not accrued for any loss at September 30, 2017,losses in the condensed consolidated financial statements as of March 31, 2019, due to the Company doesfact that either the losses are immaterial or the losses are not consider a loss to beconsidered probable or estimable. The Company faces contingencies that are reasonably possible to occur; however, the reasonably possible exposure to losses cannot currently be estimated.15(12)CONCENTRATIONSand nine months ended September 30, 2017.At September 30, 2017,March 31, 2019, and 2018.2016,2018, two separate customers were equal to or exceeded 10% of the balance of accounts receivable, from two separate customers exceeded 10%: Superior Communications, Inc. (“Superior”) and Best Buy Co., Inc. (“Best Buy”). GENCO Distribution Systems, Inc. (“GENCO”) also exceeded 10% of accounts receivable as of December 31, 2016, but not as of September 30, 2017. September 30, 2017 December 31, 2016 Superior 39 % 32 % Best Buy 16 % 22 % GENCO 7 % 10 % March 31, 2019 December 31, 2018 Superior Communications, Inc. (“Superior”) 42% 50% Best Buy Co., Inc. (“Best Buy”) 10% 15% at September 30, 2017, oras of March 31, 2019, and December 31, 2016.2018. 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 suppliersWe do not directly manufacture any of our products; rather, we employ various third-party manufacturing partners in the United States 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 InvisibleShield On-Demand (“ISOD”) products has been produced by a single supplier for the last nine years. Our 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 the Company:●Screen Protection– Our screen product line consists of InvisibleShield glass products, InvisibleShield film products, and ISOD film blanks. 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).●Battery Cases and Power Management – Our battery case and power management product lines each consist of power products that are designed to provide on-the-go power for tablets, smartphones, MP3 players, cameras, and virtually all other electronic mobile devices. 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 and headphones 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.16September 30, 2017, and 2016, Superior andMarch 31, 2019, Best Buy were our largest customers, eachaccounted for 10% of whichnet sales, and for the three months ended March 31, 2018, Superior accounted for over 10% of net sales, as follows: Three months ended September 30, 2016 Superior 32 % 30 % Best Buy 12 % 10 % For the Three Months Ended March 31, 2019 March 31, 2018 Superior 6% 29% Best Buy 10% 8% ninethree months ended September 30, 2017,March 31, 2019, and 2016, Superior and Best Buy were our largest customers, each of which accounted for over 10% of net sales, as follows: Nine months ended September 30, 2016 Superior 31 % 27 % Best Buy 10 % 10 % For the nine months ended September 30, 2017, and 2016,2018, no other customers accounted for greater than 10% of net sales.we havethe Company has contracts in place governing ourthe relationships with its retail distribution customers (“retailers”), the contracts are not long-term and all ourthe retailers generally purchase from usthe Company on a purchase order basis. As a result, these retailers generally may, with little or no notice or penalty, cease ordering and selling ourthe Company’s products, or materially reduce their orders. If any of these retailers cease selling ourthe Company’s products, slow their rate of purchase of ourits products, or decrease the number of products they purchase, ourthe Company’s results of operations could be adversely affected.The percentagenet sales by geographic region for the three months ended September 30, 2017,Financial Condition and 2016, was approximately: Three months ended September 30, 2016 United States 85 % 87 % Europe 9 % 8 % Other 6 % 5 % The percentageResults of net sales by geographic region for the nine months ended September 30, 2017, and 2016, was approximately: Nine months ended September 30, 2016 United States 86 % 89 % Europe 8 % 7 % Other 6 % 4 % (13)SEGMENT REPORTINGAs of June 30, 2017, the Company reported financial information on the following reportable segments: ZAGG and mophie. During the third quarter of 2017, management completed the consolidation of a number of ZAGG/mophie processes and functions, including the merging of the mophie enterprise resource planning (“ERP”) system into ZAGG’s ERP system. In addition, the executive team and related responsibilities were re-aligned such that 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.In addition, 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, including sales and budget reviews.Due to the changes described above, management reassessed its reportable segments during the third quarter of 2017, and concluded that the Company is a single reportable segment.(14)SUBSEQUENT EVENTSCertain settlements around litigation occurred subsequent to September 30, 2017, involving the Huang Delaware Lawsuit and the Huang California Lawsuit. Refer to Note 11 above for information regarding these settlements.
Operations17ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSaffecteffect 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.is anInc and its subsidiaries (“we,” “us,” “our,” “ZAGG,” or the “Company”) are global innovation leaderleaders in accessories and technologies that empower mobile tech accessories for smartphones and tablets. The Company is committedlifestyles, with a commitment to enhance every aspect of performance, productivity, and durability in mobile devices with our creative product solutions. ZAGGOur business was initially created from the concept of applyingusing a clear film originally designed to protect military-helicopterthe 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 ZAGG’sour mission is to ensure better performance inenable the real world.itsour home-grown brands, ZAGG haswe have created a platform to combine category-creating and innovative brands that we have acquired with our existing house of brands to address specific consumer needs toand empower a mobile lifestyle. The Company hasWe have an award-winning product portfolio that includes screen protection, power cases, power management, wireless charging, personal audio, mobile keyboards, protective cases, and casesother mobile accessories sold under the ZAGG®, InvisibleShield®, mophie®, IFROGZ®, BRAVEN®, Gear4®, and IFROGZHALO® brands.Drive,Way, Suite 500, Midvale, UT,Utah 84047. TheOur telephone number of the Company is 801-263-0699. Our(801) 263-0699, and our website addresses arewww.ZAGG.com, www.mophie.com, www.gear4.com, andwww.mophie.com. Thewww.halo2cloud.com (the URLs are included here as inactive textual references. Informationreferences, and information contained on, or accessible through, our websites is not a part of, and is not incorporated by reference into, this report.
report).18The Company hasWe have established four corporate objectives and seven core values to act as a foundation for our corporate culture and guide ZAGGus daily:
Corporate ObjectivesCore ValuesThe Preferred BrandCorporate ObjectivesCore Values Creative Product Solutions Integrity Creative Product SolutionsTargeted Global DistributionOwnership Targeted Global DistributionOperational ExcellenceCare for People Operational ExcellenceThe Preferred BrandPassion Continuous Improvement Performance Sense of Urgency the Company’sour functional teams’ goals and execution. Every ZAGG employeeone of our employees is trained to understand his or her role in executing to these objectives. Each core value acts as a key component in working toward ZAGG’sour corporate objectives of providing creative product solutions, executing targeted global distribution, achieving operational excellence, and being the preferred brand for itsour customers.fearlessly enjoy their mobile devices and never experiencewithout the inconvenience of a shattered, cracked, or scratched screen.InvisibleShield is focused on producing industry-leading screen and device protection. Our protective filmInvisibleShield Film and glassInvisibleShield Glass products offer consumers a wide array of protection types and features, all with a limited lifetime warranty.Our films wereFilm was originally developed 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 and impact protection. We also continue to drive innovation around simplifying the customer application experience like we’ve done with our EZ Apply® tabs, which are designed to help users align and apply InvisibleShield products. We alsoAdditionally, we provide custom-fit screen protection for thousands of device types through our automated InvisibleShield On Demand (“ISOD”)ISOD solution. With our ISOD solution, retailers can supply consumers with screen protection for nearly any device model, all without having to hold excess inventory.Launched during the first quarter of 2014, universally compatible touch sensitivity. In the third quarter of 2016 we announced InvisibleShield Glass+, designed to provide additional scratch resistance and impact protection over InvisibleShield Glass. Additionally,During 2018, we launched InvisibleShield Sapphire Defense duringGlass + VisionGuard™ for Apple® iPhone® smartphones, Apple iPad® tablets and Google® Pixel® smartphones, which features protective EyeSafe® technology that filters out portions of the third quarterharmful high-energy visible blue light spectrum emanating from device screens, while maintaining the superior color performance of 2016, which is a hybrid glass screen protector infusedthe device display. In addition, in 2019 we introduced InvisibleShield Ultra Clear™ for selected smartphone models that offers maximum clarity and shatter protection with sapphire crystals designed to provide premium screen protection.
an advanced glass-like surface that feels as smooth as the smartphone’s original screen.19ZAGG hasWe have maintained the leading market share in screen protection and has maintained that leading positionin the United States (“U.S.”) by consistently delivering innovative InvisibleShield products to the market.and 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® ispack® 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.The Currently, the mophie ecosystem of mobile accessories is designed to provideprovides both power and protection for virtually any mobile device. With groundbreaking battery cases, including extra data storage options,wireless charging, universal batteries, cables, adapters, and docks, mophie products represent innovation at the forefront of design and development.During the third quarter of 2017, mophie launched an new universal wireless charging pad that ispads are designed to provide an optimized charging experience forwith the iPhone 8, iPhone 8 Plus and iPhone X; the mophie charging pad also includes latest Qi wireless charging technology for universal compatibility.In 2007, the EarPollution™ EarPollution® product line was released. The eclectic selection of earbuds and headphones specifically targetedtarget 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, consumers 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.namebrand to include offerings for all ages under both the EarPollution and IFROGZ brands. In 2013, we began offering IFROGZ portableSound Hub product lines.speakersaudio category by combining unparalleled design with cutting-edge technology to produce premium Bluetooth audio solutions for music lovers on the moveoutdoor adventurer and modern audio enthusiast. BRAVEN’s intelligently designed products include robust craftsmanship and world-class engineering to create a thrilling audio experience.combine impressivethe combination of high audio quality, clever functionality,ease of use, and eye-catching design. Insuperior features will enable us to develop the third quarterBRAVEN brand into one of 2016, we introduced a new family ofthe fastest growing wireless Bluetooth audio products designed to combine outstanding sound with a lightweight listening experience by alleviating bulky earbuds and heavy control modules.ZAGG is drivingwe 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 cases, power management and social techcases, are designed to free consumers from the confines of the traditional workplace. We believe “getting away” shouldn’t mean being disconnected. We support the communicators, commuters, creators and closers who live a mobile lifestyle.OurAs such, our ZAGG products are designed to feature cutting-edge design and innovation to provide portability, style, and productivity that can keep up with even the most active mobile users. We believe that withsupport the communicators, commuters, creators, and closers who live a mobile lifestyle. With the right ZAGG mobile accessories, we believe no one ever hasneeds to feel tethered or held back.in 2010, ZAGG haswe have continually reinvented itsthe ZAGG line of keyboards while also providing timely, curated solutions for new devices released by Apple, Microsoft,Microsoft®, and Samsung, as well as other leading mobile device manufacturers.providers. In addition to device-specific keyboards and folio keyboard cases, ZAGG’sthe ZAGG line of universal full-size Bluetooth®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.market segment.
market.20judgments. We basejudgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of 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 we believeare believed to be reasonable.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. Our critical accounting policies and estimates are discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on2018 Form 10-K for the year ended December 31, 2016.10-K. There have been no material changes to the critical accounting policies or estimates previously disclosed in that report.THREE MONTHS ENDED SEPTEMBER 30, 2017, AND 2016 (amountsSeptember 30, 2017,March 31, 2019, were $134,398$78,750, compared to net sales of $124,662$112,066 for the three months ended September 30, 2016, an increaseMarch 31, 2018, a decrease of $9,736,$33,316 or approximately 8%30%. The increase$33,316 decrease in net sales comparing the three months ended September 30, 2017, to 2016 was primarily attributable to (1) increaseddecreased sales of wireless charging accessories due to challenging sell-in comparisons from the initial product launch in 2017 that extended into the first quarter of 2018 and (2) a decrease in sales of screen protection products in keyand wireless and retail accounts, particularly in international markets, and (2)charging accessories due to a pull forward of shipments into the fourth quarter of 2018 ahead of a potential tariff increase. These decreases were partially offset by increased sales of power cases driven from the launch of the mophie wireless charging pad. During the third quarter of 2016, the Company launched a new line of power station productsjuice pack access and loaded-in a significant amount of product to retail, however, there was no similar power station launch in the third quarter of 2017, resulting in a decline in overall power management sales.The percentage of netinitial sales related tofrom our key product lines for the three months ended September 30, 2017,newly acquired brands: Gear4, HALO, and 2016, was approximately: 2017 2016 Screen Protection 57 % 52 % Power Management 19 % 22 % Power Cases 12 % 12 % Audio 6 % 6 % Keyboards 5 % 6 % Other 1 % 2 % The percentage of net sales related to our key distribution channels for the three months ended September 30, 2017, and 2016, was approximately: Indirect channel 90 % 90 % Website 7 % 7 % Mall cart and kiosk program 3 % 3 % The percentage of net sales by geographic region for the three months ended September 30, 2017, and 2016, was approximately: 2017 2016 United States 85 % 87 % Europe 9 % 8 % Other 6 % 5 %
BRAVEN.21September 30, 2017,March 31, 2019, was $48,392,$23,822 or approximately 36%30% of net sales, as compared to $43,146,$37,592 or approximately 35%34% of net sales for the three months ended September 30, 2016. Typically, the Company experiences higherMarch 31, 2018. The decrease in gross profit margin in periods whenwas primarily attributable to (1) the mix of curved glass screen protection products, increases. The mix of screen protectionwhich are at comparatively lower margins than our flat glass products and which sales increased during the three months ended September 30, 2017, to approximately 57% of net salesMarch 31, 2019 compared to approximately 52%the same period last year, and (2) a decrease in sales of net sales duringour wireless charging products compared to the three months ended September 30, 2016, benefiting overall gross profit margin.September 30, 2017,March 31, 2019, were $32,457, a decrease$40,882, compared to operating expenses of $23,399, or approximately 42%, from total operating expenses$29,673 for the three months ended September 30, 2016,March 31, 2018, an increase of $55,856.$11,209 or 38%. The $23,399 decrease$11,209 increase in operating expenses was primarily attributable to (1) a $24,317 loss on disputed mophie purchase price in 2016 that did not recur in 2017, and (2) a reduction in advertising and marketing spend. These reductions in operating expense were partially offset by an increase inadditional selling, general and administrative expense associated with the newly acquired BRAVEN, Gear4 and HALO brands, (2) higher amortization of $1,113long-lived intangibles related to the BRAVEN, Gear4 and amortizationHALO acquisitions, and (3) increased marketing investments to support our growing portfolio of brands and products.$616.Income (loss) from operationsWe reported income from operations of $15,935$5 for the three months ended September 30, 2017, comparedMarch 31, 2018. The increase in other expense is primarily attributable to a loss from operationson foreign exchange transactions and an increase of ($12,710)interest expense due to higher carrying amounts of debt.September 30, 2016, an increase of $28,645. The increase in income was primarily attributable to the increases in net sales, improvements in gross profit margin, and the reduction of operating expenses primarily due to a $24,317 loss on disputed mophie purchase price in 2016.Other expense, netFor the three months ended September 30, 2017, other expense was $399March 31, 2019, compared to other expensean income tax provision of $656$885 for the three months ended September 30, 2016.Income taxesWe recognized incomeMarch 31, 2018. Our effective tax expense of $5,760rate was 22% and 11% for the three months ended September 30, 2017, compared to an income tax benefit of $6,261 for the three months ended September 30, 2016. Our effective tax rate was 37%March 31, 2019 and 47% for the three months ended September 30, 2017, and 2016,2018, respectively. The decreaseincrease in the effective tax rate was due to income in lower rate foreign jurisdictions in which the Company experienced lossesseveral factors including but not limited to a difference in the prior year for which benefits were not recognized as wellamount of the ratiodiscrete item with respect to the restricted stock unit awards. The majority of credits and other permanent differencesthe Company’s restricted stock unit awards vest in the quarter. The windfall adjustment decreased significantly from the quarter of 2018 to pre-tax book income. The Company’sthe quarter of 2019. Our effective tax rate will generally differ from the U.S. Federal statutory rate of 35%21%, due to state taxes, permanent items including amounts disallowed under §162(m) of the Internal Revenue Code, our global tax strategy, and the Company’sinclusion of global intangible low taxed income and the corresponding foreign tax strategy. (loss)thethese factors, noted above, we reported net incomeloss of $9,776,$14,424 or $0.34$0.50 per share on a fully diluted share,basis for the three months ended September 30, 2017,March 31, 2019, compared to a net lossincome of ($7,105),$7,029 or ($0.25)$0.24 per share on a fully diluted basis for the three months ended September 30, 2016.NINE MONTHS ENDED SEPTEMBER 30, 2017, AND 2016 (amounts in thousands, except per share data)Net salesNet sales for the nine months ended September 30, 2017, were $342,571 compared to net sales of $286,928 for the nine months ended September 30, 2016, an increase of $55,643, or approximately 19%. The increase in net sales comparing the nine months ended September 30, 2017, to 2016 was primarily attributable to (1) increased sales of screen protection for new device releases during the current year, and (2) higher sales of power management and power case products. Results for the nine months ended September 30, 2017, also include nine months of mophie sales compared to only seven months in 2016 as the acquisition occurred on March 3, 2016.
31, 2018.22The percentage of net sales related to our key product lines for the nine months ended September 30, 2017, and 2016, was approximately: 2017 2016 Screen Protection 52 % 53 % Power Cases 18 % 15 % Power Management 18 % 15 % Keyboards 6 % 9 % Audio 6 % 7 % Other 0 % 1 % The percentage of net sales related to our key distribution channels for the nine months ended September 30, 2017, and 2016, was approximately: 2017 2016 Indirect channel 89 % 88 % Website 8 % 8 % Mall cart and kiosk program 3 % 4 % The percentage of net sales by geographic region for the nine months ended September 30, 2017, and 2016, was approximately: 2017 2016 United States 86 % 89 % Europe 8 % 7 % Other 6 % 4 % Gross profitGross profit for the nine months ended September 30, 2017, was $112,822, or approximately 33% of net sales, as compared to $97,748, or approximately 34% of net sales for the nine months ended September 30, 2016. The decrease in the gross profit margin percentage was primarily attributable to (1) a full nine months of mophie operations in 2017, compared to only seven months of mophie operations in 2016, which are at lower gross profit margins than the corporate average, and (2) lower gross profit margin on curved glass for the Samsung Galaxy S8, compared to historical gross margins on non-curved glass products. These items were partially offset by amortization expense from the acquisition-related fair value inventory write-up in 2016, which did not recur in 2017.Operating expensesTotal operating expenses for the nine months ended September 30, 2017, were $98,040, a decrease of $17,474, or approximately 15%, from total operating expenses for the nine months ended September 30, 2016, of $115,514. The decrease in operating expenses was primarily attributable to (1) a $24,317 loss on disputed mophie purchase price in 2016 that did not recur in 2017, (2) synergies realized from cost reduction initiatives, (3) a reduction in transaction-related costs, (4) a reduction in advertising and marketing spend, and (5) an overall reduction in amortization expense. These decreases were partially offset by the following increases in operating expense: (1) the inclusion of nine months of mophie-related expenses for 2017 compared with seven months in 2016 and (2) the impairment of an intangible asset in 2017 related to an invalidated patent totaling $1,959.Income (loss) from operationsWe reported income from operations of $14,782 for the nine months ended September 30, 2017, compared to a loss from operations of ($17,766) for the nine months ended September 30, 2016, an increase of $32,548. The increase in income from operations was primarily attributable to increases in net sales and gross profit, and a decrease in operating expenses primarily due to a $24,317 loss on disputed mophie purchase price in 2016.23Other expense, netFor the nine months ended September 30, 2017, other expense was $1,460 compared to other expense of $1,639 for the nine months ended September 30, 2016.Income taxesWe recognized income tax expense of $6,281 for the nine months ended September 30, 2017, compared to an income tax benefit of $7,963 for the nine months ended September 30, 2016. Our effective tax rate was 47% and 41% for the nine months ended September 30, 2017, and 2016, respectively. The increase in the effective tax rate was primarily due to various discrete expenses recognized during the period related to the true up of a deferred amount for stock compensation and other discrete items related to the return to provision calculation. The Company’s effective tax rate will generally differ from the U.S. Federal statutory rate of 35%, due to state taxes, permanent items, and the Company’s global tax strategy.Net income (loss)As a result of the factors noted above, we reported net income of $7,041, or $0.25 per diluted share, for the nine months ended September 30, 2017, compared to a net loss of ($11,442), or ($0.41) per share, for the nine months ended September 30, 2016. (in thousands)At September 30, 2017,(Amounts in thousands)provided by operations, cash on hand and thenet borrowings from revolving credit facility.facilities. Our principal uses of cash have been for a business acquisition, cash used to reduce accounts payable balances,in operations, purchase of property and make payments on the termequipment, and revolving credit facilities.$11,394$14,789 on September 30, 2017,March 31, 2019, from $11,604$15,793 on December 31, 2016,2018, a decrease of $210. Earnings from foreign operations are considered permanently re-invested and of the $11,394 cash balance on September 30, 2017, cash from foreign entities totaled $8,735, which constitutes 77% of the total cash and cash equivalents balance.Accounts receivable, net of allowances, increased to $96,830 on September 30, 2017, from $83,835 on December 31, 2016, an increase of $12,995. The increase was primarily attributable to increased sales in 2017 partially offset by strong cash collections during the first nine months of 2017.Inventories decreased to $72,005 on September 30, 2017, from $72,769 on December 31, 2016, a decrease of $764.$1,004. The net decrease was primarily attributable to improved supply chain(1) $20,368 net cash paid for the HALO Acquisition, (2) $12,137 used in operating activities, (3) $2,628 paid for property and inventory purchasing processes,equipment purchases, and (4) $722 of payments for treasury stock. These expenditures are partially offset by inventory purchases at the end$35,000 net proceeds from revolving credit facilities.the third quarter to meet fourth quarter demand for new product launches.Accounts payableallowances, decreased to $82,742$93,617 on September 30, 2017,March 31, 2019, from $85,022$156,667 on December 31, 2016,2018, a decrease of $2,280.$63,050. The net decrease was primarily attributable to timingcomparatively lower sales for the first quarter of payments2019 in comparison to suppliers at each respective period-end.At September 30, 2017, the Company hadfourth quarter of 2018, as well as strong cash collections during the three months ended March 31, 2019.positivedecrease of $25,863. The net decrease was primarily attributable to lower sales for the first quarter of 2019 in comparison to the fourth quarter of 2018 and payment on accounts payable outstanding on December 31, 2018, during the three months ended March 31, 2019. These decreases were partially offset by liabilities assumed in the acquisition of HALO.$19,677$108,309 compared to negative working capital of ($9,408)$105,540 as of December 31, 2016.2018, an increase of $2,769. The net increase in the working capital position was primarily attributable to reductionsthe changes in accounts receivable, net of allowances, inventories, and accounts payable andpreviously noted, as well as a decrease in the line of credit,sales return liability due to decreased sales during the three months ended March 31, 2019 and an increase in accounts receivable.to be generated from operations, cash on hand and available borrowings under existingour current credit arrangementsarrangement will be adequate to fund expected capital expenditures and working capital needs for the next 12 months.24Item 3.Quantitative and Qualitative Disclosures About Market Risk We do not expect to employ these or other strategies to hedge market risk in the foreseeable future. We invest 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.Item 4.Controls and ProceduresWe maintainourthe reports filed underthat it files or submits pursuant to the Securities Exchange Act of 1934, as amended, (the “Exchange Act”),or Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SECSEC’s rules and forms, and that such information is accumulated and communicated to our management, including the chiefour principal executive officer and chiefprincipal financial officer, as appropriate to allow for timely decisions regarding required disclosure.Underdisclosures.management, including our principal executive officer and principal financial officer, we conducted an evaluationof the effectiveness of the design and operation of our disclosure controls and procedures as such term is defined under Rule 13a-15(e) promulgated underin accordance with the Exchange Act as of the end of the period covered by this Report.requirements. Based on thisupon that evaluation, theour principal executive officer and principal financial officer concluded that as of the end of the period covered byof this Report,report, our disclosure controls and procedures were effective at theand were designed to provide reasonable assurance level.As a resultthe material weakness related toHALO on January 3, 2019, represents a material overstatementchange in internal control over financial reporting since management’s last assessment of net sales and accounts receivableour internal control over financial reporting which was completed as of December 31, 2018. The HALO business utilizes separate information and accounting systems and processes. We intend to exclude the operations of HALO from the scope of our Sarbanes-Oxley Section 404 report on internal controls over financial reporting for the year ended December 31, 2016, which was corrected by management prior to issuance2019. the 2016 consolidated financial statements in the Company’s Annual Report on Form 10-K, management has completed the following changes to its internal controls during the nine months ended September 30, 2017:●Conducted training regarding the design and operation of controls with those responsible for performing and reviewing the process level control activities over revenue, accounts receivable and in transit inventory.●Enhanced review controls over revenue, accounts receivable, and inventory.●Tasked the ZAGG operations team to identify information technology solutions that streamline the process for tracking and reporting orders shipped from China directly to customers.●Enhanced the risk assessment process to consider significant changes in the business operations and the associated impact on financial reporting and internal controlsManagement 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 atas of December 31, 2016 has been remediated.2018. We are in the process of integrating the Gear4 and HALO businesses into our information and accounting systems and processes and expect that this effort will be completed in 2019.Our disclosure controlsprocedures 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 a 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, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
process safeguards to reduce, though not eliminate, this risk.25Item 1.Legal Proceedings11, “Commitments and Contingencies,10, “Contingencies,” to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q, and are hereby incorporated by reference.Item 1A.Risk FactorsAnnual Report on2018 Form 10-K, for the year ended December 31, 2016 (the “2016 Form 10-K”), which could materially affect our business, financial condition or future results. These risk factors should be read carefully in connection with evaluating our business and in connection with the forward-looking statements contained in this Quarterly Report on Form 10-Q. Any of the risks described in the 20162018 Form 10-K could materially adversely affect our business, financial condition or future results and the actual outcome of matters as to which forward-looking statements are made. These are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results.Item 2.Unregistered Sales of Equity Securities and Use of Proceeds(dollars and shares in thousands)None.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) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs January 1 - January 31, 2019 72.00 $ 10.00 72.00 $ 4,740 February 1 - February 28, 2019 — $ — — $ 4,740 March 1 - March 31, 2019 — $ — — $ 20,000 Item 3.Defaults Upon Senior SecuritiesItem 4.Mine Safety DisclosuresItem 5.Other InformationItem 6.Exhibitsa.Exhibits:Exhibit No.NumberDescription of Exhibit 31.132.2Certification ofand 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 - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document EX-101.SCH XBRL Taxonomy Extension Schema Document EX-101.CAL XBRL Taxonomy Extension Calculation Linkbase EX-101.DEF XBRL Taxonomy Extension Definition Linkbase EX-101.LAB XBRL Taxonomy Extension Labels Linkbase EX-101.PRE XBRL Taxonomy Extension Presentation Linkbase 26ZAGG INCZAGG INC. Date: November 2, 2017/s/ RANDALL L. HALESMay 8, 2019 Randall L. Hales,/s/ CHRIS AHERNChris Ahern Chief Executive Officer President, & Director(Principal executive officer) Date: November 2, 2017May 8, 2019/s/ BRADLEY J. HOLIDAYTAYLOR D. SMITHBradley J. Holiday, Taylor D. SmithChief Financial Officer (Principal financial officer) 27