| ACQUISITION OF MOPHIE INC. | (2) ACQUISITION OF MOPHIE INC. On February 2, 2016, ZAGG and ZM Acquisition, Inc. (“Merger Sub”), a Delaware corporation and wholly-owned subsidiary of the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with mophie, a California corporation, the principal shareholders of mophie named therein (the “Principal Shareholders”), and Daniel Huang as representative of the mophie shareholders, warrant holders, and option holders, pursuant to which Merger Sub agreed to merge with and into mophie, with mophie continuing as the surviving corporation (the “Merger”). On March 3, 2016 (the “Acquisition Date”), the Company completed the Merger. The combination of ZAGG and mophie creates a diversified market leader in multiple mobile accessories categories. The Company purchased mophie for total gross up-front consideration of $100,000 in cash, subject to an adjustment based on the estimated and actual net working capital of mophie as of the Acquisition Date. The Merger Agreement includes an earn-out provision whereby additional consideration could be paid based on whether mophie’s 12-month Adjusted EBITDA (as defined in the Merger Agreement) from April 1, 2016 to March 31, 2017 (the “Earnout Period”) exceeds $20,000, subject to certain tax adjustment as provided in the Merger Agreement. For every dollar in Adjusted EBITDA generated during the Earnout Period that exceeds $20,000, the Company will pay additional consideration at a five times multiple (“Earnout Consideration”), subject to certain tax adjustment as provided in the Merger Agreement, and the deposit of 10% of the Earnout Consideration into an indemnity escrow account. Any Earnout Consideration will initially be paid by the issuance of up to $5,000 in shares of the Company’s common stock valued as of February 2, 2016 (the day prior to the public announcement of the definitive agreement on February 3, 2016). In addition to the Earnout Consideration, the Merger Agreement identifies three other contingent payments to be remitted to the Principal Shareholders upon receipt of such funds by ZAGG after the Acquisition Date, subject to any applicable offset rights of ZAGG under the Merger Agreement:
● Federal and state tax refunds due to the Company related to 2012 and 2013 tax years;
● Customs and duties refunds for pre-closing overpayments of customs and duties amounts to governmental agencies; and
● Proceeds from the sale of real property located in Kalamazoo, Michigan. $2,000 of the cash consideration paid to the Principal Shareholders was placed in an escrow account to cover any net working capital shortfall and indemnification claims of ZAGG. ZAGG and the Principal Shareholders also jointly purchased a $10,000 insurance policy covering breaches by mophie and the Principal Shareholders of representations and warranties set forth in the Merger Agreement. At the Acquisition Date, mophie’s estimated closing balance sheet reflected negative working capital of $23,478. Upon completion of the procedures to evaluate the working capital account, ZAGG has determined that the closing balance sheet reflected actual closing negative working capital of $49,795, resulting in an additional actual closing working capital deficit of $26,317. ZAGG has submitted to the Principal Shareholders a closing adjustment statement seeking the release to ZAGG of the $2,000 placed in escrow based on the portion of the overall net working capital deficit that ZAGG has determined to be recoverable under Section 2.16 of the Merger Agreement. Mr. Huang, as the Representative of the Shareholders, submitted a dispute notice in which he, on behalf of all Shareholders, disputed ZAGG’s closing adjustment statement, asserted that there is no working capital deficit, and demanded release of the $2,000 escrow fund to the Principal Shareholders. The Company is continuing to pursue its claims related to the net working capital deficit, which efforts may require the Company to resort to the independent accountant dispute resolution mechanism provided in the Merger Agreement in order to obtain the $2,000 placed in escrow. ZAGG has engaged in discussions with the Principal Shareholders and Mr. Huang to seek recovery against the contingent payments described above and otherwise to be made whole with respect to such balance of the working capital deficit. However, as of September 30, 2016, there had been no resolution of either of such amounts and a total of $26,317 was in dispute between the parties. Thus, the Company has recorded a loss on the mophie purchase price of $24,317 during the three and nine months ended September 30, 2016, representing the disputed $26,317 partially offset by the $2,000 cash consideration placed in escrow, the recovery of which the Company
believes to be likely. The Company is exploring all options to recover the amounts related to the aggregate net working capital deficit including (1) pursuing collection of the $2,000 escrow amount, (2) submitting claims under the $10,000 representation and warranty insurance policy put in place at the Acquisition Date, and (3) pursuing any and all offset rights granted under the Merger Agreement with respect to the contingent payments that would have been paid to the Principal Shareholders. On October 21, 2016, Mr. Huang, on behalf of the mophie Shareholders and himself filed a lawsuit in the Chancery Court of the State of Delaware alleging that the Company has breached the Merger Agreement by failing to pay certain of the contingent payments described above related to tax refunds and customs duties and claims damages in the amount of no less than $11,420. The following summarizes the components of the purchase consideration as of March 3, 2016:
Adjustments to
Preliminary Allocation Working Revised Allocation
March 3, and March 3,
Cash consideration $ 100,000 $ - $ 100,000
Negative working capital at Acquisition Date (23,478 ) - (23,478 )
Additional negative working capital deficit - (26,317 ) (26,317 )
Contingent payments 11,283 856 12,139
Total purchase price $ 87,805 $ (25,461 ) $ 62,344 The total purchase price of $62,344 has been preliminarily allocated to identifiable assets acquired and liabilities assumed based on their respective preliminary fair values. The total preliminary purchase price has been adjusted because of (1) additional information related to the working capital reflected in the closing balance sheet and estimate of fair value of the assets acquired and liabilities assumed and (2) the determination that the fair value of the Earnout Consideration is insignificant. The excess of the purchase price over the fair value of tangible and intangible assets acquired and liabilities assumed is recorded as goodwill. The allocation of goodwill to reportable segments has not yet been completed. The Company has completed its final analysis related to the calculation of the additional negative working capital as of the Acquisition Date and contingent payments, as these items relate to purchase accounting under U.S. GAAP. The Company is still evaluating the preliminary amounts assigned to intangible assets and amounts recorded for income taxes, as these valuations have not yet been completed. Because of the dispute between the Company and the Principal Shareholders, the Company has recorded a net charge of $24,317 during the quarter ended September 30, 2016. The final resolution of these items could result in a material adjustment the allocation of purchase price to identifiable assets acquired and liabilities assumed. The following table summarizes the revised estimates of the fair values of the identifiable assets acquired and liabilities assumed as of the Acquisition Date. The revised estimates of the fair value of identifiable assets acquired and liabilities assumed are based on estimates and assumptions and are subject to revisions, which may result in adjustments to the values presented below, when management’s estimates with respect to intangible assets and amounts recorded for income taxes are finalized:
Cash and cash equivalents $ 1,779
Trade receivables (gross contractual receivables of $12,824) 12,823
Inventories 24,911
Prepaid expenses and other assets 1,073
Income tax receivable 11,814
Deferred tax assets 15,649
Property and equipment 10,191
Land held for sale 325
Amortizable identifiable intangible assets 43,812
Goodwill 12,791
Accounts payable (37,359 )
Income tax payable (196 )
Accrued liabilities (5,163 )
Deferred revenue (9 )
Sales returns liability (29,584 )
Other noncurrent liabilities (513 )
Total $ 62,344 The following table summarizes the purchase price allocation as of March 3, 2016:
Preliminary Purchase Adjustments to Revised Purchase
Price Working Price
March 3, and March 3,
Cash and cash equivalents $ 1,779 $ - $ 1,779
Trade receivables 13,483 (660 ) 12,823
Inventories 32,335 (10,011 ) 22,325
Inventory step-up 6,937 (4,351 ) 2,586
Prepaid expenses 485 215 700
Other assets 200 173 373
Income tax receivable 10,958 856 11,814
Deferred tax assets 24,925 (9,276 ) 15,649
Property and equipment 10,191 - 10,191
Land held for
sale 325 - 325
Amortizable identifiable intangible assets 45,463 (1,651 ) 43,812
Goodwill 14,092 (1,301 ) 12,791
Accounts payable (34,228 ) (3,131 ) (37,359 )
Income tax payable (196 ) - (196 )
Accrued liabilities (5,185 ) 22 (5,163 )
Deferred revenue (800 ) 791 (9 )
Sales returns liability (14,468 ) (15,116 ) (29,584 )
Deferred tax liabilities (17,978 ) 17,978 -
Other noncurrent liabilities (513 ) - (513 )
Total $ 87,805 $ (25,461 ) $ 62,344 The adjustments to working capital represented in the table above consist of (1) the additional actual closing working capital deficit of $26,317 and (2) adjustments to fair value of $856. Because the acquisition of mophie occurred in an interim period and in light of the magnitude of the transaction and existing uncertainties, the Company’s fair value estimates for the purchase price, intangible assets and amounts recorded for income taxes are preliminary and may change during the allowable measurement period. The allowable measurement period continues to the date the Company obtains and analyzes all relevant information that existed as of the date of the acquisition necessary to determine the fair values of the assets acquired and liabilities assumed, but in no case is to exceed one year from the date of acquisition (March 3, 2017). The Company is analyzing information to verify assets acquired and liabilities assumed, specifically the fair value of the acquired intangible assets and the tax accounts related to purchase accounting. As part of the acquisition of mophie, the Company incurred legal, accounting, investment banking and other due diligence fees that were expensed when incurred. Total fees incurred related to the acquisition of mophie for the three and nine months ended September 30, 2016 were $145 and $2,467, respectively, which are included as a component of operating expenses on the condensed consolidated statements of operations. Identifiable Intangible Assets Classes of acquired intangible assets include tradenames, patents and technology, customer relationships, non-compete agreements, and backlog. The fair value of the identifiable intangible assets was determined using various valuation methods, including the income and market approaches. For assets valued under the income approach, the estimate of the present value of expected future cash flows for each identifiable asset was based on discount rates which incorporate a risk premium to take into account the risks inherent in those expected cash flows. The expected cash flows were estimated using available historical data adjusted based on the Company’s historical experience and the expectations of market participants. The market approach was utilized to determine appropriate royalty rates applied to the valuation of the trademarks and technology. The preliminary amounts assigned to each class of intangible asset and the related preliminary weighted average amortization periods are as follows:
Intangible asset class Weighted-average amortization period
Tradenames $ 18,348 10.0 years
Patents and technology 15,225 7.5 years
Customer relationships 8,200 5.0 years
Non-compete agreements 1,796 5.0 years
Backlog 243 0.3 years
Total $ 43,812 Goodwill Goodwill represents the excess of the mophie purchase price over the fair value of the assets acquired and liabilities assumed. The Company believes that the primary factors supporting the amount of goodwill recognized are the significant growth opportunities and expected synergies of the combined entity. Results of Operations The results of operations of mophie are included in the Company’s results of operations beginning on March 3, 2016. For the three months ended September 30, 2016, mophie generated net sales of $39,731 and had a net loss before tax of $3,305. For the period March 3, 2016, through September 30, 2016, mophie generated net sales of $79,390 and had a net loss before tax of $17,030. Pro forma Results from Operations The following unaudited pro-forma results of operations for the three months ended September 30, 2016 and 2015 and the nine months ended September 30, 2016, and 2015 give pro forma effect as if the acquisition and borrowings used to finance the acquisition had occurred on January 1, 2015, 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.
3 Months Ended
September 30,
Net sales $ 108,614
Net loss $ (8,592 )
Basic earnings per share $ (0.30 )
Diluted earnings per share $ (0.30 )
9 Months Ended
September 30, September 30,
Net sales $ 304,254 $ 343,675
Net loss $ (15,432 ) $ (9,002 )
Basic loss per share $ (0.55 ) $ (0.31 )
Diluted loss per share $ (0.55 ) $ (0.31 ) The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred had the transaction been consummated as of January 1, 2015. Furthermore, such unaudited pro forma information is not necessarily indicative of future operating results of the combined companies, due to changes in operating activities following the purchase, and should not be construed as representative of the operating results of the combined companies for any future dates or periods. For the three months ended September 30, 2015, pro forma net loss includes pro forma amortization expense of $1,818. In addition, the Company included interest from the new credit facility and amortization of debt issuance costs for the three months ended September 30, 2015 of $536. 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 has been recorded as an unfavorable adjustment to cost of goods sold during the six months following the acquisition date. For the nine months ended September 30, 2016 and 2015, pro forma net loss includes projected amortization expense of $5,076 and $5,698, respectively. In addition, the Company included interest from the new credit facility and amortization of debt issuance costs for the nine months ended September 30, 2016 and 2015 of $1,508 and $1,622, respectively. The unaudited pro forma results do not reflect events that either have occurred or may occur after the Merger, including, but not limited to, the anticipated realization of ongoing savings from operating synergies in subsequent periods. |
