| ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company ZAGG Inc and its subsidiaries (the “Company”) are innovation leaders in mobile tech accessories for smartphones and tablets. For over 10 years, the Company has developed creative product solutions that enhance and protect mobile devices for consumers around the world. The Company has an award-winning product portfolio that includes screen protection, power cases, power management, wireless charging, audio, mobile keyboards, protective cases, and other mobile accessories sold under the ZAGG, InvisibleShield, mophie, IFROGZ, BRAVEN, Gear4, and HALO brands. In June 2011, the Company acquired IFROGZ, an audio company, which expanded its product lines beyond screen protection and keyboards. In March 2016, the Company acquired mophie inc. (“mophie”), a leader in the power management and power case categories. This acquisition further diversified the Company's product lines into key growth product categories. The results of operations of mophie are included in the Company's results of operations beginning on March 3, 2016. In July 2018, the Company acquired BRAVEN Audio (“BRAVEN”), a rugged Bluetooth speakers and earbuds provider, which offers a high quality audio experience for outdoor adventurers. This new product line and brand enables the Company to reach new markets and customer demographics. The results of operations of BRAVEN are included in the Company's results of operations beginning on July 20, 2018. On November 30, 2018, the Company acquired Gear4 HK Limited (“Gear4”), one of the top selling smartphone case brands in the United Kingdom, for its stylish phone cases which are designed with D3O technology. D3O technology can provide incredible protection to smartphones and other electronic devices by using shock absorbing materials. The Company believe this acquisition will expand its product offering to better meet the needs of its smartphone consumers for innovative case protection. The results of operations of Gear4 are included in the Company's results of operations beginning on December 1, 2018. In January 2019, the Company acquired Halo2Cloud, LLC (“HALO”), a leading direct-to-consumer accessories company with an extensive IP portfolio. HALO designs, develops and markets innovative technology products to make consumers' lives easier. This acquisition will enable the Company to enter new distribution channels, and to leverage new technology to enter into new consumer markets. The results of operations of HALO are not included in the Company's results of operations as the acquisition is a subsequent event to the consolidated financial statements. Use of estimates The preparation of consolidated financial statements in conformity with United States (“U.S.”) generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods, with related disclosures of these amounts in the notes to the financial statements. Actual results could differ from those estimates. Significant items subject to such estimates include the valuation of inventory obsolescence, variable consideration related to revenue recognition, and the fair value estimates of assets acquired and liabilities assumed in business combinations. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the economic environment, which management believes to be reasonable under the circumstances. Management adjusts such estimates and assumptions when facts and circumstances dictate an adjustment is necessary. Principles of consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Cash equivalents The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. Amounts receivable from credit card processors are also considered cash equivalents because they are both short-term and highly liquid in nature and are typically converted to cash within three days of the sales transaction. Amounts receivable from credit card processors as of December 31, 2018 and 2017 totaled $83 and $116, respectively. Cash equivalents as of December 31, 2018 and 2017 consisted primarily of money market fund investments and amounts receivable from credit card processors. Fair value measurements The Company measures at fair value certain financial and non-financial assets by using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are: Level 1 — Quoted market prices in active markets for identical assets or liabilities; Level 2 — Significant other observable inputs (e.g., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable such as interest rate and yield curves, and market-corroborated inputs); and Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting unit to develop its own assumptions. Accounts receivable The Company sells its products to end users through indirect distribution channels and other resellers who are extended credit terms after an analysis of their financial condition and credit worthiness. Credit terms to distributors and resellers, when extended, are based on evaluation of the customers’ financial condition. Accounts receivable are recorded at invoiced amounts and do not bear interest. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. Management regularly evaluates the allowance for doubtful accounts considering historical losses adjusted to take into account current market conditions, customers’ financial condition, receivables in dispute, receivables aging, and current payment patterns. Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Payments subsequently received on written-off receivables are credited to bad debt expense in the period of recovery. The following summarizes the activity in the Company’s allowance for doubtful accounts for the years ended December 31, 2018, 2017, and 2016: For the Years Ended December 31, 2018 2017 2016 Balance at beginning of year $ 734 $ 824 $ 568 Additions charged to expense 312 339 599 Assumed in acquisition of mophie — — 91 Write-offs charged against the allowance (151) (444) (430) Foreign currency translation (loss) gain (10) 15 (4) Balance at end of year $ 885 $ 734 $ 824 Inventories Inventories, consisting primarily of finished goods and raw materials, are valued at the lower of cost, determined on a first in, first out basis, or net realizable value. Management performs periodic assessments to estimate realizable values and to determine existence of obsolete, slow moving, and non-saleable inventories, and records necessary write-downs in cost of sales to reduce such inventories to estimated net realizable value. Once established, the original cost of the inventory less the related inventory write down represents the new cost basis of such products. Property and equipment Property and equipment are recorded at cost. Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the useful life of the asset or the term of the lease. Major additions and improvements are capitalized, while costs for minor replacements, maintenance and repairs that do not increase the useful life of an asset are expensed as incurred. Upon retirement or other disposition of property and equipment, the cost and related accumulated depreciation or amortization are removed from the accounts. The resulting gain or loss is reflected in selling, general and administrative expense in the consolidated statements of operations. Goodwill At least annually or when events and circumstances warrant an evaluation, the Company performs its impairment assessment of goodwill. This assessment permits an entity to initially perform a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the quantitative goodwill impairment test. If an entity concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not need to perform the impairment test for the reporting unit. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the impairment analysis is performed, which incorporates a fair-value based approach. The Company determines the fair value of its reporting units based on discounted cash flows and market approach analyses as considered necessary. The Company considers factors such as the economy, reduced expectations for future cash flows coupled with a decline in the market price of its stock and market capitalization for a sustained period as indicators for potential goodwill impairment. If the reporting unit’s carrying amount exceeds its fair value, the Company will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. Intangible assets Intangible assets include internet addresses, intellectual property, and acquired intangibles in connection with the acquisitions of IFROGZ, mophie, BRAVEN and Gear4, which include customer relationships, trade names, patents and technology, non-compete agreements, and other miscellaneous intangible assets. Long-lived intangible assets are amortized over their estimated economic lives, using a straight-line or accelerated method consistent with the underlying expected future cash flows related to the specific intangible asset. Amortization expense is recorded within cost of sales or operating expense depending on the underlying intangible assets. Impairment of long-lived assets Long-lived assets, such as property and equipment and amortizing intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, recoverability of long-lived assets is measured by comparison of its carrying amount to the undiscounted cash flows that the asset or asset group is expected to generate over the remaining life in measuring whether the assets are recoverable. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary. For the years ended December 31, 2018 and 2016, no impairment of long-lived assets were indicated and thus, no impairment charge was recorded. For the year ended December 31, 2017, the Company recognized an impairment charge of $1,959. Contingencies Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Revenue recognition The Company adopted Accounting Standards Code Topic 606, “Revenue from Contracts with Customers” (“Topic 606”) with a date of initial application of January 1, 2018. As a result of this adoption, the Company has changed its accounting policy for revenue recognition. Revenue is measured based on the amount of consideration that is expected to be received by the Company for providing goods or services under a contract with a customer, which is initially estimated with pricing specified in the contract and adjusted primarily for sales returns, discounts and other credits at contract inception then updated each reporting period. The Company recognizes revenue when persuasive evidence of a contract with a customer exists and a performance obligation is identified and satisfied as the customer obtains control of the goods or services. Revenue is recognized net of any taxes collected from customers and subsequently remitted to governmental authorities. The Company typically only charges sales taxes in transactions with customers on the Company's web sites. When the Company performs shipping and handling activities after the customer obtains control of the goods, the Company accounts for the costs as fulfillment costs, as allowed as an accounting policy election under Topic 606. For those instances where shipping occurs before the customer obtains control of the goods, the shipping costs are accounted for as fulfillment activities, as required by Topic 606. Allowance for sales returns, warranties, and other credits The Company's return policy allows end users and certain retailers rights to return purchased products. In addition, the Company generally provides the ultimate consumer a warranty for each product. Due to such policies, the Company’s contracts give rise to several types of variable consideration under Topic 606, including sales returns, warranty, and other credits. Certain customers receive credit-based incentives or credits, which are accounted for as variable consideration in the form of credit memos off future purchases from the Company. The Company estimates these amounts based on the expected amount to be provided to customers and reduces revenue accordingly for each transaction. The Company estimates a reserve for sales returns, warranties, and other credits, and records the respective estimated reserve amounts as a sales return liability in the consolidated balance sheets, including a right to return asset included in prepaid expenses and other current assets in the consolidated balance sheets when a product is expected to be returned and resold. Historical experience, actual claims, and customer return rights are the key factors used in determining the estimated sales returns, warranty claims, and other credits. The following summarizes the activity in the Company’s sales return, warranty, and other credits liability for the years ended December 31, 2018, 2017, and 2016: For the Years Ended December 31, 2018 2017 2016 Balance at beginning of year $ 34,536 $ 30,720 $ 10,196 Cumulative effect of adoption of Topic 606 5,250 — — Additions charged to sales 149,930 90,018 92,868 Assumed in acquisition of mophie — — 29,584 Sales returns and warranty claims charged against reserve (135,963) (86,299) (101,928) Assumed in acquisition of Gear4 846 — — Foreign currency translation loss (167) 97 — Balance at end of year $ 54,432 $ 34,536 $ 30,720 Income taxes The Company recognizes deferred income tax assets or liabilities for expected future tax consequences of events that have been recognized in the financial statements or tax returns. Under this method, deferred income tax assets or liabilities are determined based upon the difference between the financial statement and income tax bases of assets and liabilities using enacted tax rates expected to apply when differences are expected to be settled or realized. Deferred income tax assets are reviewed for recoverability and valuation allowances are provided when it is more likely than not that a deferred tax asset will not be realizable in the future. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records estimated interest and penalties related to unrecognized tax benefits, if any, as a component of income tax provision. The Company has foreign subsidiaries that conduct or support its business outside the U.S. The Company’s intention before enactment of the Tax Cut and Jobs Act of 2017 (the “Tax Act”) was to permanently reinvest these earnings, thereby indefinitely postponing their remittance to the U.S. Internal Revenue Service. This will continue to be the Company’s intention. Foreign earnings will be taxed according to regulatory calculations in the period earned or eligible for a 100% dividends received deduction. One of the measures in the Tax Act was a mandatory deemed repatriation tax on the historical earnings and profits of certain U.S.-owned foreign corporations. The Company recognized and remitted the tax associated with the undistributed earnings and profits in the 2017 tax year of $368 (net of $221 of foreign tax credit). Stock-based compensation The Company recognizes stock-based compensation expense in its consolidated financial statements for restricted stock units granted to employees and directors. Equity-classified awards are measured at the grant date fair value of the award. The fair value of restricted stock units is measured on the grant date based on the quoted closing market price of the Company’s common stock. The Company recognizes compensation expense on a straight-line basis over the requisite service period of the award, which is generally the vesting term of the award. For those performance-based awards, the Company recognizes compensation expense on a straight-line basis based on management estimates of the extent to which the performance criteria are probable to be achieved. No compensation expense is ultimately recognized for awards for which employees do not render the requisite service and are forfeited. Advertising and marketing General advertising is expensed as incurred. Advertising allowances provided to retailers are recorded as an expense at the time of the related sale if the Company receives an identifiable benefit in exchange for the consideration and has evidence of fair value for the advertising; otherwise, the allowance is recorded as a reduction of revenue. Advertising expenses for the years ended December 31, 2018, 2017, and 2016 were $11,994, $11,101, and $12,440, respectively. Foreign currency translation and transactions The Company’s primary operations are at the parent level which uses U.S. dollars (“USD”) as its functional currency. The Euro is the functional currency of the Company’s subsidiary in Ireland, while the Renminbi is the functional currency of the Company’s subsidiary in China. Accordingly, assets and liabilities for these subsidiaries are translated into USD using exchange rates in effect at the end of each period. Revenue and expenses for these subsidiaries are translated using rates that approximate those in effect during the periods. Gains and losses from these translations are recorded as a component of stockholders’ equity. Gains and losses resulting from foreign currency transactions are included as a component of other (expense) income in the consolidated statements of operations and totaled $(360), $590, and $(144) for the years ended December 31, 2018, 2017, and 2016, respectively. Earnings (loss) per share Basic earnings (loss) per common share excludes dilution and is computed by dividing net income (loss) attributable to stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per common share reflects the potential dilution that could occur if restricted stock units or other common stock equivalents were released, exercised or otherwise converted into common stock. The dilutive effect of common stock equivalents is calculated using the treasury stock method. The following is a reconciliation of the numerator and denominator used to calculate basic earnings (loss) per share and diluted earnings (loss) per share for the years ended December 31, 2018, 2017, and 2016: For the Years Ended December 31, 2018 2017 2016 Net (loss) income $ 39,189 $ 15,100 $ (15,587) Weighted average shares outstanding: Basic 28,064 27,996 28,006 Dilutive effect of restricted stock units 436 411 — Diluted weighted average shares outstanding 28,500 28,407 28,006 Earnings (loss) per share: Basic $ 1.40 $ 0.54 $ (0.56) Dilutive $ 1.38 $ 0.53 $ (0.56) For the years ended December 31, 2018, 2017, and 2016, restricted stock units to purchase 144, 19, and 815 shares of common stock, respectively, were not considered in calculating diluted earnings (loss) per share because the effect would be anti-dilutive. Business combinations The Company allocates the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over these fair values is recorded as goodwill. The Company has engaged an independent third-party valuation firm to assist in determining the fair values of certain assets acquired and liabilities assumed. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. The significant purchased classes of intangible assets recorded by the Company include customer relationships, trade names, patents and technology, non-compete agreements, and other miscellaneous intangible assets. The fair values assigned to the identified intangible assets are discussed in Note 6 to the consolidated financial statements. Significant estimates in valuing certain intangible assets include but are not limited to: future expected cash flows related to each individual asset, market position of the trade names and assumptions about cash flow savings from the trade names, determination of useful lives, and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and thus, actual results may differ from estimates. Segment reporting The Company is in the process of consolidating a number of processes and functions from the acquired businesses, including the merging of several of the recently acquired entities' enterprise resource planning (“ERP”) systems into the Company’s ERP system. In addition, global functional teams are directly managed by an executive from the corporate headquarters. These merged functional areas include the following: sales, marketing, product management, product development, operations, customer service, accounting, finance, legal, human resources, and IT. As the Company has continued to evolve as a mobile lifestyle company, the information regularly reviewed by the chief operating decision maker is at the consolidated level for all types of products and services generated by the Company, including relevant sales and budget reviews. Management has evaluated its reportable segments and concluded that the Company is a single reportable segment. Reclassification of prior year presentation Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on reported results of operations. A reclassification has been made with a $2,347 reduction to accrued liabilities and a $2,347 increase to sales returns liabilities, both reported as current liabilities. Recent accounting pronouncements Adopted accounting pronouncements In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (“Topic 606”). Topic 606 includes a five-step process by which entities 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. Topic 606 also requires 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 Company adopted Topic 606 on January 1, 2018, using the modified retrospective approach, with the cumulative effect of initially adopting the new standard recognized in retained earnings at the date of adoption. Therefore, the prior period comparative information was not adjusted and continues to be reported under ASC Topic 605, “Revenue Recognition” (“Topic 605”). See Note 2 for further details. Issued accounting pronouncements not yet adopted In February 2016, the FASB issued ASU No. 2016-02, “Leases” (“Topic 842”), which modifies the accounting for leases, intending to increase transparency and comparability of organizations by requiring balance sheet presentation of leased assets and increased financial statement disclosure of leasing arrangements. Topic 842 will require entities to recognize a liability for their lease obligations and a corresponding recognition of right-of-use (“ROU”) assets over the lease term. Lease obligations are to be measured at their present value and accounted for using the effective interest method. The accounting for the leased asset will differ slightly depending on whether the agreement is deemed to be a financing or operating lease. For financing leases, the leased asset is depreciated on a straight-line basis and depreciation expense is recorded separately from the interest expense in the statements of operations, resulting in higher expense in the earlier part of the lease term. For operating leases, the depreciation and interest expense components are combined, recognized evenly over the term of the lease, and presented as a reduction to operating income. Topic 842 requires that assets and liabilities be presented or disclosed separately, and requires additional disclosure of certain qualitative and quantitative information related to these lease agreements. Topic 842 is effective for annual and interim periods beginning after December 15, 2018. In addition, in July 2018, the FASB issued ASU No. 2018-11 “Targeted Improvements” to provide an additional transition method whereby entities are allowed to initially apply Topic 842 by adjusting equity at the adoption date as compared to the beginning of the earliest period presented, and recognize a cumulative-effect adjustment to the beginning balance of retained earnings in the period of adoption. The Company plans to adopt the standard using the modified retrospective approach beginning January 1, 2019. The Company expects to elect the package of practical expedients upon adoption, which allows for the application of the standard solely to the transition period in 2019 but does not require application to prior fiscal comparative periods presented. In preparation for adoption of Topic 842, the Company has been updating the accounting policy, and implementing internal controls and key functionality to enable the preparation of financial information. The Company expects that Topic 842 will have a material impact on its consolidated balance sheets due to recognition of additional lease liabilities based on the present value of the remaining minimum rental payments for lease components, with corresponding ROU assets, for its operating leases. The financial impact has an estimated range of approximately $10,000 to $15,000 upon the adoption of Topic 842. The Company does not expect the adoption to have a material impact on the consolidated statement of operations or the beginning balance of retained earnings. In addition, the Company currently expects to elect, as an accounting policy, not to recognize lease liabilities and ROU assets for short-term leases that have a lease term of 12 months or less. Adoption of Topic 842 will also expand the Company's disclosure related to its leasing activities. |
