NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, units, & shares in thousands, except per share data)
(Unaudited)
(1) NATURE OF OPERATIONS AND BASIS OF PRESENTATION
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.
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary to present fairly the financial position, the results of operations, and cash flows of the Company for the periods presented. The Company suggests that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 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.
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed 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 Accounting Policies
The Company’s significant accounting policies are described in Note 1 to the Company’s consolidated financial statements included in Form 10-K for the year ended December 31, 2018. Except for the changes below, the Company has consistently applied the accounting policies to all periods presented in these condensed consolidated financial statements.
Adoption of Accounting Standards Codification (“ASC”) Topic 842, “Leases” (In thousands, except lease terms and discount rates)
The Company adopted ASC Topic 842
,“Leases”
(“Topic 842”) with a 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.
The Company applied Topic 842 on January 1, 2019, using the modified retrospective approach. The adoption of Topic 842 includes the cumulative effect of adopting the new standard being recognized in retained earnings at January 1, 2019, 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. 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 elected the package of available practical expedients allowable under Topic 842 guidelines in its adoption approach.
The adoption of Topic 842 resulted in an increase in long-term lease liabilities of $10,684 which was included in other long-term liabilities; an increase in short-term lease liabilities of $2,362 which was included in accrued liabilities; an initial recognition of right of use (
“
ROU”) assets of $8,842 which was included in other assets; a derecognition of $3,346 related to lease liabilities under Topic 840 which was included in accrued liabilities; a decrease in deferred rent of $819 which was included in accrued liabilities; and a decrease of $39 in retained earnings as a cumulative effect of adoption.
As the Company did not have any finance leases upon adoption of Topic 842 at January 1, 2019, the largest driver of changes for the adoption of Topic 842 was the addition of the Company’s operating leases to the condensed consolidated balance sheet, creating ROU assets and lease liabilities on the condensed consolidated balance sheet as of March 31, 2019. Under Topic 840, leases were not included on the condensed consolidated balance sheets, whereas under Topic 842, ROU assets and lease liabilities are calculated and recorded on the lease commencement date. The standard had a material impact in the Company’s consolidated balance sheets, but did not have a significant impact in its condensed consolidated statements of operations. In addition, the adoption of Topic 842 had no impact to cash provided by or used in operating, financing, or investing on the condensed consolidated statements of cash flows.
Lease accounting policy
The Company determines if an arrangement is a lease at contract inception and then determines if such qualifying lease is classified as an operating lease or a finance lease. As of March 31, 2019, the Company only has operating leases. For operating leases, the Company measures lease liabilities based on the present value of the future minimum lease payments over the lease term at commencement date. As most of its leases do 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 as the sum of the 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 exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term.
The Company has lease agreements with lease and non-lease components under the definition of Topic 842. Upon adoption of Topic 842, the Company elected a practical expedient not to separate the lease and non-lease components for its leases for physical space and equipment and accounts for them as a single lease component.
Lease information
The Company has operating leases for offices, retail stores, and warehouse space that expire through 2027. The Company’s leases have remaining lease terms of 10 months to 9 years, some of which include options to extend the 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
|
The following summarizes the activities in the 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
|
For the three months ended March 31, 2019, and 2018, the rent expense was $853 and $782, 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. As of March 31, 2019, the Company had a weighted-average remaining lease term of 5.6 years and a weighted-average discount rate used to calculate the lease liability of 4.43%.
Future maturities of lease liabilities as of March 31, 2019 were as follows:
|
|
|
|
|
|
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
|
No other leases have been entered into under which the Company has significant rights and obligations as the lessee except those noted above.
(2) REVENUE
Disaggregation of revenue from contracts with customers
In the following tables, revenue from contracts with customers are disaggregated by key product lines, key distribution channels, and key geographic regions.
The percentage of net sales related to the Company’s key product lines for the three months ended March 31, 2019, and
2018, was a
pproximately as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For 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%
|
|
The percentage of net sales related to the Company’s key distribution channels for the three months ended March 31, 2019, 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%
|
|
The percentage of net sales related to the Company’s key geographic regions for the three months ended March 31, 2019, an
d 2018, wa
s approximately as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31, 2019
|
|
March 31, 2018
|
|
|
|
|
United States
|
71%
|
|
|
82%
|
|
Europe
|
12%
|
|
|
9%
|
|
Other
|
17%
|
|
|
9%
|
|
Contract Balances
Timing of revenue recognition may differ from timing of invoicing to customers or timing of consideration received. The following table provides information about receivables, right of return assets, contract liabilities, refund liabilities, and warranty liabilities from the Company’s contracts with customers as of 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
|
The current balance of the right of return assets is the estimated amount of inventory to be returned that is expected to be resold. The current balance of refund liabilities is the expected amount of estimated sales returns, discounts and other credits from sales that have occurred. The current balance of warranty liabilities is the expected amount of warranty claim returns from sales that have occurred. The current balance of contract liabilities primarily relates to the advance consideration received from customers for products for which transfer of control has not yet occurred and therefore, revenue is deferred and will be recognized when the transfer of control has been completed.
During the three months ended March 31, 2019, revenue recognized that was included in the contract liability balance as of December 31, 2018, was $11.
The following summarizes the activities in the Company’s warranty liabilities for the three months ended March 31, 2019:
|
|
|
|
|
|
Balance as of December 31, 2018
|
$
|
4,646
|
Additions
|
2,253
|
Warranty claims charged
|
(3,041)
|
Balance as of March 31, 2019
|
$
|
3,858
|
(3) ACQUISITIONS
Acquisition of HALO
On January 3, 2019, (the “HALO Acquisition Date”), ZAGG Hampton LLC, a Delaware limited liability company and wholly owned subsidiary of the Company, entered into a membership interest purchase agreement (the “Purchase Agreement”) with Halo2Cloud, LLC (“HALO”) and its equity owners to acquire all of the 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 wall chargers, portable power, and other accessories. The Company acquired HALO to expand its product portfolio and to enter into new distribution channels.
The total purchase consideration for the HALO Acquisition was $23,943 in cash, 1,458 shares of the Company’s common stock valued at $12,968, and contingent consideration estimated at $1,593 (the “HALO Earnout Consideration”). The initial purchase price was subject to adjustment within 90 days of the HALO Acquisition Date based upon the final determination of HALO’s (i) working capital, (ii) indebtedness, and (iii) transaction expenses as set forth in the Purchase Agreement.
As agreed in the Purchase Agreement, the Company retained $2,424 from the cash due to the sellers and will hold this amount for 18 months following the HALO Acquisition Date security for HALO’s indemnification obligations. The $2,424 retained by the Company that is due HALO is recorded in other long-term liabilities in the condensed consolidated balance sheets.
HALO is also entitled to the HALO Earnout Consideration from the Company if HALO achieves the target Adjusted EBITDA set forth in the Purchase Agreement for the year ending December 31, 2019. If, however, HALO’s actual Adjusted EBITDA is less than the target Adjusted EBITDA for the year ending December 31, 2019, the HALO Earnout Consideration will be reduced by the difference between the actual Adjusted EBITDA and the target Adjusted EBITDA.
The following summarizes the components of the purchase consideration for HALO:
|
|
|
|
|
|
Cash consideration
|
$
|
23,943
|
Company common stock
|
12,968
|
Contingent consideration
|
1,593
|
Total purchase price
|
$
|
38,504
|
The total purchase price of $38,504 has been allocated to identifiable assets acquired and liabilities assumed based on their preliminary fair values. The excess of the purchase price over the preliminary fair value of the tangible and intangible assets acquired and liabilities assumed is recorded as goodwill.
The following table summarizes the preliminary estimates of the fair values of the identifiable assets acquired and liabilities assumed as of the HALO Acquisition Date. The preliminary 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 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
|
Due to the fact that the HALO Acquisition occurred in the current interim period and in light of the magnitude of the transaction, the Company is still waiting to receive the 2018 audited financial statements for HALO as well as the 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 obtains and analyzes all relevant information that existed as of the 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.
Identifiable Intangible Assets
Classes of acquired intangible assets include trade names, customer relationships, and technology. The fair value of the identifiable intangible assets was determined using the income valuation method. For assets valued under the income approach, the estimate of the present value of expected future cash flows for each identifiable asset was based on discount rates which incorporate a risk premium to take into account the risks inherent in those expected cash flows. The expected cash flows were estimated using available historical data adjusted based on the Company’s historical experience and the expectations of market participants. The preliminary amounts assigned to each class of intangible asset and the related weighted average amortization periods are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Asset Class
|
|
Weighted Average Amortization Period
|
|
|
|
|
Technologies
|
$
|
14,187
|
|
8.9 years
|
Trade names
|
4,409
|
|
10.0 years
|
Customer relationships
|
8,958
|
|
8.0 years
|
Total
|
27,554
|
|
|
Goodwill
Goodwill represents the excess of the HALO purchase price over the preliminary fair value of the assets acquired and liabilities assumed. The Company believes that the primary factors supporting the amount of the goodwill recognized are the significant growth opportunities and expected synergies of the combined entity.
Results of Operations
The results of operations of HALO 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 31, 2019, HALO generated net sales of $1,273 and had a net loss before tax of $1,646.
Pro Forma Results of Operations
The following pro-forma results of operations for the three months ended 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
|
The 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, 2018. Furthermore, such 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 March 31, 2019, pro forma net loss includes pro forma amortization expense of $30 and excludes non-recurring items including acquisition-related costs of $247 and the expensing of the fair value adjustment to inventory of $343. For the three months ended March 31, 2018, pro forma net income includes pro forma amortization expense of $784, acquisition-related costs of $247 and amortization related to the fair value adjustment to inventory of $343.
The pro forma results do not reflect events that either have occurred or may occur after the HALO Acquisition, including, but not limited to, the anticipated realization of ongoing savings from operating synergies in subsequent periods.
As part of the HALO Acquisition, the Company incurred legal, accounting, and other due diligence fees that were expensed when incurred. Total fees incurred related to the HALO Acquisition for the three months ended March 31, 2019, was $247 which was included as a component of operating expenses on the consolidated statements of operations.
Acquisition of Gear4
On November 30, 2018, Patriot Corporation Unlimited Company, an entity registered and incorporated in Ireland and a wholly-owned subsidiary of the Company, entered into a share purchase agreement with STRAX Holding GmbH, an entity registered and incorporated in Germany (“STRAX”), and Gear4 HK Limited, an entity registered and incorporated in Hong Kong and a wholly-owned subsidiary of STRAX (“Gear4”), to acquire from STRAX all of the issued and outstanding equity securities of Gear4 (the “Gear4 Acquisition”).
Pro Forma Results of Operations
The following pro-forma results of operations for the three months ended March 31, 2018, give pro forma effect as if the acquisition of Gear4 and the related borrowings used to finance the acquisition had occurred at the beginning of the periods 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.
|
|
|
|
|
|
|
For the Three Months Ended
March 31, 2018
|
|
|
Net sales
|
$
|
117,272
|
Net income
|
$
|
5,360
|
Basic earnings per share
|
$
|
0.19
|
Diluted earnings per share
|
$
|
0.19
|
The pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred had the transaction been consummated as of January 1, 2017. Furthermore, such 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 March 31, 2018, pro forma net income includes pro forma amortization expense of $883 and interest from the amended credit facility and amortization of debt issuance costs of $433.
The pro forma results do not reflect events that either have occurred or may occur after the Gear4 Acquisition, including, but not limited to, the anticipated realization of ongoing savings from operating synergies in subsequent periods.
(4) INVENTORIES
Inventories consisted of the following as of March 31, 2019, and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
|
|
|
Finished goods
|
$
|
99,237
|
|
$
|
81,397
|
Raw materials
|
989
|
|
1,522
|
Total inventories
|
$
|
100,226
|
|
$
|
82,919
|
Included in prepaid expenses and other current assets were inventory deposits with third-party manufacturers of $453 and $382 as of March 31, 2019, and December 31, 2018, respectively.
(5) GOODWILL AND INTANGIBLE ASSETS
During the three months ended March 31, 2019, goodwill increased in connection with the HALO Acquisition. The following table summarizes the changes in goodwill 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
|
There was no change in goodwill during the three months ended March 31, 2018.
In connection with the HALO Acquisition, intangible assets increased $27,554 for patents and technology, trade names, customer relationships and unfavorable lease for the three months ended March 31, 2019. There were no additions to intangible assets for the three months ended March 31, 2018. Additionally, there were no impairments of intangible assets for the three months ended March 31, 2019, and 2018.
Intangible assets, net of accumulated amortization as of March 31, 2019, and December 31, 2018, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
The total weighted average useful lives of intangible assets as of March 31, 2019, and December 31, 2018, was 8.3 years and 8.3 years, respectively.
(6) INCOME TAXES
For interim periods, the tax provision is determined utilizing an estimate of the Company’s annual effective tax rate adjusted for discrete items, if any. The Company’s effective tax rate was 22% and 11% for the three months ended March 31, 2019, and 2018, respectively. The increase in the effective tax rate was due to several factors including but not limited to a difference in the amount of the discrete item with respect to the restricted stock unit awards. The majority of the Company’s restricted stock unit awards vest in the first quarter. The Company’s effective tax rate will generally differ from the U.S. Federal statutory rate of 21%, due to state taxes, permanent items including amounts disallowed under §162(m) of the Internal Revenue Code, the Company’s global tax strategy, and the inclusion of global intangible low taxed income and the corresponding foreign tax credit.
(7) STOCK-BASED COMPENSATION
The grant of restricted stock units with respective weighted-average fair value per share for the three months ended March 31, 2019
,
and 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
|
The fair value of the restricted stock units granted is based on the closing share price of the Company’s common stock on the date of grant. The restricted stock units vest annually on a straight-line basis over a nine-month (annual board of directors’ grant) to a three-year vesting term, depending on the terms of the individual grant.
As part of the 643 restricted stock units granted during the three months ended March 31, 2019, the Company granted 287 restricted stock units to certain executives and employees of the Company where vesting is linked to specific performance criterion. These performance-based restricted stock units only vest upon the (1) Company’s achievement of specified thresholds of net sales, Adjusted EBITDA, or specific goals for the individual executive, and (2) continued employment through the applicable vesting date. No restricted stock units granted during the three months ended March 31, 2018 were linked to any performance criterion.
The estimated fair value of the restricted stock units is recognized on a straight-line basis over the requisite service period of the award, which is generally the vesting term of the award. The following are stock-based compensation expenses related to restricted stock units recorded for the three months ended March 31, 2019, and 2018, which are included as a component of selling, general, and administrative 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
|
During the three months ended March 31, 2019, and 2018, certain Company 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 recording $782 and $2,612 reflected as a reduction of additional paid-in capital, 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 expenses as of March 31, 2019, and 2018, respectively.
(8) EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share excludes dilution and is computed by dividing net earnings (loss) 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 stock options and restricted stock, or other common stock equivalents were exercised or converted into common stock. The dilutive effect of stock options or other common stock equivalents is calculated using the treasury stock method.
The following is a reconciliation of the numerator and denominator used to calculate basic earnings (loss) per common share and diluted earnings (loss) per common share for the three months ended March 31, 2019, and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
For 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
|
For the three months ended March 31, 2019, 1,187 restricted stock units were not considered in calculating diluted loss per share because the Company was in a loss position, and therefore, the effect would have been anti-dilutive.
For the three months ended March 31, 2018, 114 restricted stock units used to purchase shares of common stock were not considered in calculating diluted earnings per share as their effect would have been anti-dilutive.
(9) TREASURY STOCK
During the fourth quarter of 2015, the Company’s board of directors authorized the repurchase of up to $20,000 of the Company’s outstanding common stock with no expiration date. On March 11, 2019, our board of directors authorized the cancellation of the 2015 stock repurchase program, and authorized a new stock repurchase program of up to $20,000 of our outstanding common stock.
As of March 31, 2019, and December 31, 2018, a total of $20,000 and $5,462 remained authorized under the stock repurchase program, respectively.
The Company repurchased shares for the three months ended March 31, 2019, and 2018, as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
—
|
The consideration paid has been recorded within stockholders’ equity in the condensed consolidated balance sheet.
(10) CONTINGENCIES
Commercial Litigation
ZAGG Inc and mophie, Inc. v. Anker Technology Co. Ltd. and Fantasia Trading LLC, United States District Court for the Central District of California, Case No. 8:17-CV-2193-DOC-DFM (the “Anker Lawsuit”).
On December 15, 2017, the Company and mophie filed the Anker 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 and mophie seeks monetary damages and an injunction against Anker. On March 12, 2018, Anker and Fantasia filed answers and counterclaims in the lawsuit. In their answers, Anker and Fantasia denied infringement of any valid claim and asserted counterclaims for non-infringement and invalidity of the patents at issue.
The Company disputes 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.
Best Case and Accessories, Inc. v. Zagg, Inc. United States District Court for the Eastern District of New York, Case No. 1:18-CV-04048-LDH-RML (the “BCA Lawsuit”).
On July 13, 2018, Best Case and Accessories, Inc. (“Best Case”) filed a complaint against the Company. The Company had previously sent a letter to Best Case alleging that it was using product packaging and display trade dress that is confusingly similar to the Company’s trade dress. In the complaint, Best Case alleges that it does not infringe the Company’s trade dress and that the Company tortiously 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 respond to the allegations 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.
Dan Dolar, an individual and on behalf of those similarly situated, Plaintiff, v. Mophie, Inc., a California corporation, Defendant, Superior Court of the State of California, Orange County, Case No. 30-2019-01066228-CU-BT-CXC
. On April 25, 2019, Dolar filed a complaint against mophie inc. (“mophie”) alleging, among other things, violations of California Consumers Legal Remedies Act, California False Advertising Law, breach of express warranty, violations of the Magnuson-Moss Warranty Act, violations of California Unfair Competition Law, and violation of state Consumer Protection Statutes. The complaint is based on Dolar’s allegation that mophie systematically and routinely mischaracterizes the mAh ratings of the batteries in its products. In his complaint, Dolar seeks to certify a class of Californians who purchased mophie battery-enabled products. The complaint does not specify an amount of damages claimed. Because the complaint was filed so recently, mophie has not been able to fully investigate Dolar’s claims. Based upon information presently available to mophie, it denies that it has engaged in the alleged practices, and intends to vigorously defend the lawsuit.
Michael Young, individually and on behalf of those similarly situated individuals, Plaintiff, v. Mophie, Inc., Defendant, United States District Court, Central District of California
. On May 2, 2019, Young filed a complaint against mophie alleging, among other things, violations of consumers protection and unfair trade practice laws Alaska, Connecticut, Delaware, the District of Columbia, Illinois, New Hampshire, New York, Wisconsin, Florida, Hawaii, Massachusetts, Nebraska, Washington, Missouri, Maine, Michigan, New Jersey, Vermont and Rhode Island , breach of express warranties and unjust enrichment. The complaint is based on Dolar’s allegation that mophie systematically and routinely mischaracterizes the mAh ratings of the batteries in its products. In his complaint, Young seeks to certify a class of consumer in the stated named above who purchased mophie battery-enabled products. The complaint does not specify an amount of damages claimed. Because the complaint was filed so recently and has not yet been served on mophie, mophie has not been able to fully investigate Young’s claims. Based upon information presently available to mophie, it denies that it has engaged in the alleged practices, and intends to vigorously defend the lawsuit.
SEC Investigation
The Company previously disclosed an investigation by the SEC 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. On March 7, 2019, the Staff of the SEC informed the Company that, after additional consideration and analysis, it has decided to terminate the investigation and dismiss the matter.
Other Litigation
The Company is not a party to any other material litigation or claims at this time. While the Company currently believes that the amount of any ultimate probable loss for known matters would not be material to the Company’s financial condition, the outcome of these actions is inherently difficult to predict. In the event of an adverse outcome, the ultimate potential loss could have a material adverse effect on the Company’s financial condition or results of operations in a particular period.
The Company records a liability when a particular contingency is probable and estimable. The Company has not accrued for any losses in the condensed consolidated financial statements as of March 31, 2019, due to the fact that either the losses are immaterial or the losses are not considered probable or estimable. The Company faces contingencies that are reasonably possible to occur; however, the reasonably possible exposure to losses cannot currently be estimated.
(11) CONCENTRATIONS
Concentration of credit risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company places its cash with high credit quality financial institutions. The Company maintains its cash in bank deposit accounts, which, at times, exceed federally insured limits. The Company has not experienced any losses in cash accounts for the three months ended March 31, 2019, and 2018.
As of March 31, 2019, and December 31, 2018, two separate customers were equal to or exceeded 10% of the balance of accounts receivable, as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
|
|
|
Superior Communications, Inc. (“Superior”)
|
42%
|
|
|
50%
|
|
Best Buy Co., Inc. (“Best Buy”)
|
10%
|
|
|
15%
|
|
No other customer account balances were more than 10% of accounts receivable as of March 31, 2019, and December 31, 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 net sales
For the three months ended March 31, 2019, Best Buy accounted for 10% of net sales, and for the three months ended March 31, 2018, Superior accounted for over 10% of net sales, as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31, 2019
|
|
March 31, 2018
|
|
|
|
|
Superior
|
6%
|
|
|
29%
|
|
Best Buy
|
10%
|
|
|
8%
|
|
For the three months ended March 31, 2019, and 2018, no other customers accounted for greater than 10% of net sales.
Although the Company has contracts in place governing the relationships with its retail distribution customers (“retailers”), the contracts are not long-term and all the retailers generally purchase from the Company on a purchase order basis. As a result, these retailers generally may, with little or no notice or penalty, cease ordering and selling the Company’s products, or materially reduce their orders. If any of these retailers cease selling the Company’s products, slow their rate of purchase of its products, or decrease the number of products they purchase, the Company’s results of operations could be adversely affected.